Up until the early 1960`s, the Republic of Korea followed a
protectionist strategy of import substitution for the domestic
production of non-durable consumer goods and their inputs.
Upon the exhaustion of possibilities for further import
substitution within these areas, Korea changed its
industrialization strategy from import substitution to an
"outward-looking" or export-oriented one. This shift in
industrialization strategy is reflected in the incentive policies that
the government adopted in the early sixties.
The outward-looking strategy of industrialization was firmly
established by the "won" devaluation in 1964 and the subsequent
policy reforms, although that strategy had been initiated in 1961.
Beginning in 1964, the government tried to maintain the
exchange rate near the free trade level and provided various
types of export subsidies to further encourage export and to
offset the modest degree of progressive overvaluation that
developed after each major devaluation. Importing was
significantly liberalized as both quantitative restrictions and
average tariffs on imports were gradually reduced following the
Exports expanded rapidly in response to these policies.
Korean exports which had been stagnant at a low level in the
fifties started to increase very rapidly in the early sixties.
Between 1962 and 1973, exports grew by an average annual rate
of over 40 percent. Manufactured exports increased from 27
percent of total exports to nearly 90 percent during the same
period. As the rapid expansion of exports greatly stimulated the
domestic economy, gross national product grew by an average
annual rate of about 10 percent during 1962-73, compared with
the 4 percent growth achieved in the earlier period, 1954-62. The
manufacturing sector, in particular, grew by an average annual
rate of 19.4 percent between 1962 and 1973, thus leading the
growth of the overall economy.
The outward-looking strategy of industrialization is also
demonstrated by our analysis of structural changes in the
Korean economy during the sixties. Although the expansion of
domestic demand was the most important factor, accounting for
about 80 percent of total economic growth over the period
1960-68, export expansion was overwhelmingly more important
as a source of growth than was important substitution in the
same period. Export expansion accounted directly and indirectly
for 22.4 percent during the period. Comparing only the growth of
manufactured output, the relative contribution of import
substitution was substantially greater than that of export
expansion in the late fifties when exports played a relativity
minor role in Korea`s industrialization. During the period from
1960 to 1968, export growth was significantly more important
than import substitution for the growth of manufactured output.
Export-Oriented industrialization and growth resulted in the
expansion of relatively labor-intensive manufactured exports. Our
analysis of the factor intensity of Korea`s exports and imports
indicates significantly greater than that of manufacturing, should
lie in exporting labor-intensive products and in importing capital
intensive ones, our analysis indicates that Korea`s
outward-looking strategy brought about a fairly efficient
allocation of resources.
In addition, Korea`s outward-looking strategy maintained
incentive policies in such a way that the domestic prices of
tradable commodities were not much higher than their world
market prices. As a result, the average rates of effective
protection or subsidy in Korea in 1968were significantly lower
than other developing countries and showed relatively small
sectoral dispersion. If the effective protection or subsidy rates
are indications either of relative profitability or relative
inefficiency, the relatively low rates in Korea should indicate that
there is little room for either excess profitability or substantial
inefficiency. The low average incentive rates and their relativity
small dispersion seem to provide some evidence that Korea`s
outward-looking industrialization and growth have been relatively
This discussion has summarized the development of Korea`s
outward-looking industrialization strategy in the sixties and early
seventies, the industrialization and growth performance based on
that strategy, and their efficiency aspects. We may conclude that
Korea`s outward-looking industrialization in the sixties and early
seventies was largely successful on the whole, although there
might have some inefficiency in certain industries or sectors.
It is difficult to predict the future of Korea`s industrialization
and growth. Korea began to face some difficultly in pursuing her
outward looking strategy in 1974, mainly due to external factors.
The recent increases in the prices of natural resources including
crude oil and the economic slow-down and import controls in
industrialized countries caused a sharp rise in the rate of
domestic inflation and a slow-down in export and other domestic
economic activities. In view of Korea`s poor natural resource
base and her reliance on foreign trade, the future course of her
developments in international markets for natural resources and
the growth and trade policies of major industrialized countries.