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Page |1 Government, big business, and crises: the Korean experience of economic development Elias Sanidas, Seoul National University (SNU), South Korea [email protected] Abstract The aim of this paper is to link together government and big business, as well as organizations and institutions, which all contribute to economic development, in a balanced way similar to that expressed by the Korean flag: Ying and Yang forever have their positive and negative interaction on the Korean economy and society. This dynamic evolutionary balance can be seen in many aspects of the Korean society and has been the result of three major forces. First, a political regime prevailed after World War II that exhibited high levels of vision and effectiveness in pursuing social and economic reforms and policies. Second, there was an exceptional ability to execute the five-year plans as set out by the government. Third, a particular type of Korean business was formed which contributed to the Korean development in two main areas: the owners of these businesses (extended families) closely followed the directions and planning process of the government; and their enterprises eventually formed a set of networks between huge companies and smaller companies (the Chaebols network). In turn, the evolution of the Korean society and economy can be expressed in Schumpeterian terms: creative destruction due to several crises and the forcing power of foreign occupation and autocratic regimes, plus a strong entrepreneurship promoted and sustained by these regimes. Key words: Korea, government, big business (chaebol), entrepreneurship, evolution, creative destruction, crisis, autocratic regimes Page |2 1 Introduction 1.1 Korea’s path to economic development History and path dependence are so important in economic performance of a nation that we cannot ignore them even if we find it difficult to pick up the most salient historical points. In this study, we will present some of these most obvious or sometimes hidden salient factors that have shaped Korean present society and economy. The aim of this study is not to be exhaustive about all these different factors which one way or another contribute to economic development in a country, it is rather to be selective and suggest some standing out conceptual points. From the theoretical point of view, we adopt the Schumpeterian or evolutionary way of thinking and we use it to make the analysis more robust. Before we say a few words about the main historical periods in Korea, let us summarize the issue of endowments and resources of this country since these are often considered as moving forces in economic development. Thus, Korea is relatively small in terms of total land area, and worse, the whole country is so mountainous that only a little more than a fifth of it is arable. The limited amount of arable land forces Korean farmers to cultivate their land intensively and enhance field productivity as much as possible. Consequently, agricultural productivity is known to have been relatively high throughout Korea's history. In addition, there is not any significant amount of natural resources1. Thus, among those nations with similar area, Korea may be the most mineral resource-poor country in the world. However, Korea is endowed with such mineral resources as 1 Abundance of natural resources might not necessarily benefit a country rich in such resources (see, for example, Sachs and Warner, 2001). Page |3 limestone, tungsten, and lead; in particular, it has almost infinite amounts of limestone for cement production (Song, 2003). Also we should add an important point about Korea’s cultural “resources”. Song (2003, p. 4) says that “The amalgam of traditional Confucian ethics and adapted Christian ethics in Korea… form what Tu Wei-Ming of Harvard University calls the 'new Confucian ethic'. This new Confucian ethic has provided the functional equivalent of Max Weber's 'Protestant ethic' in the West as the basis for Koreans' attitude towards work, self-discipline, desire for education, strong family ties, loyalty to the country and organizations, and flexible adaptability to change”. We can distinguish for the purpose of this paper the following most recent periods of Korean economy. Before the Japanese occupation: China's influence had prevailed in Korea, and Korea's tradition of centralized and bureaucratic government is often considered as a principal example of this influence. After 1876, the opening of a port to Japan, several Japanese companies entered Korea. Modern companies owned by Koreans started to show up from mid 1880s. They were established by capitalists, mostly noblemen (“yang-ban”) or bureaucrats, because they were relatively more educated and understood the economic atmosphere since they were close to government. They did not participate in company management but they were stockholders (Kim, et al, 2008) During the Japanese occupation (1910 to 1945). After 1910s, due to institutional changes and inflowing Japanese capital, many Korean companies were established. Large landowners became the most influential entrepreneurs. They had modern education and were much more positive in managing companies. During the Sino-Japanese War and Pacific War (1937-1945), many Korean companies went bankrupt due to strict regulations on the economy by Japan, although Page |4 some of them survived and became, in 1940s, the first Korean large enterprises. However, they were not yet the ‘chaebol’ type (Kim, et al, 2008). From 1946 to 1961. During this period, Korea was a subsistence economy. After the Korean War, from 1953 to 1961 the recovery was slow despite the massive assistance from the USA. This was exacerbated, after the Korean War (1950-3), because a postwar baby boom (1954-61) took place at the same time. In summary, as Song (2003, p. 4) says, “…the fall of Japan in 1945 and the Cold War tension that followed resulted in the division of the country into North and South and the tragic Korean War. The Korean War left over one million people dead and destroyed about half of all the country's infrastructure. It also destroyed traditional authority and class barriers and hastened the rejection of old-fashioned ways of thinking and habits. In destroying the old order, the war also destroyed many barriers to the development of a modem economy…” During especially this period, Korea depended heavily upon other countries, mainly the USA for aid and capital. This made Korea to be one of the highest aid-receiving countries in the world, (at one stage it was the fourth largest debtor nation in the world after Brazil, Mexico and Argentina). In addition, growth of industries and thereby the economy as a whole was based upon import substitution, foreign assistance, and over-valued exchange rates. As most industries in Korea were consumer-goods industries, such as food and textiles, import substitution took place mainly in these industries. By the early 1960s, the possibility of easy import substitution in these industries had almost been exhausted (Song, 2003). However, by 1961 a group of capable entrepreneurs emerged, and a base for further industrialization into the next phase of development was laid by them. Page |5 The period from 1961 to the 1960s and 1970s is the crucial period where many changes took place and hence it will be further analyzed below in some detail. We will also further consider the 1980s and the 1990s period up to the Asian Financial Crisis (AFC) in 1997/98. The