This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• The National Assembly has approved three supplementary budgets worth nearly USD 50.5 billion combined, setting a record high of total USD 431 billion of annual expense.
• Despite these increases, Korea’s debt to GDP ratio of 43.5% remains below the OECD average (109.2%) and that of other peer economies like the United States (106.9%), France (122.5%), and Japan (224.1%).
• Nonetheless, government officials raised alarm over the fact that debt is growing faster in 2020 than during the Asian Financial Crisis of 1997-98.

Implications: Both the residual trauma from the 1997 financial crisis and the looming demographic change may affect South Korea’s future efforts to stimulate the economy. Some policymakers fear that the debt growth might erode investor confidence in the Korean market as it had during the 1990s. Even with emphasis from the International Monetary Fund that a growing government debt ratio is both desired and anticipated, there are additional fears that Korea’s currently robust fiscal capacity should be preserved for future spending on the country’s aging population. With these limitations, policy discussions in the near future on further stimulating the economy may become more contentious.

Context: When Western lenders began withdrawing money from Asia in the summer of 1997, South Korea’s debt-to-GDP grew 4.3%, which panicked investors and accelerated capital outflows. The subsequent crisis in South Korea left deep social scars: unemployment rate tripled and 80% of households experienced lower income. The current debt-to-GDP is growing at 5.5%, which has led to understandable alarm among domestic policymakers.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from flickr user Mark Hanna

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• A former “comfort woman” alleged that an NGO dedicated to advocating for victims of sexual slavery misappropriated funds. The former head of the organization is now a National Assembly delegate for the Democratic Party.
• Democratic Party leader Lee Hae-chan was careful to not publicly criticize the NGO while many conservative-leaning media outlets called for a probe.
• During a meeting with the leadership of the opposition United Future Party on May 28, President Moon Jae-in reiterated that the 2015 agreement between Korea and Japan on wartime sexual slavery was one-sided.

Implications: A partisan divide has appeared in discussions involving the legacy of sexual slavery during World War II, which increasingly colors the issue as a domestic political issue as well as a challenge in Korea-Japan relations. This is most evident in media coverage of the controversy. According to Mediatoday, conservative-leaning Chosun Ilbo published 22 articles about the allegations of misappropriation, which is approximately 2~3 times more than other media outlets. By comparison, progressive-leaning Hankyoreh published seven articles. Moreover, some of the articles presented a defense of the NGO.

Context: In 2015, the conservative Park Geun-hye administration made an agreement with Japan on compensation for the victims of military sexual slavery during World War II. In return, the Korean government promised not to litigate the issue again. The conservative media characterized the agreement as meaningful. However, then-Democratic Party leader Moon Jae-in called the agreement invalid because the National Assembly did not ratify it. In addition, he accused the Park Geun-hye government of not reflecting the victims’ views. According to a 2016 opinion poll, 56% of respondents believed that the Park administration’s agreement with the Japanese government was wrong.

Korea View was edited by Yong Kwon with the help of Gordon Henning, Soojin Hwang, Hyungim Jang, and Ingyeong Park.

Picture from flickr user Lindsey Turner

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Four Japanese citizens were prevented from boarding a plane destined for South Korea on March 9, the first day of South Korea’s travel ban on Japanese from entering the nation.
• Japan, along with five other nations, banned foreigners from entering the country if they had visited certain hotspots such as
• Daegu, Cheongdo county, and North Gyeongsang Province.
• New measures from the Japanese government included the suspension of a 90-day visa-free program for Koreans.
• As of March 13, a total of 123 countries and territories were restricting entry or enforcing tougher quarantine measures for people from South Korea.

Implications: The South Korean government’s responses to Tokyo’s new travel restrictions suggest that bilateral relations continue to suffer from tensions stemming from Japan’s reaction to the Korean court upholding the legitimacy of reparations claims by victims of forced labor during WWII. While 123 countries and territories have imposed varying levels of restrictions, Seoul has only imposed reciprocal travel restrictions on Japan. This unprecedented measure not only demonstrated how pathological pressures may be further damaging frayed relations but also revealed that countries in the region are still not coordinating their responses to the pandemic.

Context: Japan’s reaction to the pandemic strikes a contrast with how the U.S. government has approached travelers from Korea. While people who visited hotzones like Daegu are being quarantined, the U.S. government has not revoked its visa-free travel for Korean nationals.

Korea View was edited by Yong Kwon with the help of Gordon Henning, Soojin Hwang, Hyungim Jang, and Ingyeong Park.

Image from the U.S. State Department flickr account.

By Yong Kwon, Soojin Hwang, and Rachel Kirsch 

The ongoing confrontation between the White House and U.S. Congress will likely engross President Donald Trump’s political attention in the months ahead. Given his central role in executing highly delicate negotiations with North Korea and high-stakes face-off over trade with China, the impeachment inquiry may affect the U.S. government’s execution of foreign policy. Two most recent cases of impeachment proceedings against an incumbent president provide insights into what domestic and international observers could expect going forward. 

