2.2.1 The Early Period of Neutral Export Promotion
Sentiments surrounding the political turmoil, economic stagnation and constant military threat from North Korea gave rise to a military coup in 1961, led by a two-star general Park Chung Hee. He was elected as the president the following year, and retained his presidency for 18 years until 1979 when he was assassinated during a dinner party. Notably, however, he was the first political leaders to initiate a systematic economic development plan.
The economic situation at the time was entirely unfavorable to development; the capital, technology and natural resources needed to advance were insufficient. The only factor of production Korea had was abundant labor, but such abundance can work as a disadvantage if the population is not adequately educated. Luckily, Korea had a long tradition placing high priority on education, resulting in a people that were relatively better educated than most other developing countries. The political situation was even worse: to the north was the major enemy, North Korea; to the left the major participant in the Korean War, China; to the right the former colonial ruler, Japan. Korea and Japan had not even been able to re-establish normal diplomatic relations until 1965. The resulted in a 20 year vacuum between the two countries. To the south, was the Pacific Ocean. In a sense, Korea was completely segregated from its neighbors, and the only ally they could rely on was the US.
The main trade and economic development policy during this period was export promotion. This distinguished Korea from many other developing countries as most developing countries focused on import substitution as they did not have enough capital and foreign reserves for import. Instead,Korea looked outward and adopted export-oriented policies. Import was, however, not freely allowed; but, in as much as such import was related to export, import was also allowed under favorable regulations. On one hand, Korea rightfully chose an open-door trade policy based on Ricardo's Comparative Advantage Theory. But, on the other, she did not have many choices as foreign currency earning was a pre-requisite to import factors of production such as capital goods, raw materials and technology.
During this period, the export of any product was given incentives by the government including tax and financial support. Important to note was that the banks were nationalized during the military coup. This made possible the wide-spread financial support by government; policy loans were extended at much lower interest rates. For the business firms, this access to loans was very attractive and also provided an implicit guarantee by the government for a bail out if the investment failed. All governmental agencies actively supported export, and surprisingly export grew at close to 30% a year during this period while the economy grew by almost 10% a year. The catch phrase at the time was "we can live better," and "re-building the country through export.