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Economic development, welfare, and income distribution in South Korea

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Economic development, welfare, and income distribution in South Korea
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Lee, Kaying
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60 leaves : illustrations ; 29 cm

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Subjects / Keywords:
Public welfare -- Korea (South) ( lcsh )
Income distribution -- Korea (South) ( lcsh )
Economic history ( fast )
Income distribution ( fast )
Public welfare ( fast )
Economic conditions -- Korea (South) ( lcsh )
Korea (South) ( fast )
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bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )

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Bibliography:
Includes bibliographical references.
General Note:
Submitted in partial fulfillment of the requirements for the degree, Master of Arts, Department of Economics.
Statement of Responsibility:
by Kaying Lee.

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|University of Colorado Denver
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Auraria Library
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All applicable rights reserved by the source institution and holding location.
Resource Identifier:
25983303 ( OCLC )
ocm25983303
Classification:
LD1190.L53 1991m .L43 ( lcc )

Full Text
UNIVERSITY OF COLORADO AT DENVER
ECONOMIC DEVELOPMENT, WELFARE, AND INCOME DISTRIBUTION
IN SOUTH KOREA
A THESIS SUBMITTED TO THE
FACULTY OF THE DIVISION OF THE LIBERAL ARTS
IN CANDIDACY FOR THE DEGREE OF
MASTER OF ARTS
DEPARTMENT OF ECONOMICS
BY
RAYING LEE
DENVER, COLORADO
MAY 1991


This thesis for the Master of Arts
degree by
Kaying Lee
has been approved for the
Department of
Economics
by
Steven G. Medema
Date


Lee, Kaying (M.A., Economics)
Economic Development, Welfare, and Income Distribution In
South Korea.
Thesis directed by Professor W. James Smith.
This study investigates the relationship between
economic growth, income distribution and social welfare
of South Korea from 1965 to 1982.
The first objective of this study is a cross
sectional analysis of income distribution. This part of
the study is the most important aspect of this thesis
work.
The second objective is to review the economic
development and growth rates of Gross National Product
(GNP) and the impact of economic growth on income
distribution in South Korea.
These results are then used to analyze the effects
of development on income distribution and welfare in
South Korea from 1965 to 1982.
Economic development fostered by the Long-Term
plan, initiated in 1962, set the stage for rapid economic
growth. This growth was due in part to the ability of
the South Koreans to expand social overhead capital,
exports, and import substitutions. These accomplishments
were the result of the South Korean government's efforts
in improving the educational system, and encouraging
technological progress. In a short period of time South
Korea transformed from an underdeveloped nation to a


leading industrialized country. South Korea enjoys a
relatively higher standard of living as demonstrated by
the generalized Lorenz dominance criterion.
This study demonstrates, for the case of South
Korea, a positive relationship between economic growth
and welfare.
The form and content of this abstract are approved.


TABLE OF CONTENTS
Chapter
I. INTRODUCTION ................................ 1
II. SOUTH KOREA'S ECONOMIC DEVELOPMENT PROCESS . 3
The Traditional Korean Economy ....... 3
Korea's Economy Under Japanese Control. 5
The Syngman Rhee Years, 1945-1960 .... 8
The Park Chung Hee Years, 1961-1980 . . 10
Production Comparison ................... 13
South Korean Economic Decisions .... 18
Korean Economic Policies ................ 20
Export Factors Which Aid
Economic Growth ...................... 23
Technological and Educational
Factors Which Aid Economic Growth . .25
Developmental Achievement ............... 28
III. MEASURES OF INCOME INEQUALITY AND
SOCIAL WELFARE .......................... 32
Measures of Inequality .................. 32
Income Distribution and Social Welfare 37
IV. AN APPLICATION TO SOUTH KOREA................43
V. CONCLUSIONS..................................56
BIBLIOGRAPHY ........................................ 58


LIST OF ILLUSTRATIONS
Figure
2.1 Exports and Imports in 1953-61 .............
2.2 Trends of Prices 1952-1961 .................
2.3 Comparison of Export Products ................
3.1 Hypothetical Lorenz curve ....................
4.1 Lorenz Curves for South Korea, 1965 and 1970
4.2 Lorenz Curves for South Korea, 1970 and 1976
4.3 Lorenz Curves for South Korea, 1976 and 1982
4.4 Lorenz Curves for South Korea, 1965 and 1976
4.5 Lorenz Curves for South Korea, 1970 and 1982
4.6 Composite Generalized Lorenz Ordinates for
South Korea, 1965, 1970, 1976, and 1982
10
16
26
36
45
46
47
48
49
54


LIST OF TABLES
2.1 Growth of the South Korean Economy
After World War II...........................17
4.1 Income Inequality in South Korea
1965, 1970, 1976, 1982 ...................... 44
4.2 Generalized Lorenz Ordinates of South Korea
1965, 1970, 1976, 1982 ...................... 52


ACKNOWLEDGEMENTS
It is with gratitude that I acknowledge the valuable
guidance, time and encouragement given to me throughout
this entire study by Dr. W. James Smith, my thesis advisor;
Dr. John R. Morris; and Dr. Steven G. Medema.
My gratitude and appreciation also are due to my
family: my wife, Chia Vang; and my three children,
Katherine, Naothia, and Kang Cha. They have given me
prayers, understanding and encouragement. Indeed, it has
been a difficult time for them. I place all of them deeply
in my heart.
I would like to thank Ronald Feldman for his countless
hours proofreading this paper.
Last but not least, I thank God for the many blessing
bestowed upon me and my family.
Denver, Spring of 1991
Kaying Lee


CHAPTER I
INTRODUCTION
South Korea has achieved remarkable economic growth
over the last two and a half decades. It has been
universally recognized as an economic success story, and
is ranked as one of the world's fastest growing nations
(Field 1984) South Korea's economic success began
shortly after the Korean War, with the country
transforming itself in a short time from an
underdeveloped nation to a leading industrialized country
(Lau 1986).
South Korea's economic development was restrained by
World War II and the Korean War. The Japanese occupation
of Korea during World War II restricted and constrained
an effective utilization of resources. The Korean War
that came after the division of the country into North
and South placed the South at a severe disadvantage, most
heavy industrial and electrical generation bases were
located in the Northern Zone and most of its resources
were destroyed (Macdonald 1988).
South Korean economic development did not become
significant until 1961 (Korea Development Institute
1975), eight years after the end of the Korean War.
Since then, South Korea has sustained one of the longest


and highest national economic growth rates in history.
At the same time, South Korea moved towards a relatively
more equal distribution of the benefits of its economic
growth (Todaro 1985, Jang-Ho 1986, Koo 1984, and Field
1984). The purpose of this study is to employ recently-
developed techniques such as the Lorenz dominance and
generalized Lorenz dominance to document Korea's economic
turnaround. This study involves tracing South Korea's
economic growth, and reviewing South Korea's income
distribution and social welfare.
The plan of this paper is as follows: Chapter 2
briefly summarizes South Korea's economic development,
and development policies, with special attention to the
sources of the country's growth. Chapter 3 gives a brief
discussion of the standard measures of inequality and
social welfare. Chapter 4 focuses on the income
distribution of South Korea across time by applying the
Lorenz dominance and the generalized Lorenz dominance
criterion as developed by Atkinson (1970) and Shorrocks
(1983). Chapter 5 will provide brief concluding remarks.


