The Republic of Korea: the taming of the tiger

Transcription

1 The Republic of Korea: the taming of the tiger Ilpyong J. Kim and Uk Heon Hong Introduction The final quarter of the twentieth century witnessed substantial reductions in some dimensions of state activity, with the shifts in government policies coming earlier in some countries and later in others. Beginning in Chile in the mid-1970s and in Bolivia after 1985, moves toward privatisation and market liberalisation spread to many other developing countries. The collapse of socialism in the Soviet Union and Eastern Europe in the late 1980s and early 1990s deepened distrust in the role of state intervention in national economic development. Nevertheless, the roles of the state in encouraging economic development differ from country to country. For example, the Venezuelan state adopted a strong programme of economic liberalisation in 1989, deserted the programme in the early years of the Caldera administration, but then returned to it under both Rafael Caldera and Hugo Chávez. Russia moved quickly toward a market economy in the early 1990s only to see its reform programme become bogged down for the rest of the decade. In South East Asia, most countries passively accepted the inflow of foreign capital until the early 1980s, but since that time they have become far more active in attracting it by liberalising their domestic markets. Ilpyong J. Kim is a Professor of Political Science Emeritus at the University of Connecticut, and was a Distinguished Visiting Professor of International Politics at Pohang University of Science and Technology in the Republic of Korea for the academic year, Uk Heon Hong is an assistant Professor of Political Science at Uiduk University, Republic of Korea. Comparative politics is his major area of research. uhhong viro.ac.kr. These contrasts raise the question of what has led nation-states to experience such different processes of change in the era of globalisation and market reform. After an extensive study of the role of the state, the World Development Report 1997 (World Bank 1997) suggested that the major lesson of recent years has been that much of the developing world had to face up to the failure of state-dominated development strategies. In this view, government leaders had to make a wrenching shift toward the market economy, because the state could no longer deliver on its promises. Even the mixed economies of the industrialised world, in response to the failures of government intervention, have opted for decisive shifts in favour of market mechanisms. Many have felt that the logical end point of all these reforms was a minimalist state. Such a state would do no harm, but neither could it do much good (World Bank 1997). In the context of this experience, it is especially important to study why and how the Republic of Korea has evolved from a developmental state toward a minimalist state over the last four decades. Three dimensions of the case make it especially meaningful in comparative perspective. First, when the Republic of Korea was widely admired as one of the most successful tiger economies of Asia, the state took a clearly interventionist role in economic ISSJ 163/2000 Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

2 62 Ilpyong J. Kim and Uk Heon Hong development. For example, the studies of Amsden (1989) and the World Bank (1993) depicted the Republic of Korea as a successful interventionist state. In a comparative study of the Korean state, Evans (1995) claimed that, unlike other predatory states, the government played a midwifery role in economic change. These perspectives on the tiger model require some rethinking, however, because closer examination reveals that the government retreated considerably from its interventionist role after the early 1980s. Secondly, the case is also important because its leaders first encouraged export development and then reduced state intervention in the economy in the face of strong domestic pressures in the opposite direction, pressures from those who denounced colonialism, dependence and internationalism, raising instead the banner of protectionism. Unlike many other newly independent countries after World War II, The Republic of Korea came to participate actively in world markets and opened up its domestic market. This sets its model off sharply from that in the Democratic People s Republic of Korea, and raises the important issue of how leaders in the South have been able to withstand political pressures both from inside the country and from the other half of the peninsula to move in a protectionist direction. Third, given the Korean experience, what can we say today as to how much culture really matters in development? In the 1980s, when The Republic of Korea was seen as a model tiger economy, the Confucian culture of the nation was frequently cited as a cause for its rapid economic development. The Confucian norms of respect for authority and the patriarchy of the state seemed to undergird the pattern of state intervention on behalf of corporations. The culture did not change abruptly in the 1990s, however, and in that decade economic growth declined and state intervention in the economy receded. What are we to make, therefore, of the earlier claims that the model of the 1970s and early 1980s was largely based on Korean culture? In responding to questions in all three of these issue areas, the broadest answer may be that, over the last four decades of the twentieth century, the Republic of Korea state adapted flexibly to world market conditions. The orig- inal purpose of the state s intervention in the economy was to encourage private companies to raise their industrial competitiveness in world markets. When the companies lost their competitiveness in the 1990s, the government swiftly changed its policy in reaction to world market forces. Bureaucrats and economists shared a view that reducing direct intervention in the economy and managing macroeconomic stability could lead to more sustainable economic growth, especially once the private sector had grown beyond the state s capability to aid it under the old model. In other words, they respected liberal tenets that emphasised flexible compliance to the market forces at each stage of economic development. Of course, the retreat from intervention was never complete; until recently, the state s informal or discreet intervention was still exercised in industrial adjustment, corporate taxation, and the distribution of bank loans. But in the model that evolved out of the economic difficulties of the 1990s, as in the model that preceded it, the adaptation to world market conditions may be the key. If so, in order to understand the processes involved in more detail, we must analyse how the state in the Republic of Korea has interacted with private industries since initiating its developmental role in Industrial policy, financial policy, and trade and foreign exchange policies are key components of the models of the role of the state in these decades. Institutions of the government have aimed to influence production, notably through capital accumulation and allocation in the national economy. For several decades from the early 1960s, the preferred model was that of a developmental state, one that intervenes in economic life with the specific purpose of promoting industrial growth. To some degree since the early 1980s and more dramatically since the middle 1990s, the model has been more that of a minimalist state, something closer to the ideal of the classical liberals where the aim is that individuals enjoy the widest possible realm of freedom in economic life. Neither model has been followed exclusively, and in both periods the role of the state revealed distinctly Korean characteristics, but the contrast in the two models helps us to understand, not simply the case of the Republic of Korea, but also the changing role of the state worldwide as well.

