Appendix F to Part III—Korea
ECONOMIC
South Korea has few resources except agricultural land. This area formerly obtained much of its anthracite, electric power, timber, fertilizer, and other chemical products from North Korea, and bituminous coal and food from Manchuria, but must now obtain these essential items (except electric power) as well as raw materials and repair parts for her industries, from other external sources.
Coal—The whole of Korea, particularly South Korea, lacks coal No bituminous deposits are known and existing coal deposits are of a law-grade anthracite. The coal runs high in ash, and tends to disintegrate to powder. The largest producing mine in South Korea, constituting in fact 50 per cent of the production, is located at Sam Chok on the east coast. Production involves costly rail-sea-rail distribution. This coal can be and is being used in thermal plants by pulverizing and mixing with oil, but its use is costly and maintenance of boiler equipment is heavy. In any case, bituminous coal must be imported for the operation of the railways and most of the industries.
Electric Power—Because of the unfavorable coal situation, South Korea is at the mercy of North Korea with respect to electric power because virtually all of the large hydroelectric installations are in North Korea. In 1945 there was a total of 1,240,000 kilowatts of installed capacity, 90 per cent of it hydroelectric and in North Korea. Some of the capacity in North Korea has been removed by the Russians. At the present time South Korea depends on North Korea sources for 75 per cent of its power requirements in the winter months when stream flow for its hydroelectric plants is low, and 50 per cent to 60 per cent during the rainy summer months. Conditions will be critical during the coming winter. Minimum peak requirements are estimated at 200,000 kilowatts and only 110,000 kilowatts are in sight including the area’s own generating capacity of 60,000 kilowatts—and that only if rehabilitation materials are received—plus 50,000 kilowatts from North Korea, which is all the Russians profess to be able to deliver. If North Korea power were cut off, all industrial production in South Korea would have to be suspended, and remaining locally generated energy rationed for military and emergency use. Any new plants to correct this deficiency or permit any revival of industry would require four to five years to complete, and would still be dependent upon imported coal or oil, or upon a considerable expansion of the low quality anthracite production. There is no reasonable solution to this dilemma other than to unite North and South Korea.
Forestry—The forest situation in South Korea is unfavorable. Before the war, effective programs of reforestation and erosion control were under way, but dining the war the annual cut averaged 168 million cubic feet as compared with annual estimated growth of only 113 million cubic feet. Furthermore, over two-thirds of South Korean requirements of lumber, fuel wood, and pulp were formerly supplied by North Korea. With this source cut off and coal imports and production drastically reduced, hills and mountains around the Urge cities have been literally denuded. Unless North and South Korea are united or substantial imports are provided, the needs of South Korea for fuel wood, lumber, railroad ties, and telephone and telegraph poles, make it inevitable that overcutting and denuding of forest land in South Korea will continue, with resulting increased erosion and flood damage to agricultural land.
Mineral Resources—Mineral resources of Korea are varied and rather extensive, but with a few exceptions are of low grade. There is a large deposit—over one billion metric tons—of low grade (35 per cent magnetic) iron ore at Musan in Northeastern Korea which the Japanese mined extensively before and during the war. Capacities are said to have been developed for the production of over 800,000 tons of pig iron and 350,000 tons of steel annually, but operations were possible only by large imports of bituminous coal from Manchuria and Japan.
In both North and South Korea, gold and copper were also mined, the latter as an adjunct of the former, and some lead and zinc, and a large quantity of graphite, the latter, however, of low quality. There is enough developed tungsten production in South Korea to make it an important export commodity.
Industries—The prospects for Korean industry, even in the event of early unification, are not bright. Before 1931 Japan exploited Korea primarily as a source of raw materials, rice and cheap labor. Thereafter Korea became Japan’s bridgehead to the Asiatic mainland, and with Manchuria, was developed as the mainland portion of Japan’s war potential. By 1938 there were 7,000 factories, mostly small, employing 183,000 workers, principally in the production of chemicals, textiles and processed foods. Main industrial concentrations were in the north, near hydroelectric power plants and the larger mineral deposits. This rather impressive industrial plant was not damaged by bombing, but it would be a mistake to assume therefore that Korea possesses a ready-made industrial plant which could quickly be turned to full and efficient peacetime operations. Production, at perhaps 20 per cent of capacity, was restored after the occupation, but output has dwindled as stocks of raw materials have been exhausted, and as machinery has stopped functioning for lack of spare parts and competent maintenance and operating personnel. The dearth of competent administrative supervisory and technical personnel, practically all of whom were formerly Japanese and are now evacuated, is the outstanding deficiency in Korean industries, power, and transportation systems. The unification of North and South Korea would make some of the required raw materials available, and spare parts may eventually be obtainable from Japan, but the serious deficiency of competent personnel is an unresolved problem.
