The Social and Economic Conditions for Sustained Economic Growth

 

A paper for the Conference on Korea: The Environment for Economic Growth, sponsored jointly by the Asia Society and the U.S.-Korea Economic Council, NewYork City, October 16, 1979. This paper was published in "The Social and Economic Conditions for Sustained Economic Growth," Asian Affairs (November-December 1979):69-78.

 
Introduction
 

              This conference we are attending has a unique objective: It deals with the sociopolitical aspects of Korea's economic development. By profession, I am an economist who happens to have been directly involved in Korea's economic affairs for many years, and I know that I am not well versed in other branches of social science to deal with the question adequately. I welcome, however, this opportunity to discuss with you some of the noneconomic factors of economic development.

At the outset, let me spell out my basic thoughts on the matter. Political stability is the prerequisite for any sustained economic development. It is also true that political stability in turn depends on economic development, as well as on other factors. They are interacting and mutually reinforcing. Ultimately, political stability derives from the minds of people. They must believe that the political system they have is capable of meeting their common needs. More specifically, the people must believe that the government they have (1) provides security from external threat, (2) provides the goods of life through economic development, and (3) leads the society toward greater equity, justice, and freedom for all. Therefore, I should like to take up each of these governmental functions and present to you what the Korean government has done to date, and what remains before us.

 
National Security
 

Let me begin with our security problem. There is no genuine peace in Korea-there is only an armistice. Poised only some 30 miles from our capital city is an army, consisting virtually of the whole population, that is armed to the teeth under the ruthless regimentation of its absolute ruler. The ruler shows no compunction in displaying extremely hostile intentions and actions. This is the man who unleashed his army against his own countrymen in 1950 causing an untold amount of sorrow and destruction.

Possessed with the most primitive type of communist ideology, he has ensconced himself securely in a system that spends more than 20 percent of its national income on armaments and an inordinate amount to promote a Quixotic personality cult. Taking advantage of our open society, he regularly dispatches unknown numbers of agitators and armed infiltrators to the South.

The persistent efforts made by us during the past seven years to bring him to a conference table have been in vain. The recent proposal for the tripartite meeting including the United States also seems to have met with the same intransigent response.

In spite of these initiatives on our part, what we received in return was a series of armed provocations: Our fishermen were fired on; farmers were murdered; the presidential residence was raided; the First Lady was assassinated; tunnels were dug under the Demilitarized Zone; not to mention the brutal axe murder of U.S. soldiers. These are the cold realities that overshadow almost every facet of our national life.

After the downfall of Vietnam in 1975, when the changing international political environment emboldened the Northern ruler into taking another attempt at belligerent actions against the South, we were alarmed and led to take some emergency political measures in order to protect ourselves against new threats. These measures of course placed a considerable degree of restriction on our political freedom. The overwhelming consensus among the people, however, was that nothing was more important than protecting the nation from the destruction of war, and there was no alternative to strengthening our defense posture in order to deter unbridled hostility.

In addition to the political measures, we introduced in 1975 the comprehensive Defense Tax in order to implement the Military Reinforcement Program, which was launched in the same year with aid from the United States. Recently, my government proposed to the National Assembly that the defense surcharge be extended for another five-year period and the tax rate be raised to increase our defense expenditures to 6 percent of the GNP. As our heavy industries have developed, the defense industry has made rapid progress in producing various types of hardware and light equipment.

I remember very well how pessimistic we were back in the 1950s. Many of us then could not get away from a defeatist psychology when it came to our ability to defend ourselves from the well-oiled communist war machine. Today, Koreans are quite confident that they can meet the challenge if North Korea should attack us alone. But if the North is aided directly or indirectly by another power, our available means and resources may not be adequate to cope, which is why the Korean people were so unhappy about the proposed U.S. military withdrawal. The Korean people's confidence will be strengthened further as the country's defense capability becomes stronger, and as our economy develops, the economic gap between the South and North will be widened year by year.