CHAPTER II
SOUTH KOREA'S ECONOMIC DEVELOPMENT PROCESS
In 1962 South Korea launched its first full-scale
economic development plan, eight years after cessation of
hostilities in the Korean War (Korea Development
Institute 1975). The Long-Term Plan set the stage for
the subsequent rapid growth, modernization, and self-
sufficiency experienced over the next twenty-eight years
(Macdonald 1988) To understand this change, an overview
of the traditional economy is useful.
The Traditional Korean Economy
Traditionally, Koreans were predominantly
subsistence farmers raising rice and other grains and
supplying most of their basic needs through barter. This
was supplemented by markets at five-day intervals in
larger towns and by itinerant vendors who supplied needs
the villages could not meet alone. Public officials were
compensated for their services with grain. This practice
continued until late in the Choson Dynasty, in the early
1800s (Frank 1975). In principle, land was allotted to
all the people according to their needs, and taxes on
land would be equitably raised to support government
activity. In practice, however, land gravitated into the


4
hands of the aristocratic yangban class, whose members
then exempted themselves from taxation. To preserve tax
revenues, taxes were raised on a decreasing base of non-
exempt land, forcing many lower class into tenancy or day
labor. "From the mid-seventeenth century on, money
increasingly replaced grain in payment of taxes and
purchases of goods by the court and aristocracy"
(Macdonald 1988, 180).
As Macdonald (1988) notes: the major manufactured
goods of the period consisted principally of cloth,
furniture, cooking and eating utensils, articles of
personal adornment, and paper largely produced by
artisans of low social status in scattered population
centers. Many of the more gifted artisans were in the
service of, or commissioned by, the court and
aristocracy. Such items as hemp cloth and paper were
produced for export to China and periodic tribute
missions, serving as a principal channel of foreign
trade. Other channels of trade included the trading
stations maintained by the Japanese and Chinese near the
Korea's southeast city ports. There were wealthy
merchants and artisans but they did not develop a
financial network, and they tended to enter the
aristocracy, often by purchasing rank.
The yangban neglected commercial activities. They
accumulated wealth from the perquisites of office and


5
their estates. This caused the gap between wealth and
poverty to widen, and from the middle of the Choson
dynasty, state revenues shrank. Wealthy landlords and
officials did not often invest in manufacture or commerce
(Macdonald 1988).
As Macdonald pointed out:
Although a North Korean scholar has
maintained that Korean private investment in
enterprise such as mining and iron
manufacturing activity began as early as the
eighteenth century, it did not appear on a
significant scale until after the Western
penetration had begun, toward the end of the
nineteenth century, and did not reach major
proportions until the period of Japanese
control. (Macdonald 1988, 182)
Korea7 s Economy Under Japanese Control
Korea's economy remained relatively the same until
the Japanese occupation. During nearly forty years (1909
to 1945) of occupation, the Japanese installed an
industrial superstructure that was geared to their own
needs. During this period, Korea was treated as an
extension of the Japanese economy. Korea was used
to supplement Japanese short-falls in such critical areas
as rice and other grains. As a result of these policies,
Korea became a Japanese imperial colony where the
Japanese-installed industries were managed by and
benefitting Japanese only, with the exception of some
urban labor workers (Jin 1972). The majority of the
Korean people remained in the traditional agrarian


6
economy. In this era, the economy of Korea were
relatively poor (Macdonald 1988).
The Japanese, however, did bring some benefits to
Korea. For instance, they built many roads, railroads,
and public works. They also expanded education at the
elementary-school level (from an enrollment of 20,000 in
1919 to 900,000 in 1937), and they introduced factory
discipline to an industrial labor force which totalled
nearly 200,000 by 1938 and grew even more during the war
years. There were another 2 million Koreans in Japan who
worked in industrial plants (Macdonald 1988).
The welfare of the general public did not improve
during this period. Grain consumption per capita by
Koreans, according to Japanese statistics, diminished to
about 5 bushels per month in 1930-33. As the public was
forced to endure this, rural starvation increased. The
real Gross National Product in Korea for 1938 was
equivalent to $63 per capita, compared with $179
for Japan (Macdonald 1988) .
Although the net commodity product in Korea grew at
a rate of 2 percent per capita from 1909 to 1945, this
growth probably did not benefit most Koreans. According
to Macdonald, despite Japanese efforts at educating the
Koreans, 87 percent of the Korean population had less
than six years of education in 1945.
During World War II, the Japanese drew heavily on


7
Korean resources.
Factories were diverted to military production;
forested hillsides were stripped for timber and
fuel; industrial plants depreciated; metals,
including family heirlooms of brass, were
ruthlessly collected and melted down to make
ammunition. In their final weeks, when
surrender appeared certain, the Japanese gave
their workers a year's salary in advance and
paid savings deposits and insurance policies in
full, flooding the currency market and creating
galloping inflation. The departure of all the
Japanese at the end of the war, including the
managerial elite, was politically necessary.
But the Koreans were left without managers,
markets, or raw materials for rundown
industrial plants that were not designed to
serve Korean needs. (Macdonald 1988, 183)
When World War II ended In 1945, Korea was divided
into North and South zones. The Korean war began shortly
after. During the War, South Korea's economy was
devastated. Many of its resources were destroyed and
most of the resource bases or generators were located in
the Northern Zone. Almost all facilities for light
industry were destroyed during the War. The South Korean
government estimates damage during the War to be: $512
million for dwellings, $475 million for public utilities,
$232 million for medical facilities, $354 million for
industrial facilities and $422 million miscellaneous.
The estimated total damage reached $3 billion, including
$1.3 billion incurred by social overhead capital such as
transportation and communication facilities (Korea
Development Institute 1975).


8
The Svngman Rhee Years, 1945-1960
In 1945, the developed natural resources and
industrial facilities of Korea were centered primarily in
the Communist-held North. This included 87.6 percent of
electric power generating facilities. The severe
imbalance of resources resulted in inflation and a
shortage of materials, which in turn threatened security
and fostered violent political chaos and social strain
for South Korea (Korea Development Institute 1975) .
Although trade between the two zones was not totally
cut off until the Korean War, it was severely hampered.
North Korea cut off the supply of electricity to South
Korea in May 1948, depriving the South of over half of
its already inadequate power. According to Macdonald,
The desperate South Koreans sought fuel where
they could, further denuding the already bare
hillsides and actually ripping up Japanese-
owned houses and factories for firewood. At
the same time, the population of South Korea
increased by 20 percent (approximately four
million) by 1951 with an influx of Korean
repatriates from Japan and refugees from the
Communist regime in the North. Food production
was also hindered by a fertilizer shortage.
South Korean daily caloric intake fell to less
than 1,500 per person in 1946-47. (1988, 183)
The economic development policies of the Syngman
Rhee administration which came into power in May 1948 at
first were naive. Neither President Rhee nor his
administrators understood economics, and for
nationalistic reasons were disinclined to take U.S.


