[KS] KSR 2002-06: _The Politics of Economic Reform in South Korea: A Fragile Miracle_ by Tat Yan Kong

[Stephen Epstein]

_The Politics of Economic Reform in South Korea: A Fragile Miracle_ by Tat
Yan Kong.  London and New York: Routledge. 2000. 280 pages. ISBN:
0-4151-4503-1.

Reviewed by Ruediger Frank
Korea Institute, Humboldt-University Berlin

[This review first appeared in _Acta Koreana_, 5.1 (2002): 106-13.  _Acta
Koreana_ is published by Academia Koreana of Keimyung University.]


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-ChaebOl 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 ChaebOl 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 ChaebOl, 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 ChaebOl non-reform: ". . . an economic setback traced to
ChaebOl 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 ChaebOl 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 ChaebOl (1986) and many more are covered and
commented on. Kong characterizes the 1980s as "a period of transition in
the state-ChaebOl 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-ChaebOl 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 ChaebOl 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 ChaebOl 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 ChaebOl, 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-ChaebOl bias" of previous measures (169).
Infrastructure investment was often made following political preferences
(like regionalism, etc.) and nurtured the ChaebOl 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 ChaebOl 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 ChaebOl
(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, Ruediger 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://www.koreaweb.ws/ks/ksr/ksr02-06.htm