After the armistice the danger of the war reigniting continually hung over Korea. Thus the Americans were entangled in a long term commitment to the ROK. This involved large amounts of military aid to deter any hostile northern action and the determination to improve economic conditions in the ROK. There was overt competition between American Capitalism and Soviet and Chinese Communism to prove which system could provide the best standard of living for its people. These factors guaranteed enormous levels of military and non-military financial aid from the USA on a long term basis.
The president of the ROK was still Rhee Syng-man in 1953. In 1952 he had the National Assembly amend the constitution so he could be elected president of the ROK by the popular vote. He was then elected in a poll which many suspected of irregularities.
Government Finances & Aid
Rhee became notorious for his ability to get what he wanted from his US backers, especially financial aid. His method has been described as playing one US official off against another. For example, he might play the US ambassador off against the commander of US military forces in the ROK.
The US supplied massive amounts of military aid to Korea. From 1953 to 1969 a total of US$ 4.1 billion of military aid was given. The ROK military grew in strength and prestige, numbering 700,000 by 1956, it was one of the largest in the world. As a result the South Korean armed forces had some of the best equipment in the world and the officer corps was highly trained and professional.
US influence and the command structure which tied it to the CINCUN (Commander in Chief UN Command), an American, kept the military out of Rhee’s political influence. The ‘autonomous’ military thus became a potential rival centre of power in the Korean state. As it turned out this was to have political consequences.
High levels of military aid had other long term effects as well. Military men who had received technical training and education took their knowledge and skills into business and into state owned enterprises when they left the military.
Military assistance also went into infrastructure developments, such as road and bridge construction, especially near Seoul and the DMZ (Demilitarised Zone, the no man’s land between North and South Korea). This was important in getting Korea’s construction industry going.
The amounts of economic and military aid Korea received were enormous and should not be underestimated in their importance. From 1946 to 1976 ROK received US$ 12.6 billion in US economic and military aid, US$ 1 billion Japanese aid, and US$ 2 billion from international financial institutions (nominal figures). This was more per capita than for Taiwan at US$ 600 versus US$ 425. It was about the same as received by the whole of Africa in the same period.
In 1957 there was a high point in US aid, the ROK receiving US$ 383 million of US aid compared to a GDP (Gross Domestic Product) of US$ 456 million. In other words US aid was equivalent to 84 per cent of GDP. This figure did not include the US$ 300 million cost of maintaining US troops in the ROK (all figures nominal).
UNKRA (United Nations Korean Reconstruction Agency) and the United States International Co-operation Agency (ICA), the forerunner of USAID, were important agencies providing aid during this period. The bulk of US aid projects were concentrated in infrastructure and manufacturing development, for example transportation and electrical power
The United Nations Korean Reconstruction Agency was approved by the UN General Assembly in 1950, during the period that UN forces were rolling back the KPA (Korean Peoples’ Army). It was not able to really start work until the military situation had stabilised in 1953. It was funded by over thirty UN member states, and some non-member states, but the bulk of funds came from, in order of decreasing amounts, USA, UK, Canada, Australia, Italy, Norway and Netherlands. The US was far and away the biggest donor, though the UK alone, also offered over half as much as the US. Other nations’ contributions were much smaller. Operations ceased in 1958, by which time a total of 150 million US dollars (nominal) had been expended on projects in the ROK.
As far as ROK government finances went, as well as conventional taxes and customs duties, it had a number of activities which generated substantial revenues. The government operated profitable monopolies on the supply of salt, tobacco and ginseng. There were also government ‘grain management’ operations.
Important to state revenues were the currency exchange transactions by which the government provided UN troops stationed in Korea with the local currency, the Hwan (later the Won). This proved particularly lucrative.
Overall the revenues generated covered the cost of the government’s routine activities however all military operations, war reconstruction, and economic development were way beyond the state’s meagre finances and had to be run on foreign aid.
Rhee was prone to printing money when he wanted it and did not fear inflation unlike some of his US colleagues who may have been mindful of the case of Chiang Kai Shek in China, whose nationalist government was largely ruined by hyperinflation. US advisers repeatedly warned Rhee of the dangers. During most of the nineteen fifties there was severe inflation, with wages racing to catch up with prices, and failing to do so in some cases. However towards the end of the decade inflation was coming down to more manageable levels.
The South Korean Economy
Most people were destitute after the Korean War. Daewoo founder Kim Woo-choong who lived at the time by selling newspapers, is quoted as saying “People were so destitute it was easier to die than to live. We were constantly hungry.”
The US military were an important market and source of resources. There were shortages of everything and US forces had to generate their own electricity. The cast offs and waste from American troops became valuable commodities, for example an early auto manufacturer in the country based its business on recycled ex-service US jeeps.
