We will examine how South Korea achieved rapid economic development following the 1961 military coup. The sources trace the emergence of a government-led growth strategy under Park Chung-hee, characterized by strong export promotion and the aggressive expansion of heavy and chemical industries (HCIs). Particular attention is given to the financial policies that supported this strategy, including the state’s provision of “growth money” and its reliance on price controls in the face of persistent inflation, in lieu of effective monetary and fiscal instruments.
We will also explore why the early export boom, especially in light manufacturing, stemmed less from targeted incentives and more from the series of early-1960s devaluations that corrected the won’s chronic overvaluation. Finally, we are going to explore the profound structural transformation of the Korean economy, marked by the rapid decline of agriculture, the rise of manufacturing and services, and the unusually swift ascent of HCIs within overall industrial production and export composition, a pace unmatched by earlier industrializers.
#export promotion #government led growth #park chung hee #korean economic growth #HCI #heavy chemical industry #export #price control #1960s #1970s
After a prolonged period of economic stagnation, South Korea embarked on a dramatic and rapid growth trajectory in the 1960s. This era was defined by a phenomenon that would later be termed "compressed growth"—an economic and industrial transformation achieved at a speed that was unprecedented in modern history.
The initial signs of this transformation were unmistakable and centered on the manufacturing sector. Manufacturing output surged, growing by an average of 17% annually in the 1960s and 16% in the 1970s. This explosive growth fundamentally altered the structure of the Korean economy. As illustrated by economic data from the period, manufacturing's share in gross value-added rose from 12 percent in 1953-1960 to 23 percent in 1971-1980. This was mirrored in the labor market, where manufacturing's share of total employment also rose rapidly. This shift occurred at the expense of the agricultural sector, whose share in both value-added and employment steadily declined, while the services sector grew continuously alongside manufacturing.
While structural change is a common feature of economic development, what sets Korea apart from these advanced countries is the speed with which it achieved its structural changes. An international comparison of employment distribution reveals the exceptional pace of this metamorphosis. In the early 1960s, Korea’s industrial structure was comparable to that of the United Kingdom in 1700 or the United States before 1880. Yet by 1990, in just three decades, Korea’s industrial structure had advanced to a stage comparable to the U.K. in 1890, the U.S. in 1950, or Japan in 1970, a transformation that took the U.K. nearly two centuries and the U.S. and Japan each more than seven decades to achieve. This rapid transition was not a historical accident but the result of a deliberate and forceful government strategy.
The catalyst for this economic revolution was a fundamental shift in governance. Following the military coup that brought Park Chung-hee to power in 1961, the South Korean government assumed a central and directive role in the economy. It adopted a state-led growth strategy designed to rapidly build a modern industrial base from the ground up.
The core of this strategy rested on two primary objectives: the aggressive promotion of exports and the strategic development of heavy and chemical industries (HCIs). To channel the nation's resources toward these goals, the government implemented a suite of powerful policy tools. These included significant import restrictions to protect nascent domestic firms and a policy of "financial repression." This involved deliberately keeping interest rates low, which allowed the government to direct cheap credit to politically favored industrial sectors, effectively functioning as a hidden tax on savers to fund its strategic objectives. This ambitious industrial policy necessitated a state-controlled financial architecture designed to channel national savings into strategic sectors.
To finance its ambitious industrialization plans, the government subordinated all other economic goals, including price stability, to the single-minded pursuit of growth. The financial policies enacted during this period were designed to supply a constant flow of capital to strategic industries, with inflationary consequences being a secondary concern.
The mechanics of this policy revolved around the provision of "growth money." Commercial banks, facing a voracious demand for credit from government-backed businesses, were unable to meet this demand through deposits alone and had to rely heavily on lending from the central bank. Between 1965 and 1993, central bank lending accounted for a remarkable 10-20 percent of total credits issued by deposit money banks (DMBs). This dependency was especially pronounced for policy-driven loans; for instance, from 1973 to 1981, banks relied on the central bank for 89 percent of their export credit funding. As the data makes clear, the primary role of the monetary authorities during the government-led growth period lay in supplying “growth money,” and price stabilization received a far lower priority.
