The Korean Developmental State

Iain Pirie

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134141579
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The Korean Developmental State is a comprehensive and up-to-date analysis of processes of state and economic restructuring in South Korea since the 1997 crisis. The book distinguishes itself from previous studies by consistently arguing that structural changes in the global political economy have played a crucial role in reshaping the Korean state's own economic project.

More precisely, Iain Pirie seeks to demonstrate how the Korean state increasingly adopted neo-liberal policies from the 1980s onwards as a rational response to the evolution of global economic structures; an evolution which has been driven by the continuous attempts of major global firms and leading capitalist states to overcome the chronic profitability problems that have dogged the core capitalist area since the late 1960s. The radical restructuring programme the Korean state initiated after the 1997 crisis must be understood as a logical conclusion to these earlier, more incremental, processes of reform it initiated almost two decades earlier. This book seeks to establish the neo-liberal character of the Korean state through a close analysis of key institutional and policy reforms, and serious engagement with more theoretical debates concerning the nature of the neo-liberal state itself.

The Korean Developmental State offers a new perspective on the economic experience of Korea as a development model, one that emphasizes global trends and contradictions for Korea's economic crisis and resulting transformation, and as such will be of significant interest to scholars of Korean studies and the Asian economy.

1 The Korean developmental state, industrialisation, crisis and post-crisis restructuring

In 1960 South Korea was one of the poorest 25 countries in the world.¹ Its Gross Domestic Product (GDP) per capita was just $82 (in 1960 prices). United States (US) policymakers’ assessment of the country as a ‘hopeless case’ appeared apposite at the time (Hart-Landsberg, 1993). However, the performance of the Korean economy over the next four decades or so could not have been more different from that predicted by such policymakers in 1960. After almost four decades of rapid growth, in 1997 Korean GDP per capita was approximately $11,000 (in 1997 prices). Korea was now a member of the Organisation for Economic Co-operation and Development (OECD) and one of the few countries that appeared to have successfully graduated from the Third World. As a result of this remarkable performance a vast volume of literature has been generated on the development of the South Korean political economy over this period. However, in December 1997 the Korean economic ‘miracle’ came to an abrupt end. Facing massive capital haemorrhaging and with its own reserves rapidly running out, the Korean government was forced to go cap in hand to the International Monetary Fund (IMF) for emergency liquidity support. By January 1998, per capita GDP had fallen to $6,600 and was set to fall a further 6 per cent by the end of the year (Cumings, 1999a). While the severe recession of 1998 was short-lived, with GDP growth exceeding 9 per cent in both 1999 and 2000, there is near consensus that the crisis has left a deep impression on the Korean political economy (International Herald Tribune, 2001). The crisis did not mark the demise of Korea as a centre of capitalist accumulation; it did, however, mark the end of the era of state-led capitalist development. Unsurprisingly, given the epoch-making nature of the crisis and Korea’s previous economic performance, the crisis attracted the attention of the global academic, policymaking and journalistic communities. Since 1997, countless journal articles, books and official reports have attempted to explain the origins of the crisis, analyse the changes that have taken place since the crisis, and offer conjecture as to where the Korean political economy is headed and policy advice to the Korean government.

Why then, given that such a vast body of literature on Korea already exists, do we feel the need to write this book? What can we contribute to this already highly developed area of study? We feel that the existing literature conspicuously fails to pay due attention to the role that global post-war economic and political structures played in shaping the development of the Korean political economy. Much attention has rightly been focused on Korea’s position within the Cold War ‘security’ system and regional production structures as necessary conditions for the Korean ‘miracle’. We fully accept the argument that it is impossible to understand the internal development of Korea without paying proper attention to Korea’s role in the Cold War security system and how the economy came to be integrated into the Japanese-dominated regional economy (Cumings, 1979; Woo, 1991: 95–6; Hart-Landsberg, 1993; Lie, 1998). The existing literature on the role wider forces played in creating and shaping modern Korea is, however, guilty of a serious error of omission in that it largely ignores the broader global political-economic context of the post-war developmental project and nationally based Fordist capitalism within which the Korean ‘miracle’ took place. It is impossible to understand the Korean developmental state project outside the context of the post-war global development project and nationally based capitalism. As the global development project has disintegrated and the locus of economic organisation has increasingly shifted to the supranational level, the Korean state has found itself under immense pressure to adapt to these new realities by marketising and opening up the economy. The central argument of this book is that the ongoing processes of marketisation within Korea, the origins of which can be traced back two decades, must be understood as a response by the Korean state to global structural change, as an attempt to secure and promote Korea’s position as a site of capitalist accumulation within a rapidly changing global economy. Changes in the Cold War security system in the 1980s, and the resulting exposure of Korea to the full weight of bilateral US trade pressures, must be understood as playing, at best, a secondary role in driving these processes.