Railways—Korea has an excellent standard-gauge railway system including a double-track main line from Pusan on the southeast coast to Antung on the Manchurian border, which adequately serves the country with the exception of the eastern half of Kangwon Province. However, trackage, rolling stock except locomotives, and railway communications are badly in need of rehabilitation as a result of years of undermaintenance because of wartime shortages of materials. The railways in common with the country as a whole have been badly crippled by the evacuation of the Japanese administrative, supervisory, and technical personnel. The right-of-way is excellently engineered and constructed and characterized by a profusion of concrete and masonry structures, but all of the seven million ties in South Korea will require replacement within the next seven years, and quantities of rails and fishplates are also needed. One hundred and one new locomotives of the 2-8-0 type have been provided by the Military Government, but much of the other rolling stock requires overhaul. Railway communications also require considerable rehabilitation.
Highways—There are no modern roads in Korea. The highways of South Korea are practically nonoperable for automotive traffic except from Seoul to Inchon, Kaisong, and Chunchon. Practically all supplies must be distributed throughout Korea by rail.
Shipping—The only shipping of South Korea consists of eight Baltic vessels, and 12 LST’s, operated by the Military Government coast-wise and for some trade with Japan.
Ports—There are two major ports in South Korea; Pusan, an excellent deep-water port with four large piers at the Southeast end of the peninsula, and Inchon, west of Seoul, a much smaller tidal-basin port which can accommodate four three-quarter-thousand-ton ships at dockside in the basin and larger trans-Pacific cargo and passenger vessels in the anchorage outside. Two other deep-water ports, Masan and Yosu, were mined and are little used at present. Mukko on the east coast is the export terminal for Sam Chok, the largest anthracite mining area in South Korea. The other ports of Mokpo, Pohang, Chinhae, and Kunsan are limited by unfavorable factors of nigh tidal range, and a lack of berths and port clearance facilities.
In North Korea, there are two first-class warm water commercial and naval ports at Wonsan and Chungjin on the east coast, the latter particularly desirable from a Russian viewpoint, and other ports Oongki, Rashin, Eungjin, Chinnanpo, and Simhu, the latter two handicapped by the 25- to 30- foot tides of the Yellow Sea.
Withdrawal of Japanese Personnel
As disastrous in its effects on Korean economy as the division of Korea’s people and resources by the 38° North parallel, was the evacuation of all Japanese personnel, except 500 retained in North Korea, after VJ-Day. The 700,000 Japanese formerly resident in Korea dominated all elements of the economy and supplied management and technical personnel even to the mechanic class. Koreans were denied opportunities or positions of consequence in all phases of political and economic life. It is no reflection on the individuals concerned to note that a former Korean stationmaster at Pusan is now head of the railways, or that a vocational school graduate is in responsible charge of a large hydroelectric plant not far from Seoul. It is however, an indication of an almost fatal deficiency in South Korean economy. The ultimate solution is not readily apparent.
Disinvestment
The process of disinvestment probably began in South Korea during the late thirties when the Japanese decided to put all new capital into war production and permit nonwar facilities to depreciate. Capital goods provided by the Japanese for maintenance and development in South Korea went with few exceptions to war plants such as the submarine shop at Pusan, and to the strategic transport services linking Japan with the Manchuria-North Korea industrial complex. This meant that facilities such as the north-south railroad from Pusan to Antung on the Manchurian border received the main portion of construction materials available. Other industrial establishments in South Korea were converted to war production or allowed to deteriorate. The supply of fertilizer, essential to rice culture in the exhausted paddies of South Korea, was drastically reduced in the early forties as a result of the conversion of North Korean nitrogen fixation plants to the manufacture of explosives. Exploitation of South Korea’s meager forest resources resulted in severe erosion and the destruction of crops and utilities through flooding The Japanese also depleted Korean stock-piles and withdrew skilled labor for Army service, or for the mines and factories of Manchuria and the Japanese islands. During two years of military government, the process of disinvestment has continued.
