Developmental Mindset: The Revival of Financial Activism in South Korea 9781501704178

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DEVELOPMENTAL MINDSET

A volume in the series Cornell Studies in Money edited by Eric Helleiner and Jonathan Kirshner A list of titles in this series is available at www.cornellpress.cornell.edu

DEVELOPMENTAL MINDSET The Revival of Financial Activism in South Korea Elizabeth Thurbon

CORNELL UNIVERSITY PRESS

ITHACA AND LONDON

The Korea Foundation has provided financial assistance for the undertaking of this publication project.

Copyright © 2016 by Cornell University All rights reserved. Except for brief quotations in a review, this book, or parts thereof, must not be reproduced in any form without permission in writing from the publisher. For information, address Cornell University Press, Sage House, 512 East State Street, Ithaca, New York 14850. First published 2016 by Cornell University Press First printing, Cornell Paperbacks, 2016 Library of Congress Cataloging-in-Publication Data Names: Thurbon, Elizabeth, author. Title: Developmental mindset : revival of financial activism in South Korea / Elizabeth Thurbon. Description: Ithaca : Cornell University Press, 2016. | Series: Cornell studies in money | Includes bibliographical references and index. Identifiers: LCCN 2015036035 | ISBN 9781501702525 (cloth : alk. paper) | ISBN 9781501703102 (pbk. : alk. paper) Subjects: LCSH: Finance—Korea (South) | Economic development—Korea (South)—Finance. | Korea (South)—Economic policy. Classification: LCC HG187.K6 T48 2016 | DDC 332.095195—dc23 LC record available at http://lccn.loc.gov/2015036035 Cornell University Press strives to use environmentally responsible suppliers and materials to the fullest extent possible in the publishing of its books. Such materials include vegetable-based, low-VOC inks and acid-free papers that are recycled, totally chlorine-free, or partly composed of nonwood fibers. For further information, visit our website at www.cornellpress.cornell.edu. 10 9 8 7 6 5 4 3 2 1 Cloth printing Paperback printing 10 9 8 7 6 5 4 3 2 1

For Ken, Xander, and Amélie

Contents

List of Illustrations List of Abbreviations

ix xi

1.

Rebirth of the Developmental State

2.

Developmental States: Bringing Ideas Back In

11

3.

 akings of a Developmental Mindset and Emergence M of Strategy Mark I

26

4.

Rise of Financial Activism

47

5.

 racturing Consensus and the Abandonment of F Financial Activism

66

6.

Return of the State

89

7.

Emergence of Strategy Mark II

99

8.

Return of Development Bankers

111

9.

Full Flowering of Financial Activism

125

What Future for Financial Activism in Korea and Beyond?

143

10.

1

Acknowledgments Notes References Index

165 169 199 213

vii

Illustrations

Figures 2.1.  3.1.  4.1.  9.1. 

 istinguishing developmental states from other D state types

20

S ome key institutional features of Korea’s fledgling developmental state

45

 he most significant institutional features of Korea’s T fledgling developmental state

64

 olicy bank loans as percentage of total loans in Korean P banking system

130

 olicy financing by Korea’s PFIs, 1990–2010 P (excluding KEXIM)

131

9.3. 

Expansion of policy financing by KEXIM, 1990–2010

131

9.4. 

KDB funds allocated to Green Growth, 2009–12

132

9.5. 

KOFC funds allocated to Green Growth, 2009–13

133

9.6. 

 OFC funds allocated to “New Growth K Industries,” 2009–13

133

9.7. 

KEXIM funds allocated to Green Growth, 2009–13

134

9.8. 

KEXIM financing for Hidden Champion candidates

136

9.9. 

Government SME financing as a percentage of GDP

140

10.1. 

Manufacturing value added as percentage of GDP

158

10.2. 

 oan breakdown of PFIs versus commercial banks L (end of 2012)

159

S elected development bank financing of Green Energy projects

161

 umulative financing of Green Energy projects C by selected development banks, 2007–12

162

9.2. 

10.3.  10.4. 

Tables 3.1. 

S ubstance of a developmental mindset and Korea’s Mark I developmental strategy

38

ix

x       ILLUSTRATIONS

4.1. 

Indicators of Korean growth, 1962–80

63

5.1. 

Policy loans as percentage of total credit in Korea

75

5.2. 

Korea’s external debt, 1991–97

87

7.1. 

S ubstance of a developmental mindset and key features of Korea’s developmental strategies

108

 actors sustaining, shaping, and enabling financial F activism in Korea

145

10.1. 

Abbreviations

AFC BOC BOK CEO EOI EPB FKI FSC GDP GFC GNP HC HCIs IBC ICT IMF ISI IT KCIA KDB KEXIM KFOF KOFC KVIC MCI MIC MITI MKE MOCIE MOF MOFE MOSF NGE OECD

Asian financial crisis Bank of Chosun Bank of Korea chief executive officer export oriented industrialization Economic Planning Board Federation of Korean Industries Financial Services Commission gross domestic product global financial crisis gross national product Hidden Champion heavy and chemical industries Industrial Bank of Chosun information and communication technologies International Monetary Fund import substitution industrialization information technology Korean Central Intelligence Agency Korea Development Bank Korea Export Import Bank Korea Fund of Funds Korea Finance Corporation Korea Venture Investment Corporation Ministry of Commerce and Industry Ministry of Information and Communication Ministry of International Trade and Industry (Japan) Ministry of Knowledge Economy Ministry of Commerce Industry and Energy Ministry of Finance Ministry of Finance and Economy Ministry of Strategy and Finance new growth engine Organization for Economic Cooperation and Development xi

xii       ABBREVIATIONS

PCGG PFI SCNR SMBA SMEs VC WTO

Presidential Commission on Green Growth policy finance institution Supreme Council for National Reconstruction Small and Medium Business Administration small and medium-sized enterprises venture capital World Trade Organization

DEVELOPMENTAL MINDSET

1 REBIRTH OF THE DEVELOPMENTAL STATE [For Chalmers Johnson] . . . Industrial policy is first of all an attitude, an orientation, and only after that a matter of technique, shifting with the changing needs of the time. —Meredith Woo-Cumings, The Developmental State

I begin this book with an empirical puzzle: How can we explain the striking revival of financial activism in Korea since the 1997–98 financial crisis, and since the mid-2000s in particular? How has it come to pass that state-owned policy banks now account for 25 percent of all loans in the Korean financial system and routinely make low-interest loans to local firms in strategic industries, often on a performance-linked basis?1 The role of the state in the Korean financial system since the late 1990s is not just remarkable in comparative terms: today, policy banks (or “policy finance institutions” as they are sometimes known) play a much larger role in the Korean economy than in other developed countries, with the exception of Germany.2 It is also remarkable because it contradicts the conventional view about the direction of financial reform in Korea since the 1997–98 financial crisis. Indeed, Korea’s embrace of financial liberalization since that time is widely cited as evidence of the state’s retreat from the economy and its convergence on a more “liberal” or “regulatory” mode of governance. Financial liberalization, we have been repeatedly told, signals the end of Korea’s developmental state.3 My primary empirical aim in this book is to document and explain the hitherto unremarked phenomenon of the revival of financial activism in Korea. In doing so, my broader analytical aim is to bring back to the study of developmentalism a key ingredient that has been increasingly marginalized and often completely ignored in the literature. That missing ingredient, the subject of this book, is the ensemble of ideas that inform the mindset and shape the goals of state actors, including a country’s political leadership. I use the Korean experience not so much to catalogue the misconceptions that arise from this neglect (al­though these are significant), but more importantly to demonstrate the analytical advantage of returning ideas to the center of developmental state discussion. My explanation of the revival of financial activism in Korea thus centers on the 1

2       CHAPTER 1

developmental mindset and the ways it has historically shaped—and continues to shape—Korean policymakers’ approach to financial governance. By developmental mindset, I mean a worldview that is focused on a desire for national techno-industrial catch-up and export competitiveness via strategic interventions by the state in economic life to promote national strength in a hostile and competitive world. A developmental mindset thus entails a particular way of thinking about finance: the principal purpose of finance is to support the productive economy, and thus the pursuit of broader developmental goals. My key contention is that since the 1997–98 crisis, the emergence of new structural pressures, including the rise of China, financialization, and energy insecurity, have helped to revive and strengthen a quintessentially developmental view of finance in Korea. Despite the country’s significant shift toward liberalization, the idea that the primary purpose of the financial sector is to serve the productive economy continues to resonate strongly among key segments of the policymaking elite. In striking contrast to most accounts of the Korean experience of financial reform since the late 1990s, I contend that new modes of financial activism have returned the state to the center of the nation’s financial system. This trend has become particularly evident since the onset of the 2008 global financial crisis (GFC). Since that time, state-owned policy finance institutions (PFIs) have taken center stage in the domestic financial system, emerging as key backers of Korea’s nonconglomerate manufacturing firms and their quest for techno-industrial competitiveness and export expansion. As in Korea’s earlier developmental experience, PFIs, including the Korea Development Bank and the Korea Export Import Bank, are pumping large volumes of low-interest loans into local firms in industries deemed nationally significant by the state, with funds typically tied to technological performance and export targets. Since 1998, successive Korean governments have also experimented with and expanded new forms of financial activism, including the development of state-backed venture funds aimed at nurturing new strategic industries. The Korean state’s continuing efforts to strengthen the link between the nation’s financial and productive sectors may go some way toward explaining how this country has managed to buck the trend toward deindustrialization evident in many developed economies.4 Indeed, Korea stands out as the only developed nation in which the share of manufacturing in GDP has actually increased since the early 1990s. Korea’s recent experience of financial regulation and reform thus promises new insights into debates over the inevitability of industrial ‘hollowing out’ in more advanced economies, and the possibilities for financial activism in an area of globalization, which is widely believed to constrain states and their policy room to move. The analytical framework I develop herein—which extends classical developmental state theorizing—helps to explain why the Korean state

REBIRTH OF THE DEVELOPMENTAL STATE     3

continues to approach financial policy so strategically, and what factors have helped to sustain this approach, despite significant domestic and international pressures for liberal reform. The broader argument of this book is that the developmental state remains the most powerful conceptual framework available to explain why some countries are so effective at climbing the industrial development ladder and at responding to relentless pressures for techno-industrial upgrading and adaptation. In the Korean case, such pressures currently derive from a diverse set of challenges—including the rise of new economic competitors and intensifying energy insecurity. Since the eruption of the 2008 GFC, however, it has been the challenge of financialization and its impact on industrial investment that has consumed the attention of the Korean policy elite and prompted the expansion of developmental activism.5 Yet, interestingly, the majority of post-GFC analysis has focused on the apparent revival of Keynesianism in response to the crisis. The idea that the GFC might herald a new era of developmentalism barely rates a mention. Silence on this topic is puzzling, for if the financial turmoil gripping the world has revealed anything, it is the havoc wrought when a disconnect emerges between a nation’s financial and industrial sectors, that is, when the financial sector becomes the leech as opposed to lifeblood of the productive economy, and when the pursuit of profits derived from nonproductive activities is privileged over national industrial capacity. Insofar as developmental states are characterized by their principal concern with national industrial capacity, the GFC arguably marks the beginning of a new era of developmental state relevance. In establishing the heightened relevance of the developmental state idea in the twenty-first century, with its implications for financial activism, I begin with a comprehensive critique of the declinist literature. In chapter 2, I show how claims about developmental state demise, focused largely on Korea, are not just inconsistent with the up-to-date empirical evidence but deeply misleading. That they could arrive at such conclusions—as we shall see—has much to do with the deployment of a flawed methodology. In their modeling of the East Asian developmental state, for example, declinists draw most heavily on the context-specific, highly centralized, and coercive Korean state of the 1970s—and the specific set of industrial policies it pursued in that period. Deviations from this highly specific (time- and space-determined) set of institutional arrangements and policy instruments—of which there were a significant number in the post-1970s period—tend to be offered as prima facie evidence of the “dismantling” of the developmental state model. Methodological problems follow from this modeling error: by framing Korea’s developmental state as a fixed set of institutions and policies and then generalizing the East Asian developmental state model from this historically specific case, declinists end up conflating an empirical case with

