In 1953, both North and South Korea were shattered by the destructive three-year Korean War that left upward of two million dead and cities and towns in ruin. Already poor prior to the war, neither country had very promising prospects for the future. However, in the first eight years after the conflict, North Korea carried out an impressive recovery under a highly organized, purposeful government that appeared to be laying the foundations for a modern industrial society. By contrast, South Korea during this time was characterized by political corruption and turmoil, sluggish economic growth, and dependency on massive aid from the United States. On the surface, at least, there seemed little to suggest that South Korea in 1961 was on the eve of one of the most dramatic economic transformations in history.
South Korea’s economic development in the first eight years after the Korean War was hindered by political upheavals and pervasive corruption. Syngman Rhee, the first president who had served since 1948, governed in an authoritarian manner but was unable to provide the effective leadership that South Korea needed to create a stable political system and pull itself out of poverty. His Liberal Party had no real ideology other than perpetuating Rhee’s rule and using his administration to personally advance the political and economic fortunes of its members. Nominally democratic with opposition parties and elections, Rhee and his Liberal Party supporters did not refrain from using bribery, electoral manipulation, and strong-armed tactics to maintain power. But rising discontent by a rapidly growing urban population, increasing public disgust with the regime’s corruption, and the disappointments over the slow pace of economic recovery and growth made Rhee’s hold on power increasingly tenuous. Losing its support, the regime took to increasingly extreme measures to maintain itself in power by pushing through a new National Security Law in December 1958 that made it easier for the government to crack down on critics under the name of endangering national security. In 1959, Rhee executed Cho Pong-am, who ran against him three years earlier. In 1960, Rhee stood for a fourth term, and the obviously fraudulent victory of his unpopular vice presidential candidate led to a violent student-led uprising in April that resulted in his exile to Hawai`i.
Following this “April Revolution, ” South Korea had a brief experiment with a more democratic government. On June 15, 1960, a new constitution was drawn up that created a parliamentary cabinet form of government that placed real authority in the hands of Prime Minister Chang Myŏn. But the new administration of the Second Republic, as it was called, was no more successful in providing effective governance than the Rhee regime. Its brief one year of rule was plagued by a series of strikes, as labor leaders, teachers, students, and others called for the removal of all members of the old regime and the enactment of laws addressing their grievances for improved working conditions, more freedom to organize, and better pay. The decision by the Chang government to devaluate the currency led to double-digit inflation, adding to the distress of wage earners, as well as making the business community uneasy. Support from the business community further eroded when the Assembly moved to pass legislation punishing corrupt businessmen with ties to the Rhee regime—although the final bill was fairly innocuous.
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With demonstrations by students, laborers, and various groups in Seoul occurring almost daily, there was an impression that the government was unable to establish order. Even more threatening to the government was the demand by students and other groups for direct negotiations with P’yŏngyang and the withdrawal of US forces from the country. This came at a time when the instability of the government was also seen by some in the military as a possible invitation to the North to invade again. In the midst of this political turbulence, a group of army officers led by General Park Chung-hee (Pak Chŏng-hŭi) seized power on May 16, 1961, the second violent overthrow of a government in thirteen months.
Under the Rhee and Chang Myŏn administrations, South Korea’s economy grew at a painfully slow rate. It averaged about 4 percent a year, less than 2 percent per capita when the high birthrate was factored in. Starting with the low point at the end of the Korean War, these growth rates meant that in 1961 the country was still extremely poor. Furthermore, most of this modest growth can be accounted for by the massive amounts of aid the United States poured into the country. Washington financed most of the ROK operating budget, paying the entire cost of its large military. From 1946 to 1976, the United States provided $12.6 billion in economic assistance; only Israel and South Việt Nam received more on a per capita basis. To put this into comparative perspective: $6.85 billion was given in this period to all of Africa and $14.89 billion for all Latin America.
The greatest amounts of aid came in the decade that followed the Korean War, yet during this time, there did not seem to be much to show for it. Partly, this was because much of the assistance to Korea was relief, including food and building materials for reconstruction, not for longterm development. With such aid, the basic infrastructure was largely rebuilt by the late 1950s, bringing South Korea back up to its prewar level. Still, American officials complained of aid funds being misallocated for political purposes and by the apparent inability of the Rhee administration to generate sustained economic growth. The Americans felt that South Korea was a “rat hole” swallowing up assistance without producing sustained economic progress.