The possibility of South Korea financing a program of investment and rehabilitation out of the proceeds of exports is not worth considering in detail. Although South Korea is primarily agricultural, it is unlikely that it will be able to export foodstuff, even under the most favorable circumstances. Deterioration of agriculture, due to accumulated soil deficiencies and erosion, and an increase of population from 15 to 20 million since 1940 indicate that no export surplus of food can be expected in the next several years. The only exports which may be derived from South Korea are small amounts of such minerals as tungsten, gold and copper, some ginseng root, and marine products such as agar-agar. The most optimistic estimate is $10 million worth of exports by 1950. Much more than $10 million earned by Korean exports will be needed to finance essential raw material imports, and there is no prospect of any capital development out of current production.
Inflation
The Korean inflation is not as serious as the Chinese inflation in rate of price increase, but its causes are less susceptible to control by measures taken within Korea. Price increases have been due to physical inability to produce goods, and not to unrestrained issuance of paper currency. Prices of consumers’ goods in various categories have risen 200 to 700 times over the 1937 level. The official rise price, however, has risen only 70 times, and about 80 per cent of the calorie requirement for the urban population is available at the official price. A runaway inflation has not yet occurred in South Korea, because (a) the Military Government has restrained the issuance of currency by keeping governmental expenditures and local occupation costs at reasonable levels, and (b) because cannibalization and the use of Japanese stocks have kept some industry going, and (c) the forcible collection of rice at harvest time has brought in sufficient food to maintain, with “disease an unrest” imports, an adequate official ration in the cities without the use of large inflationary payments to the farmers. Highly inflationary factors such as the exhaustion of raw material stocks, cumulative breakdowns in public services and transportation, and the cutting of power supply from the North, might occur simultaneously. The Korean economic outlook is, therefore, more grave than in China or Japan, where governmental fiscal policies as well as low production, are the main causes of inflation. Korea, lacking raw materials and skilled labor, is not in a position to be saved from a disastrous and chaotic hyper-inflation by the efforts of its own people combined with correct policy decisions. A breakdown could be forestalled only by external provision of large amounts of consumers’ goods and transportation equipment.
Agriculture and Fisheries
Agriculture—Over three-quarters of the total population of South Korea are farmers. The total area of land under cultivation in 1946 was 6,033,000 acres, or about 2½ acres per farm household. Approximately 15 per cent of agricultural land was formerly owned by Japanese, but title thereto remains with the Military Government and will eventually pass to Koreans. In the projected land reforms an additional 60 per cent of land, which is tenant-operated, would be involved. The Military Government has not proceeded with land reform even with regard to Japanese-held land, in the view that such reform should not precede establishment of an interim Korean Government.
After VJ-Day the influx of over two and a half million Koreans from Japan, China, and North Korea into South Korea, coupled with almost complete lack of commercial fertilizers as well as severe floods, resulted in a severe food shortage. Farmers have been reluctant to double-crop soils already depleted because of a lack of fertilizer, and have preferred to conserve land for rice, the best money crop. In 1946 the average planted acreage was only 79 per cent of the 1935-39 average, and production of grains and pulses was only 71 per cent.
In the past, about 36 per cent of the population and 36 per cent of the food production of Korea were located north of the 38° North parallel. However, postwar population movements, plus the availability of more commercial fertilizers in North Korea (where almost all of Korea’s large chemical plants are located), has changed this situation. Only about 30 per cent of Korea’s population is now north of the 38° North parallel, but that area accounts for around 38 per cent of food production.
Rice is the principal Korean crop, and it has consistently represented more than half the total value of agricultural production. During the 1930’s the rice crop averaged about 100,000,000 bushels annually. Forty per cent or more was exported each year to Japan accounting generally for about one-third of the total gross value of exports. This was by no means voluntary on the part of the Korean people. In line with Japanese policy, farm tenancy increased from less than 40 per cent in 1910 to more than 75 per cent in 1945. This facilitated grain collections, for landlords usually received their rentals in rice, and these averaged about 60 per cent of the crop. Consequently, although Koreans preferred rice to other grains, their per capita consumption was forced down from 3.62 bushels in 1915-19 to 2.0 bushels in 1939-45, a decline of 44 per cent. This deficiency was partly made up by imports of Manchurian millet and soya beans, but underconsumption was nevertheless chronic.
To meet the food crisis in South Korea and to rehabilitate agriculture the Military Government developed program to import foodstuffs to prevent starvation and to assure Korean urban residents at least a subsistence diet until indigenous production could be increased to meet minimum food needs; and a fertilizer import program designed to restore depleted soils and increase agricultural production to levels at least as high as had been reached in the past.
