Transcript 슬라이드 1 - Sogang

II. Understanding the Miracle
Korean Model of Development
Strong and stable government
Dictatorship of Chung Hee Park
Stable and consistent policty
State-led development
Government plans and private enterprise executes plans
Symbiosis between politics and business
Export-oriented growth
vs. import substitution
Chaebols
a family controlled network of big conglomerates
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Market vs. State
Prosperity of the Western Europe and the US in the
19th century
Liberalism : free market, free trade, small goverment
Rapid expansion of industry and international trade
World war I, the Great Depression of 1929
Shattered belief in liberalism
Statism : experimenting with state-led systems in less
developed regions
Socialism in Russia
Fascism in Germany, Italy and Spain
Newly liberated countries after World War II
Statism was a popular choice
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Export Promotion vs. Import Substitution
Developing country exports good X and import good Y
X: primary products or labor-intensive low-skill goods
M: capital-intensive or high-skill goods
Export promotion (outward-looking policy)
develop industries producing X
import M with money generated by exporting X
both X and M increase rapidly => more dependency on foreign trade
adopted by Asian miracle countries
Import substitution (inward-looking policy)
develop industries producing M
– decrease imports and save dollars spent on importing M
both X and M decreases => self-sufficiency
adopted by Latin American countries, India and Pakistan
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A Brief History
Long tradition of centralism – Chosun Dynasty (1392-1910)
No feudal or local powers.
King and bureaucratic scholars dominate in political power and
distribution of economic resources.
Compare Japan .
Colonial rule of Japan (1910-1945)
Modernization under the Japanese colonial rule.
US Army Military Government (1945-1948) – South Korea
Some efforts to implant democracy and capitalism
Period of political and economic chaos
Syngman Rhee (1948-1960)
Korean War (1950-1953)
inefficient and corrupt distribution of
Japanese enterprises, banks, US aids, imports.
failed to for economic development laying foundations
Korea was in a dismal state in 1960. It was as poor as sub-Saharan African
countries.
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Perkins (1997), in the early 60s,
share of agriculture and mining – 50% (15% higher than comparable countries)
share of manufacturing – 15%, unusually low.
share of exports only 3% - compared with 30% under the Japanese colonial rule
Source: Lim (2000)
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Source: Lim (2000)
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Chung Hee Park (1961-1980)
Period of authoritarian politics and rapid economic development
Anti-communist
Threatened by the economic success of the North Korea
Economic development has all the priorities
political freedom and reunification put aside
State-led economic development
Economic Planning Board created – 5 year plans
Nationalized commercial banks
Put the Bank of Korea under the control of the Ministry of Finance
Initial plan – import substitution development a la Latin American
countries
exporting primary products
developing steel and machinery industries
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Switch to Export-led growth
Export drives of labor-intensive products
Historical accidents - Lim
US tried to manipulate Park with US aids. Park, fierce nationalist, tried to be
independent of US pressures by developing dollar-generating industries.
US pressures
US preferred market-oriented outward-looking growth strategy.
No FDI (foreign direct investment)
Heavily relied on foreign loans
Government directly borrowed from the world and distributed to the private
sector
Government guaranteed foreign loans of private businesses
Development based on private entrepreneurship
-backed by foreign loan guarantees and low interest rate loans
-closely monitored by the government in export performance
Lim : government - principal
private sector- agent
task - exports
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Reasons for success
High level of education
Much higher than average developing countries’
Stable and consistent policy
Dedication to growth and export promotion
Coping with moral hazard through monitoring
Moral hazard
Borrow at cheap rates and invest recklessly in unprofitable business
Monitoring
Government supplied low interest rate loans only to firms maintaining good export
performances
Firms were disciplined by competitive forces in their export markets
Concentrating on right business with right technology
Learning from Japanese experience
Reliance on Japanese technology
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HCI drives in the 1970s
Promoting heavy and chemical industries
Industrial upgrading: from labor-intensive consumer goods to capital-intensive
intermediated goods
US withdrawal of armed forces in Asia
Creation of Chaebols (財閥)
Chaebol literally means “wealth clique.”