latter was mainly the main reason for the ‘destruction’ of several firms (including chaebols) and a rebirth of corporate governance (see for example Kim (2008)). Also, in terms of industrial structure and growth, after the AFC, many noticeable changes took place such as increased competition and lesser government intervention (see Oh et al (2008)). Finally, we must now summarize the period from the end of AFC to the 2010s. Today, Korea is one of the 12 biggest economic and social powers in the world; it shows and possesses high technology; steady and relatively high growth rate; stable governments; low criminal records; healthy economic sectors with prospects for further growth; an exceptional human capital development; and so on. Thus, “educational attainment rates in Korea continue to rise. For instance, students enrolled in secondary school made up 100 per cent of their age group, comparable to the rate of advanced countries. The rate is much higher than the average figure of 71 per cent for middle income countries. In addition, the proportion of Korean high school graduates going on to colleges or universities was a high 68 per cent in 2001-higher than Japan's rate of 49.1 per cent, and virtually identical to the rate in the United States in 2000…According to census data, the average number of years of schooling for all Koreans over the age of six in 1965 was merely five years, but by 1985 it had increased to 8.6 years, and again by 2000 to about eleven years. (Song, 2003; p. 33). Table 1 provides a glimpse as to the tremendous progress of Korea in terms of GDP per capita. Thus, the average annual growth rate for per capita GNP in Korea was about 6.5 per cent for the 1965 to 1999 period, the highest in the world. Table 1 GDP per capita in real terms Page |6 Country Name Country Code 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 East Asia & Pacific EAP 143 125 123 128 137 148 156 151 149 162 178 185 189 201 205 215 217 230 249 262 277 288 301 320 345 365 384 412 446 465 483 515 564 619 679 737 794 841 850 894 952 1006 1076 1161 1256 1367 1505 1678 1807 1928 2099 World China Japan Korea Malaysia Philippines Thailand United Kingdom United States Taiwan WLD CHN 105 78 72 78 88 100 108 99 93 105 122 127 129 136 136 146 141 150 165 175 186 194 208 228 259 290 311 341 373 383 392 422 476 536 600 658 716 775 827 883 949 1021 1106 1209 1323 1464 1641 1864 2033 2208 2423 JPN 7241 7904 8528 9157 10120 10595 11616 12783 14382 15845 16339 16888 18054 19343 18745 19018 19628 20293 21171 22144 22590 23361 23986 24552 25486 26935 27530 28520 30428 31931 33595 34605 34801 34775 34956 35478 36321 36792 35947 35828 36789 36776 36787 37227 38236 38972 39772 40707 40254 37766 39733 KOR 1154 1180 1176 1255 1316 1351 1487 1542 1684 1880 1994 2113 2163 2376 2497 2595 2824 3058 3292 3463 3358 3510 3709 4049 4323 4572 5011 5515 6044 6390 6895 7474 7841 8248 8872 9548 10119 10491 9702 10547 11347 11711 12478 12764 13304 13802 14469 15158 15458 15463 16372 MYS 813 847 872 906 925 966 1013 1024 1077 1102 1139 1175 1254 1368 1446 1424 1553 1635 1704 1821 1910 1992 2058 2130 2235 2149 2113 2163 2309 2446 2593 2764 2932 3141 3345 3582 3843 4023 3636 3768 4006 3934 4053 4194 4386 4530 4707 4926 5073 4906 5174 PHL 692 707 716 742 743 758 768 785 801 814 821 841 861 912 918 942 996 1023 1046 1074 1098 1105 1113 1103 994 897 903 917 953 987 991 962 943 941 960 982 1016 1045 1017 1026 1048 1056 1072 1102 1153 1185 1225 1283 1314 1307 1383 THA 321 328 342 359 372 390 420 443 465 481 520 530 537 576 585 599 639 686 739 762 785 815 842 872 904 929 961 1033 1149 1268 1391 1493 1599 1718 1858 2012 2109 2057 1819 1877 1943 1962 2043 2164 2278 2360 2459 2563 2608 2531 2712 GBR 10480 10661 10704 11059 11537 11781 11958 12163 12590 12791 13065 13259 13690 14633 14431 14343 14726 15083 15571 15976 15623 15411 15740 16304 16713 17276 17927 18705 19603 19998 20094 19753 19728 20119 20926 21508 22072 22744 23496 24230 25089 25613 26054 26678 27327 27755 28354 28929 28718 27138 27293 USA TAI 18229 18622 19441 20395 20104 19868 20746 21492 22462 22914 22630 22979 22310 23105 24554 25338 25966 26550 27389 28098 28299 27850 28402 28835 29655 30051 30828 31831 32847 34053 35081 35102 35406 35976 36920 37702 38342 38699 38336 36993 37797 3023 3355 3675 4052 4112 4077 3869 3817 3719 3771 4690 5053 5019 5333 5806 6190 7125 8388 8301 8636 8840 9201 10725 10801 10849 10429 10754 12446 15759 14409 14641 14406 13795 13036 13266 12600 12078 11986 14101 14827 14861 3298 3361 3483 3640 3627 3593 3705 3789 3887 3977 3981 3997 3943 3983 4105 4193 4259 4333 4460 4549 4606 4603 4631 4644 4728 4795 4889 5000 5049 5148 5298 5316 5354 5431 5586 5717 5879 6040 6060 5868 6047 Source: World Bank, IMF, Taiwan Statistics. 1.2 Theoretical considerations Page |7 We just saw that Korea went through some great and rapid changes within approximately a period of 100 years. First a shocking foreign occupation for about 35 years occurred at the beginning of the 20th century which forced upon the Korean society many new situations, such as the beginning of industrial revolution for Korea (see Cumings (2005) for a detailed justification of this statement). Second, a world war which was immediately followed by a civil war that also forced upon the Korean society many new situations, such as breakdown of old structures and establishment of new ones. Third, a dictatorship prevailed for almost 30 years which again generated many new situations and outcomes as we shall see in detail further below. Fourth, a democracy was established from the 1990s which was a completely new situation in the whole Korean history. And fifth, a serious financial crises that lasted only a couple of years but had many serious consequences on the corporate sector. How can we relate all these revolutionary and rapid changes in Korea to economic theory? An almost obvious answer is to invoke Schumpeter’s well documented “creative destruction”. Schumpeter (1942, pp. 82-83) said that “…capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary…the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one…This process of Creative Destruction is the essential fact about capitalism…” In this present paper we will endeavor to provide evidence of this creative destruction process in the case of recent Korean economic development. To do so, we need to also invoke some other contributions by some other scholars. Page |8 Bernholz (2000) in his discussion as to whether democracy and capitalism are compatible in the long run has come up with the following conclusions. First, according to Europe’s evolution through time, capitalism preceded democracy. Second, although there is an inherent tendency in democracies for government to grow, various types of crises can counteract this tendency. Third, international competition among countries motivates rulers “…to limit their domestic powers with the purpose to strengthen their economies as a base of international power…” (ibid, p. 12)2. Fourth, “…crises provide a fertile ground for reform plans proposing new political-economic regimes…” (ibid, p. 14). These crises 3 can take several forms. Thus, “…if more and more government interventions favoring interest groups occur, the burdens for ordinary voters increase and will finally be perceived by them…”(ibid, p. 13) thus leading to a crisis. Other reasons for crises are wars, religions, ethnic strife, depressions, hyperinflations, etc. Fifth, ideological movements may turn nations into totalitarian states or in any case influence political economic systems during crises. Sixth, the negative consequences of growing government (this growth is an inherent tendency of democracies) increase regulation and welfare which eventually leads to crisis in the long run. Bernholz (2001) in his formal analysis on the relationship between ideocracy or ideology and totalitarianism showed that totalitarian regimes are transient societies even though they might have initially incorporated some ideologies in their “existence” of rulership. However, as Yang (2006) argues, a totalitarian regime like the one in South Korea during Park Chung Hee’s dictatorship may also be described as a class-based hegemony because it gains political consent from certain social groups (a similar argument is developed by Volckart 2 For this international competition and its role in economic growth see Chaudhry and Garner (2006), or Chu (2010). More on crises and economics from a rather different perspective can be found in Underwood (1998), Baran (2011), and Foster (2002). 