Reviewing developments during the Nixon and Clinton administrations, domestic political scrutiny did not affect broader foreign policy visions. Simultaneously, the gravity of the foreign policy challenges confronting the respective administrations provided the White House with little cover from the legislature’s hostilities. Notably, already-empowered figures in both administrations enjoyed greater latitude to execute policies while the impeachment proceedings distracted Presidents Richard Nixon and Bill Clinton. However, these figures could not substitute the president’s role in mobilizing intra-governmental coordination. 

While the inquiry against the Trump administration is taking place in a very different political environment than what the Nixon and Clinton administrations faced, these cases provide a glimpse into what may be on the horizon.

On execution of foreign policy: Under Nixon and Clinton, key diplomatic engagements continued unabated during their respective impeachment proceedings. However, Congress placed more stringent oversight on foreign policy issues that had been flashpoints between the legislature and executive before impeachment proceedings, particularly areas that involved the allocation of resources. 

Despite the start of impeachment proceedings against Nixon by the House Judiciary Committee on May 9, 1974, the administration concluded an arms control agreement with the Soviet Union in June 1974. The Threshold Test Ban Treaty was accompanied by other agreements with Moscow that strengthened bilateral economic cooperation. Many conservative and liberal lawmakers expressed wariness towards Nixon’s easing of hostilities with the Soviet Union, but Congress did not (or could not) impede the administration’s engagements. 

However, Congress confronted the Nixon administration on long-standing disagreements. Notably, lawmakers rejected the Nixon administration’s request in 1974 to raise the ceiling on military assistance to South Vietnam. This was an extension of an ongoing dispute between the executive and legislature over U.S. commitment in Southeast Asia. As early as June 1973, when the investigation into Watergate had just started, Congress imposed a ban on any future U.S. military action in the region. 

Similarly, Clinton undertook significant foreign policy measures while facing an adversarial Congress. He led negotiations between Israel Prime Minister Benjamin Netanyahu and Palestinian leader Yasser Arafat in October 1998 despite the House of Representatives authorizing an impeachment inquiry earlier that month. 

Congress too acted more assertively to elevate its long-standing positions while the White House faced mounting public pressure. In September 1998, after Clinton publicly admitted that he had an affair, Congress blocked the administration’s request for increased funding for the International Monetary Fund to assist the containment of the Asian Financial Crisis. U.S. financial support had been a contentious issue that preceded the scandal. In December 1997, Clinton himself had called on Asian economies affected by the crisis to adopt greater macroprudential discipline as a condition for receiving external financial assistance. 

President’s use of foreign policy as a distraction from impeachment: Successive American presidents have been accused of employing foreign policy to distract the public from domestic challenges. Nixon and Clinton’s detractors also floated this theory during their respective impeachment proceedings. In both cases, however, foreign policy crises did not contribute to ameliorating the level of public scrutiny against the White House. 

The Nixon administration faced myriad foreign crises between 1972 and 1974, but Congress refused to be distracted from the ongoing investigation into the Watergate break-in. In fact, Congressman Less Aspin introduced legislation in April 1974 to preempt any efforts by Nixon “[to play] fast and loose with our national security during an impeachment trial.” This conscious bifurcation of foreign and domestic challenges by the legislature may have contributed to the impeachment inquiry continuing unabated through North Vietnam’s 1972 Easter Offensive against South Vietnam, the 1973 Yom Kippur War, and the 1973 oil crisis. 

Similarly, the Clinton administration’s decision to conduct airstrikes against Iraq in December 1998 delayed the impeachment vote from coming to the floor for four days but did not prevent the legislature from taking action indefinitely.  

Shift in foreign policymaking authority: When Nixon and Clinton faced impeachment proceedings, key figures in the administration were elevated to take the lead on foreign policy while the Oval Office focused on mounting a defense. However, these figures could not completely substitute for the president. Government resources could not be efficiently allocated to advance foreign policy aims because empowered personnel could not subordinate other federal agencies and their interests easily without central guidance from the president. 

During the Watergate scandal, Secretary of State Henry Kissinger was given so much authority that Washington Post correspondent Chalmers Roberts described him as a “surrogate president for foreign affairs.” Similarly, Treasury Secretary Robert Rubin was empowered to address the Asian Financial Crisis while Clinton dealt with the political blowback from his affair with Monica Lewinsky. Both figures, however, had a narrow purview and needed the support of other agencies to achieve policy objectives (i.e. aid to Israel in 1973 and pressure on Indonesia to adopt economic reforms in 1998). The president’s role remained essential.

These cases took place in their unique political environments and cannot be directly superimposed on ongoing developments. For example, both Nixon and Clinton enjoyed higher approval ratings than Trump when they initially faced their impeachment inquiries. Moreover, the impeachment proceedings against the two erstwhile presidents were not directly linked to their conduct of foreign policy, insulating this space from political scrutiny. In addition, Secretaries Kissinger and Rubin had been empowered before the crisis and carried the confidence of their peers in the administration. It is unclear if the same could be said about figures in the incumbent administration. Trump’s diminishing approval rating, the focus of the impeachment inquiry on his handling of foreign affairs, and the potential implication of Secretary of State Mike Pompeo in the scandal all point to a potential amplification of the challenges to the administration’s execution of foreign policy.

