A  Comparison of  the

Developments Strategies of 

Japan

and the

Republic of South Korea

 by

 Viji Rajasundram

29 July 1995

1.   Comparison of the Japanese & South Korean Development Strategies[i]

a.   Post-War Period [1]

During these periods,  South Korea mirrored Japan in several aspects except for one. S.Korea had to contend with the threat of an aggressive neighbour. This on-going confrontation played a significant role in the S.Korean development strategy in that over 4% of its GNP was devoted to a military budget - something that Japan did not have to waste money on.

In 1953, S.Korea’s economy was dominated by agriculture.  By 1957, the Government had almost completed the rebuilding of the war torn country and begun a policy of  stabilizing prices and introducing reforms very similar to those which were introduced into Japan under the Dodge Plan which sought to curb rising inflation and open the country to international trade. In Japan, however, before the Dodge Plan, there were mixed policies which began with the redistribution of wealth and the introduction of Anti-monopoly laws.

b.   Sixties and Seventies

Beginning in the early sixties, Japan introduced policies which served to reestablish powerful institutions such as the Keiretsu and Sogo-Shosha.  These policies, such as the relaxation of the anti-trust legislation, were designed to ensure Japan’s ability to recover quickly from the earlier recession by encouraging export promotion.  The Keiretsus, in turn supported the economy as they acted as a sort of lens which focused hundreds of smaller companies towards exports to meet these goals.  These concerted efforts which were encouraged by the Government, allowed Japan in becoming competitive in the world market through a very stable domestic supply of cheap goods and labour.

S.Korea, during this period began a series of five-year programs,  which first featured import substitution and later switched to export promotion very much in the footsteps of Japan.  This strategy was supported by Government policies and financial subsidies which directly assisted companies.  Financial subsidies and specific policies assisted the growth of S.Korea’s own version of the Keiretsu & Sogo-Shosha - the Chaebol & General Trading Company. The difference between them was their methods of financing. The financial assistance was given through Government banks and  tax incentives  in S.Korea, while in Japan, the Government ‘encouraged’ private banks to work exclusively with the Keiretsus. Similar strategies, but with different implementations.

Both countries began by targeting certain industries, which they thought would provide them with comparative advantages,  with S.Korea lagging about ten years behind Japan in terms of  industries targeted. As soon as a certain industry was selected, MITI-Japan would signal the banks and the Keiretsus of what was expected of them. While in Korea, the Government began by encouraging the Chaebols towards the lower-end products and then later to  higher value added products.

c.   Eighties

During this period, S.Korea, under pressure from the IMF began major economic policy changes which among other things, served to stimulate domestic demand. While maintaining an overall strategy of export lead growth, it  began assisting smaller companies and began a plan to consolidate problem sectors in the heavy industry. It also cut-back preferential exemptions and credits for certain industries which could not be internationally competitive and promoted those that could. To stimulate foreign investments,  it allowed  an increased number of industries in which they were allowed.

During this period, Japan too came under pressure to deregulate and not to encourage the Keiretsus and it implemented very much the same programs.

d.   Nineties and Onwards

Looking towards the future, it can be seen that both countries seem to have decided almost simultaneously to venture into new industries such as multi-media[ii] and interactive television broadcasting which require very much higher investments and stamina in pursuing the edge on the competition in the global market. A point to note is that while in the sixties, Japan was about ten years to fifteen years ahead of S.Korea in terms of policies, now, this period has been almost erased.

2.   Costs and Risks of the South Korean Development Strategy

A significant cost to S.Korea’s quick rise strategy, is the dependence of its growth on direct Government assistance.  This brings to question, the S.Korean companies ability to remain competitive without a large amount of Governmental support and protection. Another cost is the recent spate of building collapses which indicate the laxity in regulations which the Government had foregone for the sake of quick progress.

Other costs that it has had to incur is pollution which it has recently declared as a priority matter. A major risk S.Korea faces is the domination of the economy by the Chaebols which may therefore stem SME’s that are unable to compete with them[iii]. Another, is in making mistakes in the selection of industries it targets. This may cost it huge investments.  And while relying on Japan to lead the way - as in the past - it may also suppress entrepreneurial activity and creativity.

 The Government must also be wary of over-control, lest the people revolt at all the legislation that favours certain industries and does not encourage/allow freedom to S.Korea’s entrepreneurs.

Bibliography