Foreign capital and development strategy in Korea

Foreign capital and development strategy in Korea SangChulSuh KOREA UNIVERSITY THE main purpose of this article is to examine the role of foreign capital in Korean economic development. In order to set out a general framework of analysis, we begin with a brief review of major controversies over the effects of foreign capital in developing countries. Then we proceed to the analysis of the Korean experience, including the choice of development strategy, accelerated growth, impact on trade, efficiency in the use of foreign capital, microeconomic problems, and prospects for the future—all connected with the inflow of foreign capital. As the main theme of this article, it will be shown that the effects of foreign capital in developing countries are largely determined by the type of development strategies carried out by the governments of those countries. In the study of the Korean economy it is convenient to distinguish between the high-growth period of 1962 to 1973 and the adjustment period after the oil crisis (1974 and thereafter). This analysis will deal mainly with the period of 1962 to 1973. The late 1970s will be included only in connection with a discussion of the long-term prospects of the Korean economy. 1. Controversies overForeign Capital Most developing countries now have more than thirty years of experience with capital inflows from the advanced countries. Yet controversies over the role of foreign capital in the growth of developing countries still prevail in the literature of development economics. Those who value highly the contributions of foreign capital stress the net addition of resources along with technical know-how by the im- 68SUH portation of foreign capital. The direct and indirect benefits usually exceed the payments to the capital owners.1 On the other hand, those who question the development effects of foreign capital argue that the capital owners exploit the type of development financed by foreign capital.2 A new form of colonialism may be established. "Whatever legal organization is used to conform with the national laws of ownership, capitals of the center use a variety of institutional mechanisms, e.g., foreign subsidiaries, joint ventures, and corporate devices (management fees, patent and franchise royalties, intracompany pricing marketing fees) to effectively transfer profits to the center and maintain control over the production process."3 In addition, some agree that the inflow of foreign capital often substitutes for domestic savings (not a net addition to it) and causes distortion of resource allocation , raising the capital-output ratios.4 These are the controversies over foreign capital as it brings both additional resources and new obligations . Once the potential contribution of foreign capital is recognized, the next step is to estimate the amount of foreign capital requirements. Most studies on the subject investigate the internal and external gaps, savings function, capital-output ratios, and so on.3 This approach may be useful when the growth targets and development strategies are given. However, when the question is asked concerning the type of development strategy and targets chosen, as we do in this article, this approach is not helpful. The availability of foreign capital makes it possible to consider alternative development patterns that would not be open to the country in the absence of foreign capital. The widening of development options available to the developing countries is perhaps the most important role of foreign capital for the growth of these countries. Thus, the contributions of foreign capital must be examined in connection with the development strategies chosen and their consequences. The negative effects of foreign capital are often caused by the shortcomings of the development strategy chosen rather than by the intrinsic nature of foreign capital. The case study of the Korean experience will shed some light on the controversies connected with the role of foreign capital. It is well known that the Korean economy, since the early 1960s, has shown remarkable achievements by any international standard. For example , the overall growth rate of the economy during the 1960s was the highest among the large developing countries (see Table 1). The rapid growth of Gross Domestic Product (GDP) was accompanied by the dramatic expansion of international trade. Given Korea's poor natural FOREIGN CAPITAL AND DEVELOPMENT STRATEGY 69 resources...