[Odyssey] Post-Korean War Reconstruction Success Under Neoliberalism

In 2008, after the subprime crisis began in the United States and the euro crisis unfolded in Europe, criticism of liberalism poured out around the world, along with declarations of the end of globalization. At the center of it all was “neoliberalism.” Yet without any clear discussion of what neoliberalism actually was, only distorted notions such as “market fundamentalism” spread among the public.

If neoliberalism means solving problems through the market rather than through government intervention, and if it means deregulation policies toward businesses, then we need to look back at how such neoliberalism raised the South Korean economy after the war in the history of the Republic of Korea. This case reminds us, from an institutionalist perspective, of the importance of political-business cooperation—that is, cooperation between the market and the government.

In 1950, the South Korean economy experienced the devastation of its industrial infrastructure due to the Korean War. Yet by 1956, only three years after postwar reconstruction had begun, Korea’s productive capacity had already surpassed its prewar 1949 level. That year, transportation, electricity, and telecommunications facilities exceeded their 1949 levels, while the textile industry recorded 279% growth.

Production levels in the industrial sector showed a remarkable increase to 183% of the 1949 level. As mining and manufacturing output increased, gross national product rose to about 15% above the 1949 level, and accordingly per capita national income was also estimated to have exceeded the 1949 level. In response, the U.S. Embassy in Korea, in its annual assessment of the Korean economy, described 1956 as “the year in which the reconstruction phase was completed” and “the year in which the revival phase began.”

How, then, was this postwar economic recovery possible?

Syngman Rhee Advocates a Free Economy

After the founding of the Republic of Korea in 1948, the most urgent economic issue was land reform. At the time, the left advocated confiscation without compensation and redistribution without compensation, the right advocated confiscation with compensation and redistribution with compensation, and the social democratic center advocated confiscation with compensation and redistribution without compensation. At this point, Syngman Rhee and the right succeeded in persuading the center that confiscation with compensation and redistribution without compensation would inevitably bankrupt the national finances. This shows how flimsy the economic understanding of the social democratic center was at the time.

Syngman Rhee’s economic philosophy is clearly revealed in a press conference in December 1949. At the time, most bureaucrats and right-wing lawmakers shared the view that “planned capitalism” should be the nation’s economic ideology and believed it could be achieved through a controlled economy. Against this conventional wisdom, Rhee stated the following at the press conference:

“As there are overlapping, complicated, and unnecessary organizations both within the government and among private citizens, these must be eliminated as soon as possible. At the same time, if there are nonessential officials, their numbers must be reduced, and the complicated ranks of public officials should also be abolished. Even in economic matters, my original intention is to abolish controlled economic policies and adopt free economic policies based on the principle of supply and demand.”

It can be said that Rhee understood the importance of small government and market principles at a time when socialist economic ideology was widespread throughout the world and large government, as seen in New Deal policies following the Great Depression, was accepted as common sense. It may be inferred that Rhee’s thinking, influenced by missionaries, was closer not to the rationalist constructivism that underlay the French Revolution but to the Scottish Enlightenment—the empirical liberalism that formed the intellectual background of the American Revolution. This may prove to be an important clue in clarifying what school or origin of liberalism Rhee’s liberalism belonged to.

In any case, during the Korean War, when Rhee asked Finance Minister Dujin Paik about measures to deal with wartime inflation, he immediately understood Paik’s answer, which was based on the principle of “expenditure within revenue.” Equally important is that, at the level of the people’s economy, he understood and implemented a supply-side economic theory: Japanese properties transferred from the U.S. military government—that is, vested properties—should be sold off to the private sector as quickly as possible in order to increase the supply of daily necessities through light industry.

At the same time, in areas unrelated to wartime materials, he guaranteed the free economic activities of private businesses rather than imposing controls. As a result, a private supply system known as the “three white industries” (flour milling, sugar refining, and cotton spinning) was fostered. This led to the revitalization of private enterprise after the war and became the foundation of the Korean conglomerates that would later spearhead full-scale economic growth in the Park Chung Hee era.

