Design, Economic Development, and National Policy: Lessons from Korea

Design Management Review, Fall 2004 by Cho, Dong-Sung

In recent years, design has been a conscious and important element in Korea's growth strategy. Dong-Sung Cho reviews the impressive outcomes linked to this decision and confirms that the "design revolution" continues. Indeed, it is evolving to provide significant future opportunities not only for global competition, but also as a force for improving the quality of life within Korea itself.

Whereas the history of economic growth for Western developed countries spans some 200 years, Korea's economic development was accomplished in a matter of just four decades, after it got off to a late start 16 years after the end of World War II, in 1961.

At that time, Korea was one of the five poorest countries in the world, and the nation depended heavily on foreign assistance from UN member states. Now, the most recent estimates give Korea's GDP in 2004 at $606.0 billion, making Korea the twelfth-largest economy in the world.

Born in 1949, this writer grew up in one of the poorest countries in the world-a nation with per-capita income of less than $100. From my teens into my early twenties, while I worked to save just enough money to study abroad, I watched Korea's per-capita income rapidly escalate to $1,000.

Later, in my thirties and forties, I came back to a now semi-developed country with a per-capita income of $10,000-a country in which I enjoyed the most abundant spending years of my life. Korea is now aiming to transform into a developed economy; with its per-capita income beyond $20,000.

I doubt there is another country, or at least generation, in the history of mankind that has personally experienced such diversity in economic activities and consumption.

A Little History

During its period of growth, the Korean economy pursued not only quantitative growth but qualitative growth, as well. While size is certainly a quantitative measure of the state of the national economy, the qualitative factors supply the source of a nation's competitiveness-issues of cost, quality, design, and brand-which is what drives its economy forward.

Exports and Imports

The years prior to 1960 were the prehistoric ages for Korea as far as economic development was concerned. In the eight years from the end of the Korean War, in 1953, until 1960, exports averaged $33 million a year, representing just 13 percent of imports, which stood at an annual average of $250 million.

At the time, countless people died of starvalion every year near April on the lunar calendar, as they desperately waited for the barley harvest. This eight-year time period was the so-called era of foreign aid, as Korea could not have sustained itself without the $2.2 billion in grant aid it received in foreign assistance.

General Park Chung Hee, who took power in a military coup in 1961, launched a series of five-year economic development plans in the interest of improving life for the Korean people. In so doing, he dictated a new direction for the future of the Korean economy by making it clear that exports would be the engine behind Korea's economic growth.

In order to export, however, one needs to have many sources of competitiveness-price, quality, after-sales service, and so forth. In the first 10 years of his leadership, Park zoomed in on the country's low-wage manpower and the resulting cost competitiveness, and successfully took over the world's low-end textile and footwear markets. Korean companies, however, mostly served as subcontractors to their global counterparts, supplying them with OEM manufactured products until the early 1970s.

After the first oil shock of 1973, governments in the Western countries rushed to implement a range of import-restricting measures, such as quotas on import volume, the certificate of origin program, anti-dumping duties, and the like. In response, the Korean government established an entity called the general trading company (GTC) to promote Korean exports. The key firms that were designated GTCs were tasked with building localized marketing systems inside advanced markets, carving out new export markets, and diversifying export items.

The GTCs established branch offices or local subsidiaries on key world markets, and built themselves up into gigantic conglomerates by recruiting manufacturing firms that had diverse product lines as affiliates and by conducting mergers.

From this process emerged about 30 major conglomerate groups (chaebols) of varying size, including Samsung, Hyundai, LG, Daewoo, and SK. The five largest chaebols, each of which commanded 40 to 60 separate businesses, managed to obtain economies of scale, as well as economies of scope, the former mostly in manufacturing and the latter in the service and financial sectors. Coupled with an information advantage achieved while breaking into foreign markets, this also gave the conglomerates a competitive edge.

The Chaebols in Crisis

The financial crisis that hit the Korean economy in 1997 dealt a shocking blow to the chaebols. They had crushing debt ratios averaging 350 percent, owing to their overdependence on external capital, such as overseas loans. The excess was driven by the chaebols' simultaneous chase after growth in company size and company number.