3 Page |9 (2000) for the case of Central European States). Bernholz’s analysis is very relevant to the evolutionary development of Korea as we shall see further below. Foster (2010,) in taking up Schumpeter’s analysis on entrepreneurship as the key driver of economic growth, says that entrepreneurs “…are, necessarily, involved in a process of ‘creative destruction’ where failing entrepreneurs are just as important as successful ones…” (ibid, p. 355) Then according to relevant evolutionary or Schumpeterian principles, he recommends (ibid, p. 365) the following policy priorities in order for countries like Australia to promote innovation and recovery from the long wave phase of current recession: Explicit government strategies to promote entrepreneurship A public commitment to education and training Public support for the development and dissemination of organizational innovations A capacity to enact regulatory changes in a timely manner Public support for science and R&D Public guarantees that allow finance to flow to entrepreneurial activity from risk-averse financial institutions Government tolerance for failure and an associated capacity to distinguish genuine entrepreneurial failure from rent seeking activity A bi-partisan strategy to assist obsolete industries to downsize and release their human and non-human resources for effective use in emergent industries We shall see that Foster’s recommendations, although unrelated to Korea, could easily be applicable to Korea in the last 100 years or so. In any case, all these theoretical considerations will be checked against Korea’s evolution in the remainder of this paper. P a g e | 10 2 The Government during the 1960s to the 1980s The typical Korean public servant (or Government official) assumes full responsibility for the well-being of the people they serve. Public servants in general are even in a position to take decisions and lead the business people. Thus, the Korean government tends to be highly interventionist. Consequently, Korean people and business tend to rely on the government for growth, stability, equity, education, quality of life, moral guidance, and even basic survival. Since, government-business relations tend to be very hierarchical, the market tends to be guided or managed by the government. The government in the 1960s was so strong and interventionist that the Korean economy was often called a ‘command market economy’. Korea was noted for its strong leadership commitment to development and successful implementation of development plans. Korean growth was promoted extensively by the government through various incentive systems and appears to have generally been efficient (Song, 2003). The government has also assisted the communitarian Koreans to further cultivate their highly appreciated sense of equity. Thus, the World Bank (1993, p. 159) indicates in a famous book, The East Asian Miracle, that the essence of the miracle has been ‘rapid growth with equity’: Korea’s leadership “…effectively produced egalitarian growth. Partly by accident and partly by trial and error, the leadership gradually adopted the principle of shared growth…” The equity aspect was already a clear objective of the 3rd 5-year plan (1972-76) and mainly the 4th 5-year plan (1977-81). The Korean government during the period of the 1960s to the 1980s (about three decades) has achieved a unique performance in the world. I would like to emphasize that its best achievement has been to choose the right policies during this period of 30 years and to implement and execute these policies to the letter. Here is a brief account of the methodology used in order to decide upon the right policies. P a g e | 11 i] Introduction of a formal planning process of 5-year consecutive plans which not only indicated but also enforced the implementation of a set of objectives with great success. ii] These objectives were carefully chosen for each 5-year plan in a manner that created a smooth transition from one stage of development to the next. iii] Thus, a set of institutional changes very often preceded other changes in the Korean society. This institutional precedence over economic measures is the right overall policy to adopt as based on recent institutional economics (e.g. North (1990), Williamson (1985), and so on). iv] However, as very often is the case, economic measures are also necessary in parallel with institutional changes. v] Also, a set of unique measures of executing the 5-year plans were taken with great success. For example, regular monthly meetings (two types) between the President, bureaucrats and business people to check the implementation of plans were established from 1961 (Kang et al, 2008). vi] The President of Korea himself was the moving force in designing and implementing the government’s prioritized policies. He was further supported by the Economic Planning Board and the Ministry of Trade and Industry (the equivalent of the well-known equivalent MITI in Japan). It is worth noting that the President was very keen to learn economics and thus he became an expert by practice in economics (see below). Let’s see now some of the priorities the then government chose during that period (proven to be correct during the historical process). These priorities are summarized in Table 2. P a g e | 12 Table 2 Institutional and economic changes prioritized during 1960 to 1994 Year Economic Institutional Year Economic Colour television broadcasting begins. Economic Planning Board established. 1980 1962 Construction of the Ulsan Industrial complex begins. Monetary reform; Won introduced IBRD loans to Korea begin Korea Trade Promotion Corporation (KOTRA) begins. President's Monthly Export Promotion Conference begins. 1981 1963 Export-Import linkage scheme initiated New Commercial law begins. 1982 Production of supersonic jet aircraft. Won devalued Treaty normalizing relations with Japan signed. 1984 Completion of Taegu-Kwangju Olympic Expressway 1985 Three 'lows' - low oil price, low interest rates, and low US dollar value - spur export boom. 1986 Exports exceed imports for the first time since development began. Savings exceed investment for the first time since the First FiveYear Plan began. 1961 1965 Korea Institute for Science and Technology established. National Tax Office established The Law for the promotion of foreign investment enacted. Foreign capital inducement Law enacted. Korea Foreign Exchange Bank established. Korea joins GATT KURO esport industrial complex established in Seoul Ministry of Science and Technology Established. First Froeign Bank (Chase Manhattan) opens Branch office. 