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South Korea: the fraudulent miracle.


During 1987 popular opposition to South Korea's military dictatorship again burst into the streets of South Korean cities and into the U.S. news media. Successfully organizing around demands for democracy and reunification, progressive forces placed the dictatorship on the defensive.

As South Koreans struggle to transform their society, the U.S. press emphasizes the legitimacy of popular demands for (narrowly defined) political reform, ignores the reunification issue, and argues against the need for change in the economic system.

Because South Korea over the last twenty-five years has enjoyed one of the world's highest rates of economic growth, leaping from nonindustrial to industrial status, many analysts have called it an economic "miracle." They do so, however, without examining the political and economic effects of the "miracle" on the South Korean people. Believing in a "miracle" allows one to conclude that the South Koreans enjoy a model economy, lacking only political democracy.

In what follows, I argue that such observations and reasoning are flawed. Briefly tracing the evolution and evaluating the performance of the South Korean system, I find that the economy actually is unstable and extremely exploitative. Benefits from growth have been very unevenly distributed, the major portion going to military and government leaders and a few South Korean conglomerates and U.S. and Japanese capital. In short, it is far from the success story commonly told.

Moreover, political and economic developments cannot be understood separately. South Korea's economic system and the few big South Korean conglomerates that dominate it are largely a creation of the military-political structure which South Koreans struggle against. These conglomerates have become a major force in their own right, and their demands help to shape political as well as economic possibilities.

Thus, while there is no question that the South Korean people must first confront the military dictatorship presently blocking progressive change, a successful movement for democracy and reunification must also prepare the people to confront the conglomerates in order to transform the political-economic structure as a whole.

Military Takeover

South Korea became a separate nation in 1948, and the United States selected and supported the first elected president, Syngman Rhee, who ruled until April 1960. After he rigged a vice presidential election, student-led riots triggered the collapse of Rhee's corrupt and inefficient government. The subsequent democratically elected government (April 1960-May 1961) set the stage for greater mass involvement in politics, leading to calls for public ownershiop and planning of the economy and reunification of the country.

South Korean military leaders, having fought the Korean people--North and South--to secure a separate and procapitalist government in the South, opposed

both reforms. And having grown powerful under Rhee, they were able to stop the strengthening movement for social change. The military coup, which ended this brief interlude of democracy was apparently timed to stop a popularly supported scheduled meeting of South Korean and North Korean students.

The coup government was run by a committee of military officers, the Supreme Council for National Reconstruction. Chairman Park Chung Hee moved quickly to crush opposition and reverse popular gains by dissolving the National Assembly and all political parties, outlawing all demonstrations, taking control of the press, passing new anticommunist laws which broadened the power of the state to arrest and convict opponents, and creating the Korean Central Intelligence Agency (KCIA).

Recognizing the importance of economic as well as political control, Park created a new government-dominated trade union federation (the Federation of Korean Trade Unions) as well as business organizations (such as traders' and manufacturers' associations). New economic planning institutions (the Economic Planning Board and the Presidential Secretariat) gave him control of tariff and exchange-rate policy and the national budget. By seizing all outstanding private shares in the commercial banking system and tightening control over the Bank of Korea, Park also was able to shape interest rates and credit policy.

Such concentrated state power, Park hoped, would ensure the survival of his regime. It also opened doors to corruption and personal enrichment for those in power. In 1962 the leadership of the KCIA made millions in secret business deals and covert manipulation of the South Korean stock market. Other government leaders received commissions, bribes, and kickbacks from those seeking loans and government contracts.

Political Pressures for Restructuring the Economy

Park inherited from Rhee a failing economy and knew that to survive he would have to improve it. While Rhee had tended to ignore the economy, depending upon U.S. aid to support growth, Park acted on economic issues.

Soon after the coup, he issued South Korea's First Five Year Plan (1961), a call to establish a more independent economy by means of agricultural self-sufficiency, and a heavy industrial base financed by primary commodity exports.

Park pushed growth with a rapid expansion of government spending, but was unable to transform the economy. Spending led to inflation and a rapid increase in imports unmatched by exports. The same problems had developed under Rhee, but U.S. aid had helped South Korea handle its balance-of-payments problems. Now, with U.S. aid reduced due to global pressures on the dollar, Park's strategy for growth was not sustainable. A new economic strategy, necessary if the South Korean economy was to avert a balance-of-payments crisis, was forthcoming: over the years 1964-65, South Korea abandoned its strategy of import-substitution industrialization and adopted one of export-led development.

