Asian Passages from Developmentalism to Globalization: South Korea

Asian Passages From Developmentalism to

Globalization:

East Asia and South Korea

UT203 – Autumn 2012

Alf Gunvald Nilsen

EAST ASIA: MIRACLES AND DEBACLES

“East Asia has a remarkable record of high and sustained economic growth”:

-  From 1960 onwards, HPAEs have grown 2x as fast as the rest of EA, 3x as fast as LA/SA, 5x as fast as SSA;

-  From 1960-85: Real income per capita increased more than 4x in Japan/NIEs, 2x in ASEAN-3;

High rates of economic growth was coupled with equitable distribution and clear improvements in human welfare and poverty reduction

Why is the East Asian region often called a developmental miracle?

“The HPAEs are the only economies that have high growth and declining inequality.

Moreover, the fastest growing East Asian economies, Japan and the Four Tigers, are

the most equal”

Crucially – the developmental miracle was seen as being integrated on a regional scale,

in a “flying geese” pattern:

Japan S. Korea

Taiwan

Singapore

Hong Kong

Indonesia

Malaysia

Thailand

ASEAN-3 NIEs

“What caused East Asia’s success? In large measure the HPAEs achieved high growth by getting the basics right. Private domestic investment and rapidly growing human capital were the principal engine of growth … Macroeconomic management was unusually good and macroeconomic performance unusually stable, providing the essential framework for private investment … But these fundamental policies do not tell the entire story. In most of these economies … the state intervened – systematically and through multiple channels – to foster development”

(World Bank: The East Asian Miracle)

East Asia has been at the centre of a significant debate over the role of the

state in the political economy of development and late industrialization

The debate was initially played out between “market-centric” and “state-

centric” interpretations

The WB report of 1993 signalled the greater explanatory power of “state-

centric” perspectives

NB! R. Wade: “Japan, the World Bank, and the Art of Paradigm Maintenance”/M. Berger + M. Beeson: “Lineages of Liberalism and Miracles

of Modernisation”/R. Kiely: “Neo-liberalism Revised?”

The financial crisis of 1997 – in which an annual inflow of $93 bill gave way to a $12 bill outflow – reignited the debate: “crony

capitalism” vs. “financial liberalization”

The crisis also inaugurated a project of restructuring that fundamentally altered

the political economy of development in the East Asian region

MAKING  THE  DEVELOPMENTAL  STATE:  SOUTH  KOREA,  1945-­‐1990    

Historical Overview: South Korea, 1945-1990

a)  1945 – 1960: -  End of Japanese colonial rule:

(i) Impoverishment (ii) Modernizing impulses

-  War and division/US intervention and aid -  Land reform:

(i) Basis for lower prices for agricultural output (ii) Capital obtained by landlords reinvested in industry

-  Initial industrialization, centred on ISI

b) 1960-1979: -  Military coup, installation of Park Chung Hee regime -  Transition to export-led industrialization:

(i) Trade policy: State-led export drive + protection of domestic market (ii) Finance: Bank nationalization/Low-interest loans/Domestic savings (iii) Industrial diversification: Towards capital-intensive heavy industry (iv) State interventions in ownership/infrastructure/technology/labour market

c) 1980-1989: -  Economic downturn/political crisis/social unrest -  Recovery and growth (1981-84):

(i) Expansion of public investment/reduced interest rates/bail-outs (ii) Austerity measures/exodus from agriculture/overseas expansion

-  Growth and political change (1984-89): (i) Annual growth 10%/45% increase in real wages (ii) Pro-democracy movement and political liberalization

The Political Economy of Development Miracles – 1: Bringing the State Back In

“The state in (South) Korea was able to consolidate its strength with respect to both business and labour for what appear to be historical reasons. In the early 1960s there were no financiers to challenge the government’s power because the state-owned banking system of the colonial period was re-nationalized; the business community was as weak as the financial community and beholden to the state for largesse; the working classes were small in number; and the countryside, through a small land reform, was devoid of large land-holders”