 
Economic Growth and Stability
 

As a result of the rapid economic growth in the past 17 years, Korea has largely overcome some economic causes of social instability such as mass poverty, widespread unemployment, stagnant agriculture, paucity in domestic savings, and heavy dependence on external aid. And what is more important, the Korean people generally have gained confidence and pride in their expanding economy, which is, after all, of their own making.

Presently, the Korean economy is confronting a few thorny problems. Inflation is our main concern as it affects the living standards of our people as well as the competitiveness of our exports. Above all, inflation is inimical to social stability. Inflation is not new to the Korean economy, but this time the government has undertaken to arrest the inflation with great determination. The comprehensive stabilization program adopted early this year includes creation of a fiscal surplus, slower monetary growth, increase in imports, reduced control of prices, regulation of construction activities, and curbing of land speculation.

Although our efforts have been hindered by the recent OPEC price increases, the all-out policy efforts have begun to produce marked signs of stability. For example, the rise in the consumer price index has been rather modest over the past three months.

Another recent change in the Korean economy is the recurrence of a large current account deficit, which this year will probably reach $3.3 billion. This is not, however, a serious problem to us. We deliberately planned to run a current account deficit for domestic economic reasons. This year alone, a sum of $1.8 billion in foreign exchange loans was distributed for investments in export industries. About 35 percent of Korea's imports consist of capital goods for our heavy and chemical industrial projects and some 55 percent of total imports are raw materials, with only the remaining 10 percent being consumer goods of various kinds. This year's net inflow of long-term development loans is expected to reach some $2.5 billion, while exports will reach some $15 billion by the end of the year. The debt-service ratio will thus remain around 11 percent as in the past several years, which is well within a manageable range.

Turning to longer term perspectives, the basic question often raised at home and abroad is whether Korea will be able to maintain the high growth pattern of the past in the coming decade in view of the rather uncertain outlook of the international economic environment. It is true that Korea's exports, which have been the engine of growth since the early 1960s, face many challenges: The slowing down of the developed economies will slacken demand for imports; protectionism and other trade barriers may not wither away; competition with other developing countries will become intensified; and recurring energy crises may not be averted.

But the picture is not one sided: While developed economies are stagnant, new markets are expanding rapidly in the developing world, where governments and people are firmly committed to economic development as the overriding national goal. Our efforts for market diversification have been encouraging: Between 1975 and 1978, the share of the Middle East in total exports rose from 5 to 10 percent and that of developing countries as a whole from 15 to 25 percent.

The cloud of protectionism will not clear away, but various countervailing forces are at work, even though they are for "mercantilism for free trade." Less developed countries are catching up, but Korea is better prepared to offer quality products together with a range of new products from heavy industries. The transition from light to heavy industries for export production requires time for learning and experience. We are ahead of our competitors from the developing world in terms of the amount of investment and technology.

The export share of heavy and chemical industrial products has already increased from 25 percent in 1975 to 35 percent in 1978. As for the energy problem, the oil-rich Middle East will also be rich in funds for which goods and services are bound to flow from other countries. Korea's export of construction services is a classic example. I am convinced that an annual increase in exports of 13 to 15 percent in real terms is feasible, as projected in our plan.

Secondly, exports, important as they may be, are not the only source of economic growth. The potential of the domestic market looms large in our projection. The past experience of industrialization of the market economies commonly indicates that technical maturity goes together with rapidly widening markets for and production of consumer durables. Korea is now entering this stage of development. Such popular articles as color TVs, refrigerators, air conditioners, washing machines, telephones, and cars will be available to the majority of the consuming public in the next decade.

On the production side, electronic and machinery industries will receive great stimulus from the process of interindustry interactions-a phenomenon often termed "linkage effects" in economics jargon. Expanded investments in housing, education, health, and other public facilities will also give an added impetus to economic growth under the forthcoming Fifth Five-Year Plan (1982-1986), which will center around social development.

Will we have adequate financial resources available for this development? Our domestic savings to GNP ratio had already climbed up to the level of 27 percent by 1978, and we can climb a little more along the upward trend. External financial resources will also be available, which need not be more than 4 to 5 percent of GNP.

