South Korea

XXXXXXX

It was created by Lee Byung Chull, the son of a wealthy landowner. He grew up in a Korea occupied by Japan. He had a classical Chinese education in his early years, but when he was ten he was sent by his family to a primary school in Seoul. His university education was at Waseda University in Tokyo.He dropped out before completing his degree and returned to Seoul and did nothing for a few years. At 26 he used inherited money to start a rice mill in his home town.The venture was not particularly successful and he moved to Taegu and started a trucking and real estate business which he named xxxxxxx, which means "three stars." The business went bankrupt in a credit squeeze that resulted from the Japanese invasion of Manchuria.

But Lee went back into business and by the end of the war in 1945 xxxxxxx was flourishing.

• He added domestic and international trading to the trucking and real estate business that he had started in.

• xxxxxxx Trading Company was one of the ten largest trading companies in Korea when the Korean War broke out (?).

• Lee escaped from Seoul after the North Korean invasion and set up operations in Pusan.

• The business grew by leaps and bounds due to the war.• In 1953 Lee started the first sugar refining company in Korea, which he

called Cheil ("first") Sugar. Cheil Sugar was highly profitable and in 1954 Lee setup Cheil Wool Textile Company.

• Xxxxxxx’s companies benefited from the import-substitution policy(?) that the government pursued.

• Domestic producers were encouraged and imports were discouraged. • By the end of the 1950's Lee had acquired control of several commercial

banks and insurance companies. • In 1961 Park Chung Hee carried out a military coup d'etat and immediately

staged an anticorruption campaign.• Lee was in Japan at the time and initially refused to return to South Korea

because he knew he, as the richest man in South Korea, would be a prime target of Park's campaign(?)

• Later Lee returned to Seoul and struck a deal with Park that became the model for South Korea's chaebol.

• xxxxxxx would be allowed to remain in business but it would have to be the vehicle for carrying out the development projects that Park wanted.

• Park was somewhat of a puzzle when he siezed power. • When American government officials found that Park in his younger

days had not only joined a communist cell, but had been, in fact, the organizer of the cell, they thought that the Communists had taken control of South Korea.

• Park had a fondness for collectivist-type slogans such as "Enrich the Nation and Strengthen the Army!" and "Steel is National Power."

• Lee offered to donate most of his wealth to the government and accept expropriation of his bank shares.

• Also he agreed to gain the cooperation of other businessmen in promoting Park's development projects.

The chaebol benefited greatly from this arrangement but the nature of the economic system of South Korea was closer to a centrally planned socialist state than the capitalism that it purported to be. The success of xxxxxxx or any of the other chaebol in selling products cannot be taken to be proof of their success in profit making. It could just as well be a result of the South Korean government subsidizing in one way or another a money-losing venture. xxxxxxx however has been a well managed and economically successful business. By the late 1960's Lee chose electronics to be the focus of xxxxxxx manufacturing.In 1977 xxxxxxx put Korean engineers to work dismantling color television sets from the United States, Europe and Japan to see how they could be copied. It took about three years for xxxxxxx to go into production of color television sets. In 1979 xxxxxxx started making VCR's and in 1980 microwave ovens.

Comparison between India and Republic of south Korea

India South KoreaPopulation 1100 mn 49 mnArea 3,287,590 1,20,540 Km2

GDP Per Capita $1100 $20,000

South Korean population is 1/20th of India.Its Land area is 1/26th of India

Its per capita GDP is nearly 20 times that of India

• 1950s- When India embarked on Economic development , it was viewed as country with promising future, whereas South Korea- Basket case-ravaged by war(1950-53), very low income, Heavy dependence on U.S aid-10% of GNP.

• Unlike Japan and Germany South Korea did not have an industrial and technological Culture.

• By 1980- the picture had reversed. S. Korea grew at an average rate of 9.5% per annum .India crept forward at the 3%” Hindu Rate of Growth. By 1990 India was treated as a Basket Case, while S. Korea had become a rich, industrialized country. In 1996, it was invited to join the Organization for Economic Cooperation and Development, a club consisting of mainly rich countries.

