Following the peninsula's division, the South is primarily agricultural; Japanese-built heavy industry is located in the North. South Korea is dependent upon the North for 91 percent of its electricity. As Japanese managers and technicians leave, industries slow and shut down, causing severe material shortages. Unemployment is 50 percent by 1947, compounded by food shortages and rampant inflation.
A cease-fire concludes hostilities. The war kills an estimated five million people and destroys 43 percent of South Korea's industrial base. Postwar reconstruction begins almost as soon as the Korean front stabilizes near the 38th parallel. President Syngman Rhee uses an infusion of foreign aid to rebuild Korea's infrastructure, investing in schools, roads, and communications.
Foreign aid comprises almost half the national budget. Economic policies focus on increased industrial output, and the average annual rise in the GNP is 5.5 percent. Shortages from the war and the costs of supporting a large standing army cause high inflation, but prices stabilize by 1958.
Korea focuses on exports to transform from an agrarian society to a modern industrial nation. An Economic Planning Board directs the country's economic plans; Park's goal is to build an economy that will break free of dependence on U.S. aid. To do this, he nurtures companies that are already proven successes. The export program boosts Korea's annual production growth rate to 25 percent.
Under Park's guidance, the chaebol -- groups of companies with interrelated management -- develop. Various financial incentives, such as tax breaks, low-interest loans, and direct government subsidies, foster the growth of successful companies into giant conglomerates. Park normalizes relations with Japan, obtaining loans and compensation for wrongs committed during Japanese colonial rule.
The Economic Planning Board launches the Heavy and Chemical Industries Initiative. This "big push" targets steel, shipbuilding, auto manufacturing, and chemical industries as key to survival in the face North Korea's military might. Companies either succeed internationally or lose favorable government support. Growth declines as Korea is hard hit by the second oil crisis and double-digit inflation.
Unfavorable global conditions prove damaging to the export-intensive economy. Seeing the increasing inefficiencies of the chaebol, Economic Minister Kim Jae-Ik turns the economy from heavy industry to consumer goods, and the country moves from a negative growth rate (its first since 1962) to growth of 8.3 percent. Trade with China, the Soviet Union, and its Eastern European satellites flourishes.
The Fifth Five-Year Plan calls for steady growth of exports, low inflation, and a 7.5 percent growth in GNP. The GNP rises more than 12 percent from 1986 to 1988. Financial and import policies are liberalized. Though intervention is downplayed, success is still achieved through government sponsorship of specific industries. The government encourages savings and investment over consumption.
Responding to market demand, the Economic Planning Board shifts away from export items to meet the demands of a growing domestic market, which has developed a capacity for luxury spending thanks to burgeoning personal savings and annual double-digit wage increases since 1987. In 1989 economic growth slows, although it still maintains a respectable rate of 6.5 percent, and inflation increases.
Newly elected president Kim Young Sam quickly releases his "100-Day Plan for the New Economy" for immediate economic reform, intended to decrease inflation and eliminate corporate corruption. This is followed shortly by a new Five-Year Plan that encourages foreign investment. The Korean rice market opens to foreign imports. Per capita GNP exceeds US$10,000.
South Korea suffers in the regional financial crisis, with troubles stemming from weak financial institutions and debt-ridden chaebol. Investor confidence plummets, and GDP growth declines from 5 percent in 1997 to -5.8 percent in 1998, in part caused by massive foreign borrowing and overproduction coupled with a decrease in demand. South Korea receives a US$58 billion bailout from the IMF.
As one term of the IMF loan program, the government removes restrictions on foreign investment in the South Korean stock market, and non-citizens are allowed to buy land for commercial and personal purposes. The growth of the GDP recovers. The government encourages the chaebol to restructure and reduce its size and supports the growth of small and medium-sized businesses.
Korea continues to move from dramatic state intervention to a market-driven economy complete with open trade and financial markets. The government privatizes major state-run enterprises or reduces its presence across a wide range of sectors, including heavy industry and construction, electric power, telecoms, and banking. The economy rebounds with annual growth around 6 percent.
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