Two central debates surround the role of the state in South Korea’s rapid development – the relationship between policy and economic outcomes pitting market-oriented neo-classical economics against statist alternatives, and placing greater emphasis on the institutional setting and strategic actions by the state (Haggard and Moon, 1990). Neo-classical interpretations identify the turning point in the country’s economic growth in the shift to an export-oriented strategy in the early 1960s, as the South Korean state continued to intervene in the economy through market-oriented reforms.
Pursuing a stable macroeconomic policy, realistic exchange rate policy and selective trade liberalization allowed domestic firms to identify and recognize their comparative advantage, allowing South Korea to exploit its comparative advantage in exporting light, labor-intensive manufacture (Haggard and Moon, 1990). The ensuing positive real interest rates mobilized savings, with the business climate encouraging direct foreign investment.
The alternative interpretations of South Korea’s development emphasize a subtle interplay among arm’s-length incentives, an interventionist industrial policy and a particularly close relationship between the state and the private sector (Moon, 1988). Such interpretation perceives a greater continuity in South Korean economic policy than suggested by the neo-classical approach.
Economic policy affects aggregate growth, as well as having distributional consequences for different social groups, with the very shape of the South Korean social fabric – from the nature of agricultural land holdings to the size and structure of the chaebol, to the sectoral composition of the working class – molded in myriad ways by government policy and state intervention in the market (Haggard and Moon, 1990). Dependency and External Constraints
A small, strategically significant country, South Korea has been exposed to overwhelming external constraints throughout its modern history. The structure of contemporary South Korean state and crucial elements of its social structure can be traced back to the Japanese occupation (Cumings, 1981, p. 3). Vogel (1991) among others emphasize the crucial role of Japan as a model for South Korea. However, since 1945 the strategic and economic relationship with the United States has taken precedence, particularly in the 1960s when dependence on US aid was high.
Yet the dynamics of this influence appears to have been ambiguous, with critics arguing that Americans wielded substantial influence through both the aid relationship and the overall ineffective development policy (Haggard and Moon, 1990). A closer scrutiny of the relationship reveals a surprising ability on the part of South Korean strongman Syngman Rhee to evade American conditions, i. e. the large influence of small allies.
Yet the impending termination of aid significantly affected economic policy, changing the incentive for policy reforms to increase the availability of foreign exchange, including greater commercial borrowing, a more open policy towards foreign investment and strong emphasis on exports (Ibid). Given the devastation of the Korean War, the significance of U. S. exports to the Rhee government could hardly be overstated – aid financed about 70% of total imports from 1953-1961 and 75% of total fixed capital formation (Ibid). The U. S. in return sought economic reforms, i. e.
privatization and conservative fiscal and monetary policies. Rhee however proved skillful at manipulating South Korea’s strategic significance to maintain the flow of economic and military aid, leading President Dwight Eisenhower to privately call the said relationship “blackmail” (NDDE, 1957). The U. S. effectively took control of responsibility from multilateral agencies for South Korea’s reconstruction in 1953. Eisenhower’s plan for an additional $200 million to finance reconstruction efforts was aimed at overcoming Rhee’s opposition to the signing of an armistice (Cole and Lyman, 1971, p. 210).