advice. They were also preoccupied with a large-scale
guerrilla challenge to their political control.
It took eighteen months of dire economic
experience and a stern U.S. diplomatic demarche
(based on the leverage of economic aid, long-
delayed but finally enacted) to turn things
around. Nevertheless, there were good harvests
in 1948 and 1949. A U.S.-financed consulting
firm produced a rudimentary economic
development plan, stressing coal, electric
power, and fertilizer production. Industrial
production rose by 50 percent in 1949-1950,
coal, by 40 percent, electric power, by 33
percent. For South Koreans as a whole, 1949-
1950 was probably the best year they had had in
a decade. Despite formidable obstacles, the
South Korean economic outlook in the Spring of
1950, in the eye of U.S. observers, was
reasonably optimistic. (Macdonald 1988, 185)
South Korea began reconstruction after the 1953
Armistice, but was hindered by the burden of maintaining
large armed forces. The United States committed $1
billion in grant aid over the next three years to South
Korea's reconstruction process. Economic aid to South
Korea from 1953 to the mid-1970s totalled approximately
$6 billion, with an additional $7 billion in military
assistance (Macdonald 1988) The strategy of President
Rhee and his supporters was to maximize foreign aid,
overvalue the currency, meet government deficits by
printing money and bonds, force interest rates down, and
focus on import substitution for economic growth.
Business loans and titles to former Japanese enterprises
were often granted for political rather than economic
reasons. The result of these policies was inflation,


10
speculation in land and goods, and the discouragement of
savings and investment. "Although U.S. advice mitigated
some of the economic naivete and misdirection, much of it
was resisted by the Koreans for reasons of both principle
and political expediency" (Macdonald 1988, 186).
Moreover, some U.S. advice was not completely sound,
particularly from the point of view of the Koreans. For
example, U.S. agricultural representatives pushed wheat
sales to the detriment of Korean rice farmers. The South
Korean economy showed approximately a 4 percent average
annual real economic growth rate for the period 1953-
1962. Population growth of nearly 3 percent a year
absorbed most of the economic growth. The remaining per
capita increase of around 1 percent, which probably had
dropped to zero or less in the last Rhee years, was not
enough to meet popular expectations. In these years, U.S.
grant aid was becoming counterproductive by fostering
dependence and by discouraging Korean agricultural and
industrial growth (Macdonald 1988). See Figure 2.1 on
the trends of South Korea exports, imports, and foreign
aid from 1953 to 1961.
The Park Chung Hee Years, 1961-1980
General Park Chung Hee and his supporters, seizing
political power in 1961, recognized the need for economic
progress and committed themselves to bring it about.


In million dollars
Years
Total Exports + Foreign Aid o Total Imports
Figure 2.1: Exports and Imports in 1953-61.


12
At first, however, they embarked on a series of
rash and ill-advised economic actions including
deliberate rigging of the stock market, a purge
of leading businessmen, manipulation of the
banks, and an abortive capital levy in
conjunction with currency reform, which brought
about further confusion and confrontation with
U.S. aid officials. (Macdonald 1988, 187)
The new government learned quickly from its
mistakes. With the assistance of the United States
during the Kennedy administration, it developed its first
full-scale economic development plan (The First Five-
Year Plan) in 1962. It was based on export expansion
(Macdonald 1988). The economy achieved rapid growth and
modernization. Real Gross National Product grew by an
average annual rate of 9.4 per cent during the period
from 1962 to 1974. During the same period, the per-
capita gross national product almost tripled in real
terms. Industrialization and export expansion led the
growth of the overall economy. There was substantial
progress made in the modernization of industry and in the
improvement of people's living standards (Lau 1986).
South Korea's economy continued to maintain a rapid
pace of economic expansion and modernization despite the
world-wide recession following the international oil
crisis and through the 1980s (Macdonald 1988). This is
unquestionably the result of the diligent and strenuous
labors of the Korean workforce and the timely and
effective implementation of policy (Field 1984).
Through the First Five-Year Plan, 1962-1966, South


13
Korea hastened industrialization by developing sources of
electricity and coal, and expanding social overhead
capital (paving roads and constructing factories). This
was complemented with increasing exports and developing
import substitution industries, and increasing
agricultural productivity. The rapid economic
development achieved in the last decade is the result of
vigorous efforts to cast off the shackles of poverty (and
to lead a better life) (Korea Development Institute
1975) .
Production Comparison
In 1951, industrial manufacturing consisted of 15
percent metal extraction, 10 percent machine industry, 30
percent chemicals, and 35 percent textiles. In 1960, the
share of manufactured goods in the Gross National Product
(GNP) was only 10.8 percent, and that of mining and
manufacturing 12.1 percent. In contrast, that same year
the percentage of GNP stemming from 'agriculture, forestry
and fisheries was 41.3 percent, and social overhead
capital and other services, 46.6 percent. In other
words, agriculture and tertiary industries accounted for
90 percent of the economy while manufacturing only
accounted for 10 percent (Korea Development Institute
1975).
The First Five-Year Plan, 1962-1966, brought about
significant improvement in the industrial sector. The


14
percentage shares of Gross National Product by industry
in 1973 were: 22.8 percent for agriculture, forestry and
fisheries; 29.4 per cent ,for mining and manufacturing;
and 47.8 percent for social overhead capital and other
services (Korea Development Institute 1975).
Before the First Five-Year Plan (1962-1966) was
initiated, South Korea had to rely heavily on foreign aid
to survive. Foreign aid totalled $3 billion from 1945
through 1961. An average of $300 million of foreign aid
flowed into Korea annually in the three years 1956-58.
As for balance of payments, imports outweighed exports by
a wide margin. This deficit in the balance of payments
had been a characteristic of the Korean economy.
Before 1960, almost all manufactured
commodities were imported and primary products
like food-grains and raw cotton also had to be
procured largely through the United States
Surplus Agricultural Commodities under Public
Law 480. (Korea Development Institute 1975,
14)
The major export items were mainly primary products
such as tungsten, iron ore, fish, raw silk, agar-agar,
rice, and coal. Foreign exchange earnings from these
exports were too small to meet Korea's import
requirements. As a result, the deficit of trade balance
was substantial. In 1957 and 1958 imports exceeded
exports 20-fold. Furthermore, 80 percent of imports had
to be financed by foreign aid funds. Despite declining
aid after 1957, the government did not realize the


15
urgency of increasing exports (Korea Development
Institute 1975) -
During the eight years following the Armistice
(1954-1961), chronic inflation was experienced because of
inappropriate management of the money supply. According
to the Korean Development Institute (1975), inflation
caused instability of national life, mis-allocation of
resources, rash speculation, and low domestic savings
vitally needed for growth, which in turn acted as a
deterrent to economic development. Wholesale prices
increased at an average annual rate of 22.2 per cent. In
particular, prices skyrocketed during the four years 1954
to 1957 (see Figure 2.2). Inflation was momentarily
suppressed in 1958 due to the large-scale influx of
foreign aid as well as a sudden drop in imported grain
prices. Inflation became a serious problem again in 1960
(Korea Development Institute 1975).
Inflationary pressures and economic instability were
the main factors halting efficient mobilization of
domestic savings. Real GNP grew at an average annual
rate of only 4.4 percent over the period 1953-61. Per
capita GNP stood at a low level of $83 in 1961 (see Table
2.1). Such low per capita income resulted in a low
national savings rate of 4.3 percent, increasing the
economy's heavy dependence on foreign aid for capital
finance (Korea Development Institute 1975) .
/


