Democratic Advantages in Overcoming Economic Crises: The Case of South Korea. Hyug Baeg Im. Professor

Transcription

1 Democratic Advantages in Overcoming Economic Crises: The Case of South Korea Hyug Baeg Im Professor Department of Political Science and International Relations Korea University & Hea kyeong Kim Department of Political Science and International Relations Korea University Paper prepared for IPSA, The Error-Correcting and Error-Compounding Aspects of Democracy, Monday 25 July 13:30-15:15 Poznań Congress Center, Pavilion 14 (PCC-14)

2 Abstract Until the mid 1980s, South Korea was an exemplary case that showed the compatibility between authoritarian developmentalism and economic growth. After the successful transition to democracy in 1987, the shift in economic policy regime did not take place and developmental state policy regime continued to be the dominant policy regime that sustained high economic growth under democracy. Policy regime change to neoliberalism took place to cope with the unprecedented economic crisis in 1997 under the new progressive center left Kim Dae Jung government. In this paper, I will discuss the relationship between political regime and economic development. First, I will look into the concept of economic policy regime and policy regime change. Second, I will analyze the performances of three different economic policy regimes, i.e., authoritarian developmentalism ( ), democratic developmentalism ( ), and democratic neoliberalism (1998-present). Third, I will test the validity of the so-called incompetence of democratic government thesis. My argument is that the incompetence of democratic government thesis has been proven wrong by the facts that democratic governments did not perform economically inferior to authoritarian governments, but, in some areas, democratic governments outperformed authoritarian governments. 2

3 1. Introduction: Political Regimes, Economic Policy Regimes, and Economic Growth in South Korea Since the democratic transition in 1987, Korea has supported exogenous modernization thesis that economic development and democracy has strong causal relationship with regard to sustainability, durability or consolidation of new democracies. 1 Since the democratic transition, steady economic growth, successful overcoming of East Asian economic crisis in 1998, and resuming of economic growth showed that democracy in an affluent society like South Korea would not be subverted to authoritarianism and the Korean case perfectly fit Przeworski s exogenous democratization thesis. 2 Despite successful political regime change to democracy in 1987, what Adam Przeworski calls "policy regime change"(przeworski, 2001; 2010) did not take place in Korea. Main pillars of "developmental state policy regime" of authoritarian period remained intact under new democratic governments. Economic policy regime of authoritarian governments did not change under new democracy because Korean transition was a typical example of democratic transition from an economically successful authoritarian regime. 3 After the political regime change, while democratically elected governments have made many political and social reforms, such as establishing liberal democratic institutions, de-politicization of the military, decentralization of politics, holding local elections, instituting American style law school etc., the governments made only few reforms with regard to economic policy regime, simply to follow major economic policies of authoritarian 1 Adam Przeworski, Michael E. Alvarez, Jose Antonio Cheibub, Fernando Limongi, Democracy and Dev elopment: Political Institutions and Well-being in the World New York: Cambridge Universi ty Press (2000). 2 While endogenous modernization is a theory of change from within and contend that autocracies become democracies when per capital income crosses a threshold where dictatorships turned into democracies, exogenous modernization is a theory that economic progress makes democracies stable, i.e., a good economy makes a democracy more stable. In the words of Lipset, the more well to do a nation, the greater the chances it will sustain democracy (Seymour M. Lipset, Some Social Prerequisites of Democracy: Economic Development and Political Legitimacy, and Adam Przeworski, Jose Antonio Cheibub, and Fernando Limongi, Culture and Democracy in World Culture Report, Paris: UNESCO, 1997: 158). The basis assumption of Przeworski s exogenous democratization is that democracy is not a byproduct of economic development, its presence or absence is the result of political actors pursuing their goals. (Adam Przeworski, Jose Antonio Cheibub, and Fernando Limongi, Culture and Democracy : 177; Charles Boix and Susan C. Stokes, Endogenous Democratization, World Politics 55 (July 2003): ) 3 In South Korea "crises of success" created the conditions for democratic transition. The authoritarian dictators had to withdraw from power just because they had accomplished historical mission of econom ic development and thus became historically obsolescent. I call this pattern of transition "transition by crises of success." (Im 2000) 3

4 predecessors. However, old policy regime could not sustain indefinitely. Korean developmental state policy regime was not sustainable when it faced external as well as internal political and economic changes such as the end of the Cold War, global hegemony of neoliberalism, and the alternation in power between political parties through election. Economic crisis occurred in 1997, and newly elected Kim Dae Jung government took responsibility to overcome the economic crisis and introduced new neoliberal policy regime under the pressure from global capital, IMF and the U.S. Treasury. In 2008, president Lee Myung Bak, who made the second turnover of government, faced global economic crisis originated from the successive meltdowns of big Wall Street financial institutions. This time, Lee government did not respond to the crisis with new policy innovations, but faithfully followed neoliberal prescriptions such as currency swap agreements with the U.S., Japan, and China. Lee government was praised for its successful defense against externally generated economic crisis and neoliberal policy regime has been sustained in South Korea. Relying on an alternative perspective on comparative advantage of democracy over authoritarianism with regard to economic development and growth, I will compare economic performances of three different political-economic policy regimes, i.e., authoritarian developmentalism, ( ), "democratic developmentalism ( ), and democratic neoliberalism (1998-present). First, I will explain the concept of economic policy regime and economic policy regime change. Second, I will compare economic performances of different political economic policy regimes (1) authoritarian developmental regime during Park Chung Hee and Chun Doo Hwan dictatorships ( ); (2) democratic developmental regimes under Roh Tae Woo and Kim Young Sam presidency ( ); (3) democratic neo-liberal regimes under Kim Dae Jung, Roh Moo Hyun, Lee Myung Bak and Park Geun Hye presidency (1998-present). Third, I will try to find an answer to the question why democratic developmentalism during Roh Tae Woo and Kim Young Sam presidency performed the best among three political economic policy regimes in Korea, i.e., authoritarian developmentalism, democratic developmentalism and democratic neoliberalism. Finally, I will test the so-called incompetence of democratic government thesis which contends that the authoritarian regime excelled in democratic governments in terms of economic performances measured by GDP growth per capita, export growth, low inflation rate, full employment and gross fixed capital formation etc. Tentative conclusion is that democratic governments did not perform 4

