A Memoir by Kim Chung-yum From Despair to Hope Economic Policymaking in Korea 1945-1979 Copyright 2011 Korea Development Institute P. O. Box 113, Hoegiro 49 Dongdaemun-gu Seoul, 130-868, Korea www.kdi.re.kr ISBN : 978-89-8063-529-0 93320 A Memoir by Kim Chung-yum From Despair to Hope Economic Policymaking in Korea 1945-1979 Map of the Republic of Korea (South Korea) | Contents | Foreword Preface and Acknowledgements A Note on Romanization Introduction Part I. Korea’s Journey from Poverty to Prosperity 1 Chapter 1. President Park Chung Hee's Economic Development Policy: Assessments from the World Bank and Deng Xiaoping 2 Part II. Formative Experience: The Self-Portrait of a Young Central Banker 21 Chapter 2. Living under Japan’s Occupation and Surviving the Atomic Bomb 22 Chapter 3. Making a Mark as a Young Central Banker 42 Chapter 4. The First Currency Reform and Accession to the IMF and IBRD 64 Part III. Against All Odds: The Trials and Triumphs of a Technocrat 85 Chapter 5. Political Turmoil and the Second Currency Reform 86 Chapter 6. Stock Exchange Reform 113 Chapter 7. Export-Oriented Industrialization and Market Liberalization 119 Chapter 8. Tax Reform and GATT Accession 137 Chapter 9. Electricity, Steel, Petrochemicals, and Export Promotion 150 Part IV. Policymaking on the Front Lines 1: Social and Economic Transformation 181 Chapter 10. Unexpected Appointment as President Park's Chief of Staff 182 Chapter 11. Rural Development, Water Resource Management, and Silver Revolution 185 Chapter 12. Green Revolution and Dual Grain Price Policy 202 Chapter 13. Saemaul Undong (New Village Movement) 219 Chapter 14. Reforestation 244 Chapter 15. Expressways 272 Chapter 16. Moratorium on Curb Loans 315 Chapter 17. Value Added Tax 355 Chapter 18. National Healthcare 379 Part V. Policymaking on the Front Lines 2: National Security and Industrial Policy 391 Chapter 19. Heavy and Chemical Industry Drive 392 Chapter 20. Technical Education and Vocational Training 426 Chapter 21. KIST, Government Research Institutes, and Daedeok Science Park 442 Chapter 22. National Security Crisis and Policy Response 449 Part VI. Presidential Secretariat 495 Chapter 23. Organizational Decisions and Political Lessons 496 Chapter 24. Flexible Management of the Presidential Secretariat 548 Part VII. Conclusion 559 Chapter 25. A Personal Sketch of President Park 560 6 Lim Wonhyuk Table 1. Policy Challenges for Development xxviii Table 2. Savings and Investment in Korea, 1962-81 xxxi Table 3. Composition of Foreign Capital Flows into Korea, 1945-92 xxxii Table 4. Allocation of Japanese Reparation Funds xxxiv Figure 1. Korea's Journey from Poverty to Prosperity xi Figure 2. Sectoral Composition of GDP (Percent of GDP) xii Figure 3. Exports, Imports, and Investment (Percent of GDP) xiii Figure 4. Import Liberalization (Percent) xl Figure 5. Gross R&D Expenditure xliv Figure 6. Installed Capacity of Electric Power by Fuel Source (MW) xlv Figure 7. Road Extension (km) and Pavement Ratio (Percent) xlv Figure 8. Water Supply (liter) and Access to Potable Water (Percent) xlvi Figure 9. Enrollment Rate by School Level (Percent) xlvii Figure 10. Inflation, Unemployment, and Growth (Percent) l Figure 11. Current Account and Fiscal Balance (Percent) l Figure 12. International Reserves and Short-Term External Debt (Percent) lii | Foreword | Established in March 1971, the Korea Development Institute (KDI) is Korea’s oldest and best-known research institute in the fields of economic and social sciences. Its primary mission is to contribute to Korea’s development by setting long-term national agendas and providing policy recommendations based on rigorous analysis. Internationally, KDI has also sought to share Korea’s development knowledge with other countries that are facing the challenge of initiating and sustaining development. Since its establishment, KDI has conducted research on Korea’s development experience and sought to contribute to the socio- economic advancement of developing countries. With the Harvard Institute for International Development, KDI carried out Studies in the Modernization of the Republic of Korea: 1945-1975, which resulted in the publication of a ten-volume monograph series. This effort was followed by two subsequent joint projects with Harvard, covering Korea’s transition from an authoritarian developmental state to a democratic market economy. KDI also published The Korean Economy 1945-1995 on the occasion of the 50th anniversary of Korea's liberation from Japanese colonial rule. Most recently, in cooperation with other public research institutes, KDI published The Korean Economy: Six Decades of Growth and Development. In addition, KDI has been leading research projects on the i Hyun Oh-Seok systemization and modularization of Korea’s development experience to provide benchmark case studies for developing countries under the Knowledge Sharing Program (KSP), covering