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The economic policies pursued by the Rhee regime were not conducive to rapid development. Rhee’s government followed an import substitution industrialization policy in which imports were blocked in order to protect and encourage the development of domestic industries. While import substitution policies were pursued by many postcolonial states after World War II, this was not a practical policy for South Korea because it lacked natural resources and a large internal market. As a result, there was little industrial development. The economy instead relied on imported goods purchased with US aid funds, money spent by American soldiers in the country, and a flourishing black market in goods intended for the US forces stationed in the country. The United States encouraged Seoul to establish trade relations with Tokyo through rice and seaweed exports and attempted to interest the Japanese in investing in the country. But Rhee would not sign a peace treaty or establish diplomatic relations with his country’s former enemy. His anti-Japanese sentiments, while shared by most Koreans, went to extremes, including frequent clashes with Japanese fishing vessels and a constant state of tension with the country’s former colonial master. Rhee’s policies, considered “irrational” by the Americans, nonetheless reflected genuine fears that opening up South Korea to trade and investment with Japan would recreate the economic structure of the colonial period, thereby reducing the country to an economic colony.
Syngman Rhee, president of the Republic of Korea (left), presents the ROK Order of Military Merit (Taiguk) to Rear Admiral Ralph A. Ofstie, USN, Commander Task Force 77, in ceremonies at the presidential residence in Pusan, Korea. Also present (center) is the ROK Chief of Naval Operations, Vice Admiral Sohn Won Il. Photo is dated May 13, 1952. Source: Official U.S. Navy Photograph, now in the collections of the National Archives.
Rather than develop a constructive development strategy, the Rhee regime relied on US aid and an overvalued currency to keep the country economically afloat. American aid at one point in the mid-1950s accounted for nearly 80 percent of all government revenues and a substantial portion of South Korea’s entire GNP. The government used this aid to accumulate US dollars. It then gave out import licenses to favored businessmen, which enabled them to buy these dollars at the official exchange rate. Since the hwan (later renamed the wŏn) did not reflect any market reality, this meant that they could buy imported goods cheaply and sell them locally at great profits. Part of the profits would go to Rhee’s Liberal Party. Lee Byung-chull (Yi Pyŏng-ch’ŏl), one of the most prominent of the favored capitalists, exemplifies how this system worked. He purchased imported sugar at low prices for his Cheil Sugar, using his government issued foreign exchange license to become the country’s largest refiner while also becoming an important financial contributor to the pro-government Liberal Party.
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In this manner, a small group of wealthy businessmen who were dependent on their cooperation with the regime flourished. Meanwhile, the country exported little. In 1956, exports amounted to $25 million and imports $389 million; the huge deficit was made up for by the infusion of US aid funds.
> GlobalEDGE: Your Source For Global Business Knowledge - South Korean Government Intervention title=South Korea: Government >> GlobalEDGE: Your Source For Global Business Knowledge style=width:100%;text-align:center; onerror=this.onerror=null;this.src='https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRBpFcyntuOiYOGxt8S2bn1q5l7F_yxpTAtjoiz6h3rzvWC9EgMSBD1FxhYdcHAY6LZquc&usqp=CAU'; />
The slow pace of economic recovery in South Korea, despite massive aid, was worrisome to the Americans, who by 1956 had become aware of the much faster recovery in North Korea.
In 1957, they began cutting aid and insisting on a program that involved limiting the budget deficit to curb inflation and pressured Rhee
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In this manner, a small group of wealthy businessmen who were dependent on their cooperation with the regime flourished. Meanwhile, the country exported little. In 1956, exports amounted to $25 million and imports $389 million; the huge deficit was made up for by the infusion of US aid funds.
> GlobalEDGE: Your Source For Global Business Knowledge - South Korean Government Intervention title=South Korea: Government >> GlobalEDGE: Your Source For Global Business Knowledge style=width:100%;text-align:center; onerror=this.onerror=null;this.src='https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRBpFcyntuOiYOGxt8S2bn1q5l7F_yxpTAtjoiz6h3rzvWC9EgMSBD1FxhYdcHAY6LZquc&usqp=CAU'; />
The slow pace of economic recovery in South Korea, despite massive aid, was worrisome to the Americans, who by 1956 had become aware of the much faster recovery in North Korea.
In 1957, they began cutting aid and insisting on a program that involved limiting the budget deficit to curb inflation and pressured Rhee
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