These caveats make the current crisis against Trump a unique case. Nonetheless, history shows what avenues might both constrain and sustain the administration’s ability to execute foreign policy. 

Yong Kwon is the Director of Communications at the Korea Economic Institute of America. Soojin Hwang and Rachel Kirsch are currently Interns at the Korea Economic Institute. The views expressed here are the authors’ alone.

Photo via the National Archives and Records Administration, public domain/CC0.

KEI President Donald Manzullo, a former member of the House of Representatives, recently interviewed Charlie Rangel, a former Congressman from New York and a Korean War Veteran, for the KEI podcast. Rangel was one of three current and former members of Congress who KEI recently honored for their service in the Korean War. The two former members discussed Rangel’s experiences during the war, his journey after returning from Korea, and his time in Congress.

The following is a partial transcript of that conversation. The rest of the episode can be found here.

Donald Manzullo: Charlie, we thank you for your service. You wrote a book called “And I Haven’t Had a Bad Day Since,” after the battle of Kunu-Ri – tell us about that battle.

Charlie Rangel: We got to Korea in August of 1950, and one way or another fought our way up past Pyongyang, and the Yalu River separated North Korea from Manchuria. General MacArthur had actually cut off the North Koreans, victory was ours, home was in our minds, and in September, October we were waiting to be home for Thanksgiving and Christmas. We waited September, we waited October, we waited November. The weather changed, our clothes didn’t. We were just waiting for that ship to call, to get there.

And we had heard that one of our guys … was captured by the Chinese. I started a rumor, it never entered my mind that there were really Chinese there. And for three days the entire 8^th Army, including my outfit – the Chinese had crossed the Yalu River, they were talking to us with loudspeakers in broken English, telling us to surrender. Don, it was a nightmare, the trumpets would be blowing … and at nighttime, they would start their blasts.

That very day all hell broke loose, as tens of thousands of Chinese surrounded us and international troops, the screaming, the yelling, the killing. And I don’t know, I got shot and I got out of there. And like I said, I haven’t had a bad day since because so many … we had 90 percent casualties between those that were captured, killed, wounded.

And in telling this story, I just can’t see how I could be in love with anything that sounds like Korea except the Korea that’s there now. To believe that I had any part of creating a miracle for people I never knew, never heard of, a country I never thought was there – it makes me proud to be an American, and even prouder to see human beings like South Koreans who can come out of the ashes and become a world power economically.

Donald Manzullo: Charlie, your modesty – it’s always been a part of your life, even though you were one of the flashiest dressers in Congress. But during your time in Korea, you earned a Purple Heart, Bronze Star, Presidential Unit Citation, Republic of Korea Presidential Unit Citation, and three Battle Stars …. Your personal life is absolutely fascinating. Former Congressman, but you’re always a Congressman, high school dropout enrolls in the Army, goes to Korea, comes back home, trying to figure out what to do. The next thing you do is you go back and get your GED. Tell us about the march from the GED to the halls of Congress, Charlie.

Charlie Rangel: I never knew just how ignorant I was until I came out of the Army. I thought a couple of stripes made the difference the same way people get a couple of degrees. When I came out of the Army with all these medals you mentioned, pocket full of money, starched uniform, a couple of stripes, I must have felt like I was 10 feet tall until I went to get a job. They asked what could I do and I start talking about the M1 rife, the automatic carbine…and they said “next.” I was crushed.

And my brother was older, smarter, and so encouraging. He kept me from re-enlisting in the Army, which is what I was going to do. He got me a job at the garment center. I don’t know whether in your part of the country if you have hand trucks – two wheels, carry loads. And I’m carrying a load of lace – wasn’t heavy, just awkward – in the rain, and it slipped out of my hand in Manhattan in the rain, and cop’s cursing me out for blocking the traffic … I went straight to the VA, I told them “I don’t know what the hell’s going on, but I know I need some help.”

And I didn’t know how much help I really needed, I hadn’t completed high school. And the only reason I said I wanted to become a lawyer, which everyone thought was impossible, was because of my grandfather. I wanted to impress him, he was an elevator operator at the criminal court building of New York. He liked me, but he loved judges, he loved lawyers, and he loved the court system.

And I don’t know who laughed the loudest, the people at the Veterans Administration or my grandfather. But somehow we were able to work it out and I became an assistant U.S. attorney. And I got married to the most wonderful, understanding woman in the world – she had finished college while I was in high school.

Donald Manzullo: Well Charlie, I want to thank you for spending the day with us, for talking about old times.

Charlie Rangel: Well let me thank you Don. Like I said, Korea is a small country geographically, but it’s a country with a big, big heart in terms of giving hope to so many people whose countries historically have lived in poverty and never gotten out of it.

Image from KEI’s reception honoring Korean War Veterans in Congress. You can view the video of the event here. 

By Nathaniel Curran

One thing that shocks most first time visitors to Korea is the ubiquity of coffee shops. You can’t find anywhere in Seoul that isn’t a short walk to the nearest café. The sheer magnitude of Korea’s passion for coffee is best expressed through numbers: Korea boasts the highest per capita number of cafes in the world. The result being there are an estimated 80,000 cafes in a country slightly smaller than Kentucky. While that number is staggering, the growth of the café industry is even more mind-boggling; back in 2011, Korea boasted only a measly 12,400 cafes. Even if one goes with a more conservative estimate in 2015 that put the number of cafes at around 50,000, the industry has undeniably grown by a factor of least five in the last decade.

