Young H. Byun
Problem Posed
For a long time many scholars have been explaining about the high
performance of NICs' economies, lumping all the country together. But
whereas South Korea got under the control of IMF in December of 1997,
Taiwan survives the current Asia's financial crisis until now, which hints
us that there might be some difference in economic conditions or
institutions among seeming homogenous group of NICs.
This paper aims to explain what factor(s) explain(s) the divergent outcome
between South Korea and Taiwan. Two countries have so much similarities
including the experience of Japanese colonialism, successful land reform,
divided nation-state, state-driven and export-oriented industrialization,
concurrent industrial stages or sequences, etc.. Given these above similar
condition, the two countries has one crucial difference in the managing of
financial sector and the speed of financial liberalization since 1980s,
which contributes to the divergent economic result.
Taiwan shows us that it has been choosing very cautious and strict
monetary policy, the independent central bank, and financial policy for
broad functional categories, not geared toward specific industries or
toward a particular set of preferred firms. Contrary to Taiwan, South
Korea has gone to path where its government accepted very politicized
financial policies, took the Bank of Korea under it discretionary control,
gave the preferential loans to favorable big businesses.
This dissimilarity also helps explain why these two countries have the
different industrial structure, and why different dynamics between the
government and business evolved since the early industrialization of
1960s. For our research purpose, we need to draw on the concept of
"embedded autonomy" as a heuristic thread. We assume that if one country
have the balance between autonomy and embeddedness, then its economy keeps
going well, and if not, then bad. We think it is helpful to show the
concept with the following graph.
Path1(Taiwan)
Path2(South Korea)
Autonomy
The area of Rent-Seeking
Embeddedness
As above graph shows, path 1 is for Taiwan and path 2 for South Korea. The
space between path 1 and 2 means for the possibilities of "rent-seeking",
which could be created because the balance of embedded autonomy lose to
degenerate into the unproductive economic conditions.
We propose that South Korea and Taiwan went along the same path getting
balance between autonomy and embeddedness but due to the different
financial management since heavy industrialization of 1970s, the former
began to lose the autonomy vis-`-vis embeddedness. After this tendency of
unbalance went beyond the point of no-return which couldn't be reversed
toward the balance by any policies or leverages by government, South
Korea's economy couldn't help endure the pressure of "Asian Flu" of 1997.
But Taiwan has been keeping the balance, so its economy is getting well
until now.
Country Profile: South Korea
1. Political Regime
Industrializing spurt in South Korea began with the military coup of 1961.
Park regime tried to compensate for its lack of legitimacy by pursuing the
program of accelerated economic growth. Due to economic success and his
desire for endless power, Park declared a state of emergency, paving the
way for the institutionalization of more authoritarian Yushin
constitution, under which he pushed the heavy-chemical industrialization
until his sudden death of 1979.
The power vacuum was filled with another military coup by general Chun,
who coped with the economic turmoil of 1980, proving his government was
not so much competent to deal with stabilize and restructured the Korean
economy. Meeting the upsurge of civil society toward democratization in
1987, his government grudgingly promised some liberalized political
measures and direct presidential election. In December 1987,
ex-general-turned politician, Roh succeeded to pit two democratic leaders
against each other, and gained political power as a president.
Roh government was troubled with the democratic pressure from the powerful
parliament where ruling party was a minor one than the opposition parties,
and from the civil society where the organized labor and students claimed
democracy to be furthered and consolidated. Roh government responded to
the political crisis with formation of a grand conservative coalition in
which two major oppositions were merged with his ruling party, causing his
political regime to be called democradura(limited democracy).
President Young Sam Kim was the victor in the feud of grand coalition
government and the beneficiary from the electoral regionalism. His past
experience as a democratic leader before joining the coalition gave him
overconfident and overall attempt to deepen the democratization with a
tinge of populism or delegative democracy. But what hold his bold trial
back was the revealed corruption of his presidential staffs, which is
notorious and frequent among the politicians and businessmen in Korea. His
government was too incompetent to deal with the economic troubles
including the labor movement, international trade bargaining vis-`-vis
U.S., big businesses' bankruptcies, etc., bringing the harsh IMF's
neoliberal packages onto Korean economy in 1997. In 1997 presidential
election, an opposition candidate, Dae Jung Kim became the first
politician who achieved the alternation of political power in Korean
history.
2. Industrialization and its policies
South Korea has been featuring the state-driven industrialization
since 1960s, in that Park government assembled both a popular mandate and
the institutional means to assure an autonomous state capable of guiding
economic development . The government set the institutionalizing rule of
Korean industrialization, that is, "who and how to drive the
industrialization".
Traditionally Korean bourgeoisie was very weak, not to assume the
modern project of industrialization by itself like Western conquering
bourgeoisie. They seemed to wait for the state as deus ex machina which
would bring up the class or play the role of a historical substitute of
it.
The government policymaker' turn toward foreign loans due to the
absence of domestic available capital changed the role of Korean banks and
the attitude of business greatly. Domestic banks became facilitators and
guarantors of external finance, but they did not actually intermediate
between foreign lenders and domestic borrowers; foreign loan negotiations
were managed by the Economic Planning Board(EPB). The banks basically
issued the guarantees on instruction from the government and took little
responsibility for evaluating either the economic or the financial
feasibility of the projects for which guarantees were extended. As a
result, the banks had little basis for being held responsible for bad
loans. Big business turned to foreign borrowing as a new, rich ground for
economic rent seeking .