Prices(1970=100)
KD
Figure 2,2: Trends of Prices 1952-1961


TABLE 2.1
GROWTH OF SOUTH KOREAN ECONOMY AFTER WORLD WAR II
Gross National Product Per Capita Gross National Product Real GNP Growth Exports
year in billion won in million dollars in won in dollars % in billion dollars
1949 - 1800 - 89 - 0.01
1953 - 1400 - 65 6.0 .35
1957 1700 - 80 8.8 .43
1961 297 2124 13301 83 2.1 0.05
1966 1032.4 3655 35648 126 12.7 0.25
1971 3151.5 9848 99020 275 8.8 1.07
1973 4928.7 12374 149414 376 14.1 3.23
1977 37456 - 1027 12.7 10.05
1982 - 69300 - 1762 5.4 21.85
1986 - 94300 - 2274 12.5 34.72
source: Korea Development Institute, Korea's Economy, Past and
Present, Aug. 1975; Macdonald, Donald. The Koreans: Contemporary
Politics and Society, Boulder: Westview Press, 1988, Table 6.1.


18
The rate of return on bank deposits was far below
the rising rate of price, hence discouraging savings by
private individuals. The national government as well as
private households had no alternative but to incur
deficits (Frank 1975).
South Korean Economic Decisions
In order to implement a successful economic
development plan, it was necessary for the government to
make many important decisions. These are summarized as
follows:
First, the system of "guided capitalism" was adopted
as a basic principle. This system allowed the government
to take either a direct or indirect part in guiding key
industries. In other words, the basic economic system
was free enterprise with government guidance (Frank
1975) .
Second, realizing that the ultimate strength of
industrialization is capital formation which is required
to meet investment needs, the government exerted great
effort to increase domestic savings and to encourage the
inflow of foreign capital (Korea Development Institute
1975) .
In 1962, the year in which the First Five-Year Plan
was launched, the government made an emergency currency
reform in an effort to curb inflation and to mobilize
domestic savings. Although the currency reform was not


19
fully successful, it initiated the goal of stabilization
of the national economy. In 1963 the government
formulated the Financial Stabilization Program to curb
inflation and in 1965 adjusted interest rates to
realistic levels (Korea Development Institute 1975) .
The objective of the First Five-Year Plan (1962-
1966) was to increase production, export, and social
overhead capital. The most urgent task in launching the
plan was to expand capital in electric power generation,
transportation, and communications, which were believed
to be the foundation of industrialization. The
government felt that an environment in which private
enterprise erects factories and enhances production
activities could be created only through the expansion of
infrastructure (Korea Development Institute 1975).
During the First Five-Year Plan (1962-66), the
government allocated 32 percent of total fixed capital
investment to the expansion of social overhead capital.
The government argued that it is difficult for a private
enterprise to invest in the social overhead sector
because the gestation period of capital in that sector is
long and because of public good considerations.
Consequently, the government found it desirable to make
the requisite investments (Korea Development Institute
1975) .
During the period of the First Five-Year Plan (1962-


20
1966), social overhead capital was expanded as follows:
the generation capacity of electric power was doubled,
rising from 367,000 kilowatts in 1960 to 769,000
kilowatts in 1966, thereby making a plentiful supply
possible. The length of railway lines for industrial use
was extended by 240 kilometers to 1,699 kilometers. The
government built or imported 2,740 coaches and freight
cars and 215 locomotives to cope with transportation
demand, which was increasing annually at a 20 percent
rate. At the same time, the government expanded the
network of roads for industrial use, constructed or
restored 400 bridges, improved 122 kilometers of old
roads, and paved 500 kilometers of new ones. The
capacity of marine transportation was also increased
through "better use of ports (Korea Development Institute
1975) .
Korean Economic Policies
At the beginning of the First Five-Year plan,
official loans to South Korea from the United States and
Germany made up a large portion of foreign capital (see
Figure 2.1) because conditions for development were not
advanced enough and because of the poor creditworthiness
of private enterprises. Commercial loans based on
private credit and direct investments were also gradually
introduced (Baldwin 1981) .
Beginning in 1965, inducement of commercial loans on


21
a private basis sharply increased, thanks to the growing
creditworthiness of the Korean economy which began to be
internationally recognized. Development funds flowed in
from the United States, Germany, Japan, France, the
United Kingdom, Italy, and such international financial
institutions as the International Monetary Fund and
International Bank for Reconstruction and Development
(Korea Development Institute 1975).
Foreign capital formed 52 percent of total
investment during the First Five-Year Plan (Stoever
1986). Along with promoting international cooperation,
the government devoted itself to the expansion of exports
and free trade. As a result, exports rose at an annual
average growth rate of 43 per cent (Korea Development
Institute 1975).
The objective of the First Five-Year Plan was to
provide a basic foundation for achieving industrial
modernization and a self-supporting economy; the
objective of the Second Five-Year Plan (1967-1971) was to
sustain and continue the growth process. The goals of
the second plan were: (i) to increase the speed of
industrialization through construction of heavy
industries such as steel and machinery; (ii) to expand
exports and promote import substitutes; (iii) to promote
the advancement of scientific technology; (iv) to expand
the foundations of agricultural production through


22
farmland consolidation; (v) to expand irrigation
facilities; and (vi) to maintain a high rice price policy
and carry out special projects in order to equalize farm
and fishery incomes with that of the industrial sector
(Korea Development Institute 1975).
Building on the industrialization achieved during
the First Five-Year Plan, the government pushed forward
the Second Five-Year Plan (1967-1971), focusing on the
mobilization of investment funds, the development of
steel, machinery, petrochemicals, and other heavy
industries as well as export industries. Great progress
in the development of electric power was realized with
the construction of 15 hydroelectric and thermal power
plants and six diesel power plants. The Honam Refinery
and Kyung In Energy Co. began operation in 1969 and 1971
respectively, adding substantially to South Korean energy
supplies (Korea Development Institute 1975).
Contributing to South Korea's increasing exports,
textiles and plywood grew conspicuously, and they grew to
such an extent that South Korea became a world famous
exporter of these products. The value of commodity
exports exceeded $700 million in 1969, and reached $1,352
million in 1971 (Korea Development Institute 1975).
With the successful implementation of the First and
Second Five-Year Plans, Korea achieved rapid economic
growth through increased exports, which laid a firm


23
foundation for a self-supporting economy. In the Third
Five-Year Plan (1972-76), the government emphasized the
development of heavy and chemical industries. In
accordance with the New Community Movement, policies also
emphasized the further development of farming and fishing
villages. In addition, export and trade were expanded
and improved, and an emphasis was placed on the
development and teaching of scientific technology (Korea
Development Institute 1975)..
The development of heavy and chemical industries was
the last step in industrial modernization and the
achievement of a self-supporting economy. As the light
industries that led to export expansion reached maturity,
imports continued to grow due to the dependence on
foreign raw materials in these light industries. It was
deemed desirable to construct heavy and chemical
industries in order to fundamentally reduce this
dependency, thus, stimulating net export growth. New
policies to develop farming and fishing villages were
instituted to foster self-sufficiency in food and promote
balance between agriculture, fishing, and heavy industry.
Export Factors Which Aid Economic Growth
Industrialization and export promotion have been the
major policy goals of economic development efforts.
Therefore, redirection of the South Korean economy into
an open system has been a prerequisite since the First