3 The taming of the tiger 63 Launching a developmental state The military government of General Park Chung Hee established an active role for national economic development soon after its successful coup d état of 16 May Most citizens felt that economic growth was the most important dimension of the national agenda, partly because they had experienced hunger and food shortages since the Korean War had ended in 1953, and also because development seemed the only way to withstand the military threat from the Democratic People s Republic of Korea. New institutions came into being within months of the coup. The Economic Planning Board (EPB) was installed within two months, its express purpose being to plan and to manage the construction of the national economy. It also had the administrative power to supervise and to coordinate the work of other ministries that related to the economy. After the EPB produced the first five-year plan, running from 1962 to 1966, it later engineered six other five-year plans that lasted until 1994, when the EPB was disbanded. The Park administration also nationalised all commercial banks late in This allowed the state to allocate monetary resources directly to manufacturing industries, so that the monopoly that the government exercised over financial institutions gave it important leverage to direct the private sector. Changing the law of the central bank in 1962, President Park also put the Bank of Korea under the control of the Ministry of Finance. Special banks were installed or recrafted in order selectively to finance certain private businesses. Providing preferential loans to small and medium companies, the Small and Medium Industry Bank began operation under public control in The National Agricultural Co-operatives Federation was reorganised for agricultural development in 1962, and the Korean Reconstruction Bank was established for manufacturing industries. These institutional changes of the Park administration sharply contrasted the activities of earlier governments from 1948 to 1961, since the earlier regimes had been hesitant to take a dynamic role in fostering national economic growth. The Rhee Syngman ( ) and Chang Myun ( ) governments partici- pated actively in the reconstruction of industrial plants and infrastructure, which had been interrupted during struggle for independence from Japan, set back with the partition of the nation along the 38th parallel in 1945, and destroyed once again during the Korean War from 1950 to Rhee and Change also raised high trade barriers to protect internal industries. However, their administrations were inclined to maintain classical capitalist tenets, and, rather than instituting an industrial policy per se, they relied largely on macroeconomic measures such as monetary and foreign exchange policies. The unwillingness of the government actively to intervene in the economy before 1961 had a lot to do with President Rhee s personal belief in capitalism and with the advice of economic consultants from the United States. For example, when the Rhee regime changed the unit of money on 5 February 1953, the President opposed the introduction of compulsory savings up to a certain amount of the money to be exchanged. He rejected government interference in private savings (Song 1994, ). United States economic advisors, who were influential in orienting the economy through its heavy dependence on United States aid, believed in the same capitalist creed. Since foreign aid financed more than 70 per cent of imports to the Republic from 1953 to 1960, this dependence gave the advisors great influence with their Korean counterparts. The promotion of the manufactured exports Most studies agree as to how the economic role of the state of the Republic of Korea evolved in the decades after 1961, although the studies differ slightly in terms of timing and emphasis. For example, Lee (1998) distinguishes national economic policy in terms of four phases: export promotion from 1961 to 1972, the drive for the heavy and chemical industries (HCI) from 1973 to 1981, industrial adjustment from 1982 to 1987, and liberalisation from 1988 to the present. Perkins (1997) similarly classifies the economic policy of the country into four phases but in terms of different periods: the promotion of export manufacturing ( ), the HCI drive ( ), the retreat from an active

