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Tat Yan Kong. The Politics of Economic Reform in South Korea: A Fragile Miracle. London and New York: Routledge, 2000. 280 pages. ISBN 0-4151-4503-1.
Reviewed by Rüdiger Frank
Korea Institute, Humboldt-University Berlin
This important new book by Tat Yan Kong is about the state-business relationship in the Republic of Korea, with a strong focus on the state's dominant role in economic development. It covers the period from the beginnings of economic planning in South Korea until 1999, with the last two decades, in particular the 1990s, being at the core of the study.
The research for the book was obviously begun well before the 1997 crisis and was finished about two years later. This is a real challenge, since omitting such an important event is as impossible as is its complete assessment at this time. It is also a blessing, at least if compared to those authors who finished their work before the crisis and who now may find themselves in the uncomfortable situation of not having foreseen the disaster. It speaks for the quality of Kong's study that the crisis is not dealt with in the form of an artificially added extra chapter that somehow appears not to really belong to the rest of the book. Instead, he managed to blend the developments of 1997 and afterwards into the text and argumentation so perfectly that the causal chain is not only kept intact but also substantially improved.
The author chooses a political institutionalist approach for his analysis, asking why the bureaucratic state was so surprisingly successful in the case of South Korea, without succumbing to the negative effects commonly associated with state power. Institutionalist approaches gained popularity during the 1980s, when it became evident that established neo-classical theories were unable or insufficient to explain economic development like the one witnessed in the case of South Korea. Among economic institutionalists who attribute Korea's outstanding economic performance to the state's ability to overcome market failure, Amsden (Asia's Next Giant, 1989) is one of the most prominent.
Kong regards the development of the 1980s and 1990s-with their main features being liberalization and globalization-as an expression of a dynamic continuation of political concepts of the preceding decades and, therefore, emphasizes the integration of evidence from this period into the analysis, which, as he observes, is highly dependent on data from the 1970's and 1980's. He further insists that democratic development cannot be separated from economic policymaking.
The author formulates four major guiding questions in his study (10-11):
- Why has Korea followed a more gradual route of economic and political reform compared to other transitional political economies?
- How has Korea Inc. been reformed in the past two decades and, in particular, how can the variations in the rhythm of reform (in 1987 and 1993) within the gradualist pattern be explained?
- How does the institutional framework of state, business, and labor relations affect economic policy choice, and adaptivity to external fluctuations ("fragile miracle")?
- What is the significance of the 1997 economic shock to the Korean development trajectory?
To answer these questions, the study is divided into seven chapters with about thirty to forty pages each. After a brief introduction, (South) Korea's position in the comparative political economy debate is highlighted. Chapters 2 to 6 follow a chronological approach.
In chapter 2, basic concepts like the state-Chaebôl alliance, economic nationalism, and the symbiosis of authoritarian and economic development are introduced, covering the period until the end of the Park Chung-hee era in 1979. Here, Kong explains the success of the state-centered development model in South Korea with the substitution of competition on world markets by internal competition for state subsidies in the presence of clearly formulated economic goals (34). This argument is, however, slightly opposed by Kong himself later, when he mentions the resulting overcapacity and double investment and concludes: "The success of the government-owned steel giant POSCO suggests that the state enterprise route, or at the very least, a stricter division of labor between the Chaebôl would have yielded superior results" (55, with reference to the Taiwanese example).
It is notable that Kong does not omit the strong influence of U.S. political interests on South Korea's economic development, interests which have changed with the dynamics of world politics. Once the Cold War and the systemic confrontation between East and West disappeared, so did the showcase competition and the priority of the U.S. on political stability and visible economic success in the ROK that had resulted in their willingness to accept an undemocratic government with a non-liberal economic policy (66). Since the mid-1980s South Korea has been increasingly treated as a "normal" trading partner and now faces more aggressive opening demands than the policy makers in Seoul were used to. This change in external conditions is certainly one factor contributing to the liberalization and globalization development and to the difficulties stemming from following this path. Of importance is Kong's acknowledgement of the fact that "the" crisis is in fact just another one, fitting well into the row of similar events like those of 1971-72 and 1979-89.
