Industrial development and economic growth: Implications for poverty reduction and income

5.3 South Korea
Economic growth in South Korea has been rapid during the last 40-45 years.
During its rapid industrialization, the country was able to achieve remark-
able growth with steep reductions in poverty and inequality. In 1960-2002,
the compound annual GDP growth rate (CAGR) was 7.5 per cent. Growth
has been high especially in manufacturing. Between 1960 and 1969, the
CAGR of manufacturing value added was 16.5 per cent and between 1970
and 1979 it was 17.6 per cent. Growth in agriculture’s value-added has been
continuously declining, falling from 5.1 per cent in the 1960s to only 1.7 per
cent during 1990-2002. Rapid growth has been associated with significant
structural changes (Figure 5). In 1965, the share of manufacturing in GDP
was 14 per cent and that of agriculture 39 per cent. In 1977, the shares for
both sectors were around 24 per cent, and in 2004 they were 29 per cent and
4 per cent, respectively (World Bank, 2006). Employment in agriculture has
also declined. In 1980, 34 per cent of all employees (18 per cent in 1990)
still worked in agriculture; in 2003 the share was only 9 per cent (World
Bank, 2006). The industrial employment share has had an inverted U-shape
form during the last 25 years: in 2003 industry employed 28 per cent of
employees, compared with 37 per cent in 1991 and 29 per cent in 1980. The
share of employment in services has been continuously increasing during the
last decade, reaching 64 per cent in 2003.

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Industrial development and economic growth
In the late 1950s, the Korean government still pursued a relatively pro-
tectionist import substitution strategy. Imports were restricted by high tariffs
and import licensing systems. Most of the products exported were primary
products, and exports remained negligible (Lee 1997). In the early 1960s,
however, government policy shifted from import substitution towards export
orientation. Policies included trade reforms and export promotion, direct
export subsidies, tax exemption and low-interest export loans. Government
intervention was strong, and export targets were formulated in a detailed way
by product, market and exporting firm. Exporters also enjoyed duty-free
access to imports (Noland and Pack, 2003). Infant industries were protect-
ed. In general, however, successful export performance was likely to bring on
more favourable treatment by government. Export promoting policies were
highly successful, since during the 1962-73 period the share of exports in
GNP increased from 6 per cent to 30 per cent (Lee, 1997). At the same time,
the export structure changed dramatically, with the share of manufactures
exports in total merchandise exports increasing from 20 per cent to 84 per
cent. Within industrial products, the export of light manufactures, in which
Korea had a comparative advantage, was especially important in the 1960s.
In the 1970s, economic policy changed and massive investment programs
were introduced to promote heavy industries, like shipbuilding, steel and
chemicals. The aim was to change the export composition, reduce depend-
ence on low-wage sectors and sustain growth. Also, efforts at selective indus-
trial policies were intensified and, in contrast to the rule-based policies of the
1960s, greater policy discretion was introduced. This included an increase of
direct government control in the banking sector in order to channel funds to
preferred sectors, projects or firms (Noland and Pack, 2003). Priority indus-
tries also received tax incentives as well as trade protection. Basic metals and
chemical industry received a remarkable share of investments, whereas textile
and light industry benefited little from the policy shift (see e.g. Noland and
Pack, 2003). The impacts of this selective industrial policy can be seen in the
current export structure of Korea (Figure 6). During the recent years, exports
of labour-intensive goods like clothing have been in decline or stagnant. At
the same time, the sophistication of engineering exports has grown, and the
car industry has been evolving rapidly (Economist Intelligence Unit, 2005b). 
With rapid economic growth, absolute poverty has decreased sharply in
Korea. Even as late as the 1960s, poverty was widespread, but in the late
1990s the share of population living on less than $1 a day (PPP) was only 2
per cent (World Bank, 2004a). Export-oriented industrialization, which gen-
erated rapid economic growth, has had a major role in the reduction. It cre-
ated high demand for labour and rapid expansion of employment, increasing
incomes and reducing poverty (World Bank, 2004b). At the outset, econom-
ic growth was heavily based on export of labour-intensive manufactures.
Subsequently, an increase of human capital has made possible the specializa-
tion on more sophisticated export items. It has also enabled productivity to

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rise, and increased innovative ability and adaptation of technology developed
elsewhere (see e.g. World Bank, 2004b), all of which have contributed to
continued high growth. Compared to many other developing countries,
investment in human resources has been extensive in Korea. Education has
provided avenues of upward social mobility
3
. 
In addition to growth based on industrialization, the land reform of the
late 1940s also contributed to the reduction of poverty, especially in rural
areas (see e.g. Henderson et al., 2002). Land reform facilitated a vast trans-
fer of arable land ownership to the peasantry. There were major improve-
ments in productivity (Henderson et al. 2002). An increase of agricultural
product prices in the late 1960s and the green revolution of the 1970s, as
well as government investments in rural development, all increased income
in rural areas and reduced rural poverty (World Bank, 2004b). The govern-
ment growth strategy, however, has laid emphasis on industrialization and
urbanization, which have led to more rapid growth of income in urban areas
and increasing income disparity between rural and urban areas.
Poverty decline has been extremely rapid in Korea. After the rapid
improvements between 1960s and 1980s, the rate of decline has slowed
down (Henderson et al., 2002), but as of the beginning of the 1990s growth
was generally still highly pro-poor (see e.g. Kakwani and Pernia, 2000).
However, the change in income inequality has not been as impressive as the
decrease in poverty. According to Choo (1993), there was no significant
change in the size distribution of income between 1965 and 1990 (see also
Lee, 1997). On the other hand, Fields and Yoo (2000) argue that labour
income inequality, as measured by the Gini coefficient, fell remarkably
between the late 1970s and early 1990s. Since the economic crisis of the late
1990s, inequality has been increasing. Compared to many Southeast Asian
countries, however, income distribution in Korea has been and still is dis-
tinctly more equitable. Government social welfare programs, which have
provided the poor with subsistence assistance and medical services, have been
one of the reasons for relatively low inequality.