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거시

Policy Study

The Origin and Evolution of the Korean Economic System

페이스북
커버이미지
  • 저자 임원혁(林源赫)
  • 발행일 2000/11/01
  • 시리즈 번호 2000-03
원문보기
요약 Unlike the typically ahistorical arguments that try to explain the 1997 economic
crisis by simply dismissing even the very existence of Koreas economic success in the
past, this paper has attempted to provide an alternative explanation using the concept of
path dependence within a political economy context. Applying the QWERTY paradigm
to the evolution of the Korean economic system, the paper has argued that the very
success of the system created a coalition of economic players interested in preserving
the system, even when it became increasingly dysfunctional in a changed environment.
The paper has covered four main topics: (1) the adoption of the Korean economic
system, (2) the initial success of the system, (3) the seeds of failure in the system, and
(4) the persistence of the system. The main arguments of the paper are summarized in
the remaining pages.


Why the Korean Model of Economic Development Was Adopted

In the terminology of the QWERTY paradigm, the influence proportion or market
share of policymakers attached to Syngman Rhees crony capitalism was drastically
reduced in the wake of the 1960 student protest and the 1961 coup. Although the
evolution of economic systems is typically marked by path dependence due to the
influence of the entrenched interests, the corruption-prone system under the Rhee
government lost its supporters in the changed political environment, and this provided an
opening for competition among alternative economic systems.

Initially, Park Chung Hees military government pursued an industrial deepening
program, in which the government would have carried out massive investment projects
in basic industries financed by increased primary exports, foreign loans, and forced
domestic savings plus inflation. In the second half of 1962, however, the Park
government was forced to abandon this strategy when the U.S. used its aid leverage to
demand stabilization measures and also to press the military leaders to stick to their
commitment to restore an elected regime by 1963. Determined to avoid being trapped
in such a vulnerable position again, the Park government went far beyond the orthodox
economic policies prescribed by the Americans, and adopted drastic measures to promote
exports and increase economic independence.

First, the Park government accommodated the U.S. demands and instituted a set of
reforms designed to reduce distortions in such macroeconomic variables as the exchange
rate and the interest rate. Second, the government took unprecedented steps to share
the investment risks of the private sector. In particular, the state-owned banks provided
explicit repayment guarantees to foreign financial institutions on loans extended to
Korean firms. Third, Park Chung Hee himself spearheaded the effort to boost exports,
offering various incentives based on market performance. The resulting
government-business risk partnership, combining state-led financial resource allocation
with export market orientation, defined the core of the Korean economic system.


Why the Korean Economic System Was Successful

The Korean model of development proved an efficient choice given the countrys
resource endowment at the time. In the early 1960s, the primary and secondary
enrollments in Korea were similar to the rates in countries with three times its per
capita income. Cheap and high-quality labor could be readily employed to produce a
high rate of return on investment in physical capital, if Korea could only tap into
foreign capital and technology to compensate for the shortage of domestic resources and
exploit its comparative advantage. The governments decision to issue a selective
guarantee on private-sector foreign borrowing and promote exports was a solution to this
developmental challenge.

What the Korean government did right in the take-off stage was of a different
nature than is usually pointed out in the existing literature. Neoclassical perspectives
typically trace Koreas economic success to a set of market-oriented macroeconomic reforms in
1964 and 1965 [Krueger(1979)]. These measures by themselves, however, would not have been
very effective in correcting for the imperfections in the international capital market. It was
basically impossible for then-little-known Korean firms to tap into foreign resources. Statist
perspectives, by contrast, point to the pervasive distortion of microeconomic incentives (getting
the prices wrong) by the Korean government, and argue that such government intervention
promoted rapid economic growth [Amsden(1989)]. It is unclear, however, whether the Korean
economy grew thanks to or in spite of government intervention. Although more sophisticated
statist studies advance coordination failure arguments, they are less than convincing in showing
the existence of essential, nontradable intermediate inputs in the take-off stage and demonstrating
the role of the government in coordinating the production of these goods. The market failure
effectively addressed by the government in the 1960s was due to the imperfections in
the international capital market rather than coordination failures in the domestic
manufacturing sector. Far more important for Koreas economic growth, however, was
the Park governments effort to correct for the government failures of the past: the
policies designed to generate arbitrage opportunities that had made it virtually impossible
for firms to exploit Koreas comparative advantage. With the government addressing
financing problems as well as macroeconomic imbalances, private firms could now
invest and export to take advantage of unexplored profit opportunities. Rapid capital
accumulation, combined with learning by exporting, was the key to Koreas economic
success.


