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Growth of the manufacturing sector

In the 1960s, the manufacturing sector started to play a leading role in Korea’s economic growth. It grew by 17 percent per year between 1960 and 1970, the highest decade-long growth rate since 1953 (Table 3-1). It continued to grow rapidly in the 1970s, and its share in gross value added doubled from 12 percent in 1953-1960 to 23 percent in 1971-1980 (Table 3-2). Its share in total exports rose from one quarter in the early 1960s to nearly 90 percent in the early 1970s (Figure 3-4), with an accompanying change in major export items (Table 3-3).

Manufacturing growth in this period was dominated by the labor-intensive light industries such as clothing and footwear. These industries absorbed the surplus labor force discharged from rural areas by creating jobs rapidly. As these industries began their production activities in industrial complexes near urban areas, they also contributed to the growth of large cities and the urbanization of the Korean population. The Guro industrial complex in Seoul is one example.

There were several underlying factors for the phenomenal development of the manufacturing sector in Korea. First was the early generation of entrepreneurs who became aware of the opportunities offered by international markets and made profits from importing various goods that were in short supply in domestic markets. These small traders came to be the first group of industrial entrepreneurs who launched businesses in labor-intensive industries.

The entrepreneurship of the early traders was combined with the unlimited supply of labor from the agricultural sector to generate the explosive growth of light industries. At that time, the wage level in Korea was one of the lowest in the world, while Korean workers were relatively well-educated and diligent. Labor-intensive industries could acquire cost competitiveness quickly and increase their share in the international market.

Unlike labor, capital, another important factor of production was not abundant at that time. The domestic savings ratio was 15 and 23 percent in 1961-1970 and 1971-1980, respectively, while the investment ratio was 19 and 29 percent (Table 3-8). The gap between savings and investment had to be financed by borrowing from abroad, which amounted to 3 and 6 percent of Gross National Disposal Income.

In addition to borrowing, current transfers from abroad made significant contributions to alleviating the shortage in domestic savings. Without them, domestic savings would have been much lower (see the last row of Table 3-8).
An important development in this regard was the reparation payment of 500 million dollars and commercial loans of 300 million dollars from Japan that followed the normalization of diplomatic relationship between Korea and Japan in 1965. The payments were used in building Pohang Iron and Steel Company (now known as POSCO) and making investments in various sectors of the Korean economy.

Table 3-8. Savings and investment

The Vietnam War became another source of foreign currency earnings to support industrialization since Korea received U.S. economic aid for its military participation in the war (1965-1973), while Korean companies benefited from supplying services, including the building of military facilities, and products, such as uniforms, to the U.S. armed forces serving in Vietnam.

Lastly, the role of government was no less important in accelerating the growth of manufacturing. During the first and second Five-Year Economic Development Plans undertaken in the 1960s, the Korean government invested heavily in physical infrastructure -power plants, express highways and seaports among others-to lay the foundation for export-driven industrialization. The government established many state-owned enterprises (SOEs) in key industries such as fertilizer, cement, oil refinering, and steel and iron, which were indispensable for industrial development. In addition, the government mobilized other policy measures, involving foreign exchange, taxation, finance and customs regulations, to promote export-oriented industries. Besides these conventional measures, the Korean government employed rather unusual methods, such as the president chairing the Monthly Export Promotion Meeting, which was meant to solve problems and remove bottlenecks affecting exports.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

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