KED5.2

Summary

This session explores South Korea's economic development in the 1960s and 1970s, focusing on the country's reliance on foreign capital, particularly foreign debt, to bridge the gap between domestic savings and investment. The Korean government adopted an export-oriented strategy, using foreign loans to finance capital goods, raw materials, and technology imports. Public and commercial loans were dominant forms of foreign capital, with foreign direct investment (FDI) playing a minor role. The session highlights Korea's rapid growth, the changing nature of foreign capital, and the increasing burden of debt repayment during this period.

Takeaways

• 💰 In the 1960s and 1970s, Korea faced a significant gap between domestic savings and investments, which was filled by foreign capital, primarily in the form of debt.
• 🌍 The major types of foreign capital were public loans, commercial loans, and foreign direct investment (FDI), though debt was the predominant form.
• 📊 Korea's export-oriented strategy helped repay foreign debt by generating foreign currency, leading to rapid economic growth during the 1960s and 1970s.
• 📉 Between 1962 and 1982, foreign capital contributed an estimated 3.3% per year to Korea’s economic growth, with an average growth rate of 8.2%.
• 🏛️ Initially, public loans were used for infrastructure, while commercial loans and FDI were focused on manufacturing, with public loans being lower in interest rates.
• 📈 Commercial loans began to rise in the late 1960s, overtaking public loans and becoming a major source of foreign capital.
• 🛠️ Japan was a significant FDI contributor, especially after diplomatic normalization in the late 1960s, and Japanese investments were key to projects like the construction of POSCO.
• 🔄 Korea’s economy underwent a virtuous cycle of importing capital goods and raw materials to support production and exports, which further fueled economic growth.
• 📉 The debt service ratio and current account deficits in the 1970s indicated increasing foreign debt burdens, which led to Korea seeking more FDI.
• 📊 Over time, the type of foreign capital evolved, with the 1980s seeing a shift towards financial institution loans, while FDI remained a relatively small but growing contributor.

Q & A

What was the major form of foreign capital in Korea during the 1960s and 1970s?

The major form of foreign capital in Korea during the 1960s and 1970s was foreign debt, mainly through public and commercial loans. Bank loans and bond issues also played a role but became more prominent in later years.

Why did Korea adopt an export-oriented economic system in the early 1960s?

Korea adopted an export-oriented economic system in the early 1960s to generate foreign currency through exports. This currency was crucial for repaying foreign debts that had been introduced to fill the gap between domestic savings and investment.

What role did foreign capital play in Korea's economic growth during the 1960s and 1970s?

Foreign capital contributed significantly to Korea's economic growth during the 1960s and 1970s, accounting for an estimated 3.3% of the annual economic growth between 1962 and 1982. It enabled Korea to purchase capital goods, raw materials, and foreign technology, which in turn fueled rapid export-driven growth.

How did the type of foreign capital change as Korea's economy developed?

As Korea's economy developed, the type of foreign capital evolved. In the early 1960s, grants from the U.S. and the UN were predominant, but as the economy grew, public and commercial loans became more important. By the 1980s, bond issues by financial institutions and companies started to play a larger role.

What was the difference between public loans and commercial loans in Korea’s economic development?

Public loans were provided by foreign governments or international organizations at low interest rates with favorable repayment conditions, typically used for social infrastructure projects. Commercial loans, on the other hand, were provided by private or commercial banks, often with higher interest rates, and were mainly used for manufacturing.

What was the significance of FDI (Foreign Direct Investment) in Korea's economic growth?

FDI played a minor role in Korea’s economic growth compared to public and commercial loans. While important in manufacturing, FDI constituted only a small portion of the foreign capital that contributed to Korea’s economic development in the 1960s and 1970s.

What role did Japan's reparation fund play in Korea's economic development?

Japan's reparation fund, provided after Korea and Japan normalized diplomatic relations in 1965, played a substantial role in capital formation in Korea, especially in the late 1960s. About 40% of the grants and loans were used to purchase capital goods, and the fund also supported the construction of POSCO, Korea's major steel company.

How did Korea manage its foreign debt repayment during its economic development?

Korea managed its foreign debt repayment through its export-oriented strategy. The foreign currency earned from exports was used to repay the foreign debt. However, as the debt service ratio increased in the late 1960s and early 1970s, the Korean government sought to promote FDI to alleviate the burden.

What challenges did Korea face regarding foreign debt in the late 1960s and early 1970s?

Korea faced increasing foreign debt burdens, as indicated by the rising debt service ratio (repayment of principal and interest relative to exports) and large current account deficits. The debt service ratio peaked in 1970-1971, indicating a significant strain on the economy's ability to repay its foreign debt.

What sectors were public loans and commercial loans primarily used for in Korea?

Public loans were primarily used for social infrastructure and services, such as roads, power plants, and oil supply, while commercial loans were mostly directed towards the manufacturing sector. FDI, though small, was also mainly used in manufacturing.