Industrialization in the Colonial Period: A Comparison of Korea and Taiwan

      Presenter: Ahn Byong-Jick ( Seoul National Univ., Division of Economics )


          Konosuke Odaka ( Hitotsubashi Univ., Institute of Economic Research )

          Toshiyuki Mizoguchi ( Hiroshima University of Economics )

          Yoshiro Matsuda ( Hitotsubashi Univ., Institute of Economic Research )

          Osamu Saito ( Hitotsubashi Univ., Institute of Economic Research )

          Kazuo Hori ( Kyoto Univ., Faculty of Economics )

          Hwang Insang ( Hitotsubashi Univ., Institute of Economic Research )

          Masahiro Abe ( Hitotsubashi Univ., Institute of Economic Research )

      Part I: Presentation

      Part II: Discussion

Part I: Presentation

Odaka: Today, as a part of our project, Prof. Ahn, who has been conducting comparative research on Korean and Taiwanese economies under Japanese colonialism, will present the results of his latest research.

Ahn: A year ago, Nakamura Satoru formerly of Kyoto University asked me if I might be interested in undertaking comparative research on Taiwan and Korea during their respective colonial periods. I began looking at published English, Japanese and Korean works and found myself strongly drawn to the subject. My literature survey indicated that scholars viewed Korea's economy as revolving around big business and Taiwan's economy as being driven by small and medium enterprises. For example, a comparative survey of the two countries published by the Institute of Developing Economies, called The Development Mechanisms of Korea and Taiwan ( Hattori Tamio, and Sato Sachito eds., Institute of Developing Economies, 1996 ), in looking at the economic conditions, concluded that Korea was indeed a big business economy and Taiwan a small - medium enterprise economy. This conclusion was reached on the basis of three indicators.

The first indicator, the production totals of large-scale firms ( over 500 employees ) as a percentage of national production was 45.3% for Korea and only 26.8% in Taiwan in 1993. Second, the total sales of corporations in the top 5, 10, and 50 listings as a percentage of GNP was 47.6%, 58.8% and 79.7% ( 1991 ) for the Korean economy, while the numbers were much lower at 17.8%, 23.2%, and 36.4% ( 1990 ) in Taiwan's case. The third indicator, exports of small and medium enterprises as a percentage of total exports, was 37.7% for Korea and 67.1% for Taiwan in 1987.

The same book raised three reasons for the differences in industrial organization. One was the different levels of initial accumulation. The second reason was the differences in industrial policy. While the government played a huge role in the economic aspects of Korea's modernization policy, the Taiwanese government did not directly intervened in economic development. The third factor was the different family structures and systems.

As I specialize in economic history, I decided that in order to examine the differences in initial accumulations, I would pursue comparative research of "national capital" or "ethnic capital" in Taiwan and Korea. I would like to present my research findings today.

Overview of the Economies of Korea and Taiwan

In reviewing the economies of the two countries, I discovered after looking for similarities and differences that contrary to my initial expectations, the two countries actually had many similarities. For example, from a historical perspective, both areas had many small land - owning farmers as did others in the East Asian Confucian sphere, both were Japanese colonies in the prewar period, and both had close political and economic ties to the US in the postwar period. Moreover, as has been illustrated by Prof. Mizoguchi's research, the respective economies had high speeds of development in both pre and postwar periods.

In addition, even when they were Japanese colonies, both countries saw high levels of industrialization. Although currently the Taiwanese economy is in better shape than the Korean one, both economies are still making the transition from industrializing to industrialized stages. ( Of course, some may argue that Taiwan has already made that transition to an advanced economy ).

Nevertheless, there are many differences between the two countries, so I would like to highlight three such points in the following section.

Characteristics of Industrialization in the Colonial Period

From documentary evidence, it is clear that first, although both economies were industrialized during the colonial period, Korea was developed much more actively. Moreover, in Korea economic structure was industrialized in a balanced way but Taiwan was biased towards food products and food processing. This was a major difference. In thinking about the reasons for this difference, the fundamental reasons seem to lie in natural resources. As is well - known, Taiwan is a tropical region with bountiful natural resources. It was possible to double - crop rice, while other crops such as sugar canes, tea, camphor, banana, pineapple, etc., were plentiful, making it possible for growth to occur on the basis of only agricultural development. Thus, much of the Taiwanese colonial - era industrialization was concentrated in industries which processed agricultural products.