In order to fully understand the epochal nature of the global structural change that has taken place over the last three decades or so, it is necessary to outline the political, economic and ideational conditions that underpinned the post-war development project. At the heart of the development project was the concept of national capitalist development. Such development was to be achieved through the active use of state power to promote strategic national industries through the provision of capital and the protection of such industries from the vagaries of global competition. The global governance arrangements that emerged in the post-war period were a product of this global interventionist consensus predicated upon the idea that individual states within the system should be free to intervene in their respective domestic economies (Ruggie, 1982; Cox, 1987; McMichael, 2000a).

Not only were the global political and ideational conditions of the post-war period conducive to the pursuit of national dirigiste economic strategies, but the technologies and industrial structures of the second industrial revolution almost forced states to pursue interventionist economic strategies.² The sheer quantity of capital needed to fully exploit new systems of mass production and successfully compete in global markets meant that the state was almost forced to assist domestic firms in making such investments. To fail to intervene to assist domestic firms would have been to expose such firms to a competitive disadvantage in the global economy. This was simply not an option in an environment where national economies still primarily interacted through trade in goods and financial instruments rather than through foreign direct investment (FDI) flows. Under such conditions, national economic vitality was principally dependent on the ability of domestic firms to compete internationally. While the old second industrial revolution maxim of ‘strong national firms equal a strong national economy’ fails to reflect the full complexity of the world in which we now live, it was broadly accurate in the post-war period (Chandler, 1990; Dunning, 1997).³

Such permissive global conditions for the pursuit of national dirigiste projects have been undermined by changes in the global political economy over the last three decades. The most important developments relate to the shift in the locus of economic organisation that has taken place. As major firms sought to restructure the production process in an attempt to overcome the profitability crisis that first developed in the late 1960s they increasingly sought to organise their activities on a transnational basis in order to take full advantage of the range of placespecific competitive advantages available internationally. As full-scale economic restructuring began in earnest in the 1980s FDI grew at four times the speed of global GDP. Between 1990 and 2004 the total global stock of FDI grew from $1,950 to $8,895 billion, while the world economy as a whole grew by slightly under 3.5 per cent per annum (United Nations Conference on Trade and Development, 2005: 199, 308; IMF, 1998: 171; 1999: 169; 2006b: 177). These changes serve to undermine the effectiveness of blind support for nominally domestically based firms, since such support is as likely to translate to increased overseas investments as it is domestic investments.

At the same time as a result of structural changes in global markets the levels of capital necessary to compete in key industries have expanded exponentially, principally because of the ever-increasing costs of developing and utilising new technologies (Stopford and Strange, 1991; Dunning, 1993; 1997; Dicken, 1998).⁴ The rise in such costs presented an intractable problem for state-led late development projects of the Korean variety. The ultimate objective of the developmental state project had always been to develop autonomous national exporting capacity across a full range of modern industries. However, there were clear objective limits on the capacity of the state and domestic financial institutions to finance the increasing investments necessary to achieve competitiveness across a range of major global industries.

The scale of the changes that have taken place in systems of production have been dwarfed by those that have taken place in the organisation of global finance. As opportunities for accumulation in the real economy declined within the core capitalist world from the late 1960s onwards we witnessed a massive diversion of funds into largely speculative financial activities. In order to accommodate the rise in speculation and to secure the capacity of ‘their’ national financial centres to capture market share major states deregulated their financial systems, removing both internal controls that sought to segregate functionally distinct markets within the national financial system and external controls that sought to regulate the movement of capital across borders (Moran, 1991). The size of the global financial market increased from about $300 billion in 1974 to $7,000 billion in 1996 (Malcolm, 2001: 40).

The development of a more closely integrated global financial market has fundamentally changed the milieu within which national dirigiste projects are situated. One of the few important ‘facts’ upon which different scholars studying the classical Korean developmental state agree is the centrality of state control of finance to the entire system (Amsden, 1989; Woo, 1991). Nor was centrality of finance to the operation of the entire system of capitalist planning state management a unique feature of the Korean developmental state. Rather, the capacity of the state to manage a relatively closed national financial system in collusion with private sector insiders was also critical to the effectiveness of the Korean, Taiwanese and French developmental states (Zysman, 1983; Fields, 1995).

