View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Foreign Trade Regimes and Economic Development: South Korea Volume Author/Editor: Charles R. Frank, Jr., Kwang Suk Kim and Larry E. Westphal Volume Publisher: NBER Volume ISBN: 0-87014-507-X Volume URL: http://www.nber.org/books/fran75-1 Publication Date: 1975 Chapter Title: Chapter 2: Economic Growth in South Korea since World War II Chapter Author: Charles R. Frank Jr., Kwang Suk Kim, Larry E. Westphal Chapter URL: http://www.nber.org/chapters/c4063 Chapter pages in book: (p. 6 - 24) Chapter 2 of ti proc of it 72! cent EconomicGrowth in South put Korea sinceWorldWar II dusi deci lack nun ECONOMIC DISORGANIZATION FOLLOWING LIBERATION The Japanese occupation of Korea ended on August 15, 1945 and was sup- planted in part by a U.S. military government. The immediate postwar period was characterized by extreme economic disorganization and stagnation caused by the sudden separation of the Korean economy from the Japanese economic bloc, and by the partition of the country along the 38th parallel. — Undercolonial rule from 1910 to 1945, the Korean economy became Me highly dependent upon Japan for capital, technology, and management. Of the Ma total authorized capital of business establishments in Korea, the Japanese Ch owned approximately 94 percent, as of 1940.1 Japanese engineers and tech- nicians employed in manufacturing, construction, and public utilities in 1944 constituted about 80 percent of the total technical manpower in Korea. The Pri proportion of Korean engineers and technicians was particularly small in the Ha metal and chemical industries (11 to 12 percent).2 The relative number of Korean business establishments was very small in high-technology industries— about 10 percent in the metal and chemical industries and 25 percent in the Ce4' machinery industry. Most Korean establishments were small and used simpler Log!. technology than the Japanese. Furthermore, establishments in Korea were mainly subsidiaries of Japanese companies. Therefore, the sudden retreat of the Japanese and the separation of the economy from the Japanese economic — blocbrought about a suspension of many production activities in Korea. Partition also had deleterious effects on the South Korean economy. In • 1940, Korea's total population was 23.5 million people, 15.6 million in the put Southand 7.9 million in the North. Approximately 92 percent of average an- nual power generation, however, had come from plants in the North and most Au 6 a • ECONOMICDISORGANIZATION FOLLOWING LIBERATION 7 of the country's mineral resources were located there too. In 1940, the North producedabout 90 percent of Korea's output of metal products and 83 percent of its chemical products (Table 2—1). By contrast, the South accounted for 72 percent of machinery production, 85percentof textile production, 64 per- cent of processed food output, and 89 percent of printing and publishing out- put in the same year. Thus, metals, electric power, and chemical industries were located mainly in North Korea at the time of liberation, while light in- dustries and machinery production tended to be located in the South. The number of industrial establishments and employment in South Korea declined sharply after 1945 when the Japanese left and when firms closed for lack of electricity. The industrial survey of November 1946 showed that the number of manufacturing establishments had dropped by 43.7 percent since TABLE 2-1 Manufacturing Output and Employment, 1940 and 1948 (output in millions of 1948 constant won) sup- Manufac- eriod South Korea's turing . South Manufac- Workers, aused ManufacturingOutput in 19408 • Koreas turing 1948 • iomic All Korea South Korea Share Output, 1948 (000) came Metal 49.2(9.3) 4.9(2.0) (10.0) 2.2(4.2) 4.9(3.7) the Machinery 19.3(3.6) 13.9(5.6) (72.0) 3.4(6.4) 14.4(11.0) Inese Chemicals 181.5(34.2) 30.7(12.4) (16.9) 15.2(28.8) 32.6(24.9). Textiles 72.8(13.7) 61.5(24.8) (84.5) 21.6(41.0) 60.4(46.1) • tech- Foods 9.0(6.9) 1944 118.8(22.4) 76.0(30.6) (64.0) 6.6(12.5) Ceramics 15.7(3.0) 4.3(1.7) (27.4) 1.4(2.7) 5.6(4.3) The Printing 7.0(1.3) 6.2(2.5) (88.6) 1.6(3.1) 2.4(1.8) the Handicrafts 7.6(1.4) 4.9(2.0) (64.5) 0.7(1.3) 1.8(1.4) of Other 59.0(11.1) 45.7(18.4) (77.5) 0.0 0.0 es— Total 530.9(100.0)248.1(100.0) (46.8) 52.6(100.0) 131.1(100.0) t the Central government operated 1l.6(22.1)b 37.g(28.8)b ipler Local government operated 6.8(12.9)b were Private 34.2(65.0) 67.8(51.7) it of Total 52.6(100.0) 131.1(100.0) mic NOTE: Figures in parentheses are percentages. r. In