Industrial Policy and Economic Development: Korea's Experience
Mah, Jai S., Journal of Economic Issues
The Korean economy has recorded rapid economic growth rates for the past four decades with the exception of the economic crisis in the late 1990s. As a result, per capita gross national product (GNP) increased from less than US$100 in 1960 to more than US$14,000 in 2004. The period of rapid economic growth was accompanied by active industrial policy by the government, especially in the early phase of economic development. According to Westphal (1990, 41) for instance, "Korea's government has selectively intervened to affect the allocation of resources among industrial activities." The government provided direct subsidies including fiscal and financial incentives as well as indirect support like the provision of infrastructure, to promote certain selected industries. The share of manufacturing output by heavy and chemical industries (HCI), which were promoted by the government especially in the 1970s, increased from 23 percent in 1960 to 54 percent in 1980 and to 79 percent in 2002.
Although the Korean government provided various kinds of taxation and financial incentives during this period, the current World Trade Organization (WTO) system regulates or even prohibits most governmental provisions or incentives to promote specific industries. Therefore, many of the promotional measures taken by the Korean government during the rapid economic growth period, cannot be used by developing countries now. This paper explains policy measures taken by the Korean government to promote certain industries during its economic development process, analyzes the strengths and weaknesses of Korea's industrial policy, and provides developing countries with implications for their economic development under the World Trade Organization's (WTO) system drawn from Korea's experiences with industrial policy.
The paper is structured so that the following section explains the tendencies of Korea's industrial policy since the 1960s. This is followed by a section describing incentives provided by the Korean government to promote certain industries. The fourth section evaluates the industrial policy in the sense of the appropriateness of governmental intervention and provides developing countries with implications based on Korea's experience. Conclusions are provided in the final section.
Evolution of the Industrial Policy of Korea
In the early 1960s, Korea's industrial policy was characterized by import substitution policy emphasizing the production of consumption goods. The Ministry of Commerce and Industry (MCI) regulated imports using the discretionary import licensing system. To relieve the shortage of foreign exchange and technologies, private companies tried to borrow from abroad; this was strictly controlled by the government. The Government Debt Guarantee Act promulgated in July 1962, guaranteed the private companies' debts borrowed from abroad (Oh 1996, Vol. 1). The MCI chose fertilizer, PVC, cement, and petroleum refineries as the main industries to develop in the early phase of economic development and constructed industrial estates equipped with the appropriate infrastructure. The government established the first integrated steel mill in Korea--Pohang Iron and Steel Company, Ltd. (POSCO), in the late 1960s--which became one of the best-performing steel companies in the world a few decades later.
Korea's industrial policy went hand in hand with export promotion policies especially from the 1960s through the early 1980s. Export promotion policies began to be pursued in 1964 with the slogan "Export Number One." The government increased the direct subsidy to export and emphasis was placed on exporting products produced by labor intensive Light Industries (LI) such as textiles and clothing, where the Korean economy had a comparative advantage (Oh 1996, Vol. 1; and Lee, Kim, and Han 1989). In the mid-1960s, various export promotion measures such as tax deductions and export finance schemes were introduced. …