In 1973, the government shifted its industrial policies from labour-intensive export industrialisation to the development of heavy and chemical industries by promoting import substitution for intermediate materials and capital goods. The 1973 Heavy Industry and Chemicals Plan (HIC) was introduced to force the growth of
capital-intensive industries such as shipbuilding, steel, machinery, petrochemicals and transportation equipment, with public finance institutions, such as the Korean Development Bank, providing long-term loans to the so-called ‘strategic’ industries.
The South Korean government was, at that time, the largest shareholder in the commercial banks, and remained so until in the early 1980s (Hong, 1993, p. 424). The government had much leverage to allocate resources for supporting its economic development policies. In 1983, the manufacturing sector in South Korea financed 9.9 per cent of its business through retained earnings and capital increases, and the remainder of capital was highly subsidised and was greater the more capital - intensive the industry (Amsden, 1989, p. 85). The differences in subsidisation by industry are shown in Table 4 .3, with the loan to value-added ratio likely to be much higher in capital - intensive industry.
Table 4.3 Loan / Value-Added (VA) Ratio, 1963-82
Industry 1963-71 1972-78 1979-82
L abour intensive
Clothing & footwear 0.6 0.7 0.7
Miscellaneous manufactures a 0.4 0.6 0.6 Non-metallic minerals b 0.7 0.6 0.5 Metal products 0.4 0.5 0.8 Electrical machinery 0.6 0.6 0.7 Textiles 1.0 1.2 1.1 Wood products 1.4 1.9 2.0 C apital intensive Synthetic fibres 1.1 1.4 1.3 Rubber tires 0.9 1.1 0.9
Glass & products 1.0 0.6 0.9
Pulp & paper 0.7 1.0 1.1
Sugar refining 0.9 0.8 1.1
Petroleum products 1.6 0.7 0.9
Cement 1.8 1.3 1.2
Shipbuilding 2.7 1.6 1.1
Automobile & parts 1.3 1.2 1.6
Industrial chemicals 1.4 1.1 1.2
Iron & steel products 1.7 2.0 2.0
Notes: a: Includes precision instruments (watches and optical instruments), leather products, plastic products, and furniture, b: Includes glass and cement.
In 1974, a newly established National Investment Fund (NIF) was also made available to develop the capital goods industry and finance import of inputs of intermediate products. The NIF provided low-cost financing for purchases of domestic machinery, construction of domestic heavy machinery plants, purchases of domestically produced ships, and provided additional funds for exports on deferred payment2 (Koo, 1986, pp. 8-9). Investment as a share of gross product increased between 1976 to 1979 from 25 to 35 per cent, and four fifths of this investment went to the heavy and chemical sectors (Harris, 1986, p. 36).
Firms, which were generally large business groups with financial capability to invest in ‘strategic’ industries, were normally provided with tax incentives, such as, exemption from corporate taxes for the first three years after the establishment of the plant, a 50 per cent reduction in corporate taxes for the following two years, tax credits of 8-10 per cent of the investment amount, and accelerated depreciation of up to 100 per cent of the normal depreciation allowances (Koo, 1986, p. 9).
In addition to providing policies and incentives favourable to heavy and chemical industries, the government protected these industries to preserve the domestic market share for South Korean companies. High tariffs imposed on HCI products and the proportion of items which could be imported without prior government approval decreased from 61.7 per cent in 1968 to 50.5 per cent in 1976. In most of the ‘strategic’ industries, such as industrial machinery, electronics, automobiles, shipbuilding and metal products, the imports declined from 55.9 per cent in 1968 to 35.4 per cent in 1976 (Koo, 1986, p. 8).
The government’s support policies and investment in capital-intensive and heavy industry began to be rewarded. From 1972 the heavy and chemical industries grew
rapidly and the share of those industries to total manufacturing value added, which was already 37.8 per cent in 1972, increased to 54.0 per cent in 1983. The proportion of those products in total exports also increased from 21.3 per cent to 51.3 per cent in
1972 and 1983 respectively (see Table 4.4).