While not as uniquely Korean as the noraebang (karaoke rooms) that seem to stud most streets in Korea, coffee culture permeates every neighborhood in Seoul, with tiny boutique cafes competing alongside behemoth Korean chains like Ediya Coffee, which as of last year boasted 1,800 stores.

Far from home, close to coffee

If you ever find yourself off the beaten path, perhaps on a deserted highway, be assured coffee will not be difficult to procure; convenience stores and rest-stops across carry dozens of varieties of pre-bottled coffee. These include heated cans of coffee as well as many varieties of refrigerated specialty coffees, such as white chocolate mochas and caramel macchiatos.

In addition, instant coffee is easy to come by in Korea. Sugary, delicious, and distributed in single-serving tubes that can also double as impromptu stirring sticks, they require only the addition of hot water. Even though consumption of instant coffee has declined in recent years, it was still an almost $900 million industry as of 2015. However, most Korean cafes would be loath to be considered in the same breath as instant coffee. Specialty coffee shops in Korea often charge more than 10,000won ($8) for their drinks, which advertise beans sourced from far flung locales and that are carefully curated by hagwon certified baristas.

From Gojong to Gangnam

Coffee came to Korea in the late 19^th century, and Korea’s last monarch, Gojong, was a coffee fan, and the backer of Korea’s first coffee shop. Despite that initial foray into java, the modern Korean coffee habit owes its origins to the instant coffee powder that was common in American military bases during and after the Korean War. Instant coffee dominated the market for years, until, with the advent of Starbucks in Korea in the late 1990s, the Korean public was introduced to the joys of espresso. Now, espresso dominates the café market, with the singular “Americano” becoming Korea’s drink of choice.

Sadly, Korea’s more traditional beverage, tea, has not fared well against the onslaught of cafe-ization; the tea market has been cut in half since the late 2000s, while coffee sales climbed an incredible 1,598 percent.

The future of coffee in Korea

Experts have repeatedly predicted that Korea’s coffee market has reached saturation and that the glory days of café culture is coming to an end, only to be proven wrong. In fact, the intense competition in the café market has only given rise to more variations on the traditional coffee shop, including sleep cafes and exotic animal cafes that feature civet cats and wallabies.

While it’s hard to imagine that Koreans will drink even more coffee in the future, or that any possible ideas for cafes have not yet been exhausted, I’m confident that Korea will surprise us yet. In the meantime, Koreans can rest on the laurels of their vibrant coffee industry. Although Korea often gets called out for its overreliance on exports, what greater proof is there of a developed domestic economy than a country with a $5.7 billion dollar coffee market?

Whatever the future of cafes and coffee in Korea, the last two decades have been a heyday for Italian espresso machine makers, who are undoubtedly toasting a new sort of “Miracle” (or perhaps, “Americano?”) on the Han.

Nathaniel Curran is a PhD student at USC’s Annenberg School of Communication and a 2017 COMPASS Summer Fellow. The views expressed here are the author’s alone.

Photo from Dorothy’s photostream on flickr Creative Commons.

By Seung Hwan Chung

On December 19 1950, the SS Meredith Victory, a 7,600-ton merchant marine vessel, was about to leave from the North Korean port city of Hungnam. Hundreds of thousands of refugees flocked to the pier at Hungnam as the bombing of the Chinese army came closer. Leonard Larue, a U.S. Navy captain, made the decision to abandon almost all of the arms and military supplies from the ship and took on 14,000 evacuees in an operation code-named “Christmas Cargo.”

The parents of Moon Jae-in and his older sister were among the 14,000 refugees who fled aboard the Meredith Victory, arriving on Geoje Island in Gyeongsang Province on Christmas Eve. Moon Jae-in was born two years later on Geoje Island in January 1953. Thus, the son of a refugee from Hungnam became the 19th President of the Republic of Korea thanks to this successful rescue operation called the Hungnam Evacuation, which is credited by the Guinness Book of World Records as the largest transportation of evacuees in history.

In the lead-up to the evacuation, the 3rd U.S. Division was advancing northward from Wonsan to assist UN and South Korean forces trapped near the Chosin Reservoir. After losing Wonsan, the 10th U.S. Army Corps and the 1st Korean Army Corps had to withdraw to the sea as their retreat path was blocked, leading them to the port city of Hungnam. The first unit that withdrew from Hungnam was the 3rd Korean Division, followed by the 1st U.S. Marine Division.

According to the Korean Ministry of Patriots & Veterans Affairs, the Battle of the Chosin Reservoir is recorded as among the most brutal battles in the history of the U.S. Marine Corps. During the Battle, 15,000 U.S. marines fought through 120,000 Chinese soldiers in the extreme winter cold of -22 to -40 degrees Fahrenheit. As a result, 4,500 U.S. marines died and 7,500 were wounded.