Both the United States and Japan strongly supported this change in strategy. The United States hoped that an export-led industrialization program would reduce South Korean balance-of-payments pressures and thus dependence on U.S. aid. The Japanese felt that this strategy would ensure a profitable environment for Japanese exports to, and foreign direct investment in, South Korea.

The United States and Japan also wanted South Korea to normalize relations with Japan, the United States because it needed Japan to assume greater financial and military responsibility for the survival of the South Korean government, and Japan because it sought greater regional economic and political power. In order to avert economic crisis, Park agreed to U.S. and Japanese demands and was well rewarded.

After Park signed the Normalization Treaty with Japan in 1965, South Korea received loans, grants, and political support from that government. The reward from the United States: dollars for sending troops to fight in Vietnam and contracts for supplying goods and services to U.S. forces there. During the peak war years of 1966-69, South Korea received 30 percent of all its foreign exchange from the U.S. military.

By providing essential foreign exchange, these agreements with Japan and the United States helped South Korea solve immediate economic problems. Since aid was channeled through the South Korean state, Park was able to increase his personal wealth and power as well as his direct control over economic activity.

The agreements with Japan and the United States, however, were concluded over strong objections from the South Korean people. When the terms of the Normalization Treaty were announced in 1964, there were many demonstrations and calls for Park's resignation. After 15,000 people attempted to storm the presidential mansion, Park declared martial law. Protestors were largely motivated by fear that the Park government "would use financial resources from Japan to further consolidate its internal control, and in so doing would create an economic dependency on Japan in order to stay in power."1 Later the Normalization Treaty and the decision to send South Korean troops to Vietnam were approved at a secret National Assembly meeting with the opposition absent.

Export-led Development: The Program

During 1964-65, exports were encouraged by a number of state policies: devaluation of the won, tax exemptions for exporters, tariff exemptions for imports used in the production of exports, and subsidized interest rates for exporters. The state also helped exporters by protecting domestic markets so that low market-creating export prices could be balanced by high profit-making domestic prices. In addition, the state created a system of import-export linkages which gave successful exporters the right to import products in great demand and sell them at high protected prices.

Perhaps most importantly, the state used agricultural policy to create a low-cost labor force for the benefit of export producers. Through a system of rural cooperatives, the state dominated storage, purchase, and distribution of grains, forcing down farm prices and thus rural incomes. Millions of people had to leave their farms and move into the cities to seek jobs in newly expanding export industries.

Giving final shape to the strategy were government decisions to concentrate export activity in a few large firms and to rely on foreign capital. These decisions were motivated by more than a desire for economic efficiency; an economy dominated by a few large domestic and foreign firms meant a more manageable and profitable system of corruption.

Here is the way the system operated: All domestic and foreign loans required government approval, and were granted only after the borrower agreed to make a payment (sometimes equal to 20 percent of the loan) to Park's ruling Democratic Justice Party (DJP). The same principle applied to tariff exemptions, import licenses, government contracts, and permission to engage in joint ventures with foreign capital. Frequently, foreign firms were required to make large direct contributions to the DJP for Park's own political use. The chosen South Korean conglomerates and foreign corporations had little reason to complain, since the kickbacks, commissions, and contributions to the government were a quid pro quo for government policies guaranteeing large profits.

Thus, South Korea's export-led development strategy encouraged enormous concentration of wealth and power in both the government and the economy.

Export-Led Development: Outcomes

The transformation just described marks the beginning of the economic "miracle": from 1963 to 1978, while the volume of world trade grew approximately 184 percent, the volume of South Korean exports grew by 5,858 percent. Over the same period, the South Korean economy achieved a 10 percent annual average rate of growth of real GNP. Yet, in spite of these impressive statistics, indications of a flaw in Park's strategy appeared. By 1966, after only two years of balance-of-trade improvement, imports once again began increasing faster than exports.

The source of the problem was not hard to find. Park's policies of promoting exports had created a dual economy: (1) a dynamic import-dependent export sector fueled by cheap funds and imported capital goods, and (2) a stagnant domestic economy weakened by a depressed agricultural sector, lack of capital, and a poor, exploited working class. This imbalance between the domestic and export-oriented sectors meant that growth, rather than solving the balance-of-payments problem, made it worse.