5 economically inferior to authoritarian governments, but in some areas, democratic governments outperformed authoritarian governments. 2. Economic Policy Regimes and Economic Growth in Korea 4 Why have political leaders of different parties made similar policy choices when faced with economic crisis? Adam Przeworski analyzes the continuity of policy choices with the concept of "economic policy regime" (Przeworski, 2001, 2010). Przeworski defines "policy regime" as "an equilibrium in which different parties offer and implement similar policies" regardless of their ideological orientations and partisan stripes. Few economic policy regime changes occur despite rotation of power among different parties until some political party, triggered by economic crises, introduces major policy innovations, has been elected and reelected with the policy proposals and successful implementation of proposals, and the succeeding government of different party follows and imitate the policies of its predecessors. (Przeworski, 2010) Looking at the South Korean case through the window of Przeworski's "policy regime" is useful to analyze the introduction, stability, and change of policy regime in newly developed democracies. In South Korea, policy makers in economically developed new democracies had implemented similar economic policies of previous authoritarian governments that they regarded as successful. The economic policy regime of Korean authoritarian regime in 1970s and 1980s was called "developmental state" policy regime in which the state guides, disciplines, and governs the market. (Wade, 1990) The developmental state policy regime lasted until the advent of East Asian economic crisis in late 1997 despite political regime change from authoritarianism to democracy. Faced with the unprecedented economic crisis in late 1997, newly elected Kim Dae Jung government accepted IMF conditionalities for bailout loans that included switching economic policy regime to a neoliberal one. Imposed economic policy regime change from outside, however, was a great success. South Korea repaid IMF loans and got out of IMF conditionalities in a very short period of time of less than two years; Korean economy resumed sustainable growth without massive layoffs; foreign currency reserves were sufficiently amassed to defend short-term financial fluctuation; exports exploded and huge 4 This chapter relies on Hyug Baeg Im, Political response to economic crisis in 1997 and 2008 South Korea, in Hideko Magara, ed., Economic Crises and Policy Regimes: The Dynamics of Policy Innovation and Paradigmatic Change, UK: Edward Elgar. 5

6 trade surpluses continued while maintaining low inflation rate. Encouraged by the success, president Roh Moo Hyun, elected as the candidate to the same Democratic Party as Kim Dae Jung, pursued more radical neoliberal policies than did Kim Dae Jung. In 2007, Korea passed Huntington's "two turnover" test and completed the democratic consolidation by electing opposition conservative GNP (Grand National Party) candidate Lee Myung Bak to the president of Korea (Im, 2010; Huntington, 1991). President Lee Myung Bak, the first CEO president who served as the chairman of Hyundai Construction Co., deepened neoliberal policy regime. Lee Myung Bak, however, created his own style of neoliberal policy regime by injecting Keynesian public works programs into neoliberal policies such as Pan Korean Grand Waterway, the Four Major Rivers Restoration Project and "Green New Deal" policy. President Lee Myung Bak was able to cope with Global Financial Crisis in 2008 with currency SWAP agreements with the U.S., Japan, and China. The buoyancy of high growth Chinese economy helped Lee Myung Bak government resolve Korean companies' liquidity problems. 3. Authoritarian Developmentalism, Economic Policy Innovations of Park Chung Hee I will, first, try to trace back the trajectory of the creation, stability, and demise of authoritarian developmentalism under Park Chung Hee and Chun Doo Hwan dictatorships. Admirers of Park Chung Hee praise Park's choice of policy regime, developmental statism, as the key to explain rapid economic growth in 1960s and 1970s. The Korean miracle was possible by Park s optimal strategic choice. Park, at first, chose import substitution industrialization strategy (ISI) in which rural development, capital goods industry, and import substituting goods industries were emphasized while exports were given a secondary role. However, after witnessing the dismal outcome of the key planned sectors but unexpected high growth of exports, Park changed the development strategy from ISI to EOI (export oriented strategy or outward looking development strategy) (Im, 1987: ). Park Chung Hee was the first Third World country leader to respond to the changes in the international market that showed the ongoing transition from classical international division of labor (agricultural and mining export form colonial economies and manufactured export from advanced capitalist countries) to new international division of labor (the feasibility of world market oriented manufacturing in peripheral countries) (Im, 1987, 242; Folker Frobel et al., 6

7 (Im, 1996). 5 Moreover, Park's developmental state has its own rule of discipline which was 1980). Park s Korean miracle was a success story of what Wallerstein called promotion by invitation (Wallerstein, 1979). Park promoted Korean economy from periphery to semiperiphery by responding to the invitation by capitalist world economy (Wallerstein, 1979). Park's key economic policy innovation was the creation of a typical authoritarian developmental state model in which the state, rather than market, guided, led, and governed effectiveness and efficiency of the state-directed economy. Alice Amsden argues that Park's model was an innovation because the developmental state, unlike predatory interventionist state, overcame the penalty of lateness by state subsidies and getting the relative price deliberately wrong. (Amsden, 1990) Weiss and Hobson point out the innovative strategy of Park's developmental state which provided subsidies by which the subsidies were not provided in the form of giveaway but provided in exchange for good performances in terms of output, exports, production quality, and investment in training and R&D. (Weiss and Hobson: 1995) Weiss and Hobson also emphasize that Park invented big bourgeoisie (chaebul) and nurtured them as national champions and empire builders who prioritized long-term interests of expanding market share over short term interests of maximizing profits. necessary to respond effectively to crisis situation. Park's disciplinary rule was one of "forced adjustment" imposed by a powerful state on society (Kim and Im, 2001). During the Park Chung Hee era chaebols, as the few highly diversified national champions, rested on a conscious provision of rents, financial subsidies, license privileges and technological assistance. Without those provisions of rents by the state, chaebols could hardly enter risky ventures in heavy and chemical industries (HCI) in the 1970s. Park Chung Hee devised a harsh but effective rule of forced adjustment whereby adjustment costs were disproportionately borne by society, not by chaebol conglomerates. The core in the rule of forced adjustment was the socialization of adjustment costs and therefore bred serious moral hazards. (Kim and Im, 2001) 5 However, it has turned out that Korean miracle in the 1960s and 1970s was not made exclusively by optimal economic development strategies and policies that Park chose, but many exogenous factors contributed to the miracle such as benevolent American hegemony helping Korea economically to protect the strategically very important anti-communist buffer state in East Asia, Confucian culture emphasizing education and human capital, and the legacy of Japanese colonialism which provided Park the prototype of developmental state ideas. 7

