Promoting heavy and chemical industries

Despite their remarkable success, Korea’s labor-intensive industries showed their limits as well. The labor-intensive industries were in general specialized in finished goods such as clothes, footwear and electronic appliances, and their success led to a huge increase in imports of raw materials, parts and components, and equipment to produce those finished goods. The need increased for moving upstream to higher value-added products and deepening Korea’s industrial structure.

In the 1970s, the Korean government embarked on an ambitious industrial policy to promote HCIs. The government selected the industries that should be promoted and gave them financial support. It chose the location and built infrastructure for the industrial complexes to provide the HCI sector with the optimal geographical conditions. It provided policy loans at below-market interest rates to the HCI companies since they required a tremendous amount of capital to establish facilities and operate them. The government also promoted the creation of general trading companies to expand exports for these industries.

What distinguished the development of the HCI sector in the 1970s from that of the labor-intensive industries in the 1960s was the need for greater energy supplies and the provision of a more skilled labor force and more advanced technology.

The first priority was securing the energy supplies. The government decided to make industrialization reliant on the cheap and plentiful supplies of petroleum, switching away from Korea’s previous focus on coal as the main source of energy. When the first oil crisis erupted in 1973, however, the government renewed its emphasis on coal. The debate on the choice between the policies of “coal-first-oil-next” and “oil-first-coal-next” underscored that energy had become a contentious issue for the government. In the end, Korea was able to absorb the blow since earnings from overseas construction orders, mainly in the Middle East, offset the impact of rising oil prices. But in the second oil shock in 1979, Korea was adversely affected since the country’s energy needs were much greater by then due to the extensive development of the power-hungry HCI industries. As a result, the government recognized the need to find new energy sources besides oil to support future industrial development. Nuclear energy was seen as one important alternative to oil and a nuclear energy program was successfully launched at this time (Table 3-10).

Table 3-10. Energy consumption by source

The next task was the acquisition of technology. The launch of industrialization required that the relevant technologies should be introduced and developed at an appropriate pace with the country’s economic progress. In the beginning, the technology required was usually obtained with turn-key production plants supplied by foreign companies. By the 1970s, however, Korea needed more advanced technology, with the result that the focus shifted toward increased training for a technically-skilled workforce and the expansion of domestic R&D capacity. Many important state research institutes were established at this time and represented the most significant results of this policy.

In implementing the HCI program, the Korean government depended heavily on the creativity and dynamism of the private sector. Businessman responded to the new challenges and opportunities. Their participation made this period legendary in the annuals of Korean business. There is the story of Tae-joon Park, the head of state-owned POSCO, who created Korea’s steel industry from scratch despite lacking technology, capital and raw materials at the beginning. Or the case of Ju-yung Chung, the founder of the Hyundai group, who started Korea’s modern shipbuilding industry by first persuading a group of Greek ship owners to place orders for vessels despite the absence of shipbuilding facilities, and then used the Greek orders to persuade London bankers to provide the capital needed for the construction of the shipyards.

Opinions are divided regarding the success or failure of the HCI drive. On the positive side, many people believe that it contributed decisively to forming the foundation of the majority of key industries that currently support the Korean economy. According to them, Korea would never have been able to upgrade its industrial structure without the HCI drive.

But the HCI program also had unexpected negative side effects. The fact that low-interest policy loans were devoted to HCIs and related sectors meant that light industries were largely deprived of state financial support and placed at adisadvantage. This helped cause the unbalanced growth between HCIs and light industries.

Another significant result of the HCI program was that it contributed to the formation of the large business conglomerates, or the chaebol, that still dominate the industrial landscape. Many of the future chaebol got their start in the light-industrial phase in the 1960s and then expanded into HCIs with government support in the 1970s. This led to the concentration of economic power among the chaebol groups, which remains an issue today.

Another criticism of the HCI program was that it encouraged investments by the chaebol in the designated industries with little thought given to their long-term profitability. The government’s financial support to the HCI sector resulted in excessive and overlapping investments as the chaebol competed for government assistance. It also created the conditions for future corporate insolvencies and had a knock-on effect in terms of hampering the normal development of the banking sector, which had helped finance the HCI investments by the big business groups.

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