Initially, underlying economic problems could be ignored because U.S. and Japanese aid and foreign borrowing papered over the growing trade gap. But by the end of the decade, problems had grown too big to be ignored.

The international capitalist system had begun to slow down, threatening exports. South Korean exports (still weighted heavily toward labor-intensive products) faced growing competition from products produced in other "low-cost" third world countries. At the same time Vietnam-related aid from the United States was drying up. In short, the South Korean economy faced a new balance-of-pyaments crisis; once again a change in economic strategy was required if growth was to be maintained.

Park responded to the challenge by intensifying his old strategy of repression and exploitation while seeking greater and more direct foreign involvement in the economy. Once more military and government leaders, South Korean conglomerates, and foreign capital were to be the major beneficiaries.

Repression and Resistance

Park's immediate response to the deepening economic crisis was to slow down the economy in order to reduce imports and, by lowering labor costs, boost exports. For people already pushed to the margin of survival, this meant a reduction in standard of living. The average manufacturing wage in the early 1970s, for example, was $40 a month, while the Bank of Korea estimated that an urban family of four needed $90 a month for its expenses. In textiles, one of South Korea's major exports, young girls, working ten hours a day for six days a week, earned only $12 to $25 a month.

In addition, to increase exports and reduce a rapidly growing foreign debt, Park sought to replace foreign borrowing with foreign direct investment. In 1970, for example, South Korea opened its first free-trade zone as part of its plan to attract Japanese capital. When workers took action against several U.S. export firms during disputes over wages and working conditions, Park answered with legislation denying all rights to workers employed by foreign-owned firms. Strikes and sabotage of production continued in protest to this heightened economic repression and exploitation.

After the last direct presidential election (1971) when Park stole victory from Kim Dae Jung through voter intimidation and ballot fraud, growing resistance forced Park to declare a state of emergency. At the same time, Park extended restrictive labor legislation previously applying only to workers at foreign enterprises to all workers at all enterprises.

Still unable to suppress opposition, in October 1972 Park declared martial law, disbanded the National Assembly, and wrote a new constitution which placed virtually all power in the hands of the President. Although martial law was soon ended, popular resistance forced Park to declare a new state of emergency in January 1974.

As a result of Park's restrictions on political and economic freedoms, South Korean conglomerates and foreign capital continued to flourish. And, as they continued to pay off the government for loans and contracts, the government continued to buy off potential opposition. According to a well-connected South Korean businessman, "in 1973 . . . literally all opposition National Assembly memebers were receiving payments." Moreover, Park's "fear of military disloyalty" prompted him to make larger than usual payoffs to "key Army commanders in the early 1970s."2

My point here is that the South Korean people were oppressed by the interrelated nature of the South Korean political and economic systems. The political structure supported an economic system producing profits which were used, in turn, to support the political structure.

A New Economic Initiative

Park's attempt to solve South Korea's balance-of-payments problems by directly involving foreign capital in production was refined and sharpened with the 1973 publication of The Heavy and Chemical Industry Development Plan.

While Park's initiatives in the early 1970s had kept the international accounts from further deterioration, they had not solved underlying economic problems. Park's new response was to diversify and technologically upgrade the country's industrial base. New heavy and chemical industries (steel, shipbuilding, oil refining, machinery, electronics) were to be established in order to reduce import dependence and create a new export base.

The Heavy and Chemical Industry Development Plan required enormous state intervention, financed by massive credit creation and the assistance of foreign capital. Using his overwhelming power to control economic activity, Park succeeded in directing over 75 percent of all manufacturing investment into the targeted heavy and chemical industries. The results were impressive: by 1979 the heavy and chemical industries accounted for 50 percent of total manufacturing output; from 1971 to 1979, the percentage of heavy and chemical exports in total exports went from 15 to 38 percent.

Economic growth picked up and, from 1974 to 1977, exports grew faster than imports. South Korea appeared to have solved its major economic problems. In 1978 it was the number one third world exporter of manufacturers to the developing capitalist world. An efficient steel industry, modern shipyards, and production of advanced electronics all bespoke a successful economic transformation. To mainstream economists, South Korea had become a major industrial power and a model of third world development.

End of the "Miracle"

Success, however, was short-lived. By 1979 the country was facing another balance-of-payments crisis, and people took to the streets again, demanding an end to the Park regime. The economy went into recession, and even many supporters of the South Korean "miracle" pronounced it dead.