8 Stability of Authoritarian Developmentalism under Chun Doo Hwan After the dictator Park Chung Hee was assassinated by his close protege, KCIA chief Kim Jae Kyu in October 1979, another military authoritarian regime led by Chun Doo Hwan was restored in With regard to policy regime, the new military authoritarian government inherited most of the pillars of developmental authoritarian policy regime invented by Park Chung Hee, such as chaebol as the national champion of Korean economy, "governing the market" (Wade, 1990), productionist state regime (in contrast to consumptionist Keynesian welfare state regime), and socialization of adjustment costs. Chun, nonetheless, made minor revisions to Park's economic policy regime, which was more "market-conforming" than Park's developmental state. Therefore, I call Chun's policy regime as "market-conforming" developmental state policy regime in the sense that the authoritarian state stressed more market rationality and economic liberalization than did Park's "market-shaping" developmental state. Chun's liberalization policies included trade liberalization, financial liberalization allowing chaebol companies to invest in NBIFs (Non-Bank Financial Institutions), and abolition of state subsidies to specific strategic industries. But basically Chun's policy regime can be called developmental state regime on the ground that the state controlled major banks and financial capital, nurtured chaebols as the champion of Korean industrialization and thus forced adjustment costs disproportionately on politically weak sectors in the society, and excluded workers from the distribution of national growth and repressed workers from organizing unions and protesting in the street as well as in the work places. During Chun's tenure, the economy soundly resumed to grow rapidly with relatively low inflation. While many said that good economic performances of Chun government owed to favorable exogenous conditions, called "Three Lows" (low oil prices, low interest rates, and low exchange rates), rapid economic growth was possible mainly because president Chun mended the flaws in Park's developmental policy regime and complemented it with the injection of neoliberal policies with "autonomous state" apparatuses. (Skocpol et al., 1985: 9) 4. Democratic Developmentalism, Developmentalism survived under the new democratic government of Roh Tae Woo Despite political regime change to liberal democracy in 1987, economic policy 8

9 regime remained intact. 6 None of election promises to overhaul developmental state policy regime was kept by newly elected president Roh Tae Woo, the candidate of ruling Democratic Justice Party. President Roh Tae Woo sustained developmental state policy regime. Roh Tae Woo, as the first democratically elected president since 1972, had to protect the new fragile democracy from subversion, political turmoil and militant union workers' demand for more wages. Immediately after democratic breakthrough on June 29, 1987, more than 3000 strikes erupted in the aftermath of June 29. For managing uncertain and volatile transition politics, president Roh needed to maintain good booming economy that would have served as the cushion for political turmoil. President Roh needed robust economic growth and thus he had to rely on old policy regime, which had proven record of long term high rate of economic growth. The necessity for successful democratic transition prevented him from exploring new economic policy innovations. 7 Roh chose stability rather than innovations in terms of economic policies. Authoritarian capitalists argue that democracy provided workers the right to demand more consumption and vote-maximizing democratic politicians tried to satisfy workers (or low income masses) demands. As the democratic government tried transfer power to the workers by reallocating resources from long term investment to consumption and welfare, the outcome would be lower profit, less investment and economic stagnation. 8 However, Roh's excellent economic and social performances proved the dismal prediction of authoritarian capitalists arguments (Galenson, 1959; de Schweinitz, 1964) to be wrong in the case of Korean new democracy. Despite the outburst of workers in the street, the Korean economy had been doing outstandingly well. Economic growth under Roh Tae Woo period was very high compared to advanced industrial countries as well as high-growth East Asian emerging market economies. The president Roh Tae Woo did a good job in managing many problems that occurred in the transition period. Under Roh Tae Woo presidency, democracy was not 6 Nonetheless during electoral campaign for presidential election in December 1987, every candidate promised to reform developmental state policy regime because the policy regime has authoritarian characteristics that the authoritarian state forcefully socialized investment risks and business losses of chaebol firms. Popular sectors, thus, had shouldered disproportionate shares of adjustment costs through wage cuts and job losses (Kim and Im, 2001). 7 However, developmental state's systematic distortion of incentive structures in favor of export, "gambl er's approach" concentrating scarce resources in few industries, massive injection of relief loans to ailing chaebol firms became major causes of financial crisis in Walter Galenson, Labor and Economic Development; Karl de Schweinitz, Industrialization and Democra cy: Economic Necessities and Political Possibilities; Adam Przeworski, Michael E. Alvarez, Jose Antonio Cheibub, Fernando Limongi, Democracy and Development. 9

10 subverted; the economy continued to grow rapidly under democracy; and the middle class did not invite praetorian dictators. Economic Growth and Crisis under Kim Young Sam Presidency President Roh was succeeded by the president Kim Young Sam who was the candidate of the same ruling Democratic Liberal Party. Therefore the inauguration of Kim Young Sam was actually an intra-party power succession. Nonetheless, Kim Young Sam as the first civilian president since 1963 aggressively pursued demilitarization and civilianization of politics. However, he did not try to overhaul developmental state policy regime which had revealed many problems in terms of growth, distribution, transparency, moral hazard and responding to globalization effectively. And in the last year of his presidency, he put the whole economy into an unprecedented national economic crisis and contributed to the first turnover of power to opposition party leader Kim Dae Jung in the presidential election in December Under Kim Young Sam presidency Koreans became richer than any other time in history with per capita income of more than 10 thousand dollars in 1995 (in 1995, per capita income surpassed 10,000 dollars, according to World Databank) and Korea joined the OECD, a club of affluent democratic countries. In Asia, only Japan has been a member country of OECD. Crisis in Developmental Policy Regime in 1997 The wind of globalization began to blow in Korea in the last years of Kim Young Sam presidency in the mid-1990s. However, most Koreans believed that economic prosperity would continue without changing developmental state policy regime. They even welcomed globalization as a window of opportunity that would provide them more markets for Korean exports. They did not understand the hind side of globalization that would change the whole rules of game in international political economy (Wade, 1998, Lee Jay Min, 2012). Koreans entered into the global open market without instituting new governance in finance, business and labor. The outcome of insufficient preparedness to globalization was a disaster to Koreans. When the wave of East Asian financial crisis reached Korea in late 1997, the financial system melted down and the Korean economy was pushed to the brink of state default. South Korea avoided the worst scenario with the help from the IMF that bailed out 10