1966 1967 1968 Construction of Pohang iron and steel mill began Resident Registrations System begins The first National Wealth Survey begins 1987 Institutional New economic policy shifts emphasis away from sole economic growth to economic stability and equity. Riot at Sabuk coal mine. Kwangju democratization movement begins and lasts nine days. 4,992 government officials purged for corruption. Domestic sale of colour televisions permitted. Democratic Justice Party formed. Fiar Trade Commission formed. Liberalization of foreign trade begins. Seoul named host for 1986 Asian Games and 1988 Summer Olympics. 37-year-old nightly curfew lifted. Second National Land Development Plan (1982-91) begins. Korea Fund established. President Chun's state visit to Japan. Establishment of Korea Fund investment in Korean stock market. Korea Europe Fund (KEP) established. 29 June democratization declaration by ruling party presidential candidate Roh Tae-Woo. Labour disputes break out nation-wide. P a g e | 13 Table 2 Cont… Ten-Year Plan for modernization of rural areas formulated. Dual farm price policy began Free Trade Zones established. Law for the promotion of local industries enacted. 1969 Satellite-relay receiving station established at Kumsan Seoul-Inchon Expressway opens. 1970 Seoul-Pusan Expressway opens. Dual farm price system begins. Taejon-Chonju Expressway opens. 1971 Construction of first nuclear power plant begins. Opening of the Seoul-Kangnung Expressway Korea Development Institute established. First National Land Development Plan (1972-81) formulated North and South Korea hold first talk. Saemaul Undong (New Village Movement) begins Korean Air opens trans-pacific route 1972 1973 1974 1975 US grant aid ceases. Central railway line (155.2km) electrified. Completion of Pohang iron and steel mill. National Emergency Measures No. 1, No. 2, and No.3 announced. Seoul subway (9.5km) opened and railway lines in the Seoul region (98.6km) electrified. Yongdong-Tonghae expressway opened. Land transaction needs government permission. Policy of opening-up trade with North Korea announced. 1988 1989 Construction Plan for Two Million Housing Units begins. Construction Plan for Two Million Housing Units begins. Comprehensive Land Tax System begins. First APEC meeting holds in Australia. 1990 The System of Land Use Based on Public Concept begins. Deregulation of land use in green belts. 3 August Emergency Measure freezes informal debts of private companies.Martial law declared and National Assembly dissolvedYushin (Revitalization) Constitution introduced, President Park re-elected and the Fourth Republic begins. 1991 Import Liberalization Plan (1992-4) begins.Korea Asia Fund (KAF) established.Direct North-South Korea Trade permitted.Computerization of residential lands in the six largest cities.Korea joins ILO. Government plan for developing heavy and chemical industries (HCI Plan) announced. Family rituals standards announced. Green belts around major cities formed. 1992 Korean stock market opens to foreigners. Designation of six industrial bases nationwide. US economic assistance programmed phased out. Pusan port development plan implemented. General trading companies (GTCs) established. Export of construction to Middle East promoted to recycle oil dollars. 1993 Seoul-Busan Express Railroad (TGV) construction plan announced. Financial transaction using real names enforced. Korea-China relations normalized. Daejon Expo begins. 1994 Pohang Iron & Steel Co. (POSCO) becomes the first Korean firm listing shares on the New York Stock Exchange. Pohang Iron & Steel Co. (POSCO) becomes the first Korean firm listing shares on the New York Stock Exchange. President Kim Young Sam announces Declaration of Globalization. P a g e | 14 Table 2 Cont… Asset formation savings scheme for wage earners enacted. Antitrust and Fair Trade Law enacted. Export-Import Bank established. National health insurance scheme introduced. 1976 1995 1977 Export target of US$10 billion achieved four years ahead of schedule. Population Redistribution Plan for the capital region begins. Value-added tax (VAT) system introduced. 1978 Completion of the first nuclear power plant. Middle East construction boom reaches its peak. First Korean guided missile produced. First-stage import liberalization begins. Second0Stage import liberalization begins. Measures for curbing real0estate speculation enacted. Third-stage import liberalization begins. 1997 Rationalization of heavy and chemical industries. President Park assassinated by the head of the Korean Central Intelligence Agency and Prime Minister Choi Kyu-ha becomes acting President. 1998 1979 Source: based on Song (2003) Exports pass the US$100 billion level. Per capita GNP passes the US$10,000 mark. 1996 Hanbo Steel Business Group (BG), the fourteenth largest, goes into bankruptcy. Sammi Steel BG, the twenty-sixth largest, goes into bankruptcy. IBRD loans to Korea ended. Ministry of Finance and Economy decides to allow more foreign or guest workers. First Asua-Europe Meeting (ASEM) in Bangkok. Price control of new housing units liberalized. KOSDAQ (modeled after the US NASDAQ) market opens. Korea becomes a member of the OECD Government eneacts three labor laws (Labor Union Law, Labor Relations Law and Basic Law of Labor). Hanbo Steel Business Group (BG), the fourteenth largest, goes into bankruptcy. Daenong BG files for bankruptcy. Kia BG files for Bankruptcy Korea government requests emergency financial support from IMF. Moody's and Standard & Porr's downgrade Korea's sovereign credit rating as unfit for investment. Sammi Steel BG, the twenty-sixth largest, goes into bankruptcy. Kim Dae Jung asks chairmen of the four largest business groups to undergo restructuring. Financial Supervisory Committee established. Federation of Korea Industries agrees to business swaps among BGs-Big Deal Agreement. Government and five BGs sign agreemtns on the Big Deal. P a g e | 15 These priorities as shown in Table 2 above were rigorously determined through the 5-year plans. The latter are now shown in some detail in Table 3. There we can see that all economic and social aspects were adequately addressed. Thus, for example, at the start of the First Five-Year Economic Development Plan (l962-6), the annual population growth rate was 2.6 per cent well above the economic growth rate of 2.2 per cent. As a result, the per capita GNP growth rate was then negative. Then, the First 5-Year Plan, identified population control as one of the most urgent national tasks and the government systematically implemented population-control plans, especially in the 1960s and early 1970s, at the national level, very much like a military campaign (for example, it monitored the use of contraceptives and other family planning measures with almost the same attention it devoted to export promotion). Or, another example was about the planning regions for Korea which were devised for the first time in the National Land Development Plan (1972-81) in 1971. This plan divided the whole country into the four 'large development or river basin regions' based on the four major river basins. These four regions were then further divided into eight major regions. A third example is that in 1965, normalization of economic relations with Japan provided momentum for growth acceleration through the expansion of market size, inflow of foreign technology, and promotion of innovation (Song, 2003). Also we can see in this Table 3 that the planned growth rates were achieved precisely. This is an unusual achievement for indicative planning. That is why we can suggest that the Korean 5-year plans were of the command type plans as they were implemented with great success. We can also say that these successfully implemented plans were a type of crisis and major changes, thus destruction of old structures and creation of new ones was always prevalent. P a g e | 16 Table 3 Plan First FYP Second FYP Third FYP Fourth FYP The planning process with 5-year plans, objectives and policy directions Growth Rate Objectives 1962-6 7.1 a (7.9) b 1. Breaking the vicious circle of poverty. 