4 64 Ilpyong J. Kim and Uk Heon Hong 70.0 Interest Rate Corporation Bond Eaming Rate Private Loan Export Loan Industrial Banks Loan Year Figure 1. The costs of different forms of borrowing in the Republic of Korea, selected years, Source: Lee Byungki, Growth factors of the Korean economy and the role of industrial policy, Seoul, Korean Economic Research Institute, industrial policy ( ), and relaxation of economic regulation (1988 and after). Following Perkins classification, which is based essentially on changes in political leadership, questions arise as to the characteristics of each stage and how in detail the stages differ one from the other. During the initial stage of export promotion, the government established basic investment priority in manufacturing rather than in agriculture or other areas. This primacy was maintained until the early 1980s. During the initial stage, planners in the Republic also established the world market as the target for sales, because they saw the domestic market, with 20 million relatively poor citizens and with little resource endowment, as simply too small to allow an effective strategy of import substitution. Per capita income was only US $87 in 1960, although it was to rise dramatically in the decades ahead, justifying the emphasis on the export market that has remained unchanged. Another fundamental reason for this success was that from 1961 onwards the government respected the private sector. Although the Park administration nationalised all commercial banks, it minimised the public sector in other industries. Most manufacturing industries remained in private hands, so that a strong market economy developed along with the expansion of the private sector (Cho 1999). Under these principles, how did the government promote manufactured exports? First of all, it provided preferential financing to export manufacturers. Two financial incentives worked effectively in the 1960s and 1970s: unrestricted access to the tariff-free import of raw materials and intermediate products to be used for the production of exports, and automatic access to bank loans with preferential interest rates for obtaining working capital. As Figure 1 indicates, there were vast differences between the costs of export loans and private loans in the 1960s and 1970s. This system of preferential loans was offered to all exporting private firms, whether large or small, agricultural or industrial. It assured essentially neutral status for all export manufacturers. Throughout this period, the financial sector was seen as a means to accumulate capital rather than as an independent industry. Secondly, the government borrowed capital abroad and provided credit approval for private companies to do so as well. With low domestic savings rates in the early 1960s, foreign capital was vital in order to allow rapid capital accumulation. With international financial organisations hesitant to lend to unknown private companies in the country, President Park and his ministers concentrated their diplomatic efforts on acquiring foreign capital until the early 1970s. During the first five-year plan, foreign savings (that is, the sum of foreign aid, borrowing, and investment) shared around 60 per cent of the total investment of local firms. Foreign borrowing reached about 20 per cent of the total

5 The taming of the tiger 65 foreign savings, although it remained below the planned rate of 30 per cent. Similarly, the Park regime adopted measures to increase domestic savings. In order to attract these savings into bank accounts, interest rates on savings deposits were frequently raised during the 1960s and 1970s. Quasi-compulsory savings occurred when all employees were required to have a savings account in a bank. It was not until the late 1990s that the free market was allowed to determine interest rates, although, as Figure 1 suggests, regulated interest rates came to be closer to free market rates from the mid-1980s. The Park government also adopted measures to supervise the private sector. Under a system to monitor export targets, government officials examined annual targets by commodity and by destination, adopting special measures if the targets were not being met. Similarly, the Korea Trade Promotion Corporation (KOTRA) was established to help exporters create overseas marketing networks by providing administrative and information services. Finally, the Monthly Export Promotion Conference (later renamed the Monthly Trade Promotion Conference) provided a direct communication channel between the government and exporting firms (Kim and Kim 1997, 17). In combination, these measures effectively ensured that private corporations receiving government benefits were living up to their promises; that is, the measures worked to eliminate free-riders. To increase institutional capability, the Park administration took other measures. It created special banks with public ownership: the Citizens National Bank, the Korea Exchange Bank, the Korea Development Finance Corporation, and the Korea Housing Bank. Meanwhile, its direct intervention in the manufacturing sector was limited to the construction of basic facilities, such as steel mills. As Korean firms became more able to compete in world markets, some imports were liberalised in Import controls similarly changed from a positive list system, that is, a listing of the items that could be imported, to a negative list system, that is, a listing only of imports that were prohibited. The number of prohibited and restricted items then shrank from about 26 thousand to only 2.6 thousand items (Perkins 1997, 79). After this changeover, trade barriers remained quite stable until the early 1980s. The foreign exchange rate was regulated throughout this period, but it was maintained closer to market rates in the latter years. Over time, the leaders of the state became more confident in their activities. Successful achievements in economic growth during the 1960s generated greater confidence in managing the national economy during the 1970s. In deciding on the strategies to promote economic growth, an active pressure from interest groups was not much in evidence. Memoirs of those who drafted the first five-year plan, for example, have declared that they saw the strategy of export promotion simply as a rational policy based on national economic conditions of the 1960s. In practice, this relative absence of interest-group pressure set the Korean experience off sharply from that of the United States and other nations. Over time, it was one of the reasons that the tiger economy of the Republic was so widely interpreted in terms of the Confucian ethos, that is, in terms of the strong value of loyalty to the state standing in contrast to the individualism that characterises the United States. The drive for heavy industry and chemicals As the strength of the economy grew, leaders of the Republic of Korea began to promote heavy industry and chemicals, the so-called HCI strategy. The second five-year plan ( ) began to promote this strategy in a limited way, passing laws to promote seven industries: machinery, shipbuilding, textiles, electronics, petrochemicals, iron and steel, and non-ferrous metals. However, the government was most concerned to build an integrated mill and a petrochemical complex. It was during the third five-year plan ( ) that the government exercised a much more systemic and extensive industrial policy. In the New Year s Message of 1973, President Park declared that the government would actively pursue the HCI drive between 1973 and This was to involve the equivalent of US $9.6 billion for six HCI projects, and it was a particularly ambitious plan given that exports in 1971 only equalled about US $1 billion. Three motivations essentially underlay the HCI initiatives: a desire to improve the