4       CHAPTER 1

an ideal type or theoretical model. The result has been to confuse the means of one developmental state at one particular moment in history with the ends or purpose of developmental states more broadly. As well as overspecifying the developmental state, the historical-ideal conflation paints an excessively static view of its capacities. Little scope is then left for understanding how developmental states might evolve and, in particular, how the need to confront new pressures at home and abroad may rekindle developmental ambition, leading policymakers to adopt new modes of strategic activism—like those that I identify in this book. This modeling problem raises an obvious question: How should a developmental state be conceptualized? Somewhat surprisingly, even though “developmental state” is one of the most widely used concepts in the field of comparative politics, there exists no common understanding of what this term means—no agreed-on “ideal type” with which to examine particular empirical cases.6 More surprising still, for the past thirty years, the absence of broadly accepted definition has failed to frustrate the fruitful application of the concept to the question of Northeast Asia’s industrial development. It is only since the emergence of the declinist debate that this lack of conceptual clarity has become a serious issue. For in their efforts to demonstrate dismantling, many have seized on a definition of developmentalism with which few scholars would agree, with serious consequences for understanding new developments, especially the renewed emphasis on financial activism in Korea. So, rather than merely countering claims about dismantling, I advance a fresh way of conceptualizing developmental states that is in keeping with the classical intent. My approach, which is grounded in the foundational but oft-neglected developmental state literature, gives primacy to “ideas” (by which I mean orientation or “mindset”) rather than to specific institutional arrangements or policy practices. What principally unites developmental states, I argue, what makes them “developmental,” is the presence of a developmental mindset and the capacity to formulate and execute a developmental strategy. A developmental mindset refers to a set of shared ambitions on the part of the policy elite, as well as shared understandings about how best to realize those ambitions. Briefly, those ambitions can be summarized as techno-industrial transformation and export competitiveness for the purposes of ensuring national security and building international prestige. Shared understandings about how best to achieve these goals involve the necessity and desirability of strategic interventionism. These shared ambitions and understandings can in turn be traced to the common formative experiences of policy elites, such as Japanese colonialism in the Korean case, and the exposure to a state-directed model of industrial developmental that this involved.

REBIRTH OF THE DEVELOPMENTAL STATE     5

The presence of this mindset is what leads policy elites in developmental states to devise and execute long-term developmental strategies—the practical means by which developmentally minded policymakers go about pursuing their goals. A key contention of this book is that while all developmental states pursue developmental strategies, those strategies are likely to differ both between states, and within states over time, reflecting diverse historical experiences and ever-changing political and economic exigencies. Nationally distinctive and temporally contingent developmental strategies necessarily imply the existence of varied, and variable, institutional arrangements and policy practices that are nonetheless directed toward achieving the same end goal.7 In refocusing attention on the ideational foundations of developmentalism, I am not suggesting that the institutional features also identified by Johnson (and thereafter extensively elaborated, refined, and extended by others) are unimportant. These include a meritocratic bureaucracy; a pilot agency responsible for planning and coordinating industrial transformation; relative insulation of the economic bureaucracy from political pressures that might compromise long-term planning capacities; regularized, cooperative relationships with business that facilitate the effective design and execution of developmental plans; and a degree of control over key resources such as finance.8 Without an appreciation of such features it is impossible to explain why East Asia’s developmental states have historically been so effective in pursuing their substantive goals. The developmental significance of these particular institutions has been extensively canvassed in the literature, being the subject of numerous single-country and comparative studies.9 I have no wish to question their importance here. The point I wish to make is the danger of reducing the developmental state idea to a fixed set of common institutional arrangements (such as an autonomous, meritocratic bureaucracy) and limiting our analysis to these, as the developmental state literature has tended to do.10 The risk is that it blinds us to the significance of institutional arrangements that might be unique to a particular country, but which are nonetheless central to the routine functioning of its developmental state. The Presidential Office in Korea is just such a case, as I show in chapter 3. Indeed a key argument of this book is that it is impossible to explain the dynamics of developmental policy making in Korea since the 1960s without reference to the Presidential Office—and indeed to the role played by particular presidents who have sought to maximize the influence afforded them by their institutional home.11 This brings us to a further limitation of an exclusively institutions-focused conceptualization of developmentalism—it blinds us to the role of agency, and more specifically to the role of leadership, in shaping the direction of developmental state evolution in Korea.12

6       CHAPTER 1

To avoid such pitfalls, I draw on recent innovations in historical institutionalist theorizing and take as my analytical starting point institutionally situated, interpretive agents (i.e., developmentally minded Korean policymakers).13 Then, to explain the recent revival of financial activism in Korea, I examine the ways in which these policymakers have, since the 1960s, navigated the ideational, institutional, political, and structural terrains confronting them in pursuit of their developmental ambitions (cf. Bell 2005).14 I am not suggesting that the developmental mindset itself is fixed and impervious to change. Rather, I am proposing that if the goal is to understand developmental state evolution, we might begin more fruitfully by asking what conditions (structural, political, etc.) gave rise to a developmental mindset in Korea and shaped its first developmental strategy? And which institutional arrangements enabled the country’s first developmentally minded policymakers to translate their strategy into action? Equipped with an understanding of the origins of a developmental mindset and the institutional underpinnings of the state’s capacity for strategic activism, we can then ask: What factors have strengthened or weakened the developmental consensus over time, and facilitated or frustrated the pursuit of a developmental strategy? Thus, while I take developmentally minded policymakers as my analytical starting point, my approach is to focus on the dialectical interplay between these agents and their institutional, structural, and political environments. This approach allows me to bring ideas back in to developmental state analysis without ejecting institutions. The payoff is an account that can illuminate the dynamics and direction of developmental state evolution while avoiding certain pitfalls of a conceptualization of developmentalism focused primarily on institutions. My argument is that originally (in the 1960s), there was a far-reaching consensus among the policy and political elite around a developmental worldview, and thus around the necessity and desirability of financial activism. But that consensus began to fracture in the 1970s and 1980s. Since that time, a developmental mindset has been an enduring constant among some segments of the policy and political elite (especially within key industry ministries, the Bank of Korea, and segments of the Finance Ministry)—but the resonance of developmental ideas among the wider elite and broader population has waxed and waned, depending on the nation’s economic and political circumstances. I further argue that it is possible to explain the waning and waxing of financial activism over the 1990s and 2000s in terms of shifts in power from more liberally oriented to more developmentally oriented ministries, but more fundamentally, the orientation of the president is a key factor behind these power (and policy) shifts. To develop this argument, I begin in chapter 2 highlighting weaknesses in the declinist case, and by developing an ideas-enriched conceptualization of developmentalism and a framework for analyzing developmental state emergence

REBIRTH OF THE DEVELOPMENTAL STATE     7

and evolution. I then set out in chapter 3 to apply this framework, discussing as a first step the formation of a developmental mindset in Korea. I pay particular attention to the shared formative experience of Korea’s first developmentally minded policymakers under Japanese colonial rule, especially the experiences of Park Chung Hee (widely remarked as the father of Korean developmentalism) and his closest associates. I show how the colonial encounter generally, and their service in the Japanese Imperial Army in 1930s Manchuria and Korea in particular, fueled these men’s strong desire for Korean independence. It also exposed them to Japanese-style statecraft, showing them firsthand how a state could effectively manipulate an economy for nationalistic, industrial transformation purposes. Analyzing the consensus-building approach adopted by Park and his cadre following their 1961 coup, and the institutional reforms that this involved, I then examine how developmental ideas became a shared way of thinking among the Korean policy elite. In a second, related step, I examine how a particular developmental strategy was conceived for Korea. Here I focus on the historical experiences and domestic political exigencies that led Park and his associates to perceive rapid, export-oriented industrialization led by “mammoth” private enterprise under strong state supervision as the only viable strategy for Korea. This perception was also shaped by Park’s personal experience of breakneck industrialization in Japanese-controlled Manchuria and Korea, and his aspirations to apply these lessons to his liberated country. It also reflected more immediate geopolitical imperatives, particularly the perceived need to achieve rapid industrialization for national security purposes. In chapter 4, I discuss how the mindset and strategy of Korea’s first developmentally oriented elite informed the rise and consolidation of financial activism in the 1960s and 1970s. I pay particular attention to the origins of developmental ways of thinking about finance in Korea, which I trace to the experience of key economic policymakers in Japanese-controlled policy banks under colonial rule. I then show how Korea’s first developmental strategy involved the subordination of other economic objectives, particularly financial stability. In this respect, Korea differed quite dramatically from Taiwan, not to mention Japan.15 Finally, I examine the institutional innovations that enabled the translation of “growth first” financial activism into action. The analytical approach adopted in chapters 3 and 4 allows me to conclude by identifying the most significant actors in, and institutional features of, Korea’s developmental state upon its establishment. These extended beyond the economic bureaucracy—both upward to the president and Presidential Office, and downward to development bankers and banks. Having identified the most significant ideational and institutional aspects of Korea’s fledgling developmental state, I turn to the question of its evolution

8       CHAPTER 1

broadly, with a particular focus on financial activism. Three central questions thus animate chapters 5 through 9, which review the experience under successive Korean administrations: What factors contributed to a strengthening or weakening of the developmental consensus among the policy elite in each period? What factors helped in each case to shape their developmental strategy? And what factors (political, agential, institutional, or structural) enabled or frustrated pursuit of that strategy—especially its financial policy aspects? In chapter 5 I show how, beginning in the 1970s, the negative economic and social impacts of Korea’s “growth first” strategy began to fracture the developmental consensus. Within certain segments of the bureaucracy, a powerful view emerged that the government’s traditional development strategy was the source of the country’s boom-bust pattern of growth. It was within this context that the domestic debate about financial liberalization emerged. For its advocates, the aim of liberalization was to abolish financial activism and to install a liberal market order. Yet while developmental ideas about finance were challenged during the 1980s, developmentally minded policymakers were able to maintain an upper hand in the governmental apparatus. Korea thus continued its traditional developmental strategy and the financial activism that it involved, despite being the target of growing foreign calls for financial liberalization as the 1980s progressed. However, in the early 1990s, the cause of liberal reformists within the bureaucracy was advanced by the 1993 election of President Kim Young Sam. As Korea’s first liberally inclined president since the 1960s, Kim used his mandate to push through sweeping financial reforms, including the liberalization of the short-term capital account and the abandonment of investment coordination. These reforms only heightened Korea’s vulnerability to the regional financial crisis of 1997 and brought the experiment with financial liberalization to a premature halt. In the wake of the crisis, the new president Kim Dae-jung pursued further rounds of financial reform, including greater liberalization. His aim, I argue in chapter 6, was to redress once and for all the main cost of Korea’s “growth first” strategy. That cost was a grossly imbalanced industrial ecosystem that benefited Korea’s large firms (the chaebol) at the expense of its smaller, nonchaebol firms, which made up the bulk of the economy, creating significant economic distortions and political tensions. Yet Kim’s reforms had an unintended consequence: they returned the state to the center of the national banking system and galvanized developmentally minded bureaucrats in key economic ministries. Moreover, the flip-side of the president’s corporate reform agenda—the promotion of nonchaebol firms—called for the development and expansion of new forms of financial activism, including the significant expansion of state-backed venture investment funds.

