Understanding the trajectory of national economic development is essential to analyzing South Korea’s remarkable economic transformation from the mid-20th century to the present, and to drawing policy lessons from its experience.
A national economy typically progresses through three main stages. Stage 1 represents underdevelopment, often accompanied by historical and social backwardness. At this stage, an economy may fall into a poverty trap, leading to prolonged deprivation and multiple negative consequences. Stage 2 begins after the economy escapes the poverty trap. During this phase, the market economy develops rapidly, transitioning from an agricultural to an industrial economy, with growing contributions from manufacturing and services to total output and employment. Stage 3 marks a strong upswing and transformation into a high-income developed economy. To reach this stage, economies must continue to evolve their growth models, requiring the participation of key factors related to total factor productivity, such as strong innovation in science and technology, improved state regulatory capacity, and better enterprise management.
Type 1 growth is capital-intensive industrialization-driven growth. If an economy relies too heavily on this model without innovating to boost productivity, it may fall into Type 2 growth, characterized by slow growth due to increasingly inefficient capital use. Type 3 growth, or deindustrialization, is not relevant to South Korea’s case. Type 4 growth, however, represents the path to avoid stagnation and transition into a developed economy based on productivity, where total factor productivity contributes significantly alongside efficient capital use, leading to balanced and sustainable economic growth.
Theoretically, once a country reaches upper-middle-income status, it can become a high-income economy within a short period (around 15 years) if it maintains an average annual growth rate of 5% or higher. In practice, however, transitioning to a high-income economy presents a major challenge for many countries. Between 1950 and 2011, the probability of a low-middle-income economy remaining at that level for at least 20 years was 90%, while the probability for upper-middle-income economies was 65%, with only a few successfully transitioning to developed status.
South Korea’s economic development journey began in the early 1960s and continued through the late 20th century, marked by state-led development and the rise of large economic conglomerates. Following the Korean War (1950–1953), South Korea maintained political independence but faced significant economic challenges, including a weak scientific and technological base, low production levels, and war devastation.
In the early 1960s, South Korea began to make rapid progress. The rise of President Park Chung-hee in 1961 marked the beginning of the country’s remarkable development. From 1961 to 1979, his administration played a crucial role in the overall economic boom. Subsequent administrations continued the aspiration and efforts toward development, helping South Korea reach upper-middle-income status by the mid-1970s and becoming a high-income developed economy by 1995.
The development path South Korea followed during this period was often described as a “miracle,” driven by various policies, particularly the Five-Year Economic Plans proposed by the government from 1962 to 1995.
The First Five-Year Plan (1962–1966) focused on the textile industry, helping South Korea achieve self-sufficiency through policies such as nationalizing all commercial banks and allowing the banking system to control credit, providing low-interest loans to businesses, and promoting the development of light industries for export.
The Second Five-Year Plan (1967–1971) focused on heavy industry, attracting foreign direct investment (FDI), and improving basic infrastructure. Policies included industrial structure modernization, development of alternative industries, and promotion of steel, machinery, and chemical industries.
The Third Five-Year Plan (1972–1976) was export-oriented, targeting underdeveloped areas and emphasizing heavy chemical industries. Policies included promoting iron and steel, transportation, consumer electronics, shipbuilding, and petrochemical industries; supplying raw materials and capital for new industries; and developing new industries in southern regions.
The Fourth Five-Year Plan (1977–1981) aimed to develop industries competitive in the global export market. Policies included focusing on high-tech and skilled labor-intensive industries such as machinery construction, electronics, and shipbuilding, and continuing to develop large-scale chemical and heavy industries such as iron, steel, petrochemicals, and non-ferrous metals.
The Fifth Five-Year Plan (1982–1986) aimed to shift focus from heavy and chemical industries to high-tech industries. This plan emphasized the production of high-precision products such as mechanical processing and telecommunications equipment.
The Sixth Five-Year Plan (1987–1991) continued the push toward high-tech industries. During this period, South Korea accelerated import liberalization by removing numerous restrictions and non-tariff barriers.
The Seventh Five-Year Plan (1992–1995) gave a strong push for South Korea to catch up with global development trends in typical high-tech industries such as microelectronics, refined chemicals, new materials, biotechnology, optics, and aerospace. State-corporate collaboration helped develop leading industries across many provinces and cities.
South Korea’s five-year plans highlight the significant role of the state in initiating and driving development. In the South Korean developmental state model, the government created and unilaterally directed a “master plan” independent of private sector investment.
Overall, the period from 1961 to 1996 witnessed South Korea’s economic development primarily driven by Type 1 growth, characterized by capital intensity (capital utilization rate increased 4.4 times, while total factor productivity increased 1.9 times throughout the process). However, as South Korea increasingly focused on heavy industry (from the 1970s) and high-tech industries (from the 1980s), it experienced periods (typically 1968–1976, 1980–1988, 1990–1996) where both capital utilization and total factor productivity rose in parallel under Type 4 growth. This indicates a rapid transformation toward productivity-based growth, where total factor productivity and capital efficiency increasingly contributed to South Korea’s rise from middle-income to high-income status by 1995.
To achieve such a rapid and decisive transformation, along with the state’s role as an enabler, South Korea’s developmentalism during this period was also characterized by “a reduced emphasis on small and medium enterprises, focusing capital instead on large corporations,” including globally renowned firms such as Samsung, Hyundai, LG, Lotte, and Kia.