The Korean War devastated Korea’s industrial infrastructure, but through a public-private cooperation model in which private production organizations such as the Three White Association played a pivotal role in people’s livelihoods during reconstruction while the government worked to rebuild industrial infrastructure, the country had already recovered to its prewar level by 1956 and increased national income by more than 15%.

In particular, the Reconstruction Committee, organized for postwar economic recovery, under the leadership of the outstanding economic bureaucrat Dujin Paik, laid the groundwork for currency stability through monetary reform and for a free economic system. During this period, the Rhee administration urgently needed constitutional revision, as the Constitution was tilted toward public interest, in order to promote economic development. In 1954, Prime Minister Dujin Paik explained the need for constitutional amendment in the National Assembly as follows:

“When comparing private ownership and freedom, on the one hand, with state ownership and control, on the other, which produces greater effects on production, and which can more quickly bring about economic revival or industrial reorganization? … You have no reason to doubt that in a democratic society of the free world, when the desire to live better is guaranteed by national law, production will increase and industry will be rapidly reorganized and developed.”

A Postwar Reconstruction Project Succeeded Through the Market Economy

It is paradoxical that the foundations of the South Korean economy’s liberal economic system began with the Korean War itself. But when we consider that the socialist, state-led planned economy promoted by the Constituent Assembly after liberation became impossible because of the war, and that public finances were diverted to military spending, making the revitalization of the private economy inevitable, the Korean War may, in some sense, have been a blessing for the Republic of Korea in allowing a free economic system to take root.

The “Reconstruction Planning Team,” headed by Dujin Paik, began in earnest to seek a liberal direction for reconstruction as soon as the war ended. Even before the war, Paik had argued that in order to secure foreign aid, Korea would have to follow U.S. demands, eliminate the remnants of the Japanese-style controlled economy, and move toward a free economy.

Paik declared that all plans and policies would be implemented according to the principles of private enterprise, and that through the swift disposal of vested properties, a management system would be established in which aid supplies and domestic capital could be combined most efficiently. At the time, Planning Agency Director Yongseok Won presented the basic task of economic policy as gradually establishing “a free economic system capable of shedding the old managed-economy system and realizing rational economic principles.” Donghyuk Ahn, Minister of Commerce and Industry, also stated that in price policy, too, efforts would be made to remove obstacles so that prices could be determined according to the principles of a free economy, and that therefore the controls currently imposed on goods would gradually be resolved.

Through the Reconstruction Committee, the socialist elements in the Constitution steadily disappeared, while the principles of individual ownership, freedom, and the market economic order were strengthened. This was also facilitated by the fact that, due to the Korean War, leftist forces in South Korean politics had been wiped out, leaving little political opposition.

After the war, Rhee separated military aid from economic aid and resolved the issue of military expenditures by signing a mutual defense treaty with the United States, while seeking to foster a heavy and chemical industrial base through economic aid. However, the United States believed that South Korea’s excessive push for heavy industry would cause economic instability, and therefore demanded that Korea expand trade with Japan and focus on national defense. In effect, it was calling for a kind of international division of labor. Rhee, however, judged that if this happened, the foundation for a self-reliant economy would never be established, and the dream of an independent state could not be realized.

Rhee and Dujin Paik pursued a strategy of reducing security costs by relying on the United States, using the aid economy to lay the foundation for self-reliance, and then pursuing a genuinely self-supporting economy in earnest. But this strategy came into conflict with the U.S. position, creating difficulties in the smooth execution of the aid that had been promised. Whether Rhee’s judgment was correct remains open to debate, but given that this was the moment when postwar regime competition between North and South Korea was beginning in earnest, it can be said that Rhee prioritized political considerations.

In the end, the Rhee government fell in the April 19 Revolution without realizing the economic revival it had planned. All of the economic development plans and principles later advanced by the Park Chung Hee government can be seen as putting into practice what had been designed by the Rhee government. The decisive difference, however, was that the economic success of the Park Chung Hee administration rested not on the import substitution pursued through the aid economy under the Rhee government, but on an export strategy aimed at overseas markets.

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Original title: [오디세이] 신자유주의로 성공한 6·25 전후 복구사업

Author: Jeong-seok Han

Date: 2021-04-21

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=4&idx=23640