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South Korea, 1950s. After more than three decades of Japanese colonization, the division of the country in two, and three years of fratricidal war, the country was in a shambles.
Explore how South Korea transformed from a poor post-war country into a global industrial powerhouse through strategic state-led industrialization.
Key Takeaways
- State-led industrialization under Park Chung-hee was crucial for South Korea's economic transformation.
- Strategic use of foreign loans and diplomatic ties enabled massive investment despite initial poverty.
- Export-oriented policies and support for large conglomerates drove rapid industrial growth.
- South Korea's model contrasts with typical free-market approaches, emphasizing government intervention.
- The country's success offers lessons but also highlights challenges like social unrest and concentration of economic power.
What the video covers
- South Korea was devastated after Japanese colonization, division, and the Korean War, with most industry in the North.
- In the 1950s, South Korea was extremely poor, relying on agriculture and foreign aid, with GDP per capita lower than Haiti or Ethiopia.
- President Park Chung-hee's 1961 military coup led to an 18-year dictatorship focused on rapid industrialization.
- South Korea's economic development occurred in three phases: import substitution, export-oriented industrialization under Park, and market liberalization from the 1980s onward.
- The 'developmental state' model prioritized industry above all else, channeling resources into companies that invested and exported aggressively.
- The government secured cheap foreign loans and diplomatic agreements, notably the 1965 treaty with Japan, to finance industrial growth.
- Chaebols (large family-owned conglomerates) played a central role in industrial expansion, supported by state policies including currency depreciation.
- South Korea became a world leader in steel, shipbuilding, cars, and semiconductors, with companies like Samsung and POSCO gaining global prominence.
- The industrialization process caused massive urban migration and social changes but ultimately lifted South Korea into the ranks of wealthy, advanced economies.
- Later democratic governments introduced reforms to reduce chaebol dominance and open the economy further, but the industrial legacy remains a key success.
Chapters
- 00:00Post-War South Korea in the 1950s
- 01:01South Korea's Economic Transformation Begins
- 01:48Park Chung-hee's Military Coup and Industrial Focus
- 03:03Introduction to South Korea's Industrial Strategy
- 04:31Phases of South Korea's Economic Development
- 05:58The Developmental State and Industrial Prioritization
- 06:45Financing Industrial Growth through Foreign Loans
- 07:23Diplomatic Agreements and Business Families' Role
- 08:43Chaebols and Industrial Expansion
- 09:22Currency Policy and Export Strategy
Full Transcript — Download SRT & Markdown
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To make matters worse, almost all the industry, mining, and 80% of electricity production that existed at the time Korea had split in two in 1948 were concentrated in the northern part.
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South Korea was created as an extremely poor country. In the 1950s, its GDP per capita was lower than that of countries such as Haiti, Ethiopia, or Yemen.
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The first South Korean president, Syngman Rhee, led some reforms, such as land reform and the creation of a relatively high-quality education system.
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But that was not enough. The South Korean economy relied primarily on rudimentary agriculture and international aid from partners such as the United States.
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However, wait a minute, because suddenly that began to change. In a matter of a few decades, South Korea would be a completely different country.
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This is something we have already talked about in past videos. South Korea is today one of the richest and most technologically advanced countries in the world.
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We're talking about a world-class industrial leader. And it doesn't matter if we are talking about steel, cars, or ships.
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South Korea is even a powerhouse in semiconductors, the oil of the 21st century. Korean companies are capable of manufacturing semiconductors so advanced that not even the United States can match them.
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And let’s not forget the skyscrapers, K-pop, or even the popular Netflix series. And yes, as many of you are probably imagining, this is one of those stories that has a main character, an absolutely key figure.
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In 1961, the economic situation in South Korea was still not improving much, and corruption and social unrest were spreading like wildfire.
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In the end, all this social agitation ended up exploding with a military coup d'état, which at the time many supported because they thought it would bring some stability.