6 66 Ilpyong J. Kim and Uk Heon Hong Woman in the centre of Seoul, Republic of Korea. Ulrich Baumgarten/Vario-Press/Imapress

7 The taming of the tiger 67 3, ,000.0 Total Collected Corporate Tax (A) Exempted Tax (B) B/A (%) Billion Won 2, , , % Year Figure 2. Change in corporate tax reduction in the Republic of Korea, selected years, Source: Lee Byungki, Industrial policy in the era of globalization, Seoul, Korean Development Institute, balance of payments through higher profit margins, the need to shift out of labour-intensive industries as the advanced countries erected trade barriers against them, and the desire of the Park regime to become more self-sufficient in terms of national defence (see Kim and Kim 1997, 22). This HCI drive differed from the earlier export promotion in a number of ways. Bureaucrats and their advisors decided not only about which industries should form the core of the HCI drive but also about the details of planning, such as the appropriate scale to be built in a given industrial park. The government selected the private firms to implement the HCI drive, as the HCI projects were not put out for bids. Instead, large companies (chaebols) were assigned to carry out each project (see Perkins 1997, 81 82). Moreover, in addition to benefiting from preferential loans and favourable access to import licenses, the selected HCI firms could receive more favourable tax treatment than did light industries. Since the early 1960s, corporate tax reduction had been provided to companies that exported their products. However, the rates of tax reduction rose significantly from the mid- 1970s until the early 1980s. As Figure 2 suggests, the tax reduction rate increased from around 20 per cent in the early 1970s to more than 60 per cent in This increase was largely due to generous tax reduction for the HCI companies. As Yoo (1990) calculated the tax schemes, the actual tax rate of the HCI was less than 20 per cent from the early 1970s to the early 1980s, while that of light industries was more than 50 per cent. Preferential tax reduction to the HCI ceased to be part of the law in Along with these financial and tax incentives, the government took other steps to help heavy industry and the chemical industry. It increased educational facilities to train engineers and established several new research institutes in the HCI fields. It protected the existing HCI firms with entry restriction, and it instituted some price controls on HCI products. Parallel to the HCI drive, the government also intervened in agricultural development, working to raise farmers earnings and to modernise local villages. The Park administration launched the New Village campaign in 1972, subsidising the purchase of farm machines and insecticides. The regime constructed electricity lines nation-wide, extended roads, and subsidised the rebuilding of homes. This programme of rural modernisation lasted until 1979 and was quite successful in reducing inequality between urban and rural areas. Especially effective was the development of new varieties of rice and the wider use of insecticides, which spurred agricultural production.

8 68 Ilpyong J. Kim and Uk Heon Hong In the 1970s, the government also came to use its power more frequently to resolve economic deadlocks. Six emergency financial measures were issued between 1972 and 1975 (Kim 1997, ). For example, in 1972 the President s Emergency Decree on Economic Stability and Growth froze private loans to companies. The interest rate on private loans was lowered to 16.2 per cent per year, a rate equal to that of regular bank loans. Firms could pay their previous debts with this rate for the following five years, and they used this benefit to reduce their financial burdens. Informal intervention measures also increased during the HCI drive, as governmental sanctions on industrialists became strong and strict. Presidential directives in 1974 forced government-supported corporations to go public, selling shares on the stock market. This sanction was intended to prevent the concentration of wealth in a few chaebols and to share government-supported economic growth more evenly among the people. Before this, as private industries grew rapidly with preferential treatment from the government and as workers and their families made significant sacrifices, the ownership of the chaebols had remained family-held and closed to the public. The Park regime also came to loosen its control somewhat in the banking sector. Although it had intensified its grip on banks since their nationalisation in 1961, it gave enhanced legal status to various private financial institutions in These included investment and financial companies, mutual savings and finance companies, credit unions, and life insurance firms. A major reason for allowing these private financial institutions was that the official banks could no longer meet the increasing financial demand of the HCI projects. Moreover, the private financial institutions had grown much faster than the banks in the 1960s, since the free-market interest rates that the uncontrolled institutions charged were higher than the official rates of the government-directed banks. When seen in perspective, the HCI drive was quite effective in attracting private firms to invest in the HCI projects. In the first half of the 1970s, investment in the HCI rose to 57 per cent of the total manufacturing investment and it surged to 64 per cent in the second half of the 1970s. The share of HCI firms in the total investment in equipment reached 60 per cent during the period from 1973 to The drive succeeded in changing the industrial structure of the Republic of Korea. In 1971, the share of secondary industry exceeded that of primary industry in the nation for the first time in history. Agriculture and fishing fell from 31.7 per cent in 1970 to 26.6 per cent in 1976, while mining and industry increased from 22.8 per cent to 28.6 per cent (see Figure 3). The proportion of heavy industry among the manufacturing production also rose from 38.2 per cent to 46.2 per cent (see Table 1). Some sectors of heavy industry even became internationally competitive. Production in electronics rose from less than $1 billion in 1975 to $2.8 billion in 1980, with more than 75 per cent of the electronics production being exported. Steel production grew from less than 1 per cent of the total manufacturing in 1970 to 6.9 per cent in 1980, while the share of steel export in the total exports grew from 1 per cent to 9 per cent in the same period. Shipbuilding was also a fast growing industry in the 1970s, as the export of ships reached 3.5 per cent of the total exports. In 1980, shipbuilding capacity in the Republic ranked fourth in the world. Nevertheless, other sectors such as machinery, automobiles, and chemicals suffered from slow growth in the 1970s, and in some of these areas the country gained world competitiveness only after the mid-1980s. For example, machine exports were $0.3 billion in 1979, but at the same time the importation of machines jumped to $3.4 billion (Lee 1997, 100). The export of automobiles was negligible in 1980 but reached 1.9 per cent of the total exports in 1985 and 3.0 per cent in Even though not all of the programmes of the HCI drive had the same degree of success, when the gains of the 1980s are added to those of the 1970s, the drive clearly attained its ambitious objectives. The retreat from industrial policy Partially because these successes were accomplished, the government came to change course in the 1980s and 1990s. By the late 1970s, the government-led economic growth