Chapter 3 deals with the gradualist patterns of transition like those evident since the Chun Doo-hwan presidency, namely the emergence of a liberalization agenda, reforms of the financial system, the Chaebôl, and labor. Kong pinpoints the adverse effects of these policies, such as export dependency, a widening technology gap in spite of intensified R&D efforts, a distorted industrial structure, and asymmetric development levels inside South Korean society deriving from an increasingly uneven income distribution. In the 1980s, South Korea was "apparently leaving the late-industrialization model and joining the liberal-capitalist main-stream" (72). But this transition was gradual and "did not result in a weakening of the dominant priorities or interests forged under Korea Inc." (p. 73), it rather meant a power shift within the old developmentalist alliance. In other words: "in practice . . . liberal policy measures were either not implemented or were neutralised by other measures. That the Korean government expressed a preference for liberalisation as an ultimate goal could not be interpreted as the green light for sweeping liberalisation." (75). In a brilliant observation of reality, Kong outlines what he calls Chaebôl non-reform: ". . . an economic setback traced to Chaebôl malpractice provokes widespread calls for structural reform; then the realisation sinks in that effective structural reform would have to deepen economic pain in the short-term; favourable cyclical factors plus some limited adjustments by the Chaebôl themselves promote recovery; once the recovery is under way, the momentum for structural reform evaporates." (84). The decisive role of the unstable political power of the respective presidents could have been added here. Major reform issues of the 1980s like the introduction of competition policy with the passing of the Monopoly Regulation and Fair Trade Act (1980) and the creation of the Fair Trade Commission (1981), events showing the limits of reform like the dismantling of the Kukje Chaebôl (1986) and many more are covered and commented on. Kong characterizes the 1980s as "a period of transition in the state-Chaebôl relationship from state dominance to interdependence" (108). The repressive anti-labor measures under Chun and the lack of serious attempts to develop peaceful and cooperative labor relations made labor disputes get out of control in the aftermath of democratization in 1987. "This legacy would undermine economic restructuring efforts in the 1990s." (108-109).
Chapter 4 adds a political dimension to this economic picture by exploring the sources of democratization after 1987, its limits and its impact on the developmental change, in particular redistributional measures, which were mostly lacking in the years before. Kong shows that, since democratization was introduced by the developmental state, it was possible to constrain the opposition within moderate confines and secure continuity in political leadership (111). He further argues that the state after 1987 failed to integrate labor into the new developmental consensus and to effectively reverse the advance of business concentration. Hence, "the institutional basis of Korean development remained far from consensual, a deficit that made Korea significantly different from Japan Inc." (112). Kong states that the democratization of South Korea was a result of its economic development, since the latter created a middle class of educated white-collar workers and led to urbanization, which "was a development favourable to the oppositional forces" (113). The radical opposition at the end of the 1980's was "in no position to launch a credible electoral alternative of their own" (126) and hence had to leave the field to the conservative opposition and the democratic converts from the former authoritarian leadership. It was the impact of democratization that broke up the formerly exclusive state-Chaebôl alliance as the institutional basis of Korea Inc. and led to redistributional measures like popular capitalism and housing construction to win over the middle class, plus the greater role of the newly empowered labor-movement (130-131). These measures had, nevertheless, often quite other effects in reality than was planned by economic policy makers in Seoul. As a result, the power of the Chaebôl grew constantly, while no consensual basis with labor could be reached. Kong concludes that in its transition to advanced industrial status, South Korea would face more difficult economic problems than Japan did a generation earlier, with a more conflict-ridden institutional framework than Japan's (131).
Chapter 5 (Rise and Fall of the Globalization Project) covers the Korean political economy under Kim Young-Sam. The self-proclaimed five key areas of reform are analyzed: financial liberalization, the shift from direct to functional intervention, business deconcentration, labor, and anti-corruption. None of them was really new, and neither were the shortcomings, namely the ever-growing influence of the Chaebôl and the failure to "bridge the historical enmity between business and the . . . labour movement" (145). Kong sees the modified, but continued role of the state in economic development as a reaction to the instabilities of globalization, namely potential macroeconomic instability, social instability as a result of rising unemployment after an expected wave of hostile takeovers and losses of market shares for Korean companies, and the growing power and concentration of the Chaebôl, since the latter were the only ones who possessed the financial means to profit from the new opportunities. He concludes that both the government and big business wanted liberalization, but on different terms (155-156). Kong regards the labor situation as "a central feature of the crisis facing the Korean development model" (157).
In the 1990s, functional intervention of the state, which replaced direct intervention, reinforced the "pro-Chaebôl bias" of previous measures (169). Infrastructure investment was often made following political preferences (like regionalism, etc.) and nurtured the Chaebôl which won huge contracts, thereby conflicting with the government's stated aim of promoting business de-concentration and competition. The sectors of the economy that benefited from old-style intervention were also becoming the principal beneficiaries of the new (172). Kong further explores the regulatory framework of state-business relations, touching on the deregulation drive and the role of the Fair Trade Commission in active pro-competition and anti-concentration policy. For a book printed in 2001, at least the Framework Act on Administrative Reform (1997) and the establishment of a permanent Regulatory Reform Committee in early 1998 should have been included in the analysis. Accordingly, since a political institutionalist approach is the credo for this study, the work of the Presidential Commission on Administrative Reform under Kim Young-Sam deserved some mentioning.