President Moon Jae-in remarked on his family’s story at a reception for Korean War Veterans on  June 23, 2017, saying, “Today we are joined by the heroes of the Battle of Chosin Reservoir and the Hungnam Evacuation from North Korea. These two historic occasions became well known even to postwar generations in Korea who did not experience the war. The son of a refugee from Hungnam could become the President of the Republic of Korea and join you all today. I hope this fact helps make the Korean War veterans of the U.N. Forces feel a sense of delight and reward.”

President Moon Jae-in is scheduled to make a visit to Washington D.C. from June 28 to July 1 for his first summit meeting with U.S. President Donald Trump. As his first stop in the United States, he visited the new memorial for the Battle of the Chosin Reservoir at the National Museum of the Marine Corps in Quantico, Virginia on June 28. There, Mr. Moon laid a wreath before the memorial that commemorates the Korean War battle which enabled the evacuation of civilians.

The “Star of Koto-ri,” a symbol of the battle, is on the top of the monument. U.S. Marines started to wear the star to commemorate the bright stars they saw after a snowstorm before succeeding in the evacuation.

President Moon will also visit the Korean War Veterans Memorial in Washington D.C. along with Vice President Mike Pence, whose father was a Korean War veteran who was awarded a Bronze Star Medal for his service.

Additionally, Foreign Minister Kang Kyung-wha remarked on the Hungnam Evacuation during her visit to the U.S. 2nd infantry division base in Gyeonggi Province, stating “President Moon will invite Korean War veterans who participated in the Hungnam Evacuation” to the White House during the summit.

President Moon’s visit to the United States will lay the foundation for further upgrading South Korea-U.S. relations. The fact that the new Korean president is highlighting his family history and making a point to thank Korean War veterans throughout the trip can make the summit even more meaningful. Through the visit, the two heads of state can share a vision for further developing the Korea-U.S. alliance into an even greater one.

Seung Hwan Chung is a reporter with the Maeil Business Newspaper and a visiting fellow with the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Image from USMC Archives’ photostream on flickr Creative Commons.

By Jenna Gibson

Any student of Korea policy knows “The Two Koreas,” by Don Oberdorfer.  Famous both for its physical heft and its incredible detail, this book is regularly referenced as the go-to history book in Korea policy circles. It is bittersweet now to read the optimistic final chapter on North-South relations, but that does not take away from Oberdorfer’s rich insights.  There are dozens of further great books out there that examine different aspects of Korean history – here are five of them that can help those interested in the Korean Peninsula’s future better understand its past.

1)      A History of East Asia: From the Origins of Civilization to the Twenty-First Century, by Charles Holcombe

It’s hard to understand Korea without studying its neighbors as well. For thousands of years, Korea, China and Japan have influenced each other in myriad ways. This book is a helpful guide to the intricate network that has tied these three countries together over time. Good for beginners, this book is both informative and engaging as it goes through East Asian history from pre-historic times all the way up to the present.

2)      The Coldest Winter: America and the Korean War by David Halberstam

For decades known as the Forgotten War, this book sheds light on the Korean conflict from its outbreak to the armistice and beyond. Halberstam, a journalist who covered the Vietnam War, incorporates interviews with veterans of the Korean War into his book, putting human faces on the conflict. He also includes detailed looks at the American perspective back in DC to illuminate the behind-the-scenes decision making that influenced the war.

3)      The Impossible State: North Korea, Past and Future by Victor Cha

Victor Cha’s 2013 book on North Korea is not only a fascinating look at what made the DPRK the DPRK, it also provides good context for ongoing challenges on the peninsula. Written in an accessible way, the book highlights  the crazy things the Kim regime has done and said, while simultaneously painting a sober portrait of the world’s most reclusive state.

4)      Korea: The Impossible Country by Daniel Tudor

If North Korea is the impossible state, its Southern counterpart is apparently the impossible country. This book focuses on South Korea, and discusses every aspect of the country’s rise from a destitute post-war state to a tech-obsessed powerhouse. What sets this book apart is the inclusion of several interviews with important Korean pioneers, including the mayor of Seoul, actor Choi Min-sik, and Soyeon Yi, Korea’s first astronaut. As someone who often writes about Hallyu and cultural exchange, I use this book is a go-to resource for its in-depth explanation of the origins of modern Korean popular culture.

5)      The New Korea: An Inside Look at South Korea’s Economic Rise by Myung Oak Kim and Sam Jaffe

For those who have heard the term “Miracle on the Han” and want to know more about South Korea’s rise from poverty to become to the 11^th largest economy in the world, this book is for you. A close look at the economic and political factors that made this growth possible, this book also examines issues like chaebol culture, long working hours, and environmental concerns.

If you have other books to recommend, please add a comment!

Jenna Gibson is the Director of Communications at the Korea Economic Institute of America. The views expressed here are the author’s alone.

By William Brown

September, 1961 was not a happy time in South Korea, at least according to the US Intelligence Community.  See how CIA described the dismal situation soon after junta commander Park Chung-hee’s coup d’état, in a declassified National Intelligence Estimate.