Alice Amsden: Asia’s Next Giant

In state-centric perspectives, the defining feature of SK’s developmental

state is its relatively independent position in relation to domestic interest

groups from 1960 onwards

The state itself was restructured: (i) review of bureaucracy, (ii) centralization

of authority (EPB), (iii) bank nationalization

The state was thus able to effectively discipline SK’s chaebols in accordance

with coherent development strategy, through multiple instruments: loans/

subsidies/performance standards

Simultaneously, the state effectively regulated relations with global market

forces: market protection, regulation of FDI, technology transfer

Chibber’s criticism:

“If Korea’s new development strategy was launched by the state, with the business class having to adjust to this turn regardless of its own preferences, wherein lay the source of this power?”

The problem with the state-centric perspective is that it assumes that the turn to ELI during the 1960s was a unilateral initiative made by the reconstituted developmental state

This analysis disregards the significance of the countervailing power of capital in relation to the state, residing in control over final investment decisions

It is unlikely that control over finance provided the Korean state with autonomy and power to such

an extent that it could simply dictate and impose a new

development strategy of ELI

An alternative perspective:

“The key to the origins of ELI in Korea would thus seem to lie in

the means by which state managers were able to elicit a

switch to the new strategy by the business class without triggering a

downturn in the investment climate … To anticipate, the turn

to ELI was not imposed on Korean capitalists but was arrived at

consensually; indeed, there was even pressure from business to

initiate it”

The Political Economy of Developmental Miracles – 2: Bringing Class Back In

An adequate understanding of SK’s developmental trajectory has to conceptualize the social origins of the developmental state in a set of historically specific class relations, embedded in regional and global

circuits of production, trade and investment

1)  There is no reason to believe that the Park regime had any intention of simply imposing its will on domestic business;

2)  The turn to ELI was consonant with the emerging orientations of Korean capital at the time, due to links with Japan;

3)  The turn to ELI was a condition for successful “disciplining” of capital, as it made it beneficial to cooperate with the state

The First Phase of the Park Regime:

The first development plan was oriented towards small business and farmers, and centred on ISI

The plan was withdrawn as a result of economic crisis: savings

strategy resulted in currency withdrawal/dearth of finance/

balance of payments crisis

Revealed potential of business power and weaknesses in state

apparatus (EPB)

Vivek Chibber: “Building a Developmental State”

A New Development Strategy

2 crucial shifts:

(i)  Resignation of military planners from EPB/increased status of civilian planners

(ii)  Shift in strategy from ISI to ELI – exports became the pillar of economic planning; performance made a condition for subsidies

ELI entailed a substantial reorientation of SK industry – but this reorientation was not simply imposed on the business classes.

What explains the success of this radical change in development strategy?

The Importance of Japan

By the mid-1960s, Korean capital had the opportunity to access foreign markets through an alliance with

Japanese capital

Japan had exhausted its initial strategy of promoting industrialization

through light-manufacturing exports to ACCs: (i) increase in labour costs;

(ii) American protectionism

Japan relocated labour intensive, light-manufacturing industry to SK:

FDI/joint ventures/trading companies

For Korean capital, this meant market access, marketing assistance,

provision of credit/inputs, technological cooperation –

mediated by the state

This prompted commitment to ELI and gave state leverage over business

ELI as a development strategy represented a pact between state and capital in Korea – made possible by conjunctural shifts in the world economy:

“Korea was blessed with the happy accident of falling within the ambit of Japanese capital’s emerging accumulation strategy, in which declining industries were off-loaded to Korea, where they then set up shop to reexport. Further, Japanese trading companies acted as intermediaries to the United States, helping to secure markets that would otherwise have been inaccessible. In return, they were able to provide their Korean clients as purchasers of capital goods to Japanese companies”

The making of a successful developmental state in South

Korea was predicated upon this particular historical context, and its interventionist strategies were

in turn imperative in terms of ensuring that ELI did in fact result

in genuine domestic development:

Economic growth in SK: -  1960s: 9%

-  1970s: 9.3% -  1980s: 10%

Manufacturing in output/employment:

-  1962: 10% -  1990s: 25%

1996: South Korea becomes an OECD member

UNMAKING THE DEVELOPMENTAL STATE: CRISIS, RESTRUCTURING AND RESISTANCE

IN SOUTH KOREA

1994: East Asia was the destination of more than half of all investment flows to the global South; between 1990 and 1996, private capital flows to ASEAN-4 and SK rose from $20 bill to $95 bill; total capital formation increased by 300% in the same period.