11 massive loans of 55 billion dollar with many conditionalities. Financial crisis in Korea showed the world that developmental policy regime came to an end. Problems in developmental state policy regime had been accumulating in the last days of Kim Young Sam presidency, and reached the crisis point with the advent of East Asian financial crisis in Korea. There have been competing diagnoses and explanations about the causes of the economic crisis in Korea. Krugman (1998) argued that Asian crises, including Korea, broke out with the burst of financial bubble in a contest of declining returns to investment. International capital flows contributed to inflows of foreign capital in Korea, while crony capitalism increased domestic investment in speculative real estate and unsound financial activities. Corsetti, Pesenti, and Rubini (1998) observed unsound fundamentals of several imprudent macroeconomic policies as responsible for the onset of the crisis such as real currency appreciations by pegging fixed exchange with the US dollar, excessive lending to risky and low profitability projects of chaebols, weak and fragile financial system, and accumulation of short-term debt. Radelet and Sachs (1998) explained self-fulfilling panics in external financial markets as the main causes of the crisis. They argued that the Korean financial crisis was triggered by dramatic swings in creditor expectations about the behavior of other creditors, thereby creating a self-fulfilling, though possibly individually rational, financial panic. (1998: 22) Wade and Veneroso (1998) point out the conspiracy of Wall Street- US Treasury-IMF complex as the main culprit to the cause of the East Asian financial crisis. The complex trio conspired to force those countries in East Asia, South Korea as the largest economy among them, policy regime change to neoliberalism including radical financial liberalization by pulling out massive amount of invested capital and thus pushing those economies on the verge of bankruptcy. I believe that these theories on the cause of the economic crisis can explain partially the true story about the short-term cause of economic crisis in 1997, but these theories are not sufficient enough to explain long-term structural cause of the crisis. I find that the crisis was caused structurally by two constraints, democratization and globalization. Koreans started to feel the wind of globalization with the Plaza Accord in The Plaza Accord forced sharp revaluation of East Asian currencies, fueled American demands for the opening of financial markets in Korea. Globalization as a whole became a powerful constraint on macroeconomic management of the developmental state. Moreover, the advent of globalization coincided with democratization, and democratization in turn hindered smooth adjustment to the impact of globalization. The electoral democracy immediately had negative 11

12 effects on Korea s model of development. The labor launched a massive wave of strikes only a month after the democratic breakthrough in The strikes ushered in a new era of labor militancy, which would fundamentally hinder effective workings of the developmental state policy regime. Between 1987 and 1990 dissident labor leaders engaged in a wide range of union organizations from regional conferences for unions in small vendor firms, industry federations for service workers, and councils for workers employed by chaebol firms and finally the establishment of a loose umbrella organization for major dissident labor unions, called the "democratic" Korean Confederation of Trade Unions (KCTU) in Thereby, the national level of labor movements fractured into two hostile peak organizations, a reformist official Korea Federation of Trade Unions (KFTU) and a dissident democratic KCTU, which had successfully penetrated into chaebol firms. Democratization activated organizing labor union movements at the company, intermediary, and national peak level, but those national and intermediate unions were too weakly organized to force the state and peak associations of big business to agree on a comprehensive social contract binding all major segments of capital and labor to an economically sustainable rate of wage increase. The real wage, in fact, rose 8.3 percent annually between 1987 and 1996, 3.7 percentage points higher than one achieved between 1979 and 1986 (Kim and Im, 2001). The rise of union movements and labor militancy threatened the political mechanism of adjustment under developmental policy regime. The typical adjustment mechanism was state subsidies to chaebol firms and repression of wage increase. When faced with stagflation crisis, the developmental state injected massive relief loans for chaebol firms while forcing on workers a dramatic reduction in wage increases. After 1987, located within a dense web of linkages between industries established by vertically and horizontally integrating chaebol conglomerates, as well as placed in a geographically concentrated network of subcontractors organized around the final assembler, chaebol, labor unions could individually disrupt production in myriad related industries through strikes. Labor unions had a structural power to decide wage rate, which constrained state action and business calculation even without an active exercise of it by union leaders. Democratization sowed the seeds for the demise of one of the main pillars of economic policy regime, wage repression by developmental state (Kim and Im, 2001). Moreover, the coming of electoral democracy made the formula of adjustment of policy regime obsolete by transforming chaebol itself into a privileged status group. After democratization, finance officials in 1987 imposed a ceiling on loans for Korea s forty largest 12

13 chaebol conglomerates and pushed for a gradual reduction of cross shareholding between affiliate chaebol firms. Then in 1990 amidst a business crisis, Roh Tae Woo envisaged a regrouping of chaebol into a specialized industrial combine with four or five core areas of production through a swap of secondary unrelated businesses with other conglomerates. The call for chaebol reform had a large audience within society. These reform efforts, however, failed dismally. They were actively sabotaged by an organized lobby of chaebol groups, but also structurally preempted by Korea s dependence on chaebols for continuous export growth. However, chaebols were not merely a passive target for change. They were also an active player whose decision ironically weakened Korea s old model of growth from which they benefited so much. As globalization made the opening of financial markets inevitable, added by an intense political pressure from abroad, finance officials encouraged an entry into formal financial markets by chaebol as well as curb market lenders, to establish local commercial banks and a host of nonbank financial institutions without an effective program of decontrol on interest rates, which resulted in a dangerous situation of moral hazards. Chaebols soon acquired a controlling share in most insurance firms, investment and finance companies and securities houses. These nonbank financial institutions became a source of capital for distressed chaebols and hardly brought a more efficient allocation of economic resources. Chaebols' takeover of financial institutions only worsened Korea s already serious problem of moral hazards as financial institutions become a direct source of capital for inefficient chaebol firms who could not borrow from commercial banks. The maladjustment to globalization and insufficient policy innovation under democratic governments generated structural crisis in developmental state policy regime. Therefore, economic growth regime forged by Park Chung Hee had been actually disintegrated well before a financial crisis struck Korea in late (Kim and Im, 2001) However, despite unprecedented economic crisis in late 1997, Korean people went to the polling places and elected an opposition leader to the president and delegated him to overhaul developmental state policy regime and to institute new policy regime that can resume economic growth without the so-called "crony capitalism" which prevailed under authoritarian regimes and extended its life in the new democracy. Therefore, the election in 1997 shows the durability and the improved accountability of the Korean democracy. The election demonstrated Korean people s determination to live under democracy regardless of severe external fluctuations like the financial crisis. And the defeat of the ruling party candidate in the election showed that the electoral mechanism of accountability was working since the people 13