REBIRTH OF THE DEVELOPMENTAL STATE     9

As the first decade of the twenty-first century unfolded, intensifying competitive pressures associated with the rapid rise of China led policymakers to question the desirability of freer financial markets and their compatibility with developmental goals. In response to these challenges, the Roh Moo-hyun government, elected in 2003, articulated for the first time since Park Chung Hee a new developmental strategy for Korea. This strategy, which I call Korea’s “balanced growth” strategy, was aimed at developing a suite of new growth engine industries and at rapidly upgrading the technological and export capacities of Korea’s nonchaebol firms. As I explain in chapter 7, this focus on nonchaebol firms is what most clearly distinguishes Korea’s new developmental strategy from that which preceded it.16 “Balanced growth” called for an even greater expansion of financial activism. However, economic progress under Roh was insufficient to quell concerns about Korea’s waning techno-industrial competitiveness, which were further amplified over the 2003–8 period by challenges associated with financialization, including rolling financial crises and flagging industrial investment. The outbreak of the 2008 global financial crisis served only to amplify these concerns, further undermining faith in freer financial markets and heightening the resonance of developmental ways of thinking about finance among the policy elite. It was in this context that President Lee Myung Bak swept to power on an unprecedented wave of developmental nostalgia. A former chaebol CEO, President Lee brought to his role the lived experience of developmentalism under Park Chung Hee and presented himself to the public as a Park-style leader for the twenty-first century. One of his first actions as president was to appoint as finance minister long-time Ministry of Finance bureaucrat and financial activism advocate, Kang Man-Soo, and a host of other similarly minded advisors, to key positions within the policymaking apparatus. In chapters 8 and 9, I examine the return of developmental bankers under Lee and the full flowering of financial activism that attended his administration’s expansion, elaboration, and intensification of Korea’s new balanced growth strategy. I conclude with a discussion of the direction of financial reform under current president Park Geun-hye, the daughter of former president Park Chung Hee. The revival of financial activism in Korea that I trace in this book has not been a linear process, nor has it gone uncontested—either locally or internationally. Thus, in developing the argument I have just outlined, I pay particular attention to the international and domestic pressures that have compelled successive governments to intervene in financial markets for strategic purposes, and the political, institutional, and structural factors that have at various times facilitated or frustrated their efforts. In chapter 10, I tease out the significance of my findings for broader debates. These include the inevitability of

10       CHAPTER 1

deindustrialization in more developed economies, especially under conditions of financialization, and the enduring possibilities for financial activism in an era of financial globalization. Overall, I offer a rigorous defense of the developmental state idea and its continuing relevance as concept and reality—whether for scholars interested in the political foundations of techno-industrial transformation, or for policy practitioners grappling with questions of “what’s possible?” in a financially integrated world.

2 DEVELOPMENTAL STATES Bringing Ideas Back In A state’s first priority will define its essence. . . . A state attempting to match the economic achievements of Japan must adopt the same priorities as Japan. It must first of all be a developmental state. —Chalmers Johnson, MITI and the Japanese Miracle

For those interested in the question of industrial transformation, particularly in latecomer countries, the 1980s and early 1990s produced a bounty of conceptual advances, perhaps the most famous of which was Chalmers Johnson’s developmental state idea, first articulated in 1982.1 Based on his pioneering analysis of Japan’s remarkable postwar development drive, Johnson sought to draw some generalizable lessons for other latecomer nations by identifying the essential ideational and institutional foundations of successful late development. The developmental state concept was quickly adopted and adapted by other scholars seeking to explain the rapid economic rise of other East Asian countries, from South Korea and Taiwan in the north to Singapore in the south. However, just as the developmental state idea appeared to be gaining a mainstream audience, the 1997–98 financial crisis struck. The dramatic downturn of East Asian economies prompted many to declare the model redundant—the victim of the homogenizing pressures of globalization. As economic integration proceeded and the complexities of industrial governance intensified, developmental states were proclaimed destined for the dustbin of history, along with all other “non-liberal” or “non-regulatory” modes of capitalism (e.g., Cerny et. al. 2005). South Korea soon emerged as the case study of choice for proponents of such arguments. That country’s post-1997 financial reforms, and its embrace of financial liberalization in particular, are widely cited as evidence of developmental state dismantling (see, for example, Jayasuriya 2005 and Pirie 2008). In this chapter, I evaluate the key claims within the declinist school—from the radical to the moderate. I then develop a conceptual defense of the developmental state idea, arguing that it is necessary to return ideas to the center of this important analytical framework in order to illuminate the process of developmental state evolution. In subsequent chapters, I apply the framework to the case of Korea, with a view to demonstrating how it can help explain the recent revival of financial activism in that country. 11

12       CHAPTER 2

Before examining the claims of those I shall refer to as declinists, it is worth noting that the arguments they advance are hardly new. Scholars have been predicting the demise of Japan’s developmental state since the mid-1980s. As I show below, there are some striking similarities between declinist arguments now targeted at Korea and those made much earlier about Japan by an altogether different group of scholars. A sophisticated debate now exists concerning the direction of state transformation in Japan which, as I also show, has important implications for claims about developmental state decline in Korea and the continuing utility of the developmental state concept more broadly. Given the parallels between these two literatures, the fact that they are so rarely linked stands out as a scholarly curiosity. Yet it is also true that, when it comes to assessing the question of the continuing utility of the developmental state idea, the literature on Japan is not necessarily the best place to start—or end—for a number of reasons. To begin, while the scholarship challenging the idea of the demise of Japan’s development model is of a high quality, it tends to be grounded in, or framed against, the varieties of capitalism literature, not the developmental state literature. In other words, this scholarship tends to focus on the question of the durability or otherwise of a unique “Japanese model” as opposed to the more generalizable developmental state model. The difference is subtle but significant. Take, for example, Steven Vogel’s (2006) impressive study of the trends and direction of recent Japanese reforms; the focus here is on the durability of institutional features that are unique to Japan (such as lifetime employment, tight interfirm relations, and the main bank system) rather than factors that are common to, or unite, developmental states. So while this literature certainly offers important theoretical insights concerning the dynamics of state transformation, it is not a sufficient basis from which to critique broader propositions about (supposed) developmental state demise. Here the benefit of a focus on Korea becomes salient. As Korea is widely acknowledged as an emulator of Japan’s “developmental state” model, a focus on Korea facilitates a more concentrated discussion about what actually constitutes a developmental state and the concept’s continuing analytical relevance. As I show below, the question of “What is a developmental state?” sits at the heart of the Koreacentric declinist literature that has gained such prevalence since the 1997–98 crisis.

“Radical” Declinists and the Obsolescence of Developmental States In the radical declinist view, the era of the developmental state in Korea is over.2 Liberalization measures adopted since the 1990s have undermined what was once the state’s key developmental policy instrument—control over finance.

DEVELOPMENTAL STATES     13

Reforms that include the establishment of an independent central bank, the widespread entry of foreign financial institutions, and the introduction of prudential standards around bank lending now make it impossible for the Korean state to pursue the highly leveraged, debt-based national champion strategy that so defined its industrialization drive. Gone is the state’s ability to influence the investment decisions of the chaebol—the massive private conglomerates that were traditionally the target of the state’s developmental activism. Add to these constraints tough international trade obligations, which rule out other forms of local industry promotion, and so the Korean state, radical declinists argue, is developmentally hamstrung. Policymakers must now limit themselves to a regulatory rather than developmental role. This means they must establish and monitor the rules of free market competition instead of attempting to guide the economy through strategic interventions. Thus for Kanishka Jayasuriya (2005), Korea should now be classified as a “regulatory” state, not a “developmental” one, while for Iain Pirie, “Korea must now be understood as an unambiguously neo-liberal state” (2008, 10). In response, we can well agree that the regulatory changes implemented in Korea since 1997 have without question been far reaching and significant. However I argue that radicals’ claims about developmental state decline and “neoliberal” transformation in Korea (and beyond) are methodologically and conceptually flawed. Methodologically, radical declinists make the mistake of confusing the developmental state model with a single empirical case.3 Specifically, they tend to (mis)construe as the East Asian developmental state model the context-specific, highly centralized, and coercive 1970s Korean state and the particular set of industrial policies it pursued in that period. Any deviation from this narrow (time- and space-specific) set of financial sector arrangements and policy instruments is subsequently painted as the “dismantling” of the developmental state. For example, Pirie views the specific set of policy options adopted by the 1970s authoritarian Korean state as definitive not only of Korea’s version of the developmental state but also of East Asia’s developmental states more broadly. For instance, he defines Korea’s developmental state exclusively in terms of its policy emphasis of promoting large national champions via top-down control of a highly concentrated bank-based financial sector (Pirie 2008, 21). The government’s embrace of financial liberalization, and its decision to eschew financial market control as a means of directly supporting the country’s massive private conglomerates (chaebol), is then subsequently portrayed as the “demise” of Korea’s developmental state. Yet defining Korea’s developmental state by way of a particular set of policy instruments and then generalizing the developmental state model from this historically specific case is problematic for a number of reasons. To begin, the idea

14       CHAPTER 2

that developmentalism is synonymous with particular policies (such as promotion of national champions via heavy-handed credit control) is flawed because it fails to reflect the reality of the wider regional development experience. While some of East Asia’s developmental states pursued this particular policy approach in some sectors during particular periods, others eschewed it altogether. Taiwan, for example, is widely cited by scholars as an example of a developmental state.4 Yet Taiwan never placed the promotion of massive national champions via heavy-handed credit control at the center of its industrialization strategy. Indeed, Taiwan’s preference for promoting small-to-medium-sized enterprises via a variety of policy measures is now generally acknowledged as the hallmark of Taiwan’s distinctive brand of developmentalism.5 From a comparative historical perspective, defining developmentalism in terms of a given set of policies in a particular country thus makes little sense. By equating developmentalism with particular policy approaches, radical declinists freeze the developmental state in time and space. In doing so, they remove scope for understanding the variety of measures by which such states may seek to pursue their developmental ambitions—not only in different national settings, but in the same national settings over time. Indeed, the idea that developmental policy evolution, as distinct from its abandonment, has been the norm—whether in Korea or in developmental states more widely—is the subject of a growing body of literature.6 Scholars pursuing this course readily accept that the domestic and international conditions facing developmental states have changed significantly since the 1990s, presenting a host of new challenges for economic policymakers. But drawing on evidence from a cross-section of particular national and industry cases, they argue that as domestic and international conditions have evolved, the states in question have sought to devise new developmental policies more appropriate to the challenges at hand. Such attempts may not always be successful, but they serve to highlight problems inherent in conceptualizing developmentalism purely in static policy terms. To the extent that radical declinists seek to grapple with such arguments, they do so in different ways. Some simply ignore the question of what East Asian states are currently doing in the industrial policy sphere, limiting themselves to an examination of macro-level changes in these countries. The establishment of an independent central bank, for example, is sometimes seen as sufficient evidence for Korea’s transformation from a “developmental state” to a “regulatory state.”7 This is problematic because, as I have shown elsewhere, the existence of an independent central bank reveals little about a state’s developmental orientation; Taiwan’s independent central bank has long played an active role as a development banker, recycling foreign exchange reserves to local firms wishing to internationalize but agreeing to “keep their roots” (i.e., some manufacturing capacities) in Taiwan (Thurbon 2007).

