Competition policy in South Korea before and after the 1997 crisis

Transcription

1 24 April 14 Competition policy in South Korea before and after the 1997 crisis Salomon Winther Pedersen STU count (number of pages): (10) B.Sc. International Business and Politics Comparative Political Economy Final Exam home assignment Hand in: 24/ Copenhagen Business School

2 Table of Contents 1. Introduction 2 2. Choice of Theory 2 3. The Social Structure of Accumulation framework A regulated and a liberal SSA 4 4. Changes in Korean competition policy - Towards a liberal SSA? Competition policy before the 1997 crisis Competition policy after the 1997 crisis Comparing competition policies pre- and post crisis 6 5. Incorporating ideational factors A new discourse from within The influence of an outsider IMF intervention 9 7. Conclusion Reference list 11 1

3 1. Introduction The 1997 East Asian financial crisis exposed South Korea s structural fragility and raised questions about the potency of the state-led developmental approach that had been pursued for decades hitherto. The state-guided capitalist system had until 1997 become highly cherished for its ability to produce stellar economic growth firing South Korea up amongst the richest nations on the continent (Heo et al. 2008: 2). However, the 1997 crisis proved detrimental for the country that eventually had to seek financial support from the International Monetary Fund (IMF) in December The IMF intervention that followed greatly reconfigured Korea s regulatory institutions and inspired the consolidation of a new discourse on competition policy. This paper aims to uncover this change by comparing Korean competition policy before and after the 1997 crisis and looks to understand the reason behind this sudden change in trajectory. The research question of this paper is thus: What changes of competition policy did South Korea undertake in response to the 1997 crisis, what do these changes signify, and how can the neoliberal response to the crisis be explained? In answering the research question this paper will utilize the theoretical frameworks of the Social Structure of Accumulation (SSA) approach along with constructivist political economy. The first section presents the theoretical considerations underpinning the choice of theory reflecting on the applicability of other relevant theories within Comparative Political Economy. Subsequently, the SSA approach will be elaborated and the most recent reformulation of the theory by Wolfson and Kotz will be presented. The paper then turns to a longitudinal comparison of Korean competition policy before and after 1997, drawing on the ideas of the reformulated SSA theory. Having revealed the changes of Korean competition policy including the consequent institutional adjustments, the penultimate section incorporates ideational factors to the analysis suggesting a change in discourse within Korea after the 1997 crisis. Blyth s concepts of institutional change are then introduced to disclose the ideational impact of the IMF intervention. Finally, this paper is concluded. 2. Choice of Theory Firstly, Esping-Andersen s/rice s welfare regime typology provides few tools applicable to this papers research question. The typology is centered on welfare regimes, which has little to say about the development of competition policy in Korea. Furthermore, this typology presents a snapshot perspective that does not comply with the longitudinal analysis of this paper. While Bob Jessop s 2

4 KWNS SWPR scheme does in fact take such a diachronic perspective, this framework is also focused on welfare state development, and thus has some of the same limitations as the aforementioned typology. Jessop s scheme also lacks focus on the changing power balances leading to institutional change, which is central to this paper. The Varieties of Capitalism (VoC) approach provides a better alternative to these two. The VoC approach has several resemblances to the SSA approach in that both theories are focused on the institutional configurations that make up a capitalist system. VoC is a firm-centred framework focusing on the relational conception of firms (Hall & Soskice 2001: 6), and specifically its dimension of inter-firm relations is highly relevant for the topic in question. Adopting this framework the paper could have analyzed the institutional complementarities between different institutions in enforcing different competition policies both before and after the 1997 crisis. This would perhaps lead to a discussion of Korea s potential move from a coordinated market economy to a liberal market economy. However, in the discipline of Comparative Political Economy the VoC is mostly applied as a static framework used for analyzing institutions in a synchronic comparison. In answering this papers research question the SSA approach is better suited to depict institutional change and focus on shifting power balances. There exists a high degree of complementarity between the SSA approach and constructivist political economy while the SSA framework may help to portray the shifting power balances and the resulting change in competition policy between the two periods, constructivism unveils how the ideas of central actors facilitated this development. Nevertheless, these two theories also have their individual limitations. Firstly, the SSA framework may be criticized for being overly inclusive thereby allowing for the possibility to point in several directions for supportive explanations. Further, it can be difficult to pinpoint the timing of SSAs as the shift tends to be gradual. Constructivism may be accused of paying too little attention to the significance of material dimensions and of its failure to provide an in-depth theory of the state. 3. The Social Structure of Accumulation framework Initially coined by American economist David Gordon in 1980, the theory of the Social Structure of Accumulation proposes an interpretation of capitalist development through long waves of economic activity marked by periods of interchanging growth and stagnation (Diebolt 2002: 86). In line with Marxian economics, the SSA theory suggests that capitalism is inherently conflictual and crisisprone due to the internal tensions between the two main classes, labour and capital (McDonough 3