On the other hand, Korea was extremely poor in natural resources. Especially in agricultural products, the only exportable crop was rice. The best way to counter economic instability arising from problems in the rice economy was through industrialization. Korea had more underground resources than Taiwan, and more electric power resources. From the 1920's, hydroelectric resources were discovered. This may be the main reason why Korea was industrialized more systematically than Taiwan. Table 1 outlines the differences in industrialization through comparisons of manufacturing industries. Taiwan, as you can see, is biased toward food products, while Korea was more balanced than Taiwan.

Secondly, although industrialization was pursued more actively in Korea, by the end of the colonial period, Taiwan was still more industrialized than Korea. Comparing net products, that is agricultural products and industrial products ( see Table 2 ), Taiwan was at 67.8% in 1916, and at 58.9% in 1938, indicating minimal growth. In contrast, in Korea the level was 5.8% in 1912, but 33.9% by 1938. It is clear that the growth rate in Korea was extremely high. However, in actual levels, Korea was much lower than Taiwan. Also, looking at employee breakdowns by industry, agriculture occupied a higher percentage in Korea. Taiwan apparently broke 50% for agricultural workers, but in Korea, it remained around 70%. From this perspective, we can confirm that Taiwan was indeed more industrialized than Korea.

Let us look at the industrialization of this region from a historical viewpoint. Taiwan was an island which traded with mainland China and Europe from the 17th century on, resulting in a highly developed commerce. In the case of Korea, in the late Choson dynasty, there was some commercialization, but it basically remained a "Hermit Kingdom" ( as Westerners referred to it ), controlled by the natural economy.

In concrete terms, if we think about the development of the agricultural economy, late Choson period Korea's most advanced agricultural operations were grain cultivation and commercial cash crop cultivation, in other words diversified cultivation. On the other hand, in Taiwan, in addition to diversified cultivation, there was also processing of agricultural products, and handicrafts for market sale in farm villages. By this I mean, as I will explain in more detail later, toranken ( small Taiwanese rice mills - tulungchien in Chinese ) in rice hulling and milling, and tofu ( traditional small - scale Taiwanese sugar mills ) in the sugar processing industry. Taiwan's commercial economy was quite developed prior to colonization. In Korea's case, even if there was some development in commerce, the overall level of commercialization was very low.

Thirdly, there was trade. Since the start of modern trade, Korea always suffered from trade deficits. As you know, Korea finally recorded a trade surplus in 1986. But from the time statistics came to be systematically compiled and organized, from the period of the opening of the ports through the colonial period ( although the statistics for the period shortly after the opening of the ports are sparse ), trade balance was in the black only twice, in 1924 and 1925. In Korea, domestic savings needed to be supplemented by overseas savings for industrialization and economic development. After 1986, the situation changed somewhat. But with Taiwan, economic development was supported by domestic savings, and the money left over was used for capital export. In this point, Korea and Taiwan were utterly different.

The above three points were reflected in business management. Taiwan had many small capitalists and small enterprises, and self - financed firms constituted a high percentage of total firms. In contrast, Korean corporations ran on loans. It was a deficit economy. These differences did not arise by coincidence, but from deep historical roots.

"National Capital" in the Two Countries

Building on the above observations, let us next turn to the issue of differences in "national capital."

It is well - known that in colonial Korea and Taiwan all the large - scale firms were Japanese - owned. There were two or three large - scale national capital firms, but nothing of major significance. However, the overwhelming majority of small - and - medium enterprises in Taiwan were Taiwanese - owned and operated. Japanese firms accounted for only 10% of the total number of factories ( see Table 3 ).

There are no documents on "national capital" in Taiwan before 1930. I attempted to supplement existing the documents, but discovered very little. In the Korean case, the Korean Factory List allows for research on "national capital" from the beginning of the colonial period. According to this data, in Korea's early colonial period, large, medium, and small - scale firms were predominantly Japanese. But with the economic boom during World War I, Korean enterprises grew in number. Of course, there were Korean firms prior to that, but incremental increases began around 1916. At first, Japanese firms comprised 72.9% of the total. However, these were formal statistics; in actuality, almost all firms were Japanese - owned. By 1938, however, Japanese companies were down to 39.9% of the total, meaning that around 60% were Korean firms. Thus, significant numbers of Korean and Japanese small - and - medium firms co - existed in the latter half of colonial period Korea. In Taiwan's case, the vast majority of firms were Taiwanese. In Korea, Japanese firms constituted a significant portion of small - and - medium enterprises.