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In this way, General Park Chung-hee overthrew the government of the newly elected Prime Minister Chang Myon and installed a reformist military government led by himself.
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Park Chung-hee became the all-powerful president in 1962. His long dictatorship was to last 18 years.
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And, pay attention, because when we talk about reformist military government, we mean that this dictatorship had one obsession above all others: industry, industry, and industry.
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Park was convinced that only in this way could the country escape poverty. But to achieve this, a plan was needed.
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Do you want to know what he did? To what extent did he succeed in changing things in Korea?
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Is this the best possible model for countries that want to escape poverty? Well... One thing we are sure of is that this entire story will surprise you a lot.
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Now let’s get back to today’s video. (THE BIRTH OF AN INDUSTRIAL STAR) Some years ago, in a past video here on VisualPolitik, we already gave you some hints about the development of South Korea.
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Theirs is a model that has nothing to do with the typical formulas of free market, foreign investment, and low taxes that we usually talk about.
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In South Korea, for a while, things were done a little bit differently. Now, the burning question you are all waiting to be answered is, so what exactly was done?
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According to most analysts, we can identify at least three phases: The first phase was the import substitution policy.
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This policy was promoted by President Rhee from the end of the Korean War in 1953 until Park came to power in 1961.
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Basically, it was to try to boost the economy by substituting imported products with ones made in South Korea.
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It did not work. The second phase was that of export-oriented industrialization, or that of the developmental state, which was carried out during Park's dictatorship.
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Finally, there is the phase of balance and stabilization, which is considered to have begun in the 1980s, during the military dictatorship that followed Park's assassination, and continues up to the current period.
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In this phase, the South Korean market was opened up with progressive liberalization and foreign direct investment was encouraged.
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Now, wait a minute. Park... Developmental state? What on earth is this developmental state? Well, you see, what is known as a developmental state is a political and economic system quite common among emerging countries in Asia and Africa.
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Basically, it consists of trying to promote economic development through industrialization. Do you remember what we said earlier about industry, industry, and more industry?
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Well, there you have it. But of course, talking about industrialization is easy... It's as if I were to say that I would like to suddenly become a quantum engineer.
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The hard part, obviously, is to make it happen. So the question is, what exactly did the South Koreans do?
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Well... Basically, they doped the industrial sector. To fatten it up as much as possible while at the same time restricting imports.
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For the Park Chung-hee regime, everything else was of no concern: No social welfare, no citizen payments, nothing like that.
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Virtually all available resources were directed to industry. The state supported companies to grow. In return, they had to invest and export as much as they could.
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The idea was that with strong companies and well-developed industry, wealth would eventually flood all levels of society.
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Now, all this sounds very nice and it seems very simple, but don't forget that we have just told you that South Korea was an extremely poor country and that the state was essentially dependent on international aid.
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So... How on earth could the industrial sector be boosted given such a scenario? Well, you see, here comes one of the key moves.
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To get the money, the first thing the Park regime did was to devise a system in which it was the state that sought financing from all over the world and then gave it to companies with artificially cheap loans.
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In this way, the South Korean government only bore the interest cost, while ensuring that South Korean companies had all the money they needed to grow.
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This funding came primarily from two places: the United States and Japan. But, do you want some data?
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Well, in just the decade between 1972 and 1982, the foreign debt grew in absolute terms by 825%.
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It went from about 4 billion to more than 37 billion dollars. Of course, since the industrial sector was already starting to export and the economic take-off was beginning thanks to it, debt repayments in relation to the country's wealth
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barely grew. However, not all the money was obtained through loans. Some of it was also obtained through diplomacy.
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Specifically, in 1965, President Park negotiated and signed the Treaty on Basic Relations between Japan and the Republic of Korea.
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Thanks to this treaty, the land of anime, sushi, and origami gave South Korea 800 million.
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And that was no small change. That $800 million was equivalent to more than 20% of the entire South Korean GDP that year.