SOURCE: Bank of Korea, Economic StatisticsYearbook,1949, pp. 1—47—1—48. the a. Data for 1940 were recompiled by Bank of Korea to obtain manufacturing out- put for South Korea. an- b. These shares were large because the government took over Japanese firms after Tiost August 1945. Most of those firms were later sold to private interests. I a 8 ECONOMIC GROWTH SOUTH KOREA SINCE WORLD WAR H 1944. Manufacturing employment was 59.4 percent lower. In 1948 total man- ufacturing output in South Korea was only about one-fifth of the 1940 level (Table 2—1) and had declined sharply in every major sector. (Manufacturing output is likely to have been much lower in 1946, but data are not available.) In addition to the drastic decline in domestic manufacturing, severe food shortages developed after the war. Population increased rapidly because of Rice the immigration of refugees from the North and the repatriation of Koreans Wheat from Japan and other countries. Since domestic grain output was not enough Anthr to feed the increased population, the U.S. military government imported Tungs about 670 thousand metric tons of food (including wheat, barley, rice, and Salt powdered milk) from May 1946 to January 1948. roce Uncontrolled expansion of the money supply before and after liberation Raws set off a hyper-inflation. Currency in circulation expanded by about 6.7 times Cotto between the end of 1941 and August 15, After the liberation, it ex- Cotto panded 77 percent between August 15 and November 1, 1945 and by about Paper 15 times in the four years and four months from August 15, 1945 to the end Laun of 1949. Prices rose very rapidly. The Seoul retail price index increased about Ceme 123 times from June 1945 to June 1949. China The U.S. military government attempted to control inflation by announc- Nails ing maximum prices on essential goods and by rationing. These measures Trans were not successful and were accompanied by increased black market activ- Light ities. When this became apparent, the government relaxed the controls. Av Aver ex ECONOMIC GROWTH AND TRADE, 1946 TO 1953 annu Neither national income data nor an overall industrial production index is available for the period 1946 to 1953. Production indexes are available, how- Of a ever, for major commodities as shown in Table 2—2. the Although the average production index for the major commodities is an unweighted, simple average, it gives a rough indication of the growth rate of time production. Starting from a very low base in 1946, the postwar recovery of indu11 production was fairly rapid. The average production index shown in Table 2—2 achiej increased about two and a half times from 1946 to 1949. Electric power gen- tota!41 eration and tungsten production for export increased sharply. Heavy industry, however, recovered much more slowly, especially iron and steel and chemicals. The Korean War again brought a sharp drop in industrial production in port 1950 and 1951. By 1952 industrial production began to pick up again as the were fighting gradually stalemated along the present demilitarized zone. Although only hostilities did not cease until 1953, by that time the average production index Pu (excluding tungsten) had slightly surpassed the 1949 level. The recovery, how- ever, was uneven. Tungsten production increased spectacularly, but production cou ECONOMIC GROWTH AND TRADE, 1946 TO 1953 9 TABLE 2-2 I man- Production Indexes of Major Commodities, 1946 to 1953 ) level (1946 100) lable.) Commodity 1947 1948 1949 1950 1951 1952 1953 efood use of Rice 115 123 122 121 94 77 117 oreans Wheat and barley 90 95 123 127 74 106 125 Anthracite coal 169 281 347 222 44 175 269 • nough Tungstenore 353 394 413 112 327 1,1062,347 ported Salt 87 113 225 208 99 241 238 e, and Processed marine products 72 61 118 52 61 61 78 Cigarettes and tobacco 237 296 367 280 316 480 433 - Raw silk 100 91 92 46 66 70 112 times Cotton yarn 109 115 247 191 111 188 257 it ex- Cottoricloth 119 79 230 198 116 154 216 about Paper and paper products 83 84 213 150 62 266 261 end Laundry soap 7 141 197 164 268 316 310 about Cement 172 212 225 108 68 339 390 Chinaware 107 150 419 303 274 356 330 lounc- Nails 598 595 865 716 225 569 1,114 asures Transformers 93 74 41 14 53 51 57 Light bulbs 163 162 127 49 35 30 68 activ- Electric power 109 217 291 182 140 282 327 Average index (unweighted) 155 184 259 180 135 270 392 Average index (unweighted) excluding tungsten 143 171 250 184 124 221 277 SOURCE: Various indexes,Bank of Korea,Annual EconomicReview,1955; various annualoutput figures, ibid.