The direct result of this policy was a rapid expansion of the money supply, which inevitably fueled high inflation. Central bank lending was the single largest source of reserve base growth during this era. In the period from 1973 to 1981, for example, the reserve base grew by an average of 25.1 percent annually, with 20.2 percentage points of that growth coming directly from lending to commercial banks. Consequently, consumer price inflation soared to 10-20 percent throughout the 1960s and 1970s, a rate far higher than that experienced by its regional peers like Japan, Taiwan, or Singapore. This persistent inflation created a significant policy challenge, which the government chose to combat not with macroeconomic tightening, but with direct intervention.
Faced with chronic inflation created by its own growth-first policies, the government relied heavily on direct price controls rather than traditional monetary or fiscal tools. This approach reflected a preference for direct intervention in the market to suppress the symptoms of inflation, rather than addressing its underlying causes.
The government's use of price controls evolved and intensified over time. A legal basis was first established in 1961 with the "Act on Temporary Measures for Price Controls." As inflation escalated in the 1970s, these measures were strengthened significantly with the 1973 "Price Stabilization Act," which expanded the scope of regulation from goods to services, including rent and user fees. In 1975, the act was revised again into the "Act on Price Stabilization and Fair Trade." This new act introduced wide-ranging regulations on monopolistic pricing, driven by the government's belief that a "fundamental cure for inflation lay in installing a competitive market structure." This gave the government sweeping powers to intervene in production, distribution, and pricing across the economy.
Ultimately, this strategy was a failure. Not supported by monetary and fiscal adjustments, however, price controls failed to stabilize inflation. Instead of providing a solution, they created a host of negative economic consequences. The controls merely delayed inevitable price increases, which eroded public trust in government policy and fueled inflationary expectations. Producers, unable to sell profitably at controlled domestic prices, diverted their sales to overseas markets, which exacerbated domestic shortages and inflationary pressures. This, in turn, enlarged the black market and forced the government to intervene even further with production quotas and export caps. These distortionary and ineffective controls were gradually reduced in the 1980s and finally abolished in 1994. While the government struggled to contain domestic prices, a massive and transformative boom was simultaneously unfolding in the export sector.
It is a common assumption that South Korea's export boom in the 1960s was driven primarily by a complex system of direct government subsidies and incentives. However, a closer analysis of the data reveals that while these incentives existed, the true catalyst for the explosion in exports was a more fundamental and powerful policy change.
The evidence of the boom is dramatic. Beginning in the early 1960s, exports grew by an astonishing 40 percent per year on average. This growth was overwhelmingly driven by labor-intensive light manufactures, such as textiles and footwear. The share of these goods in total exports rose from around 10 percent in the early 1960s to 70 percent by the end of the decade. Historical data allows for the pinpointing of 1962 as the precise start date for this rapid and sustained expansion. While the government did introduce export promotion measures around this time—including tax reductions and the establishment of the Korea Trade Promotion Agency (KOTRA)—these were not the primary cause. An analysis of exporters' earnings shows that direct subsidies accounted for a negligible portion of their revenue. Furthermore, real earnings per dollar of exports were actually declining at the very moment the export expansion began, invalidating the theory that new incentives were the main driver.
The true cause was a critical adjustment in foreign exchange rate policy. The most significant change preceding the boom was the drastic shrinking, and eventual disappearance, of the premium on the export dollar. This premium existed because the official exchange rate kept the won artificially overvalued, forcing exporters to sell their dollars for far fewer won than they were worth on the open market.
This was the direct result of a series of three devaluations between February 1960 and February 1961, which raised the official exchange rate from 50 won to 130 won per dollar and closed this profitability gap. 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 a pace no one thought possible. This export success became a key engine for the profound structural changes that were reshaping the entire Korean economy.
The combined force of the state's industrial strategy and the explosive success of its export-oriented policies resulted in a fundamental restructuring of the national economy at a pace without historical parallel.
The shift in the country's export profile was particularly stark. In 1970, primary industries like mining and fisheries accounted for 17% of total exports, light industries 70%, and heavy and chemical industries (HCIs) just 13%. By 2008, this structure had been completely inverted: primary industries had fallen to 2%, light industries to 6%, and HCIs had risen to dominate exports at 92%. This dramatic inversion of the export structure was the direct culmination of the state-led heavy and chemical industry drive initiated decades earlier.