2. Establishing the foundations of self-sustaining economic development 1. Securing energy supply sources. 2. Correcting structural imbalances. 3. Expanding basic industries and infrastructure. 4. Effective mobilization of idle resources. 5. Improving the balance of payments position 6. Promoting technology 1967-71 7.0 (9.7) 1. Modernization of industrial structure. 2. Promotion of self-sustaining economic development. 1. Self-sufficiency in food, development of fisheries and forestry. 2. Laying the foundation for industrialization. 3. Improving balance of payments position. 4. Employment creation, family planning, and population control. 5. Raising farm household income. 6. Improving technology and productivity. 8.6 (10.2) 1. Harmonizing growth, stability, and equity. 2. Realizing a self-reliant economy. 3. Comprehensive national land development and balanced regional development. 1. Self-sufficiency in food staples. 2. Improving the living environment in rural areas. 3. Promotion of heavy and chemical industries. 4. Improving science, technology, and human resources. 5. Development of national land resources and efficient spatial distribution of industries. 6. Improving the living environment and national welfare. 9.2 (5.7) 1. Achievement of self-sustaining economy. 2. Promoting equity through social development. 3. Promoting technology and improving efficiency. 1. Self-sufficiency in investment capital. 2. Achieving balance of payments equilibrium. 3. Industrial restructuring and promoting internatinoal competitiveness. 4. Industrial restructuring and enhancing international competitiveness. 5. Employment expansion and manpower development. 6. Improving living environment. 7. Expanding investment for science and technology. 8. Improving economic management and institutions. Period 1972-6 1977-81 Major Policy Directions P a g e | 17 Table 3 Fifth FYP Sixth FYP Seventh FYP Cont … 1982-6 1987-91 1992-6 7.5 (8.7) 1. Establishing foundations for price stability and self-sustaining economy. 2. Technology improvement 3. Improving quality of life. 4. Restructuring government's economic functions. 1. Eradicating inflation-oriented economic behaviour. 2. Increasing competitiveness in heavy industries. 3. Improving agricultural policy. 4. Overcoming energy constraints. 5. Improving financial institutions. 6. Readjusting government functions and rationalizing fiscal management. 7. Solidifying competitive system and promoting open-door policy. 8. Manpower development and promotion of science and technology. 9. Establishing new labour relations. 10. Expanding social development. 7.3(9.9) 1. Establishing socio-economic system. Promoting creative potential and initiative.2. Industrial restructuring and improvement of technology. 3. Improving national welfare through balanced regional development and income distribution. 1. Expanding employment opportunities.2. Solidifying foundation for price stability.3. Realizing balance of payments surplus and reducing foreign debt.4. Industrial restructuring and technology improvement.5. Balanced regional and rural development 6. Improving national welfare through improved social equity.7. Promoting market economic system and readjusting government functions. 1. Promoting healthy and efficient economy through self-regulation and orderly competition. 2. Management innovation and the establishment of sound work and civic ethics. 1. Reorganization of education and training. 2. Promotion of innovation and information. 3. Expansion of infrastructure and efficient transportation. 4. Efficient management and industrial organization and strengthening of small and medium-sized firms. 5. Improvement of agricultural structure and balanced regional development. 6. Alleviation of housing and environmental problems. 7. Expansion of social welfare and development of endogenous culture. 8. Promotion of self-regulation and reestablishment of government function. 9. Expansion of opening of the economy. 10. Preparation for unification and promoting North-South cooperation. 7.5 (7.1) 1. Bringing the economy up to the 1. Strengthening growth potential of the 3. Improvement of living conditions. level of advanced countries. 1993-7 economy. 4. Reform of institutions, and administration 2. Strengthen economic base in 2. Expansion of international marketing. and work ethics. preparation for unification. Source: Song (2003). (i) Prepared from the successive five-year plans formulated by Economic Planning Board. Goals and major policy issues of the Fifth Five-Year Plan (1982-6) are those of Revised Fifth Five-Year Plan (1984-6). See Economic Planning Board, 1961, 1966, 1971, 1976, 1981, 1986, 1991, and 1993. (ii) a: planned growth rate; b. achieved growth rate. New Economy FYP 6.9 (6.8) P a g e | 18 From these 5-year plans as shown in Table 3, we can discern several distinct stages of development which are shown in Table 4. Table 4 Stages of development as seen in the planning process 1st stage (1953-1961) 2nd stage (1961-1971) 3rd stage (1971-1980) 4th stage (1980-1987) 5th stage (1987-1997) 1961 Postwar reconstruction and early stage of import substitution almost completed 1962 The First FiveYear Plan begins. Fiscal and financial reforms in mid-1960s 1972 The third phase of development policy : the phase of the HCI-heavy and chemical-industry drive begins 1980 The fourth phase of development policy (1980-6)-emphasis on more macro stability than on industrial expansion-begins Substantial financial aid received; overall stagnation 1971 The second phase of development policy (1963-71) – of actively promoting manufactured exportsends. Korea begins to be classified as a NIC (Newly Industrializing Country) From 1977 the farm labor force started to decrease and farm mechanization started to spread in rural areas. Vending machines for coffee, cigarettes, and other products were popularized from around 1977. Real wages also started to increase rapidly around this time. From about 1977, Korea became a labor-scarce economy 1986 Economy simultaneously achieves the triple economic targets of high economic growth (2.3 per cent), price stability (wholesale prices dropped to minus 2.2 per cent), and a net balance-ofpayments surplus (current account surplus of US$4.7 billion). The national savings rate also increased to 33.6 per cent, exceeding the rate of investment (29.5 percent) for the first time in Korea’s history. Economy appears to have entered the self-sufficient stage 1987 The fifth phase of development policydemocratization, privatization, and liberalization-begins. The year of the Declaration of Democracy by Roh Tae-Woo 1988 Due to the 1988 Seoul Olympics, the era of new economic life for Koreans began. The number of private automobiles started to increase rapidly, increasing from one million to eight million between 1988 to 1995. The government