My optimism is, however, tempered by the realization that economic development in any case is a thorny path requiring constant caution and adjustment. Given the determination, ingenuity, pragmatism, and experience displayed by the people and government of the Republic of Korea, however, I am quite confident that we will be able to maintain the relatively high growth momentum in the next decade, thereby meeting the rising expectations of the people for higher standards of living.

 
Social Equity
 

Turning to the problems of income distribution and labor-management relations, here again we have challenges as well as achievements. Several studies made at home and abroad tell us that the distributional pattern in Korea is not much different from those market economies such as Japan and Taiwan, which fare well in an international comparison. In particular, they note that Korea is one of the few cases in which rapid growth has been accompanied by fairly well diffused growth benefits.

The major factors explaining this outcome include: (1) the land reform of 1949-1950, which was introduced well before our embarkation on industrialization; (2) increases in agricultural productivity resulting from development investments and seed improvement, combined with the liberal price support policy for rice and barley; (3) the effect of the New Community Movement; (4) tax policies that exempt more than 70 percent of wage earners from the highly progressive income tax; (5) the enthusiasm of the people for education combined with the easy upward mobility of labor, free from any cultural or social barriers; (6) and, above all, the strategy of industrialization based on labor-intensive technology that incorporates widely diffused jobs and income among low income brackets.

We are concerned, however, with signs of deterioration in income distribution that have become noticeable in recent years. This might have been related to factors such as (1) the high rate of inflation, (2) appreciation of land values, accompanied by speculation, (3) changing industrial structure in favor of capital intensive industries, (4) business concentrations, and so on.

It is the general feeling of the economic planners in Korea that, at the present stage of development, we cannot afford to provide all those social welfare programs found in developed countries, nor do we feel that all of them are worth imitating. Our approach at present is to place emphasis on investment in what we call "social development." The Health Protection and Insurance Program for low-income families was initiated in 1977 and the Rural Housing Improvement Program was launched in 1978. Already, public expenditures for social development are the second largest item in the government budget, exceeded only by defense expenditures. This pattern of resource allocation will receive even greater emphasis in the next plan period.

Early in the 1950s, Korea copied U.S. laws on labor relations under the influence of the political mood of the time. Even then, many people expressed concern over the relevance of the laws to the underdeveloped and traditional conditions of the country. In 1975, the right to strike was suspended by law as part of the political reforms introduced in the aftermath of the Vietnam fiasco. We were convinced that Korea could not afford social disorder and economic disruptions in the wake of mounting international political and economic vicissitudes and the threat from the North.

Under the new arrangement, workers do have the right to organize themselves and engage in collective bargaining with management. In companies with 30 or more employees, there is a Labor-Management Council, whose function covers wage and other company policies on labor conditions as well as cooperative measures for the improvement of productivity. If for any reason this internal machinery encounters difficulties in settling disputes, the parties may decide to refer the case to a third party for arbitration. If this procedure still fails to produce a solution, the case is brought to the Office of Labor, a government agency, for final arbitration based on a mutually acceptable formula.

There is a contention that the restriction imposed on the exercise of labor's rights has worked against the interests of the workers. But the facts do not seem to attest to this view. Since 1972, the rate of wage and benefit increases for industrial workers has advanced steadily. During the past three years, for example, the average wage increased by some 30 percent per annum in nominal and 18 percent in real terms, while labor productivity increased by only 10 percent per annum. The rapid increase in wages may be related to several factors, including the labor shortage that developed in the construction and machinery industries in the course of the industrial boom, and the exodus of skilled manpower to the Middle East.

What is to be noted here, however, is the role of the Office of Labor. As you know, the government is much more susceptible to public opinion and political pressures than it is to pressure from private businesses, and it is natural that the Office of Labor usually sides with labor in settling disputes. Some people even argue that the greater role of the government in labor-management relations may solve one problem but create another by going too far in the direction of high wages. At any rate, my point here is that determinants of the wage rate are many and the right to strike is only one of them.

Korea's labor-management problems have not found a final solution. No doubt, a fair and workable labor-management relation has to be developed on the basis of our own cultural background and national needs. Encouraged by the phenomenal success of the Saemaul Undong, or New Community Movement, in rural development, we have been extending the movement to the business community with significant results in promoting harmonious relationships between labor and management.