5 2011: 1239). Furthermore, building on Keynesian economics, this perspective adopts the idea that investment decisions in the capitalist system are unstable as a result of constantly changing expectations (Ibid: 1239). The SSA theory ascribes an imperative role to institutions and proposes that the construction of sets of institutions may help alleviate the apparent troubles of capitalism presented by Marxian and Keynesian economics. Institutions can (temporarily) stabilize the capitalist system by mitigating class conflict and stabilizing the capitalist class long run profit expectations (Ibid: 1240). The framework states that each distinct SSA is constituted by a comprehensive set of interdependent and mutually compatible economic, political, and ideological institutions. The institutions of an SSA are broadly defined as all institutions that contribute to the capital accumulation process (Wolfson & Kotz 2010: 74). Collectively these institutional arrangements initially support the lucrative and relatively stable process of rapid capital accumulation of the reigning SSA. The prevailing accumulation process will, however, eventually be undermined and brought into imbalance, eventuating in a systemic crisis and subsequent demise of the current SSA (McDonough 2011: 1240). Following the disintegration of the prevailing sets of institutions and a prolonged period of crisis, a new institutional structure is consolidated promoting a new SSA and renewed rapid growth. Each SSA follows this development of establishment, consolidation, crisis, and eventually collapse (Diebolt 2002: 88). 3.1 A regulated and a liberal SSA The latest modification to the SSA framework has come from Wolfson and Kotz (2010). In their reformulation they propose a shift in focus moving away from rapid economic growth and towards what Wolfson and Kotz identify as the ultimate goal of capitalists maximizing profit (Wolfson & Kotz 2010: 78). This follows from their assumption that the successful establishment of an SSA and its institutions requires the engagement of (at least part of) the dominant capitalist class. As such, the capitalist class will seek the creation of institutions that facilitate profit-maximization rather than rapid capital accumulation. In line with the original framework, Wolfson and Kotz assert that no capitalist institutional structure can persist in the long-run (Ibid: 78). They suggest that SSAs alternate between two varieties, liberal and regulated, which differ primarily on the way in which the contradictions of capitalism are temporarily stabilized. 4

