Hi everyone, today let's talk about a very interesting country: South Korea.
In 1960, South Korea was one of the poorest countries in the world. Its GDP was only one-third of North Korea's. However, in the short span of 30 years, its economy skyrocketed with a GDP growth rate close to 10% annually. It nurtured globally renowned companies like Samsung and Hyundai, and its entertainment industry captivated the world. South Korea became the 12th largest economy globally.
Yet, simultaneously, South Korea faces rampant corruption, intertwined with chaebol dominance and collusion between government and businesses. There are few presidents who have emerged untainted by bribery scandals. Despite its economic prowess, South Korea boasts the lowest happiness index, highest suicide rate, and lowest fertility rate among developed nations.
You might wonder, how did it develop so rapidly while its people remain so unhappy? What makes South Korea such a contradictory economy?
Japanese Colonial Rule and the Korean War
In 1910, the entire Korean peninsula fell under Japanese colonial rule, which lasted until the end of World War II in 1945. Post-war, the peninsula was divided along the 38th parallel, creating North and South Korea.
The Korean War erupted from 1950 to 1953. By this point, South Korea's hand was incredibly weak. Exploited under colonization for over three decades and ravaged by war, almost all of its industrial facilities were reduced to rubble. It was arguably the world's poorest country, with a GDP per capita of only $67, a mere one-thirty-fifth of the United States'.
At that time, South Korea was much poorer than North Korea. Although the 38th parallel seemed to divide the landmass equally, North Korea inherited most of the mineral resources and heavy industries. Approximately 80% of the electricity generation capacity resided in the North. The South, on the other hand, was primarily agricultural.
The situation was so dire that some South Koreans, driven by poverty, attempted to defect to the North.
The First Republic and Dependence on the US
The first decade after independence was known as the First Republic. South Korea found itself under the authoritarian rule of its first president, Syngman Rhee.
Contrary to expectations of an immediate rise, the Rhee government didn't prioritize infrastructure development. South Korea relied heavily on foreign aid, with nearly all its foreign exchange reserves and 80% of government revenue coming from US support.
This over-reliance on foreign capital fostered a phenomenon we've discussed repeatedly: Crony Capitalism. Simply put, it's collusion between government and businesses, where everything revolves around money. This environment nurtured numerous enterprises with deep government ties. Samsung and LG, for instance, emerged as the first batch of Korean chaebols.
We know that South Korea's chaebol system is arguably unparalleled. However, it was still in its early stages at that time.
Overall, during Rhee's era, South Korea's economy didn't show significant improvement. The average annual GDP growth rate remained at a meager 2%.
Park Chung-hee and the Miracle on the Han River
In 1961, a South Korean major general named Park Chung-hee (some refer to him as Park Jeong-hee) seized power in a coup and ruled South Korea for 18 years. While the term "military rule" might evoke images of suppression and economic stagnation, Park Chung-hee defied these expectations.
Remember this name; he's a pivotal figure in South Korea's history. From his rise to power in 1961, the country's economy experienced rapid growth, transforming from an aid-dependent nation to one of the Four Asian Tigers. This period of development is known as the Miracle on the Han River, and Park Chung-hee is hailed as its architect.
While it might seem like we're glorifying Park Chung-hee, it's crucial to remember that his military dictatorship was marred by suppression, authoritarianism, and the elimination of dissent. However, our focus today remains primarily on the economic aspect. Objectively, he led South Korea through a remarkable turnaround. Consequently, many South Koreans remain grateful to Park Chung-hee and view him favorably.
While not an economic expert, Park possessed remarkable vision and foresight. He recognized that South Korea's fragile state, with external threats and internal instability, left it reliant on the US like a beggar. This was unsustainable. He understood that economic development, stability, and independence were essential for political stability and to counter North Korea.
Park prioritized economic development, determined to lift South Korea out of poverty. In January 1962, he introduced the first Five-Year Plan, setting the overall direction for South Korea's development: an export-oriented, industrialization-led economic model.
Despite encountering challenges, the first Five-Year Plan achieved an average annual GDP growth rate of 8.3% and an export growth rate of 29%. The subsequent second Five-Year Plan proved even more impressive, achieving an astounding average annual GDP growth rate of 11.5%.