24
Five-Year Plan. There was a need for labor-intensive
export products which were expected to augment national
wealth by earning foreign exchange and also to enhance
production and employment through increased demand (Korea
Development Institute 1975) .
Accordingly, the government placed considerable
emphasis on exports.
Export promotion conferences that were
inaugurated in December 1962 and chaired by the
President have been held monthly ever since.
Export promotion has been advocated as of first
importance among all economic policies, and the
primary concern in making policies for trade
administration, taxes, financing and fiscal
matters. (Korea Development Institute 1975,
34)
To contend with various unfavorable economic
factors, the exchange rate was readjusted to a more
realistic level in 1964. The measure resulted in
dramatic improvement in export profitability. Tax
concessions and adequate financing were adopted to
support effective and preferential export promotion. In
addition, the government took various measures to improve
trade administration and develop export industries (Korea
Development Institute 1975).
Export emphasis shifted from primary commodities
such as farm and marine products, to manufactured
products. Exports of heavy industrial and chemical
products, such as electronic goods and ships, were
preferred to light industrial products, such as textiles.


25
Marine and mineral goods accounted for 82 percent of
total export commodities in I960, but in 1973
manufactured products represented 88 percent of the total
exports (Korea Development Institute 1975) (see Figure
2.3).
Technological and Educational
Factors Which Aid Economic Growth
Progress in science and technology is an important
factor in industrial modernization and economic
development. The social welfare of a nation depends on
increases in per capita income. An important element in
raising productivity is technical progress (Papanek
1986) .
The South Korean government made promotion of
technology one of the major goals of the First Five-Year
Plan (1962-66), along with science education and business
management. Improving the levels of technology and
productivity were targets of the Second Five-Year Plan
(Korea Development Institute 1975) .
Aspects that were emphasized included introduction
of advanced foreign technology, systematic research and
development, diffusion of technical education,
improvement of industrial technology, cooperation between
industry and education, and strengthening of the
administrative system. Substantial efforts were made to
meet increasing demands for technicians through technical


In 100 million dollars
CO
CM
Years
Primary products + Manufactured Prod.
Figure 2.3: Comparison of Export Products.


27
education and training. Education in South Korea was
developed with a view toward quality as well as quantity
after 1945. The government attempted to improve
technical skills in the course of the economic
development of the 1960s. Since 1963, efforts have been
made to strengthen vocational training. The number of
students in technical high schools rose from 34,000 in
1963 to 82,000 students in 1972, a nearly three fold
increase; similarly, in the same period, engineering
school enrollment jumped from 15,000 to 38,000. Junior
technical colleges were established in 1967 and a
respectable 19,000 students were enrolled in 1972 (Korea
Development Institute 1975).
The government has also worked for the improvement
of industrial technology through direct policy supports.
In line with industrialization policies, the proportion
of heavy and chemical industries in the whole industrial
sector rose, and labor force needs changed from simple
manual workers to skilled technicians. This created
problems of technical training.
To meet the increasing demand for skilled manpower,
the government implemented short-term and long-term
manpower development plans, accomplished primarily
through on-the-job training programs. The number of
trained workers increased from 10,738 in 1967 to 48,640
in 1973, and 88 percent remained employed. Posts


28
available for on-the-job training also increased from 50
to 124 (Korea Development Institute 1975) .
The spread of on-the-job training and the
improvement of industrial skills have not only laid a
foundation for the development of the nation's heavy
industries, but have also enabled Korean technology to
operate abroad. Technical assistance to foreign
countries increased rapidly, from 46 in 1965 to 197 in
1973, of which 177 went to Asian countries, six to
African nations, three to Latin American states and five
elsewhere (Korea Development Institute 1975) .
The superiority of South Korean technology has been
demonstrated world-wide by Korean craftsmen. South
Korean rank second overall at the Twenty First
International Vocational Training Competition held in
August, 1973 in Munich, and they won six gold medals. To
utilize vocational education in the field more
effectively, the government established a program which
encouraged cooperation between vocational schools and
industry, in thus helping to meet increasing demands for
skilled technicians (Korea Development Institute 1975).
Developmental Achievement
Since 1962, South Korea has achieved remarkable
economic growth. During the First Five-Year Plan (1962-
66) the average annual real GNP rate reached 7.8,
surpassing the developed countries (5.1 percent) and


29
Southeast Asian countries (5.5 percent) and exceeding the
original target of 7.1 percent, which at that time had
been considered to be too ambitious (Korea Development
Institute 1975) .
During the Second Five-Year Plan (1967-71), the
economy further accelerated and recorded a real average
annual growth rate of 10.5 percent, which exceeded the
5.3 percent growth rate for developed countries and the
6.7 percent rate for Southeast Asian countries during the
same period (Korea Development Institute 1975).
During the Third Five-Year Plan (1972-76), South
Korea's economy was able to sustain this high growth
rate. The average real GNP growth rate during this
period amounted to 10.2 percent, far above the projected
rate of 8.6 percent and double the 5.1 percent growth
rate for developed nations and the 5.5 percent growth
rate for Southeast Asian countries (Korea Development
Institute 1975) .
In the next five years (1977-1981), South Korea
recorded an average real GNP rate of 5.9 percent. This
rate was lower due to the oil shock of the 1970s.
The overall average real GNP growth rate of 9.6
percent during the 12 years from 1962 to 1973 presents a
striking contrast to that of the preceding 12 years
(1954-61) when the average annual growth rate was only
4.4 percent (Korea Development Institute 1975). As a


30
result of such rapid economic growth, GNP rose to $12.4
billion (4,928.7 billion won) in 1973, 5.9 times GNP in
1961, before the implementation of economic development
(see Table 2.1). During this period, per capita GNP
increased from $83 (1961 dollars) in 1961 to $376 in 1973
(1961 dollars) (Lau 1986) .
During this twelve-year period, the average annual
growth rate in mining and manufacturing reached 18.2
percent, while agriculture, forestry and fisheries
recorded a somewhat lower growth rate of 3.8 percent.
Although this rate was low compared to the growth of the
other sectors in the economy. This rate was relatively
high when compared with the growth of the same sector in
other developing countries (Korea Development Institute
1975) .
The impressive performance of the Korean economy was
mainly due to the rapid growth in manufacturing and
social overhead capital and other service sectors. The
manufacturing sector in particular showed a remarkable
22.2 percent annual average growth rate since the Second
Plan (Korea Development Institute 1975).
The average real GNP for South Korea continued to
increase through the 1980s. From 1982 to 1986, South
Korea experienced an average annual real GNP rate of 8.65
percent and a per capita GNP of $94,300 billion
(Macdonald 1988).


31
The success of South Korea's economic development
was the result of the policies undertook by the Park
Chung Hee administration (1961-1980). This growth
process was fused by timely policies. These important
policies included, expanding the infrastructures,
increasing exports, increasing quality and quantity of
education and improving technology. Both the South
Korean private and public sectors have put utmost efforts
in making the industrial sector as efficient as possible.