DEVELOPMENTAL STATES     15

Other radical declinists acknowledge, but reject, arguments about developmental state evolution. They concede that the Korean government continues to intervene in the economy to support specific industries but contend that there is nothing inherently “developmental” about what the state is doing, as their policy options are basically limited to supporting national research and development, attracting foreign investment, and assisting smaller businesses. And insofar as all advanced industrialized countries engage in these kinds of activities, there is nothing particularly “developmental” about them; such policies are sufficiently universal as to render them unremarkable and, for some, entirely compatible with “neoliberalism.”8 What does matter, they argue, is that Korea is no longer supporting national champions via heavy-handed financial sector control, for this is what constitutes developmentalism in Korea. And so we come full circle—to a restricted conceptualization of developmentalism that is contradicted by comparative historical experience. Clearly, to assess the nature of changes currently underway in Korea (and beyond) we need a more advanced understanding of what constitutes a developmental state than is offered by radical declinists.

What Is a Developmental State? We thus arrive at the core issue in the declinist debate: What is a “developmental state”? To answer this question I start with the work of Chalmers Johnson (1982) who coined the term and famously applied the concept to the Japanese case. Johnson went further in later work, applying the concept to other East Asian countries—including Korea—in order to tease out the common characteristics of this distinctive brand of capitalism (1987). For Johnson, the developmental state was a contrastive concept; his contribution was not simply to identify for the first time the key features of a developmental state, but also to specify what sets them apart from other state varieties. And at the top of Johnson’s list of distinguishing features was the set of priorities of the policymaking elite, or more specifically, their prioritization and unwavering commitment to the goal of economic growth. In Johnson’s words, “A state’s first priority will define its essence. . . . The effectiveness of the Japanese state in the economic realm is to be explained in the first instance by its priorities. For more than 50 years the Japanese state has given its first priority to economic development” (1982, 305–6). Johnson further argued that elite cohesion around the goal of development informs a particular kind of government intervention in the economy: developmental intervention is “plan-rational.” It is aimed at substantive outcomes—specifically, transforming the industrial structure of the nation with a view to enhancing international competitiveness (Johnson 1982, 18–19).

16       CHAPTER 2

For Johnson, “plan-rationality” distinguishes developmental states from their “market-rational” counterparts, who are more concerned with the rules of economic activity than substantive outcomes, and from “plan ideological” states in which bureaucratic planning is valued in itself.9 It is thus fair to say that Johnson’s original conceptualization of a developmental state placed primary emphasis on the shared goals or ambitions of the policymaking elite (which might be summarized as national techno-industrial transformation and competitiveness), as well as shared ideas about how these goals might best be met (involving strategic interventions in the market). In this Johnsonian sense, developmentalism has a distinguishing ideational element: it is as much a political-economic philosophy—a set of ideas about the primary purpose of economic activity, the central goals of the state, and the appropriate role of the state in achieving those goals—as it is a set of institutional arrangements and policy expressions. In the developmental mindset, the purpose of economic activity is to promote national strength in what is perceived to be an inherently competitive and hostile world. The pursuit of local manufacturing capacity, technological autonomy, and export competitiveness is thus primarily a political project. This informs a consensus amongst the policy elite that the state can and should strategically intervene in the economy in pursuit of its goals. Insofar as the developmental mindset imbues economic activity with the sociopolitical purpose of protecting and cultivating the nation, it can be understood as a variety of economic nationalism.10 Indeed, there are strong parallels between the developmental worldview that emerged in Northeast Asia and the “classical” economic nationalist ideas espoused by Freidrich List and Alexander Hamilton in the late nineteenth century. These parallels are no coincidence. For in grappling with the challenges of military vulnerability and economic backwardness in the late 1800s, Japan’s first developmentally minded policymakers, the Meiji elite, looked to, and were inspired by, the German and American experiences of state-led industrial “catch-up” with Britain. Indeed, the Japanese were avid readers of List and Hamilton, who viewed industrial capacity as the bedrock of national security and independence, and who thus envisaged a key role for the state in nurturing the domestic manufacturing sector.11 However, as Richard Samuels has observed, the brand of economic nationalism that emerged in post–World War II Japan was shaped as much by Schumpeterian as Listian thinking, in that it emphasized technological development as the foundation of industrial competitiveness.12 Korea’s first developmentally minded policymakers in turn drew inspiration from Japanese thinkers and the experiences of other late industrializers, especially Germany.13 I trace the origins of, and influences on, developmental ways of thinking in Korea in chapter 3. The point I wish to

DEVELOPMENTAL STATES     17

emphasize here is that developmentalism has a distinguishing ideational element. Of course, as Loriaux (1999) reminds us, to say the ambitions and actions of developmentally oriented elites are informed by a particular perception of “how the world works” is not necessarily to agree with that perception; it is simply to acknowledge that such worldviews exist and serve to shape social action, like more “formal” institutional arrangements. Let it be clear that in distinguishing the ideational from institutional and policy aspects of developmental states, I am not suggesting that institutions and policies are somehow devoid of “ideas”; ideas inform and pervade all social action.14 Rather, my intention is to highlight the significance of an often-overlooked aspect of developmentalism—the mindset of the governing elite. This mindset informs the institutions and policies, which are the focus of most developmental state analysis.15 Yet mindset has received far less attention than institutions and policies—despite forming the centerpiece of Johnson’s original conceptualization.16 This marginalization is problematic, for it has led radical declinists to erroneously imply but one possible response to pressures for institutional or policy change—dismantling of the developmental state. If we are going to avoid this kind of determinism and allow for developmental state evolution, then we need to return ideas to the center of developmental state theorizing. In other words, we might anticipate that where there is an enduring political will to achieve certain economic outcomes for whatever motives, states are very likely to seek out new ways to achieve this goal.17 It is significant that, unlike the radicals, moderate declinists appreciate the importance of a developmental mindset. Their most sophisticated arguments examine challenges to the Korean state’s developmental will or ambition.18 Before turning to these arguments, it is first helpful to conclude this conceptual discussion by outlining how developmental states can be distinguished—ideationally, institutionally, and in policy terms—from nondevelopmental state types. Armed with such a tool we can then fully appraise arguments about the nature and extent of changes under way in Korea.

Distinguishing Developmental States from Other State Types Developmentalism is fundamentally a political-economic philosophy or worldview that informs policymakers’ perceptions of the kinds of goals that are important, and of the appropriate role of the state in achieving those goals. In post-1945 East Asia, this worldview informed the evolution of institutional arrangements, which in turn facilitated the design and implementation of developmentally

18       CHAPTER 2

oriented industrial policies. These policies were not static and unchanging. They evolved over time to reflected changing local and international challenges. There was of course nothing straightforward, linear, or cross-nationally uniform about the process of translating developmental ambition into institutional capacity in East Asia (or elsewhere). But what distinguished these countries was the high degree of coincidence between developmental ambition (the desire for techno-industrial catch-up and competitiveness) and institutional capacity (the ability to pursue this goal with a relatively high degree of effectiveness).19 How, then, are developmental states best distinguished from other kinds of states, particularly so-called “neoliberal” states? As I have observed elsewhere, distinguishing developmentalism from neoliberalism is not a straightforward task, as these concepts vary significantly in their scope (Thurbon 2012). Developmentalism is essentially a set of ideas about the necessity and desirability of strategically governing the industrial economy for nation-building goals. This worldview might have implications for spheres of governance beyond the industrial. However, given their goals, developmental states are focused principally on the task of industrial governance, with policy measures in other domains likely to be shaped by considerations of their industrial economy impacts. The privileging of industrial governance arguably distinguishes “developmental states” from other state types. It is also worth noting that the “developmental state” descriptor employed by scholars like Chalmers Johnson grew out of a relatively straightforward type of social scientific analysis that is inductive in approach, whereby general conclusions are drawn from specific, real-world observations. In other words, “developmental state” is an analytical category that has been arrived at through a process of empirical observation, testing, and refinement. It is thus possible to point to examples of “developmental states” in the real world; the same cannot be said of neoliberal states. Neoliberalism has, like developmentalism, a distinguishing ideational element, which involves a set of assumptions about the allocative efficiency of free markets and a set of prescriptions about how markets should be left to work.20 However, while these prescriptions certainly extend to the industrial governance sphere (as discussed below), neoliberalism does not privilege this particular policy arena. Rather, neoliberalism advocates the extension of market solutions and disciplines to all spheres of social life, from industrial to labor and welfare policy and beyond. Perhaps because of its scope, the idea of a “neoliberal state” arguably remains an unfulfilled ideal (for its advocates). That is, if we look for an example of a neoliberal state in the real world we typically come up empty handed, since states are polymorphous, not unitary (Weiss 2012).

DEVELOPMENTAL STATES     19

As this chapter is largely concerned with the nature of developmental states, and as these states are chiefly involved in issues of industrial governance, I limit my discussion of neoliberalism to its implications for the industrial governance sphere. In particular I ask: What are the defining features of developmental and neoliberal approaches to industrial governance? In the diagram below, I depict developmentalism and neoliberalism as sitting at opposite ends of the industrial governance spectrum, and I distinguish them primarily in ideational terms. These ideas clearly inform the institutional environment in which policy making takes place, thereby helping to shape a particular policy approach. The following observations can be drawn from the diagram. First, as mentioned, when we look for a real-world example of a “neoliberal state,” at least in the sphere of industrial governance—we are likely to be disappointed. It is difficult to nominate a state that adheres to a purely “regulatory” role across all, or even a majority, of sectors and industries. Some states may be more neoliberally inclined than others in their attitudes toward particular sectors at particular times. But as policymakers in all countries must balance economic and political imperatives, the temptation to intervene in the economy for political purposes—whether to offset the vulnerabilities associated with economic openness, or to pander to politically powerful interests, or for “national security” concerns broadly defined—renders the idea of a neoliberal state a myth in the industrial governance sphere. I suggest that most states fall into the nondevelopmental category. That is, in the policy sphere in question, ideas about the appropriate role of the state in governing the industrial economy are highly contested. In nondevelopmental states, developmental and neoliberal voices are likely to compete with those of political pragmatists and opportunists. This is not to say that developmentally oriented policymakers never get their way in nondevelopmental states. But the so-called “balance of power” between competing voices makes it difficult to forge a consensus around a particular set of economic priorities.21 This lack of consensus thwarts attempts at developmentally oriented institution building; in turn, the institutional environment remains unsupportive of developmentally oriented policy making. So while nondevelopmental states might experiment at various times with the kinds of policies characteristic of developmental states—such as those aimed at supporting the creation, commercialization, production, and export of products and technologies in strategic industries—there is no observable consensus for, or pattern of, economic activism of the kind one finds in developmental states.22 This is why distinguishing between state types by observing policies alone is fruitless; all states intervene in their economies to support and promote certain kinds of economic activity. What distinguishes

IDEATIONAL LEVEL

FIGURE 2.1  Distinguishing developmental states from other state types

MICROECONOMIC POLICY Industry policies designed to influence aggregate economic activity (such as aggregate investment levels or expenditure on R&D) as opposed to being targeted at specific industries; incentives do not discriminate between local and foreign firms.

MICROECONOMIC POLICY Might employ a range of policies aimed at supporting innovation/commercialization/production/export but there is not a consistent pattern of developmental activism across a range of strategic industries; policies often short-term and subject to change on political whim. Less likely to be monitored for effectiveness/ tied to performance targets.