1997: East Asia had become the epicentre of a massive financial crisis; in one year, net outflows of private capital reached $20 bill.

The crisis was triggered by a collapse of investor confidence in the Thai real estate market; there was a run on the baht and devaluation.

The crisis quickly spread in and beyond the region – South Korea, along with Thailand and Indonesia, was one of the countries that was hit the hardest by the 1997 crisis

South Korea:

-  August 1997/August 1998: Industrial production dropped by 12%

-  Third quarter, 1998: Business investment decreased by 28.3% compared to 1997

-  Corporate bankruptcies reached 3,197 firms during December 1997

-  Unemployment stood at 7.4% by August 1998, and between August and

December 1997 average incomes were halved

3 December, 1997: South Korea agreed to a rescue package assembled by the

IMF, amounting to $57 billion rescue – that is more than 10 times the total

official development assistance given to SK the previous 40 years

How and why did South Korea make such a dramatic transition from

developmental miracle to developmental debacle?

Bullard,  B

ello  and

 Mallhotra:  “Taming  the  Tigers”  

South Korea in the 1990s: Liberalization and Globalization

In the first half of the 1990s, South Korea witnessed reforms that liberalized the economy and deepened its incorporation into

global circuits of accumulation

Early 1990s: •  SK trade balance enters into deficit

•  Profits and domestic investments decline •  Regional overproduction lowers export prices

The SK government sought to counter the economic downturn through reforms that (a) opened SK capital markets, (b) deregulated foreign borrowing by chaebols, (c) abandoned coordination of borrowings/

investments, (d) relaxed bank supervision

As part of the same set of reforms, the EPB was abolished

•  Current account deficit: 1992/$4.5 bill – 1995/$8.9 bill – 1996/$23.7 bill •  Chaebol profits: 49 largest companies registered total profits of $32 mill on

sales of $274 bill in 1996 – i.e. a return of 0.01% •  1997: SK foreign debt = $160 bill, with $70 bill repayment pending

•  October 1997: Non-performing chaebol loans = $50 bill

The crisis of 1997 resulted in a structural adjustment programme centred on the following elements

Monetary/Fiscal reform: •  Controlled money supply •  Increased interest rates •  Balanced/surplus budgets

Institutional reform: •  Independent central bank

•  Closure of “troubled” finance institutions

•  Accelerated approval of foreign entry into finance markets

•  Trade/capital account liberalization •  Labour market reform

The outcome of these reforms was a substantial restructuring of the political economy of SK – centred on an “unmaking” of the developmental state,

and manifested in 2 key changes:

•  Denationalization: Opening of the economy + devaluation of domestic enterprises = Substantial foreign acquisitions of SK firms

•  Concentration/centralization: SMEs have been the main victims of bankruptcy post-1997; several chaebols have been bailed out by SK state;

ownership connections among chaebol subsidiaries have increased

“The Second Opium War”? A State-Centric Perspective on the 1997 Crisis

Robert Wade: The 1997 crisis was the result of the incompatibility between:

a)  The Asian high debt model – EA/SK exhibit high debt/equity ratios, based on firm/bank cooperation + government regulation of borrowing/cash flows

b)  Financial liberalization – high debt/equity ratios = vulnerability to financial shocks; the effect of liberalization was to enhance foreign borrowing and therefore vulnerability to capital flight