9 The taming of the tiger 69 Figure 3. Change in industrial structure in the Republic of Korea in terms of added value, selected years, Sources: Bank of Korea, Economic Statistics Yearbook, 1997; World Bank, Social Development Indicators, Table 1. Composition of manufacturing industry by added value (%), selected years Heavy and chemical Basic materials Assembly Light industry Source: Bank of Korea, National Accounts, various years. had led to serious imbalances at the macroeconomic level. The second world oil shock of 1979 and the subsequent world recession also dealt serious blows to the drive for industrialisation and export growth. With a considerable increase in domestic oil prices and exacerbated balance of payment problems, the government was forced to adopt policies of fiscal austerity. Facing financial and fiscal difficulties, the government gave up various interventionist measures, such as special loans and tax reductions for the private sector, creating instead a strong stabilisation programme. In 1980 the new Chun Doo Hwan regime pursued conservative fiscal and monetary policies, cutting government expenditures and deferring public investment. As a result of this austerity, the consolidated budget deficit declined from an average of 3.1 per cent of GNP in to 1 per cent in The annual growth rate of the money supply (M2) also fell from 30 per cent to 15 per cent during the same period. The shift to stabilisation helped to reduce inflation but also caused a slowdown, first in the industrial sector and then in economic growth more generally. From 1979 to 1983, the government pushed firms in the industrial sector to merge with competing companies, to reduce planned production capacities, and to specialise in certain products. The state bureaucracy lured the private sector by rescue financing for investment adjustment, pressing the chaebols informally to make rapid adjustments (see Lee 1992). The Chun administration also actively pursued financial liberalisation. State-owned

10 70 Ilpyong J. Kim and Uk Heon Hong commercial banks underwent privatisation in 1981 and 1982 and the gaps in interest rates between policy loans and ordinary bank loans were almost completely eliminated in Entry barriers were lowered in the financial industry, and financial services were diversified. Also, preferential financing for exports gradually declined. For example, the loans of the National Investment Fund, a governmentdirected credit programme to finance long-term investments in the HCI, shrank from 25 per cent of the total bank loans in 1979 to only 5 per cent in 1991 (Kim and Kim 1997, 35). The policy initiated by the Park administration of manufacturing first, financing second thus left the financial industry relatively backward until the late 1990s (see Kim 1997, ). While financial reform in the 1980s removed the state monopoly of bank ownership, it was not until the mid-1990s that governmental bureaucrats gave up their power to decide to whom to lend, turning this effective authority over to the banks. Along with financial liberalisation, the Chun regime moved to expand market competition. Lifting regulations that had aimed to limit competition, the government instituted a fair competition law in The average customs rate on imports declined substantially, as the proportion of tariff-free imports grew from 76.6 per cent in 1982 to 91.5 per cent in Limitations on the importation of high technology products were removed, and foreign direct investment became easier. In sharp contrast to the Park regime in the 1970s, the Chun administration in the 1980s thus moved toward a minimalist state. Nevertheless, Park and Chun responded similarly to the world oil shocks of 1973 and 1979, swiftly adjusting to the changing patterns of world supply and demand. With the dramatic 1973 increase in oil prices, Park raised gasoline price four times within days, dropped real wages by 6 per cent in 1974, and froze wages in 1975 (Krause 1997, ). In 1979, the Chun government failed to protect the domestic market from the rapid change in oil prices, instead pursuing a drastic stabilisation policy. By adjusting to these oil shocks more rapidly than many of their competitors, Koreans turned the shocks into a competitive advantage for their export production. When the reforms of the 1980s are evaluated in toto, what turn out to be the causes for the general retreat from governmental intervention in the economy of the Republic of Korea? Most basically, the decision once again was that of governmental bureaucrats and their economic advisors. They withdrew from the old practices, because they had come to believe that the old practices of direct intervention could no longer be realised effectively, that the economy had grown to a point where such interference was beyond their capability. Bureaucrats in the Chun administration initiated a drastic liberalisation in the face of pressure from the chaebols that they continue the old patterns of support (see Lee 1992). In this, the decline in the importance of heavy industry for national security facilitated the choice of free market policies. High technology industries, like intelligence processing, emerged in the 1980s as more important than heavy industry for strengthening national security of the nation. To develop high technology, the prevailing knowledge was that the state s intervention should be minimised, so that, once again, the continuing military pressure from the Democratic People s Republic of Korea ironically strengthened the economy and the defence capabilities of its rival to the south. The opening of the national economy In the early 1990s, as the demand for smaller government was increasing in countries around the world, the entrance of the Republic of Korea into the middle-income group of nations made it difficult to continue the old patterns of government intervention in the economy. Global integration, technological advance, and the arrival of the information age encouraged freer competition. As elsewhere, political democratisation accompanied social and cultural changes that favoured individual diversity and stressed quality of life issues. A small but strong government, various studies suggested, could provide the best environment for the private sector to cope with changes at the domestic and the global levels. Leaders of the Kim Young Sam administration from 1993 to 1997 believed that only a full-blown market economy could build an

