South Korea's economy grew rapidly under Park. The military leaders, with little previous political or administrative experience, and lacking a developmental program, later turned to the economists and planners for assistance. The Economic Planning Board was established in 1961. A program of rapid industrialization based on exports was launched. The shift in orientation was reflected in the First Five-Year Economic Development Plan (1962-66), and the subsequent second (1967-71), third (1972-76), and fourth (1977-81) five-year economic development plans.
Park's policies encouraged private entrepreneurs. Businesses were given powerful incentives to export, including preferential treatment in obtaining low-interest bank loans, import privileges, permission to borrow from foreign sources, and tax benefits. Some of these businesses later became the chaebol.
Toward these ends, the currency was drastically devalued in 1961 and 1964 and import quotas for raw materials eased. Private saving was encouraged by raising interest rates and funds were borrowed from abroad. Exports also were encouraged by direct subsidies; all taxes and restrictions on the import of intermediate goods that were to be used to produce export products were removed. As the existing industries--textiles, clothing, and electrical machinery, among others--had been stagnant owing to a lack of imported raw materials, these policies produced immediate results.
These developmental programs required enormous amounts of capital. As the level of United States assistance had stabilized, the Park regime turned to "financial diplomacy" with other countries. The normalization of relations with Japan in 1965 brought Japanese funds in the form of loans and compensation for the damages suffered during the colonial era. Park made a state visit to the Federal Republic of Germany in 1964 that resulted in the extension of government aid and commercial credits. The availability of funds and the increasing level of exports elevated Seoul's credit rating, making it possible to increase borrowing in the open international market. Further, the conflict in Indochina stimulated economic growth. Seoul's export drive also owed much to the availability of an educated labor force and a favorable international market.
South Korean businesses discovered that they could successfully compete abroad. As idle capacity was used up and the demand for new manufacturing investment rose, increasing numbers of foreign investors were attracted to South Korea.
Foreign exchange earnings improved as export and foreign receipts rose. The government also took steps to increase tax revenues and stabilize consumer prices. Much of the price stabilization program was carried out at the expense of farmers, who were forced to accept the government's policy of low grain prices. Agricultural development lagged behind until 1971, when the government shifted to a policy of high grain prices and inaugurated the Saemaul undong (New Community) Movement aimed at improving the farm village environment and increasing agricultural production and income.
Official statistics indicated rapid economic growth. Substantial successes were achieved under the first two five-year economic development plans. The manufacturing sector provided the main stimulus, growing by 15 percent and 21 percent, respectively, during the two plans. Domestic savings rates grew and exports expanded significantly. A new economic strategy emphasizing diversification in production and trade proved generally successful in the 1970s. Under the third plan, the government made a bold move to expand South Korea's heavy and chemical industries, investing in steel, machinery, shipbuilding, electronics, chemicals, and nonferrous metals. South Korea's capability for steel production and oil refining rose most notably. Refineries for zinc and copper and modern shipbuilding facilities were constructed; automobiles began to be exported to a few markets. The plan sought to better prepare South Korea for competition in the world market and to facilitate domestic production of weaponry.
The quadrupling of oil prices beginning in 1973 severely threatened the South Korean economy, which depended heavily on imported oil for energy production. Construction contracts in the Middle East, however, provided the necessary foreign exchange to forestall a balance-of-payments crisis and to continue the high rate of growth.
The growth-oriented economic strategy emphasizing exports inevitably produced side effects. Although the government previously had been able to manage these side effects and effectively surmount various economic crises, the situation began to deteriorate in 1978. The emphasis on exports had produced a shortage of domestic consumer goods that was exacerbated by the increasing demands brought about by rising wages and the advance in living standards. Price controls imposed on producers of consumer goods discouraged the manufacture of these goods. Meanwhile, the inflow of dollars rapidly expanded the money supply and inflation became a serious problem. According to a Bank of Korea report, consumer prices rose only 14.4 percent in 1978, but most observers agreed that the actual rate was near 30 percent.
The high rate of inflation continued into 1979. According to a report issued by the Economic Planning Board in August 1979, the average household's cost of living had gone up 26.3 percent from the previous year. Although wages had been rising rapidly during the previous several years--spurred by shortages of skilled and semiskilled workers--the rise in wages began to slow down. The average wage increased 12 percent during the year preceding August 1979.
To address these ills, Park had replaced the economic team in the cabinet in December 1978 and adopted stabilization measures entailing the lowering of the growth rate: a stringent tight-money policy; a switch of investment capital planned for heavy industries to light industries producing consumer products; a reduction of price controls to encourage more production of consumer goods; and assistance for the poor. But these measures caused a recession, produced a succession of bankruptcies among small and medium loan-dependent enterprises, and increased unemployment.
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