CHAPTER III
MEASURES OF INCOME
INEQUALITY AND SOCIAL WELFARE
There are many techniques for measuring income
inequality, each with its own advantage. I will briefly
examine and critique the following techniques: relative
mean deviation, variance, the coefficient of variation,
the Gini coefficient, Distributive Share, and both the
Lorenz dominance and the recently developed generalized
Lorenz dominance principle.
Measures of Inequality
The degree of inequality of income can be measured
by utilizing such simple measures as the relative mean
deviation, variance, and the coefficient of variation.
Although their simplicity makes them attractive, these
measures are not widely used because they do not take
into account the skewness of the income distribution
(Bronfenbrenner 1971). For example the coefficient of
variation has a lower bound (at zero) but no finite upper
bound. These measures are also overly influenced by
extreme values.
Sen (1973) noted that relative mean deviation
compares the income level of each individual with mean


33
income. The calculation of the relative mean deviation
requires summing the absolute values of all the
differences between mean income and individuals' income
and dividing the result by total income (Dasgupta 1973).
Relative mean deviation is reported as a number between 0
and 1. When there is perfect equality, the relative mean
deviation equals 0. When there is perfect inequality,
the relative mean deviation approaches 1.
The main problem with this approach is that it does
not take into account transfers of income from one
individual to another individual which lie on the same
side of the mean income (Sen 1973). For example, for two
individuals whose income is greater than the mean, a
dollar transferred from a poorer individual to a richer
individual would increase one gap and decrease another
gap by exactly the same amount. Since relative mean
deviation is derived through the summing of all the gaps,
this will leave the relative mean deviation completely
unchanged (Sen 1973).
The variance measure, a common statistical measure
of variation, is derived by summing the square of the
differences between the mean income and individuals'
income (Sen 1973). The variance measure avoids the
transfer problem of the relative mean deviation. This
criterion has the property of increasing or decreasing
the variance when there is a transfer of income from a


34
poorer individual to a richer individual or from a richer
to a poorer individual. This is an attractive property
for measuring income inequality. Dalton (1920), who
pioneered the application of welfare analysis to income
inequality and income distribution (Smith 1989), argued
that any measurement of inequality must have this minimal
property. It is known as the principle of transfer
(Smith 1989) or Pigou-Dalton condition (Sen 1973) .
However, since a variance relies on mean income
level, it does not allow comparison of distributions with
different mean incomes. The distribution around a
smaller mean income will yield a relatively larger
variance than a larger mean income. For example, one
distribution may indicate a much lower variation than
another yet still have a greater variance when the mean
income level of that distribution is larger than that of
another distribution (Sen 1973).
According to Sen (1973), the coefficient of
variation is defined as the square root of the variance
divided by the mean income. This measure does not suffer
the deficiency which variance does and focuses on
relative variation. It takes into account income
transfers for all income levels, and it does not depend
on the mean income. However, the coefficient of
variation does not capture the skewing of income
distributions (Bronfenbrenner 1971).


35
One of the most popularly used measures of personal
income inequality in Western Europe and America is the
Gini coefficient of concentration (Kravis 1960). The
Gini coefficient can be defined in various ways. The
most standard definition relies on the Lorenz curve*.
The Lorenz curve relates the cumulative percent of people
ranked by income on the horizontal axis, and the
corresponding cumulative percent of total income on the
vertical axis (Figure 3.1) (Atkinson 1974). The curve
possesses interesting mathematical properties. Its slope
at every point is the ratio of the corresponding income
to the mean income (Bronfenbrenner 1971). If the
distribution is perfectly equal, the Lorenz curve will
coincide with a 45-degree line through the points (0,0)
and (100,100) (Figure 3.1) since any given percent of
population will have received the same percent of total
income. On the other hand, the Lorenz curve comprises
the horizontal base line and the right-hand vertical base
line if all the income goes to one recipient. These two
special cases have been labeled lines of equality and
inequality, respectively, in Figure 3.1. The Lorenz
* According to Bronfenbrenner (1971), this function is
known in English-speaking countries as the Lorenz curve,
and in Latin countries as the Gini curve. It was applied
to income inequality at approximately the same time, and
apparently independently, by two economist, the American
Max Lorenz and the Italian Carrado Gini (1905).


100
90
80
70
60
50
40
30
20
10
0
Cumulative % of recipients
Figure 3.1: Hypothetical Lorenz Curve
Inequality


37
curves should pass through the points (0, 0) and (100,
100), but otherwise will lie somewhere between the lines
of equality and inequality (Bronfenbrenner 1971).
The area between the Lorenz curve and the line of
equality becomes greater as a percentage of the right
triangle as the income distribution becomes more unequal.
In cases of great inequality, "the two areas (area of
inequality and triangle) will include almost identical
regions, so the ratio will approach 1." (Bronfenbrenner
1971)
In general, if there is perfect equality, the
Lorenz curve will simply be the diagonal (a 45-degree
line). If there is inequality where some groups enjoy a
proportionately lower share of income than others, the
Lorenz curve will lie below the diagonal, and "its slope
will rise as we move to richer and richer sections of the
population." (Sen 1973)
The Gini coefficient is the ratio of the area within
the Lorenz curve and the diagonal (Figure 3.1) to the
total area of the isosceles triangle under the line of
equality. The coefficient may range from 0 (no
inequality) to 1 (total inequality) (Sen 1973).
Income Distribution and Social Welfare
Dalton (1920) noted that any measures of economic
inequality must be concerned with economic welfare to
have any genuine meaning. He asserted that the most


38
worthwhile method of studying inequality and distribution
issues must satisfy three underlying principles of social
welfare: (i) additivity: a summation of all individuals
welfare functions to obtain an aggregate welfare function
(Sen 1973); (ii) symmetry: exchanges of two individual's
places in the distribution leaves social welfare
unchanged; and (iii) strict concavity: assumes
diminishing marginal utility function. Since the Social
Welfare Functions (SWF) of the Dalton class are
utilitarian and anonymous, welfare is unchanged if two
persons exchange places in the income distribution. With
the assumption of strict concavity, the SWF is biased
toward equality, and meets the requirement of the Pigou-
Dalton condition, which states that Income transfer from
a richer individual to a poorer individual raises social
welfare (Smith 1989).
The most commonly used technique of judging economic
progress is examining rates of growth of GNP. Todaro
(1978) argues that basing judgements of social welfare on
GNP is biased and inadequate. Todaro asserted that the
calculation of GNP growth is largely a calculation of the
rate of growth of the incomes of the upper 40% of the
population who receive a disproportionately large share
of the national product. It has little or nothing to do
with the overall welfare of an economy. Therefore, GNP
growth rates should not be used as an index of improved


