Rakesh Bhandari wrote:
>Perhaps someone could download the WSJ editorial from a few days ago by
>Professor Meredith Cumings Woo of Northwestern University? Her analysis
>seems to differ from Amsden's in important ways; for example, she seems to
>be quite a bit more critical of the kind of state monopoly
>capitalism that South Korea had practiced. For example, Woo expressed
>criticism of the way certain enterprises, in which bureaucrats had
>an important stake, had been subsidized simply on the basis of their size
>at the expense of more profitable smaller firms. Perhaps there are
>limits to how long more powerful firms can monopolize credit or set their
>prices in such a way as to stave off the fall in the average rate of
>profit at the the expense of smaller capitals?
Ask and you shall receive. Amsden says it makes perfect sense for the state
to get out of mature industries like cars (though lifting import
restrictions could deal a sharp blow to the Korean auto industry), Korea
can only upgrade into high-tech with continued government industrial
policy.
Doug
----
The Wall Street Journal Interactive Edition -- December 8, 1997
Resources: Edit Page Features
How Industrial Policy Caused South Korea's Collapse
By MEREDITH WOO-CUMINGS
Last week South Korea and the International Monetary Fund
signed a bailout package worth at least $55 billion, the
biggest in history. How did an industrial juggernaut like
South Korea, the world's 11th-largest economy, end up in
the lap of the IMF? And what does this portend for Korea
The short answer is that the IMF has bitten off a
lot more than it can chew, let alone digest.
For decades, South Korea's politics masked its intrinsic
economic instability. Korea emerged from a half-century
and war utterly destitute. During the Cold
War it occupied a prominent location between the U.S. and
the Soviet Union, however, and from 1961 to 1987, South
Korea parlayed its geopolitical position into economic
advantage. Successive authoritarian leaders amassed huge
amounts of foreign aid in the 1950s and then later,
foreign loans, allocating them to coddled export
industries.
Economic planners did this by fiat at first, setting low
financial prices (even negative real interest rates,
which prevailed throughout the 1970s) and allocating
credit through state banks. The banks in Korea became
policy instruments of what has been called "late
industrialization," emphasizing exports and development
of heavy industries related to security needs. This was a
strategy indulged by Washington for many years, because
it both promoted South Korea's security and turned that
country into a model of export-led government industrial
policy.
Over three decades the state created an impressive
constellation of mammoth industrial firms, known as
chaebol, a group of oligopolies heavily reliant on
government protection and assistance. Firms like Hyundai
and Samsung were always hugely leveraged, with very high
debt-equity ratios. Because they usually had lower profit
rates than small-sized firms, they always needed periodic
infusions of new cash. These firms could survive largely
because they provided floodtides of cash for the
country's politicians. This was their best insurance
against default on their debt, along with an additional
insurance that came from their sheer size and therefore
their importance to the domestic economy; analysts said
they were in a "state of permanent receivership."
After South Korea's long period of dictatorship ended in
1987, inquiries into the so-called slush fund scandals
determined that one former president, Chun Doo Hwan,
amassed more than $900 million in political kickbacks,
and another, Roh Tae Woo, about $600 million. These
enormous sums revealed to the Korean people the massive
patronage required to keep Korea Inc. running. By the
early 1980s, the system of chaebol support for the ruling
parties had become a kind of mad extortionism.
During the Cold War, the Korean financial system's
insecure footing was ignored or winked at, and Washington
always stood ready to help out in the event of trouble.
During the economic debacle of 1979-1980, for instance,
the U.S. acted swiftly to stabilize Korea, sending
signals to the international financial community that in
spite of the assassination of Park Chung Hee and the
Kwangju rebellion, Korea remained a stable investment
environment. U.S. leaders also pressured Japan to share
the burden of bailing out a Korean regime that was
grappling with economic troubles amid widespread popular
disaffection. In 1983, Tokyo gave Seoul some $4 billion
in loans--nearly 13% of Korea's net external debt, more
than 5% of its GNP, and almost one-fifth of its total
investment that year.
Thus, throughout the past 30 years the Korean financial
system was vulnerable to exactly the sort of calamity
that has now occurred. The final scenes played out two
weeks ago, when the Korean government asked for bilateral
help from the central banks of Japan and the U.S. Japan
may have been willing to help but was pressured to back
off by the U.S. At any time before 1989, Seoul could
expect Washington and Tokyo to extend bilateral aid.
Today, however, the U.S. much prefers to rely on
multilateralism, with the IMF in the lead, tying any
bailout to major economic and financial reforms.
South Korean President Kim Young Sam seems to understand
the urgency of his country's plight. Soon after he took
office, he made financial transparency one of his
priorities--notably requiring that bank deposits be made
under account-holders' real names, which amounted to a
revolution in Korean finance. But a thorough reform of
the financial sector would have required extraordinary
determination. So the regime stalled, unable and
unwilling to overhaul the system that had given the state
so much clout. Neither could it overrule an increasingly
strong labor movement, which spilled out to the streets
last January, opposing a new labor law that would have
made layoffs easier.
The IMF will now attempt to do what the Kim
administration did not have the power to do, treading a
very fine line to restore the fundamentals of the Korean
economy, avoid alienating Korea's strong labor movement
and its increasingly active civil society, reform the
financial system and the chaebol, and to do it all with a
hotly contested election just around the corner. For the
sake of the Korean people, we all must hope that the IMF
succeeds in bailing South Korea out of a mess of its own
making. But at the same time, we mustn't hope for too
much from the IMF, given that many Koreans are already
voicing resentment of their foreign "saviors."
----------------------------------------------------------
Ms. Woo-Cumings teaches political science at Northwestern
University and served on the White House Commission on
U.S.-Pacific Trade and Investment Policy.
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