The author obviously feels more at home when he comes to the well-founded analysis of the labor market that led to the much-debated reform of 1996/1997 (181-193). He elaborates on the plans to include labor in the state-led developmentalist alliance, labor's role in Korea's globalization project, various strategies of labor inclusion, and models of state-labor relations, while also illustrating the respective reaction of business. In the passage on state-business independence in the 1990s (193-204), Kong touches on important areas including corruption, collusion, and the announced as well as the real results of the numerous reform and purification drives. Kong concentrates on the question of why corruption continued to exist after authoritarianism was overtaken by democratization. One of the reasons he gives is "deeply ingrained political habits" and a traditional leadership style (197). This is one of the otherwise rare moments in Kong's book when cultural factors are explicitly given their due consideration for understanding the institutional system of Korea. But the author does not go back as far as the neo-Confucian roots of Korean society, but instead focuses on the "staunch anti-communism of successive authoritarian regimes," which eliminated alternative political forces and led to a more or less uniform political landscape, where distinction was only possible by "emphasising personal qualities and locality" (198). It is refreshing to read Kong's clear and well-chosen words on the nature of politics and politicians in South Korea, something that is not often found in other publications.
Kong concludes that all the liberalization and deregulation efforts of the 1990's could not eradicate past collusive practices, since imperatives such as satisfying the public by securing continued economic success (often quite naively measured by GNP growth) and the need for political funding in costly electoral campaigns prevented the dependence of politicians and leading administrators on business from being lessened or even eliminated.
In Chapter 6, the economic crisis of 1997 is described as a logical consequence of the development in the preceding years and decades. Kong, from the vantage point of mid 1999, raises the possibility of a radical and far-reaching change being induced by the crisis. This stands in some contrast to the argument of continuity and gradualism, and indeed, recent developments in South Korea-namely the failure to reform the Chaebôl and the still strong interventionist role of the state-make a profound change unlikely to have happened. Kong places the "economic meltdown" of 1997/98 in the context of the institutional analysis of his book. He finds that the regulatory weaknesses that led up to the crisis of 1997 were consistent with patterns of state-business interaction that pre-dated the 1993-97 wave of accelerated liberalization and that despite the shift towards redistribution and social consensus building, democratic governments were unable to transform the pattern of confrontational industrial relations inherited from their authoritarian predecessors (210). He thereby dispels the notion that the Korean economy was fundamentally sound, since "vulnerability to economic shocks . . . was inherent in the design of the developmental state itself" (213). He cites overcapacity, the erosion of the state's disciplinary powers, collusive state-business relations, and cronyism as the main and long-embedded weaknesses.
For the writer of this review, of utmost importance for understanding the crisis is Kong's observation that "by failing to step in early, the government ruptured the implicit official guarantee on which external lending was based" (217), even though Kong associates this with the Kia case instead of the earlier Hanbo bankruptcy. He also correctly labels the industrial strife after the passage of the new labor law as another important short-term factor in the deterioration of the South Korean economy in 1997 (221), a point quite often omitted in other studies on "the" crisis. On the following pages, Kong discusses the IMF measures and the various supporting and counter-arguments in detail, providing a handy overview of the debate. He then turns to the restructuring of the Chaebôl (227-232), making the observation that, as in previous cases, the large groups responded to the crisis by trying to expand extensively instead of with thorough rationalization and intensive use of the given resources. The fact that inter-group rivalry played a major role in business decisions shows that there were other driving forces beyond economic rationality-another strong argument in favor of those who advocate detailed cultural knowledge as imperative for understanding the dynamics of the political economy of Korea. The last section of the chapter deals with a discussion of the social pact (state-business-labor) and its perspectives.
The main findings of the study are condensed in Chapter 7 (the conclusion), focusing on the state-business-labor relationship, economic nationalism and its limits, and the question of a "neo-liberalization" (247 ff.) of South Korea. Kong emphasizes two major aspects of state-society relations: the importance of a growing economy to elected politicians and the con-frontational nature of South Korean labor relations in contrast to Japan (243). It is striking that indeed, political sensitivity to economic slowdown affected democratic and authoritarian regimes alike (244). And while economic nationalism was and is fuelled by the aim of catching up and gaining more economic strength in order to be effectively protected from Japan, paradoxically this has led to a strong dependency on technology and supplies from that country (246). Overly patriotic readers will probably feel uneasy with frequently repeated passages like "the essential components of the Korean-owned industrial structure were literally 'made in Japan' . . ." (246) or ". . . the Korean state owed its creation to Japan and the U.S." (67). Interestingly, Kong indirectly equals the IMF with the U.S. when he states that after 1997, "no longer restrained by . . . strategic sensitivity, the U.S. was . . . prepared to put Korea through a painful transitional period of recession and high unemployment for the sake of market principles . . ." (248). Kong states that a recovery program depends on the cooperation of big business and organized labor. He predicts that unless they reach a consensus, they will face an externally driven restructuring process over which they have only little control, and concludes: "In their reluctance to concede anything, they will risk loosing everything." (251).