As South Korea gradually accumulated technological prowess, during Park's later years and Chun Doo-hwan's presidency, the country successfully transitioned into heavy industry. It became one of the world's leading exporters of steel, shipbuilding, machinery, and electronics.
Park Chung-hee's vision of an export-oriented, industrialized economy, as outlined in his first Five-Year Plan, continued to deepen and thrive.
However, merely stating these facts oversimplifies the story. Considering the global landscape and South Korea's geopolitical constraints, focusing on industrialization and exports wasn't a difficult choice. Neighboring Japan employed a similar approach. The challenge lay in how to effectively implement and execute this vision.
Nearly every Five-Year Plan under Park's leadership exceeded its targets. This, I believe, is Park Chung-hee's most remarkable accomplishment.
So how did he achieve this? I believe it boils down to two pillars and one driving force.
The Rise of the Chaebols
The first pillar deviates from the conventional economic theory of free competition and survival of the fittest. As a military leader, Park Chung-hee didn't rely solely on policy support or encouraging small and medium-sized enterprises with the hope of them becoming giants over time. That approach was too slow and uncertain.
Once a target was set, it was assigned to specific individuals and companies for execution. For instance, if the goal was to develop the fertilizer industry, the most capable and obedient company, such as Samsung, would be selected. They would receive maximum policy support and preferential loans to establish large-scale fertilizer plants, enabling South Korea to achieve self-sufficiency as quickly as possible.
With their capabilities and strong government support, Samsung rapidly became the largest fertilizer producer in the country. This targeted approach proved highly efficient for the Park Chung-hee government, with clearly defined responsibilities.
This system gave rise to a large number of super-sized enterprises, forming the first pillar of Park Chung-hee's economic philosophy: Chaebols. This, in turn, opened the Pandora's Box of the chaebol system.
What exactly are chaebols? Are they simply large corporations? Not quite. Many countries have numerous large corporations, but when we speak of chaebols, South Korea immediately comes to mind. Therefore, being large alone doesn't define a chaebol.
True chaebols have two defining characteristics. First, they are family-controlled. Second, they maintain extremely close ties with the government. In essence, South Korean chaebols are family-run conglomerates with deep government connections.
This might sound reminiscent of the Japanese Zaibatsu we discussed previously. While there are similarities, the key distinction lies in the Zaibatsu's core: a giant bank around which their businesses revolve. Korean chaebols, on the other hand, lack banking operations. Park Chung-hee's government maintained control over the banking industry. This became a crucial tool for the government to maintain control over the chaebols.
When Park Chung-hee came to power, one of his initial actions was to punish the chaebols that thrived during Syngman Rhee's era. He imposed heavy fines and even imprisoned 51 prominent business leaders, including the then-richest man and Samsung founder, Lee Byung-chul.
However, after several interactions with Lee Byung-chul, Park had a change of heart. He decided to cooperate with the chaebols and grant them even greater favor than before.
Gradually, control of South Korea's vital industries shifted into the hands of these chaebols. Some of the most prominent included Samsung, LG, Hyundai, Hanjin, and Daewoo. The government, through the banking system, exerted tight control over these chaebols, determining who received loans, the loan amounts, and interest rates. Naturally, the chaebols eagerly curried favor with the government.
The chaebols relied on government support for favorable policies and funding, while the government leveraged the chaebols' wealth and influence to maintain control and suppress competitors. Overt and covert exchanges of power and money became increasingly commonplace.
This symbiotic relationship is best described as collusion between government and businesses. While this term carries negative connotations, for military regimes like those of Park Chung-hee and Chun Doo-hwan, it was a means to an end: economic development.
Their objective was clear: economic growth. Chaebols received preferential treatment, but they were expected to deliver results. If they failed to meet expectations, they risked being replaced. This explains why there was constant turnover among South Korean chaebols during that period.
For instance, out of the top 100 South Korean companies in 1965, only 22 remained a decade later. However, some companies, particularly those with strong capabilities and shrewd business acumen, thrived and grew during those three decades, such as Hyundai.
Chung Ju-yung, the founder of Hyundai, consistently delivered exceptional results on infrastructure projects for the US military and the South Korean government. Recognizing his efficiency and reliability, Park Chung-hee decided to strongly support Chung, propelling Hyundai to become the dominant force in South Korea's construction industry.