39
social welfare.
Todaro suggested an alternative method for measuring
social welfare, "distributive share," where the index of
social welfare would be constructed on an "equal-weights"
or even a "poverty-weighted" index, with the latter
oriented toward eliminating inequality and poverty.
However, this method is purely arbitrary; that is, there
is no set of agreeable weight assignments to which all
would subscribe.
The Lorenz dominance criterion developed by Atkinson
(1970) fulfills all social welfare functions of the
Dalton class in addition to not being as arbitrary as
Todaro's distributive share criterion. It is a way of
accounting for both income distribution and the social
welfare function (SWF) of an economy without having to
worry about the weights of the SWF. Atkinson utilized
the Gini coefficient criterion, working from the Lorenz
curves with the joint cumulative distribution function of
total income and recipient units (Smith 1989).
Atkinson's theorem, proved that for populations of
equal size and means, distribution A will be preferred to
distribution B by all additive, strict concave SWFs if,
and only if, the Lorenz curve of A lies everywhere inside
the Lorenz distribution of B. Hence, Lorenz dominance
exists if distribution A's Lorenz curve lies completely
inside B's. For equal populations and means, social


40
welfare is greater with an income distribution which is
unambiguously more equitable. Social welfare of the two
distributions cannot be ranked if Lorenz curves
intersect. Thus, the Lorenz dominance criterion gives
only a partial ordering of distribution functions because
welfare conclusions cannot be drawn unless Lorenz
dominance exists. When there is a crossing of the Lorenz
curves, we can specify a set of weights to reverse any
conclusion (Smith 1989).
As useful as the result of Atkinson's theorem is, it
is applicable only within restricted classes of
distribution functions, namely, those with equal mean
incomes. In reality, more often than not, mean incomes
are not equal. Thus, Atkinson's model is limited in
application. To overcome this limitation, Shorrocks
(1983) developed the generalized Lorenz dominance
criterion (Smith 1989).
Shorrocks's theorem is based on the generalized
Lorenz curve that he obtained in a direct and unambiguous
manner from the ordinary Lorenz curve. The ordinate of
the generalized Lorenz curve is simply the product of the
mean income and the ordinate of the ordinary Lorenz
curve. The endpoint of the right-hand side of a
generalized Lorenz curve reflects the efficiency of an
economic system in generating income. Generalized Lorenz
curves, like Lorenz curves, are convex from below. The


41
curvature reflects income inequality. A social policy
which promotes economic welfare reflects income
inequality. A social policy which promotes economic
growth leaving the distribution of income unchanged will
shift the generalized Lorenz curve upward at all points.
A social policy which raises income while also affecting
the degree of Lorenzian inequality will change both the
height and curvature of the generalized Lorenz curve
(Smith 1989) .
Generalized Lorenz curves can be compared in
essentially the same manner as Lorenz curves.
Shorrocks1s theorem concluded that distribution A is
preferred to distribution B if, and only if, the
generalized Lorenz curve for A lies everywhere above that
for B. Thus, the welfare consequences of social policies
which promote both growth and inequality can be evaluated
by applying Shorrocks's theorem on generalized Lorenz
dominance (Smith 1989).
The usefulness of Shorrocks's theorem to evaluate
social welfare and income inequality has great potential.
When a nation has both population and income growth
through time, a generalized Lorenz curve is an
appropriate device for evaluating the social welfare
effects of the growth process, particularly when
inequality is rising.
There is one possible drawback of the generalized


42
Lorenz dominance criterion. It does not take into
account envy. When there is generalized Lorenz
dominance, but income distribution has deteriorated, envy
among individuals in the society has detrimental effects.
For example, if individual A's income rate has
deteriorated in comparison to individual B's income rate,
but the income has increased absolutely for both parties;
the generalized Lorenz dominance criterion will show
improvement in social welfare. Individual A, due to
envy, may protest against the result of the generalized
Lorenz dominance criterion. Envy may be expressed in
demonstrations, riots, and even revolutions against the
rich. Envy is very difficult to measure and quantify,
thus it may not be rational or efficient to base any
theory on it.
Other possible problems with the generalized Lorenz
dominance criterion are that it does not take into
account population changes and mobilities. It does not
account for changes in population and changes of income
places of individuals.


CHAPTER IV
AN APPLICATION TO SOUTH KOREA
This chapter investigates South Korea's income
distribution and social welfare using the Gini
coefficient, the Lorenz dominance, and generalized Lorenz
dominance principle. The data in Table 4.1 is from Jang
H. Yoo (Virginia Commonwealth University)*. There is no
comprehensive, or original data that covers all income
groups currently available. Moreover, all existing
statistics on household income were calculated indirectly
from raw data that has had serious sampling problems (Lau
1986, 128). These statistics, therefore, give only
probable size distribution. The data set in Table 4.1,
shows the income inequality in South Korea in 1965, 1970,
1976 and 1982. The table contains the mean income by
deciles as well as the overall mean. South Korea's
Lorenz curves are portrayed through time in Figures 4.1,
4.2, 4.3, 4.4 and 4.5. These figures compare the Lorenz
curve in 1965 to 1970; 1970 to 1976; 1976 to 1982; 1965
to 1976; and 1970 to 1982, respectively.
* The same data set from 1965 to 197 6 was cited in Lau,
Lawrence ed. (1986, 129) by Sung Yeung Kwack. According to
Kwack the sources are Choo, Hakchung and Daemo Kim (1978);
and the Economic Planning Board (1981, 351) .


TABLE 4.1
INCOME INEQUALITY IN SOUTH KOREA1965, 1970, 1976, AND 1982
Cumulative Proportion of Income Mean Income
Decile 1965 1970 1976 1982 1965 1970 1976 1982
1 1.32 2.78 1.84 2.56 36.96 113.42 119.60 247.55
2 5.75 7.34 5.70 6.86 124.04 186.05 250.90 415.81
3 12.22 13.15 10.63 12.32 181.16 237.05 320.45 527.98
4 19.34 19.63 16.85 18.80 199.36 264.38 404.30 626.62
5 26.55 27.26 23.92 26.31 201.38 311.30 459.55 726.22
6 34.87 35.97 32.26 35.04 232.96 355.37 542.10 544.19
7 46.19 46.21 42.17 45.07 316.96 417.79 644.15 969.90
8 58.19 58.38 54.66 57.01 336.00 496.54 811.85 1154.60
9 74.22 74.59 72.50 71.95 448.84 661.37 1159.60 1444.70
10 100.00 100.00 100.00 100.00 721.84 1036.73 1757.50 2712.44
Average 279.95 408.00 647.00 937.00
Source: Jang H. Yoo, Virginia Commonwealth University


100
90
80
70
60
50
40
30
20
10
0
F
Cumulative Proportion of People
1965 + 1970
ure 4.1: Lorenz Curves for. South Korea,- 1965 and 1970


Cumulative Proportion of People
VO
1970 + 1976
Figure 4.2: Lorenz Curves -for South Korea, 1970 and 1976.


Cumulative Proportion of Income
r~
n 1976 + 1982
Figure 4.3: Lorenz Curves for South Korea, 1976 and 1982.


100
90
80
70
60
50
40
30
20
10
0
F
Cumulative Proportion of People
a 1965 + 1976
ure 4.4: Lorenz Curves for South Korea, 1965 and 1976.


CTi
100 -[
90 -
o
E
o
o
c
o
a
o
e
Cl,
O
>
3
<3
3
E
U
80 -
70 -
60 -
50 -
40 -
Figure 4.5: Lorenz
I
T
4
l J
10
Cumulative Proportion of People
1970 + 1982
Curves for South Korea, 1970 and 1982.