6 4. Changes in Korean competition policy - Towards a liberal SSA? This section briefly presents the main features of competition policy before and after the 1997 crisis before providing an in-depth comparison between the two drawing on Wolfson and Kotz ideas. 4.1 Competition policy before the 1997 crisis Prior to the 1997 crisis Korea pursued heavy state-led developmental policies characterized by close relationships between the Korean government and large family-owned business conglomerates called chaebols (Heo et al. 2008: 3). The Korean government actively supported the growth of selected export-oriented industries (Jung & Chang 2006: 688) through means such as uneven allocation of credit and tax incentives favouring the large chaebols. This politically guided allocation of resources created high entry barriers into strategic market sectors culminating in the formation of monopolistic and oligopolistic market structures (Ibid: 689). The enactment of Monopoly Regulations and Fair Trade Act (MRFTA) in 1981 was designed to deal exclusively with competition law and appeared up front as a new route for competition policy with the act s selfclaimed purpose to promote fair and free competition (Ibid: 694). However, the MRFTA initially failed in alleviating economic concentration of the chaebols (Ibid: 692), one of its key competitionpromoting initiatives. Antonielle and Mariniello (2003) attribute the lack of attainment of this legislative change to the fact that the MRFTA was only effectively enforced after the 1997 crisis. 4.2 Competition policy after the 1997 crisis The effective implementation of the MRFTA that eventually proceeded after 1997 epitomized the successful turn-around of competition-promoting policy initiatives in Korea. Since the crisis Korea has successfully undertaken initiatives to eliminate anti-competitive elements from the market such as artificially high entry barriers and largely reduced government intervention (Jung & Chang 2006: 687). The Korean Fair Trade Commission (KFTC) has since 1997 pursued vast measures to restructure the market, many policies specifically targeting the chaebols (Yoon et al 2002). In 1999 the KTFC launched the Ombibus Cartel Repeal Act (OCRA) (Jung & Chang 2006: 698). The OCRA was put forward to deal with pervasive cartel arrangements permissible prior to the crisis and amended twenty laws that had hitherto obstructed market competition (Ibid: 698). The bankruptcies and closures of 14 of the top 30 chaebols in 1999 (Kihwan: 2006: 17) clearly proved that the Korean government no longer supported unprofitable and un-competitive firms based on non-market factors. 5

7 4.3 Comparing competition policies pre- and post crisis As previously touched upon Wolfson and Kotz propose the idea that SSAs alternate between two different varieties, a liberal and a regulated SSA. Specifically, they suggest that liberal and regulated SSAs differ along five key dimensions, of which three are deemed particularly relevant with respect to competition policy. These are; 1) the state role in the economy; 2) the contradiction within capital; and 3) the character of the dominant ideology (Wolfson & Kotz 2010: 81). 1) State role in the economy: The period leading up to the 1997 crisis was marked by close relationships between the state and capital. This relationship led some scholars to term pre-1997 as Korea Inc. (Lee & Han 2006; Shin & Chang 2003) while others go as far as interpreting the statecapital nexus as constituting a quasi-internal organization (Lee et al. 2000). Conversely, the subsequent post crisis environment extensively broke these ties marking a clearer distinction between the two. This transformation away from a government-led economy (Pirie 2005: 25) into a more market-based one has been at the heart of Korean competition policy since the 1997 crisis. The pre-crisis strategic government-support of certain export-oriented industries exemplified the states desire to interfere in market proceedings thereby constraining the free actions of capitalists. Precisely such role of the state is what characterizes a regulated SSA (Wolfson & Kotz 2010: 82). In comparison, after the crisis Korea has managed to undertake a series of successful competition policy reforms supporting the principle of free market, most notably initial amendments to the MRFTA and the OCRA. Yoon et al. argue that since the crisis of 1997 the role of government has conspicuously shrunk and the importance of market has greatly increased (2002). The principles of free market together with the restricted regulation by the state of the market are the founding features of a liberal SSA (Wolfson & Kotz 2010: 82) and sum-up the Korean environment post ) The contradictions within capital: The second dimension in focus covers the nature of competition between capitalists (Wolfson & Kotz 2010: 83). Before the crisis in 1997 many markets were characterized by chaebol-dominated monopolistic and oligopolistic structures that did not match the mechanisms of supply and demand (Ministry of Government legislation 2009: 4). A top priority of post-crisis competition policy was thus to create an environment in which the chaebols competed on equal terms with the residual market actors. This effectively meant dismantling the chaebol structure (Shin & Chang 2003: 50) The KFTC s Cartel Act and its several amendments of the MRFTA constituted some of the most significant initiatives taken towards 6