In 1967, inspired by Japan's success in the automotive industry, Park Chung-hee encouraged Chung to venture into car manufacturing. With government backing, Hyundai Motor Company was established, marking their entry into the automotive sector. Hyundai's outstanding performance earned them continued government support, solidifying their position as a leading South Korean chaebol.
This example illustrates how, amidst the constant churn of South Korea's chaebol landscape, four companies – Samsung, Hyundai, LG, and SK – consistently grew, eventually becoming the country's four dominant conglomerates.
Two common misconceptions surround the concept of chaebols. First, they are often equated with monopolies, which isn't entirely accurate. Park Chung-hee recognized the detrimental effects of monopolies on the economy. While he supported specific companies, he generally promoted competition, preventing single companies from monopolizing entire industries. This explains the constant turnover among chaebols.
The second misconception is equating chaebols with corruption. While collusion between government and businesses inevitably breeds corruption, it's crucial to differentiate between the two. Corruption typically refers to systemic rot, where every level of society demands bribes. However, South Korea's corruption wasn't pervasive at the time. It was primarily confined to the highest levels of decision-making and large-scale transactions. This would change over time, but we'll delve into that later.
Education: The Invisible Pillar
Apart from the chaebol system, another crucial, albeit less visible, pillar underpinned South Korea's rapid rise: education. South Korea, Japan, and later China all experienced periods of remarkable economic growth. I believe that education played a vital, perhaps even the most significant, role in driving this growth.
These countries, despite their underdeveloped economies and low per capita incomes, boasted high population quality and education levels. This readily available pool of highly skilled but inexpensive labor is what allowed them to become the "world's factories."
This phenomenon stems from a deeply ingrained cultural value placed on education within East Asian societies. There's a sense of pride associated with attaining higher education, with professors and doctorates holding a higher social standing than those in high-paying professions.
South Korea exemplifies this cultural phenomenon. After the Korean War, the country's overall education level rapidly improved. Park Chung-hee's government implemented an education-first development strategy, allocating an average of one-fifth of the government budget to education.
Coupled with their strong work ethic, South Korean workers could achieve 2.5 times the output of American workers at one-tenth the cost. This efficiency was a key factor in their export-led growth.
Foreign Investment: Fueling the Engine
While we've discussed the two pillars of South Korea's economic miracle, there's a crucial driving force to consider: foreign investment. As mentioned earlier, South Korea heavily relied on US aid during Syngman Rhee's presidency. However, the US wasn't in the business of endlessly funding South Korea. Towards the end of Rhee's tenure, there were signs of the US reducing its financial support.
Park Chung-hee, dissatisfied with South Korea's dependence on US aid, initially restricted foreign investment, including from the US and Japan. So why do I argue that foreign investment played a significant role in the Miracle on the Han River? The answer lies in a crucial historical event: the Vietnam War.
The Vietnam War, raging from 1955 to 1975, spanned over two decades. South Korea contributed 300,000 troops in support of the US war effort, providing significant assistance. In return, the US government offered various forms of support, including substantial financial aid, technology transfer, and procurement contracts.
For instance, numerous infrastructure projects in Vietnam were directly awarded to Hyundai. With US support, South Korea, or more precisely, Hyundai, secured many infrastructure projects in the Middle East. This factor contributed to Hyundai's rapid rise.
Furthermore, securing these Middle Eastern projects allowed them to weather the two oil crises of the 1970s relatively unscathed. As a heavily oil-dependent, export-oriented economy, South Korea should have been severely impacted. However, they managed to maintain a 10% GDP growth rate throughout the 1980s, largely because the oil-rich Middle East was flush with cash and investing heavily in infrastructure, with South Korean companies reaping the benefits.
Later on, iconic structures like Dubai's Burj Khalifa, Kuala Lumpur's Petronas Towers, and Taipei 101 were all contracted to Samsung. These were some of the world's most prestigious construction projects, highlighting the competitiveness of South Korean companies.
While we've focused on US foreign investment, another crucial source for South Korea was Japan. Despite historical animosity, both countries recognized the potential for mutual economic benefit.