Question

How is it that in 30 years, a small, backward country like South Korea went from abject poverty to prosperity, while India and Indian industry- stagnated and even went backward.

Auto Industry1940-1960- India • 1940 to late 1950’s -nascent period of the industry; where in a

number of new companies came into existence for the production of the automobiles.

• Amongst these very few companies survived the impositions of the government. A major part of the private sector in the budding industry was swiped out due to license raj imposed by the government.

• The government had a socialistic approach towards development, thus the auto industry did not face much competition in its initial stages. Due to lack of competition the industry faced losses in form of low purchases due to the same automobile models.

• The growth of the industry during this period was very slow due to the low economic status of the country.

• Major Players – Hindustan Motors.The company was the largest car manufacturer in India before the rise of Maruti Udyog.

Hindustan Motors- Ambassador- The king of Indian roads

•Established just before Indian independence, in 1942 by B.M. Birla.

•The company was the largest car manufacturer in India before the rise of Maruti Udyog.

•Based on the Morris Oxford III model first made by the Morris Motor Company at Cowley, Oxford in the United Kingdom from 1956 to 1959.

Premier Ltd- Padmini

• The car ruled Indian roads for three decades (1955-1985.

• Flagship company of India's Walchand Hirachand Group.

• Along with the Hindustan Ambassador, it harks back to the socialist India of pre-liberalization, before the reforms program of 1991.

As Taxi

Indian Automotive Industry - 1970–1990• Few changes in the growth rate were seen during the

years 1970 to 1980 when a few new industries entered the market with new models.

• This profited the market and enhanced the growth of the industry.

• Major players- Telco (currently owned by Tata Motors), Ashok Leyland and Bajaj Premier entered the market with the launch of the new range of commercial vehicles.

• The market for the first time had faced such a growth. This growth also affected the national economy. This marked the start of a new segment for profit production in the Indian economy which would grow on to become a major sector of the economy.

1980 to 1990• During the years the automobile market was further opened. • The Japanese were the first global player to invade the Indian

industry. • They entered into joint venture with the Indian companies and

started the production work. • It marked the origin of the leading manufacturers of automobile in

India, The Maruti Suzuki. • The alliance brought a few new twists in the market. With new

models entering the market, the growth rate further increased. • Automotive industry became a major contributor to the GDP of the

country. • During this era, the then prime minister Dr. P V Narasimha Rao and

the then finance minister Dr. Manmohan Singh foresighted the growth opportunity of the automotive sector.

• The origin of Ashok Leyland can be traced to the urge for self-reliance, felt by independent India. Pandit Jawaharlal Nehru, India’s first Prime Minister, persuaded Mr Raghunandan Saran, an industrialist, to enter automotive manufacture.

• The company was established in 1948 as Ashok Motors, to assemble Austin cars. The company’s destiny and name changed soon with equity participation by British Leyland and Ashok Leyland commenced manufacture of commercial vehicles in 1955.

• Today the company is the flagship of the Hinduja Group, a British-based and Indian originated transnational conglomerate.

Iraq Army Ashok Leyland truck

Till 1987• Total production of 4 wheelers(Cars+ Trucks)-1.30 lakh vehicles• None of them exportable.

S. Korea started in early 1960s• It was making 2 mn vehicles- a large part for the international markets.• Now it makes nearly 5 mn vehicles per annum.Strategy followed by S. KoreaStarted mass Production with single product- Hyundai- Pony.Three large diversified S. Korean co.s emerged in Automobile sector – Daewoo- GM, Hyundai –Ford and Kia; gained knowledge & exp. through jt. ventures with MNCs but never surrendered management control. Later developed their own models for world market.In the development and transformation of the auto industry, four elements of government policy have had the greatest impact: Import restrictions, Control over direct foreign investment, Industrial organization, A commitment to international competitiveness.

• strat

Import Restriction• Of the cars on South Korean roads, 99.9% are Korean made. • Despite the formal adoption of an import liberalization policy in

1988, foreign cars are hard to find on the streets of Seoul.