“The greatest threat to South Korea, at least in the near term, comes from within South Korea. The country lacks a sense of national purpose and faces both tremendous economic problems and a brittle political situation. The military junta seeks to provide the drive and stability which was lacking in the previous civilian government but is subject to internal factionalism and lacks general public support in confronting these enormous problems. … U.S. aid will probably succeed in preventing economic collapse. However, even under the most favorable circumstances, progress will be slow and South Korea will continue to require large-scale foreign aid for the indefinite future if it is to remain an independent nation allied with the West.”[i]  

The longer-term threat was North Korea, seen then as a vibrant economic entity, pu­­­lling the frustrated South into the communist orbit.   

“One thing seems fairly clear; both the South Korean people and the leadership face many disappointments, frustrations, and failures in the years ahead.  In such a situation, the desire for economic progress and for an end to hopeless temporizing, rising interest in unification, and continued enticements offered by the [more prosperous] North Korean regime could lead to some movement in the south toward an accommodation with the north.” 

National Intelligence Estimate 14-2/42-61, 12 September, 1961.[ii]

Within months, South Korea had set forth on what now must be seen as one of the world’s most remarkable economic and political development paths. And within about a dozen years, North Korea would default on foreign credits and begin a long decline into famine.

Not known for its prescience in such matters—just eleven years earlier the brand new CIA had boldly said China would not enter the then flaming Korean War[iii] — this pessimistic Estimate may have served as a useful warning to the Kennedy Administration which went on to put some of its best minds together to change the nature of U.S. assistance to Seoul.  Instead of commodities aid—free food—that was ruining South Korean agriculture, the aid program focused on fixing the overvalued monetary system and developing exports. Who did this and why would be a good topic for historians to revisit and our countries to honor. But I’d like to look at the take-off from the perspective of peering back into the past with an eye toward the future. How did this intelligence forecast turn out so incredibly wrong, and wonderfully so? And what can we learn in order to convince North Korea to make a similar about-face.

An excellent new book, The Korean Economy: From a Miraculous Past to a Sustainable Future, by Eichengreen, Lim, Park, and Perkins[iv], provides what is probably the school view of South Korea’s remarkable turnaround.  In looking for an up-to-date book for my ­Georgetown University course on the two Korean economies, I was pleased to discover this work, not the least because it includes a chapter on North Korea. But I must say I was disappointed in reading what it has to say about what caused the economic take-off. This is not to say that they might not be right; it just doesn’t fit with my pre-conception and I’d like to see a new, more full, academic discussion.  Perhaps objective economists in South Korea, that is academics not predisposed to punish Park for his authoritarian rule, can help with this.

At its essence this is a chicken and egg discussion.  Eichengreen and others say that it was Park’s shifting the economy from import substitution to export-led industry that allowed savings and investment to blossom, raising the productivity of Korean workers.  Exports, from a subsistence-level economy, were possible only because foreign aid provided the surplus needed to attract investment.  The pull from abroad thus lifted the economy.

In contrast, I have thought it was reforms to the money and banking system that provided incentives to save, even out of very low incomes, that created an exportable surplus which then pulled in the foreign investment that jump-started the economy. In other words, an outward push from inside Korea provided the lift.  Foreign aid was less important. An arcane, perhaps, but I think important distinction, especially as we look towards North Korea’s current predicament and to its penchant for nationalist self-reliance.

My view stems from a personal memory—admittedly a dangerous source of analytical vigor. I was a young American boy living in Kwangju, capital of South Chulla province, during this time—fortunately, my Presbyterian missionary parents had not read the secret CIA document. Early one rainy season morning in 1962, my mother got me up to search our neighboring American doctor’s house for a stash of hwan cash. The doctor and his family were away but had rung up (that is the way the old phone system worked) to say he had a bunch of South Korean money that needed to be turned in; he just couldn’t remember exactly where it was, probably in his library. Exciting in a way I’ll never forget, I found the stash of cash, in cut-away books just like you see in spy novels. The bigger story, of course, and unknown to us at the time, was the change to the monetary system and to Korea’s economy that this currency reform signaled.  The initial phase was not completely successful; apparently not enough new won notes had been secretly printed in England and brought by ship to Korea, but within months the new cash had taken hold.  So if I was to make a point estimate, June 9, 1962 was the day that made modern South Korea. It should be a holiday. Everyone was given a few days to take their hwan money, at least up to a pretty high limit, and go down to the Cheil bank and exchange it for newly printed won notes at a 10-to-one ratio; after that hwan would be useless.  Larger amounts of money had to be deposited for a year at a high interest rate but most of the hwan was converted and prices changed accordingly.  And to encourage the public to deposit and save their new won, something like 20 percent annual interest rates were offered.  Even in days before calculators, I remember figuring out how fast the money would grow and how soon I could be a millionaire—forgetting the problem of inflation that this new policy was meant to address.

I wasn’t the only one thinking this way and very quickly South Koreans shifted from being just about the worst savers in the world to being the best. Poor people stopped spending on weddings and funerals and instead saved money, and the banks used these saved resources to lend to farmers to buy small tractors, assembled from kits made in Japan, revolutionizing agricultural productivity.

The tractor that replaced the cow. Park’s Memorial Museum, Seoul

Elimination of U.S. food aid, and government support to higher agricultural prices, as well as subsequent deals with Japan and the World Bank helped, but the driving force was a decent money and banking system that gave the right incentives to the Korean public to save and invest in the future. At least that is the way I have remembered and taught the story.