MICROECONOMIC POLICY

(Difficult to distinguish between states at this policy level)

MACROECONOMIC POLICY LEVEL

No pattern of cooperative government-business relations across strategic industries, although exceptions may exist.

Employ a wide, evolving range of policies designed to support the creation, commercialization, production and export of technologies and products by local firms, across a range of strategic industries. Supports tend to be extended conditionally, with performance requirements attached.

Pattern of institutionalized, cooperative governmentbusiness relations across range of strategic industries designed to facilitate long-term industry policymaking & implementation.

Industry policymaking process highly politicized, preventing a long-term approach.

Arms-length government business relations (to avoid “collusion with” or “capture by” business interests.)

Attempts to create more centralized responsibility or more effective coordination mechanisms open to contestation/reversal.

Relative insulation of industry policymaking elite from political interference/intrusion.

INSTITUTIONAL LEVEL Decentralized responsibility for economic policymaking for the purposes of “checks and balances.”

INSTITUTIONAL LEVEL

High degree of consensus amongst economic policymaking elite around idea of the allocative efficiency of the free market—targeted industry policy assumed to distort the allocative efficiency of the market and create perverse outcomes.

Responsibility for industry policymaking typically dispersed amongst various ministries/agencies with low levels of coordination between them.

Low level of consensus amongst economic policymaking elite concerning state’s primary economic goals and the role state should play in governing the industrial economy. Battles may exist between developmentally and neoliberally oriented actors as well as political pragmatists and opportunists. Short-term political considerations often drive industry policy interventions.

High level of consensus amongst policymaking elite around primacy of goal of national techno-industrial catch-up and export competitiveness AND the desirability of an active role for state in facilitating the creation, commercialization, production & export of technologies/products by local firms in strategic industries. Long-term competitiveness concerns drive policy interventions in strategic industries.

NEOLIBERAL STATES

INSTITUTIONAL LEVEL

IDEATIONAL LEVEL

IDEATIONAL LEVEL

Centralized responsibility for industrial policy planning/implementation—(e.g., existence of ‘pilot agency’ in industrial dev’t phase; more decentralized bureaucratic apparatus in high-tech dev’t phase.)

NON-DEVELOPMENTAL STATES

DEVELOPMENTAL STATES

DEVELOPMENTAL STATES     21

developmental states from others is not the existence of intervention per se, but the developmental ambition and elite consensus that frames that intervention.23 As mentioned, moderate declinists take the question of developmental ambition seriously. However, they question whether such ambition can be sustained, given the complexities of governing a high-tech economy.

“Moderate Declinists” and the Gradual Demise of Developmentalism Moderate declinists reject the idea of the “neoliberal makeover” of developmental states; they accept the idea that all states intervene in their economies in nonregulatory ways, both to offset the social costs associated with economic downturn and restructuring, and to support particular kinds of economic activity (Kalinowski 2008). Yet moderate declinists also argue that industrial governance in Korea (and elsewhere) is no longer “developmental,” having become “less proactive and planned, and more reactive and erratic” (Kalinowski 2008, 449). Numerous factors are identified as having contributed to this shift, one of the most significant being the dynamics of capitalism itself. For moderates, developmental state decline is being driven largely by “challenges inherent in post-industrial development,” an argument comprehensively articulated by Joseph Wong (2011). Wong bases his arguments on efforts to promote a local biotechnology industry in Korea, Taiwan, and Singapore. For Wong, what characterized these developmental states during the postwar period was their willingness and ability to “gamble” on nurturing particular industries, technologies, and firms with a view to “making winners” (Wong 2011, 8). While this was not a low-risk game, a number of factors made risk mitigation possible, the most significant being that these states were attempting to follow established players in existing industries. The risks of developmental activism thus were knowable and manageable, especially given the caliber of the policymaking elite in these countries. Now, however, the name of the game has changed and these states must make the transition from fast followers to independent innovators in the science-based industries of the future. And according to Wong, the development challenges inherent in such industries (e.g., biotech) are fundamentally different to those in industrial sectors, being characterized less by “risk,” which can be mitigated, than “primary uncertainty,” which cannot. The practice of supporting specific technologies and firms thus becomes less about risk mitigation than random and expensive guesswork, which often results in failure. In

22       CHAPTER 2

Wong’s reckoning, the high incidence of policy failure has had profound implications for East Asia’s developmental states, undermining their developmental ambition. He illustrates this through a study of their biotech industry strategies. The story, he argues, “is about the retreat of the state, and, in effect, the end of the developmental state era” (2011, 179).24 On the basis of his biotech analysis, Wong advances four general propositions about the changing nature of industrial governance in these developmental states: First: The state has “retreated from its past leadership role in directing industrial upgrading, and economic development more generally, from the top down,” and now refrains from “picking winners” (supporting specific firms) (2011, 40). Second: The state has “scale[d] back past practices in actively coordinating industrial activity” and no longer exhibits its trademark “capacity and willingness to coordinate actors in productive ways.” Rather than “actively forging linkages amongst public and private actors” as it used to, the state prefers to provide general support to industry and to wait for linkages amongst firms and between public and private actors to emerge organically (from the bottom up) (2011, 40–41). Third: This “hands off ” approach to industrial governance reflects a more general pattern of the “diminished coherence and fragmentation of the state apparatus.” Biotech is by its very nature multidisciplinary, and the complex process of biotech-related innovation, commercialization, and regulation involves a multiplicity of private and public actors. Consequently, policy making in this arena has become less “vertically organized” and coherent and more “horizontal,” haphazard, and contested (2011, 41). Wong doesn’t argue that these changes have come about quickly or uniformly. For many years, these states defaulted to traditional industry promotion strategies, which in Korea meant supporting the chaebol and a narrow “supporting cast” of smaller high-tech firms in an attempt to manufacture national biotech “stars.” Yet the state’s expensive biotech gamble has failed to pay off, and in light of successive failures and mounting economic and political costs, Wong argues that the policymaking elite has lost its appetite for strategic activism. This brings us to his fourth and final proposition about developmental state demise in Korea, and more broadly: Fourth: The state has actually “chosen to become less developmental”; in light of the political costs of failure, there has been a strategic decision to retreat from developmental activism (2011, 14). There is little to dispute in Wong’s analysis of the complexities and costs involved in biotech. It is true that the countries in question have struggled—along with countless others—to come to terms with the inherent challenges of biotech industry building. In East Asia, these challenges are amplified by the fact that the countries in question are effectively starting from scratch, with almost no preexisting competencies in basic life sciences research. Building a biotech industry in

DEVELOPMENTAL STATES     23

such a context is as much about building a national basic science research base as encouraging innovation and commercialization—a point readily acknowledged by Wong. In light of the special nature of biotech, and the low base from which these countries are starting, it seems fair to ask if biotech is the weakest test of developmental state decline in East Asia. A focus on efforts to promote high-tech industry creation and competitiveness in areas where Korea possesses relevant transferable competencies might yield different results—a point I return to in later chapters. Here, I suggest Wong’s propositions regarding developmental state demise should be qualified in three further ways. The first qualification addresses Wong’s claim that public dissatisfaction with high-profile policy failures is driving developmental state retreat. This idea is important because it shines a light on the question of what kinds of domestic political conditions are necessary for sustaining developmental activism? Have policy failures in biotech been sufficient to undermine popular support for (or at least acceptance of) the state’s wider developmental project? It is beyond question that there have been some policy failures in biotech in Korea—as has been the case in all countries that have targeted this industry for promotion. But there is little evidence that policy failures have manifested in a form of antistatist opposition in Korea. Indeed, as I discuss in chapters 8 and 9, the emergence of a pervasive Park Chung Hee nostalgia from the mid-2000s generated expectations of a revival of strategic activism. These expectations, fueled by intensifying economic insecurities, appear to have outweighed concerns about policy failures and reinvigorated public appetite for ambitious industry development initiatives. Capitalizing on this shift in public sentiment, in the 2008 presidential election Korea’s conservative party campaigned on a nationalist platform centered around economic revival, with (now former) President Lee Myung-bak “implicitly offering himself as a new Park for the twenty-first Century” (Chang 2012b, 85). The recent election of Park Chung Hee’s daughter Park Geun-hye as Lee’s successor lends further weight to the idea that in Korea, developmentalism is undergoing a popular revival. This brings us to the second qualification: the extent to which Korea’s capacity to pursue developmental goals has diminished. According to Wong, the challenges of science-based industry development demand a less centralized approach to industrial governance that precludes “picking winners,” thus making the state less developmental. Here Wong verges on taking the same methodological misstep as radical declinists: equating developmentalism with a specific policy approach. To the extent that developmental states have historically picked winners, this has involved extending public support to local firms on a conditional basis. Conditionality means that firms agree to engage in specific economic activities and to meet stringent performance requirements. This ensures the state’s broader

24       CHAPTER 2

goal of improving national techno-industrial competitiveness is met. Again, as I argue in chapter 9, there is little evidence to suggest that the Korean state has abandoned such practices in science-based industries—although the nature of conditions attached to government support has changed over time.25 Wong’s more general point is that, at the technological frontier, jumping in to back a particular firm that pushes a particular blue-sky innovation is incalculably risky because of all the unknowns involved. There is nothing to argue with here. But Wong’s argument seems to overlook the variety of tasks to which the Korean state has turned in its quest to breathe life into science-based industries and to support local firms as they approach the technological frontier. These tasks do not all lend themselves to “top down” coordination. But this does not necessarily make them less developmental. Take Sung-Young Kim’s study of the Korean government’s extensive role in the development of a local wireless internet platform technology (WIPI) from the early 2000s, and the promotion of this technology as a local and international standard (2012b). Kim shows how a decentralized bureaucratic environment was no obstacle to the state’s ability to effectively coordinate the wide range of private and public actors to these ends. In light of Kim’s study, claims that developmentally oriented industrial governance should be defined in terms of “top down” or “centralized” coordination of industrial policy making must be revised, as must propositions that the Korean state no longer exhibits the “capacity and willingness to coordinate actors in productive ways” (Wong 2011, 40–41). Of course, Kim’s study is focused on one industry: telecommunications. I indicated earlier that developmental states are distinguished by a “pattern of activism” across a range of industries deemed strategic, thanks to an elite consensus about the necessity and desirability of intervening in the economy for developmental ends. In chapters 7 through 9, I argue that such a pattern endures in Korea under the new developmental strategy. A troika of challenges—waning industrial competitiveness, financialization, and energy insecurity—have been crucial in reigniting developmental ambition and reviving a similar view of finance under Korea’s post-1997 regimes. Financial reforms have thus centered on ensuring that adequate financial resources are directed toward local firms in strategic industries and are aimed at improving local manufacturing capacity, technological autonomy, and export competitiveness.