An additional difference is that when looking at Taiwan's factories, small and petty factories are listed in the List of Factories ( Taiwan Government - General Development Bureau, 1939 ). In contrast, the minimal standard for inclusion as a factory in the List of Korean Factories ( Korea Industrial Association, 1937 ) was that the facility have more than 5 employees, or the capacity to employ 5 or more workers. This naturally begs the question, why petty firms were included in Taiwan and not in Korea. Upon examining the possibilities, I concluded that the roots of Taiwanese small and medium firms could be traced to indigenous traditions, the two best examples being toranken and tofu. These industries were modernize under Japanese colonial rule. Of course, the sugar industry came to be controlled by large Japanese firms under colonial policies, but toranken was still run by Taiwanese. Not only toranken, but also tea, bananas, pineapples, and other areas were mostly dominated by Taiwanese.

In comparison, all of Korea's small and medium enterprises operated in transplanted industries. One of the most typical ones was rice milling. Rice - milling began to develop in Korea soon after the Sino - Japanese War. In that period, Japanese milled rice in the open ports. By 1903 - 1904, Koreans began managing rice - milling companies. The best - known small and medium "national capital" industries in colonial Korea were rubber and knitted goods, but these were transplanted rather than traditional industries. The only industries with any kind of traditional roots were Korean paper - making and ceramics. But these constituted only a small percentage of the total number of small - medium firms. Therefore, we can say that Korean small and medium enterprises were basically transplanted industries, whereas Taiwanese small and medium enterprises were modernized traditional industries.

The fact that small industries were left out of the List of Korean Factories, but included in Taiwan's List of Factories, did not mean that Korea was bereft of medium and small businesses. There were in fact many petty industries in Korea. From various documents, however, we can tell that there were far fewer than in Taiwan. Thus, colonial officials in Korea most likely felt it unnecessary to include them in the List. I do not think it was the case that the colonial bureaucracy simply did not survey small firms in Korea. I have not looked at statistics for Japan on this issue, so I cannot comment on the situation in Japan at the time. But in Korea, although there were small factories, at least in my research on rice - milling, there were not very many small firms. This was the main point of difference between Taiwanese and Korean economies, and a very important one at that.

Odaka: Could you clarify what you mean when you say rice - milling was transplanted into Korea? Did it come from foreign sources?

Ahn: Yes. It was not an indigenous industry but an imported one.

Odaka: Where was it transplanted from?

Ahn: There were cases where Japanese firms came into Korea, but in other cases, Koreans learned technologies and methods from Japanese and other foreigners conducting business in Korea. These were imported rather than indigenous industries. Prof. Kimura Mitsuhiko of Kobe University has done some interesting research on the subject of petty industries in Korea and Taiwan. According to Prof. Kimura, there were large differences in the level of division of labour and specialization in household industries. The reason was that although there were many Korean households engaged in cottage industry, production per household was very low. In Taiwan, there were very few households engaged in cottage industry, but production output per household was very high. We can surmise from this that Korean household industries were mainly for self sufficiency, for their own consumption. Taiwan's household industries were for market sale. This point highlights the differences in the level of division of labour and specialization in the two countries.

Differences in Business Organizations for Rice Milling

Ahn: If we compare at the firm level, in both Taiwan and Korea, the industry with the highest number of companies was rice - milling. Putting aside the issue of the actual significance of rice milling and looking in terms of sheer numbers only, rice milling was by far the largest industry. As there has not been much research conducted on rice milling in Korea, I limited myself to comparisons of rice millers in Keijo ( Seoul ) and Taiwanese toranken. Of course, there was rice - milling other than toranken in Taiwan, but it accounted for the largest portion of the rice milling industry. From this comparison, I saw that Keijo rice millers had more employees than Taiwanese ones. Keijo rice millers had an average of 22 employees per mill, while Taiwanese rice mills averaged only 2-3 employees per mill.

The fact that Taiwanese toranken could operate with only 2-3 workers can be explained by the fact that family members worked in addition to the formal employees. In contrast, many family members of Korean owners often did not help in the business. This was a typical characteristic of Korean petty firms. For example, even if the parents ran a restaurant, the sons often did not even come into the neighborhood in which the business was located. The yangban attitude of looking down on commercial activity remained strong. Due to this reason, even in the case of small and medium companies, family members did not participate in the business. Of course, things have significantly changed in Korea during the last few years.