8 making competition less restrained and more free. The new emphasis on competition policy after the 1997 crisis increased competition between capitalists, compared to before the crisis, as new legislation provided SMEs with better opportunities to compete with the chaebols. According to Wolfson & Kotz, competition generally tends to be more unrestrained and cutthroat in liberal SSAs as opposed to regulated SSAs (2010: 83). In the case of Korea the post 1997 capital-capital relations are best portrayed by the former type of SSA while the pre 1997 period falls closer to the latter. Prior to the crisis the relationship between chaebols was typified by a complex web of internal financial and other ties (OECD 2000: 3) suggesting that competition was more co-respective and muted. This resembles the features of Wolfson and Kotz regulated SSA. 3) The character of the dominant ideology: Before the culmination of the crisis in 1997 the Korean model heralded the strong contribution that active government intervention could make to economic progress (Shin & Chang 2003: 33). Competition policy was thus to a large extent subordinated to industrial policy (Jung & Chang 2006: 722) as the state pursued a crucial role in promoting growth and capital was essentially the offspring of the state (Jeong 1997: 95). In comparison, the post 1997 period redefined the role of the state as a promoter of the free market and the new dominant ideology perceived unrestrained competition as essential. The increased role of Korea s central competition institution the KFTC and its promulgation of the 1999 OCRA and the MRFTA manifested this ideological turn. The pre 1997 ideological conviction of the importance of the state in contributing actively to economic progress resembles the ideology underpinning a regulated SSA (Wolfson & Kotz 2010: 84). In comparison, the improved emphasis on creating a free market after 1997 suggests that this period is best portrayed by Wolfson & Kotz liberal SSA (Ibid: 84). The subsequent section will further elaborate on the ideological dimensions underpinning these institutional changes and uncover some of the factors responsible for this development. When comparing competition policy in the two periods, pre- and post respectively, it becomes evident that they differ significantly in terms of the 1) the role of the state; 2) the competition between capitalists, and 3) on the content of their dominant ideology. By reviewing Koreas competition policies with respect to these three dimensions it seems apparent that the two periods are marked by two different SSAs, the former constituting a regulated while the later bares the features of a liberal SSA. Nevertheless, it should be noted that the liberal and regulated SSAs are ideal types and therefore it can be argued that both periods to some extent combine features of the liberal and regulated SSAs. 7

9 5. Incorporating ideational factors Having offered an account on the institutional changes underpinning the shift in competition policy this paper now seeks to incorporate ideational factors to the analysis. Adopting a constructivist point of view entails viewing ideas as central to institutional change (Blyth 2001: 4-5). This approach depicts economic reality as socially constructed and highlights the importance of ideas in alleviating uncertainty. In periods of uncertainty ideas about the causes of uncertainty will determine which institutional forms are required to resolve the uncertainty (Ibid: 4). In the case of Korea it was ideas about how the East Asian financial crisis had occurred that resulted in the implementation of new competition-promoting policies. The following section aims to explain how both internal and external ideas proved vital to the shift towards a liberal SSA, suggesting an apparent change in discourse. Furthermore, this section adopts Blyth s theory (2001) on how ideas affect institutional change within the context of Korean competition policy before and after the crisis. 5.1 A new discourse from within Following the financial crisis of 1997 it became evident that a new discourse within the country was consolidating. The previously applauded state-led capitalism model was increasingly raising questions and many of these concerns were directed towards the influence of the chaebols and their deteriorating contribution to the Korean economy and market competition measures (Murillo & Sung 2013: 7). The 1981 MRFTA reflected the growing attention towards the importance of competition policy and an early voice for the free market, however, these ideas were not yet routed into the dominant ideology, hence the lack of effect of the legislation. In the midst of the crisis there developed a strongly held view that the chaebols were culpable for the financial crisis, as their concentration was impeding the growth of SMEs causing negative effects on innovation (Jung & Chang 2006: ). This new discourse flourished greatly in the subsequent years after 1997 and calls for the creation of a free and fair market gained further support. The crisis challenged Korean developmental nationalism, which had hitherto obtained status as the hegemonic ideology (Cho 2008: 82). The 1998 change in government handed the presidential post to the leader of a minority party and proved to be significant in the build up of this new discourse. For the first time in 15 elections the presidential post did not fall to one from the ruling party (Ibid: 84). This meant that the new government could legitimately distance itself from its predecessors by 8