A Mindset/Strategy Framework for Analyzing Developmental State Emergence and Evolution In this chapter I have advanced an ideationally informed conceptualization of developmentalism that is centered on the developmental mindset. Such a

DEVELOPMENTAL STATES     25

conceptualization is the most meaningful way to distinguish developmental from other state types—at least in the sphere of industrial governance. It is clear that most governments intervene in their economies in an attempt to influence industrial activity. But observing policies alone tells us very little about how states intervene and, importantly, why they intervene. Here a focus on the ideational is essential. In the case of developmental states, thanks to their will to build local manufacturing capacity, technological autonomy, and export competitiveness, policymakers intervene in the industrial economy in a very particular way: that is, with long time horizons, across a range of “strategic industries,” drawing on an evolving range of incentives that are often conditional on performance standards. Although the likelihood of failure is always present when risks are taken, on balance, their actions have been more likely to support rather than hinder national efforts at industrial transformation. I have also suggested that a mindset-centered conceptualization of developmentalism is key to explaining developmental state evolution. If developmentalism is conceived of in fixed policy or institutional terms, then there is only one possible way to interpret policy and/or institutional change: developmental state dismantling. If we understand developmentalism primarily as a mindset, it allows us to accommodate the idea of developmental state evolution; for where there is a broad consensus and political will to promote national techno-industrial transformation, the state is most likely to seek out a way, adapting its developmental strategy to suit changing domestic and international conditions. Understood thus, two sets of questions take center stage and point us toward a mindset/strategy framework for analyzing developmental state emergence and evolution (and the evolution of financial activism). First, what conditions gave rise to a developmental mindset among a policy elite in a particular national context and shaped their first developmental strategy? And which institutional arrangements enabled that country’s first developmentally minded policymakers to translate their strategy into action? Once we understand the origins of a developmental mindset and the institutional underpinnings of the state’s capacity for strategic activism, we can then ask: What factors have contributed to a strengthening or weakening of the developmental consensus amongst the policy elite over time? What factors have shaped their developmental strategy? And what factors have facilitated or frustrated pursuit of that strategy (including its financial policy aspects)? The remainder of this book is dedicated to investigating these questions in the context of Korea.

3 MAKINGS OF A DEVELOPMENTAL MINDSET AND EMERGENCE OF STRATEGY MARK I In human life, economics precedes politics or culture. —Park Chung Hee, The Country, The Revolution, and I

The origins of Korea’s developmental state have been discussed extensively in the rich literature on this country’s twentieth-century transformation by scholars spanning the fields of history, sociology, political science, and political economy. Contributors to this discussion have examined (sometimes in impressive detail) how various external and local factors, such as the legacies of Japanese colonialism, the impact of situational imperatives, and the influence of particular groups and individuals, especially former President Park Chung Hee, fueled and shaped developmental state emergence in 1960s Korea.1 I draw amply on the findings of these studies, but I reframe them with the aim of developing the mindset/strategy framework that drives the argument of this book. My larger purpose is to bring to light the evolution of Korea’s developmental state and the recent revival in that country of financial activism. In the first part of this chapter I trace the emergence of a developmental mindset in Korea, drawing on insights from existing accounts of the country’s politico-economic history. This is principally a sociological task and involves asking, Who were the original carriers of the mindset in question, and what formative experiences shaped this particular way of thinking? To foreshadow, I identify a group of Japanese-trained military officers that included Park Chung Hee as the original exponents of developmental ideas in Korea. I examine how the experience of Japanese colonial rule and U.S sponsorship shaped their nationalistic outlook, their belief in economic advancement as the key to national strength and independence, and their vision of a central role for the state in achieving that goal. I then show how Park and his associates sought to foster a consensus around their developmental vision among the wider policy elite after seizing power in 1961. Next I examine the origins of Korea’s Mark I developmental strategy and ask, What led the country’s first developmentally minded policymakers to adopt the “growth first” strategy that they did? Here again, I emphasize the importance

26

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      27

of the Japanese influence, along with the situational imperatives facing Korea’s new developmental leadership in the early 1960s. I conclude by discussing how Korea’s developmentally oriented elite were able to translate their “growth first” strategy into action. By starting with interpretive actors (developmentally minded policymakers) and examining how they created, manipulated, and navigated their institutional environments in pursuit of their strategic goals, I arrive at a more complete picture of the Korean developmental state than is typically portrayed. As we shall see, the picture that emerges extends above, alongside, and below the economic bureaucracy, the central focus of most developmental state analysis, taking in the Presidential Office (above), special presidential committees (alongside) and development banks (below). This architecture has strongly shaped the dynamics of developmental policy making and execution in Korea since the 1960s. A consideration of this architecture—and how it has enabled the translation of developmental strategy into action over time—is central to my explanation of the revival of financial activism in Korea from the late 1990s, the subject of chapters 6 through 9. All stories of revival, however, must be prefaced with stories of emergence and abandonment. In the chapter that follows, I thus examine the emergence of financial activism in the 1960s, and how that emergence was motivated and shaped by the mindset and strategy identified herein.

The Makings of a Developmental Mindset What motivates the leaders of some states to prioritize national economic advancement and to proactively pursue this goal? This question has been addressed by numerous scholars in the wider political science literature, and the developmental state literature in particular. In the East Asian context, the presence of intense geopolitical threats has been posited as a significant factor fostering such ambition and commitment—a proposition I agree with.2 However it is also clear that the presence of external threats is an insufficient precondition for the emergence of a developmentally oriented elite; Korea’s dire geopolitical circumstances during the 1950s did not elicit a developmental response from its political leadership, as we shall see. It does, however, seem important to consider the shared formative experiences of particular elites—and the mindset forged by that experience—to explain why they came to interpret and respond to external threats in the way that they did. Such an approach characterizes foundational theorizing on the developmental state.3 For example, in understanding the sources of shared developmental priorities in postwar Japan, Chalmers Johnson emphasized the “collective consciousness” created by the experience of

28       CHAPTER 3

MITI bureaucrats in the 1930s Ministry of Munitions, Ministry of Commerce and Industry, and Economic Stabilization Board. For many, this shared history included service in Japan-controlled Manchuria during that colony’s aggressive, state-led industrialization for defensive purposes (Johnson 1982, 33–34). These experiences provided a mental map for their subsequent development efforts; it shaped their belief in industrial development as the foundation of national security and their understanding that the state could and should play a lead role in pursuit of these goals. Johnson and others have also considered the history of Japan’s top postwar bureaucrats in Tokyo University a significant mindset-making experience. In 1881, Meiji revolutionary and premier of Japan, Ito Hirobumi, purposefully established Tokyo University as a “school for government bureaucrats,” inspired by the Prussian experience aimed at creating a cohesive, dedicated, goal-oriented bureaucracy. Ito had much admired Prussia’s bureaucracy for its esprit de corps, ethos of public service, and insulation from both aristocratic interference and corruption (Kohli 1994, 1273). By creating such a training facility (and by adopting meritocratic recruitment methods) he sought to create a similar kind of bureaucracy in Japan—and to foster the same outlook and spirit among its members.4 Significantly for Korea, upon its conquest by Japan and its establishment as a Japanese protectorate in 1905, Ito Hirobumi was appointed its resident-general.5 As political scientist Atul Kohli reports, Ito immediately set about the same state-building task in that country, apparently stating at the time: “Korea can hardly be called an organized state in the modern sense. I am trying to make it such.”6 To achieve this goal, all high-ranking Korean government officials were immediately replaced with rigorously trained Japanese administrators. Meritocratic recruitment and promotion measures were then put in place, with qualified Koreans permitted to assume junior bureaucratic positions. Korean civil servants, however, would never be allowed to outrank Japanese officials. The experience of such racial discrimination under Japan’s brutal and oppressive rule fostered a deep resentment and longing for national independence among many Koreans, not only within the bureaucracy but within other social spheres, including the labor force (see Yang 2004, 19). In the Korean context however, arguably the most significant shared experience insofar as the makings of a developmental mindset is concerned was that of military training and service under Japanese colonial rule. It was after all from Japanese-trained segments of the Korean military that the country’s first developmentally oriented leadership emerged, led by then General Park Chung Hee. Korean’s participation in the Japanese military dates back to Japan’s arrival in Korea in 1905. At that time, the Japanese dismantled the Korean Army and

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      29

replaced it with elements of the Japanese Imperial Army, which immediately began to enlist Koreans into its ranks.7 Future president Park was eventually one such recruit (as were some of Korea’s key financial policymakers, as discussed in later chapters). Park was born in 1917, twelve years into Japan’s colonial rule. He received a traditional Japanese education before willingly enlisting in the Manchurian Xinjing Officers School in 1939, aged twenty-two (Manchuria at that time being a colony of Japan). It has been convincingly argued by some historians that Park’s motivation in enlisting was self-consciously nationalistic; he wanted to equip himself with the practical and leadership skills required to eventually lead a Korean army and to free the country from foreign oppression.8 After two years in Manchuria, having received top grades, Park was one of four in his class to be accepted into the prestigious Japanese Military Academy in Zama, Japan, where he completed his training in 1944. Park was reportedly a proud graduate of the academy and often “championed its spirit of discipline, leadership and loyalty.”9 Indeed, upon Park’s assassination in 1979, then Japanese ambassador to Korea lamented his death as “the death of the last soldier of Imperial Japan.” There is little doubt that Park’s experience in the Japanese Army had a profound personal impact; he was both fascinated with, and an overt admirer of, Japan’s approach to nation building through heavy-handed, state-led industrial development.10 It is widely observed that Park was a voracious reader of Japanese history and his own writings explicitly reference Meiji Japan as the model most worthy of emulation in Korea’s quest for national independence and international prestige.11 But Park did not just read about Japan’s pursuit of state-led industrialization for nation-building purposes. As a member of the Japanese Imperial Army, Park also witnessed that pursuit firsthand during the time he spent training in 1930s Manchuria, as Japan aggressively industrialized that colony for defensive purposes. Upon returning to Korea, he then experienced Japan’s rapid industrialization of his own country for the same purpose—as did his military associates. Yet while Park was an admirer of Japan’s nation-building ambitions and economic strategies, he and his Korean cadre were imbued with a fierce nationalism of their own—in the sense that they longed to be free of foreign control and for Korea to become master of its own destiny. They were thus hopeful that the end of the Pacific war in 1945 and Japan’s exit from the country would usher in a new era of national autonomy for Korea. They were bitterly disappointed. For no sooner did the Pacific War end than the Cold War began, with the Korean Peninsula becoming the front line in the battle between the two emerging superpowers, the United States and Russia. Upon Japan’s surrender in 1945, Korea was divided in two at the Thirty-Eighth parallel, with Soviet forces occupying the north and U.S. forces the south.

