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KOREAN STUDIES REVIEW

The Korean Economy Beyond the Crisis, by Duck-Koo Chung and Barry Eichengreen. Cheltenham: Edward Elgar, 2004. 372 pages. (ISBN 1-84376-603-5), 79.95 £ (hardback), 35 £ (paperback).

Catch-up and Crisis in Korea, by Wontack Hong. Cheltenham: Edward Elgar, 2002.  166 pages. (ISBN 1-84064-917-8), 45 £.

Korea's New Economic Strategy in the Globalization Era, by O. Yul Kwon, Sung-Hee Jwa, Kyung-Tae Lee. Cheltenham: Edward Elgar, 2003. 247 pages. (ISBN 1-84376-045-2), 65 £.

reviewed by Bernhard Seliger
Hanns Seidel Stiftung
seliger@hss.or.kr

Ten years after South Korea's accession to the OECD and nine years after the breakout of the financial and economic crisis in 1997, the question becomes inevitable whether preoccupation with the crisis still renders new insights and results. By now there are far too many books treating the broad topic of the emergence of the financial crisis to give an overview of all of them. Similarly, the intertwined causes for the crisis (external contagion, a weak domestic institutional framework, and a consequent build-up of firms with untenable financial positions) certainly have been discussed in depth. Earlier mono-causal theories have mostly been discarded in favour of a view that the origins of the Korean crisis were multiple. Equally, the response to the crisis in monetary, exchange rate and fiscal policy has been thoroughly reviewed, especially for South Korea and its interaction with the IMF. South Korea, after all, was already staging a phenomenal comeback just one year after the crisis period, in 1999.

Nevertheless, the question of the impact of the crisis on South Korea's economic model has not yet been finally answered. This continued questioning can be seen not only in the still lively debate among economists and the consequent research output on the crisis, but also in the policy discussions about the lower-than-desired growth of the last half-decade and the response of the Korean people. In 2005, opinion polls revealed that Koreans' confidence in their economic future has fallen lower than in the year 2000, just after the financial and economic crisis. The scandal surrounding Seoul National University professor Hwang Woo-Suk and his faking of scientific data adds spice to this debate, since the supremacy of science and technology and the necessity of upgrading science as a way out of the crisis has been a constant -- maybe the constant rallying cry -- of economic policy after the crisis, beginning with "DJnomics" in 1998.

In this review, I consider three recent collections of articles that take up again the Korean crisis and are well worth being read in comparison, since they offer different views on the problems of the Korean economy, and focus especially on the question of the future of Korea's economic system.

"The Korean Economy Beyond the Crisis" by Duck-Koo Chung and Barry Eichengreen, published in 2004, includes a number of important papers by international and Korean experts covering several aspects of the crisis, such as monetary and fiscal policy, social impact, financial and corporate restructuring, labour markets and the role of the United States. Two very different papers, which in my opinion are, respectively. the most interesting and the weakest papers of the collection, analyse the impact of the crisis on the Korean political economic system. Jaeyeol Lee in "Transparency and Social Capital," addresses the question of how the governance system of South Korea was changed by the crisis. By opposing Korean and Anglo-American types of governance, he simplifies the analysis, but nonetheless reaches interesting conclusions. Following the intercultural studies approach of Hofstede ("Cultures and Organizations: Software of the Mind") and using the data of Hofstede and Transparency International, he maps Korea on a three-dimensional map of individualism, power distance and transparency, showing that its ranking in these three dimensions is low not only compared to Anglo-American economies, but continental European and East Asian competitors. For a system in which leadership is based on rules, rather than personalized, institutionalized trust is still missing to a large degree. Its absence has an impact in many spheres including corruption. Lee concludes that "one way of characterizing post-crisis reform in Korea is that progress has been fastest where international involvement is greatest." This is an interesting statement that contrasts with much of the earlier debate on the failure of conditionality in IMF policies.


The weakest chapter of the book immediately follows, an analysis of Korean political development after the crisis in terms of class division and class struggle.  Lim Hyun-Chin and Joon Han's "Social realignment, coalition change and political transformation" suffers from a lack of clear definitions (e.g. on the content of "reforms" and "reformist policies", the meaning of "conservative," etc.) that makes it difficult to understand their framework and its usefulness for the analysis of the post-crisis situation. Certainly, the consequences of the crisis for the distribution of wealth are marked, but they have to be related to growth in absolute terms (rising inequality in a growing economy like Korea's after 1999 is completely different from rising inequality in a shrinking economy such as Russia's in the 1990s). Their conclusion that the time for a "fundamental reconstruction of political power" has been missed lacks a clear explanation; given, however, their predilection for seeing the world in terms of class struggle, it might be a blessing that "remaking the nation" in the sense in which Lim and Han speak did not take place.

The final piece, "Reform and the risk of recurrence of crisis" by In June Kim, Baekin Cha and Chi-Young Song, offers a very interesting view on the phenomenal rebound of South Korea and its V-shaped recovery after the crisis.  In contrast to the mostly very optimistic views on the immediate effects of restructuring, the authors stress the role of expansionary monetary and fiscal policy, a favourable external environment, and the extreme depreciation of the won in Korea's recovery. They argue that these factors had more significant short-term effects than restructuring, although they concede that such restructuring may have an impact in the long term (the authors are quite sceptical about its thoroughness, however). The importance of short term factors in the fast recovery after the financial crisis not only explains the worsening macroeconomic performance after 2001, but also reminds us of the still ongoing necessity for corporate and financial reform.