Table 4.4
Share of Heavy and Chemical Industries, 1964-83 (unit: percentage)
1964 1972 1979 1983 In Total Manufacturing Value Added (Constant Price)
31.4
37.8
52.6
54.0
In Total Exports (Current Price)9.4
21.3
38.4
51.3
Source: Ministry of Trade and Industry; Koo, 1989, p. 10.
However, in 1979, oil prices increased and the onset of a world slump reduced external demand for South Korea’s exports, generating negative growth in 1980. From 1979 to 1980, the government borrowed heavily to finance the heavy and chemical industries and achieve its aims of promoting and protecting the sector. The accumulation of a heavy debt burden, coupled with excessive supplies of capital in the economy, resulted in an increase in inflation, and due to rising domestic prices, the competitiveness of the South Korean exports decreased. Heavy losses were incurred and shipbuilding and heavy machinery manufacturing declined.
However, regardless of the negative external factors affecting the growth of HCIs, there were more fundamental problems for the development of HCIs in South Korea. When the government launched the development programme for its HCI in the 1970s, it was too ambitious to not consider whether domestic market demand was large
product cycle model, LDC scale-sensitive industries can have comparative advantages when the markets of LDCs meet certain conditions. The South Korean economy was growing rapidly and per capita income rose, in other words, the market was in the dynamic youthful stage of the product cycle. However, the South Korean firms could not secure access to a large market so that they could amortise their investments. Without crossing a plant of the minimum viable threshold size, the South Korean HCIs were forced to be developed by the government.
After the government adopted its policy for the HCI, the industries seemed to grow rapidly, but then started to decline due to over-capacity. This trend indicated the fact that the development of HCI in South Korea was premature and the government had no choice but to borrow funds for declining HCIs. Despite the government’s effort, many entrants declared an insolvency status. As a result, the South Korean economy experienced heavy losses and inflation, as mentioned above, and the government was forced to pursue a consolidation of the HCIs.
Due to the premature timing of HCI entry supported by the government, many firms in the HCIs had to pay the penalty, resulting in making a dent in the growth of the South Korean economy as well as wasting resources, although the consolidation of the HCIs was eventually effective. If the government encouraged firms’ entry in the 1980s, the HCIs could have been developed more efficiently.
However, the government’s HCI policy was somehow an incubator for the development of capital- and technology- intensive products which could be exported to foreign markets. The production of automobiles, ships, and intermediary industry products required strong support from the heavy and chemical industries, and during the 1973 to 1985 period, the government built the foundation on which future export could grow and the industrial structure could be upgraded. The share of the manufacturing
sector increased from 9.1 per cent of GNP in 1962 to 29 per cent in 1983, while that of the agriculture, forestry and fishery sectors decreased from 43.3 per cent to 16.3 per cent (see Table 4.5). The South Korean economy experienced its first structural change from a primary-product-based economy to a newly industrialising developing country (NIC).
Table 4.5 Changes in Industrial Structure (unit: % of the GNP in constant prices)
Sector 1962 1972 1979 1983 Agriculture, Forestry and Fishery
43.3
26.5
17.5
16.3
Mining and Quarrying2.0
1.8
1.4
1.4
Manufacturing9.1
16.9
27.6
29.0
Services45.6
54.8
53.5
53.3
Total100
100
100
100
Source: EPB, 1984.The growth of the economy in the 1970s and early 1980s depended largely on market demand in the U.S. and Japan. Despite sluggish growth in these two countries during the period, the South Korean economy grew sharply through an export-led boom. Unlike dependency theorists3, neo-classical economists4 argued that close attachment of a small national economy to a large, more advanced one, such as that of the U.S. or Japan during the 1950-73 period, would ensure demand for exports (Barrett
3 Dependency theory originated among Latin American scholars who sought national economic