The Role of Government in Export Expansion in the Republic of Korea: A Revisit

Abstract

It is widely agreed that Korea's rapid economic development since the early 1960s resulted from the rapid expansion in exports and that the Korean government has been heavily involved in this process. There is, however, disagreement over the role of the government in the economic development, particularly in relation to the market forces. Some studies regard the Korean growth model as a neoclassical model that stands upon a free-market and free-trade system, but others not. During the period 1962 to the early 1980s, though export-promotion was strongly undertaken, most commodity prices—interest rates, exchange rates, and wage rates— were not able to change freely in response to market conditions of supply and demand but were controlled by the government. Market disequilibria with rigid prices prevailed in the economy. In this regard, it might be safe to say that Korea's export-led growth (ELG) strategy did not necessarily involve a free market system with equilibrium prices. The study finds that for most of the time before the mid-1980s, the Korean won had always been overvalued in light of relative inflation between Korea and its major trading partners. The disadvantageous effect on exports of the persistently overvalued exchange rate was partly or completely offset by two kinds of government support for exporters: (i) an ad hoc export promotion system; and (ii) psychological encouragement by President Park. The paper contends that the government support provided an "assured" economic climate that is similar to the "social climate" of Schumpeter in which creative, innovative entrepreneurs receive high social prestige in addition to a high rate of income. The climate, prima facie, must have stimulated dynamism and aspiration among Korean entrepreneurs in their economic activities, including investment, production and exports, creating X-efficiency.