What had gone wrong? As before, problems proceeded from the "logic" of South Korea's growth model. Guided by the state, the large conglomerates raced into new industries. In many cases this led to serious overinvestment in the heavy and chemical sector at the expense of light manufacturing. These new industries were often technologically dependent upon foreign capital. In some cases, shipbuilding for example, production depended on imports: South Korea built one of the world's largest corporate shipyards but domestically produced only the hulls. All the machinery, engines, and instruments had to be imported from Japan.

Thus while massive state spending spurred economic growth and profits for the large conglomerates, foreign corporations, and state officials, the economy became increasingly lopsided and dependent. Growth pulled in imports of technology and capital goods, while the overbuilt and often inefficient new industries were unable to generate sufficient compensating exports. The results, by 1978, were a widening trade deficit and a need for heavy foreign borrowing. By mid-1979 Park had to take action to keep balance-of-payments problems from exploding: to reduce imports, and restore export competitiveness in light manufacturing, he threw the South Korean economy into recession.

Even during the "successful" industrial expansion and transformation of the South Korean economy, few workers benefited. The government claim that income is distributed more equitably in South Korea than in the United States and other developed capitalist countries is based on selected data "derived from surveys that exclude wealthy households, single-person households, nonfarm households in rural areas, and small farmers."3

More accurate is the 1979 Catholic Youth Council report that three tenths of one percent of the population received 43 percent of the GNP, while 75 percent of all workers made less than $100 a month. With unions heavily controlled by the state, workers were also forced to accept oppressive working conditions and long hours.

The 1979 recession, then, intensified economic injustice. In October of that year it took only the ousting of an opposition party leader from the National Assembly (for criticizing Park to the New York Times) to trigger massive demonstrations against Park's regime. As a result of sharp differences within the government over how to respond to this rebellion, the head of the KCIA shot and killed Park. Now not only the economic "miracle" was dead, but also its architect as well.

With the collapse of the economy and the death of Park, the South Korean people again had a chance to build a new, democratic political economy. But dominant economic and political interests again stood in the way.

A Return to Dictatorship

Demanding their rights, workers in coal, textiles, iron, steel, and other industries struck over wages, hours, working conditions, and union democracy. Since the newly formed interim civilian government yielded to many of these demands, foreign and domestic capital increasingly worried about their investments. Business Week, for example, warned that "there is no end in sight to spiraling wages." The magazine also highlighted the spring coal strike in which "miners seized rifles and dynamite, troops were called out, and the company had to drop by helicopter the leaflets with the settlement terms," as an example of potential future developments if order was not restored.4

Working-class activism, an important part of the democratic advance in the period after Park's death, threatened the existing political economy. To halt the development and consolidation of a working-class movement for change, the military again intervened with force. On December 12, 1979, General Chun Doo Hwan moved troops stationed near the North-South demilitarized zone into the streets of Seoul to establish his power. Finally, on May 18, 1980, Chun declared martial law and officially took control over the government.

After brutally suppressing popular resistance to martial law--most violently in Kwangju--Chun took action to restore "stable" political and economic conditions. Illuminating the close relationship between economics and politics, he immediately issued labor legislation even more restrictive than Park's. Hundreds of trade union leaders were fired and the police and intelligence service mobilized to prevent independent working-class activity. Chun's quick action won him political and financial support from the U.S. and Japanese governments as well as from South Korean and foreign capital.

The sequence of events described above is a spiral of increasing political and economic restrictions on South Koreans and dependence on foreign countries and corporations. We see a nation that has developed neither political rights, nor widely shared, stable economic success. Each successive economic crisis could be "solved" (i.e., growth maintained) only by stronger dictatorship and greater foreign dependence, thereby creating the conditions for the next crisis.

The Spiral Continues

Ignoring this pattern across time, apologists for South Korean capitalism argue that after a period of economic difficulty in the early 1980s, the economy is riding high again. Pointing out that GNP grew 12.5 percent in 1986, and over 15 percent in the first half of 1987, they predict the beginning of a new "miracle." But this new miracle is no different from the last.

Since Park's death, the conglomerates he created have grown in size, power, and profits. Sales of the ten largest amounted to 42.8 percent of GNP in 1981, 57.1 percent in 1982, and 65.2 percent in 1983. Similarly, the top ten exporters accounted for 48.7 percent of all exports in 1982 and 70 percent in 1984. Thus does the concentration and centralization of economic power and wealth continue.

