|Korea's Experience with the First Five -Year |
Economic Development Plan
Economic development is a central theme today throughout underdeveloped countries, and most of them endeavor to speed up economic growth through planning. Korea is no exception. She is now in the fourth year of the First Economic Development Plan, which went into effect in 1962. The purpose of this paper is to review the major characteristics of the plan and discuss some of the central problems posed by Korean planning. Economic planning is many sided, and may include studies systematically under the headings of administrative machinery, planning procedure, implementation and evaluation, and so on. Because of limited space, however, the present treatment will be confined only to the general features of the plan, the actual performance of the economy during the plan period from 1962 to 1964, and some evaluative comments on the development strategies reflected in the plan and in government policies undertaken in the period.
Prior to the First Five-Year Economic Development Plan, several formulations became abortive before the stage of implementation. The first attempt at formal planning dates back to 1954, when Robert Nathan and Associates submitted, under contract, the "Korean Reconstruction Programme" to the United Nations Korean Reconstruction Agency (UNKRA). However, the programme was not adopted by the Korean government.
It was not until 1958 that the Korean government showed its interest in overall planning by establishing the Economic Development Council within the Ministry of Reconstruction. The council, headed by the minister of reconstruction, was assigned to conduct economic research for current policy problems, to work out investment plans in the public sector for the annual budget, and, above all, to formulate a long-term development plan. In May 1959, the council submitted a draft of the Three-Year Economic Development Plan to the Cabinet.
When the plan was approved by the Cabinet in the spring of 1960, however, the April Student Revolution broke out, with the consequence that the regime of the Liberal Party government led by Dr. Syngman Rhee was replaced by a Democratic Party government. Naturally, the plan was abandoned. But the need for development planning was obvious to the new political leaders, and toward the end of 1960, the council-under the new government-was instructed to draw up a new five-year plan that would improve upon the previous one.
As soon as the five-year plan was completed in May 1961, however, the Military Revolution took place, with the result that the ruling power was taken over by the Supreme Council for National Reconstruction headed by General Park, now the president of the Republic of Korea. The plan naturally became dormant on the planners' shelf.
Along with the feverish knot-cutting reforms introduced in both political and social matters, the Revolutionary government undertook to break through the economic stagnation and to speed up economic development through overall planning. Out of the general reorganization of the administrative system emerged a central planning agency called the Economic Planning Board. The board was instructed by the Supreme Council to draw up a first-year development plan within a period of a few months in line with "guidelines" handed down by the Supreme Council. Pressed by the time limit, the board took down the shelved plan and set out to change the numerical contents, effecting the necessary coordination to achieve internal consistency.
Swayed by the "guidelines" and the general mood of the time, the revision was by and large in the direction of inflating figures and extending the scope of the development projects. The First Five-Year Economic Development Plan thus prepared was approved with minor changes by the Supreme Council in November 1961 and was put into effect in January 1962.
The plan aimed at laying foundations for the attainment of a self-sustaining economy by correcting socioeconomic vicious circles. Special emphasis was laid on the increase in energy production; expansion of such key industries as cement, fertilizer, and oil refining; other social overhead capital such as transportation and communication; increasing agricultural output; creation of additional opportunities for employment; and the promotion of technical knowhow.
From the outset, however, the plan was criticized by the learned circle for lack of realism and for overambitiousness. For example, it was argued that the average annual growth rate of the GNP (7.1 percent) postulated for the plan period was unreasonably higher than the average rate of 4.7 percent realized during the past seven years. The criticism was well justified by the results of the first year. Consequently, the plan underwent major revision toward the end of the first year of implementation. In order to be more realistic, the target growth rate of the GNP was reduced to an average of 5 percent per annum. Investment outlays were trimmed according to the more conservative estimate of available resources; some overambitious projects were suspended for reconsideration; emphasis was shifted from some projects to others. The revisions, of course, applied only to the remaining four years.
|Provisions of the Plan|
The plan in its revised form called for outlays for development investment amounting to nearly 218 billion won during the remaining four-year period, the yearly amount increasing from 43.6 billion (actual) won in 1962 to 57.5 billion won in 1966. The annual investment outlays, on the average, were equal to 17 percent of the estimated GNP, or 15 percent of the estimated total resources available (that is, GNP, net borrowing abroad, and net foreign donations combined). The planners estimated that these outlays would increase the country's gross national product by 5 percent per annum on the average, or an increase of 21 percent at the end of the remaining four years. With population growth reduced to an annual rate of 2.5 percent, this would increase per capita GNP by 1.5 percent per year, or as much as 8.6 percent at the end of those same four years.