From the late 20th century to the present: a new developmentalist state in the context of globalization.
After becoming a high-income country in 1995, South Korea quickly faced the 1997 Asian financial crisis. In the aftermath, the previous developmental model proved inadequate, forcing the country to transform its model to overcome the crisis and continue progressing. This new model, known as the new developmentalist state, clearly defines South Korea’s development direction amid the irreversible trend of globalization.
In the public sector, alongside gradually reducing intervention in economic operations (especially in the financial sector), the South Korean government has focused on heavily investing in research and development and improving human resource quality. Since the late 1990s, the government has shifted its policy priority from past support for large corporations to focusing on R&D. With this new direction, South Korea has achieved significant success in innovating its national production system. The country has gradually built a robust industrial innovation ecosystem, including both the formal national innovation network and informal innovation networks between private enterprises and research institutions, creating synergy across the entire innovation ecosystem.
In the private sector, thanks to national R&D promotion policies, large South Korean corporations have gradually overcome the challenges of global integration in a context where many global competitors already had stable international partner networks. Through government efforts to promote SME innovation and develop the national industrial ecosystem, South Korean multinationals have gradually built a successful global production network based on close collaboration with reliable domestic partners (contractors, parts manufacturers, etc.). Additionally, alongside improved administrative efficiency, South Korean companies have invested a significant portion of their profits into R&D. This aligns with broader government efforts, making South Korea one of the most R&D-intensive developed economies relative to GDP size. Statistics show that South Korea’s R&D spending as a percentage of GDP was only 1.7% in 1991 but rose to 4.3% in 2014, the highest among OECD countries. This figure increased to 4.83% in 2018 (second only to Israel) and reached 4.93% in 2021.
The dominant role of Type 1 industrialization-driven growth from the earlier period, after gradually transforming the model and overcoming the 1997 financial crisis, has led South Korea’s economy to consistently follow Type 4 growth since 2000. This demonstrates a dramatic shift toward productivity-based growth, where total factor productivity has become the main driver of overall economic success. “South Korea has successfully improved its national innovation capacity and international competitiveness based on a new development model emphasizing mutual learning and enhancing innovation capacity through a comprehensive cooperation network.” Rather than being complacent with past success, South Korea’s new developmentalism continued to leverage the opportunities opened by the 1997 crisis to make a fundamental shift in its development path, successfully transitioning to a knowledge-based creative economy.
South Korea’s experience in achieving remarkable economic development offers valuable lessons for many other countries, particularly in terms of the leading and creative role of the state and major economic corporations, and the shaping of national development through each five-year plan.
First, regarding the experience of overcoming the middle-income trap, South Korea is a typical example of the successful implementation of the 3i Strategy — Investment, Infusion, and Innovation — which has helped the economy transition successfully from low-income to high-income status. Therefore, in the early stages of development for low-income countries, growth is stimulated through investment promotion. When a country reaches the middle-income stage, mere expansion of investment is no longer sufficient to sustain growth; it becomes necessary to improve productivity through the infusion of foreign technology into the national economy. Therefore, to achieve high income, along with greater productivity and sustainable economic growth, technological innovation and innovation in many key areas of the economy are fundamental requirements.
South Korea effectively implemented this 3i Strategy (although specific policy names may differ) to increase per capita GNI from $120 in 1962 to $11,820 in 1995 and $33,490 by the end of 2023. Since the 1960s, South Korea has expanded infrastructure investment through financial market liberalization, attracting foreign capital (corresponding to the Investment factor), followed by improving productivity efficiency through the adoption of foreign technology (corresponding to the Infusion factor), and then focusing investment on R&D, education, promotion of competitive markets, and support for domestic enterprises (corresponding to the Innovation factor). South Korea’s experience shows that to achieve economic advancement, there must be advancement in science and technology, innovation, digital transformation, and the creation of a leading and creative role for the state and major economic corporations, as well as the development of both public and private sectors.
Second, the close and consistent combination of the state’s leading role with the dynamism, growth, and continuous innovation of the private sector to generate revolutionary development momentum in economies with a low starting point is clearly demonstrated in South Korea’s case. Both before and after becoming a high-income economy in 1995, South Korea consistently pursued state-led developmentalism with adaptive adjustments depending on the context of each period. In particular, to overcome the middle-income level, from the mid-1980s onward, South Korea’s policies played a particularly important role. Alongside this, the private sector also continuously expanded and deepened its contribution to total factor productivity, creating balanced and solid economic growth. Therefore, “South Korea’s growth in R&D spending reflects the government’s policy orientation in establishing an innovation-based industrial system… South Korea’s domestic manufacturing innovation capabilities have been continuously strengthened and recreated rather than lost in the globalization process, thanks to the state’s efforts to strengthen industrial capacity and the private sector’s adaptation to state implementation.”
Third, from South Korea’s experience, it is evident that for a developing country to achieve remarkable economic growth, overcome the middle-income trap, and become a high-income country, it must address many challenges, such as harmonizing the relationship between the state and large corporations, multinational enterprises, managing favoritism, and addressing major issues such as aging populations, motivation creation, and the appropriate resolution of the relationship between the state, the market, and society. This requires innovative policies, rationalized organization, efficient and effective operations, innovation, and improvement of national competitiveness.