The defining characteristic of this entire transformation was its incredible speed. As defined by Jungho Yoo (1997) for international comparison, "industrialization" is the period during which a country's agricultural employment share falls from over 50% to below 20%. By this measure, Korea completed the process in a fraction of the time it took earlier industrializers. This rapid evolution was also evident within the manufacturing sector itself. The Hoffman ratio, which measures the value-added of light industries relative to HCIs, declined far more rapidly in Korea than in other advanced countries, signifying a swift transition to a more sophisticated industrial structure.
This evidence leads to a clear conclusion: Korea indeed achieved “compressed” growth in the last few decades in much the same way as Taiwan and other East Asian countries did. This historically unique pace of "compressed growth" offers several enduring lessons on the power, and the perils, of the Korean development model.
South Korea's development in the 1960s and 1970s provides a definitive case study in state-led transformation. The nation's "economic miracle" was engineered through a powerful, export-oriented strategy directed by a central government that prioritized industrial growth above all else. This success was built on a foundation of paradox: the brilliant pragmatism of a realistic exchange rate policy that ignited the initial export boom, coexisting with significant economic distortions like financial repression and ultimately futile direct price interventions to suppress the resulting inflation.
The truly defining feature of the Korean model during this period was the state’s capacity to orchestrate this contradictory mix of policy tools to achieve a structural economic metamorphosis at a historic and unprecedented speed—a "compressed" path to industrialization.
Source: https://atlas.hks.harvard.edu/countries/410/export-basket
We will examine how South Korea achieved rapid economic development following the 1961 military coup. The sources trace the emergence of a government-led growth strategy under Park Chung-hee, characterized by strong export promotion and the aggressive expansion of heavy and chemical industries (HCIs). Particular attention is given to the financial policies that supported this strategy, including the state’s provision of “growth money” and its reliance on price controls in the face of persistent inflation, in lieu of effective monetary and fiscal instruments.
We will also explore why the early export boom, especially in light manufacturing, stemmed less from targeted incentives and more from the series of early-1960s devaluations that corrected the won’s chronic overvaluation. Finally, we are going to explore the profound structural transformation of the Korean economy, marked by the rapid decline of agriculture, the rise of manufacturing and services, and the unusually swift ascent of HCIs within overall industrial production and export composition, a pace unmatched by earlier industrializers.
#export promotion #government led growth #park chung hee #korean economic growth #HCI #heavy chemical industry #export #price control #1960s #1970s
After a prolonged period of economic stagnation, South Korea embarked on a dramatic and rapid growth trajectory in the 1960s. This era was defined by a phenomenon that would later be termed "compressed growth"—an economic and industrial transformation achieved at a speed that was unprecedented in modern history.
The initial signs of this transformation were unmistakable and centered on the manufacturing sector. Manufacturing output surged, growing by an average of 17% annually in the 1960s and 16% in the 1970s. This explosive growth fundamentally altered the structure of the Korean economy. As illustrated by economic data from the period, manufacturing's share in gross value-added rose from 12 percent in 1953-1960 to 23 percent in 1971-1980. This was mirrored in the labor market, where manufacturing's share of total employment also rose rapidly. This shift occurred at the expense of the agricultural sector, whose share in both value-added and employment steadily declined, while the services sector grew continuously alongside manufacturing.
While structural change is a common feature of economic development, what sets Korea apart from these advanced countries is the speed with which it achieved its structural changes. An international comparison of employment distribution reveals the exceptional pace of this metamorphosis. In the early 1960s, Korea’s industrial structure was comparable to that of the United Kingdom in 1700 or the United States before 1880. Yet by 1990, in just three decades, Korea’s industrial structure had advanced to a stage comparable to the U.K. in 1890, the U.S. in 1950, or Japan in 1970, a transformation that took the U.K. nearly two centuries and the U.S. and Japan each more than seven decades to achieve. This rapid transition was not a historical accident but the result of a deliberate and forceful government strategy.