Moreover, insofar as it is the government that has been ultimately
responsible for credit allocation decisions, the problem of moral hazard
on the part of the commercial banks has been serious. When banks
accumulated nonperforming debts, the government could not help but rescue
them. As a result, it has proved difficult for the government to break out
of a vicious circle of financial regulation. This restructuring -- in
effect, the bail out -- episodes, which recurred in 1969-1970, 1972,
1979-1981, and 1986-1988, exemplify this cycle.
3. Chaebols, the Big Bourgeoisie of Korean Industrialization
The Chaebol, referring to business holding owned and controlled by the
founder and/or his family, has been occupying the leading or monopolistic
role in Korea. Their period of most rapid growth was during the
heavy-chemical industrialization in 1970s. The share in manufacturing
output of the 20 largest groups increased from 7% of GNP in 1973 to 29% in
1982 . The share of top 10 chaebols is could be found by the indicator of
their sales in GNP, which rose from 15.1% in 1974 to 68.8% in 1987 . A
narrow developmental alliance, forged by the industrial institutionalizer,
Park, with conglomerate capital facilitated a remarkably rapid economic
growth and reduced the cost of institutional communication and policy
implementation.
In South Korea, big businesses have been benefited from state-guaranteed
policy loan, which is carried exceedingly low rate with longer maturity,
and is virtually nondefaultable because of state backing. Preferential
interest rates on export industry were 6.0%(1971), 9.0%(1975), 9.0%(1979),
15.0%(1981), compared to general interest rates, 22.0%(1971), 15.5%(1975),
18.5%(1979), 17.5%(1981). And Chaebol claimed over 40 percent of total
domestic credits, 74 percent of total loan categories, and bolstered
industries and projects supervised by eleven different government
ministries .
4. Financial Sector
The unwillingness, rather than inability, to use credit as a principal
instrument of industrial policy separates Taiwan from South Korea,
financial system of which has been reorganized in support of economic
development plans. Amending the Bank of Korea Act in May 1962, Park made
it clear that it was the government, not the central bank, that was
ultimately responsible for monetary and financial policy. As a result, the
Bank of Korea was relegated to the status of a virtual rubber stamp for
Ministry of Finance decisions and served as a ready source of government
debt financing when necessary. If we look into the magnitude of policy
loans issued by the Bank of Korea, we find that the total policy bond per
reserve base of the Bank of Korea was 38.6 per cent in 1975, 33.1 in
1978, 44.7 in 1980, 70.2 in 1981 .
Moreover, liberalization of financial market since 1980s has posed
problems for the conduct of monetary policy. The domain controlled by the
(central) bank(s) has become increasingly marginalized by the growth of
the non-bank financial intermediaries -- including the banks' trust
accounts. The control variable used by the Bank of Korea(M2) has become
increasingly irrelevant, falling from 70 per cent of the wider measure(M3)
in 1980 to under 33 per cent in 1993 .
If we look into the shares of financial intermediaries, we'll find that
the share of commercial banks has been steadily declining from more than
50 per cent in 1975 to about 20 percent in 1992, whereas the share of
non-banks has been rising from about 10 per cent in 1975 to more than 60
percent in 1992 . Because big business' control was effective in non-bank
financial institutions such as insurance, securities, and short-term
finance companies, and government has some leverages enough to control the
major allocation by commercial bank to industries(i.e., government chooses
the president of the bank), from the above data we could say that the
economic power of big businesses vis-`-vis the government became dominant,
in contrast to Taiwan where state plays the dominant role of managing the
banking system.
Despite the fact that the freeing of interest rates constitutes an
integral part of financial liberalization, little progress has been made
on this front. The fundamental reason for this delay is that Korea's
business is highly leveraged, with high capital cost and high levels of
indebtedness. Moreover, the term structure of borrowing has been
extraordinarily skewed toward the short term, though short-term loans have
become long-term through continuous rollovers. In this situation, a small
change in short-term interest rates would result in a significant change
in the financial position of business. So whereas curb interest rate was
an average of 21.8 per cent from 1985 to1991 and corporate bond yield was
14.9 per cent during the same period, the regulated interest rate of
general bank loans kept the level of 11.5 per cent steadily .
5. Liberalization of Financial Sector
During 1980-81, the government initiated a restructuring program toward
heavy-chemical industries. Despite the unusual threat to the concerned
firms that the government would no longer support future projects unless
they complied with government directives, the restructuring attempt
failed. This experience and the tremendous frustration felt by the
government became a boon to neoliberal policymakers, who persuaded the
political leadership to undertake a wide-ranging economic reform efforts.
Financial liberalization was not only a part of this effort, but the
requisites for South Korea to join the OECD in 1995.
However the actual process of financial liberalization since 1980s was not
smooth and homogenous and divided into three different area of
liberalization: privatization of commercial banks, the deregulation of
entry and business boundaries, and the freeing of interest rates and
credit allocation. Speedy and remarkable progress was made in
privatization and entry regulation, whereas the freeing of interest rates
was bogged down, policy loans reappeared, and the presidents of the
privatized banks continued to be appointed by the government . In result,
after joining the OECD in 1995, South Korea accepted only 15 of all 91
items on the rule of capital flow, falling behind Mexico which did even 70
items of all . South Korea is under the control of IMF which is imposing a
harsh neoliberal reform onto the outdated financial sector, meaning
greater liberalization in the future.
Reference
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