plan to construct four new towns near Seoul and two million housing units increased housing ownership tremendously. Source: based on Song (2003) Some importance consequences of all these institutional and economic changes are the following. i] Korea was the first country in the world to aggressively choose and implement the export-oriented growth models at a time (from the 1960s) when all other developing countries followed import substitution policies. Exports from Korea expanded rapidly form 1963 with the adoption of an export-oriented industrialization strategy and the subsequent reform of various trade and economic policy measures (see for example Choi (2010)). However, imports played an P a g e | 19 equal role in the process of development. Thus, “…firms were allowed to freely import raw materials, parts, and machinery required for export production, up to the limit of the value of their export earnings…” (Song, 2003, p. 148). ii] Since the early 1960s the core of the Korean agricultural policy has been to expand rice production and achieve self-sufficiency. Together with this rice policy we should mention the numerous laws in Korea to regulate the use of limited land (not without problems, Song, (2003)). iii] Seoul had grown very rapidly since Korea's economic take-off in the 1960s, but the Busan region only began its rise with the promotion of heavy industries after 1972. Now, the Busan area is Korea's second most important region in terms of development. iv] In contrast to Japan, where business people influence politicians, in Korea it is the other way around. v] Scholars play a very important role in politics and economics. vi] Equity is developed in Korea in all parts of the society. Thus, the Gini coefficient is still one of the lowest in the world (around 0.30-0.35) which indicates relatively fair income distribution. vii] Technology has been the primary target of many groups (e.g. government institutions, see Yang et al, (2006)) in Korea. This technology is not only machines and equipment but also organizational technology. P a g e | 20 3 Big business (Chaebols) The Chaebol 4 (this word first used in the mid 1950s) system, the Korean version of family capitalism, is one of the cornerstones of Korean achievement5. This system is still deeply familyoriented, which agrees with the communitarian nature of this country. Family members own and manage a set of various firms, without necessarily holding legally sufficient shares. Effectively, with confucianism being deeply rooted in Korea, and also both communitarianism and individualism being present in the Korean society, the family in Korea is the most representative communitarian organization together with ‘Groupism’ and ‘corporatism’ which are concepts similar to communitarianism. Consequently as Song (2003) says, Korean organizations are managed similarly as that of a family and Koreans often say that even the President manages the country as if it were his own family6. The extended family as a distinct anthropological entity remains strong and substantially affects economic behavior to the extent that even among political parties and corporations, members tend to treat one another like family 7 . Recently, family members of large Chaebols such as Hyundai also attempted to be elected as politicians thus confirming even more “officially” the close relationship between big business, governments and society. This relationship has generated some reactions in many levels of Korean social and intellectual circles which seek a reduction in Chaebols’ role in society (e.g. see Chang, 2010). 4 Besides chaebols other types of firms existed and still exist in Korea. These non-chaebols companies (for example, public corporations) played their own important role in the Korean economy, however, many researchers including myself recognize the exceptional role of chaebols. 5 Hattori (1997) and Fukagawa (1997) analyzed in more details the reasons of existence of chaebols. In general, for the importance of big business in the USA, and other countries see Chandler (1990), Lee et al (2010), and Sanidas (2007). 6 The word-root for ‘nation’ or ‘state’ in Korean is kook, but kookka is most commonly used term, where ka means family (Song, 2003). 7 Family rituals, such as wedding and funeral ceremonies, are very important social events and economic activities. P a g e | 21 Historically, the beginning of chaebols started mostly after 1945 when the Japanese business establishment as fleeing back to Japan left behind them industrial assets which the then free Korean government rightfully claimed. That government in turn decided to distribute Japaneseabandoned industrial assets to private entrepreneurs, many of whom in fact were in kinship or social network with the government; hence, a politico-economic entrepreneurial class was born (Chang, 2010) It is worth noting that very few Koreans had owned or managed large companies before the 1950s, and in particular during the Japanese colonial period. The government disposal (by sale) of government-vested properties started from 1949; by 1958, 90% of these properties were effectively disposed. Among about 2700 companies (85% of the factories in South Korea) almost 2000 companies were disposed by sale. However, most of them went bankrupt because of the Korean War and because a large proportion of the factories were disposed to persons who did not have any experience (but they had close relationship with government) (Kim, et al., 2008). When the military took over the government in 1961, some leading industrialists were arrested and charged with corruption and other similar charges, but soon this government realized that they need all the industrialists in the country for its fast development. Thus, there was increased cooperation between corporate and government leaders; the government provided the blueprint for industrial expansion and the chaebols achieved or executed parts of the plans. Also, the government selected companies to undertake projects and channeled funds from foreign loans; then it guaranteed repayment should a company be unable to repay its foreign creditors (US Library of Congress). The growth of chaebols (mainly established in the 1950s and 1960s) has been tremendous during the whole period from the 1950s to the 1980s, the main reason being the assistance (not only P a g e | 22 financial) provided by governments. At the same time these chaebols (32 in 1987, 43 in 1988 due to definition change, 30 in 2001 due to bankruptcies during the 1997/98 AFC) have been the main players of the Korean economy as they acquired a considerable market power through concentration of industrial production. Another reason for this concentration is that until the mid 1980s, “…bureaucratic regulations made it almost impossible to establish new firms…” (Song, 2003; p. 137) The main characteristics of chaebols are the following. First, overall, owners still govern and manage. Second, Korean firms belonging to different chaebols compete fiercely with each other. Industries belonging to the same chaebol also compete in terms of growth and other performance indicators. Third, by law, chaebols do not own their own Bank and hence they depend on others for finance. Fourth, there is intense cooperation between firms of the same chaebol. Fifth, chaebols are a type of conglomerate firm, thus they diversify their production and include general trading companies (GTCs), especially after the mid 1970s. These GTCs had also the function “…to promote