Japanese Zaibatsu vs Korean Chaebol
Family-controlled industrial conglomerates
Samsung – Lee
Hyundai - Chung
SK
- Choi
LG
- Koo
GS
- Huh
Diversification – controls a large number of unrelated business
Samsung – Amusement park, electronics, insurance, credit cards, construction
Hyunday - automobile, ship-building, construction, securities, electronics
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Controls a network of companies with small holdings of equity
Multi-pyramid
=> firm A => firm B => firm C
Circular investment
firm A => firm B => firm C
Government –Chaebol partnership
Government select target industries
Government select firms to enter target industries
Government provides low-interest loans and trade protection
What if a project fails?
Government has a moral responsibility to bail out firms without threatening
governance. => moral hazard
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Source: Lim (2000)
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Advantages of Chaebols
Shortage of entrepreneurial talents
Inefficient legal enforcements and low level of trust
– Integration saves transactions costs
Diversifying heavy risks in investment in heavy industries
– Large sunk costs
– Long gestation periods
“Without chaebols, would automobile, ship-building and semiconductor
industries have been possible in Korea?”
Inefficient labor markets
– Evaluation of employees
– Intra-firm mobility of labor
Coping with informational problems in banking industries
– Mutual loan guarantees
– Transfer pricing
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III. Financial Crisis of 1997
Growth Rate of GDP (1971 – 2006)
Bank of Korea
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Exchange Rate (Won/Dollar)
Bank of Korea
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The Financial Crisis of 1997
Foreign Debt Crisis
In 1997, Korea was fast accumulating foreign debts, mostly
foreign short-term loans to commercial and merchant banks
in Korea.
Questioning the ability of Korean banks to pay back these
loans, foreign banks declined to roll over the loans.
Lacking foreign reserves to pay off debts, Korea turned to IMF,
resulting in a rescue program amounting to $57 billion, the
largest in IMF’s history.
Foreign Exchange Crisis
Because of the dollar shortage and the speculative forces, the
Won/Dollar exchange rate skyrocketed from 900 to 1700
over several months.
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The Financial Crisis of 1997
Banking Crisis
For most banks, the amount of non-performing loans
exceeded equity, and was in a state of bankruptcy.
Left alone, bank runs would break out and paralyze the
economy.
The root cause of the crisis
Korean Model of Growth
– Risk partnership between government and business
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The root cause of the crisis
Korean Model of Growth
– Risk partnership between government and business
Government select target industries and select Chaebols to
develop these industries =>
Government has implicit responsibility to bail out Chaebols
if they fail.
=>
Moral hazard of underestimating the downside risks
arises.
Government subsidize Chaebols by providing loan
guarantees and low-interest rate loans
=>
Excessive investment
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Korean Model of Growth
– Mobilizing resources through state-controlled banks
State-controlled banks channel household deposits and
foreign loans to firms designated by the government.
 Banks do not develop the ability to assess and manage
risks in loan-making business
Interest rates are set by government.
Banks absorb losses from bail-out operations dictated by the
government.
=> Incompetent banking industry
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Delayed Reform
Lim (2000) pp. 42-55
Park assassinated in 1979.
Chun takes power by a military coup in 1980.
A sharp recession following the second oil shock,
political instability and the results of over-investment
in late 1970s =>
Korea on the verge of a major financial crisis
Chun adopt the stabilization package recommended by
IMF
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Tight monetary policy
Consolidating industries and chaebols
Reformatory ideas
Of Chun’s technocrats
Korea outgrew the Korean Model of Development.
The economy became too complicated to be understood and
controlled by the government.
The market and the private sector should lead.
– Liberalizing the banking industry
Privatizing commercial banks
Interest rates chosen by banks
 Ministry of Finance keeps the lever by retaining the power to select
bank presidents
From State-owed to semi-public.
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– Pro-competition policy
New Fair Trade Law
 Without splitting Chaebols or opening up trade,
limited impact on competition structure
Government tries to regulate the behavior of Chaebols.
Bureaucratic control of the government remains.
Political resistance of vested interestes
Chaebols and bureaucrats
Korea democratized in 1987
Chaebols form a new relationship with presidents and politicians
thorough (legal or illegal) campaign funds
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