South Korea swiftly opened its doors to Japanese investment. Coinciding with Japan's own economic miracle, demand from Japan was immense. South Korea effectively became both the "world's factory" and "Japan's factory."
Essentially, from 1962 to 1979, encompassing Park Chung-hee's entire reign, South Korea absorbed capital, technology, and production models from both the US and Japan. This influx of resources acted as a direct catalyst for its economic development.
Between 1961 and 1987, during those 27 years of military rule, South Korea's GDP per capita surged from less than a quarter of the global average to more than double the world average. Calling it a "miracle" is no exaggeration.
Democratization and its Discontents
In 1987, under mounting pressure, South Korea adopted a new constitution, restoring democratic presidential elections and ushering in a new era. Embracing the global trend of liberalization and encouraging competition, South Korea experienced a period of rapid growth, with an average GDP growth rate of 10% during the first five years. The country rose to become the 15th largest economy globally.
While seemingly positive, cracks began to appear within South Korea's economic foundation, gradually spreading throughout the country.
The chaebols, already immensely powerful, now found themselves operating in a democratic system. Under military rule, their relationship with the government was transactional, with favors exchanged at the highest levels. However, democratic elections changed the game.
Perhaps scarred by their experiences with dictatorship and colonization, South Korea's new constitution limited presidential terms to five years with no re-election. While this prevented authoritarianism, it created a revolving door of presidents, each with a short timeframe to exert their influence.
The one constant throughout this political change was the chaebols. No longer beholden to military leaders, they found themselves operating in a less regulated financial environment and dealing with a less assertive government.
The chaebols seized this opportunity to exert greater control, influencing elections through political contributions and lobbying. Presidents, either propelled into office by chaebol backing or dependent on their support for re-election, were unlikely to challenge them.
Nearly every South Korean president has faced allegations of corruption, either personally or within their families. This phenomenon is often referred to as the "Blue House Curse," named after the presidential residence.
While chaebols wielded significant influence during the military era, corruption wasn't as pervasive. However, under democratic rule, their tentacles reached every corner of the government, including the judiciary.
The chaebols' grip on the country, both economically and politically, tightened. Prior to 1985, there was constant turnover among chaebols. After 1985, however, the top four – Samsung, Hyundai, LG, and SK – remained firmly entrenched. This speaks volumes about the level of manipulation and influence they wielded.
Economically, the chaebols' power grew even further. In 1990, the top five – Samsung, LG, SK, Hyundai, and Lotte – accounted for two-thirds of South Korea's GDP. These companies were essentially untouchable.
Even with the best intentions to rein them in, the government couldn't afford to act too aggressively, as the entire economy relied heavily on these conglomerates.
Emboldened by their influence, the chaebols expanded aggressively, taking advantage of financial liberalization and market openness to increase leverage and borrow heavily. They established numerous subsidiaries, many of which were unprofitable and propped up by cheap bank loans. Banks, accustomed to government protection, readily extended credit, fueling this unsustainable expansion.
The Asian Financial Crisis and its Aftermath
In 1997, the Asian financial crisis swept through the region, toppling economies one by one. While South Korea, with its seemingly robust economy, was initially thought to be immune, it proved susceptible. As soon as capital flight began, the overleveraged chaebols and their debt-ridden subsidiaries faced a liquidity crisis, dragging the entire South Korean economy down with them.
South Korea was forced to seek an emergency loan of $58 billion from the IMF, the largest bailout in IMF history at that time.
The 1998 crisis prompted significant reforms within South Korea's banking sector. However, reforming the financial system is a delicate process. It requires a gradual approach to avoid systemic shocks.
Consequently, South Korea's banking sector, despite improvements, remains a relative weakness compared to its robust manufacturing industries.
While 55 chaebols collapsed during the crisis, including the then-second largest, Daewoo, marking South Korea's largest bankruptcy at the time, the crisis ultimately led to consolidation rather than dismantling of the chaebol system.
Hyundai, for instance, capitalized on the situation by acquiring Kia, becoming South Korea's dominant car manufacturer. The chaebols' overall size decreased compared to pre-1997 levels, but their overall dominance remained largely intact. Of the 50 largest companies on the South Korean stock market today, 47 are chaebol-affiliated.
Despite the crisis, South Korea's economy recovered quickly, transitioning towards technology and services. Companies like Samsung, Hyundai, and LG became globally competitive.