As global financial integration brought into being a practically unlimited source of funds outside of the state’s control it inevitably created pressures on national dirigiste models. National firms, who increasingly possessed overseas subsidiaries, sought to assert their ‘right’ to access global financial markets in order raise funds at best available terms in order to compete in key global markets. Furthermore, in those dirigiste economies that consistently ran current account surpluses the need to effectively recycle these surpluses generated increasing strains on attempts to maintain a strict division between national and global financial markets.

This change in the locus and nature of capitalist systems of accumulation has supported and been supported by a profound shift in global governance structures and ideational conditions. The concept of development as a nationally based state-led project has been increasingly undermined over the last three decades, not simply by the changes in the locus of production discussed above but also by the inherent weaknesses of Keynesian state-led development itself. The inability of state-led capitalism to deliver on its social and economic promises became evident prior to any wholesale shift in the locus of economic activity as the long post-war boom petered out in the late 1960s, it is in that we find the genesis of the re-articulation of development as a private enterprise.⁵ While the genesis of the re-conceptualisation of development may predate the comprehensive reorganisation of economic activity on a regional/global level, it is nevertheless true that the reorganisation of production has since driven the transformation of the concept of development. The changes in what is understood by development have been profound. The current consensus among global economic managers simply equates development with participation in the global market. The essence of this new consensus is summed up in the 1997 World Development Report (World Bank, 1997: 12):

Globalization is not yet truly global – it has yet to touch a large chunk of the world economy. Roughly half of the developing world’s people have been left out of the much-discussed rise in the volume of international trade and capital flows since the early 1980s. Governments’ hesitance to open up to the world economy is partly understandable. Joining the world economy carries risks as well as opportunities. . . . But the difficulties should not be exaggerated, particularly when laid against the risks of being left out of the globalization project altogether. The cost of not opening up will be a widening gap in living standards between those countries that have integrated and those that remain outside.

The contemporary World Trade Organisation (WTO)-led global governance system fully reflects both this new ‘development’ consensus and contemporary material conditions, in that it subordinates national regulation to a comprehensive framework of global rules designed to secure capitalist accumulation on a world scale. In other words, the WTO framework makes effective participation in the global economy conditional upon the acceptance of an ever-increasing number of neo-liberal norms; norms that represent a direct challenge to the dirigiste states of the post-war era. It is important at this point to stress that the state remains a key actor within the contemporary global political economy, that what we are witnessing is a redefinition not a retreat of the state. Global structural change is leading to a tendential shift away from state forms which attempt to decommodify key aspects of economic and social life towards neo-liberal state forms where the state is above all else a ‘commodifying agent’ (Cerny, 2000: 305; Jayasuriya, 2000; McMichael, 2000b).

Any examination of how the Korean state has responded to the global structural changes outlined above, and how the imperatives of globalisation have come to be internalised within the Korean state itself, must engage with four central questions. First, it is necessary to understand the principal forces which drove Korea’s rapid transformation from a severely underdeveloped to an industrial economy in the 1960s and 1970s. In other words it is necessary to examine the exact nature of the Korean developmental state. Second, we must examine why the Korean state embarked upon a gradual liberalisation programme in the 1980s and the relationship between these liberalisation processes and the 1997 crisis. Third, the study examines the forces and imperatives driving the processes of post-crisis restructuring and the exact nature of the contemporary Korean state and economy. Finally, in order to develop a proper contextualised understanding of the contemporary Korean political economy and its development over the last three decades we must engage with more theoretical debates concerning the nature of contemporary neo-liberalism, its social consequences and the viability of other forms of capitalism. These are the critical phenomena and questions with which the proceeding seven chapters are concerned. It is useful, however, to take the opportunity in the introduction to briefly summarise the essential arguments of the book and explicitly identify those scholars whose work this study is influenced by and adopts as a point of departure. Inevitably in the relatively concise summary of the main arguments of the book presented below we proceed by assertion. The evidence and analysis to support these arguments is offered in the main body of the work.

Sketch of the main arguments

The autonomy of a miracle

We seek to illustrate the decisive role that supranational political and economic structures played in shaping the evolution of the Korean state and driving the process of industrialisation without simply treating domestic Korean politics as a dependent variable. In pursuing this objective we follow in the footsteps of a number of high profile scholars including Cumings (1979; 1999b), Hart-Landsberg (1993) and Bernard (1996; 1999). The work of these analysts has much to recommend it. For us Hart-Landsberg’s work stands out as particularly important because of the manner in which he combines consideration of supranational context with penetrating study of the Korean state itself and its role in the economy.