Why the System Became Increasingly Dysfunctional

Changes in the nature of state guarantees as well as changes in the economic
environment led to serious problems in the Korean economy. Driven by internal logic,
the nature of state guarantees changed in the direction of exacerbating moral hazard.
Moreover, government intervention itself became increasingly ineffective as Korea was
liberalized and democratized.

Although the Korean system was initially designed to contain idiosyncratic moral
hazard by making government support contingent on market performance, it was
increasingly exposed to systemic risks as apparently successful firms kept borrowing to
expand their business under government guarantees on foreign debt. When an economic
slowdown threatened to topple the debt-plagued corporate sector in 1972, the
government decided to issue an emergency decree to relieve the debt burden of the
firms. This drastic measure fundamentally changed the nature of state guarantees: the
government gave a strong impression that it would not only guarantee repayment on
private-sector foreign borrowing but also protect the governance rights of the incumbent
owner-managers in a crisis situation. The state-led heavy and chemical industry (HCI)
drive aggravated the problem as the government was increasingly trapped in a vicious
cycle of intervention. The politicization of the government-business risk partnership in
the 1980s exacerbated moral hazard as firms making political donations came to expect
the government to protect them from downside risks.

By the 1980s, it had become possible for successful Korean firms to raise capital
on their own. It had also become increasingly difficult for the government to identify
profitable investment opportunities and monitor the performance of individual firms.
Moreover, increased domestic and foreign pressure for liberalization and democratization
forced the government to relinquish some important policy instruments that it had used
to motivate and discipline private firms. Given the reduced desirability and
effectiveness of government intervention in the economy, policymakers should have
fundamentally re-defined the role of the government. The lack of such reform,
combined with increased moral hazard, proved fatal for the Korean economy.


Why Fundamental Reforms Were Delayed

By the beginning of the 1980s, the Korean economic system had produced a
coalition of economic players who were interested in consolidating and maintaining the
government-business risk partnership. In the terminology of the QWERTY paradigm,
these players commanded a large market share in policymaking circles. Although
domestic and foreign pressure for liberalization and democratization did lead to the
adoption of some market-oriented reforms, the government-business risk partnership
continued to dominate and blocked fundamental reforms.

As early as the beginning of the 1980s, many technocrats advocated a transition
to a more market-oriented system. Backed by a new political leadership determined to
arrest the inflationary spiral in the wake of the second oil shock, the technocrats were
able to impose tough stabilization measures and to reorient economic policy away from
the industry targeting approach of the HCI drive. They were, however, far less
successful in introducing policies designed to enhance the autonomy of the financial
sector and to promote competition in the product and M&A market. The politicians
and bureaucrats were certainly unwilling to relinquish the levers of control. The state
control of the banks continued, and the government took a decidedly bureaucratic
approach to competition policy. The chaebol groups tried to expand their influence in
the financial sector through the ownership of non-bank financial institutions, and limit
the presence of foreign multinationals in the domestic market. In short, the economic
players interested in preserving the existing economic system were empowered to make
policy decisions.

In general, once an economic system is well-established, it is very difficult to
introduce fundamental changes because the economic players interested in preserving the
existing system tend to be the ones who wield a great deal of influence in the
policymaking process. The Korean model of economic development itself was adopted
only when the entrenched interests associated with the old corruption-prone system were
wiped out in the wake of a student revolution and a military coup. As for the new
economic system based on the government-business risk partnership, the chances for
fundamental change were smaller than in the case of the old system. It was not just
because the new system was far more successful than the old one. In the case of the
old system, which was based on crony capitalism, a political upheaval throwing out the
entrenched interests would do the trick if it is followed by an institutional reform
designed to reduce rent-seeking in the economy. In the new system, however, a
political upheaval replacing one set of policymakers with another would not result in a
fundamental change unless the new politicians and bureaucrats were willing or forced to
relinquish their control over the economy. Even in the wake of the economic crisis,
Korea has made little progress in this regard.
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