14 called on the ruling party to take responsibility for generating such profound national economic crisis. Democracy helped Korea to make a comprehensive policy regime change without arousing serious political instability by institutionalized electoral mechanism for legitimate power change (Haggard, 2000, Kim, Byung Kook, 2001). 5. Democratic Neoliberalism, 1998-Present Policy Regime Change to Democratic Neoliberalism under Kim Dae Jung Presidency Change of government occurred in the midst of national economic crisis. At the presidential election in December 18, 1997, the Korean people elected Kim Dae Jung to the presidency. The election of Kim Dae Jung meant the first peaceful transfer of power to the candidate of an opposition party through popular votes. Koreans mandated the long-time opposition leader the tasks of advancing democracy toward consolidation, overcoming economic crisis and instituting new democratic governance that would restore economic growth and prosperity. Kim Dae Jung escaped from the economic crisis by the infusion of emergency standby loans by the IMF, which provided Korea with unprecedented 55 billion dollars in exchange for neoliberal structural reform along the lines of the Washington Consensus. IMF actually demanded Korea to discard Park s developmental state model and instead to adopt Anglo- Saxon neoliberal economic model. Kim Dae Jung s solution was the parallel development of democracy and market economy. Kim Dae Jung publicly questioned the efficacy of authoritarian developmental state model. As a result, Park s developmental authoritarianism was degraded from a historical necessity to a historical obstacle hindering parallel development of democracy and market economy. 9 Policy Regime Change to Neoliberalism Kim Dae Jung government launched four key structural reforms in the areas of chaebols, financial institutions, public sector and labor. In instituting more flexible labor market, Kim Dae Jung government, for the first time in history, relied on tripartite compromise, 9 Hankookchungchiyounkoohoe (Study Group on Korean Politics (ed.), DongAsia Baljunmodeleun Silpaeheatneunga? (Did East Asian developmental model fail?). Seoul: Samin (1998); Hee Youn Cho, Tongasia Palchoroneui Chaegumto (The Reappraisal of East Asian Developmental Model), Kyongchewa Saheo(Economy and Society) (1997). 14

15 coordination and agreement among labor, capital and the state. With new tripartism, Kim Dae Jung government persuaded unions to accept flexible labor market in return for more political and social rights to the workers and made a grand compromise in the February 6 Social Pact. The tripartite agreement helped Kim Dae Jung to persuade fleeing Wall Street capital to return and reinvest in Korea and thus help Korea overcome financial crisis. After overcoming the financial crisis, the Kim Dae Jung government found IT industry to be the future source of growth. The Kim Dae Jung government built up a nation-wide high-speed internet superhighway networks, nurtured high-tech venture firms, and for the first time in history constructed Korean welfare state called the productive welfare system to compensate market losers and provide social safety nets for them. Under democratic governments, high economic growth continued without victimizing equitable distribution. On being elected to the president, Kim Dae Jung reached the same conclusion as the IMF that the cause of economic crisis lies in the developmental state policy regime and thus the prescription for escaping from the crisis must focus on reforming four main pillars of developmental policy regime such as chaebol s monopoly, moral hazard in financial institutions, translucent and unaccountable public sector, and rigid labor market. Kim Dae Jung government instituted new governance in those four targeted sectors to satisfy the global standard, meaning Anglo-Saxon or neoliberal policy regime. 10 Neoliberal Policy Innovations of Kim Dae Jung First, in order to lay the foundation for corporate governance reforms, President Kim Dae Jung reached an agreement with major chaebol owners on the Five Principles of Chaebol Reform on January 13, 1998 and announced three supplementary principles of chaebol reform on the Independence Day of August 15, The Five Plus Three Principles have been the backdrop of corporate governance reforms of Kim Dae Jung government. A lot of improvement has been made in the internal and external corporate governance with regard to enhancing transparency, accountability, and minority shareholders rights (Cho, M. H., ), the removal of shadow-voting rule, increasing the ratio and strengthening the power of 10 Not all countries contagious of East Asian economic crisis in 1997 adopted IMF-pressed neoliberal policy prescriptions. Malaysia s Mahathir resisted the international capital s pressure to adopt Anglo-Saxon model of crisis-resolution, while Korea s Kim Dae Jung faithfully followed IMF conditionalities and went further to pursue far-reaching transition from developmental state policy regime to a neoliberal policy regime. Japan, even though it had been under the long economic stagnation since the early 1990s, has been hesitant to restructure its economy from Japanese model to Anglo-Saxon model. 15

16 outside members in the board of directors. 11 The transparency in corporate governance has been enhanced with improved disclosure rules. Accounting principles that complied with international standard were introduced in December 1997 and beginning in August 2000, consolidated financial statements became mandatory for companies with asset larger than 2 trillion won. In 2002, penalties for fraudulent public disclosure by listed firms were increased. (Ahmadjian and Song, 2004) The governments strengthened auditing procedures. The government can impose fines up to 500 million won on accounting firms for improper audits. There also had been remarkable reform in external corporate governance. First, the new Commercial Code streamlined merger procedures and made M&A by foreign companies easy. The acquiring firm can purchase more than 90% of the target company shares (Cho, M. H., 301). The new regulations removed limit on equity ownership by foreigners and hostile take-over barriers, and allowed M&A specialized fund (Jang, Ha Sung, 2003). Now foreigners can purchase 100% of the shares of most Korean firms. Korea changed from the most protected country to foreign investors to the most foreign investment capital-friendly country. Second, with respect to the governance of financial institutions the Kim Dae Jung government established an integrated supervisory agency, called the FSC (Financial Supervisory Commission) in the aftermath of the crisis and placed all regulatory powers over banks, security companies and insurance firms under the new FSC. The idea to establish an integrated financial supervisory agency was first proposed by the Presidential Commission on Financial Reform under Kim Young Sam government and was not realized until the inauguration of President Kim Dae Jung because of bureaucratic infightings and political opportunism of non-decisions in delicate financial reforms. However, as the IMF forced Korea to restructure its financial institutions, political circles rushed to install the FSC (Kim, Byung Kook, 2003: 73). The FSC played a pivotal role in improving the poor financial sector governance system. The FSC implemented the closure of financial institutions that had never occurred before. As of September 1998 the FSC closed 5 banks, 16 merchant banks, 2 security companies, and 1 investment trust company. In addition, 4 security companies, 4 insurance companies and 1 invest trust company were suspended. The total number of either closed or suspended was 94. After overhauling financial institutions, the FSC introduced a prompt corrective system and management evaluation system, strengthened bank disclosure system by 11 For companies with asset larger than 2 trillion won (1.8 billion dollar), more than 50% of members of the board should be outside directors. (Jang H. S., 2003) 16