10 advocating neoliberal competition reforms, which put the previous hegemonic ideology of developmental nationalism into imbalance. The 1997 crisis of developmental nationalism inspired a discourse of crisis and spurred the cries for a change in Korean society paving the way for a new discourse of neoliberal reform (Ibid: 86). Whilst nationalism was not completely abandoned it was greatly transformed, as asserted by Cho; nationalism still haunted Korean society, but it would transform itself through being articulated with core ideas of neoliberalism (Ibid: 87). 5.2 The influence of an outsider IMF intervention Despite hints of a change in discourse within Korea it was an external actor, the IMF, whose intervention during the 1997 crisis ultimately tilted the balance of power in favour of the neoliberal reformers (Pirie 2005: 26). The IMF made no secret of their conception of the cause of the crisis insisting that the Korean system had been weakened by government interference in the economy and by close linkages between banks and conglomerates (IMF 2000). IMF s view that Korea s crisis was very much the result of the previous state-led development model framed its views on how to resolve the crisis. The IMF identified tight monetary policy along with deep structural reforms as the necessary solution to overcome the crisis (IMF 2000; Heo et al. 2008). The corporate restructuring was directed towards improving corporate governance and adopting neoliberal competition policies as steps to improve the efficiency of markets and increase competition were highlighted as fundamental to the recovery (IMF 2000). The $57 billion bailout package (Lee et al. 2000: 28) supplied by the IMF to the Korean government was conditioned on the implementation of IMF s ideas of how to recover from the crisis. On the verge of bankruptcy the Korean government could do little but accept the conditions paving way for the neoliberal reform of competition- and other key policy areas. In this sense it is fair to say that the IMF s ideas thus functioned as weapons (Blyth 2001) as they challenged the existing institutional arrangements. The effect of these ideas as weapons is noticeably prominent in the commitment to successfully enact the MRFTA after IMF s intervention in The previous inability to effectively put through the legislation can be interpreted as being due to a cognitive lock whereby previous ideas about the relationship between competition policy, industrial policy, market, and the state were institutionally embedded and thus blocked the 1981 attempt to alter this configuration. During a period of uncertainty in the midst of the crisis IMF s ideas functioned as institutional blueprints offering concrete ideas on the causes of, and a solution to, the crisis. Evidently, the promulgation and deployment of these new economic ideas introduced 9

11 by IMF was a prerequisite for breaking the previous cognitive locks and implementing the fundamental institutional changes to the area of competition policy after 1997 (Blyth 2001: 4). The institutional blueprint deriving from the ideas of the IMF facilitated the consolidation of a new, liberal, SSA. 7. Conclusion On the background of the 1997 East Asian financial crisis, this paper set out to reveal South Koreas shift in trajectory by comparing diachronically the nations competition policy in the periods of preand post respectively. Initially, this paper applied Wolfson and Kotz Social Structure of Accumulation framework to unveil that competition policy in the pre- and post periods differed significantly with respect to at least three fundamental dimensions; 1) the role of the state; 2) the competition between capitalists, and 3) on the content of their dominant ideology. The differences between pre- and post competition policy signifies that these two periods are marked by different SSAs, the former constituting a regulated and the latter a liberal SSA. The following section adopted the assumptions of constructivist political economy and Blyth s concepts of institutional change to look at how ideas about the causes of the 1997 crisis led to the proposed resolution of it. The findings suggested an apparent change in discourse within Korea with new emphasis on reform and on creating a free market consolidating under the new 1998 government. Developmental nationalism was further challenged as a hegemonic ideology following the intervention of the IMF whose ideas functioned as weapons to ultimately tilt the balance of power in favour of the neoliberal reformers. The neoliberal response to the crisis can thus best be explained by the complementary ideological developments internally and externally whereby the hegemonic ideology was modified to encompass the elementary ideas behind neoliberal competition policy. The institutional changes relating to the shift in competition policy must be viewed in a broader perspective as competition law does not operate in a vacuum but is inextricably intertwined with a wide range of other political, social, and cultural institutions. Nevertheless, it is fair to assume that the ideational factors underpinning the shift in competition policy are applicable and reflective of the simultaneous developments within the broader institutional arrangements of which Korean competition policy is embedded in. 10