11 The taming of the tiger 71 Table 2. The reform of economic regulations in the Republic of Korea in 1998 Total number of regulations Number of abolished Number of reformed Number of maintained regulations a regulations regulations 11,125 (100%) 5,326 (48%) 2,441 (22%) 3,358 (30%) a Including laws regarding public health and social customs. Source: Ministry of Finance and Economy, Economic Policy Direction and Operation, January economy competitive at the world level. Administrators therefore worked to increase the role of the private sector, to loosen the concentration of the chaebols, and further to deregulate the financial markets. The Kim Dae-Jung government after 1998 also chose the option of less intervention, elaborating its policies under the banner of parallel development of the market economy and democracy (see Ministry of Finance and Economy 1999). To increase the role of the private sector, the Kim Young Sam government abolished the Economic Planning Board (EPB) in Since the installation of the EPB in 1961, it had expanded continuously, starting with 12 departments but ending with about 60. The government also opened domestic markets in agriculture, finances and services, in the process gaining membership in the World Trade Organization in 1995 and Organization for Economic Co-operation and Development in Financial markets in the Republic opened further in the 1990s. In the early 1980s, the Chun administration came to rely substantially on foreign borrowing, acknowledging that foreign direct investment promoted competitiveness and the transfer of advanced technology. By the late 1980s, local manufacturing was almost completely open to foreign direct investment, and from 1992 on the government provided tax incentives to foreign firms with advanced technology. Along with the opening of the domestic capital market, the foreign exchange market became nearly free in the mid-1990s. Confronting the foreign exchange crisis of November 1997, the government responded with further liberalisation of the market for foreign exchange. In 1998 foreign domestic investment was legalised, as the law simplified administrative procedures for foreign investment. The ownership of real estate, whether for business or individual use, was made freely available to foreigners. Mergers and acquisitions by foreigners were allowed without restrictions, while the remaining regulations on foreign exchange and stock market activity were lifted or drastically reduced (Korea Institute for International Economic Policy 1999, ). The government of Kim Dae-Jung pursued economic deregulation actively. As Table 2 indicates, in 1998 it abolished almost half of the existing regulations and reformed 30 per cent of them, leaving only 22 per cent intact. This encouragement of foreign direct investment brought great change to the Republic of Korea, where anti-colonialism had been strong throughout the twentieth century. As compared to 1996, foreign direct investment more than doubled in 1997, and rose again by 16 per cent in 1998 (Ministry of Finance and Economy 1999). From 1992 to 1997, foreign direct investment in the country was only 0.34 per cent of Gross Domestic Product (GDP), whereas this proportion was far higher in other Asian countries, such as Singapore (8.78 per cent), Malaysia (6.86 per cent), and China (4.57 per cent). The proportion was even lower in Japan (0.02 per cent) than in the Republic of Korea, but in other major nations it stood higher, as in Mexico (2.1 per cent), the United Kingdom (1.8 percent), and the United States (0.7 percent). Thus the changes in Korean law at the end of the 1990s suggested that citizens were no longer so sensitive to their historic concerns about colonialism, indicating that they could now tolerate levels of foreign direct investment more like those of other nations. The sources of change in the role of the State The economy of the Republic of Korea, along with those of the other tiger countries, has

