MOLDING AN ECONOMY TO TAKE ON THE WORLD

FOR almost two decades the South Korean economy has defied gravity. And it shows no immediate signs of coming down to earth. The economy has grown at a nearly continuous double-digit rate. The average income of Koreans has risen 20-fold in the past 20 years. The country has become a major exporter, even challenging Japan. Western markets are filling up with Korean-made cars, VCRs, and televisions, producing a balance-of-payments surplus since 1986.

The transformation of South Korea from a poor, agrarian developing country into a modern industrial nation is trumpeted by economists as a ``miracle.'' But serious new challenges have come with success.

The Korean economy has grown behind a wall of protection, encouraging exports while building up domestic industry. The government, both directly and indirectly, has played a strong role in Korea's industrialization. Government policy has favored the formation of large private conglomerates at the expense of smaller business.

As South Korean products flood into foreign markets, particularly the United States, pressure has mounted on Seoul to open its own markets to foreign competition. ``How Korea will accept more internationalization'' is one of the two major tasks for the future, says Koo Bon Oh, the president of the prestigious government-funded Korea Development Institute.

As it faces demands to open up, Korea is struggling to reduce trade barriers, to limit the role of the government in the economy, and to curb the growth of big business. The aim is to shape an economy that can face global competition with less protection.

These reforms must be carried out at the same time that Korea is facing a wave of labor militancy. Since last summer, millions of workers have staged often-bitter strikes to form unions and gain higher wages. Despite the visible improvement in living standards, Korean workers have suffered low wages and the longest average workweek (about 54 hours a week) in the industrial world.

Every day Koreans can see evidence of a growing gap between rich and average workers. While almost every Korean household now has a television set, the men who manufacture the Hyundai cars for export to America still have little hope of owning their own car. Their bosses, however, lead lives of affluence.

``How to combine this new tide of political and social democracy with more economic growth and more economic liberalization'' is the second major task for the future, Dr. Koo says. Korean economists worry that rising wages will slow growth, undercutting the advantage of cheap labor that has made Korean exports so competitive.

Korea's development has gone through discernible stages since the Korean war. ``After the war, it was basically a US aid-dependent economy,'' says Koo. ``If there was no US aid, thousands and thousands of people would have starved to death.''

But during the 1950s, Korea laid the basis for industrialization by investing in public education, up to the college level. Compared with other countries at similar economic levels, Korea achieved a far higher percentage of literacy and advanced education, including sending thousands to the United States for specialized training.

``Korea has no raw materials and is very poor in natural resources,'' explains Kim Dae Ki, deputy director of planning with the Economic Planning Board (EPB). ``The only source of our economic development is high-quality labor.''

Starting in the 1950s, strong-willed entrepreneurs like Lee Byung Chul, founder of the Samsung group, built up huge conglomerates called chaebol. Groups like Hyundai, Goldstar, Lucky, and Daewoo are still run today by the families that founded them.

Korean development started to take off after the military-led takeover of 1961. The government of former Gen. Park Chung Hee, who ruled until 1979, provided political stability and strong leadership aimed at promoting exports and industrialization. The new government set up powerful planning institutions, notably the EPB, which controlled both government budget planning and the allocation of credit.

``There were no private financial resources in this country; therefore we decided our economy would be government-led,'' recalls Park Tae Jin, a former major general who headed the military government's Commerce and Industry Commission. Mr. Park, who now runs the country's largest steel company, contends that if they had let the private sector determine the pace, ``it would have taken longer.''

During the 1960s, Korea embarked on a strategy of export-led growth. Korea's hardworking labor force churned out cheap light manufactured goods, such as textiles and shoes. The government offered strong incentives for exports, including automatic loans. ``Export above all'' was the slogan, and it was realized in the form of 30 to 40 percent annual growth in exports.

``Japan was the model of economic growth,'' says opposition party leader Kim Jong Pil, a key figure in the military government and an advocate of planning. ``Through the export-oriented economy, Japan has become an economic superpower - despite the fact they have so little resources.''

In the 1970s, Korea, like Japan before it, moved to use its success in light industry to build a base of heavy industry. The government invested huge sums of money in creating the auto, steel, shipbuilding, construction, chemical, and other industries. High tariffs meant that Koreans would buy cars made at home rather than foreign ones. But the cars were made in collaboration with foreign companies, using imported technology and parts.

While private business made the goods, government planners decided what would be made and by which companies. According to Koo, who worked as a planner at that time, a special committee under President Park's direction effectively ``set how much [money] for each industry.''

Through the government-controlled banking system, says Koo, ``effectively government allocated the funds to particular firms and industries. It was capital rationing.''

The government intervention of the 1970s produced high rates of growth. But it also produced inflation, bloated industries that could not survive without government-subsidized loans, and an economic structure dominated by the chaebol at the expense of small and medium-size businesses. The share of total manufacturing produced by the top 30 chaebol grew from 32 percent in 1977 to 40 percent in 1985, according to EPB planner Kim. Also, ``income distribution became more unequal in the 1970s because of this,'' he says.

The close ties between government and business also bred corruption. There have been spectacular cases of companies paying off officials to ensure the flow of loans.

``Korean economic performance was really remarkable, but many Koreans felt bitter about it because some got too rich by being too close to the government,'' Koo observes.

The 1980s, Korean economists say, have been the era of change toward an economy based more on the free market and less on government controls. The shift was aided by a rare downturn in the Korean economy in the early 1980s, sparked by the oil crisis of 1979.

The government has dropped many trade barriers, reducing tariff rates on many goods. The commercial banks were denationalized in 1981 (although the government retains effective control by appointing top bank officers, most experts say). The powers of the Economic Planning Board were reduced. Government began to pay more attention to social needs.

The direction is clear, but the pace is still too slow for many critics, including those outside South Korea. Change is now complicated by democratization, which imposes the pressures of constituency politics on government bureaucrats used to having their own way. Recent demonstrations at government offices by farmers angrily demanding that barriers to foreign beef and fruits be maintained are only one example.

Many Koreans take comfort in the fact that these are the pains of maturation. Fortunately for South Korea, the problems of the 1990s will be those of success, not failure.

Coming tomorrow: Seoul dons Olympic dress