Textile workers support exports. Park’s Memorial Museum, Seoul

Eichengreen and the other authors, however, use the data to paint a slightly different picture.

“Domestic savings remained in the single digits (share of GDP) in the first half of the 1960s, the takeoff period. … The most dramatic change was, in fact, the rapid growth in exports. Exports at constant prices grew by 35 percent per annum from the end of 1963 to the end of 1969.[v]

The data shown in their text, however, are at five-year intervals so I question the interpretation of the leads and the lags.  Looking at annual household savings data, (graphic below) it seems that the savings growth kicked-in in 1962 and 1963, simultaneously with the money change and a year before exports began their upward spiral from a tiny base.[vi] Admittedly 5 percent household savings are not much but it is the change from nothing that arguably sparked Korea’s real revolution.

As I say, a chicken and eggs argument. If my memory serves, it was human hair (wigs), plywood, and leather goods that started the export push, not products that required foreign investment.  But clearly Eichengreen is right about what happens next; general and soon-to-be “president for life” Park got on the export bandwagon and the rest is history. Export growth soared giving the economy a huge boost even as savings and investment rates rose, allowing the import of capital goods for South Korean industry.  Park’s most controversial policy was then to shift from light industrial exports, especially textiles and footwear, to heavy and chemical industry, despite what appeared to World Bank and U.S. economists as a comparative advantage in labor intensive products.  By now it would be hard to argue that Park wasn’t correct but, whatever the case, on the basis of this surge in investment, South Korea’s comparative advantage has shifted, for the time being, to heavy industry.  I say for the time being since China looms as a tough competitor in all of these products and is investing even more heavily than did Korea.  Another important step, as is hinted at in the old NIE, was Park’s creation of an objective and expert Economic Planning Board that supervised the creation and publication of data that his and subsequent governments could use as the road map and guide for economic policy making (and which makes possible our current analysis of what caused the economic takeoff).  The U.S. role was critical as well.  Despite missteps with respect to aid, the U.S., soon after liberation from Japan, had supervised the fundamental change in Korea from a tenant based agricultural economy to a capitalist one with massive land reform giving land to the tenants, and, of course, by providing the security shield that protected the country from the Communists.  While initially skeptical of the currency reform—U.S. officials had not been notified in advance even though the U.S. was financing about half of the South Korean budget—U.S. balance of payments support that followed allowed the new won to achieve credibility.

But the real genius of the Park administration, it seems to me, was those early courageous and risky steps in changing the money and using the change to create a sound currency and a high-interest banking system that encouraged savings and that recognized the high returns on capital if used only in high productivity endeavors.  Now seen as a textbook solution to be sure but one that must have been complicated and risky for the generals to manage. Subsequent Seoul governments have relied too much on banking and not enough on more efficient direct capital markets—stocks and bonds—but all of that is a different story, well told in Eichengreen.

The parallels to North Korea today are interesting and I would hope officials and scholars in Pyongyang are carefully studying Park’s success.  I say carefully since they tried something similar to the South Korean currency reform in 2009 but bungled it badly.   On paper what is known as the 2009 currency redenomination must have looked similar but with critical differences. Citizens were told to change about a third of their cash into a redenominated currency of the same name at a 100-1 ratio. That ratio doesn’t matter but the fact that only a small share of cash could be converted, and the absence of a name change, are important.  North Koreans immediately saw most of their money devalued by 99 percent over the span of a few days and naturally associate that disaster with the North Korean won notes.  It isn’t clear what was supposed to happen with their bank accounts but these were artificial anyway since cash can’t be withdrawn from a bank except with special permission—maybe like a 401k that never matures—and that policy has not changed.  By sharply reducing the money supply, the move might have been designed to bring black market prices down close to the fixed ration price levels and end the arbitrage that was and continues to destroy the planned, fixed price, economy.  That didn’t work since market prices immediately soared, leading to an even larger gap between official and market prices.

Whatever the reasons for the redenomination, it backfired—even strongly socialist PRC commentators called this a theft of the people’s money.  The Kim Jong-il government executed the party finance chief and, a first, offered an apology to the public.  But once done such a deal cannot be undone and North Korean won quickly became essentially worthless, with foreign money, U.S. dollars and RMB, seeping into the circulation in large amounts. Pyongyang by now has stabilized the won at prices significantly above the pre-2009 level but the foreign money circulates without impediment, an astonishing development in a so-called Marxist and “self-reliant” economy.  To hire a taxi, you now need something like two U.S. dollars.  To buy an apartment, you need $30,000 US.

In these respects, the situation now is probably not so different than South Korea in 1961.  At least a market now exists and the command economy seems to have lost some of its sting.  Entrepreneurs make dollars buying and selling in the street markets, and former (maybe current) officials and military officers might be hoping to make it big, using their government connections and licensing abilities to make millions of dollars by building apartment buildings and selling the flats, carefully keeping enough dollar cash handy to pay off the authorities.