Foreign capital also continues to be crucial. South Korea's foreign debt, the fourth largest in the third world, went from $29 billion in 1980 to over $45 billion in 1987. The growing involvement of transnational corporations is even more striking. New arrangements between U.S. and South Korean auto producers, for example, deepen the conglomerate-dominated and export-dependent nature of the South Korean economy.

Corruption in the military government continues unabated, ensuring that benefits of growth are enjoyed by the military and political elite. Chun, his wife, and members of their families have been some of the biggest winners.

The South Korean people also continue to pay a heavy price for creating "miracles." As Business Week points out, "few workers can afford to buy the consumer goods they make. . . . And the slums that surround Seoul grow daily as the unemployed flock in from the countryside."5 Moreover, according to a 1985 U.S. AID Development Study, there is "evidence of increasing disparities in income, both between the urban and rural sector and between the richer 10 percent of the population and those at the bottom."6 South Korean workers continue to have the world's longest work week and highest industrial accident rate.

Finally, the current expansion like past ones is highly unstable; international and domestic trends make a long period of growth very unlikely. Growth, for example, has become increasingly dependent on exports to the United States. In 1981 the United States took 26 percent of South Korea's exports, by 1986 50 percent. Only a record trade surplus with the United States of over $7 billion enabled South Korea to achieve its first overall trade surplus in 1986.

This dependence on the United States threatens stability because the U.S. market is very competitive. Even when the United States runs a big trade deficit, there is no assurance that South Korean exporters will outsell producers from other countries. South Korean producers recently have succeeded in part because of a South Korean exchange rate that makes South Korean goods cheaper than those produced in rival countries. If these countries, which are beginning to challenge this advantage, force an exchange rate adjustment, South Korean exports could decrease and bring the expansion to a halt.

Even if South Korea can keep its relative currency advantage, instability lies in the offing due to the improbability that the United States will continue much longer to run record trade deficits. Since deficits are hurting the U.S. economy, either policy or a recession will eventually force them down. Then South Korean exports to the United States probably will fall. Given South Korean dependence on the United States, so will the South Korean economy.

The stability of South Korea's export-led expansion is also threatened by new competition from other third world countries and by dependence on foreign technology (largely Japanese) for export production.

An equally if not more important reason, though, that South Korea's current "success" is unstable is domestic working-class opposition. Hundreds of underground unions have been formed, and labor actions have increased greatly. During the recent period of rapid economic growth worker activism, rather than diminishing, has increased. South Koreans made this point emphatically with last summer's strike wave involving hundreds of thousands of workers at over 3,000 enterprises.

If labor continues to become more organized and militant, it will scare off foreign investment, undermine joint ventures, and hurt export production. Thus not only the factors of trade, but also the social "factors" on which production is based may soon put an end to the new "miracle."

The Struggle for Democracy and Reunification

If the people of South Korea are going to lay the groundwork for democracy and reunification, they must gain the power to reduce the country's extreme dependence on exports and foreign capital, achieve better internal balance regionally and industrially, ensure production for mass domestic needs, and raise the standard of living of farmers and workers under conditions they themselves can control. These changes will necessarily entail confronting the present conglomerate-dominated capitalist system as well as the military-dominated political system.

The fight for democracy and reunification cannot be both partial and successful. Those who support the South Korean people in their present struggle to end over twenty-five years of military dictatorship must understand this. Those who oppose them certainly do understand it.

1. Joungwon A. Kim, Divided Korea: The Politics of Development (Cambridge: Harvard University Press, 1975), p. 257.

2. Committee on International Relations, U.S. House of Representatives, Investigation of Korean-American Relations, (Washington D.C.: U.S. Congress, Oct. 1978), p. 234.

3. Kim Dae Jung, Mass-Participatory Economy, (Lanham, MD: University Press of America, 1985), p. 37.

4. See Karen Gellen, "Calm Before the Storm," Guardian, July 2, 1980.

5. "The Koreans Are Coming," Business Week, December 23, 1985.

6. Quoted in Selig S. Harrison, "Dateline South Korea: A Divided Seoul," Foreign Policy, No. 67, Summer 1987, p. 161.
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Title Annotation:economic miracle and military dictatorship
Author:Hart-Landsberg, Martin
Publication:Monthly Review
Date:Dec 1, 1987
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