3 bitious plans to modernise the Korean economy. He had been able to observe methods of com­prehensive economic planning when he was a Japanese officer in Manchuria. Possibly he drew inspiration too from North Korea, which at that time applied Soviet planning methods quite suc­cessfully. 6 Such planning by its very nature is the very opposite of the incrementalism, which economists then and now propagate so dili­gently. The point of economic planning is not to adapt passively to the market forces, but to change your competitive situation through sys­temic, roundabout modernisation in a middle and long-term perspective. nelled it into the acquisition of technology, know-how and intermediary goods. It also con­trolled the enterprises through the banks, which were all government owned, and the KCIA, which used the soft spots of the`Ü~ÉÄçä owners to pressure them. The terms of these so-called policy loans were quite favourable to enterprises. The ÅÜ~ÉÄçä, which were their main recipients, were“for all practical purposes … private agen­cies of public purpose” 8 Economic planning gave them relatively long, stable planning horizons. When things did not turn out as expected, firms could be sure to be bailed out, at least as long as they accepted the leadership of the State. With its limited resources and its low wages, Ko­rea at that time at best could hope to develop some light industry, yet one could hardly expect that it would ever be able to catch up with North Korea, while it would continue to remain economically and politically dependent on the United States. To avoid this, Korea had to change its resource endowment and that meant to invest heavily in industry, technology and in­frastructure. Such a modernising accumulation regime re­quired plenty of capital. Where should the capi­tal come from? Internal savings were weak. Yet, there were plenty of dollars coming into the country. In fact, American economic and military aid accounted for 75 percent of the military and 50 percent of the civil budget. 7 Much of that ended up in the black market and was used to buy foreign-produced goods, in detriment of local industry. Hence, it was not easy to redirect these funds to import foreign technology and know-how. Therefore, Park Chung Hee had to look for other sources of foreign capital too. First, he sent young Korean men into German mines and nurses into German hospitals. He made it quite clear that their sacrifices were for the good of the nation and its development. Second, as a result of normalisation with Japan in 1965, several hundred million dollars flowed into the country in the form of grants and in­vestments. The works on the huge steel mill in Pohang started. Third, the Vietnam War became a true bonanza for the economy and much of the Korea-produced steel ended up there. The government maintained effective controls on much of the foreign exchange and chan­6 Bruce Cumings, Korea’s Place in the Sun. A Modern History. W.W. Norton, N.Y., et al., 1997, p. 311. 7 ibid., p. 310. In the logic of the planners, labour costs had to be kept low in order to secure the profitability of enterprises, which in turn had to invest whatever they earned. Social, and, for heavens sake, po­litical unrest had to be suppressed at the roots. That was the task of the KCIA, which became ever larger and more powerful. Thus the political equivalent of the accumulation regime was dic­tatorship. The breathtaking results of this regime are well known. A country with a per capita income of less than 100 Dollars 9 at the beginning of the 1960s became an industrial nation with high levels of sophistication, able to compete in some areas successfully with the best Japanese and German firms on world markets. Financial Market Regime Let us first have a look at the some merits of the accumulation regime. In Diagram 1 one can observe the yearly in­creases in gross investment(at constant prices). It is astounding. Please note that investment growth is much lower nowadays than in the 1960s, 70s and 80s. Private Consumption in­creased in a much more stable fashion than in­vestment, just below 10 percent every year. Again, nowadays growth rates are at much lower levels. 8 ibid., p. 317, quoting Woo Jung-en, Race to the Swift: State and Finance in the Industrialization of Korea, Co­lumbia University Press, 1991, p. 159. 9 GNP per capita amounted to 82 US Dollar in 1961 pro Kopf(Bank of Korea, Economic Statistics System). How­ever, just the official US transfers to Korea between 1945 and 1976 were in the order of 600 US Dollar per capita of the Korean population(Cumings, 1997, p. 307).