The catalyst for this economic revolution was a fundamental shift in governance. Following the military coup that brought Park Chung-hee to power in 1961, the South Korean government assumed a central and directive role in the economy. It adopted a state-led growth strategy designed to rapidly build a modern industrial base from the ground up.
The core of this strategy rested on two primary objectives: the aggressive promotion of exports and the strategic development of heavy and chemical industries (HCIs). To channel the nation's resources toward these goals, the government implemented a suite of powerful policy tools. These included significant import restrictions to protect nascent domestic firms and a policy of "financial repression." This involved deliberately keeping interest rates low, which allowed the government to direct cheap credit to politically favored industrial sectors, effectively functioning as a hidden tax on savers to fund its strategic objectives. This ambitious industrial policy necessitated a state-controlled financial architecture designed to channel national savings into strategic sectors.
To finance its ambitious industrialization plans, the government subordinated all other economic goals, including price stability, to the single-minded pursuit of growth. The financial policies enacted during this period were designed to supply a constant flow of capital to strategic industries, with inflationary consequences being a secondary concern.
The mechanics of this policy revolved around the provision of "growth money." Commercial banks, facing a voracious demand for credit from government-backed businesses, were unable to meet this demand through deposits alone and had to rely heavily on lending from the central bank. Between 1965 and 1993, central bank lending accounted for a remarkable 10-20 percent of total credits issued by deposit money banks (DMBs). This dependency was especially pronounced for policy-driven loans; for instance, from 1973 to 1981, banks relied on the central bank for 89 percent of their export credit funding. As the data makes clear, the primary role of the monetary authorities during the government-led growth period lay in supplying “growth money,” and price stabilization received a far lower priority.
The direct result of this policy was a rapid expansion of the money supply, which inevitably fueled high inflation. Central bank lending was the single largest source of reserve base growth during this era. In the period from 1973 to 1981, for example, the reserve base grew by an average of 25.1 percent annually, with 20.2 percentage points of that growth coming directly from lending to commercial banks. Consequently, consumer price inflation soared to 10-20 percent throughout the 1960s and 1970s, a rate far higher than that experienced by its regional peers like Japan, Taiwan, or Singapore. This persistent inflation created a significant policy challenge, which the government chose to combat not with macroeconomic tightening, but with direct intervention.
Faced with chronic inflation created by its own growth-first policies, the government relied heavily on direct price controls rather than traditional monetary or fiscal tools. This approach reflected a preference for direct intervention in the market to suppress the symptoms of inflation, rather than addressing its underlying causes.
The government's use of price controls evolved and intensified over time. A legal basis was first established in 1961 with the "Act on Temporary Measures for Price Controls." As inflation escalated in the 1970s, these measures were strengthened significantly with the 1973 "Price Stabilization Act," which expanded the scope of regulation from goods to services, including rent and user fees. In 1975, the act was revised again into the "Act on Price Stabilization and Fair Trade." This new act introduced wide-ranging regulations on monopolistic pricing, driven by the government's belief that a "fundamental cure for inflation lay in installing a competitive market structure." This gave the government sweeping powers to intervene in production, distribution, and pricing across the economy.
Ultimately, this strategy was a failure. Not supported by monetary and fiscal adjustments, however, price controls failed to stabilize inflation. Instead of providing a solution, they created a host of negative economic consequences. The controls merely delayed inevitable price increases, which eroded public trust in government policy and fueled inflationary expectations. Producers, unable to sell profitably at controlled domestic prices, diverted their sales to overseas markets, which exacerbated domestic shortages and inflationary pressures. This, in turn, enlarged the black market and forced the government to intervene even further with production quotas and export caps. These distortionary and ineffective controls were gradually reduced in the 1980s and finally abolished in 1994. While the government struggled to contain domestic prices, a massive and transformative boom was simultaneously unfolding in the export sector.
It is a common assumption that South Korea's export boom in the 1960s was driven primarily by a complex system of direct government subsidies and incentives. However, a closer analysis of the data reveals that while these incentives existed, the true catalyst for the explosion in exports was a more fundamental and powerful policy change.