In addition to scale, another difference lay in the social backgrounds of the businessmen. Toranken operators were originally landowners, peddlers and traders, rice dealers, money lenders, and merchants. Furthermore, in addition to domestic sales, there was a long history of exports to mainland China. Therefore, during the colonial period, these rice millers formed associations in an effort to export rice to Japan. Although they were unsuccessful, the toranken operators did make several attempts to obtain export rights.

The prevailing view in Korea is that the rice millers were landowners and grain merchants. However, when I looked at 1910 documents of Keijo rice merchants and list of rice milling merchants, there was not one name that appeared on both lists. Therefore, it is not clear whether these rice millers were in fact from merchant class backgrounds. Some rice millers winnowed not only on a sub - contracting basis, but also bought grains themselves, then milled and sold the rice. In that sense, rice millers could be considered rice merchants.

The functions of Taiwanese and Keijo rice millers were apparently very different. Keijo rice millers generally did not buy unhulled rice or market rice. Instead of pursuing such commercial profits, they generally concentrated only on processing profits. In short, their method of conducting business was very simple. Taiwanese rice millers were quite skilled at commerce, seeking profits by engaging in various activities such as buying hulling rice, extending loans to farmers, dealing in futures, engaging in brokerage, and acting as a wholesaler. Consequently, processing profits were not essential for toranken. Under some conditions, processing profits could even be detrimental. The operating patterns in Keijo and Taiwan were completely different.

Next, although I have not completed research on this issue, I would like to compare production costs of rice per koku ( 4.96 bushels ). We can see in Tables 4 and Table 5 that Keijo rice millers used the category of "production costs" while Taiwanese mills used "operating fees." As the basic frameworks for accounting were different, it is not possible to make direct comparisons. Nevertheless, there are specific items which can be compared.

First, "electricity and wages" for Taiwanese mills amounted to 0.093 yen per koku, but "wages and power" for Keijo rice millers totaled 0.47 yen. Looking at this, we can conclude that as toranken employed family labor, wage - related expenditures were lower, while Korean rice millers had to devote more to wages for formally hired factory employees. Of course, at this stage, this is merely a guess, and requires further research.

Second, when we compare "office staff wages" per koku, toranken was at 0.095 yen, while Keijo rice millers used 0.14 yen. These statistics indicate that Korean rice millers employed more office staff and technicians than Taiwanese operators.

Third, Korean rice millers calculated "interest loans," but Taiwanese rice millers did not include this category. It is possible that toranken operated wholly on their own capital.

Remaining Issues - Transaction Costs and Distribution Organizations

I have presented what I have researched so far. In order to construct a larger conclusion, more research is required. "National capital" in Taiwan and Korea were clearly different, but I cannot offer anything more definitive at this stage.

However, the following points can be confirmed as a result of my analysis thus far.

    1. Due to differences in available natural resources in the two areas, Korea was industrialized much more actively than Taiwan.

    2. As Taiwan traditionally had more developed in the level of division of labour and specialization , it had more small or petty industries than Korea.

    3. As the market economy was more highly developed in Taiwan, Taiwanese entrepreneurs had better business skills than their Korean counterparts.

Using data from a comparative study of footwear industries in 1980's Korea and Taiwan, Brian Levy applied transaction cost theory to explain why Taiwan's economy was small and medium firm - centered, while Korea's economy was big business - oriented. According to Levy, the market economy was not well - developed in Korea, thus, transaction costs increased. This engendered the development of a footwear industry which favored large - scale firms. On the other hand, the market economy was highly developed in Taiwan, and as a consequence, transaction costs were lower. Thus, a footwear industry with conditions favorable to small - medium firms emerged. I am not at the stage of my research where I can confirm all of Levy's conclusions. Today, I have concentrated on explaining how Taiwan's market economy was more developed than Korea's during the colonial period.

Finally, there were apparently differences in the distribution organizations and systems of Taiwan and Korea, but how they were different and what differences existed in distribution costs are points that need further examination. I also plan to analyze the development of knitted goods industries in China, Japan and Korea through a focus on the developmental history and distribution processes for the final products. Through such research, I hope to better understand the differences among the three countries in their respective industrial structures, and the historical factors behind these differences. Today's presentation was one part of this larger project. Thank you for your attention.