12 8. Reference list Antonielle, M and Mariniello M. (2013) Competition Policy Trends in South Korea [online] Bruegel. Available from: [Accessed: 18 April 2014]. Blyth, M. (2001) The Transformation of the Swedish Model: Economic Ideas, Distributional Conflict and Institutional Change, World Politics, 54(1), Cho, Y. (2008) The national crisis and de/reconstructing nationalism in South Korea during the IMF intervention, Inter-Asia Cultural Studies, 9:1, Diebolt, C (2002) Towards a New Social Structure of Accumulation?, Historical Social Research, 27, pp Hall, P and Soskice, D. (2001) An Introduction to Varieties of Capitalism, In P. Hall & D. Soskice (Eds.), Varieties of Capitalism (pp. 1-66), Oxford: Oxford University Press. Heo, U; Jeon, J; Kim, H; and Kim, O. (2008) The Political Economy of South Korea: Economic Growth, Democratization, and Financial Crisis, Maryland Series in Contemporary Asian Studies, 2:1, pp IMF. (2000) Recovery from the Asian Crisis and the Role of the IMF [online] International Monetary Fond. Available from: [Accessed: 21 April 2014]. Jeong, S. (1997) The Social Structure of Accumulation in South Korea: Upgrading or Crumbling?, Review of Radical Political Economics, 29:4, pp Jung, Y and Chang, S. (2006) Korea s Competition Law and Politics in Perspective Symposium on Competition Law and Policy in Developing Countries, Northwestern Journal of International Law & Business, 26, pp Kihwan, K. (2006) The Korean Financial Crisis: Causes, Policy Response, and Lessons, The International Monetary Fund, pp

13 Lee, C; Lee, K; and Lee, K. (2000) Chaebol, Financial Liberalization, and Economic Crisis: Transformation of Quasi-Internal Organization in Korea, Institute of Economic Research Seoul National University, 31. Lee, S and Han, T. (2006) The demise of Korea, Inc. : Paradigm shift in Korea s development state, Journal of Contemporary Asia, 36:3, pp McDonough, T. (2011) Social Structures of Accumulation: A Punctuated View of Embeddedness, American Journal of Economic and Sociology, 70(5), pp Ministry of Government Legislation. (2009) Monopoly Regulation and Fair Trade Act, Laws on Green Growth, and Economic Investment in Korea, pp Murillo, D and Sung, Y. (2013) Understanding Korean Capitalism: Chaebols and their Corporate Governance, ESADE, 33, pp OECD. (2000) Korea The Role of Competition Policy in Regulatroy Reform, Country Studies. Pirie, I. (2005) The new Korean state, New Political Economy, 10:1, pp Shin, J and Chang, H. (2003) Restructuring Korea Inc. London: RoutledgeCurzon, Chapter 2 and 3 pp. 7-33, Yoon, J; Kee, Y; and Ryu, M. (2002) South Korea: Toward a New Competition Policy in Korea [online] Mondaq. Available from: +Korea [Accessed: 20 April 2014]. Wolfson, M. H., & Kotz, D. M. (2010) A Reconceptualization of Social Structure of Accumulation Theory, In T. McDonough, M. Reich, & D. M. Kotz (Eds.), Contemporary capitalism and its crises: Social structure of accumulation theory for the twenty-first century. Cambridge: Cambridge University Press. 12