Korea is well-known for its rapid economic development since the 1960s. Indeed, the economy took off with a series of 5-year development plans led by the President Park’s regime. The average annual growth rate during the two decades recorded almost 10 percent, which pushed up per capita income from below US$ 100 in 1960 to around US$ 1,700 in 1979. The whole society was truly dynamic and became more and more confident of its own economic success.
However, it is not as well-known that Korea suffered greatly from high inflation and its side-effects during the same period.
[Note]Nam (1991, p.237)) observed: “From the 1960s through the early 1980s Korea had one of the highest inflation rates in the world. Among over a hundred countries included in the World Bank, World Development Report(1983) for which inflation data for 1960-81 in terms of the GDP deflator are available, Korea stood in eleventh place, behind only the Latin American countries that had suffered from hyperinflation.” Heavy and chemical industries, the most important strategic industries favored by the government, were suffering from a vast amount of idle facilities due to over-investment. Inflation was soaring to a double-digit, while current account was running chronic deficits. The whole economy was becoming more and more fragile, and doubts regarding the sustainability of the government-led development strategy were growing. Finally, the Korean economy plunged into a crisis in 1979 when the Second Oil Shock was triggered and President Park was assassinated.
Against this backdrop, bold stabilization policies were unfolded in the early 1980s. Fiscal expansion was suppressed and monetary policy was liberated from industrial policies. It may not be extremely difficult to argue for such a macro-policy shift toward stabilization, but its actual implementation faced fierce resistance from various groups. As a matter of fact, it was more difficult in Korea because such a policy shift had to overhaul the whole economic policy framework that was believed to be indispensable for rapid development until then.
It was after the leadership change from President Park to President Chun that stabilization policies were finally implemented in a full scale. Convinced of the new framework, President Chun continued to give a firm support for stabilization policies. After weathering through the painful recession and balance-of-payments crisis until 1982, the Korean economy began to stabilize from 1983. Inflation was brought down from a double-digit to around 3 percent, leading nominal wage growth rate and interest rate to also stabilize. Exporting companies recovered their competitiveness and overall economic activities became revitalized. By the mid-1980s, the growth rate surged to a double-digit, while the inflation rate stayed around 3 percent.
Government budget deficit continued to decline to zero, decreasing the public debt to GDP ratio. A sizable amount of current account surplus was realized, overcoming the balance-of-payments crisis. It is clear that the stabilization policy in the early 1980s bore great economic fruits.