Well paid UN troops created a market for locals to provide with services. Foreign visitors have commented that the inner city markets of South Korea in the nineteen fifties were a breeding ground for commerce and entrepreneurship.
On a larger scale the US army presence created a demand for local sub-contractors. One example is Cho Chong-hun, later head of the Hanjin chaebol and of Korean Airways. He started in the nineteen fifties by filling transport contracts for the US military worth US$ 2.28 million per year. He later acquired a fleet of army surplus buses with which he set up a bus company serving the Seoul to Inchon route.
In the nineteen fifties South Korea was still a largely agrarian country. The majority of people lived and worked in the countryside. Far and away the most important food crop was rice. There were also substantial amounts grown of ‘summer grains’: barley, wheat, rye, potatoes and sweet potatoes. There were lesser amounts of winter grains grown: millet, maize & oats. Agriculture, especially grain production benefited from an ICA aid Programme, for example the building of covered storage for grain and short term loans for farmers to buy seeds, tools etc.
Fish, seafood and seaweed were important products. Fish canning was a major industry, used to supply ROK troops. Fish products were also an important export. Fishing in the ROK benefited at this time from an ICA aid programme, supplying fishing craft, fishing equipment and ice-making / cold storage facilities.
The most important industries at this time were mining and textiles. Mining was dominated by anthracite coal, which was kept for domestic use. There was a wide range of other metals and minerals mined, of these important exports were: iron ore, tungsten concentrates and amorphous graphite.
The major manufacturing industry was textiles, a range of different yarns and cloth were produced. Cotton predominated though in both cloth and yarn. Textiles were operated as an import substitution industry, and as textile output increased, imports declined. Textiles received help from UNKRA aid programmes, including raw material supplies and capital goods such as brand new spinning machines.
The distribution of UNKRA financed raw cotton imports led to preferential treatment of some companies which enabled them to expand at the cost of others. The Ministry of Commerce and Industry distributed the raw cotton according to plans drafted by the powerful industry association SWAK (Spinners and Weavers Association of Korea). The result was that only companies which were members of SWAK could bid for the cotton.
Furthermore UNKRA aid for capital goods became concentrated in the hands of just three companies which used them to purchase spinning machines. This accelerated a trend towards the spinning industry becoming very concentrated. By 1959 some 85 percent of all operating spindles were owned by the ‘big eight’ spinning companies. These companies had economies of scale and market domination which acted as barriers to entry for competitors.
The structure of the textile industry became one in which the upstream spinning industry was dominated by a small number of large enterprises, while the downstream weaving and knitting industries consisted of large numbers of SMEs (Small or Medium Enterprises, employing 250 or fewer personnel). This concentrated market power in the hands of the big spinners meant they were able to amass large amounts of capital. Such concerns included firms like Samsung, Sunkyong, and Hyosung which were later to grown into massive conglomerates, the chaebol.
For example the giant SK Energy group grew out of Sunkyong Textiles which in 1958 was the first company in Korea to manufacture polyester fibre from imported raw materials. As another example, in 1951 entrepreneur Kim Sung-kon rebuilt his textile factory, destroyed during the Korean War with aid from UNKRA. His Kumsung Textile Co. was to be the basis from which grew the Ssangyong Cement Industrial Co., Ltd. the largest cement producer in the ROK, which came to have interests in oil refining, petrochemicals and the automotive industry.
Other major industries included salt production (by evaporation), cement production, chemical fertiliser production and the manufacture of porcelain insulators for the electric power industry. There was a wide variety of small scale, labour intensive industries, such as rubber shoe manufacture, bicycle making, and various electrical products: light bulbs, copper wire, transformers and batteries.
After independence Korean businessmen were taking up abandoned Japanese industries and branching into new industries. Some of these business pioneers would turn out to be the founders of major industrial conglomerates, the chaebol.
In 1947 Koo In-hwoi founded the Lak-Hui (“Lucky”) Chemical Industrial Corp. which one day would grow into the electronics giant LG. Lucky made and sold household chemicals like soaps, ‘HiTi’ laundry detergent, and its most famous product ‘Lucky & Perioe’ toothpaste.
In 1952 this company entered the plastics processing industry using imported material with the injection moulding of synthetic resin at a factory in Pusan. This soon expanded. In 1958 as the plastics business thrived, Koo set up a new company called Goldstar to enter the industry of consumer electronics. It started out in 1959 by assembling vacuum tube radio sets. This was the very beginning of the Korean consumer electronics industry.
One Korean businessman Lee Byung-chull had his groceries and noodle business wiped out by the Korean War. In 1951 he started out again with financial help from a business associate. In 1953 he established the first sugar refining business in the independent ROK, Cheil Jedang, based in Pusan. In 1954 he set up the largest wool milling business in ROK, called Cheil Mojik in Daegu. In 1958 he diversified into flour milling. All his companies performed well. This was to be the origin of Samsung, arguably the most successful Korean conglomerate of all time. Cheil Jedang would one day spin off from Samsung as the CJ Group which still has interests in food, food additives and pharmaceuticals.