such cases as the Saemaul Undong (New Village Movement) and the post-1997 economic crisis reforms and restructuring. In order to share Korea’s development experience and contribute to international development cooperation, KDI established the International Development Exchange Program (IDEP) in 1982, which in 2010 was expanded into the Center for International Development (CID). In conjunction with these efforts, and on the occasion of KDI’s 40th year since its founding, it is a great honor to publish Mr. Kim Chung-yum’s memoir. Starting his career as a central banker in the 1940s, Mr. Kim was a leading figure in economic policymaking in Korea for more than 30 years. During Korea’s “take-off” in the 1960s, he played a major role at the Ministry of Finance and the Ministry of Commerce and Industry. Subsequently, he served as President Park Chung Hee’s Chief of Staff for more than nine years, from 1969 to 1978. Although the usual caveats apply to a personal memoir like this, Mr. Kim’s memoir is a true asset not only to KDI's publications but also to the literature of development. ii Foreword Lim Wonhyuk, Director of Policy Research at CID, oversaw this project from its inception and wrote the introduction for the memoir. Having first met Mr. Kim in 1995, he is grateful to Mr. Kim for providing valuable advice and guidance over the years and for agreeing to have his memoir translated and published for international distribution. He also thanks CID Research Associates Kim Yoon Jung, Woo Hye Young, Lee Taeyeon, and Kim Ha Yeon for their meticulous work on the manuscript. I hope that this memoir will be a valuable source of information to policymakers of developing countries and transition economies in promoting their own development in retrospect to the development strategies that enabled Korea to make the leap from one of the poorest countries in the world to the ranks of advanced industrial countries. Hyun Oh-Seok President Korea Development Institute iii Hyun Oh-Seok | Preface and Acknowledgements | For more than thirty years, I worked for the central bank of the Republic of Korea and the Korean government, beginning in 1944, when I started out as a clerk at the Bank of Chosun, the forerunner of today’s Bank of Korea, and ending in 1980, when I resigned from my post as Korean Ambassador to Japan. In 1950, I participated in the drafting of the Bank of Korea Act, and in 1953, when I was only twenty-nine, I wrote the entire text of the First Currency Reform. After that I was often involved in major Korean economic policy matters, either directly or indirectly. I had considered the Bank of Korea my lifetime employer, but in 1959 I was dispatched to the Ministry of Finance. I served as the Director-General of the Bureau of Finance through the end of the First Republic (1948-1960), the transition government (1960), and the beginning of the Second Republic (1960-1961). From 1962 to 1969, I served as Vice Minister of Finance, Vice Minister of Commerce and Industry, Minister of Finance, and, finally, Minister of Commerce and Industry. From 1969 to 1978, I was the Chief of Staff to President Park Chung Hee, and from 1979 to 1980, I was Korea’s Ambassador to Japan. As for my contributions to the field of banking and finance, I was responsible for the First and the Second Currency Reforms and was iv Preface and Acknowledgements closely involved in the Presidential Emergency Decree of August 3 in 1972, which froze informal money markets. I also supported the introduction of a value added tax (VAT). In the areas of industrial and social policies, I was involved in the export-oriented industrialization policies of the 1960s. Most of all, I played a critical role in the development of Korea’s heavy and chemical industries and the build-up of the defense industry. Furthermore, I dedicated myself to various issues in which President Park showed an interest: agricultural development, the reforestation of the mountains, the Saemaul Undong (New Village Movement), the construction of expressways, and the establishment of a medical security (national healthcare) system. Looking back, I must say I was daunted at times by the uphill struggle Korea faced. In the 1950s, when I was helping to rebuild and stabilize the economy after the Korean War (1950-1953), I wondered whether Korea, struggling as it was with “Asian stagnation” and the vicious cycle of poverty, could ever graduate from being a low- income country. In the 1960s, when I was involved in the First and Second Five-Year Economic Development Plans, I was determined to make the economy take off. In the 1970s, when Korea was becoming one of the newly industrialized economies, I recollect v Kim Chung-yum having worked single-mindedly, with a deep sense of achievement. This memoir is an attempt to record the Korean economic policies in which I was closely involved from the beginning of the 1950s to the end of the 1970s.