While South Korea's economic miracle seems to continue, with a GDP per capita approaching $35,000, a darker side lurks beneath these impressive figures.
The High Cost of Success
As mentioned earlier, South Korea grapples with the highest suicide rate, lowest happiness index, and longest working hours among developed countries. These issues are, in many ways, the delayed consequences of the Han River miracle, with the chaebols' dominance over politics and the economy playing a significant role. Their power has led to social stratification and stifled competition.
While the chaebols' rapid growth brought short-term benefits, it limited opportunities for ordinary South Koreans in the long run. Career paths often feel limited, with many funneled towards a singular goal: attending a top-ranked high school, gaining admission to a prestigious university, securing a coveted position at one of the four major chaebols, and climbing the corporate ladder.
This pressure-cooker environment, fueled by both cultural expectations and systemic constraints, has led to an obsession with education known as "Education Fever."
Approximately 95% of South Korean students attend private after-school tutoring academies called "Hagwons." South Korean families, on average, spend one-fifth of their income on these academies.
Many South Korean high school students endure grueling schedules, waking up between 5 and 6 a.m. for school, followed by hours of self-study and late-night tutoring sessions that can extend into the early hours of the morning.
The ultimate goal for many is to gain admission to one of South Korea's three most prestigious universities: Seoul National University, Korea University, and Yonsei University, collectively known as "SKY." However, even achieving this feat doesn't guarantee an easy path. Graduates then face intense competition for jobs at the chaebols.
Samsung, for instance, conducts annual recruitment exams that attract tens of thousands of applicants, with acceptance rates as low as 10%. Securing a position at Samsung is a cause for celebration for the entire family.
Even after entering a chaebol, employees face a long and arduous climb up the corporate ladder. South Korea has the longest average working hours among developed nations.
Similar to Japan, after-work socializing, often involving heavy drinking, is practically mandatory, creating an environment where personal time is scarce.
This rigid social hierarchy and relentless pressure have taken a toll on South Koreans, particularly the younger generation.
Conversations with South Korean friends reveal a shared sentiment: life in South Korea is suffocating. Society imposes a rigid set of expectations, fostering intense competition and a pervasive sense of unease.
This pressure-cooker environment and lack of work-life balance contribute to another pressing issue: the decline in the fertility rate.
With demanding work schedules and limited personal time, starting a family becomes less appealing. The prospect of subjecting their children to the same pressures of academic achievement and career competition further discourages couples from having children.
South Korea's fertility rate stands at a mere 0.84. A fertility rate above 2 is generally needed to maintain a stable population. Anything below 1.5 is considered critically low. South Korea's rate of 0.84, the lowest globally, highlights the immense pressure its citizens face.
A look at South Korea's population pyramid reveals a concerning trend. The base of the pyramid shows a rapid decline in the younger generation.
Comparing South Korea's population pyramid to Japan's, we see similarities, particularly in the shrinking base. However, the key difference lies in the timing. Japan's population boom, reflected in the bulge of 70 to 75-year-olds, occurred during the post-World War II economic miracle.
In contrast, South Korea's population boom, seen in the 60-65 age group, coincides with Park Chung-hee's rise to power and the beginning of the Han River Miracle in the 1960s.
These population pyramids provide insights into a nation's economic and historical trajectory. South Korea's current demographic structure, with a large working-age population supporting a relatively small number of elderly and children, has fueled its economic growth. However, as the current workforce ages and the number of newborns continues to decline, maintaining this growth will become increasingly challenging in the coming decades.
This, in essence, encapsulates the paradox of South Korea's economic miracle: a nation grappling with high suicide rates and low happiness despite its economic achievements.
While the country excels in technology and innovation, it remains beholden to powerful chaebols that exert considerable control over its political and economic landscape.
Among these chaebols, Samsung stands out as a particularly intriguing case study. Despite numerous political upheavals and changes in leadership, Samsung has maintained its position as South Korea's most dominant company for over six decades.
How did Samsung achieve this remarkable feat? How did its leaders navigate the treacherous waters of South Korean politics? And how did they manage to survive, even thrive, amidst corruption scandals and fierce competition?
Stay tuned for the next episode: The Dark Side of Samsung.