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And the question is, what do you think the South Korean government did with all this money?
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Well, it did exactly the same thing it did with the money it borrowed on the international market: it gave it to companies to build up domestic industry.
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To distribute the money, the government relied mainly on a group of business families who had already done business in Korea, Japan and other countries.
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The idea was that these families would not lack the money to build their empire.
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An empire that would operate in a totally private and autonomous way on a day-to-day basis, but in exchange, they had to meet the production targets set by the government.
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And right there, VisualPolitik community, was how the chaebols were created, the big business conglomerates that produced practically everything.
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We are talking about giants like the Samsung Group, the Hyundai Group and the Lotte Group that for decades were tremendously favored by the State.
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And when we say that they manufacture practically everything, we mean it: Samsung manufactures air conditioners, smartphones, televisions, microchips, refrigerators...
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They even produce ships. For example, to give you an idea of what we are talking about, the Samsung Group alone still accounts for, wait for it, 20% of South Korea's GDP.
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Yes, I know, it's really crazy. Another good example is POSCO, which was the Chaebol that received the most money from Japanese reparations.
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No less than 100 of the 800 million dollars paid by Tokyo ended up in this company.
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With that money POSCO built huge, modern steel plants, which along with low wages made it very competitive.
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The result is that almost 60 years later POSCO is still the sixth largest steel manufacturer in the world.
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Curious, don't you think? I'm sure some of you are reminded of the Soviet Union.
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And in a way that is not surprising: in South Korea the government had five-year plans and set production targets.
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Even so, the big difference is that in Korea they never intended for the means of production to be state-owned.
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In fact, the private sector and, above all, these chaebols had a lot of leeway.
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In any case, in the first stage, investments were directed to relatively straightforward and easy to establish industries.
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However, as these began to produce, the State financed the development of increasingly complex production.
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And so from steel it went to cars and ships, and from these to electronics.
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And so on. It was the construction of a huge production line made in Korea.
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But that's not the end of it. At the same time, the government also supported openness to foreign trade, albeit in a fundamentally unidirectional manner.
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That is, from Korea to the world, but not the other way around. The idea was to become a mega-factory for the rest of the world, while forcing South Koreans to consume their own products in the domestic market.
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In practice, the government only gave a free hand to buy abroad those products needed by the national industry.
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Nothing more. But perhaps the most striking thing is that in order to boost exports, the State did practically everything: not only did it provide cheap financing, but also a lot of fiscal and regulatory aid.
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For example, companies that exported had all kinds of benefits: profit tax reductions, tariff exemptions, foreign currency loans and even export insurance paid for by the State.
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And not only that: Imagine they needed to build a new factory or a road?
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No problem, the State took care of the expropriations and everything else that was needed.
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It was basically an open bar in exchange for investing, producing and exporting. We can see these privileges perfectly if we take a look at the subsidized interest rates.
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In 1965, for example, while loans were given at rates of 26%, loans to export companies cost a mere 6.5%.
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These loans were known as "policy loans" and were mainly granted by the Industrial Bank of Korea and the Korea Development Bank, two state-owned financial institutions.
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In fact, the chaebols even received loans with negative interest. In other words, they were paid by the state-owned banks to borrow money.
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And we are not done yet. The Park government also depreciated the Won, the national currency, as much as possible to make it cheaper to buy from abroad.
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And yes, I know what you are thinking... What a barbarity, that destroys wealth! And it is true, but it also has another effect that at that time was a priority for the dictatorship: it helped to export more cheaply.
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In a way, this functioned as a transfer from the pockets of South Koreans to the country's large export groups.
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Basically the purchasing power of South Koreans was eroded in exchange for enriching the large conglomerates.
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Of course, that was not the only sacrifice. South Korean workers also had to deal with wage increases that lagged far behind productivity gains.
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Why? Well, to keep costs from skyrocketing at all costs. That explains why the chaebols became more and more influential in the national economy.