exports, particularly in the heavy and chemical industries. The four major functions of GTCs are information gathering, organization, financial transactions, and trade facilitation…” (Song, 2003; p. 76) Sixth, the relationship between the Korean government and businesses is vertical- thus, businesses follow government’s plans. The strong government’s power can be mostly attributed to path dependence (history). “…Koreans inherited a tradition of very strong government from the Chosun dynasty (1392-1910) that lasted over 500 years, and from the Silla dynasty which had preceded it and ruled for about 1,000 years. Furthermore, the Japanese colonial government (1910-45) had in place a very strong administration. After the end of the Japanese colonial period, the Korean government was led by the military for many years…” P a g e | 23 (Song, 2003; p. 77) Seventh, the founders and owners of most chaebols were charismatic leaders and had good business acumen. The chaebols were represented in the Korean society very early with the foundation of the Federation of Korean industries (FKI), which is one of the five most influential economic organizations in the country: FKI, The Korea chamber of Commerce & Industry (KCCI), Korea International Trade Association (KITA), Korea Federation of Small and Medium Business (Kbiz), and Korea Employers Federation (KEF). Among these five, FKI is undoubtedly the most influential and powerful organization. It is an organization which mostly includes ‘big’ business, thus chaebols. It was officially founded in 1961 with 13 members of leading businessmen, their leader of the group being Byung-Chull Lee, the founder of Samsung. Following May 16th 1961, when the military coup by General Park took place, the military government accused the above 13 businessmen for their “accumulation of wealth by illicit means”. Samsung’s Lee met General Park in person and persuaded him of their major role in the reconstruction of economy. In the end, they were not legally prosecuted but were instead fined. They formulated the organization for economic reconstruction of Korea on July, which was enlarged to 20 members on August 1961 and then it was renamed to FKI. This organization (FKI) played a decisive role in 1960s-70s. Thus, it formulated the plan of key industries, the introduction of foreign capital (for example a private loan for the world biggest fertilizer plant etc.), the proposal and construction of an industrial complex in Ulsan, etc. Overall, the organization was the representational group for chaebols, and kept very close relationship with the government to influence the economy. And still, it is known as the most influencing civil organization for the economy. However, as the time goes by, KFI’s power is decreasing, P a g e | 24 mainly because the structure of the economy has changed. Also, FFI as representative of chaebols has weakened somehow since the number of members has increased to 500 recently (Institute of new industry strategies, 2010). It is now worth mentioning a good example of the interaction between a chaebol leader (that of Hyundai) and the government via its planning process: this is about the shipbuilding industry, how it was founded and prospered from the 1960s (Chung, 1998). This industry is now number one in the world (Yang et al, 2006), hence its importance to further analyze here. The crucial motive of Hyundai’s entering the shipbuilding industry was the (almost compulsory) persuasion of the government (led by President Park); effectively, in the late 1960s, the government encouraged Hyundai to start this industry. Although there was a public corporation called the Korea Shipbuilding Corporation, it was too small. It was one of the main tasks of “The 2 nd Plan” to enrich the shipbuilding industry, and it was also requested for the shipbuilding industry to consume steel produced from POSCO which was already under construction. Ju-yung Chung the founder of Hyundai on the other hand had already thought to start his shipbuilding company since the mid 1960s. However, Chung’s effort to contract a loan with Japan and US failed and he gave up at first. No one would have expected Korea to build ships. Then President Park literally got mad and scolded at Chung warning him that the government would never do any business with Hyundai ever again. Eventually, due to Park’s perseverance on the industry, Chung accepted once again the proposal. In 1971, Hyundai made a contract with A&P Appledore, a UK shipbuilding company, on the construction of the dockyard and technical tie-up. And starting from the Barclays Bank of UK, contracted a loan with Spain, France, Germany, Sweden etc. The first buyer of the two P a g e | 25 260,000-ton ships was a Greek ship owner called Livanos. From 1972, Hyundai started to construct the dockyard and the ships at the same time, and, in 1974, completed the construction (fastest construction in world history). Then, in 1975, by expanding the facility, the company owned the world’s largest dockyard8. 6 Conclusion Rostow (1983) suggested that the following factors accounted for the rapid growth of the Korean economy since the early 1960s: the adoption of a sound growth strategy; the development of growth-promoting institutions and public policies; high quality workers and entrepreneurs; a technological backlog available to Korea as a latecomer; proper use of public resources for infrastructure development and education; population control; the capacity of entrepreneurs and policy makers to adjust rapidly and flexibly to external shocks; maintenance of relatively equitable income distribution; and, finally, the avoidance by economists that an economy can be managed adequately using only such macro-economic tools as the regulation of the money supply, interest rates, and so on (all this is also mentioned in Song, 2003). We already saw in this paper that Rostow’s evaluation is confirmed. We might also add that the strong competition among firms, among industries, and among big business groups such as chaebols were one of the important factors explaining Korea’s rapid growth. All this was achieved - according to our study- because of the following factors: A determined dictatorial government to reconstruct and make Korea grow very fast in a healthy way. Park’s leadership was transformational, had a vision for Korea that Korean 8 From a more theoretical perspective, Kang’s (1990) and Lee’s (1992) accounts offer a good explanation of the fruitful relationship between the government and the chaebols. Weiss (1995) examines this relationship in the broader context of the three East Asian countries Taiwan, Korea, and Japan. For a more recent account of restructuring the Korean economy and the Korean maritime industry, see Lee (1999). P a g e | 26 people can do it and get out of poverty (Kim, 2011). This point is closely related to Bernholz’s analysis as stated in sub-section 1.2. This government chose and implemented the correct policies in the right time and space (for example, they put more emphasis on micro economic policies in the 1960s before they emphasized macroeconomic policies, see also Song, 2003). This government directed and closely cooperated with big business, especially the chaebols. This is closely related to the assistance of government to business in order to promote enterepreneurship (see our analysis in 1.2). Korean people showed a remarkable maturity to endure and cooperate with government and chaebols most of the time. A recent account of the Korean economy during