Catch-up and Crisis in Korea by Wontack Hong, published in 2002, is an amended collection of papers by this distinguished professor from Seoul National University, who developed many of his ideas in an earlier book published in 1994 under the title Trade and Growth: A Korean Perspective. Those familiar with Hong's earlier research might therefore not learn much new from this book. This collection nevertheless is an interesting contribution to the ongoing debate on Korea's crisis, since it (re-)focuses the view on the very source of Korea's catch-up, namely its trade and growth. Certainly, there are a number of possible views on how economies grow: the institutional setting has been always a prime variable and, ever since the works of Douglass North, the development of "New Institutional Economics," has become more important as a field of economic theory. In the preface Hong offers a justification of why he limits himself to analysing trade and growth, and this restricted treatment keeps the discussion very interesting, because debate on the Korean crisis and its focus on international financial factors and internal institutional weaknesses sometimes overlooks the very basis of South Korea growth.

Hong's book, following his earlier work, is mainly interested in the question of Korea's catch-up and its export-oriented growth. Only in the later chapters does he treat the crisis following the catch-up. While Hong says little about the sources of growth in terms of accounting for inputs and technology, his views on the export-oriented (institutional) regime, trade patterns, chaebol as engines of growth and the role of credit are well presented. The comparison of South Korea and Taiwan and their industrial structure is particularly interesting. The conglomerate-based Korean model, which is politically influenced made Korea's economy more vulnerable than of the Taiwanese economy, with its foundation in small and medium enterprises (SME), but also had an impact on the possibility of rebound. It is unfortunate that the implications for reform of the Korean model are not discussed in more detail here.

In his conclusion (143) Hong calls the 1997 crisis an admittedly costly blessing in disguise that helped Korean people to "wise up by experience." In a self-proclaimed optimistic view, he sees the positive aspects of the change in the economic system after the crisis, with new and more transparent "rules of the game," less political interference, and, finally, less corruption. Hopefully, the lessons learned will remain the basis of economic policymaking in Korea in the future.

Korea's New Economic Strategy in the Globalization Era by O. Yul Kwon, Sung-Hee Jwa and Kyung-Tae Lee was published in 2003. In two aspects it differs from the two other books under review: first, it does not look into the crisis itself, but rather into policy-making after the crisis. Secondly, and appropriately so, given its focus, many of the writers are or have been advisors to the Korean government, thereby making this book more policy-oriented and less theoretical. Given the short life cycle of some political and policy ideas in Korea, this focus, naturally, also may become a limitation. Catchwords like "Cyber Korea 21" change under every new administration (consider, e.g., Kim Young Sam's globalization drive, Kim Dae Jung's DJnomics and the "hub of East Asia" debate under Roh Moo Hyun). With the exception of a paper from Bernie Bishop of Griffith University on FDI liberalization in East Asia, only Korean "insiders" have contributed to the volume, with concomitant advantages and limitations.

This book offers a highly comprehensive sectoral treatment, covering not only trade, restructuring, the financial sector, labor and social policy, but also energy, agriculture and inter-Korean relations. My personal favourite among the papers is by Sung-Hee Jwa, head of Korea Economic Research Institute. While the topic of his "A New Framework for Government-Business Relations in Korea" is hardly new, he is the only author in any of the books reviewed to stress the paramount importance of competition policy as a substitute for direct government intervention. Giving maximum freedom to companies, as he calls for in his conclusion (96), does not, then, mean unlimited, unregulated "Manchester capitalism." Competition itself becomes the prime regulator of behaviour, firm structure and size. Given that the state can effectively bar restrictive practices, collusion, and monopolization based not on innovation, but barriers to market entry, its market-correcting actions become as unnecessary as they are damaging.

Two papers focus on a national innovation system as a precondition for sustained growth: "Korea's Drive for a Knowledge-based Economy" by Kwang Sun Pai, Ki-Hong Park and Suk-In Chang, and "A Development Strategy for Korea's Information Society" by Chang-Bun Yoon and Sang-Young Sonn. As mentioned above, in the light of the recent scandal surrounding cloning research by Professor Hwang Woo-Suk, the stress on a national innovation system governed and steered by the central government seems problematic. The problem of the selection of prestige projects without proper control has been at the core of the scandal. After attempts to establish Korea as a "hub of East Asia" had been loudly trumpeted, but then more or less evaporated as they were belittled by competitors, the "international stem cell hub" led by Professor Hwang became a huge prestige project. But, similarly to earlier Korean experiences with corporate expansion under quasi-state guarantee, the project failed and left the state with the resulting damage (here, mainly to Korea's image as a modern state on the forefront of international research and technological competition). As the lessons of the financial and monetary crisis showed, strong institutions and governance structures are the key to success, not direct state involvement in business or innovation activities. Nothing could demonstrate the ongoing necessity to learn from the crisis of 1997 and its lessons more vividly than this case.

Overall, each of the three volumes gives important insights on the crisis. Although my personal favourite is the book by Chung and Eichengreen with its more international approach and outlook, I learned much from each one. The debate on the crisis is ongoing, and valuable lessons are still to be found in analysis of the Korean crisis.

Citation:
Sliger, Bernhard 2005
Review of The Korean Economy Beyond the Crisis, by Duck-Koo Chung and Barry Eichengreen (2003); Catch-up and Crisis in Korea, by Wontack Hong (2002); and Korea's New Economic Strategy in the Globalization Era, by O. Yul Kwon, Sung-Hee Jwa, Kyung-Tae Lee (2003).
Korean Studies Review 2006, no. 01
Electronic file: http://koreanstudies.com/ks/ksr/ksr06-01.htm


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