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The division left South Korea short of critical industrial infrastructure, which was mostly concentrated in the North under Japanese rule. United States sponsors helped install a pro-American democratic government in the South, led by President Syngman Rhee. Yet Rhee took few steps toward economic reconstruction between 1945 and 1950, which marked the outbreak of the Korean War.12 This war, the most destructive in the country’s history, devastated the peninsula. During three years of fighting, Seoul changed hands four times, leaving it (and the majority of urban centers) in ruins. Furthermore, thousands of young Korean men—the backbone of the workforce—were lost or maimed in action.13 The war ended in an armistice in July 1953, the Thirty-Eighth parallel division remaining largely unchanged. The war’s devastating impact did not inspire Rhee to developmental action. His approach instead centered on maximizing U.S. aid and using these funds to bolster his political support base. The greatest recipients were Korea’s large business groups, the chaebols, whose primary focus was speculation. By 1959, the economic plight of the South Koreans had hardly improved since the end of the war, breeding widespread social unrest.14 Incursions by guerrillas from North Korea became increasingly frequent. These situational challenges eventually galvanized the developmental ambitions of a small group of relatively young, Japanese-trained military officers led by Park Chung Hee and spurred them into revolutionary action. Already imbued with a fierce nationalism from their time under Japanese rule, this group’s desire for national autonomy had been further reinforced by their experience of America’s sponsorship of Korea from 1949. After World War II, the United States had been eager to create a Korean army that was willing and able to hold the line against the Communists. The Americans thus put a great deal of effort into training Korean military officers over the 1950s, including many who had been previously trained by the Japanese, such as Park. American military training, conducted both in Korea and the United States, was aimed not only at equipping Korean officers with sophisticated technical and logistical skills but also at indoctrinating them with a “sense of duty and patriotism.”15 Indeed, the officers’ training program provided by the Americans during the 1950s (modeled on that provided to American soldiers at West Point) was explicitly designed to inculcate cadets with “self-discipline and devotion to their nation . . . loyalty . . . to both army and country.” As American historian Gregg Brazinsky concludes on the basis of primary research, these efforts served only to strengthen the existing desire of many Korean officers for independence from outside influence, even though American influence appeared more benevolent than Japan’s: “Many of the new South Korean officers had served in the Japanese Army during World War II, and that experience continued to color their outlook. . . . Ultimately,

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      31

South Korean officers came to share Americans’ commitment to building their nations’ strength and prosperity. But many wanted to attain these objectives in a way that would maximize the autonomy of both the military and the country and minimize U.S. influence” (2007, 107).16 Such was the mindset of the small group of officers led by Park Chung Hee, who in 1959 decided that an urgent response to Korea’s deteriorating geopolitical, economic, and social circumstances was essential. This group had long been frustrated by the corruption of the Rhee regime and its lack of nationalistic ambition. Their loyalty to the existing Korean military leadership was also challenged by the involvement of leading officials in corrupt behavior, and their resulting unwillingness to react to the president’s political troubles, even in the presence of intensifying security threats from the North. Park and his associates thus began to seriously question their loyalty to the Rhee regime and to consider a “national revolution” in the truest sense (Cole and Lyman 1971, 35). Park is reported to have drawn inspiration for his planned coup from the attempted 1936 coup in Japan by a faction of that country’s ultranationalists. Park had studied that coup closely during his time training in the Japanese Military Academy at Zama (Moon and Jun 2011, 120). However his plans were interrupted by massive student demonstrations in April 1960, which forced President Rhee into exile. An election ensued, delivering the Democratic Party to power, led by Chang Myon. The change was not for the better. The new government was soon exposed as visionless and corrupt. Social disarray continued, and the national police force disintegrated under pressure. Within the military’s middle ranks, new fears emerged that social dislocation would lead to Communist insurgency.17 So at daybreak on May 16, 1961, Park finally put his plans into action. The Chang government was ousted in a bloodless coup, martial law declared, and the Supreme Council for National Reconstruction (SCNR) established to head the revolutionary government. Chaired by Park, the SCNR in its own words was composed of “members elected from among the officers on active duty of the National Armed Forces who are deeply imbued with the cause of the May 16th Military Revolution” (SCNR 1961, 22). And so it was that General Park Chung Hee assumed leadership of a country that was among the world’s poorest. Korea was plagued by starvation and social unrest, distrustful of corrupt and failed governments, poor in natural resources, and devoid of critical infrastructure. On top of these burdens, it faced a major security threat from the North. Upon assuming power, and in a reflection of his developmental mindset, Park clearly stated the intention of the revolution as a “National Renaissance” aimed at rebuilding the Korean nation and restoring a sense of nationalism and pride to the long-suffering Korean people. As he wrote in his 1962 treatise:

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This revolution was not simply a change of regimes. It was a new, mature national debut of spirit, marking the liquidation of the continuation of the ancient and medieval times of schisms and strife. It marked, too, the end of the 500 years of stagnation of the Yi dynasty, the oppression and bloodshed of 36 years of Japanese rule and the nagging chronic diseases bred by the residue of the Liberation. . . . This resolution [sic] is the turning point in the history of modern Korea. It is our third start after the Liberation. It is our last chance for a National Renaissance. Spiritually, this revolution must—and will—establish our self-respect. Socially, it is to modernize our society. Economically, it is to industrialize our nation. It is to revive our people, reconstruct our nation and reform us. This is a revolution of national reform. (Park 1970a, 22–23) While a “National Renaissance” was the ultimate aim, economic development was viewed by Park as the prerequisite for this goal. As he put: “Unless we can establish an ‘economy first’ consciousness, our dream of building a strong national state will end in a dream and nothing more” (Park 1970a, 168). Put simply, Park believed that the “creation of a self-supporting economy and accomplishment of an industrial revolution is a key to national renaissance and prosperity” (Park 1970a, 171). Park thus portrayed the military revolution of 1961 as the start of an industrial revolution, upon which Korea’s security and future status as a sovereign state depended. In the words of his 1962 manifesto: I want to emphasize, and re-emphasize, that the key factor of the May 16 Military revolution was to effect an industrial revolution in Korea. Since the primary objective of the revolution was to achieve a national renaissance, the revolution envisaged political, social, and cultural reforms as well. My chief concern, however, was economic revolution. One must eat and breathe before concerning himself with politics, social affairs and culture. Without hope for an economic future, reforms in other fields could not be expected to yield fruit. At the risk of repetitiveness, I must again emphasize that without economic reconstruction, there would be no such thing as triumph over communism or attaining independence. (Park 1970a, 173)18 So much, then, for the origins of a developmental mindset in Korea. But by what mechanisms did these ideas become a shared way of thinking among the wider policy elite? After all, developmentalism was destined to become larger than its original exponents within the Korean military. As we shall see, a discussion

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      33

of those mechanisms also serves to highlight the contribution that an agent/ mindset-centered analysis can make to developmental state theorizing. That is, it serves to expand our focus beyond the narrow set of institutions typically considered in the developmental state literature, giving insight into the unique dynamics of developmental policy making in Korea and the forces that have subsequently shaped developmental state evolution in that country.

Forging a Developmental Consensus Park Chung Hee is widely credited as the so-called “father” of Korean developmentalism and the most fierce and constant advocate of the goal of national economic advancement. As president, Park exerted enormous personal influence over the pace and direction of the country’s development drive, being the principal architect of the country’s Mark I developmental strategy, as we will see.19 So how did it come to pass that key segments of Korea’s bureaucratic elite fell in so closely behind Park, loyally dedicating themselves to the task of designing and implementing policies geared toward the nation’s rapid economic advancement? We should note at the outset that, in seeking to foster bureaucratic cohesion around a shared project, Park was not starting from scratch. As Korean political scientists Chung-in Moon and Byung-joon Jun observe, “Park’s ideational structure was by and large a reflection of the South Korean people. He represented not only the mind-set of older South Koreans who experienced Japanese colonial teachings during the 1930s, but also that of young military officers who yearned for greater autonomy and independence during the post-war era” (2011, 139). In this sense, it was not difficult to find people with a similar orientation to staff the civil service. Moreover, as we have seen, Japan left Korea with a well-trained civil service instilled with the qualities of discipline and loyalty.20 Many of those who had served under Japanese rule staffed the bureaucracy of Korea’s fledgling developmental state and were thus already inclined to follow orders from above. Yet there was nothing inevitable about the emergence of a developmental consensus in Korea in the early 1960s; as I have noted, Japan’s colonial legacy and latent nationalism had also been present under the Rhee administration, which was decidedly nondevelopmental in orientation. The cultivation of a developmental mindset among the policy elite was an intentional act that demanded a great deal of foresight and political nous on the part of Park.21 Drawing on the small but impressively detailed political history literature on the Park Chung Hee era, it is possible to identify four main steps in Park’s cohesion-building approach, which involved fostering dedication to developmental priorities and

34       CHAPTER 3

to the president’s own “growth first” developmental strategy (the details of which I discuss in the following section). First, upon seizing power, Park set about refocusing the existing bureaucratic apparatus and instilling a sense of discipline, loyalty and national mission among the rank and file.22 In an arbitrary display of power, most senior-ranking bureaucrats were summarily dismissed.23 The remaining cohort of younger civil servants were left in no doubt about the fact that their jobs—and future promotion opportunities—would be dependent on their maintaining strict standards of professional behavior. For example, upon the establishment of the Ministry of Commerce and Industry in 1961, the activities its bureaucrats were overseen on a daily basis by pistol-carrying marine colonels. If a bureaucrat was caught acting in a way deemed unbecoming of a revolutionary task-bearer (taking bribes, or even visiting drinking establishments in their own personal time) they would be dismissed (Kim H-A 2011, 106). To help minimize corruption within the civil service, the SNCR put in place a property registration system. All government officials were required to register their possessions on a list made available to the public. To further reduce the incentive for corrupt behavior, the salaries and pensions of public servants were increased. Welfare facilities were also introduced to promote good health and the desire to work. Second, to boost bureaucratic competence and cohesion, Park introduced a highly competitive civil service entrance exam (the haengsi system).24 Haengsi bureaucrats typically hailed from Korea’s top universities, particularly Seoul National University (SNU), which had a monopoly on the nation’s best and brightest minds. Indeed, many SNU graduates had also attended the same high school (Kyuungi Senior High), further tightening their bonds (Austin 2009, 156).25 As in Japan, common school and generational ties imbued Korean civil servants with a sense of shared identity and fostered an esprit de corps (Kim B-K 2011c, 205).26 Bureaucrats enlisted through the civil service exam were also granted tenure upon their appointment, which had a significant loyalty- and cohesion-building effect. As leading Korean political scientist Byung-Kook Kim explains, Job security made a career bureaucrat view the ministry where he began his career as his “native home” . . . an object of loyalty and affection. Typically he would stay in his home ministry most of his public life, ending up identifying its institutional goals and missions as his own, internalizing its distinctive culture, absorbing its specialized policy knowledge and experience, and rising and falling with its political fortunes and misfortunes. By nurturing common values and sharing a common fate, the bureaus and divisions of any given ministry came to acquire organizational unity. (2011c, 205)

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Third, Park put in place a bureaucratic architecture and staff-rotation system designed to deepen and sustain cohesion around his unique developmental vision. At the apex was the Presidential Blue House. As Byung-Kook Kim (2011b, 148) observes, the Blue House operated as a “mini-cabinet.”27 Park’s chief of staff (holding a rank equivalent to minister) presided over up to eight senior secretaries (with vice ministerial rankings) who in turn oversaw their own teams of secretaries (with ranks equivalent to bureau chiefs). Each secretary then had jurisdiction over particular ministries and worked closely with those ministries to “transform Park’s vision into a detailed, workable policy package.” About 80 percent of Blue House staff was focused on economic policy (the remainder allocated to security and political issues). Staff were drawn overwhelmingly from the two most senior economics ministries under Park’s tenure, the Economic Planning Board (EPB) and the Ministry of Finance (MOF)—with the president personally seeking out the most talented candidates from his regular interactions with these ministries.28 Moreover, it was often Park himself who appointed EPB and MOF leaders (who held the rank of vice minister), typically selecting career bureaucrats from within the ministries themselves. With Park alone to thank for their promotion, these vice ministers often developed a fierce loyalty to the president. The circulation of senior policymakers between the Presidential Office, the EPB, and the MOF was one of the primary means of fostering a sense of loyalty, a shared identity, and developmental vision among the bureaucratic elite. As Byung-Kook Kim notes, “The Blue House was an integral part of the state bureaucracy, recruiting its elite as secretaries and senior secretaries and sending them back to the ministries as high-level policymakers—with a reinforced sense of mission and loyalty inculcated by Park during their blue house service” (2011b, 150). To ensure that appointees developed a sense of identification with the Blue House, rotations would last around two and a half years. Moreover, having been members of the Blue House team, Park’s aides would enjoy lifelong political patronage upon their return to the EPB or MOF, further fostering a sense of loyalty to the president and his vision. In this way, from 1963, Park was able to mould the EPB and the MOF into a “cohesive bureaucratic team,”29 which shared the president’s vision for the direction and pace of the national developmental drive. To then ensure the diffusion of Park’s developmental ideas through the broader economic bureaucracy, EPB and MOF staff were routinely circulated through the leadership ranks of middle- and lower-ranking economic ministries.30 The penetration of industry policymaking ministries such as the Ministry of Commerce and Industry (MCI) by EPB and MOF officials ensured that all bureaucratic bodies worked as one toward implementing Park’s vision. Yet for all the power they wielded within the bureaucratic apparatus, the EPB and MOF remained ever answerable to the president. It was Park who set the vision

