Of course compared to socialist North Korea, the Republic of Korea is incredibly free. And the relationship between extreme poverty and political corruption is clear in North Korea. After the Korean War both countries were ravaged. No infrastructure existed: transit routes were destroyed, buildings had been leveled, and food and water were scarce. During the 1950's South Korea's GDP per capita was lower than Zimbabwe's. When General Park Chung-hee seized power in 1961, South Korea had per capita income of less than $100 per year. Now, South Korea produces the twelfth largest total GDP in the world, and has a GDP per capita of $31,753 when adjusted for purchasing power parity. Zimbabwe's GDP PPP per capita is $487. Needless to say, the Republic of Korea has grown an astounding amount.
During the period after the Korean War, from 1953 to 1961, the political leadership in South Korea was a failure. Another problem was that the economy was not growing very fast. The economic policies that South Korea adopted were ineffectual because of the widespread political corruption. The first step that the Republic of Korea took towards economic solvency was to increase the level of political freedom. Most historical surveys of South Korea argue that their fantastic growth started around 1961. At this time Park Chung-hee executed a coup d'etat, removed the corrupt heads of state, and purged the police and military of individuals who acted corruptly or unjustly. This first step towards economic recovery seems contrary to Milton Friedman's view that economic freedom is needed for political freedom to prosper: at this time, South Korea's economy was stagnating but its political culture was fixing itself.
The South Korean government's first effectual economic policies, moreover, were not endorsements of market freedom. The leadership of South Korea decided that the country would be best suited to produce industrial manufacturing products. These industries were deeply subsidized. Moreover the government chose particular winners in the Korean manufacturing industry, and supported these conglomerates to ensure their financial security. Doosan Group, now the largest producer of supertanker ships in the world, is an example of this support. Because South Korea was a war torn country, many investors were wary of contributing their capital to South Korean firms. Most economists, perhaps even Milton Friedman, would likely state that South Korea, lacking even basic infrastructure, would have a comparative advantage producing anything other than heavy equipment and technology. But the leadership in the government helped urge growing companies like Doosan to seek foreign investment and to grow as large as possible. The first contract that they earned had incredibly strict terms: not only was the deadline to create the ship much earlier than for most ship construction contracts at the time, if Doosan did not complete the project (whose value was greater than the whole South Korean GDP) they would have to pay the value of the contract back in full, without reimbursement for the failed project. Doosan earned this first contract before they had constructed a dock to build their ship in. Even with a dry dock, which needs to be much larger than the tanker it will house, most industry professionals were skeptical about the investment. The government helped to subsidize and organize the project. The workers began building the boat before they finished building the dry dock, which is unheard of. The labor force worked in shifts, with individuals doing work on the boat 24/7. The government sponsorship of the project, and the nationalist pride associated with the manufacturing deal, both led the project to be completed two weeks before schedule. In a sense, the South Korean people saw the boat as an ark, which would lead them out of poverty. Instead of being led by market forces, the government helped spearhead growth in the industrial sector which accounted for 70% of the total GDP growth in South Korea. While this is simply one anecdote about South Korean industry remnants of this development still exist. The biggest industrial firms, the chaebols, are still closely tied to and supported by the government. This revolution in government, and set of economic controls (rather than economic freedoms) helped to jettison South Korea to where it is today. South Korea's biggest change in economic freedom came during the aftermath of the Asian financial crisis of 1997.
Up until 1997, there was no system of financial reporting in South Korea. The government had been taking a larger and larger role in planning the economy and in subsidizing the industries which it considered valuable. The approach was focused on growth rather than profits, and on capturing market share rather than controlling costs. When western investors would come to visit companies in Seoul, and would ask about the balance sheet or financial reports, often the reply would be that "the balance sheet is in the Chairman's head." Economic entities were largely state-sponsored and the government was deeply intertwined with the economic policies that shaped the nation. After the financial crisis, most of these problems with the economy began to change. The government began to relinquish its hand in the economic affairs of the nation. Financial reports were mandated, and the government began to assume of regulation and review rather than control. Contrastingly, the constitution was changed several times during the years leading up to 1997, changes that made the constitution look closer and closer to the Constitution of the United States of America.
The point of this blog post is to show a counter example to Milton Friedman's theories about the relationship between politics and economics. I believe that South Korea is an example of a nation whose political freedoms evolved far before its economic freedoms. And, contrary to the belief that the free market is the only way for an industry to thrive, South Korea proves that government control can lead to some of the highest GDP growth rates in the world: they proved it for the last 50 years. From 1962 to 1989, the country's GDP grew at an average rate of over 8% per year. This case also helped to show that different nation in different circumstances may fall outside of financial models or economic theories.
Most of the information that I posted here came from Miracle on the Han River.
http://www.heritage.org/index/country/southkorea
http://en.wikipedia.org/wiki/Miracle_on_the_Han_River
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