1.1 The Korean economy
In 1945, as World War II came to an end, Korea was liberated from Japanese colonial rule and the Korean peninsula was divided into two along the 38th parallel. The South was occupied by the United States, the North by the Soviet Union. In 1948, the governments of both North and South Korea came into being. In 1950, the Korean War broke out; an armistice agreement was reached in 1953.1
At the time of partition, roughly two-thirds of the population of the peninsula were living in the South (17.0 million) and one-third in the North (8.9 million). Between 1945 and 1949, due to the massive repatriation of overseas Koreans (1.41 million from Japan and 0.62 million from Manchuria) and refugees from the North (0.46 million), the population of the South increased by 2.48 million. The North had a slightly larger surface area (120,000 square kilometers) than the South (100,000 square kilometers), with arable land accounting for about 20 percent of the total in each. Of the arable land in the South, 60 percent was rice paddies and the rest dry fields; in the North, 23.5 percent was rice paddies and the rest dry fields.
Most of the peninsula’s mineral resources were located in the North, and nearly all electric power (92 percent) was generated in the North. The manufacturing sector was small for the whole peninsula, while the industrial structures of the South and the North were highly complementary to each other. Most heavy industries were located in the North, with most light industries in the South. In 1940, the North produced about 90 percent of the country’s total metal products and 83 percent of its chemical products; the South produced 85 percent of textiles, 72 percent of machinery and 64 percent of the processed food output. According to the statistics from 1940, the total “net commodity-product” (defined as the net-value output of the agriculture, forestry, fishery, mining, and manufacturing sectors, which excludes double-counting2) in the South was slightly greater than in the North. However, in per-capita terms, the net commodity-product was 60 percent greater in the North, as the South had twice as large a population as the North.3
Under the 35-year Japanese rule, the economy had been dominated by Japanese firms, capital, and technicians. In the late 1930s, Japanese residents made up only 3 percent of the total Korean population. However, Japanese-controlled businesses accounted for 58 percent of the total of 5,413 establishments and 89 percent of the paid-in capital of all business establishments, implying that in terms of paid-in capital the Japanese firms were on average nearly six times larger than Korean firms. In 1944, Japanese engineers and technicians in manufacturing, construction, and public utilities accounted for 80 percent of the total.
The Liberation in 1945 meant a sudden separation of the economy from the Japanese economic bloc, as well as partition of the country. Economic chaos followed. By the next year, the number of manufacturing establishments dropped by half and manufacturing employment by 60 percent in the South. Additionally, a severe food shortage developed, and hyper-inflation was set off by uncontrolled expansion of the money supply before and after the Liberation; “The Seoul retail price index increased about 123 times from June 1945 to June 1949.”4
In 1948, the North completely and finally shut off the power supply to the South, immediately creating a serious power shortage. The Korean War broke out in June 1950, ending in 1953. Roughly 1 million civilians were killed or wounded during the war, with 137,000 South Korean soldiers and around 40,000 UN soldiers killed in action. The war damage to South Korea is estimated to have been equal to 86 percent of a year’s gross national product (GNP) in 1953.5
Statistics on the Korean economy in the South are scanty for the years immediately following the Liberation and during the period of Korean War. No national income estimate is available. The first year for which consistent national income account data are available is 1953, the year the Korean War ended. The subsequent years until 1957 are considered the recovery period, during which the growth rate of the economy was relatively rapid. Afterwards, the growth rate declined from 6.1 percent in 1958 to 4.6 percent in 1959 and 1.8 percent in 1960, mostly because of a forcefully applied financial stabilization program. Available statistics indicate that the “net commodity-product for 1953 was about 27 percent lower than that for 1940”.6 If the ratio of GNP to net commodity-product in 1953 had been the same as it was in 1940, GNP in 1953 must also have been 27 percent lower than it was in 1940. If that had been the case, and GNP had grown at the rates shown in Table 1.1, GNP slightly exceeded the 1940 level for the first time in 1961: a loss of 20 years of economic growth.
Table 1.1 Growth and inflation rates, 1954–1970 (%)