 
Political Stability
 

I have so far reviewed the government's endeavor to discharge its basic role in meeting the common needs of the people. There is a broad consensus of opinion among the Korean people that the present government has made remarkable progress in ensuring national security, developing the economy, and promoting social equity in a relatively short period of time since it came to power in 1961.

There is no doubt in the minds of the Korean people that this progress would not have been possible without the basic political stability sustained under the dedicated and effective leadership of the president. And they also recognize that he did not seek the stability for its own sake, but to achieve the well-defined common goals of the people. To the extent that the goals were attained, this in turn contributed to the political stability, for political stability ultimately derives from what the political leadership does for the people.

There are criticisms that Korea's political stability is imposed rather than voluntary, and as such it is not consistent with some of the democratic norms. That we do not today enjoy the same kind of political freedom as you do in this country is a fact. But there are other compelling considerations.

In the post-World War II era, political instability has become a hallmark of developing countries. Of some 100 new states that have been born since the 1950s, almost all have experienced chronic political unrest while the pressing need to free the people from mass poverty and gross inequity has been left unattended. In fact, such endemic instability was also the case in Korea until 1961.

To my knowledge, no great social thinker or practitioner has found a workable solution to this difficult problem. In one of his works, Professor Rostow urged leaders of developing countries to read Benjamin Franklin's admonition every morning: "We must, indeed, all hang together; or most assuredly we shall hang separately."

How, then, are we to hang together? Not by habit, because modernization brings us new problems that confuse old ways of living and thinking; not by traditional authority, because modernization weakens old loyalties; not by sheer force of governmental machinery, because it stifles initiative and basic human values; and not by borrowed ideology and institutions, for they provide no answer to the problems that the great mass of impoverished people must face every day.

"States are not made, nor patched. They grow," wrote Masefield a century ago, "grow slowly through centuries of pain." Western democracies are not exceptions to this. In Britain, more than three centuries elapsed between the Magna Carta and Bagehot. And here in the United States, at least two violent social conflicts had taken place before the great democratic institutions were forged. France achieved an effective parliamentary system only after the 1870s; the powers of parliament in Germany did not count until after World War I, and full representative government was realized in Japan only after its defeat in World War II.

The crux of the political dilemma facing developing countries today is that the strict application of Western democracy to existing realities fails to provide effective government. In this situation, a pragmatic reconciliation between a degree of democracy and effective government is indispensable. This is what we have done with our political system; we added to the system a few devices that suited our own situation better and took off some that did not.

Our ideals are not very different from those of other democratic societies: We too want to develop a more representative government; we too wish more liberty; we too desire an orderly transition of power. But our tortuous past experiences tell us that this cannot be achieved overnight by merely transplanting foreign political institutions to our native soil.

Taking all this into account, Korea needs time and understanding from its friends abroad. We need friends who realize how hard it is to build a democratic nation in a traditional society, friends who understand the danger of the pressing political environment we have been forced into by international power politics, and friends who recognize that teaching democracy in terms of the prices to be paid-rather than in terms of ideals-may in reality provide a shorter path to the realization of democracy in developing countries.

 
Conclusion
 

Nations face different problems and conditions, they possess varying degrees and kinds of resources to meet them, and both are constantly changing. If a political system is going to be viable, it has to remain responsive and open to the needs of the people. The Korean people now desire freedom from want and freedom from fear of aggression more than anything else. They want to be treated with dignity and fairness and to be respected for their right to be the master of their own house.

The foundation of Korea's economic development has been the free enterprise system. This, we believe, is the only basis upon which democratic institutions can be built. Moreover, economic development will help create conditions that are congenial to the workings of democratic institutions. Mencius once said, "Generous minds rest with generous wealth." We remain firm in our belief in the free enterprise system. We are also convinced that political development must proceed in parallel with economic development. Step-by-step, societies must institutionalize their own values according to the actual situation in which they find themselves. Toward this goal, Korea has not reached the end of the road yet. We have miles to go. Thank you.