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They had everything going for them. And yes, I can imagine what you are thinking...
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What an unfair system! Well, yes, but at least they achieved one thing: they reduced poverty a lot.
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People stopped working in the fields and started working in factories which, although they were paid badly, meant they earnt more money than planting rice and cabbages.
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And so, while in 1965 more than 40% of the population was considered extremely poor, this percentage had dropped to 9.8% by 1981.
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Of course, at the same time all this boosted a huge exodus of population from the countryside to the city.
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In rural areas, poverty rates were much higher. And it’s at this point that we come across another of the great icons of South Korea's take-off: the Saemaul Undong [PRON: Say-ma-ool Oon-dong], which translated into English would mean something like the New Village Movement.
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This was an initiative launched by Park in 1970 with the aim of modernizing rural Korea, which was still terribly poor.
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In this case, instead of giving them money or having the central government decide what they had to do or not to do in rural areas to get ahead, what the government did was to give them a fixed and regular amount of building materials.
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The communities decided what to do with these supplies and those that made the best use of the resources were rewarded with extra resources.
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The success was such that even today, 53 years after its creation, this movement still exists to some extent and, in fact, South Korea is trying to export it as a model to developing countries.
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("With the spread of the Saemaul Undong, we are helping developing nations get confident about affluence by sharing our experience in economic development.” – Former President Moon Jae–in) Basically, the idea was: don't give them fish, give them the fishing rods.
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But, anecdotes aside, as with all dictatorships, not everything was as rosy as it seems, nor do they last forever.
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President Park Chung-hee was assassinated on 26 October 1979 by the director of the KCIA, the South Korean secret service, during a private dinner.
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Not surprisingly, the country remained under the reins of a military dictatorship until the early 1990s.
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[Yes, South Korean democracy is much younger than you might imagine]. The fact is that in terms of the economy, the 1980s and 1990s did bring about many changes.
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Among other reasons because Park's model also had many problems: Competition was conspicuous by its absence, companies were terribly dependent on low labor costs, depreciated exchange rates and government subsidies.
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Many investments were not fully productive and lack of innovation was a problem. Let's just say that South Korean companies knew how to copy, but they had much more trouble creating.
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And that's not all, of course the living conditions in the country were worse than what corresponded to its level of economic development.
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In general, escaping poverty is much easier than escaping the so-called middle-income trap. In fact, it is possible that South Korea would be wealthier today if Park's model had not been applied so strictly.
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In comparison with the other Asian tigers, it does not fare so well. And exactly for this reason the post-Park governments, and especially the democratic governments, have made many reforms to do away with the Chaebols and open the country
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to competition and foreign investment. And guess what? That has worked even better. Take a look at this other graph: What you are looking at is foreign direct investment in South Korea relative to gross domestic product.
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As you can see, as the country abandoned protectionism, foreign capital started pouring in like there was no tomorrow.
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And with the opening up, South Korean companies also had to invest a lot more in innovation.
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In fact, without the increasing openness of the 1980s and 1990s, it is very likely that South Korean industry would have been left far behind.
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But if one thing is clear, it is that in spite of everything, the industrialization process was a tremendous success.
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Moving from an agrarian economy to an industrial economy is always a great leap forward.
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It also happened in the Soviet Union itself. The difference is that in South Korea they took the gamble that the initiative would be taken by private companies and not by the State and that was decisive...
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But as you can see, it did not solve all the problems either. But at this point, the question is for you: Do you think that South Korea's development model can be taken as a reference for a lot of other countries?
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What do you think of the role played by the South Korean State? Well, leave us your opinions below in the comments.
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And remember, if you liked this video don't forget to like it and subscribe to the channel if you haven't already done so you won't miss anything new.
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Once again, thank you very much for watching. All the best and see you next time!
Topics:South Koreaindustrializationeconomic developmentPark Chung-heedevelopmental statechaebolsexport-oriented growthpost-war recoveryAsian Tigersstate-led economy