17 increasing the regular disclosure items to the scope requested by the IAS and upgraded prudential regulation standards by strengthening loan classification standards as well as provisioning requirements in accordance with international standards. (Nam, Kim, Kang, Joh, and Kim, 1999) The last, but the most important neoliberal innovation that Kim Dae Jung had to initiated reform for instituting neoliberal flexible labor market. Given the most militant unions and workers, international capital was unwilling to invest in Korea without labor reform. Therefore, Kim Dae Jung launched labor reform for flexible labor markets. Kim Dae Jung, before the election, was known as the champion of democracy and the friend of workers. After the election, president-elect Kim changed and embraced IMF prescriptions for flexible labor market. Kim Dae Jung transformed himself from a pro-labor populist politician to a neoliberal IMF man in Seoul, he implemented aggressively IMF-mandated flexible labor market reforms. (Cumings, 1999: 36) In implementing neoliberal labor policies, Kim chose a consensual approach of forming a social pact to reform the rigid labor market to flexible labor market. He tried to institute flexible labor market with the consent of organized workers who would be the victims of flexible layoff system by means of burden sharing of the costs of restructuring among labor, capital and government. On December 26, president-elect Kim proposed the establishment of the Tripartite Commission to overcome the economic crisis in the meetings with union leaders and urged them to discuss policies and measures to surmount the national disaster (KILF, 1998: 5). In less than a month the major actors in labor politics decided to accept Kim s proposal for establishing a tripartite commission. To summarize major agreement on 90 issues among labor, capital and government were: (1) an earlier implementation of flexible layoffs and legalization of hiring substitute workers, (2) allowing labor union activity, (3) recognizing school teachers union activity in collectivity bargaining, (4) allowing unemployed to join unions (5) strengthening social safety net (6) tripling unemployment fund from 0.7 trillion won to 2.0 trillion won (7) assuring business greater share of burden through corporate governance reform and corporate restructuring, (8) politicians pledge for political reforms. (Kim Jang Ho, ) Kim Dae Jung instituted Tripartite Commission and three parties of labor, business, and the government of the Commission reached the February 6 Social Pact in In the pact-making, unions made concession to government and business allowing the earlier implementation of flexible layoffs in return for securing industrial citizenship of workers, 17

18 active policy of employment, more social safety net and social welfare. The government and the political society moved quickly to back up the political exchanges through the legislations of the agreements. The National Assembly quickly convened to revise labor laws on February 13 in accordance with the Social Pact of February 6. The new laws allowed flexible layoffs not only in the case of emergency situations, but also in cases of corporate mergers and acquisitions, handovers and restructurings. (Mo and Moon, 64) The February 6 Social Pact played a key role in overcoming financial crisis, shortterm financial crunch, in particular. The Social Pact and the quick legislative actions that backed up the agreements assured international capital of the prospects for success of financial and corporate restructuring. As the Social Pact removed the barriers to restructuring business and banks through layoffs and hiring substitute workers, international capital had confidence in the ability of the Korean government and businesses to successfully manage the financial crisis and restructure the economy. Creditors in the Wall Street started to agree on rolling over the matured loans and converting short-term loans into long-term loans, and took actions to buy the bankrupted companies and to invest in Korean stock market. In less than 6 months the Korean economy escaped from short-term credit crunch and the government launched longerterm neoliberal restructuring. Sustaining Democratic Neoliberalism under Roh Moo Hyun Presidency: Democratic Populist Neoliberalism Roh Moo Hyun's election to the presidency in 2002 signified the intraparty transfer of power and the inauguration of the second consecutive center-left government. He was a populist in a sense that he was very popular among progressive young voters and owed them very much to be elected to the president. However, after inauguration he faithfully followed Kim Dae Jung's neoliberal policies. He further cut corporate taxes to induce foreign direct investment (FDI) and pursued free trade regime by making bilateral free trade agreements starting with Korea-Chile FTA in By the end of his presidency, Roh Moo Hyun concluded 4 major FTAs (Korea-Singapore, Korea-EFTA, Korea-ASEAN, Korea-US (KORUS)). As the Three Kims (Kim Young Sam, Kim Dae Jung, Kim Jong Pil) Era came to an end, new political phenomena have risen in Korea. The election of Roh Moo Hyun signals an end to politics of Three Kims generation. Post-modern and post-materialist political issues such as generational shift, gender equality, environmental protection, peace, and civil society 18

19 came to the fore of the political agenda. These changes did not occur spontaneously after the exit of the Three Kims who dominated the Korean political scene. Profound social change acted upon as the motive force that pushed the emergence of new politics. That social change is the rise of what I call neo-nomadic society in Korea. South Korea is one of the countries where the IT revolution has been advancing very fast. The number of mobile phone and internet users and the total amount of internet use is the first in East Asia except city states like Singapore and Hong Kong. More than 30 million Koreans became netizens who access the Internet everyday. The number of mobile phone exceeds the number of population. South Korea is the only country that has completed the countrywide information superhighway infrastructure. The per capita VDSL user is the first in the world, surpassing the United States. As far as IT revolution is concerned, South Korea is no more the country that is catching up advanced countries, but the frontrunner that leads the revolution. Koreans nomadic temperaments have reemerged with the advent of digital revolution and globalization. Digital gale in Teheran Valley, 12 and spectacular growth of mobile phones and internet users, and phenomenal increase in digital access have transformed the Korean people into virtual nomads. The inflow of foreign workers, flexible labor markets, free trade agreements, and the opening of agricultural market by WTO has compelled Korean workers and farmers who have to travel to find jobs for survival to become lower-nomads. Affluent people become hyper-nomads who travel all over the world to preoccupy the profitable resources. Thomas Friedman of New York Times pointed out that Koreans are one of cybertribes in neo-nomadic world. Equipped with the internet and connecting it with a diaspora community (7 million overseas Koreans) spread out all over the world, Korean cybertribe can combine speed, creativity, entrepreneurial talent and global networking, and generate enormous wealth 13 The rise of Neo-Nomadic society has transformed Korean politics toward organizationally smaller in size, faster in speed, networking-friendly, more open, and tolerant. Neo nomadic democracy slims down the size of political organization and thus realizes the high-efficiency, low cost politics. Heavy physical materials add inconvenience to ceaselessly traveling neo-nomads. Neo-nomad democracy would likely transform Korean politics to a 12 The digital area around Teheran Boulevard, Seoul where IT firms are concentrated 13 Thomas Friedman, Thomas, The Lexus and Olive Tree: Understanding Globalization. New York: Anchor Books,

20 more open, flexible, participatory and inclusive one 14 Neo nomadic democracy thrives on neo nomadic economy. Netizen society power and internet politics could not have been possible without the development of neo-nomadic industry. And Korea is the frontrunner in IT industry in terms of IT hardware, software, and systems. And IT industry became the major source of new economic growth surpassing heavy and chemical industries and traditional labor-intensive industries. Neo Nomadic democracy goes hand in hand with neo-nomadic economy and creates new parallel development of democracy and market economy in the 21 st century. Democracy and market economy found new source of partnership in neo-nomadic IT industry. (Table 1) IT Index under Roh Moo Hyun Presidency (2007) Sustaining Democratic Neoliberalism under a different party government of Lee Myung Bak: Keynesian Neoliberalism A conservative politician and former CEO of Hyundai group, Lee Myung Bak won the 2007 presidential election. His victory signified the second peaceful turnover of power from the ruling party candidate to the opposition party candidate, and thus Korean new democracy passed Huntington's test for democratic consolidation. However the rotation of power did not generate policy regime change because previous center-left government already pursued radically neoliberal economic policies. What Lee Myung Bak had to do in terms of economic 14 Hyug Baeg Im, Neo-Nomadic Democracy. (in Korean) Seoul: Nanam,