The largest portion (47 percent) of total investment outlays (1963-1966) was to come from foreign donations, mostly from the United States; about 34 percent from domestic saving; and about 19 percent from borrowing abroad in the form of intergovernmental or private loans or private direct investments. The planners urged that measures be taken to increase domestic saving from the level of 2.1 percent of GNP in 1962 to 8.2 percent in the fifth year, averaging 5.1 percent per annum during the period.
Of the foreign exchange amounting to $1.8 billion that would be needed to pay for all the country's imports of goods and services during the period from 1963 to 1966, more than 38 percent was to come from foreign donations and 15 percent from domestic sources. Of the total, 26 percent was earmarked for investments, the remainder being planned for supporting current production and consumption.
About 18 percent of the total investment outlays was to go to agriculture, forestry, and fisheries; 16 percent to transportation and communications, 21 percent to mining and power; 25 percent to manufacturing industries; and 20 percent to education, housing, and social welfare. Of the total outlay, half was to be in the public sector, the remainder being in the private sector.
The plan emphasized the need for increasing agricultural output. It included the addition of 50,000 jung-bo to the country's cropland through reclamation and irrigation. It proposed the improvement of seed, deep plowing, and adequate fertilization and the control of insect pests and plant diseases.
Coal and electric power occupied a strategic place in the plan. Coal output was expected to increase by 58 percent by the fifth year-which would, however, still fall short of the demand, expected to rise from the general expansion of industrial activities. The plan undertook to double the output of electric power by the fifth year. It also provided for improvement and expansion of the country's railways, highways, harbors, and communication facilities. Most of this investment was to be made in the public sector, demanding about 26 percent of the government expenditure.
In the field of manufacturing industries, priority in the allocation of resources was accorded to such industries as those producing capital goods, import substitutes and export goods; special assistance was promised to small industries that were preponderant in numbers, employment, and value added in the country. Cement, fertilizer, oil refining, and chemicals also received particular emphasis.
It is worth noting here that in the process of revising the original plan, a monumental project of constructing an integrated iron and steel mill, turning out 250,000 tons of pig iron, had to be suspended for reconsideration because the planners found the financial and technical difficulties surrounding the project almost insurmountable. Emphasis was shifted to the fuller utilization of existing plants and to other more appropriate projects.
As a result, the target of fertilizer output, originally set at 88,000 tons, was raised to 328,000 tons to fully satisfy the expected domestic demand in the fifth year. Cement also received renewed emphasis; its target was raised from the original 1.3 million tons to 2 million tons. This would be sufficient to meet domestic requirements in the fifth year. The plan included construction of a petroleum refinery with an estimated capacity of 30,000 barrels daily. The target output was considered sufficient for satisfying domestic civilian demands in the final year.
The plan included the construction of a P.V.C. plant with a capacity of 6,000 tons to partly satisfy the growing demand at home, and the construction of a straw-pulp mill with an annual capacity of 15,000 tons of rice-straw pulp, which, together with the wood pulp produced by the existing mills, would meet nearly half of the estimated demand in the fifth year.
With this impressive scheme of industrialization, the plan called for an "intensive productive effort" in order to achieve an annual growth rate of more than 20 percent on the average in the "secondary industries" (mining, manufacturing, construction, and power), and thus raise their proportion of the gross national product from 21 percent in 1962 to 26 percent in the final year. To sum up, the major target of the revised plan was to raise the output of the "secondary industries" by 50 percent, the output of agriculture by 15 percent, and that of transportation and communication by 12 percent over the level of 1962.
