Power in the punch: Wealth means South Korea, a “bottomless pit” in the 1950s, can now punch above its weight
South Korean government took absolute control over the coun- try’s then scarce foreign exchange. Chang recalls that violation of the foreign exchange controls could be punished by the death penalty! “When combined with a carefully designed list of priori- ties in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs,” Chang adds. Today, looking at South Korea’s deep pockets and the neon
lights of the capital, Seoul, neo-liberal economists thump their chests and say South Korea has succeeded because it followed free market ideas – ie, the principles of sound money (low inflation), small government, private enterprise, free trade, and friendliness towards foreign investment. But this is far from the truth. “Te reality,” Chang insists,
“was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government sup- port (eg, overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition.” He goes on: “Te government owned all the banks, so it could
direct the lifeblood of business – credit. Some big projects were undertaken directly by state-owned enterprises – the steel maker, POSCO, being the best example – although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprises worked well, that was fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs); and if some private enterprises were mismanaged, the government often took them over, restructured them, and usually (but not always) sold them off again.” Te government also took foreign investment under its wing,
“Valuable foreign currencies were really the blood and sweat
of our ‘industrial soldiers’ fighting the export war in the coun- try’s factories. Tose squandering them on frivolous things, like illegal foreign cigarettes, were ‘traitors’.” Imagine any African country doing that? It would be promptly charged with enact- ing “draconian laws”. But South Korea went even further than that. “Spending foreign exchange on anything not essential for industrial development was prohibited or strongly discouraged through import bans, high tariffs, and excise taxes (which were called luxury consumption taxes),” says Chang. “Luxury items included even relatively simple things like small cars, whisky or cookies... “Foreign travel was banned unless you had explicit gov-
ernment permission to do business or study abroad. As a re- sult, despite having quite a few relatives living in the US, I had never been outside Korea until I travelled to Cam- bridge at the age of 23 to start as a graduate student there in 1986.” But wait for this: Like the strict rules of currency trans- actions in Europe under the Marshall Plan (see p. 22), the
and heavily controlled it with a mixture of measures. In general, it welcomed foreign investment with open arms in certain sectors and shut it out completely in others, in line with the dictates of the national plan at any one time. Reverse engineering – where Korean companies stripped
down a foreign product and copied it – was actively encouraged by the government, which generally had a lax attitude towards foreign patents and the pirating of patented products from ad- vanced countries. Says Chang: “Te popular impression of Korea as a free-trade
economy was created by its export success. But export success does not require free trade, as Japan and China have also shown… Te Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. “Te government did not vanquish the market as the com-
munist states did. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognised that they often need to be corrected through policy intervention.” Any lessons for Africa?
New African April 2011 | 19
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