Hart-Landsberg accepts the arguments of the state-institutionalists, such as Amsden (1989) and Evans (1995), concerning the critical role played by industrial policy and state control of finance in the process of Korean industrialisation. However, by giving due weight to the role that the state’s agricultural policies played in creating a proletariat and the role that the violent state played in controlling that proletariat, he develops a far more complete understanding of the Korean developmental state. Furthermore, radicals such as Hart-Landsberg and Cumings provide us with the theoretical basis to develop a far more nuanced and accurate analysis of the developmental state’s relationship with private capital than its statist supporters.

State-institutionalists essentially argue that the developmental state forced private capital to serve its interest. The chaebol⁶ are explicitly reduced to the position of being ‘private agents of the state’s purpose’ within this literature (Woo, 1991: 175). The government is essentially seen to have ‘used’ the chaebol to achieve certain national objectives such as the achievement of rapid growth, development of heavy industry or the promotion of exports. This analysis obscures the class and fundamentally capitalist nature of the state. The point is that not only were the chaebol ‘agents of the state’s purpose’ but that promoting development of the chaebol was the state’s primary purpose. From the very beginning, the Korean developmental state demonstrated a commitment not simply to ‘growth’ or ‘development’ but to capitalist development. At the heart of the state’s economic strategy was a policy of developing and supporting large national capitalist firms. That the state sought to dominate and control these firms does not alter the fact that developing private capital was the Korean developmental state’s raison d’être. The state may not have acted at the behest of the capitalist class – which it itself created – but it was committed to acting in its interests (Cumings, 1979).

Equally significantly, the emphasis of Cumings (1979; 1999b), Hart-Landsberg (1993) and Bernard (1996) on how Korea came to be articulated into a Japanese-dominated regional system of production and on the role of the US in shaping the Korean political economy is to be welcomed. Japan has over the last century played a profound role in the development of the Korean political economy, initially as a colonial power and later through the interaction of Korean and Japanese firms and as an aid donor. If anything, the US has played an even more integral role in the development of modern Korea. South Korea is essentially a US creation, a creation the US has protected from external threat and provided with both ideational and material support for over four decades.⁷ The scale of the material support the repressive Korean state received from the US between 1947 and 1976 is staggering. Combined US military and economic assistance to Korea totalled $12.6 billion over this period; economic grants and loans alone totalled $6 billion. To put these figures into perspective, total US economic grants and loans to all of Africa over the same period came to just $6.89 billion (Woo, 1991: 45). No serious scholar of the Korean political economy can neglect the role of either the US or Japan in shaping modern Korea.

The monograph adopts the work of these scholars on the role of Japanesedominated regional production structures and the US in shaping Korean political economy as a point of departure in seeking to understand more fully the context within which Korean industrialisation took place. As we argued in the opening section of this chapter, it is impossible to understand the Korean developmental state outside the context of the post-war global development project and the second industrial revolution. Because of the manner in which the modern Korean state was initially created, its severe initial underdevelopment and the security situation on the peninsula the project of state-led capitalist development took a particularly intense form in Korea. This should not, however, be allowed to blind us to the similarities between the Korean state and post-war core capitalist national industrial states.

Both the Korean state and its more economically advanced counterparts focused very closely on promoting large nationally owned firms. More specifically, the Korean developmental state and the major core capitalist national industrial states both heavily subsidised the investments of large national firms. The fact that certain states, such as the US, may not have done so directly but rather made hidden subventions through defence and medical research policies in no way alters the fact that they did so (Ward and Davies, 1991; Cusack, 1991; Moran, 1999: 139–49). As we argue in the main body of this work the principal rationale underpinning these policies lay in the demands of international competitiveness in the post-war world. In an environment where production was essentially organised at a national level there was a very clear link between the success of major national firms and the national economy as a whole. Within such an environment, and given the prevailing dirigiste norms, to have not subsidised key national firms would have been to seriously prejudice national economic competitiveness.

The Korean state was a dirigiste state in a world of interventionist states. Korean elites were attempting to develop a distinctive Korean capitalism in a world of interconnected but still distinct national capitalisms. The essential argument of the monograph with regard to th...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Abbreviations
• 1 The Korean developmental state, industrialisation, crisis and post-crisis restructuring
• 2 Putting Korea in its place
• 3 Global competition, neo-liberalism and alternatives
• 4 Ontology of a miracle
• 5 Disintegration of the development state and the failure of economic liberalisation in Korea
• 6 Building institutions for markets
• 7 Corporate and financial restructuring in post-crisis Korea
• 8 Social impact of crisis and neo-liberal restructuring
• 9 Conclusion
• Notes
• References