In spite of the inclusion in the plan of many projects for the production of import substitutes such as cement, fertilizer, oil, and paper, and despite the proposed drastic increase in the export of goods and services from $166 million in 1962 to $243 million in the fifth year, the international balance of payments was expected to register a deficit of $242 million, only 18 percent less than that in 1962. This was due to the expected overwhelming demand for foreign exchange required by the developmental investments. The deficit was to be met mostly by foreign donations that were, however, expected to decrease from the $236 million of 1962 to $186 million in the final year, and partly by borrowings abroad in the form of intergovernmental loans and private investments up to $69 million in the fifth year.
Turning to the area of employment, in spite of the ambitious developmental efforts proposed, the planners conceded that unemployment would mount from 780,000 persons in 1962 to 850,000 persons in the fifth year. Because the natural increase in the labor force would outweigh the additional absorption, the situation would be no better in the fifth year than in the first.
The plan proposed numerous measures to support its execution. It urged, among many other things, austerity or more savings on the part of citizens, economy and efficiency in administration, more taxes, "liberalization" of markets, "privatization" of government enterprises, and more efficient management. But the foremost emphasis was placed on financial stability as the precondition for sound economic development and the successful execution of the plan.
|The Actual Performance|
The performance of the economy from 1962 to 1964 generally fell short of the promise of the plan. GNP, instead of growing at an annual rate of 6.5 percent, grew at 5.7 percent. The "tertiary industries" alone grew at an annual rate faster than the rate expected in the plan. Agriculture failed most in approaching the target, while industry come closer to the intended level of performance.
The mobilization of the resources for economic development up to the end of 1964 largely fell short of the target set by the plan. Domestic savings averaged, instead of 7 percent, only 5 percent of GNP during the three-year period from 1962 to 1964. The government's nondevelopment expenditure outran the planned figures and less funds were available for government investment and loans to the private sector.
Foreign exchange earned through exports cumulated to $261 million at the end of 1964, only half of the planned value. Inflow of foreign capital in the form of intergovernmental and private loans, instead of reaching the estimated total of $251 million, stood at the level of only $103 million, or less than a half of the expected value. A wide discrepancy occurred between the planned amount and the actual amount in the area of U.S. aid. By the end of 1964, the aid received totaled $572 million as compared with $892 million expected in the plan.
These shortfalls in the introduction of foreign resources necessitated curtailment of imported raw materials and capital equipment both for developmental and current purposes, constituting a fatal blow to the execution of the plan. In all, imports fell short of the expected level by 58 percent during the period.
As a result of the shortfalls in the mobilization of the resources required for the realization of the plan, investments lagged behind the target: The total investment outlays (in constant prices of 1960) during the three years are estimated at 14.8 billion won, while the planners wanted an outlay of 17.7 billion won to be invested. The ratio of investment to GNP averaged-instead of 22 percent-only 17 percent during the three-year period.
The government's effort to maximize investment expenditure for planned projects was not without result. Remarkable progress was made during the period in the field of power and transport. The projects for expanding power generating facilities were completed ahead of schedule, turning out electric power sufficient to meet domestic requirements as of 1964. Coal production increased close to the target level. An oil refinery went into operation in 1964 on schedule with a capacity to meet domestic demand. Also completed were three cement plants with a combined capacity more than enough to meet domestic demand at the present. A fertilizer plant constructed in 1962 commenced its operation in 1964, adding to the nation's capacity to produce fertilizer. There was remarkable expansion and improvement in the area of transport and communications. On the other hand, little progress was made in the field of mechanical industries. A number of projects, including the steel mill and automobile plants, were abandoned or postponed because of inavailability of funds and the lack of technical know-how.
Inadequate and fluctuating agricultural production constituted a major factor impeding both the nation's economic growth and the effective [implementation of the plan. In 1962 the economy suffered from a bad rice harvest, resulting in an increase in the general price level. In the following year, the disastrous failure in the harvest of summer grain (barley) more than offset the effect of the bountiful harvest of the autumn crop, causing grain prices to rise as much as 57 percent over the level of the preceding year. Korea enjoyed a record-breaking bumper crop in the autumn of 1964, but grain prices continued to rise throughout the first half of the year; finally the belated U.S. aid grain and the newly harvested grain began to appear in the market to press down the grain price.
Thus, during the period under consideration, the fluctuation of grain prices was one of the major sources of economic instability that made the implementation of the Five-Year Plan almost impossible. However, little seems to have been done to remove this most fatal bottleneck that is impeding rapid economic development. There is no indication that arable land, through reclamation, has thus far increased significantly; nor is any sign of improvement in agricultural productivity discernable.
