Korea’s Stabilization Policies in the 1980s
Sub-Theme 1 | Political and Economic Environment in the 1970s
The 1970s was a decade of global inflation accompanied by resource war. In particular, the oil price hikes were devastating for a resource-poor country such as Korea that followed an energy-intensive industrialization strategy.
From the perspective of international relations, the 1970s was also a decade of hardship for President Park’s regime. President Park, who had long been in power and severely suppressed opposition leaders, could not get along with US leaders who emphasized peace and democracy in international diplomacy. The more the Korea-U.S. relations deteriorated, the more the Park’s regime had to cling to self-defense from North Korea.
It is alleged that this political tension led Park’s regime to shift the main strategic industries from light industries to heavy and chemical industries (HCI) such as steel, petrochemicals, shipbuilding, machinery, nonferrous metals, electronics, and so forth. In order to promote HCI, every possible policy measure was mobilized. Among many, financial policy tools were very actively utilized. Naturally, financial markets were severely repressed to serve these government policies and provide cheap credits to the strategic industries. In this context, monetary policy was also mobilized as a tool for providing, so called, “growth money.” Fiscal resources were no exception. The government substantially increased its own spending for this purpose and applied various tax incentives, including preferential depreciation allowances, tax reductions and exemptions for exporters and strategic industries.
Under this environment superimposed by the government, it was a truly formidable task to control money supply. By directly controlling the amount of bank credits, the BOK tried to achieve two contradictory goals, supplying a sufficient amount of cheap money and suppressing the amount of money under control. Yet, the government’s priority for the industrial policy rather than inflation control increased the money supply with its growth rate hovering around 30 percent per annum. As a result, double digit inflation was taken for granted and economic agents began to reflect inflation in their economic activities such as wage bargaining and financial contracts. A typical pattern of a vicious circle of inflation --- inflation expectation and actual inflation reinforcing each other --- was set off in the second half of the 1970s. While accelerating inflation under the rigid exchange rate management was weakening exporters’ competitiveness, the Second Oil Shock broke out in 1979. The trade deficit was sharply expanded again and the Korean government had to hurry borrowing from abroad to cover the deficit. Foreign loans were rapidly accumulating, driving the Korean economy to the edge of its balance-of-payments crisis.