the 1960s to 1970s has reached this important conclusion, thus summarizing the above points as follows: “…the government and the private sector…developed a ‘big-push partnership’ in which the government shared the investment risks of the private sector and provided support largely based on performance in competitive markets…export-oriented industrialization and human resource development, as encapsulated in the slogans ‘exportization of all industries’ and ‘scientification of all people’, capture the essence of Korea’s approach…” (Kim, 2011, pp. xiii-xiv) This particular ‘big-push partnership’ between a strong non-democratic but very patriotic government and an oligarchy of big private business makes us think of the following question: can other countries imitate Korea in order to take off and sustain their economy in the long run? The chance of imitation is rather small in my opinion, because usually dictators and private business do not know how to be patriotic in the Korean sense: follow principles of economics and political economy in a consistent and reliable manner. P a g e | 27 However, we can think of China as being the closest example of a rather successful imitation of Korea’s experience. Nonetheless, there was a price to be paid by the fast development and hidden problems or inefficiencies: there has been corruption, excess capacity in chaebols, victims of the regime, and so on. Effectively, the relationship between governments and business (especially chaebols) was painted by much corruption to the point that some authors doubt the patriotic intentions of these two groups at stake. For example, Kang (2002, p. 201) argued that “…although the Korean state may have provided public goods and supported investment, that may not be why those goods were provided. The Korean state intervened in the way it did because to do so was in the interests of a small group of business and political elites…” Also, “…given the Korean state’s total control over the financial sector in the 1960s and 1970s, businesses were naturally interested in gaining access to the enormous rents that accrued to a chaebol if it received a lowinterest-rate loan…” (Ibid, p. 188). However, it is well known that the supply of funds in return for favors for both politicians and businessmen created a fine balance of power between these two groups that resulted in potentially less corruption, and a strong growth in the development of both big Korean business and the Korean nation. This strong growth was accompanied by a strong growth in the middle class which supported the authoritarian regimes of the 1960s to 1980s period (Yang, 2006), thus reinforcing the government’s role in Korea’s economic development. This took place with a considerable unrest both in terms of demonstrations or persecutions, and labor-management disputes; even so, Korea’s economic fluctuations thus closely related to this unrest (Soh, 1988) proved eventually beneficial in the long term as the government’s choices were the appropriate P a g e | 28 ones to generate strong economic growth which raised everybody’s welfare (e.g. GDP per capita) in a spectacular way. In any case, by the end of the 1980s the “Korean Asian paradox” (Gleysteen and Romberg, 1987) (paradox in the sense of its happy ending of internal political contradictions) was resolved in its way into a more democratic regime and a more sustainable long term development that brought Korea to become today one of the happiest (this is my personal anecdotal view) and 12 most developed nations in the world. As a brief epilogue to this paper, I would like to summarize all this study into one particular reason out of so many for Korea’s unique development path. This reason is shown very clearly on the Korean flag: it is the round circle of Ying and Yang. This symbolizes the eternal forces of internal conflict and at the same time of consequential harmony or balance between all conflicting factors in a society. In my opinion, after having lived in Korea for almost three years, I can see this balance everywhere: in people’s behavior, in organizational traits, in relationships, and so on. Hence Korea is for example a very safe place to live, not violent but also not lethargic; expressing itself but not abusing its rights for expression; working hard but also combining work with leisure; advancing technologically but also respecting traditions; and so on. Korean people in general posses a set of high moral and cultural values that help the whole process of development. I am convinced that this inherent balance in Korean society is the secret most important factor of Korea’s unique miracle. If we now adopt the Schumpeterian or evolutionary analysis more closely, as briefly presented in sub-section 1.2 above, we can see that its main points are successfully applicable in the case of the Korean economic miracle. According to this analysis three main processes promulgate economic development: first creative destruction, hence crises are necessary for this destruction P a g e | 29 to take place (thus see Bernholz’s work as shown above); second, entrepreneurs are the main force in this creative destruction; and third, the role of government is crucial in promoting entrepreneurship and innovations through education and knowledge. Looking back at some of the details we have described in previous sections we can see that Korea in the short period of 100 years went through the following major crises: a foreign occupation which forced upon the Korean society major changes that helped more government intervention, promoted entrepreneurship and made Koreans more decisive to compete internationally (see Cumings, 2005). Then, a bloody civil war and American patronage took place after World War II, which eventually brought into government a very efficient dictatorship. The latter “forced” upon the Korean society, through a rigorous central planning, a series of crucial changes (institutional, social, and economic). These changes in turn promoted entrepreneurship, big business (chaebols), innovations, technology, and education. Overall, there has been a “harmonious” co-evolution of government, business, ordinary people, and institutions through a series of crises or events of creative destruction. As epilogue we can now reappraise Foster’s (2010) recommendations in the case of Korea: Explicit government strategies to promote entrepreneurship: YES, this was implemented. A public commitment to education and training: YES Public support for the development and dissemination of organizational innovations: YES A capacity to enact regulatory changes in a timely manner: YES Public support for science and R&D: YES Public guarantees that allow finance to flow to entrepreneurial activity from risk-averse financial institutions: YES P a g e | 30 Government tolerance for failure and an associated capacity to distinguish genuine entrepreneurial failure from rent seeking activity: YES A bi-partisan strategy to assist obsolete industries to downsize and release their human and non-human resources for effective use in emergent industries: YES The present paper has brought substantial evidence in a historical and evolutionary manner that the crises which Korea went through in the last 100 years destructed many institutions and other socio-economic structures; and in replacement they generated new institutions and structures that made Korea within approximately 100 years one of the best countries in the world. 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