Capital investment made during the period, being mostly of the capital intensive type, has done comparatively little to absorb the nation's ever-increasing idle labor into productive uses. Employment in the industrial sector, reflecting the concentration of investments in this area, increased more than expected, but employment in other sectors failed to increase at the expected rate with the result that the overall increase in employment lagged behind the target and also lagged behind the increase in the working population during the period under review.
Expansion of development expenditure under the plan ran into foreign exchange difficulties toward the end of 1962, forcing the government to revise its attitude toward, among other things, the introduction of foreign private capital. Encouraged by the government policy at first, private business contracts for foreign loans rose from nothing to $130 million in 1961. The immediate result was that the foreign exchange was lost through down payments. The liquidity of the central bank was also threatened by the increasing payment gurantees to foreign creditors. To curb the exchange crisis and political criticism, the government revised its policy to discourage the introduction of foreign private loans requiring down payments and of loans requiring guaranteeing by the central bank. Encouragement was given to direct foreign investment and intergovernmental loans.
Until the end of 1963, the deficit in international accounts was growing due to ever-increasing imports for developmental purposes, accompanied by a gradual decrease in U.S. economic aid. In the meantime, as a result of the government's determined effort to promote export by means of an import-export link system and subsidies, exports reached a record high of $119 million in 1964, making it possible to replenish the reserve balance to something comparable to the 1961 level. On the whole, the development plan suffered more from poor absorptive capacity than from the lack of sources of foreign capital.
It was in financial and monetary management that the plan failed most sadly. By the end of 1964 the money supply had increased by 40 percent over the year-end level of 1961. This enormous increase in the money supply undoubtedly served to finance the expansion in productive facilities as described above, but it also contributed much more to the rapidly progressing inflation that had occurred. The wholesale price index soared from 128 (base: 1958) at the end of 1961 to 228 at the end of 1964, an increase of about 73 percent in the short span of time.
Finally, an account of at least two examples of monetary mismanagement during the period seems to be in order. The currency reform is one; the stock market failure is another. The government announced a currency reform in June 10, 1962, the very first year of plan implementation. The whan was replaced by won as the new monetary unit, at the rate of 10 whan to 1 won. All inhabitants within the territory of Korea were requested to surrender all cash balances and orders of payment to designated banks. A part of the money was to be paid back to the depositors by new money according to the proportions prescribed by the government, the remainder going to blocked accounts.
The primary purpose of the reform as envisaged by the government was to freeze what was thought to be idle cash balances held by a group of people who had amassed great fortunes illicitly under the preceding governments. The government hoped to ward off inflationary trends and at the same time collect a large sum of funds that could be channeled to productive investment as required by the Five-Year Plan.
Aside from the reform's wisdom from the policy viewpoint, it clearly involved a naive analytical error in assuming that people kept large, idle cash balances in the face of the rapidly deteriorating value of money. Sure enough, the government failed to uncover any significant number of large currency hoards, and it became doubtful whether any worthwhile amount of funds could be raised by this venture. The adverse effects, however, were seen to be far reaching, and the government began step-by-step to lift the monetary blockade. In consequence, the reform caused an entirely unnecessary economic disturbance and undermined the confidence of the people in the banking system and in the government.
The trial with the stock market was well intended but failed as a result of inexperience. Early in 1961, the government gave some stimuli to the stock market to activate its operation with the hope that it would help mobilize the private domestic capital needed for development projects. For a while trading moved up, but it soon began to deteriorate into outright speculation, which ultimately brought about a series of market failures that resulted in a suspension of the market operation. This failure made it even more difficult to develop the financial market, and forced the government to seek other means of raising domestic capital.
The developmental effort of the government by means of deficit financing had its own limit. Early in 1963, the government, realizing the seriousness of inflation, restored the practice of formulating the annual Financial Stabilization Program, which had been abandoned upon the beginning of military rule in 1961. Under the program the government effected curtailment of development expenditure in the interest of a balanced budget, allocating less available funds for selected uses. Bank credit was also placed under more strict control to limit the expansion of credit.