21 policy regime was to deepen neoliberal business-friendly policy regime such as more reduction of corporate taxes, privatization of public corporations, deregulation, labor market flexibility, small government, privatization of welfare service, and expanding FTA agreements with EU, Canada, Mexico, Australia, New Zealand, China and Japan. What is unique in Lee Myung Bak's neoliberalism was that he mixed neoliberalism with Keynesian public works programs such as Four Great Rive Project. In less than a year since Lee Myung Bak's inauguration, Korean economy confronted the second economic crisis, which originated in the heart of global capitalism, the Wall Street in October Lee Myung Bak responded to the 2008 global crisis better than Kim Dae Jung did in due to the buoyancy of the Chinese economy and the SWAP agreement with the U.S., Japan, and China. After the crisis, surviving chaebol firms emerged as the true global players, some of them (e.g., Samsung) surpassing the Japanese rivals by preemptive entering into new dynamic industries such as IT (Information Technology) and cultural industries. Lee Myung Bak government pursued further globalization and concluded FTA with the U.S. and EU. Even though economic growth resumed with the input of neoliberal reform therapy, social inequality worsened and the whole society polarized among classes, occupations, industries and schools. The incumbent Lee Myung-Bak government strengthened neo-liberal policies and promoted business-friendly policies, such as tax cut to the rich, and deepened social polarization as a result. The tax reduction to the rich goes against the social justice that John Rawls teaches. Tax reduction to the rich generated reverse income transfer from the poor to the rich, deepened social polarization between the rich and the poor with regard to income, and dismantled the thick middle class. As a consequence, the class structure in postfinancial crisis in 1997 has shifted from diamond-shaped class structure to snowmanshaped or sandglass-shaped one. The whole society disassembled into a society without the waist. Society-wide polarization has taken place in every area of income, property, employment, education, industry, and class. (No, Se Geuk, 2009) 6. Comparative Economic Performances of Authoritarian Developmentalism, Democratic Developmentalism, and Democratic Neoliberalism When reviewing the performances of authoritarian governments and democratic 21

22 governments, I find that the performances of authoritarian governments have been overstated while the performances of democratic governments have been underrated. There have been many myths in the thesis of poor performances of democratic governments and public disenchantment to democratic governments. Also the miraculous achievement of authoritarian government has to be demystified because the miraculous achievement was attributed not only to wise and proper strategic choice of development by dictators (A la Machiavelli, virtu) but also indebted to many exogenous lucks that the dictators were handed over from the past, outside forces, and cultural legacies (a la Machiavelli, fortuna). Therefore, I can say that democratic developmentalism and democratic neoliberalism is superior to authoritarian developmentalism in terms of economic development. Authoritarian Developmental Thesis Denied in terms of Economic Development since Democratic Transition in 1987 The economic performances of democratic governments after democratic transition in 1987 were strong, robust and sustainable. Authoritarian capitalists predicted that immediately after democratic transition workers will stand up to demand for more wage to consume and capitalists and governments will respond to workers demands positively because now workers have organization to solve collective action problem and votes to decide the locus of power. Thus, the firms increased wages and the government transferred income from the rich to the poor through taxes. The outcome, according to authoritarian capitalists, would be economic stagnation as wage increase reduces profit rate, then firms cut investment and at the same time the government tend to distribute income away from investment by tax, transfer, and less public investment. Hence lowering investment slows down growth. (Przeworski et al., 2000:143) However, in South Korea after democratic transition in 1987, none of the posttransition syndromes occurred. Of course, workers erupted. After democratic breakthrough at June 29 Compromise, more than 3000 strikes erupted between July and August only throughout the whole industrial work places. As authoritarian capitalists predicted workers demanded more wages, better working conditions and rights to organize and collective actions. Nonetheless, despite massive workers eruption and the sharp rise of wages, 15 firms did not 15 Between 1989 and 1993 inclusive, wage increases in South Korea were 21.1, 18.8, 17.7, 15.2 and 12.2 percent respectively, which were way above the government s wage guidelines. This was in sharp contrast to the years before 1987, when wage increases beyond the guidelines set were suppressed by the government. 22

23 reduce investment: domestic investment rate in 1987 was 32.4% which was very high compared with that of advanced industrial countries, to say nothing of Latin American new democracies; gross fixed capital formation as the percent of GDP also remained very high to the level of 30% compared with 22% in advanced industrial countries and 21% in Latin American countries (Table4; Figure 6). As is shown in Table 6, GDP growth rate in 1987 was very high, 11%. Korean capitalists did not reduce investment because of steep rise of wage. The economy was so strong and robust to make more profit even with paying more wages to workers. The success of economic development under democratic governments is not confined to democratic transition period but was extended to the whole democratic consolidation period. Except in 1999 when GDP growth rate dropped to -7% from previous year s 5%, average GDP growth rate in the whole period of democracy after transition ( ) is about 6.2% which is not much lower than average GDP growth rate in the whole authoritarian period ( ), 7.9% (Table 6). Among three periods of authoritarian developmentalism, democratic developmentalism, and democratic neoliberalism, growth rate in the second period is the highest, 8.6%, while that in the first period is the second highest, 7.9%, and the growth rate in the third period is the lowest, 3.5% (4.8% by subtracting rates in regional and global financial crisis years of 1999, 2008, 2009). Nonetheless, compared with growth rates in the same period ( ) of advanced industrial countries and Latin American emerging market countries, Korean economy did perform much better than those two groups (3.5% in Korea, 1.9% in advanced countries, 3.1% in Latin American countries). Second, Gross Fixed Capital Formation (as % of GDP) during democratic period has been much higher than authoritarian Miracle period. (Figure 7; Table 4) Between 1961 and 1986, average GFCF was 26.4%, while that of average GFCF in the democratic period is about 32%. Between democratic developmental period and democratic neoliberal period, the growth rate of GFCF in democratic neoliberal period is slightly higher than that of democratic neoliberal period, 36% and 36.4% respectively. Third, democratic governments witnessed spectacular economic growth without causing bad side effects such as high inflation, trade deficit, high unemployment, low wages (Y. Park and M. Lee, Economic Development, Globalization and practices in industrial relations and human resource management in Korea in Verma, A, Kochan, T, and Lansbury, R. (eds.) Employment Relations in the Growing Asian Economies. Routledge, London and New York, 1995: 42; Y. Park and C. Leggett, Employment Relations in Korea. in Bamber, G. and Lansbury, R. (eds.) International and Comparative Employment Relations, 3 rd ed, Allen and Unwin, 1998:

24 and bad provision of social welfare. While the Korean economy suffered perennial problem of high inflation and trade deficit during the authoritarian period, democratic governments in Korea solved the trilemma among high growth, high inflation and trade deficit. Trade balance in South Korea turned from perennial trade deficit to trade surplus since 1998 except just one year 2008, the year of outburst of global financial crisis. (Table11; Figure 9) Since the democratic transition in 1987, the Korean economy came out of trilemma of high growth, high inflation, and trade deficit and stabilized a pattern of high growth with low inflation, trade surplus, good wages, and low unemployment. (Table8, 9; Figure 10, 11) Between authoritarian developmentalism and democratic neoliberalism, the latter did perform better in the areas of low inflation rate and unemployment rate, 11.6% vs. 3.4%; 4.3% vs. 4% respectively. Social expenditures increased from the former period to the latter period and perennial trade deficits in the former period turned into huge trade surpluses. Between democratic developmentalism and democratic neoliberalism, the former did perform better with regard to unemployment rate, while the latter performed better with regard to low inflation rate, social expenditure, and trade balance. In general, Korean firms since the democratic transition in 1987 had room for investment even with paying higher wages and taxes without reducing employment. From this observation, we can conclude that as far as the case is confined to Korean case, the necessity of authoritarianism because of the incompetence of democratic government does not stand in any respect (growth rate, employment, trade balance, investment, gross fixed capital formation). The Korean case shows democratic governments excels in achieving economic development as well as making an equitable society with good wages, provision of better social welfare, and most of all, very low unemployment compared to that of advanced countries. 24

25 (Figure 6) (Figure 7) 25

26 (Figure 8) (Figure 9) 26

27 (Figure 10) Exogenous Factors of Growth under Democratic Governments Many authoritarian capitalists argue that the spectacular growth under democratic governments has not been made by the timely optimal choice of developmental strategy and policies by democratic governments, but by exogenously given good lucks such as the timely collapse of socialist countries in Eastern Europe and Soviet Union, and the end of the Cold War, the emergence of favorable international economic environment such as the three lows, economic boom between 1986 and 1988 (low interest rate, low won-dollar rate, and low oil price), the expansion of export markets for Korean goods and services due to economic openness and globalization, and conditionalities imposed by the IMF to make economic structural reform in return for massive IMF loans to Korea at the time of East Asian financial crisis. I do not deny that these external or exogenous factors contributed a great deal for sustainable growth under democratic governments. The fortuna of three lows came from the outside and provided good opportunity to catch three rabbits (growth, current account balance, and stabilizing consumer price) with one stone. With the help of the three lows, export increased phenomenally; firms invested more domestic markets as well as global markets; price stabilized and as a result the economy grew more than double digit. Unfortunately the fortuna of three lows was given as a free gift of global capitalism and was not in the boundary of control by Korean governments. The three lows lasted for only three 27

28 years and was replaced by three highs (high interest rate, high won-dollar rate, and high oil price). The second exogenous factor for contributing to sustainable growth in Korea came from Eastern Europe. The end of the Cold War and the collapse of socialist countries in Eastern Europe relaxed the security tension in East Asia and the Korean Peninsula. The democratic transition in South Korea came at a favorable world historical time, i.e., the end of the Cold War (Im, 2006). The end of the Cold War permitted the new democratic government to cut defense spending to help finance expensive welfare programs and to distribute tax funds for more investment in constructing infrastructure rather than spending for defense. However the end of the Cold War has not always been favorable to the Korean democracy and development. As the Cold War receded in East Asia, the strategic value of South Korea to the U.S. declined and the United States hegemony to Korea became less benevolent. As the Cold War receded, Washington s major East Asian allies would go from being linchpins of U.S. security in the region to being mere levers to open markets in the region. 16 The U.S. did not give South Korea special treatments in assisting South Korea to overcome financial crisis. Korea, without exception, was put under the IMF conditionlities that is, sweeping neoliberal economic restructuring whose rescue package included typical menu of neoliberal structural reforms such as stabilization, liberalization, financial and corporate restructuring, privatization and flexible labor market in return to massive bailout loans from IMF. Third, the stretching and expansion of globalization since the end of the Cold War has worked in favor of the Korean economy, which has been heavily relying on export and foreign investments. While authoritarian regimes persisted with the developmental state model of economic growth and protected domestic markets and chaebols in return for their performances in the international market, democratic governments, Kim Dae Jung government in particular, accepted IMF conditionalities and aggressively pursued to comply with the global standard. The Korean case of globalization shows that globalization (or economic openness in the word of Li and Reuveny, 2009) promotes democracy. In other words, globalization promotes economic development, reduces information costs, reduces incentives for dictators to cling to power, intensifies the diffusion of democratic ideas, increases demands for international business for democracy, promotes domestic institutions supporting democracy, 16 Renato Cruz De Castro, Whither Geoeconomics? Bureaucratic Inertia in the US Post Cold War Foreign Policy toward East Asia, Asian Affairs, Winter

29 and thus, all these facts together work for promoting democracy. 17 Endogenous Factors of Growth under Democratic Governments: Democracy matters in Economic Development Even though we do not deny the contribution of exogenous factors to economic development under democratic governments, we dare to argue that economic development under democratic governments has been due to rapid completion of democratic consolidation process and continuous upgrading of quality of democracy in Korea. (Im, 2010) Those are the main components of endogenous factors of growth under democratic governments since Since the democratic transition in 1987, Korean democracy completed democratic consolidation and upgraded itself into the group of Full Democracy. According to Democracy Index measured by EIU (Economic Intelligence Unit), between 2006 and 2008 the Korean democracy moved upward from the category of Flawed Democracy to Full Democracy. All other East Asian democracies still remain in the category of Flawed Democracy including Taiwan. As a member of Full Democracy, Korean democracy improved its quality in many partial regimes of democracy which is related to economic development under democracy such as rule of law, voices and accountability, control of corruption, responsiveness, governmental effectiveness, regulatory quality, rule of law, and economic freedom. (Table 2) 17 Quan Li and Rafael Reuveny Democracy and Economic Openness in an International System: Complex Transformations. New York: Cambridge University Press (2009): 28; Eichengreen and Leblang argue that they found through cross-country study, evidences that positive relationships run both ways between globalization and democracy: globalization (trade openness and financial openness) (FDI, Capital flows to GDP, FDI to GDP) promotes democracy and at the same time democracy promotes globalization (trade openness, liberalization, privatization, capital market opening etc. (Barry Eichengreen and David Leblanc, Democracy and Globalization, unpublished paper, 2006) 29