Other early developments in the chemicals industry included the founding of Korea Explosives (Hyun Am) Corporation in 1952. Its founder Kim Jong-hee recognized the demand for explosives in the shadow of the military tensions between north and south. He established the first and only privately owned explosives manufacturer in the ROK. Demand rose quickly and his business grew and diversified. In 1957 the company began producing nitroglycerine. In 1958 it began producing dynamite. The company also diversified into the civilian market for fireworks. The true development of a chemicals industry in the ROK however, would have to await the development of oil refineries in the mid-nineteen sixties.
There were also foundations being laid for the automotive industry in numerous small engineering workshops producing replacement parts for vehicles such as bicycles, trucks and US army jeeps. Arguably the first firm to produce complete vehicles in the independent ROK was Sibal.
Choi Mu-seong and two of his brothers began making and selling a Korean version of the US army Willys Jeep called the Sibal (“new start”) in 1955. By the time the firm went bankrupt in 1963 some three thousand units had been produced by labour intensive methods in a number of small workshops around Seoul. It was manufactured by mounting a modified and localized jeep engine on a US military jeep style car body made with the sheet metal from junk oil drums and military junk jeep parts. It is claimed that about fifty per cent of the engine was built from Korean made parts. The main customers for the Sibal were taxi companies.
In 1944 Kyungsung Precision Industry was founded as a maker of steel tubing and bicycle parts. In 1951 it graduated to building complete bicycles. In 1952 it changed its name to Kia. Starting in 1957 it began building motorcycles. In the nineteen sixties, with help from the state, it was to become a designated truck manufacturer in the ROK. Today it is known as a global brand of small, affordable passenger cars.
In 1954 the firm which was to become Shinjin Motors, started as a parts producer. In 1958 it earned business by rebuilding scrapped vehicles for the US army. In the nineteen sixties it would become an assembler of Japanese passenger cars.
Until the late nineteen sixties the ROK steel industry consisted of about a hundred obsolete facilities inherited from the Japanese, consisting mainly of rolling mills, several steel making mini mills, and a few iron making installations. With these facilities Korean businessmen ran a number of small steel companies such as Yonhap Steel, the Inchon Iron & Steel Co., Ltd. (established in 1953), and Hanbo Iron & Steel (founded in 1957 in Seoul). The industry made steel bars, beams etc. for construction and tubing etc. These companies were not suited at the time to compete in export markets. They lacked economies of scale and integration of processing.
Even in the nineteen fifties South Korea had an energy deficit. Some energy had to be imported in the form of fossil fuels, supported by foreign aid. Aid was also given in the form of the loan of electricity generating ‘Power Barges’ from the UN military command.
Immediately after the Korean War the South was heavily dependent on hydroelectric power. Power shortages and rationing were frequent. Power generation benefited from a US ICA aid program which constructed a number of 25 Megawatt coal-fired power stations to increase electricity generating capacity in the ROK.
As coal fired power stations were added to, the dependency on hydroelectric power reduced, and the need for barges was eliminated. Electricity supplies became more reliable towards the end of the nineteen fifties. In 1957 South Korea’s total electricity generating capacity was only 250 Megawatts, less than that of the sparsely populated Scottish highlands in the early 21st century.
Rhee’s Import Substitution Industrialisation (ISI) Policy
South Korea’s location on the front line of the cold war meant it suited US military strategic interests to help build up Korea’s industry by any effective means. Despite the conservative Republican credentials of the Eisenhower administration, South Korea was not forced to embrace liberal free market economics. The resulting policy was ISI, “Import Substitution Industrialisation”, largely supported by the US.
This policy seeks to reduce the importation of manufactured goods by manufacturing them domestically. The aim is to develop the technology and know how to industrialise. The process may work in phases. Firstly, completed manufactured goods are assembled from imported parts. Next an increasing proportion of the parts are made domestically and do not need to be imported. In secondary import substitution the raw materials such as chemicals, fuels and steel are produced domestically, further reducing import dependence and increasing the technological knowledge of the work force.
It has been suggested that Rhee’s ISI strategy was partly motivated by a desire to avoid Korea becoming Japan’s junior partner in economic development again. Eisenhower sought to build a supportive relationship between Japan and the ROK, but Rhee, as a nationalist, rejected this idea vehemently.
Rhee’s ISI policy involved maintaining a strong Hwan (later renamed Won), this increased the value of aid dollars received as aid needs were costed in Hwan, then converted to US dollars. A high Hwan also reduced the costs of imports needed, such as the capital goods, intermediate goods, raw materials and energy needed for industrialisation.