The tightening policy naturally exerted a hard downward pressure on production and prices. The government succeeded in 1963 but failed in 1964 in restraining the expanding money supply within the limit set by the program. The government consistently failed to bring the rising prices to a halt largely owing to, it appears, the shortage of food and the decrease in imported material, matched by a highly inelastic demand with respect to price. These defied the downward pressure of the inadequate monetary restraints.
At any rate, it was increasingly clear toward the end of 1963 that the major concern of the government was no longer so much following up the Five-Year Plan as arresting inflation and correcting the widening imbalance in international accounts. And by this time the plan had almost lost contact with the actual operation of the government and its agencies because the originally planned figures had been deprived of their meaning under the progressing inflation-and because the vicissitudes of government policies had rendered futile any attempt at consistent articulation and readjustment of the overall plan.
Here, then, was the general picture of Korean experience with the first economic planning. Without adequate preparation, the government embarked on an overambitious development plan. Failing in mobilizing the domestic and foreign resources required by the plan, the government made recourse to conventional deficit financing. It also tried poorly considered ventures such as the currency reform and the stock market effort. The government, with the aid of deficit financing, succeeded to some degree in attaining the primary objective of the plan-installation of infrastructures and some of the basic industries. But at the same time it served to aggravate economic instability, which had been and still is the central problem in the economic development of the country. The severe economic instability, apart from its pervasive adverse effects on the economy as a whole, rendered the Five-Year Plan unavailing. The shortage of food and the fluctuation of agricultural production was one of the major sources of economic instability, constituting a primary hindrance to smooth economic growth. Investments during the period made only a minimum contribution to the mitigation of the mass unemployment.
|Some Comments on Strategies|
Korean planning was beset with many difficulties and studded with weaknesses, as has been seen explicitly or implicitly in the foregoing survey of economic development under the Five-Year Plan. Putting aside the political and administrative difficulties of planning, space permits only brief comments on the development strategies that were reflected in the plan and the government policies employed under the plan.
The Korean planning experience illustrates the common mistakes often found in underdeveloped countries in that the government embarked on an overambitious development plan without adequate prepration and soon ran into foreign exchange difficulties and inflation.
The achievement made in the installation of basic industries and social overhead facilities may be taken as a case for inflationary financing. However, it must be weighed against the heavy cost incurred by the economy in terms of the evils of inflation, which are too well known to be repeated here. Suffice it to recall once again that when the deficit financing had reached the limit set by severe inflation, the government's energy and administrative resources were diverted in large measure to wrestle with the self-created economic instability, and amid this situation the development plan gradually gave way to the stabilization plan. In short, the government failed to meet the basic requirement of the overall plan that the investment program be fitted into a framework consistent with internal fiscal stability and with stability in the international balance of payments.
One significant reason why the government cannot do away with the habit of deficit financing seems to lie in the fact that deficit financing is effective in the stage of initial spending as long as it can move resources away from the other sectors. This positive effect is clearly visible in the form of newly built plants, railroads and bridges, and the like, whereas its negative effects, pervasive as they are, are not usually visible, or visible only indirectly to the eyes of common people. Lack of the concept of the cost of inflation seems to underlie the false dictum often implicit in the government policy that inflation can be cured by means of inflation. This false notion may also be operating behind the loose self-dicipline on the part of the government in the matter of monetary management. The loose self-dicipline is especially damaging if, as in Korea, the banking system is under a high degree of control by the government.
In order for the development plan to be successful, the government must ensure a maximum contribution from the private sector by stimulating and regulating them to act in the direction of the planned development. However, government policy seems to have been generally against this requirement. The private sector suffered from the inavailability of real resources when the price of raw materials and other productive services were rising, and from the lack of liquidity when the government, aware of the danger of inflation, was abruptly reverting to a contractionary policy, throwing the major burden of adjustment upon private business units, particularly those outside of the "programmed sector." There is some statistical evidence that the small industries, in spite of the government's promise for special help, had low morale throughout the plan period and that the only florishing areas of private investment were those of housing construction and service industries-areas other than those envisaged by the plan.
