Throughout the 1950s, the Korean government maintained an overvalued exchange rate, restricted imports, regulated interest rates and bank lending, and undermined central bank independence. These market interventions created economic rents, which amounted to 16-19 percent of GNP according to Nak-nyeon Kim (1999). Of these, the rents resulting from exchange controls amounted to 11-15 percent of GNP and those resulting from financial repression 3-8 percent of GNP.
The question is how much of these rents were utilized in productive activities. Sang-oh Choi (2005) observes that rents were distributed mostly to those who put them to productive use, and stimulated economic reconstruction at the time. He cites the case of the cotton spinning industry, which lost 66 percent of its facilities during the war, but recovered soon after and even encountered over-capacity in the latter half of 1956. Younghoon Rhee (2007) also claims that the government maintained acertain degree of consistency and ethical standards in distributing dollars obtained from foreign aid and military payment advances to civilians. In fact, real output grew by 3.8 percent annually in 1953-1960. This is about half the rate witnessed in the 1960s and afterwards, but it can hardly be called “stagnation.”
Contrary to these views, some authors believe that the government policies at the time encouraged zero-sum rent-seeking activities rather than positive-sum productive ones, leading to the underperformance of the Korean economy far below its growth potential. Jones and SaKong (1980, pp.270-274) describe the rapid growth of the chaebol after the liberation, and declare that the major sources of accumulation were (1) non-competitive allocation of import quotas and import licenses, (2) the bargain price acquisition of former Japanese properties, (3) the selective allocation of aid funds and materials, (4) privileged access to cheap bank loans, and (5) the non-competitive award of government and U.S. military contracts for reconstruction activities. To be successful as an entrepreneur, one had to build close ties with politicians and return their favors with cash (Jung-en Woo, 1991, pp.65-69).
However plausible each of these contrasting views is, it is not possible to make any quantitative judgment on this issue. We will conclude this section by looking at policy changes taken in 1957. In the mid-1950s, the view gained wide support within America that the best way to win the war against communism lay in promoting the economic growth of its allies. The American government subsequently separated military and economic aid, and began to reduce the former while increasing the latter. In addition, it reduced unrequited transfers and introduced the Development Loan Fund in its place. American aid to Korea peaked in 1957 and declined rapidly thereafter. At the same time, the American government pressed the Koreans to adopt the Financial Stabilization Program (1957-1960) to eliminate large budget deficits and curb rapid monetary expansion. Unlike previous efforts, stabilization under the Program relied on asystematic framework comprising annual targets for M1 growth and quarterly and monthly implementation plans. This provided the first opportunity for Korean officials to learn the techniques of controlling money supply (Pyung-joo Kim, 1995, p.187).
Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.
References
· Kim, Nak-nyeon, "Korea's Economic Growth in the 1960s and the Role of Government," Economic History,Vol.27, 1999, pp.115-150(in Korea).
· Choi, Sang-oh“, Foreign Aid and Import-substitution Industrialization,”in Dae-geun Lee (ed.), New Korean Economic History: From the Late Joseon Period to the High-growth Period of the 20th Century, Na-nam, 2005, pp.349-375 (in Korean).
· Rhee, Younghoon, A Story of the Republic of Korea: Re-understanding the Post-Liberation Period, Ki-pa-rang, 2007 (in Korean).
· Jones, Leroy P. and Il SaKong, Government, Business, and Entrepreneurship in Economic Development: The Korean Case, Harvard University Press, 1980.
· Woo, Jung-en, Race to the Swift: State and Finance in Korean Industrialization, Columbia University Press, 1991.
· Kim, Pyung-joo, “Financial Institutions and Economic Policies,”in Dong-Se Cha and Kwang Suk Kim (eds.), The Korean Economy 1945-1995: Performance and Korea Development Institute, 1995, pp.179-254 (in Korean).