50
According to the Gini coefficient correlation,
South Korea's income distribution improved slightly from
1965 to 1970 (Figure 4.1). By the same criterion, income
distribution deteriorated from 1970 to 1976 (Figure 4.2).
It improved between 1976 and 1982 (Figure 4.3). These
results are probably due to the policies undertaken by
the South Korean government during each of these
periods**. During the First-Five Year Plan (1962-1966),
the government's focus was on restructuring all bases of
production, including industry, forestry and fisheries,
mining and manufacturing, and social overhead capital and
services. All South Korean households' income rate
increased spontaneously. The income rate of the
industrial sector continued to increase due to rapid
growth in the Second-Five Year Plan (1967-1971), and
consequently the South Korean government increased the
income of farm household to the equivalent level. In the
Third-Five Year Plan (1972-1976), the government
continued to focus on expanding all phases of industrial
production, increasing the income of these sectors, and
increasing incomes of farmers and fishermen. Despite
** Income distribution analyses of South Korea have been
performed by Adelman, I. (1978); Choo (1980); Islam (1986);
Jang-Ho (1986); Jorgenson (1984); Koo (1984); Mizaguchi
(1976); Rao (1978); Renaud (1976); Yasuba (1981); and Yoo
(1987) .


51
continuous efforts to improve the income of the farming
and' fishery sector, the rapid growth rate of income in
industrial sectors superseded the farming and fishery
sector. For the following years, 1976 to 1982, the rapid
growth of the industrial sectors continued but income
distribution equality was refused with government
determinations, hence, income equality improved between
these years.
According to Atkinson's theorem, South Korea was
unambiguously better off in 1970 than in 1965 since the
Lorenz curve of 1970 lies everywhere above that for the
1965 Lorenz curve (Figure 4.1). By the same criterion,
Figure 4.2 demonstrates that South Korea was better off
in 1970 than in 1976 since the Lorenz curve in 1970 lies
everywhere above the 1976 Lorenz curve. Since there are
intersections or crossings of Lorenz curves between 1976
and 1980, 1960 and 1976, 1970 and 1980 (Figures 4.3, 4.4,
and 4.5 respectively), in terms of the Lorenz dominance
theorem, we cannot unambiguously decide, on the basis of
the data, which distribution is preferable.
Atkinson's theorem is limited to describing the
social welfare state of these distributions but does not
take into account changes in mean income. Thus, we need
to employ the generalized Lorenz dominance criterion.
Table 4.2 shows the generalized Lorenz ordinates in South


52
TABLE 4.2
GENERALIZED LORENZ ORDINATES OF SOUTH KOREA
1965, 1970, 1976, 1982
Generalized Lorenz Ordinates
Decile 1965 1970 1976 1982
1 369 1134 1190 2398
2 1609 2995 3688 6428
3 3421 5365 6878 11544
4 5414 8009 10902 176i6
5 7433 11122 15476 24652
6 9762 14676 20872 32832
7 12931 18854 27284 42231
8 16290 23819 35365 53418
9 20778 29580 46907 67417
10 27995 40800 64700 93700


53
Korea in 1965, 1970, 1976 and 1982***. The generalized
Lorenz curves of South Korea in 1965, 1970, 1976 and 1982
are plotted in Figure 4.6.
The data show a clear pattern of generalized Lorenz
dominance through time. Applying Shorrocks's theorem, we
can conclude that welfare unambiguously rose from 1965 to
1970, and from 1970 to 1976, and again from 1976 to 1980.
Because the generalized Lorenz criterion takes into
account both income distribution and mean income, it is
able to generalize the welfare of South Korea during all
of these years.
The result of the generalized Lorenz dominance
criterion between 1965 and 1970 (Figure 4.6) is
consistent with the improvement of income distribution as
well as mean income in South Korea (Table 4.1), where all
values for 1970 are greater than values for 1965.
Although the income distribution in South Korea
deteriorated between 1970 and 1976 (Figure 4.2), the
generalized Lorenz dominance still shows welfare gains
since mean income grew at a fast enough rate to
compensate for losses due to the rise in inequality
(Figure 4.6).
More often than not, intersections or crossings of
*** This is derived by multiplying the cumulative
proportion of income by the average of mean income then
dividing by 100. The averages of mean income are 280 for
1965, 408 for 1970, 650 for 1976 and 967 for 1982 (see
Table 4.1).


Generalized Lorenz Ordinates
(Thousands)
a*
in
n 1965 + 1970 1976 A 1982
Figure 4.6: Composite Generalized Lorenz Ordinates for
South Korea, 1965, 1970, 1976, and 1982.


55
Lorenz curves as shown in Figures 4.3, 4.4, 4.5, do not
occur when plotted using generalized Lorenz ordinates.
Using the generalized Lorenz dominance criterion, the
same data set between 1976 and 1982, 1965 and 1976, 1970,
and 1982 shows clear patterns of welfare gains from the
earlier years to the later, 1965 to 1970 to 1976 to 1982.
The result of the generalized Lorenz dominance
corresponds positively to economic development that
occurred in South Korea in these years, 1965 to 1982.
The real GNP for South Korea in 1965 was 3,026 million
dollars. It increased to 9,462 million dollars by 1970,
37,456 million dollars by 1977, and 69,300 million
dollars by 1982 (see Table 2.1). Corresponding to this,
the generalized Lorenz curves (Figure 4.6) illustrate a
clear increase in the well-being of South Korea,
emphasizing that growth generates greater welfare
(Chenery 1980) in the case of South Korea. When income
distribution in South Korea deteriorated, such as in 1970
and 1976, welfare continued to improve due to increases
in mean income.


CHAPTER V
CONCLUSIONS
The economic development of South Korea has been
remarkable since the Korean War. South Korea changed
from an underdeveloped agricultural country to a leading
industrialized country. To understand this phenomenal
growth, this paper reviewed South Korea's past: the
traditional Korean economy as was extant before the
1900s, the colonization by Japan in 1910 and its status
as a colony ending in 1945. The period of the division
of Korea into north and south was reviewed. The naivete
of the Syngman Rhee period from 1945 to 1960 was
discussed as was the destruction caused by the Korean
War, which began in 1950 and ended in 1953. Lastly, a
review of the government under Park Chung Hee, from 1961
to 1980 was provided.
South Korea's successful development process can be
summarized as follows. Since 1965, South Korea has
invested heavily in social overhead capital since it was
felt that development could only progress with the
expansion of infrastructure. South Korea stimulated net
exports. Progress in science and technology and great
efforts in improving education contributed greatly to the
growth process.


57
This paper reviewed several measures for evaluating
the welfare of South Korea in the years 1965, 1970, 1976
and 1980. It introduced Shorrocks's generalized Lorenz
dominance principle. South Korea's economic welfare has
risen consistently with its GNP growth. Assuming an
equality preferring S-concave social welfare function,
the earlier years of generalized Lorenz curves lie below
the latter years, demonstrating that the welfare in the
latter years has unambiguously risen. If generalized
Lorenz dominance occurs, then we can rank the welfare
consequences of economic growth.


58
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