Regarding development strategy in developing countries, Walinsky once remarked:
Curiously, one finds little emphasis placed on so homely a strategic concept as trying to do better what is already being done. Since most people in developing countries are engaged in agriculture and other extractive industries which can be made tremendously more productive by the introduction or relatively low-cost and relatively simple known techniques, this would seem to be basic to any strategy of development.
Walinsky's observation was well illustrated by the Korean case. Besides the inadequate effort to explore potential agricultural productivity, to whcih we shall momentarily turn, the rate of output of small-scale industry, according to the statistics prepared by the Small and Medium Industry Bank, remained low at roughly half the capacity rate, and was in a downward trend generally throughout the plan period from 1962 to 1964.
The difficulty in utilization of existing facilities is exemplified by the case of one of the largest mechanical plants in Korea. The state-owned company, with nearly 800 employees, was found in a field survey to be in a state of overt underutilization mainly because of the lack of demand for products, a shortage of skill, and inadequate working capital. The company was complaining that the government was permitting the importation of machine tools of the sort that the company was capable of producing at a lower cost than the foreign machines and at a reasonable quality standard, if provided with some foreign technical assistance and operational capital. The government could make these available to the company. With the low rate of earnings, the company's idle facilities lay in a state of poor maintenence. Foreign observers would undoubtedly feel that the productive facilities are generally poorly maintained and there is much room for increasing the nation's output by innovation and improvement based on the existing facilities and management.
One noneconomic factor working against the effort in this direction seems to be worth mentioning. Under the competitive party system in developing countries, there is a suspicion that government leaders, because of political psychology, tend to be preoccupied by the creation of new things instead of improving on what is already in existence. The demonstration of new plants, new roads, and new monumental construction is appealing to the public and apt to be taken as an evidence of the capability of government without reckoning the opportunistic cost thereof in terms of the deterioration of the already existing facilities and the resulting decrease in output and employment. New highways are open, but comparatively little attention is given to the damaged sewer system. New plants are constructed, but the old ones are left idle. New institutions are created only because old, similar institutions are inefficient. Indeed, even a political leader in an opposition party frankly remarked to the writer that his party recognized the great need for fuller utilization of the productive capacity of small-scale businesses and agricultural development, but that it would not be a very impressive slogan for the election. This attitude seems to be of significance in respect of the development effort in underdeveloped countries.
Finally, the balance in policy emphasis between agriculture and industry may be called into question. We have noted that inadequate and fluctuating agricultural output was the major source of economic instability and a great deterrant to the economic growth of the country. By now it seems reasonably clear that unless Korean agriculture becomes able to supply enough food to feed the increasing population, the extreme ripple of price index cannot be smoothed; and unless Korean agriculture is able to supply more raw materials for industry or export, thereby providing the market for domestic industry, there will be no economic growth as a self-sustaining process. In spite of this consideration, agricultural development was given only second place in the policy emphasis and in the allocation of investment funds in the Five-Year Plan, the first priority going to the industrial sector.
This strategy may be interpreted variously. One may argue with Hagen that the construction of a certain number of infrastructures and basic industry installations are prerequisite to any conceivable pattern of development, and viewed in this light, the concentration of the investment effort on industry in the Korean plan leaves little to be censured.
One may also support the Korean strategy by reference to Messrs. Kaldor and Hirshman's suggestion that a deliberate, but temporary, imbalance in growth by heavy emphasis on capital-intensive industries at the expense of agriculture may be necessary, depending on the particular circumstances.
The Korean strategy seems to be defensible more plausibly by the former than the latter argument. But, as is common everywhere, the policy perception of the government is indicative of an overpredilection for industrialization without taking much heed in the concept of industrial complementarity and integration.
Granting that industrialization is the major solution to the problems of economic betterment in this country, it still leaves unanswered the question of the process through which the goal is approached. The process requires that industrialization proceed over time and it must be linked with the development of domestic resources and an increase in agricultural productivity. Otherwise there will be "good inflation" on the one hand and the isolation of agriculture from the rest of the economy on the other, as already exemplified in Korea's economic development in the past years.