The evidence of the boom is dramatic. Beginning in the early 1960s, exports grew by an astonishing 40 percent per year on average. This growth was overwhelmingly driven by labor-intensive light manufactures, such as textiles and footwear. The share of these goods in total exports rose from around 10 percent in the early 1960s to 70 percent by the end of the decade. Historical data allows for the pinpointing of 1962 as the precise start date for this rapid and sustained expansion. While the government did introduce export promotion measures around this time—including tax reductions and the establishment of the Korea Trade Promotion Agency (KOTRA)—these were not the primary cause. An analysis of exporters' earnings shows that direct subsidies accounted for a negligible portion of their revenue. Furthermore, real earnings per dollar of exports were actually declining at the very moment the export expansion began, invalidating the theory that new incentives were the main driver.
The true cause was a critical adjustment in foreign exchange rate policy. The most significant change preceding the boom was the drastic shrinking, and eventual disappearance, of the premium on the export dollar. This premium existed because the official exchange rate kept the won artificially overvalued, forcing exporters to sell their dollars for far fewer won than they were worth on the open market.
This was the direct result of a series of three devaluations between February 1960 and February 1961, which raised the official exchange rate from 50 won to 130 won per dollar and closed this profitability gap. 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 a pace no one thought possible. This export success became a key engine for the profound structural changes that were reshaping the entire Korean economy.
The combined force of the state's industrial strategy and the explosive success of its export-oriented policies resulted in a fundamental restructuring of the national economy at a pace without historical parallel.
The shift in the country's export profile was particularly stark. In 1970, primary industries like mining and fisheries accounted for 17% of total exports, light industries 70%, and heavy and chemical industries (HCIs) just 13%. By 2008, this structure had been completely inverted: primary industries had fallen to 2%, light industries to 6%, and HCIs had risen to dominate exports at 92%. This dramatic inversion of the export structure was the direct culmination of the state-led heavy and chemical industry drive initiated decades earlier.
The defining characteristic of this entire transformation was its incredible speed. As defined by Jungho Yoo (1997) for international comparison, "industrialization" is the period during which a country's agricultural employment share falls from over 50% to below 20%. By this measure, Korea completed the process in a fraction of the time it took earlier industrializers. This rapid evolution was also evident within the manufacturing sector itself. The Hoffman ratio, which measures the value-added of light industries relative to HCIs, declined far more rapidly in Korea than in other advanced countries, signifying a swift transition to a more sophisticated industrial structure.
This evidence leads to a clear conclusion: Korea indeed achieved “compressed” growth in the last few decades in much the same way as Taiwan and other East Asian countries did. This historically unique pace of "compressed growth" offers several enduring lessons on the power, and the perils, of the Korean development model.
South Korea's development in the 1960s and 1970s provides a definitive case study in state-led transformation. The nation's "economic miracle" was engineered through a powerful, export-oriented strategy directed by a central government that prioritized industrial growth above all else. This success was built on a foundation of paradox: the brilliant pragmatism of a realistic exchange rate policy that ignited the initial export boom, coexisting with significant economic distortions like financial repression and ultimately futile direct price interventions to suppress the resulting inflation.
The truly defining feature of the Korean model during this period was the state’s capacity to orchestrate this contradictory mix of policy tools to achieve a structural economic metamorphosis at a historic and unprecedented speed—a "compressed" path to industrialization.
Source: https://atlas.hks.harvard.edu/countries/410/export-basket
After a prolonged period of economic stagnation, South Korea embarked on a dramatic and rapid growth trajectory in the 1960s. This era was defined by a phenomenon that would later be termed "compressed growth"—an economic and industrial transformation achieved at a speed that was unprecedented in modern history.
The initial signs of this transformation were unmistakable and centered on the manufacturing sector. Manufacturing output surged, growing by an average of 17% annually in the 1960s and 16% in the 1970s. This explosive growth fundamentally altered the structure of the Korean economy. As illustrated by economic data from the period, manufacturing's share in gross value-added rose from 12 percent in 1953-1960 to 23 percent in 1971-1980. This was mirrored in the labor market, where manufacturing's share of total employment also rose rapidly. This shift occurred at the expense of the agricultural sector, whose share in both value-added and employment steadily declined, while the services sector grew continuously alongside manufacturing.