The liberalization process in the 1990s was the result of pressure and

encouragement from the IMF, the OECD and western governments, banks, and

firms – related to SK OECD membership

The 1997 reforms are expressive of how the “Wall Street-Treasury-IMF complex”

advance a political agenda through crisis management

The effect is to counter the East Asian challenge to US hegemony:

“The combination of massive devaluations, IMF-pushed financial

liberalization, and IMF-facilitated recovery may … precipitate the biggest

peacetime transfer of asserts from domestic to foreign owners in the past

fifty years anywhere in the world … The crisis has also been good for the

multilateral economic institutions” Wade/Veneroso:  “The  Asian  Crisis”/Wade:  “From  ‘Miracle’  to  ‘Cronyism’/”The  East  Asian  Debt-­‐and-­‐Development  Crisis  of  1997-­‐?”  

W.  Bello:  “East  Asia:  O

n  the  Eve  of  the  Great  TransformaOon”;  Bullard,  Bello  and  M

allhotra:  “Taming  the  Tigers”  

Towards a Class-Centric Perspective on the Crisis

Whereas pressure from multilateral institutions and western states and firms were important, it was not the only source of 1990s liberalization

Endogenous pressure: Domestic corporate forces pushed for liberalization in the 1990s; this reflected their increased power relative to the state/desire for domestic + international expansion

Exogenous pressure: The US and multilateral institutions pushed for liberalization as a response to the

success of SK companies in penetrating US/ACC markets

Endogenous and exogenous pressures towards liberalization were mediated and channelled into policy-making processes by state personnel with strong preferences towards neoclassical economic theory – Neoliberal technocrats had been introduced into the SK state apparatus by the Chun

regime and received support from the WB/IMF in the context of the implementation of austerity policies in the early 1980s

The hegemony of the new generation of state economists was completed in 1994, when the EPB was abolished and replaced with the Ministry of

Finance and Economy and development planning was disbanded Hart-­‐Landsberg/BurkeT:  “Economic  Crisis  and  Restructuring  in  South  Korea”   Y.  T.  Kim:  “Neoliberalism  and  the  Decline  of  the  Developmental  

State”  

The social impacts of the 1997 crisis exhibit a clear class bias:

Within a year of the outbreak of the crisis unemployment escalated from 3.3% to 7.4% (1.8 mill unemployed).

By 2002, growth and employment levels had been restored to pre-crisis levels.

But – as a result of the restructuring process, labour markets had been deregulated; the result was a dramatic escalation in the use of “contingent workers” (36% è 57%) vs. “standard workers” – CW are non-unionized, work is insecure and often short-term, and social protection coverage is limited

The class-biased distribution of social costs has undermined the relative

equality that has characterized SK’s developmental trajectory:

•  Gini coefficient, 1970 to 1997: 0.283 •  Gini coefficient, 1998: 0.316 •  Gini coefficient, 2000: 0.321

Labour-market reform to enhance “flexibility” cannot be plausibly construed

as a unilateral exogenous imposition

-  An attempt at reforming the labour market was introduced in 1996, but initially

failed due to workers’ protests

-  A revised labour law was passed in March 1997, eight months prior to the launch of IMF-sponsored restructuring

-  The restructuring process provided an opportunity to deepen labour market

reforms

From 1986-90, SK witnessed a steep increase in union membership and the emergence of the KCTU as an independent workers’ movement è The general strike of 1996-97

The crisis of 1997 pushed the KCTU onto a defensive terrain – In early 1998 KCTU entered a national tripartite commission with state and business and agreed to an accord which accepted IMF conditionality, including labour reform

More recently, contingent and migrant workers have been the source of labour militancy in South Korea, through prolonged strikes and innovative mass actions

Renewed labour militancy has occurred alongside new farmers’ protests and the emergence of popular resistance to negotiations over a bilateral FTA between the US and SK

K-­‐Y  Shin:  “GlobalizaOon  and  the  Working  Class  in  Korea”;  M.  Park:  South  Korean  Trade  Unionism  at  the  Crossroads”;