The Origins of a Growth Miracle

Book subtitled as:

An Economic History of Korea, 1700-2010


Table of Contents

  1. Introduction
  2. Population and Living Standards
  3. Capital Accumulation and Technological Progress
  4. Market and State
  5. Human Capital Accumulation
  6. Savings and Fertility
  7. Divergence and Convergence
  8. Conclusions

Published in the Korean language by Haenam Publishing in August 2014.

This book explains 1) what drove Korea’s escape from Malthusian trap to modern economic growth, and 2) why Koreans opted for quality, rather than quantity, of life to achieve a growth miracle. Chapter 1 begins by familiarizing readers with industrial revolution and demographic transition — the two historic events high income countries of today typically went through. Industrial revolution refers to transition from economic stagnation to ever increasing prosperity and tends to occur concurrently with decline in mortality and then in fertility — a shift in population regime known as demographic transition. As I describe in Chapter 2, different indicators show living standards fell for at least two centuries before rising from around 1900. The turn-of-the-century reversal in growth trend coincided roughly with the beginning of mortality transition, which probably gained speed with under Japanese rule (1910-45). Fertility began to fall in the 1930s, but most of the Korean fertility transition took place from 1960-90, the classic era of the South Korean growth miracle. As mortality fell consistently, population growth more than doubled to 1.3% in colonial Korea, which further increased to 1.9% from 1960-90 before tapering off in recent decade with continued decline in fertility.

Chapter 3 assesses the role of capital accumulation and productivity advance in generating the long swing in living standards. While pre-colonial Korea suffered shrinking stock of capital, the growth of the colonial and South Korean economy was propelled largely by capital accumulation. Describing the twentieth century growth as a process of capital accumulation however is an oversimplification however, given that Korea managed to achieve rapid productivity catch-up vis-à-vis the U.S. over the past century. Also total factor productivity improvement speeded up significantly after 1945, although higher savings ratio explains a greater part of the post-colonial growth acceleration. The capital accumulation raised capital/labor ratio over the twentieth century, which drove structural shift toward manufacturing, a capital-intensive sector relatively to either agriculture or service industry. Productivity improved more rapidly outside agriculture, which caused resources to flow into manufacturing and service.

Why did the rate of capital accumulation and technological advance differ nontrivially depending upon period? Chapter 4 argues that the answer lies in what the government did and failed to do. Unable to exert effective control over landowning elites, the government of dynastic Korea failed to build adequate fiscal and legal capacity. One of the important consequences of the ineffective public sector was deforestation, which drove down incomes of different groups during the eighteenth and nineteenth centuries. Japanese rulers brought down the fragile regime in 1910 to introduce a solid system of administration in Korea, including legalized land property rights, a stable currency, and a sustainable system of public finance. While the institutional reform played an important role in putting an end to the growth failure, the colonial government rarely intervened to promote economic growth, leaving resources to be allocated largely by markets. It was only after the end of Japanese rule that a “developmental state” emerged in South Korea. Although many praise the wisdom of the policy measures implemented to promote exports and substitute manufacturing imports, little evidence exists to prove that the South Korean industrial policy helped South Korea grow faster. More likely, the activism inflicted deadweight losses on the economy, slowing down growth. As the comparison of colonial and South Korea growth reveals, growth speeded up after 1945 despite the policy intervention, because human, as well as physical capital expanded much faster after 1945.

Chapter 5 begins by calculating an index of human capital stock to show that labor quality improved in South Korea more than twice as fast as in colonial Korea. What caused human capital to grow more rapidly after the end of Japanese rule? Human capital accumulation in colonial Korea was led by the spread of primary schooling, as is indicated by the rise in primary school enrolment rate rose from virtually nil at the beginning of colonial period to 54% on the eve of independence. The educational achievement was largely an outcome of an ambitious school building campaign launched by the colonial government in the face of landowning elites’ reluctance to finance mass schooling by taxation. Primary schooling enrolment made an even more impressive advance in postcolonial decades to approach 100% by 1960 as the U.S. military government spent greater efforts for mass schooling. In the following decades of high growth, the South Korean government allocated a substantially larger share of the public revenue than either the colonial or U.S. military government on schooling to raise secondary school enrolment rate from 25% in 1960 to 74% in 1990. The South Korean government is unlikely to have been able to make the remarkable shift to the pro-education policy, had the traditional elites — co-opted by Japanese as partners of colonial rule — not fallen into disrepute in the wake of de-colonization, had the security of rights to their landed wealth not been irrevocably impaired by the Soviet-style land reform implemented in North Korea, and had they hence been allowed to continue to control the Korean society after 1945.

The rapid growth of human capital stock from 1960-90 was closely linked with the steep rise in domestic savings ratio from 9% in 1960 to 38% in 1990, as Chapter 6 explains. The increased public spending for education made it pay for parents to have fewer children and educate them better than to raise a larger number of poorly educated children in terms of either altruism or old age support. As parents reduced total fertility rate from 6 in 1960 to 1.6 three decades later, they found themselves left with an ever larger amount of resources available for purposes other than child rearing, hence saved an increasingly larger share of their incomes. The South Korean fertility decline was also driven by development of financial markets, which led parents to substitute financial assets for children, and by policies implemented to control population, which improved the availability of fertility control devices and reduced the cost of contraception. Given the high likelihood of the faster improvement in labor quality after 1960 causing technological learning to take place more rapidly in South than in colonial Korea, the shocks triggering the shift from quantity to quality of children represented ultimate causes to explain the post-colonial growth acceleration driven by faster technological advance and accumulation of human and physical capital.

Chapter 7 puts the performance of the Korean economy in the past three centuries in international context to explore 1) why Korea failed to achieve growth as either England or Japan did in the eighteenth and nineteenth centuries, and 2) what allowed Korea to grow faster than the rest of the world in the twentieth century. The growth failure of pre-colonial Korea was a part of economic collapse suffered by the Chinese empire, which stands in contrast with economic growth and proto-industrialization occurring in England and Japan. The Chinese empire, including dynastic Korea, suffered capital scarcity, which became increasingly acute as de-forestation occurred in the eighteenth and nineteenth centuries. The origins of capital scarcity was to be found in the famine relief granted by the governments of imperial China and dynastic Korea, which not only reduced precautionary savings but also created moral hazards to discourage productivity improvement.

Although per capita grew in colonial Korea only one third as fast as in South Korea, the colonial growth far outweighed the growth achieved by the rest of the contemporary world as did the South Korean growth. To identify causes to explain the Korean outperformance, international growth accounting equations are estimated using data from 41 countries including Korea from 1910-90 in Chapter 7. The results indicate that while Korea could grow faster because the government intervened less than in other countries, the more important cause to explain the Korean high growth were the institutions Japan built in Korea to bolster colonial rule.

Summing up the analysis in preceding chapters, Chapter 8 isolates 1) institutional modernization as implemented by Japanese rulers, 2) market-friendly policy making, and 3) non-elitist and mass-oriented schooling policy as the three fundamental causes of the South Korean growth miracle. They did not represent a consequence of conscious choices made by Koreans, but a consequence of political shocks imposed on them, Japanese imperialism and Soviet communism, in particular. Chapter 8 also discusses what the Korean growth episode implies for development policy and theories of economic growth, why economic history matters to understand economic development, and what might lie in the future for Korea’s prosperity.

While English edition is in the pipeline, non-Korean-speaking users might be interested in checking out the table of contents and lists of tables and figures provided in English to get a rough idea about how the arguments flow and what types of evidence are used to support them.

 


 

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