In the light of this obvious continuity it does not make much sense to expect an abrupt change in the skillfully described developmental pattern. Nevertheless, Kong does so and notices "several distinctive features . . . [which] appear to favor such a transition" (22) and supports this argument by the expected slow recovery, the sweeping reforms of Kim Dae-jung, and the strict conditions of the IMF rescue package. All three points can be seriously challenged. The official announcement that "the crisis has been overcome," as wrong as it was, came much earlier than expected (Kong cites estimates of 2002, 22) at the beginning of the year 2000, eroding public support for painful changes and supporting businesses' claim for an end to forced reforms. Kim Dae-jung's reforms took the same path as those of his predecessors; that is to say, they were powerful during the first two years of his term and eroded afterwards, in direct proportionality to public support for the president. It is not logical to expect a different form of development just because Kim Dae-jung did not come from the ruling camp, as long as no profound change in political parties and the political system itself happened. Finally, since South Korea followed the prescriptions so strictly and repaid the debt much ahead of schedule, there are no further ways for the IMF to significantly interfere with Seoul's economic policy, not to mention that any such attempt would face furious resistance from most Koreans. Nevertheless, the author's less than convincing expectation of a drastic change does not affect the credibility of his work.
Kong largely draws on previous studies of South Korean economic and political development. An interesting detail is that he uses the term "kerb market" instead of the more common "curb market" for the unofficial financial exchanges. Throughout the book, comparisons are made with the Latin American and Taiwanese experience. Normative categories applied by Kong when it comes to assessing the role of the U.S. in South Korea's development often remind one of Bruce Cumings' writings, which are frequently cited.
While it makes the book more readable, the rare use of references in the first chapters-particularly in case of numbers-makes it difficult for the academic reader to check the original sources of given data. Using footnotes instead of endnotes would have greatly enhanced the user-friendliness, especially since important information is included there. In the contents section, only levels one (chapter headings) and two are included. Adding level three would have helped much in locating specific information and in better understanding the structure of the book. It is also somewhat surprising that such a profound expert in Korean affairs did not use the established McCune-Reischauer or the new South Korean system of romanization.
Routledge was well advised to decide to publish Kong's outstanding study. Holding the book in one's hand, feeling the fine quality of the cover, the paper, and the typeset, and reading the name of a leading academic publishing house on the front cover, one would expect that the editors were working as professionally as the printers. Unfortunately, they were not. In the bibliography, we find an entry that reads: "Hayek, F.A. (1993): The Road to Serfdom, London: Routledge (first published 1944)". It is not very gentleman-like to omit the "von" in front of the last name, which indicates ancestors of aristocratic origin in German speaking countries. And why is von Hayek's first name given in the abbreviated form only? Admittedly, later in the bibliography we find this entry: "Von Hayek, Frederich (1986): The Road to Serfdom, London: Routledge & Kegan Paul (first published 1944)". Now the middle initial is missing, the publishing year has changed, but, at last, von Hayek got his due "von" back. Obviously, the same book is mentioned twice, and, most embarrassingly, it was Routledge themselves who published it. This case is not an exception. A man with the Korean name "Park Fun-Koo" is listed as a co-author of Lawrence B. Krause, but appears some pages later as Park Funkoo.
Such unnecessary flaws do not support the credibility of the writer. Fortunately, he does not need such support. "The Politics of Economic Reform in South Korea" is a wonderful book with precise analysis of a complex topic. The author possesses enough knowledge and understanding of the public administration system and the state-business relationship of South Korea to refrain from painting another simple black-and-white picture of either the "Wow, what a perfect miracle" or the "look, how totally wrong they were" type. He does not fall into the trap of taking every printed word by a politician for granted (such as "Long live market principles!"), and neither does he trust rosy statistics too much ("Full recovery from the crisis reached!"). As a sincere academic, he draws his conclusions from well-founded and long-term analysis instead of the short-lived fashion of the day. If you want to understand why the crisis of 1997/1998 happened and how South Korea's political economy will most likely develop in the next decade, then you must read Kong's book.
Citation:
Frank, Rüdiger 2002
Review of The Politics of Economic Reform in South Korea: A Fragile Miracle, by Tat Yan Kong (2000)
Korean Studies Review 2002, no. 6
Electronic file: http://koreanstudies.com/ks/ksr/ksr02-06.htm
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