In 1945 the Military Government’s attempt to institute a compulsory system of rice collection for rationing to non-self-suppliers was largely unsuccessful. In 1946, a poor crop year due to floods, the Military Government collected 87,428 tons of rice, or about one-sixth of the total production. In order to supplement indigenous production to meet the minimum needs of non-self-suppliers in South Korea, 180,848 metric tons of wheat, corn, and flour were imported into South Korea by the Military Government from May through December, 1946.
A program for the collection of the rice in 1946 was given highest priority by the Military Government, as one of the most important ways to ease the food situation, stabilize the economy, and check the inflationary spiral. This program was fully supported by all agencies, and it succeeded in collecting a total of 548,000 metric tons of polished rice, or its equivalent, about 30 per cent of the total 1946 production.
This successful collection program, coupled with the importation of 275,962 metric tons of cereals purchased with U. S. funds during the first seven months of 1947, has enabled the Military Government to stabilize the food situation in South Korea through the issuance to non-self-suppliers of minimum staple rations averaging slightly over 300 grams (1,050 calories) per person per day.
Fisheries—Fishing was one of the important prewar Korean industries, ranking sixth in the world. It is second in importance, only to agriculture in the economic structure of the country. The industry was, however, largely dependent upon Japan for imports of fisheries supplies and, has deteriorated seriously since this source has been cut off. Consumption of fish products has decreased from a prewar average of 47 pounds per capita per year to 32 pounds. Korea needs additional fisheries supplies, boats, manila line, nets, trawls, ammonia for refrigeration, tin plate for canning, salt and sugar for canning. Fears are expressed that if such supplies are not forthcoming and fishing operations considerably expanded, the Japanese will enter claims for fishing grounds now reserved for the Koreans.
Foreign Trade
The total volume of Korea’s external trade grew from 660,000,000 yen in 1910 to more than 2,400,000,000 yen in 1939. With respect to the principal categories of its trade, i. e., foodstuffs, textiles and fibres, minerals, manufactures, and miscellaneous items. Korea was consistently a net importer; of all, except for foodstuffs. Food exports however, were seldom so large that they did more than offset imports of textiles and fibers.
From 1910 to 1945, Korea’s external trade was almost wholly absorbed by the Japanese Empire and the prime factor during the entire period was the export of rice to Japan. In 1936, of the value of 41 Korean products showing a net export balance, rice accounted for approximately 64 per cent. Although by 1939 the relative importance of rice exports had declined in favor of minerals and manufactures, of the 55 net export products in that year, rice still made up one-third of the total money value. Until the years immediately preceding the war, fish and marine products ranked second to rice, averaging from 7.5 per cent to 9 per cent of all net export commodities. Other exports individually were of minor significance. Korea’s principal imports historically have reflected its dependence on the outside world for fuels, heavy manufacturers, machinery, automotive equipment, textiles, and fibers, and specialized products.
Under current conditions, foreign trade in the ordinary sense of the term is small in amount. During the period August 15, 1945, through June 30, 1947, the value of goods entering or leaving the area was approximately $168,000,000. Of this sum, however, only about $25,000,000 represents the value of goods exchanged between Korea and the mainland of Asia as a result of the operations of private traders. The remaining $143,000,000 represents mainly commodities imported by agencies of the United State Government as a part of the Civilian Supply Program and financed with appropriated funds of the War Department, or as shipments made under the $25,000,000 UNRRA supplies. Exports which enter into this figure are surplus Foreign Liquidation Commission credit, plus small amounts of government-owned minerals and marine products, to the value of some $5,000,000.
The Military Government is endeavoring to encourage such trade as will reduce the area’s dependence upon American funds. Credits realized from South Korea exports, unless balanced in kind by imports approved as essential, are to be used to purchase commodities similar to those making up the Civilian Supply list and certified for import by the Military Government. On July 15, 1947, Korea was declared open to small numbers of foreign businessmen, who might desire to develop trade possibilities within the framework established by the military authorities. Meanwhile, trade has been undertaken with Hong Kong and Macao, and some critically needed materials have been obtained by barter in exchange for Korean surpluses. Recent negotiations with the Egyptian government have led to an agreement to exchange 730 tons of tungsten concentrates for 3,000 bales of long-staple Egyptian cotton.
