Southwest Hidden Gate, Suwon Castle, largest of the five hidden gates, where a hidden road for transporting military provisions begins

IN THE FIRST THREE decades after the Park Chung Hee government launched the First Five-YeÍÍÍÍar Economic Development Plan in 1962, the South Korean economy grew enormously and the economic structure was radically transformed. South Korea's real gross national product (GNP--see Glossary) expanded by an average of more than 8 percent per year, from US$2.3 billion in 1962 to US$204 billion in 1989. Per capita annual income grew from US$87 in 1962 to US$4,830 in 1989. The manufacturing sector grew from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987. Commodity trade volume rose from US$480 million in 1962 to a projected US$127.9 billion in 1990. The ratio of domestic savings to GNP grew from 3.3 percent in 1962 to 35.8 percent in 1989.

The rapid economic growth of the late 1980s, however, slowed considerably in 1989. The growth rate was cut almost in half from the previous year (to a still-robust approximate 6.5 percent), the inflation rate increased as wages soared even higher, and there was speculation concerning a small trade deficit in the early 1990s. These developments all pointed to a gradual slowing of the expansion of the rapidly maturing economy. Nevertheless, it also was clear that rapidly rising domestic demand would keep the economy healthy (even with a slight drop-off of exports), unless a major political crisis were to shock the country.

The most significant factor in rapid industrialization was the adoption of an outward-looking strategy in the early 1960s. This strategy was particularly well suited to that time because of South Korea's poor natural resource endowment, low savings rate, and tiny domestic market. The strategy promoted economic growth through labor-intensive manufactured exports, in which South Korea could develop a competitive advantage. Government initiatives played an important role in this process. The inflow of foreign capital was greatly encouraged to supplement the shortage of domestic savings. These efforts enabled South Korea to achieve rapid growth in exports and subsequent increases in income.

By emphasizing the industrial sector, Seoul's export-oriented development strategy left the rural sector relatively underdeveloped. Increasing income disparity between the industrial and agricultural sectors became a serious problem by the 1970s and remained a problem, despite government efforts to raise farm income and improve living standards in rural areas.

By the early 1970s, however, the industrial sector had begun to face problems of its own. Up to that time, the industrial structure had been based on low value-added and labor-intensive products, which faced increasing competition and protectionism from other developing countries. The government responded to this problem in the mid-1970s by emphasising the development of heavy and chemical industries and by promoting 100investmstment in high value-added, capital-intensive industries.

The structural transition to high value-added, capitalintensive industries was difficult. Moreover, it occurred at the end of the 1970s, a time when the industrial world was experiencing a prolonged recession following the second oil price shock of the decade and protectionism was resulting in a reduction of South Korean exports. By 1980 the South Korean economy had entered a period of temporary decline: negative growth was recorded for the first time since 1962, inflation had soared, and the balance-of-payments position had deteriorated significantly.

In the early 1980s, Seoul instituted wide-ranging structural reforms. In order to control inflation, a conservative monetary policy and tight fiscal measures were adopted. Growth of the money supply was reduced from the 30 percent level of the 1970s to 15 percent. Seoul even froze its budget for a short while. Government intervention in the economy was greatly reduced and policies on imports and foreign investment were liberalized to promote competition. To reduce the imbalance between rural and urban sectors, Seoul expanded investments in public projects, such as roads and communications facilities, while further promoting farm mechanization.

These measures, coupled with significant improvements in the world economy, helped the South Korean economy regain its lost momentum in the late 1980s. South Korea achieved an average of 9.2 percent real growth between 1982 and 1987 and 12.5 percent between 1986 and 1988. The double digit inflation of the 1970s was brought under control. Wholesale price inflation averaged 2.1 percent per year from 1980 through 1988 consumer prices increased by an average of 4.7 percent annually. Seoul achieved its first significant surplus in its balance of payments in 1986 and recorded a US$7.7 billion and a US$11.4 billion surplus in 1987 and 1988 respectively. This development permitted South Korea to begin reducing its level of foreign debt. The trade surplus for 1989, however, was only US$4.6 billion dollars, and a small negative balance was projected for 1990 (see table 2, Appendix).

In the late 1980s, the domestic market became an increasing source of economic growth. Domestic demand for automobiles and other indigenously manufactured goods soared because South Korean consumers, whose savings had been buoyed by double-digit wage increases each year since 1987 and whose average wages in 1990 were about 50 percent above what they had been at the end of 1986, had the wherewithal to purchase luxury items for the first time. The result was a gradual reorientation of the economy from a heavy reliance on exports toward greater emphasis on meeting the needs of the country's nearly 43 million people. The shifts in demand and supply indicated that economic restructuring was underway, that is, domestic consumption was rising as net foreign demand was falling. On the supply side, the greater growth in services mirrored what the people wanted--more goods, especially imports, and many more services.

By 1990 there was evidence that the high growth rates of the late 1980s would slow during the early 1990s. In 1989 real growth was only 6.5 percent. One reason for this development was the economic restructuring that began in the late 1980s--including the slower growth of major export industries that were no longer competitive on the world market (for example, footwear) and the expansion of those industries that were competitive, such as electronics.

Data as of June 1990