Further it has been claimed that the effect of the strong Hwan in increasing the price of exports was not a problem because the main exports, rice and tungsten concentrates had inelastic demand at that time. In other words the price increase would lead to an increase in total revenue, not a decrease.
In support of the ISI strategy, the Hwan to US Dollar exchange rate was fixed, and only readjusted occasionally for example in 1955 it was set at 500 Hwan equal to one US Dollar. The US pressed for devaluations, and was successful in 1953 and 1955. Thereafter there were no more devaluations during Rhee’s tenure.
Successful ISI required substantial aid from the US as ROK exports could not cover the costs of all the country’s import needs. From 1953 to 1962 the main years of ISI, aid financed nearly 70 per cent of total imports, and aid equalled 75 per cent of total fixed capital formation
Hidden behind high tariff walls, (high import duties), a number of industries developed rapidly, including textiles, milling and light manufactured consumer goods. Despite the fact that from 1954 to 1960 the agricultural sector was slow to recover from the war, and the Korean economy only grew on average by 4% per year, below the world average, and well below Taiwan’s 7.2%, the industrial sector grew rapidly by 11% per year.
However problems built up in the ISI economy including Inflation, an overvalued currency, unrealistically low bank interest rates and ineffective tax collection. Also the need to import large amounts of chemical fertiliser for intensive food production caused foreign exchange shortages.
The Politics of Rhee’s Regime
In 1954 Rhee got another amendment of the constitution which allowed him to serve as president for more than two terms, and in 1956 Rhee was re-elected as president, apparently for life. In the Rhee regime corruption was perceived as endemic. There were numerous scandals that discredited his government. For example one notable scandal in 1952 was the Tungsten Dollar Incident. Some US$ 3 million in foreign exchange earned from tungsten concentrate exports were paid to well-connected firms for imports of grain and fertiliser. Some of the money ended up in the pocket of Rhee’s Liberal Party.
One other of a number of such scandals was in 1956, just before the election, the Commercial Bank of Korea made large loans to twelve industries. The money was secretly donated to the ruling Liberal Party.
Rhee and his family did not seem to personally benefit financially, such activities seemed to be important mechanisms in his political patronage of cabinet colleagues, political allies and cronies. During the nineteen fifties almost every single major business project would have to pass through his office, giving Rhee the opportunities for such activities.
People with government connections exploited them to profit financially. Many well connected businessmen profited from the state’s industrialisation policies. For example the Samsung founder Lee Byung-Chull purchased a former Japanese owned sugar refinery, to found the business Cheil Jedang, and a former Japanese owned wool mill, to found the business Cheil Mojik, at preferential prices from Rhee’s government. In return political favours were expected, and Lee was later accused of donating 64 million Hwan to Rhee’s Liberal Party.
In 1960 Rhee was returned as president in what was widely perceived as a rigged election. By this time the economy was still in a poor state. GNP (Gross National Product) growth was only 2.3% per annum, in previous years it had averaged 4% per annum. Unemployment was severe at twenty per cent, and per capita income at US$ 100 was the same as India, and a third less than in Taiwan.
The poor economic prospects combined with dissatisfaction over Rhee’s perceived corruption and autocratic governing methods, manifested itself in large scale student riots on 19 April 1960, triggered by the killing of a student. Martial law was declared, but on 27 April 1960 Rhee stepped down as president and went into exile in Hawaii.
The Short Lived Korean Second Republic
Following Rhee’s departure a provisional government acted to revise the constitution, the aim being to reduce the powers of the president and strengthen parliament and the prime minister. It was intended that in future the president would be selected by both houses of the National Assembly, rather than by popular vote, and would be reduced to a mere ceremonial role. The prime minister would be appointed by the president, but subject to the approval of the lower house.
On 29 July 1960 parliamentary elections were held, thus establishing the Korean ‘Second Republic’. The opposition DP (Democratic Party), conservative in complexion, gained a majority in both houses, displacing Rhee’s LP (Liberal Party). A former ambassador to the US, ‘John Chang’, (Chang Myon), was selected as prime minister under president Yun Po-sun.
However creation of the second republic did not bring any quick improvement in living conditions.The economy and social unrest got worse. Industrial production fell, inflation increased. Meanwhile mass student demonstrations continued, partly due to the unpopularity of the police associated with Rhee’s regime. In September 1960 the ruling DP split over differences in how to deal with the economic crisis. One faction wanted an austerity program.
The ‘revolution’ of April 1960 created an opportunity for an independent trade union movement to flourish. From 1959 to 1960 the number of strikes more than doubled, with over 60,000 workers participating. This burst of union activity was to be short lived though.
Unrest continued into 1961. Many of the demonstrators were calling for the reunification of Korea, raising fears in some quarters about the national security implications of the unrest. One Korean journalist described the ethos of the country at that time, as “Total chaos, economically, politically & socially.” On 16 May 1961 Chang was overthrown by a military coup.