Government, Business and Finance in Korean Industrial Development

Abstract

This paper reassesses the roles of government, business and finance in South Korea's economic growth and development. It argues that these extra-market mechanisms were each important, in their own ways, for solving coordination problems that would have otherwise posed obstacles to industrial growth. But what were solutions in the early stages of modern economic growth proved to be impediments later, as the problems that had to be solved changed but the institutions did not.

Keywords:

• Economic growth
• industrialization
• coordination problems
• Korea

JEL CLASSIFICATIONS :

• N0
• O0

Acknowledgements

This article draws on collaboration with Wonhyuk Lim, Yung Chul Park and Dwight Perkins, under the sponsorship of the Korea Development Institute, whose support is acknowledged with thanks. This work was also supported by the Academy of Korean Studies Grant funded by the Korean Government (Ministry of Education, Science and Technology), AKS-2007-CB-2001.

Notes

¹See Eichengreen et al. (forthcoming, chapter 3).

²The historical association of the growth of manufacturing with the growth of the economy as a whole also explains why the falling share of manufacturing in total employment is widely viewed with trepidation.

³Lim & Morck (forthcoming) refer to this as solving the outside investors’ collective action problem.

⁴Be these social goals or the interest of their political supporters and campaign contributors.

⁵The Korea Stock Exchange had been created in 1956, but there were few listings of economic consequence.

⁶Before 1965, when both lending and deposit rates were controlled, access to bank credit meant not just singular opportunities but also significant subsidies; after 1965, although lending rates were allowed to rise, differential access remained. That is, concessional interest rates on export credits remained unchanged (see Hoshi et al., forthcoming).

⁷As Lim & Morck put it.

⁸Both measured in dollar terms.

⁹The other way of attracting foreign finance would have been liberalizing regulations on inward foreign direct investment. But whether Korea would have been an attractive site for the green-field plants of multinational corporations in the 1960s is questionable. In any case, foreign investment remained politically sensitive in the aftermath of Japanese colonialization; hence this alternative was not pursued. FDI accounted for only 4% of the net inflow of foreign capital between 1962 and 1971.

¹⁰The latter being the Latin American alternative.

¹¹Krueger (1979, p. 147).

¹²Lim (2003, pp. 45–6).

¹³Stern et al. (1995, p. 70).

¹⁴The share of the top 20 in shipments by the manufacturing sector meanwhile rose from 25% in 1974 to 29% in 1979 and 37% in 1982. Lee et al. (1993, p. 208).

¹⁵Stern et al. (1995, p. 78 et seq).

¹⁶See Hoshi et al. (forthcoming).

¹⁷For example Reinhart et al. (2003).

¹⁸They also had to spend much of the 1980s undoing the legacy of problems created by overly ambitious HCI firms.

¹⁹It had actually been passed by the Congress in 1976 but was not activated at that time.

²⁰And until 1994 the Korea Fair Trade Commission (KFTC) remained under the authority of the Economic Planning Board, as a result of which competition policy was subordinated to other economic policy goals. Whenever a large firm insisted that a merger or acquisition was essential for the maintenance of competitiveness, the KFTC disregarded the implications for market power, rejecting only three of the nearly 2000 merger proposals it examined in the 1980s.

²¹In 1980 the authorities mandated that 55% of the increase in local bank credit and 35% of city banks’ credit should go to SMEs. In 1984, it temporarily froze bank credits for the top 5 chaebol and set credit ceilings for the top 30. The Office of Bank Supervision was given authority to limit the share of loans to individual chaebol in individual banks’ asset portfolios.

²²The decision in the early 1980s to relax entry barriers affecting non-bank financial institutions can be understood as a response by the government to the danger that commercial banks with MOF-approved presidents might still fail to make lending decisions on a purely commercial basis; competition from NBFIs was a limited way of subjecting them to market discipline. The critical mistake was to assume that NBFIs would be motivated to allocate resources in a manner consistent with market efficiency and not simply cater to the needs of the chaebol.

²³For more on this, see below.

²⁴In 1991, Hyundai chairman Chung Ju-Yung launched the Unification National Party with the aim of running in the National Assembly elections of 1992. That the government also slapped a $180 million fine on Hyundai for illegal stock transactions had more than a little to do with Chung's political activism. In April 1992, coincident with the campaign for the National Assembly, the government arrested more than a dozen Hyundai executives on charges of tax evasion. Chung launched a public counterattack. The eventual truce involved having the anti-chaebol officials leaving the Economic Planning Board and the Blue House, and Hyundai paying taxes and fines.

²⁵All of these problems became evident well before the crisis of 1997–98, as noted in, inter alia, OECD (1996).

²⁶OECD (1996, pp. 78–79).

²⁷See the discussion in Hoshi et al. (forthcoming).

²⁸Chopra et al. (2001, p. 21).

²⁹Which prevented hostile takeovers.

³⁰See Krueger & Yoo (2002) and Haggard et al. (2003).

³¹Lim & Morck (forthcoming, pp. 309–311).

³²KAMCO bonds were given to banks in exchange for NPLs. KAMCO financed its operations by issuing its own bonds, guaranteed by the government, and by borrowing from the Korean Development Bank. KAMCO was to purchase nonperforming assets at their fair market value. KAMCO presented the price on a take-it-or-leave-it basis, given that there were few other buyers in the event that a financial institution resisted the terms.

³³Revealingly, the main industries subject to these deals (petrochemicals, oil refining, motor vehicles, other transport equipment) were the same ones that had once been the subject of the Heavy and Chemical Industry program.

³⁴Chun et al. (2008) put TFP growth at 0.7% per annum in 1999–2005, up from 0.3% in 1991–97.