Exports began to expand rapidly in the early 1960s, with exports growing by 40 percent per year on average in current dollars and reaching 835 million dollars in 1970, more than 40 times as large as in the 1950s. As a result, the export/GNP ratio rose from less than 1 percent in 1959 to more than 10 percent in 1970. The rapid expansion of exports continued over the next decades. This subsection attempts to date the beginning of this trend and discuss the reasons.
Table 4-3. Korea’s imports and exports (1955-1970)
The rapid expansion of exports was so sudden that it is possible to date the beginning with the help of Table 4-3 and Figure 4-1, which breaks down total exports into three groups; two subgroups of manufactures and non-manufactures. The first of the two manufacturing subgroups comprises goods belonging to SITC (Standard International Trade Classification) 6 and 8. SITC 6, “manufactured goods chiefly classified by material”, includes textile products, leather products, rubber products, etc. and SITC 8, “miscellaneous manufactured articles”, includes clothing, footwear, travel goods, etc. This subgroup consists mostly of labor-intensive “light” manufactures. The other subgroup is the sum of SITC 5 and SITC 7, the former being “chemicals” and the latter “machinery and transport equipment.” This second manufacturing subgroup consists mostly of more capital-intensive and more technologically sophisticated manufactures than the first subgroup. Non-manufactures include the products from the agricultural, fishing and mining industries.
Figure 4-1. Export composition
As shown in the figure, in the 1950s almost all Korea’s exports were non-manufactures.
Afterwards, this share declined to around 20 percent by 1970 as the share of manufactures rapidly increased. In particular, the share of labor-intensive, light manufactures (SITC 6+8) rose from around 10 percent in the early 1960s to 70 percent of the total in the late 1960s.
This characterized the early expansion of Korea’s exports. For this reason, it seems appropriate to pick year 1962, when the share of light manufactures in total exports began to increase and continued to increase thereafter, as the start date for Korea’s rapid export expansion.
What were the reasons for the sudden, rapid increase in exports of light manufactures?
Since there were new export promotion measures introduced in the early 1960s, one should ask if they were the reason. An income tax reduction of 30 percent was introduced in 1961 for exporters, which was raised to 50 percent the next year. Direct subsidies were provided from 1961 to 1963. In 1962, “export targets” were established, which turned out to be much lower than what was actually achieved. In addition, the Korea Trade Promotion Agency (KOTRA) was founded in 1962 to assist exporters by gathering information on new foreign markets. However, these measures, though numerous, do not appear to have been the main reason for the sudden and rapid export expansion as they did not add much to exporters’ earnings.
This can be seen in Figure 4-2, which shows earnings per dollar of exports in real terms from 1958 to 1970, with 1965 as the base year. It breaks the exporters’ earnings into three components: official exchange rate; the premium on export dollars, that is, the difference between the official and market exchange rate; and export subsidies. According to this figure, export subsidies accounted for anegligible portion of exporters’earnings in real terms in the early 1960s. Furthermore, the figure shows that the earnings per dollar of exports were declining in the early 1960s when rapid export expansion began. Therefore, the availability of export incentives cannot explain the sudden and rapid export expansion.
Figure 4-2. Earnings per dollar of exports
On the other hand, the most noticeable change in Figure 4-2 is that the premium on the export dollar in the preceding years drastically shrank in 1961 and disappeared in 1962.
This was the direct result of three devaluations that took place in aspan of one year between February 1960 and February 1961. The devaluations changed the official exchange rate from 50 won to the dollar to 130 won to the dollar, nearly eliminating the won’s overvaluation. This can also be seen in the comparison of official and market exchange rates in Table 4-2 and Annex table 2. Once most of the won’s overvaluation was eliminated and the official exchange rate began to send correct price signals, the export of light manufactures took off and increased at apace no one thought possible.1)
Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.
NOTE
1)See Jungho Yoo (2008) for further discussion.
References
· Yoo, Jungho, “How Korea’s Rapid Export Expansion Began in the 1960s: The Role of Foreign Exchange Rate,”Working Paper 08-18, KDI School of Public Policy and Management, 2008.