While structural change is a common feature of economic development, what sets Korea apart from these advanced countries is the speed with which it achieved its structural changes. An international comparison of employment distribution reveals the exceptional pace of this metamorphosis. In the early 1960s, Korea’s industrial structure was comparable to that of the United Kingdom in 1700 or the United States before 1880. Yet by 1990, in just three decades, Korea’s industrial structure had advanced to a stage comparable to the U.K. in 1890, the U.S. in 1950, or Japan in 1970, a transformation that took the U.K. nearly two centuries and the U.S. and Japan each more than seven decades to achieve. This rapid transition was not a historical accident but the result of a deliberate and forceful government strategy.
The catalyst for this economic revolution was a fundamental shift in governance. Following the military coup that brought Park Chung-hee to power in 1961, the South Korean government assumed a central and directive role in the economy. It adopted a state-led growth strategy designed to rapidly build a modern industrial base from the ground up.
The core of this strategy rested on two primary objectives: the aggressive promotion of exports and the strategic development of heavy and chemical industries (HCIs). To channel the nation's resources toward these goals, the government implemented a suite of powerful policy tools. These included significant import restrictions to protect nascent domestic firms and a policy of "financial repression." This involved deliberately keeping interest rates low, which allowed the government to direct cheap credit to politically favored industrial sectors, effectively functioning as a hidden tax on savers to fund its strategic objectives. This ambitious industrial policy necessitated a state-controlled financial architecture designed to channel national savings into strategic sectors.
To finance its ambitious industrialization plans, the government subordinated all other economic goals, including price stability, to the single-minded pursuit of growth. The financial policies enacted during this period were designed to supply a constant flow of capital to strategic industries, with inflationary consequences being a secondary concern.
The mechanics of this policy revolved around the provision of "growth money." Commercial banks, facing a voracious demand for credit from government-backed businesses, were unable to meet this demand through deposits alone and had to rely heavily on lending from the central bank. Between 1965 and 1993, central bank lending accounted for a remarkable 10-20 percent of total credits issued by deposit money banks (DMBs). This dependency was especially pronounced for policy-driven loans; for instance, from 1973 to 1981, banks relied on the central bank for 89 percent of their export credit funding. As the data makes clear, the primary role of the monetary authorities during the government-led growth period lay in supplying “growth money,” and price stabilization received a far lower priority.
The direct result of this policy was a rapid expansion of the money supply, which inevitably fueled high inflation. Central bank lending was the single largest source of reserve base growth during this era. In the period from 1973 to 1981, for example, the reserve base grew by an average of 25.1 percent annually, with 20.2 percentage points of that growth coming directly from lending to commercial banks. Consequently, consumer price inflation soared to 10-20 percent throughout the 1960s and 1970s, a rate far higher than that experienced by its regional peers like Japan, Taiwan, or Singapore. This persistent inflation created a significant policy challenge, which the government chose to combat not with macroeconomic tightening, but with direct intervention.
Faced with chronic inflation created by its own growth-first policies, the government relied heavily on direct price controls rather than traditional monetary or fiscal tools. This approach reflected a preference for direct intervention in the market to suppress the symptoms of inflation, rather than addressing its underlying causes.
The government's use of price controls evolved and intensified over time. A legal basis was first established in 1961 with the "Act on Temporary Measures for Price Controls." As inflation escalated in the 1970s, these measures were strengthened significantly with the 1973 "Price Stabilization Act," which expanded the scope of regulation from goods to services, including rent and user fees. In 1975, the act was revised again into the "Act on Price Stabilization and Fair Trade." This new act introduced wide-ranging regulations on monopolistic pricing, driven by the government's belief that a "fundamental cure for inflation lay in installing a competitive market structure." This gave the government sweeping powers to intervene in production, distribution, and pricing across the economy.
