The Origin and Evolution of the Korean Economic System

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제목The Origin and Evolution of the Korean Economic System

설명Unlike 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.

생산자임원혁

날짜2000-11-01

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연관링크http://www.kdi.re.kr/research/subjects_view.jsp?pub_no=1863&pg=3&pp=1000&mcd=001002001