• Foreign firms sell only a few thousand cars in a half million-unit new car market, or less than one-half of one percent. Such protection has allowed Korea's nascent car makers to learn from their mistakes and to build volume before exposing their products to foreign competition.

• Import restrictions have also allowed the car makers to subsidize exports through higher domestic prices.

Control over foreign equity investment• The government has maintained strict control over direct foreign investment, and

has restricted foreign firms to minority ownership except in industries where Korean firms require extensive foreign assistance.

• At the beginning of the 1980s, less than half of the direct foreign investment in the country was invested in ventures that had either half or majority foreign ownership, and less than a third of foreign investment took the form of a wholly owned subsidiary.

• In areas where domestic technology is deficient, the government continues to encourage foreign investment, but an extensive system of licensing and monitoring requirements ensures that such investments benefit the national interest.

• Largely because of this paternalistic approach to foreign investment, the South Korean auto industry is under local ownership and control. Hyundaiand Kia have foreign partners who hold minor shares, and thoughDaewoo Motor Co. is an equal joint venture with GM, management controlrests with Daewoo

Industrial organization• To make Automobile industry competitive S. Korean Govt. set a limit to the number of assemblers.

•Taiwan has seven, Mexico has eight, the Philippines nine, Indonesia ten, and Thailand thirteen assemblers .

•With so many assemblers in markets with limited demand, over-capacity is endemic.

•The contrast with Korea is striking: in 1980 the government reduced the number of assemblers to two and when in 1989 Samsung and Chrysler sought to establish a new auto-making joint-venture, the government overruled Samsung, Korea's largest industrial group.

Commitment to international competitiveness• The most often cited drawback to the protection of domestic "infant industries" is

the tendency of such firms to stagnate.

• South Korea has utilized a number of instruments to ensure thatdomestic enterprises become internationally competitive.

• It has provided firms with a plethora of financial incentives directly tied to their level of exports.

• Such incentives as subsidized loans, access to foreign currency, and licenses to import scarce consumer goods.

• To enable Korean firms to dump products in foreign markets profitably, virtually compelling Korean firms to compete, not only with each other, but with foreign firms in export markets as well.

India versus S. KoreaIn short South Korea did:• Targeted Auto and some others as Electronics as an export oriented Industry.• Liberal credit at low interest rates.• Tax Concessions• Free import of latest technology& machinery.• Low tariffsContrasting India

• Protectionism- Obsolete Technology• Restraint on private sector Growth- MRTP• No Incentives- till 1991• No FDIAll changed after 1991. Today, India produces 2 million 4 wheelers & 20 mn. 2/3 wheelers.May become the hub of World Auto –Production in future (Nano)

Economic policies followed by S. KoreaDirigisme-An economic term designating an economy where the government exerts strong directive influence. What makes this effective?Competence, strength, determination of the Govt., the traditions, social attitudes and work habits of the population. The standard of Education including technical, professional & business skills.Macroeconomic level The government used its control of the banking sector to allocate 50-70% of available domestic credit, often at highly subsidized interest rates. This control has enabled it to direct the flow of capital into preferred industries• Industries with export potential and then, • Later in the 1970s, the heavy industry and chemical sectors.

Microeconomic policy of the Govt.• At the microeconomic level, the government

manipulated the structure of competition.

• Govt. intervened in the affairs of individual firms in order to attain its goals.

• For instance, in 1978 President Park asked Daewoo to take over a huge quarter-built shipyard, foundering in debt, as part of the government's Industrial rationalization policy .

Economic Policies followed by S. Korea1953-60• Import substitution• Huge Deficit- financial aid by U.S aid.• Protection through Tariffs and quotas.• Growth rate average 4% per annum- similar to India, largely because

of inflows from U.S.1961

Coup by General Park Chung Hee.• Objective: To beat N. Korea in the race of Economic prosperity.• At that time N. Korea Per Capita Income was double that of South

Korea.• Asian Tigers& China- Economic growth under authoritarian regimes;

Democracy came later. India-opposite

Economic Reforms• Inward looking-Outward Orientation.• Promote exports of light manufactured goods in which Korea

possessed comparative advantage given its cheap labor cost.• Macroeconomic Measures-such as maintaining high interest rates

to mobilize domestic savings, and enacting the Foreign Capital Promotion Act to encourage the inflow of foreign investment.