Ultimately, this strategy was a failure. Not supported by monetary and fiscal adjustments, however, price controls failed to stabilize inflation. Instead of providing a solution, they created a host of negative economic consequences. The controls merely delayed inevitable price increases, which eroded public trust in government policy and fueled inflationary expectations. Producers, unable to sell profitably at controlled domestic prices, diverted their sales to overseas markets, which exacerbated domestic shortages and inflationary pressures. This, in turn, enlarged the black market and forced the government to intervene even further with production quotas and export caps. These distortionary and ineffective controls were gradually reduced in the 1980s and finally abolished in 1994. While the government struggled to contain domestic prices, a massive and transformative boom was simultaneously unfolding in the export sector.
It is a common assumption that South Korea's export boom in the 1960s was driven primarily by a complex system of direct government subsidies and incentives. However, a closer analysis of the data reveals that while these incentives existed, the true catalyst for the explosion in exports was a more fundamental and powerful policy change.
The evidence of the boom is dramatic. Beginning in the early 1960s, exports grew by an astonishing 40 percent per year on average. This growth was overwhelmingly driven by labor-intensive light manufactures, such as textiles and footwear. The share of these goods in total exports rose from around 10 percent in the early 1960s to 70 percent by the end of the decade. Historical data allows for the pinpointing of 1962 as the precise start date for this rapid and sustained expansion. While the government did introduce export promotion measures around this time—including tax reductions and the establishment of the Korea Trade Promotion Agency (KOTRA)—these were not the primary cause. An analysis of exporters' earnings shows that direct subsidies accounted for a negligible portion of their revenue. Furthermore, real earnings per dollar of exports were actually declining at the very moment the export expansion began, invalidating the theory that new incentives were the main driver.
The true cause was a critical adjustment in foreign exchange rate policy. The most significant change preceding the boom was the drastic shrinking, and eventual disappearance, of the premium on the export dollar. This premium existed because the official exchange rate kept the won artificially overvalued, forcing exporters to sell their dollars for far fewer won than they were worth on the open market.
This was the direct result of a series of three devaluations between February 1960 and February 1961, which raised the official exchange rate from 50 won to 130 won per dollar and closed this profitability gap. 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 a pace no one thought possible. This export success became a key engine for the profound structural changes that were reshaping the entire Korean economy.
The combined force of the state's industrial strategy and the explosive success of its export-oriented policies resulted in a fundamental restructuring of the national economy at a pace without historical parallel.
The shift in the country's export profile was particularly stark. In 1970, primary industries like mining and fisheries accounted for 17% of total exports, light industries 70%, and heavy and chemical industries (HCIs) just 13%. By 2008, this structure had been completely inverted: primary industries had fallen to 2%, light industries to 6%, and HCIs had risen to dominate exports at 92%. This dramatic inversion of the export structure was the direct culmination of the state-led heavy and chemical industry drive initiated decades earlier.
The defining characteristic of this entire transformation was its incredible speed. As defined by Jungho Yoo (1997) for international comparison, "industrialization" is the period during which a country's agricultural employment share falls from over 50% to below 20%. By this measure, Korea completed the process in a fraction of the time it took earlier industrializers. This rapid evolution was also evident within the manufacturing sector itself. The Hoffman ratio, which measures the value-added of light industries relative to HCIs, declined far more rapidly in Korea than in other advanced countries, signifying a swift transition to a more sophisticated industrial structure.
This evidence leads to a clear conclusion: Korea indeed achieved “compressed” growth in the last few decades in much the same way as Taiwan and other East Asian countries did. This historically unique pace of "compressed growth" offers several enduring lessons on the power, and the perils, of the Korean development model.
South Korea's development in the 1960s and 1970s provides a definitive case study in state-led transformation. The nation's "economic miracle" was engineered through a powerful, export-oriented strategy directed by a central government that prioritized industrial growth above all else. This success was built on a foundation of paradox: the brilliant pragmatism of a realistic exchange rate policy that ignited the initial export boom, coexisting with significant economic distortions like financial repression and ultimately futile direct price interventions to suppress the resulting inflation.
The truly defining feature of the Korean model during this period was the state’s capacity to orchestrate this contradictory mix of policy tools to achieve a structural economic metamorphosis at a historic and unprecedented speed—a "compressed" path to industrialization.
Source: https://atlas.hks.harvard.edu/countries/410/export-basket