12 72 Ilpyong J. Kim and Uk Heon Hong Table 3. Change in major industrial policies and economic performance, Republic of Korea, Phases of the role of the Major industrial policy Major performance State Promotion of manufactured Nationalisation of commercial banks GNP per capita: US$87 (1960) exports Foreign bank branches allowed Tenfold increase in exports from ( ) Installation of three special banks US $0.1 billion (1962) to US $1 billion Shift to export promotion (1971) Provision of export subsidies and loans Manufacturing/GNP 17.0% (1971) Expansion of infrastructure Heavy and chemical industry Installation of five special banks Exports passed US $10 billion (1977) drive Provision for financial institutions GNP per capita: US $1,000 (1977) ( ) Promotion of heavy and chemical Manufacturing/GNP: 27.6% (1976) industries Credit allocation to private firms Selective industrial support Retreat from industrial policy Privatisation of commercial banks Achievement of first trade surplus after ( ) Industrial adjustment independence (1987) Shift to macro-economic management Import liberalisation ratio for Retreat from the HCI drive to private manufactured goods: sector initiatives 95.4% (1987) Opening to foreign capital Deregulation and opening of Deregulation Exports exceeded US $100 billion the economy Opening of domestic financial markets (1995) ( ) Liberalisation of foreign exchange GNP per capita: market US $10,000 (1995) Fairness and transparency in economic Admitted to OECD (1996) policy Technology-based industrial policy grown faster and with more stability than have those of other developing and industrialised countries since In this period, it increased 25 times faster than that in sub-saharan Africa and around three times more rapidly than that of economies in Latin America. Between 1960 to 1990, real GDP per capita in the Republic of Korea rose more than five times. Moreover, the country has been unusually successful in sharing the fruits of growth with most of its citizens. From 1965 to 1990, World Bank (1993) data indicate that it maintained highly egalitarian income distribution, although this distribution became less egalitarian in the 1980s and 1990s. As the data summarised in Table 3 indicate, the role of the state in the economy of the Republic has been reduced gradually but consistently since the early 1980s. What caused these shifts? What can we learn from the Korean case regarding theories on the role of the state? Among the perspectives used to explain the changing role of the state in economic development are five that may be especially relevant to the case: state-centric theories; society-centric theories; cultural perspectives; institutional approaches; and a focus on the global economy. First, state-centric or statist theories suggest that nation-states have their own interests as well as the capacity to impose these on society (see Krasner 1980). Similarly focusing on state capacity, World Bank (1997) economists argue that a crucial determinant of different levels of economic development is the effectiveness of the state. A capable state is vitally important for the provision of goods and services, as well as for the formulation of laws and institutions. This perspective depicts the state as central to economic and social development, not as a direct provider of growth but as a partner, a catalyst, and a facilitator. Statist theories help to elucidate the Korean case in that bureaucrats and economic specialists

13 The taming of the tiger 73 Seoul, February 1998: he has just been dismissed. Nam Hun Sung/Rapho occupied the centre of policy making. In this sense, the Korean experience supports the fundamental World Bank position as to the importance of state capacity for economic development. Moreover, the fact that the decisions regarding heavy industry were made mainly on technical grounds with little consideration of interest group pressure also sustains the statist interpretation, and during the drive for heavy industry bureaucrats even played manager roles in private firms. However, the statist approach fails to explain the limitation of state enterprises and the movement toward the minimalist state in the Republic of Korea. For example, when the Park administration nationalised all commercial banks in 1961, it could have built state enterprises in the manufacturing sector on the basis of its monopoly of financial institutions. Actually, the government limited its direct interventionatthattime,movinglatertoreturnbanks to the private sphere. Certainly two generations of bureaucrats demonstrated clear conceptions of how the government could best advance the economy between 1961 and 2000, but their goal was to further the interests of the nation rather than merely that of the state apparatus. Secondly, unlike statist theories, societycentric or group explanations argue that change arises from conflicts among social groups or classes. The more dominant power a group exercises, the more likely to be skewed are the policies of the state. This society-centric approach helps to explain the evolution in the role of the Korean state into deregulation and the opening of the 1990s. The basic logic of this transition was that state interference and regulation had come to impede the efficiency and therefore the international competitiveness of the private sector. By the 1990s, the enormous growth of the Korean middle class, especially of professionals in the private sector, tended to promote the decline of government interference in the economy. For example, as Table 4 makes clear, expenditures for private research and development (R&D) grew from 3 per cent of the total