• In order to promote exports, the government also devalued the currency by nearly 100 % .

• Exports to GDP Ratio• 1961 5.3%• 1980 33%

Korean Exports-Competing against most efficient producers in the world & accessing world state of the art technology via imports of pdts & machinery.

Indian – policy of self sufficiency & import substitution means outdated technology & production of sub standard products.

1970’s• To upgrade the composition of its exports, Korea turned to the heavy

and chemical industry (HCI). HCI Development Plan-1973• Investment -produced significant results, and the country soon

developed successful undertakings in electronics, shipbuilding, and other fields.

Negative effects of HCI.• To initiate these industries, extensive investment in capital intensive

industries had to be made, such as power generation equipment, heavy machinery, and diesel engines.

• Firms that made such investments accumulated excessive debt in the process.

• In addition, the sharp demand for low-interest loans swelled the domestic money supply.

• The government's low interest rate policy to support HCI reduced savings, and producers of light manufactured goods were losing investment funds to the new industries.

DD for skilled workers & wage hike• DD for skilled workers• High wage rate• Widened wage differential between skilled & Unskilled workers.• Urbanization- workers flocked to Industrial centers-Job.• To improve the income distribution among skilled and unskilled labor

as well as urban and rural workers, the government initiated the self-help SaemaCul Undong (New Community Movement) to improve productivity and living standards in rural areas.

• The government adopted grain price support program.• Govt. successful in making balance.• V. Good Results of HCI Policy..• 1972-1978- Avg. GNP growth-10.8% annually• !976-1978- 11.2% annual growth rate.• Share of HCI in GDP1972 197821.3 % 34.7% • However, this progress came at the cost of high inflation

High Inflation• Wholesale price increases accelerated to nearly 18 % each year

from 1972 to 1979, compared to 12 % between 1962 and 1971.

• In addition, Korea's industrial structure was distorted by over-investment in HCI and under-investment in light industries.

• The government controls also distorted prices and stifled competition.

• At the same time, real wages were increasing faster than productivity, weakening export competitiveness.

Liberalization Contd..• FDI allowed- Promote Competition & transferring advanced foreign

technologies.

• Real GNP growth from 1982 to 1988 averaged 10.5 % annually, and inflation in both the wholesale and the consumer sectors was well below 5 % annually after 1982.

• The trade surplus began in 1986 and the amount of current account surplus reached $14.2 billion in 1988.

• Throughout the decade, the economy generated about 2.8 million new jobs, and the unemployment rate sank to the unprecedented level of 2.5 % in 1988.

Korea's Globalization in the 1990s• Entering the 1990s, wage hikes averaged 18% annually. • In addition to such excessive wage hikes, high financial costs,

excessive administrative regulations on business activities, have afflicted industrial competitiveness and entrepreneurship.

• Furthermore, the sudden increase in disposable income among Koreans has induced excessive private spending and speculation.

• The balance of payments deteriorated and inflation soared. • The current account balance, which had shifted from chronic deficit

to surpluses after 1986 again reverted to a deficit in 1990. • Inflation reached nearly 10 % in the early 1990s.

• Internationally, the 1990s witnessed growing regionalization as economic trade blocs were formed among countries of Europe and America.

• The government increasingly felt the need to change its economic strategy, as the previous strategy that promoted exports using cheap labor as comparative advantage while keeping domestic markets protected from foreign competition showed its limit.(more openness required)

• The government began to tear old regulations apart and reform irrational procedures.

• The Korean economy made a remarkable comeback in the first half of the 1990s. With increased investment and export, economic growth rate increased from 3% in 1992 to 8.6% and 8.9% in 1994 and 1995, respectively.

• The GNP per capita surpassed the US$10,000 mark in 1995, and in 1996, the unemployment rate recorded the unprecedented 2%.

• With such high economic growth, inflation remained relatively stable at a 4% level throughout the 1990s.