In fact, it is interesting to think that the 1961 NIE might work well today, simply exchanging “North” for “South” Korea. Land reform that gives farmers’ ownership rights; stopping the inflow of disrupting foreign aid that discourages export development; and an export push all are within the capabilities of even a sanction-limited Pyongyang government. But most important is creating a money and banking system that allows the North Korean people to do their own saving and investing.  If Kim Jong-un wanted to link such a policy to his grandfather, all of this could be placed in a “juche” nationalist and self-reliance context.  Clearly, against the advice of many non-Koreans, Park Chung- hee managed to change South Korea from a beggar, aid-dependent country to a self-reliant lending and aid giving powerful and well-liked country.  One would think the young Kim would like to do the same. But before any of this can work, he needs to fix his rapidly dollarizing monetary system and adopt capitalist tools to raise savings and create private incentives to invest in the future. A decent bank and a decently positive real interest rate would do wonders.  And like Park, Kim might be able to use a little American and Japanese help to get this done.

So, where is the briefing book that we can give the young General that will properly explain what he needs to do?  I’m pretty sure the junta leader’s daughter can give the lecture.

William Brown is an Adjunct Professor at the Georgetown University School of Foreign Service and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photos courtesy of the author.

By Junil Kim

In discussions of Korea’s possible reunification, observers often cite the German unification and integration process as a possible model due to its notable similarities with Korea. KEI’s own Senior Director of Congressional Affairs and Trade Troy Stangarone recently wrote a series of articles examining insights from German unification and their possible application to the two Koreas.

The case is less often made for Ireland. December 2^nd marked the 16^th anniversary of when the British-Irish Good Friday Agreement went into force. The Agreement, which was affirmed by voters in both the Republic of Ireland and Northern Ireland, established North-South institutions, decommissioned weapons held by paramilitary groups, and largely ended violent conflicts. While a North-South divide still exists, the Good Friday Agreement is generally seen as a large positive milestone in Irish reconciliation.

Although the Irish case is not frequently mentioned in discussions of Korean unification, there have been notable proponents in recent years. Both current Irish ambassador to South Korea Aingeal O’Donoghue and her predecessor Eamonn McKee suggested that the Irish peace process with Northern Ireland could serve as a valuable model for Korean reunification. Both envoys were involved in the Irish negotiation process, which slowly developed over the course of several years. Ambassador O’Donoghue noted the value “of sharing lessons or experiences from the Northern Ireland peace process in Korea, though recognizing that the two situations are very different.”

There are several important similarities that make the Irish model useful for possible Korean application. Both regions share a history of colonization by a larger regional power. The Republic of Ireland gained official independence from British rule in 1949, and both Korean nations broke from Japanese colonial administration at the end of World War II in 1945. Ambassador McKee publicly commented on this similarity, stating, “You’ve got two small countries, Ireland and Korea, who are surrounded by big powers and have retained their national identity over many, many centuries despite being buffeted by these powers and the power politics of their regions.”

Both regions were also partitioned in the 20^th century. Northern Ireland remains a part of the United Kingdom and the two Koreas were separated by Cold War politics in the aftermath of World War II. Both regions also have a nationalist sentiment that transcends their designated borders. Notable examples of cross-border nationalism include the Irish national teams with athletes from across the island and the two Korean Olympic teams marching together under the Korean unification flag at multiple athletic ceremonies.

Although there are similarities regarding the historical contexts of both Korea and Ireland, there are also significant differences that may make lessons from Ireland difficult to apply to Korea. Unlike the heavily militarized and maintained DMZ that marks the border between the two Koreas, Ireland and Northern Ireland have a relatively open border where residents in both area can travel freely across. This contrasts sharply to the rigorously controlled interactions between North and South Korean citizens, such as the brokered inter-Korean family reunions that occurred this past October.

The Korean security situation is also drastically different from Ireland. Although paramilitary violence has flared up at times within Northern Ireland and in England, North Korea’s military capabilities have far greater security implications for both the Korean peninsula and the wider East Asian region. North Korea’s nuclear weapons development remains the most prominent concern and has regularly drawn the attention and ire of the international community. The amount of present cross-border dialogue is also low compared to North-South interactions in Ireland, which was a crucial factor in the Irish peace process.

Another key difference between the two situations is that the UK and the Republic of Ireland’s membership within the European Union meant that significant EU resources were available to promote the peace process. Furthermore, the U.S. was able to play a crucial role in promoting the Northern Ireland peace process because it was perceived as a neutral party by both the UK and the Republic of Ireland – a situation which emphatically is not the case on the Korean peninsula.

South Korea has demonstrated interest in learning lessons from the Irish peace process. In early 2014, the Korean Ministry of Foreign Affairs formed the Peninsula Club, an organization made of 21 foreign ambassadors to both Koreas. The group, which Ambassador O’Donoghue is also a part of, is meant to function as a networking platform to build international support for Korean reunification. In a more explicit show of South Korean interest, a delegation of officials from the Republic of Ireland and Northern Ireland visited Seoul in 2012 to discuss their peace process with South Korean government leaders.

Despite significant differences between Ireland and Korea, the Irish peace process provides an optimistic example of reconciliation. Important similarities between the two regions make the Irish model worth examining for possible application to Korean reunification.

Junil Kim is an intern at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from laura photo’s photostream on flickr Creative Commons.