14 74 Ilpyong J. Kim and Uk Heon Hong Table 4. Change in the share of private research and development expenditure in the Republic of Korea, selective years R&D/GNP (%) Private R&D/Total R&D expenditure (%) Researchers in private sector/total researchers (%) a a The researcher includes full-time professionals who work for research and development in public institutes, universities, and the private sector. These figures do not include research assistants, technicians, and other supporting personnel. Sources: Ministry of Science and Technology, Twenty years of science and technology administration, Seoul, Ministry of Science and Technology, 1987; 93 Report on the Survey of Research and Development in Science and Technology, R&D expenditure in 1963 to 83 per cent in A worldwide opinion survey carried out among more than 12,000 adults in 22 countries during 1997 and 1998 also supports the societycentric approach. This study indicated that citizens of the Republic of Korea preferred free trade to protection to a greater extent than did people in any other country in the survey (Angus Reid Group/Economist 1998). While 60 per cent of the former favoured free trade, this was true of only 48 per cent of all those surveyed. Some Asian tiger countries, such as Malaysia, remained strongly protectionist, and this set off patterns of attitudes there sharply from those in the Republic of Korea. A single survey cannot indicate whether free-trade support encouraged free-trade policies, or, as is more likely, whether the population upholds trade policies that were engineered by government bureaucrats and that have helped to maintain a very impressive record of economic growth. Whatever the pattern of causation, however, one can certainly find strong support in the country s civil society for the opening of the economy in the 1990s. Thirdly, institutional approaches suggest that changes in institutional configurations generate the presence or the absence of state interference in economy. These interpretations focus on the institutional actors, the formal rules, the compliance procedures, and the standard operating practices that shape national economic policies. The institutional approach makes particular sense in the case of the Republic of Korea, because it has maintained consistent policy directions over long periods of time. For example, export subsidies were effective for more than two decades. Similarly, financial liberalisation has been maintained without interruption since its initiation in the early 1980s. However, a focus on formal institutions helps us far less to understand the prevalence of informal ties between government and the private sector over the last four decades. For example, bureaucratic corruption and concentrated lending by banks to big businesses have continued without much change after the privatisation of commercial banks in the early 1980s, and it is to other interpretations that one must turn for explanations of these ties. Fourthly, in cultural analyses, politicians and bureaucrats are seen as likely to make decisions in terms of the values and the political culture of their nation. For example, the perspective of East Asian culture suggests that state leaders in this region will tend to choose more collectivist policies because of the group-oriented traditions of their nations. The individualism that characterises many Western countries stands far removed from the East Asian tradition. The cultural perspective, and especially the focus on Asian values, helps to elucidate how bureaucrats maintained leading roles in shaping the economy of the Republic right up to the late 1990s. However, this approach explains little about why the bureaucrats reduced the role of the state. Moreover, it does not help to clarify why the élites, with their history of authoritarianism, chose to move at the same time in the direction of political democracy.

15 The taming of the tiger 75 Fifth and finally, an approach that centres on the global economy suggests that world market mechanisms limit the choices for national economic policies. When shifts occur in the patterns of worldwide supply and demand, the roles of the state may well be affected. This approach helps us to understand how and why the country s leaders responded quickly to changes in the world market. Also, it was partially world market conditions that triggered the switch of government support from heavy industry projects in the 1970s to the information industry in the 1980s. The international competitiveness of Korean products has been a significant criterion in defining the role of the state. Also, a more general study of the world economy recently concluded that advances in computing and telecommunications enlarge the domain of the global economy, but that they shrink the power of the nation-state (see Crook 1997). In the 1990s, when foreign businessmen worried about the weak transparency, unfair competition, and high debt ratio of the Korean private sector, the government moved to further market liberalisation and economic deregulation. All these examples look once again to the importance of the international arena for the advance of the economy of the Republic of Korea. Conclusion Two of the highly successful tiger economies of Asia up to the 1990s were the Republic of Korea and Indonesia, yet the former adapted to the changes of that decade far more smoothly than did the latter. As Kristof (1998) writes of Indonesian President Suharto s decision to step down after violent protests against him: The force that brought him to this point after 32 years was not a communist insurgency but a conspiracy of far more potent subversives: capitalism, markets, and globalisation. Instead of hiding in the jungle, they established a fifth column in the glass-and-steel towers in the major cities. Suharto s security forces never figured out how to handcuff them or torture them into submission. Leaders in the Republic of Korea faced these same market forces throughout the decade, and a similar economic crisis in the middle years of the decade, yet they dealt with these challenges without repression, without a govern- ment being forced out of office, and without the same damage to the national economy. Once again, it may be instructive to analyse the causes for this comparative success. Perhaps the key reason for this success was the flexible response by bureaucrats in the Republic to changing world market conditions, a response that varied considerably but thus proved adaptable during the last four decades of the twentieth century. In the 1960s and the 1970s, state administrators worked directly to intervene in the national economy, first increasing export production and then encouraging the chaebols in heavy industry. In the 1980s and the 1990s, when the economy had grown so large as to make the old practices unfeasible, the administrators withdrew from them, privatising the financial system and withholding the subsidies that chaebol leaders still sought. These orientations meant building up state power during two decades and then reducing it during the next two, but essentially it was the state bureaucrats and their economic advisors who made the decisions in both periods. In the context of these reforms, the force of the Confucian ethic may be easily misunderstood. With the turndown of the economy in the 1990s, some who had resorted to a culture of Confucianism interpretation for earlier economic successes now too easily found that this cultural interpretation of national attainments could not be valid. The Confucian inheritance did not change, yet the economy came to do far worse, so of what use were Confucian influences? Perhaps Confucian values were of great use, because central dimensions of the Confucian tradition are respect for governmental administrators, the recruitment of the best young people into the state bureaucracy, and acceptance by the populace of their decisions. In fact, this respect and this acceptance operated consistently in the country throughout the last four decades of the twentieth century, and they led to short-term sacrifices in wages that produced impressive economic gains in the long run. Indirectly, these essential values of Korean culture also helped to cushion the oil shocks of 1973 and 1979, encouraging the population once again to meet these challenges in ways that gave them competitive advantages in world trade. In fact, just as the underlying impact of Confucian culture did not change, so in each