Some progress has already been made in industrialization in Korea with foreign economic assistance. However, industrialization with foreign economic aid seems to have its own limitation. New plants were erected by imported equipment and operated with imported material with little use of domestically produced resources. With little contribution to the production of the new goods, farmers were given relatively little money to purchase the goods produced. This would not necessarily be the case if the terms of trade between agriculture and industry consistently changed in favor of agriculture so that farmers could earn more money in exchange for the same amount of grain and the extra income was expended on the increased manufactured goods. However, the terms of trade were always kept adverse to the farmers by the grain pricing policy of the government, which, as a rule, fixed grain prices even below the cost of production.
Nor did the major benefit of the high price of grain in the market at the time of scarcity accrue to the farmers, because the grain had already been in the hands of wholesalers. Even if the terms of trade were such as to solve this problem, it would still be true that the expansion of manufacturing industry in such a manner did little to stimulate the development of domestic resources.
The larger part of the newly produced goods was bought by those who had access to the money originated from the proceeds from the sail of aid goods and the money created by the deficit financing in the commercialized sector of the economy. In this situation it is probable that unless the government feeds the commercialized sector with new money at a certain rate, the new industry will easily fall into difficulties because of the shortage of demand for their products, even under the inflationary process. The income elastiticity of demand for the products within the commercialized segment of the economy may decrease over time.
At any rate, it was in this process that a group of businessmen who were favored in the allocation of aid goods and bank credit raised themselves to the status of capitalists in the past 20 years, and the disparity between the agricultural sector and the industrial sector in terms of income, living standards, and cultural life grew rapidly.
The process of industrialization also requires that the industrial sector expand in such fashion as to absorb the labor released from the agricultural sector as a result of the increase in agricultural productivity, the labor currently unemployed, plus the natural increase in the working population. Otherwise the economy will suffer from the ever-widening Malthusian trap.
Recently Ranis and Fei made an interesting and enlightening analysis in this aspect. Referring to the Japanese experience in industrialization in terms of the reallocation of the labor force from the agriculture to industrial sectors during the period from the Post-Restoration years to 1914 (when the Japanese economy had reached the stage of economic maturity in the Rostovian sense, perhaps), they estimated that, for Korea, "given its present structure and agricultural productivity conditions and the suppressed rate of growth in population (2.5%), it would take an unrealistic 90-100 years to achieve the goal of economic maturity" comparable to that attained by Japan by the time of 1914. And for this they remarked:
This less than adequate performance of the industrial sector is again traceable in large part to the failure of the agricultural sector to perform sufficiently well in terms of providing the food and raw material surpluses to support a rapidly growing industrial labor force. It is also due to the inability of the industrial plant which did grow up during this period to be more labor-absorbing or labor intensive.
In other words, the writer's warning is that the industrialization has already reached the limit set by the lagging of the agricultural sector, and if the blind predilection for industrial expansion is carried to the next stage of planned development, the economy will suffer from the ever-widening imbalance between the industrial sector and the agricultural sector.
The general characteristic of Korea's experience with the First Five-Year Economic Development Plan was the loss of balance in the choice of strategy between "preparation and plunge." The Korean experience supports the contention that in the economic planning of developing countries, strategic emphasis should be placed on "slow, careful, and painstaking preparation" before embarking on the total development effort, and the plan must be based on a careful assessment of the political, administrative, and managerial limitations.
By now it seems clear that the Korean plan has failed to perform the primary function of intergrating the diverse elements of developmental activities into a mutually consistent framework, and has been degraded to a status of little more than a micro-investment program. Would Korea's economic growth in the plan period have been much different from what it has actually been had there been no comprehensive plan? An indirect answer to this question seems to be coming from the people on the street, who generally appear to think that many of the new plants, new buildings, and new roads have come out of the Five-Year Plan. Then one may find a reason to say that the First Five-Year Plan at least served to awaken people's attention to the national task of economic development, which in itself is a desirable condition for the development effort.
Furthermore, since there seems to be no single example on earth of economic planning that succeeded from the beginning, the Korean planners were entitled to fail from inexperience. Indeed, "in the first years," as Zweig has remarked, "only bad plans can be drawn up, since there is no stable basis on which one can rely and all the problems must be solved simultaneously." But the experience in the first plan can be made an asset with which to improve the next planning exercise. This paper, then, apparently has committed sins in trying "to kill them at the start by airily pointing out the failures and defects inevitable during their teething stages."
Bibliography (Official Publications)