All dealings with Japan are restricted to a governmental level, and China has imposed conditions which make legitimate trade virtually out of the question. Actually, a growing smuggling trade is going on both with Japan and China, and via Hong Kong and Macao. An essential step for promoting Korea’s trade on a sound basis would be development of an efficient customs service.
United States Investment in Rehabilitation
There is one basic policy question which overhangs all financial and economic programs for Korea: How long will the occupation of South Korea continue on a unilateral basis? Until this question is answered in terms of months or years, no satisfactory decision can be made on United States financial or developmental programs for the area. The characteristics of the South Korean economy are such that there is no compromise which provides effective utilization of dollars, and at the same time leaves open the decision concerning the duration of the occupation. If a serious decline in the living standard, and possibly economic disintegration are to be avoided, South Korea must have (a) unification with North Korea, or (b) substantial relief supplies, or (c) relief and rehabilitation supplies of $200 to $300 million a year for several years. The third alternative would provide a possible basis for an indefinite continuance of occupation. The capital investment in a permanently separate South Korea would be wasteful, and the likelihood of a stable economy resulting therefrom would be in doubt for some years. South Korea is a depleted and eroded country with no minerals worth mentioning; an agriculture dependent on nitrate input, and a backward people. In terms of the needs of the East Asia area, an investment in rehabilitation and industrialization, which would permit South Korea to subsist on its own industrial output at its standards of the past 10 years with a minimum of relief, could be justified only by political and strategic consideration of the highest order.
A consideration affecting the duration of the occupation of Korea, and hence the type of economic program, is the estimated length of the occupation in Japan. General MacArthur has indicated his desire for a United Nations, or other international administration to take responsibility in Japan soon after the peace treaty is signed. There would be obvious difficulties in any long-term occupation and rehabilitation program for South Korea, initiated at a time when the occupation of Japan was about to be relinquished by the United States. Apart from the problem of tactical forces in Japan to back up the Korean occupation, there would be communication and supply problems. There might he political objection to the occupation of liberated Korea after the termination of occupation in defeated Japan.
The United States Military Government in Korea has recommended a five-year rehabilitation program starting in July, 1948, and requiring U. S. financing for a deficit of $647 million. The estimates indicate that the proposed rehabilitation of the Korean economy would cost more per year for the first three years, than the relief program of $137 million which was tentatively approved for fiscal 1948, but reduced in July, 1947, to $92.7 million.
A feature of the proposed rehabilitation program is an expenditure of $35 million to provide a chemical fertilizer industry and the supporting power installations, roughly duplicating the installations in North Korea which formerly supplied the fertilizer needs of South Korea. An additional amount of approximately $85 million is included in the five-year rehabilitation program to cover the cost of fertilizer imports, pending the completion of the plants. Other items in the program are investment in coal mining to provide low-grade anthracite for briquetting, and to provide for the development and reconstruction of the transportation, textile and fisheries industries. There is no assurance, however, that (a) $35 million fertilizer industry would meet the estimated requirements, or reach capacity production in the time allotted. The suitability of low-grade anthracite dust as the basic energy source for a considerable industrial establishment in South Korea has not been tested, and (b) there are no reliable estimates of the reserves of this fuel, and no evidence of this fuel, and no evidence that the mines and railroads could be developed to fit the prescribed time schedule.
In the event that it is decided to continue a one-nation occupation of South Korea for some years, the least costly program would be one designed to provide, not capital goods, but raw materials and fertilizer in sufficient quantity to stabilize the economy at a satisfactory standard of living as measured by a prewar Japanese and potential North Korean living standards. In this way, the risk of an experiment in industrialization without resources would be avoided.
A relief program of the type envisaged might cost the United States about $150 million a year, in addition to the present military occupation costs which are in the neighborhood of $200 million a year. It would be necessary frankly to recognize this as a relief program which held no prospect of financial return, and no prospect of making South Korea a self sufficient economy.
Industrial Survey
A comprehensive industrial survey of South Korea would not be warranted. The industrial elements and capabilities as well as weaknesses of that area are all too evident. Should Korea be reunited, and the United States bear a responsibility in the economic rehabilitation of the country, an industrial survey wholly or in part by qualified United States Government personnel is indicated. If, however, it be made by private consultants, they should clearly understand that the survey must be realistic and reflect the economic needs and capabilities of the country. Foreign consultants and construction firms do themselves and their own country as well as the country concerned, a disservice in recommending projects for which there is not complete economic justification.