Now, let's take a look at Korean economy in 1970s. 1970s Korean economy was the period of promoting heavy and chemical industries. We will take a look at the backgrounds of the HCI policy. And also, you get more detailed policies that were implemented. And we will examine the changes of industrial structure. If you look at the background of it, actually, it began in the late 1960s, with non-economic factors. That was the doctrine of the USA President Richard Nixon, in 1969. Basically, it says that USA will not provide national security of its allies forever. Which means that, from now on, each ally of the USA have to be responsible for the national defense, by herself. And that's a big problem to Korea, because until the early 1970s, Korea was inferior to North Korea both in terms of economic power and also in terms of the military power. As we can see in this graph, this is an estimated GDP per capita of South Korea and North Korea. Basically, it was not until 1970s that South Korea has overtaken North Korea in terms of its GDP per capita. So, therefore in the early 1970s, it was necessary for South Korea to build up the military industry in order to be self defensive. And basically the military industry was heavy in chemical industries. And of course, there were economic factors as well. Where first of all, export promotion policies in the 1960s were largely successful, but were focused on labor intensive industries only. And we needed a new source of growth. And furthermore, the labor cost was about to increase from the late 1960s. So it was no longer possible to enjoy price competitiveness, in terms of the labor intensive product. Also, protectionism from advanced countries who are rising, so we need it to develop new export sector. Also, in the early 1970s, the economic growth slowed down in South Korea. Furthermore, lot of heavy chemical industries, they have strong linkage effect. They're based on linkage effect of forward and backward linkage. Therefore, by promoting HCI such as, electronics or steel or automobile, you can actually encourage the promotion of other related industries. This graph shows the rising wage costs of South Korea. As you can see, thus from the late 1960s that the real wage index began to increase. So in many senses, this HCI Drive of South Korea was fairly similar to the Big-Push argument. In development economics, Big-Push is a fairly famous argument that can be applied to rapid industrialization of developing countries. In order for the developing country to catch up with advanced country, they need to promote the development of many big industries at the same time. And in many cases, these big industries used to be heavy in chemical industries. So the promotion of HCI in Korea in 1970s was kind of the Big-Push of the Korean version. So we adopted many policies in order to promote heavy chemical industry. Almost every policy you can imagine to promote a certain industry was employed. But this time it was much more aggressive and direct than the export promotion policies of 1960s. We selected six target industries, steel, metal, electronics, chemical, machinery, and shipbuilding. And one by one, we have built industrial facilities and promoted large companies that specialize in these six target industries. One of the key factors to promote these industries was bank loan. And this time we have set up a very special bank loan called National Investment Fund, NIF. This was a very special fund that were set aside by commercial banking sector exclusively for HCI. And if you look at the interest rate charge it to national investment fund, it was substantially lower than the official interest rate. So, a lot of money channeled into heavy and chemical industries through NIF. And one good case study would be the shipbuilding industry. It was in the early 1970s when the Chairman of Hyundai, Mr. Chung Ju-yung, was assigned to develop shipbuilding industry. But he simply did not have any experience. Basically at that time, Hyundai was a construction company. So he had to find the money, he had to find expertise, technologies, know-how So he went to U.K., the most advanced country in terms of the ship building. And he had a hard time to find the right person. And finally, he met Chariman Lambata of The Ecuador Company. The Ecuador Company was the famous consulting company that specialized in ship building industry. So Chairman Chung asked for help, but Chairman Lambata refused. Basically they think that Hyundai is not ready to produce ship, no money, no technology. So Chairman Chung was desperate, but then suddenly he picked up this local Korean currency and showed it to Chairman Lumbato. This is the currency that he actually showed in Chairman Lombato. This is 500 wan currency, and if you look carefully, there is an iron ship. This legendary iron ship, that looks like a tortoise, is a ship that were produced 400 years ago by our ancestors during the war between Korea and Japan. And Chairman Chung showed this money to Chairman Lombata and told that, look, this is the iron ship our ancestors has produced 400 years ago. If our ancestors could produce a ship like this, then we can do it. So please help us and that is the beginning of Hyundai's ship building industry. And after all those painful effort, and a lot of improvization and finally Hyundai and a couple of other big ship builders in Korea, have became world famous ship builder. This table shows how massive the bank loan was provided to HCI. If you look at the proportion of bank loan between HCI and the other manufacturing sector, you can see that more than three quarters of all the loans provided to manufacturing sector went into HCI. As a result, the structural change took place, both in terms of industrial structure and also in terms of the export structure. Gradually, heavy chemical industries have become more and more important sector in our manufacturing industry. And if you look at the export sector from the middle of the 1980s, HCI has accounted for more than 50% of the total export. Well so in many senses, the promotion of HCI in 1970s can be similar to the promotion of export industries of 1960s, but we do have some differences. Here, I summarize some differences. HCI promotion was a lot more aggressive, a lot more direct, and bigger, and the promotion policy for HCI was industry specific. It means that all these incentives and bank loans were provided specifically to HCI industries or HCI companies. This can be one of the major difference between 60s and 70s. In 60s, it doesn't matter which industry you engage, so long as you export, you could get incentive from the government. But, in 70s HCI industries, they actually dominated the incentives from the government. And we invested massive amounts so domestic capital was not good enough, so we had to rely on foreign capital and this time it was foreign loans. Or so, the contribution of HCI to export was kind of lagging behind. As we have seen in the previous table it was not until the middle of the 1980s that the HCI was accounting for more than 50% of the export. We can compare it to the Japanese experience. As you can see in this table, 1970s experience of Korea is fairly similar to 1970s experience of Japan. In 1930s, Japan also promoted HCI heavily, and as a result, HCI industry was accounting for more than half of the manufacturing sector by the late 1930s. Now, let me stop here and in the next lecture, we will take a look at the implicationof HCI policies on the Korean economy.