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that these ministries pursued. And it was Park who disciplined these ministries should that vision be questioned. For instance, when the EPB expressed skepticism as to Park’s desire to launch an ambitious push into heavy and chemical industries (HCIs) in the late 1960s, the president did not hesitate to reduce the board’s influence in the policymaking apparatus. The president achieved this by creating a special committee and granting it ultimate responsibility for formulating and implementing the HCI drive. Established in 1971, the Heavy and Chemical Industry Promotion Committee was chaired by the president’s first economic secretary, Oh Won-chol.31 As Jung-en Woo explains, “The raison d’etre for this team of economic cowboys . . . was the speedy formulation and execution, unfettered by the bureaucracy, of policies relating to investments in heavy industries.”32 Throughout the 1970s, Economic Secretary Oh reported directly to the president. During this period, the Economic Secretariat “became firmly ensconced—as a critical if not the most critical—economic decision-making body in the Republic, bypassing and sometimes dictating to the Economic Planning Board and the Ministry of Finance.” In fact, the HCI drive was announced by Park and the economic secretary without prior consultation with the Ministry of Finance (Stern et al. 1995, 22). Thus from 1971, the EPB was effectively demoted in this critical policymaking arena to ensure the unfettered pursuit of the president’s developmental vision. Yet knowing that EPB buy-in was critical to the successful execution of the HCI drive, Park was also careful to foster EPB compliance. To this end, Park fired the HCI-averse EPB head and appointed a vice minister more sympathetic to his ideas, showering him with career privileges to win him over to the HCI agenda (Kim B-K 2011c, 223). Since 1971, the creation of special presidential committees has become a standard means of neutralizing bureaucratic resistance to ambitious presidential visions and of mitigating the turf wars that these ambitions might spark—a point I return to throughout this book. The fourth and final means by which Park fostered a developmental consensus within the bureaucracy was by balancing the voices of career bureaucrats with those of industry practitioners. The appointment of engineers and scientists to ministries responsible for devising and implementing industry-specific development strategies (such as the aforementioned MCI) became de rigueur under Park. This was particularly important in shaping ideas about what the government could and should do to promote rapid industrial transformation. These bureaucrats’ ideas about the appropriate role of the state in the economy were not constrained by abstract economic theory. They were shaped by a combination of practical industry experience and a clear instruction from above (the president) to “get the job done” by any means possible, as quickly as possible. To ensure that these civilian recruits were imbued with the sense of discipline and national mission expected of Korean bureaucrats, all MCI employees above the

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      37

rank of section chief had to undertake compulsory “thought training” run by the Korea Military Graduate School (Kim H-A 2011, 106). The economic bureaucracy built under Park thus combined Japanese traditions of loyalty and discipline with U.S traditions of technocracy in equal measure (Kim H-A 2011, 102). The result was what Byung-Kook Kim usefully describes as a “professionalized but patrimonial state” (2011c, 204) in which devotion both to the president and to the task of developmentally oriented policy making were rewarded in equal measure. The president himself dictated the pace and direction of the nation’s development strategy, while the bureaucracy was responsible for formulating and implementing concrete plans to meet the president’s ambitious goals. The EPB plans were translated into actual industrial investment strategies by the monthly meetings held with senior chaebol management—with export performance evolving as a proxy for developmental effectiveness.33 One of my core propositions in this book is that the presidential-bureaucratic relationship established under Park has had a profound impact on the dynamics of developmental state evolution in Korea. In so centralizing power and responsibility for economic decision making within the Presidential Office, Park secured for future leaders the power to exert enormous personal influence over the direction of industrial development and the means of its pursuit—if they chose to do so. I develop this proposition in the following chapters, focusing in the main on financial policy. I further show how this specific role of the Presidential Office has provided the institutional underpinning for continuity of purpose and the maintenance of a developmental mindset in Korea—though not necessarily continuity in strategy. It is to the emergence of Korea’s first developmental strategy to which we now turn.

Formation of Strategy Mark I Why did Korea’s first developmentally minded policymakers adopt the “growth first” strategy that they did? After all, this strategy was very different from those adopted by other developmental states in the region, especially Taiwan. In that country the developmental elite prioritized stability alongside growth from the very outset, which compelled them to adopt a markedly different approach from that of their Korean counterparts.34 In this section, I consider the historical experiences and situational imperatives that combined to shape policymakers’ understanding of the most viable developmental strategy for Korea. I focus mainly on the experiences and perceptions of Park himself, for as we have seen, it was he who—through the Presidential Office—exerted supreme influence over the pace and direction of Korea’s first developmental strategy.

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The three main features of Korea’s first developmental strategy were the promotion of a self-reliant economy via rapid, export-led industrialization, led by “mammoth” private industrial enterprise under close state supervision. Korea’s pursuit of export-led growth led by conglomerate capital over the 1960s and 1970s has been widely discussed, and the economic policies employed to promote this strategy have been well documented.35 They do not require reiteration here, although I do discuss some financial policy particulars later. My immediate task is to explain why Park perceived “growth first” as the most appropriate developmental strategy for Korea, focusing on the ideational and situational factors that shaped that understanding. The promotion of a “self-reliant” economy: The urgent need to create a “self-reliant,” “independent,” or “self-sufficient” economy is a dominant theme running through Park’s presidential writings and speeches. His desire to swiftly reduce foreign reliance was born of his doubts about the permanence of U.S. aid (Cooper 1994, 261). Park had a “lifelong distrust of U.S. intentions,” the result of America’s abandonment of South Korea in 1950, just before the Northern invasion that sparked the Korean War (Kim B-K 2011c, 221). In Park’s mind, U.S. economic and military support could not be counted on in the medium to long term. Yet when Park came to power, Korea was overwhelmingly aid dependent. United States financial assistance accounted for approximately 52 percent of national budget outlays (Park 1970a, 27). Moreover, the Rhee government had squandered the billions of U.S. aid dollars received since the end of the Korean War on luxury consumption, neglecting the industrial economy. In 1961, Korean producers were almost entirely reliant on aid-financed imports of raw materials and semifinished goods. Moreover, despite its agricultural past, Korea had TABLE 3.1  Substance of a developmental mindset and Korea’s Mark I developmental strategy THE SUBSTANCE OF A DEVELOPMENTAL MINDSET (UNITES ALL DEVELOPMENTAL STATES)

(1) Primary purpose of economic activity: to build national strength (i.e., national security

KOREA’S MARK I DEVELOPMENTAL STRATEGY (1961–93)

‘Growth first’, based on, (a)  promotion of a self-reliant economy, via

and autonomy and international prestige)

(b)  rapid export-led industrialization, led by

(2) Primary goal of industrial governance: rapid

(c) mammoth private enterprise under the

industrial transformation, underpinned by local manufacturing capacity, technological autonomy, and export competitiveness (3) Economic role of the state: State can and should intervene in the industrial economy in pursuit of transformative goals

close supervision of the state

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      39

experienced food shortages every year prior to 1961, compounding its reliance on aid and imports (Park 1970a, 172). Park knew that Korea would be economically and militarily crippled if foreign aid were withdrawn (see for example Park 1970a, ch. 1). America’s subsequent decisions to reduce military and financial assistance to East Asia in the late 1960s, and to South Korea in 1970, reinforced Park’s longstanding belief that foreign support could not be counted on. Park thus saw a self-sustaining economy as critical to Korea’s economic and military security, particularly in the face of the persistent Communist threat from the North. Park also saw economic self-reliance in a nationalistic light—industrialization was as much a prestige- as security-seeking exercise. In his writings Park describes Korea’s reliance on foreign aid as a source of national shame (Park 1970a, 29); he likened it to “begging alms” from advanced countries.36 In Park’s eyes, the creation of a self-reliant economy would help build national independence and international prestige and propel Korea into the ranks of advanced industrialized countries. In a statement that captures his underlying quest for international respect, the new leader makes clear his concern for Korea’s international reputation: “Our friends abroad are beginning to look upon our country as a self-supporting country, an exporting country, and an adult member of the international community. Increasingly, we are becoming an object of their interest, good will, encouragement, and praise.”37 Park evidently saw an intimate relationship between economic self-reliance, national security, and international prestige. But how was self-reliance to be achieved? Throughout the 1950s, Korea had followed an import substitution industrialization (ISI) strategy. By 1961, the limitations of ISI were obvious. Korea’s domestic market was simply too small to generate the profits required for industrial expansion. Furthermore, in the early 1960s, ISI policies were coming under attack from U.S. president Kennedy, whose desire to promote a more liberal world trading order was inconsistent with such introversion (see Cumings 1988, 261–63). Exporting was the logical alternative for Park’s quest for self-reliance. The pursuit of rapid, export-led industrialization: The most cursory glance at Park’s writings reveal his belief in rapid export-led development as the key to self-reliance. Throughout his seventeen-year tenure, Park frequently made reference to the “supreme national goal of a self-sufficient economy through export.”38 His faith in this strategy is revealed in many of Park’s now famous maxims, such as “Export or Death,” “Nation Building through Export Promotion,” and “Loyalty to the Country through Export.” Park’s commitment to export-led industrialization was influenced by his careful observation of the experiences of advanced industrial nations, such as Japan, Germany, and Britain, all of which had relied heavily on exporting in their pursuit of industrialization.39 Like Korea, these countries had limited domestic markets and depended heavily on imported raw

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materials for their industries. Park believed that, under such circumstances, the nation’s “economic lifeline” lay in exports, thereby accessing a seemingly unlimited market for its products and a massive source of income to fund the nation’s industrial expansion.40 For Park, the achievement of export competitiveness was also central to acquiring international status. As he put it in 1965: “Defeat in the severe competition on the international market would deprive the Korean people of any chance to display their excellence as a race. Although it is imperative for us to win over the communists, it is also of utmost necessity that we never falter in economic competition on the international market.”41 While Park was convinced about the necessity of an export-oriented industrialization strategy from the outset, intensifying geopolitical and economic pressures during the 1960s only reinforced that view.42 These pressures also led him to conclude that export-led growth itself was not enough. That growth also had to be fast in order to deliver self-reliance as soon as possible. Park’s concern with the pace of export-led growth is exemplified in the following extract from a speech commemorating Korea’s Fourth Export Day on November 30, 1967: Five or six years ago . . . I asked a Korean economist what should be done if our people would be to live without reliance upon others. . . . His answer . . . was that we had to earn at least $300 million in commodity exports. . . . However, despite the fact that we are to export $360 million worth of goods this year, the amount still is not sufficient for self-reliance. . . . I think that we must increase the amount of commodity export at least to the amount of $1 billion. . . . We have the ability to and confidence that we should be able to earn $1 billion in commodity export within three or four years . . . we should not be satisfied with the present export growth rate of more than 40 percent per annum, but should further intensify our efforts.43 The ambition underpinning the $1 billion goal is clear if we consider that Korea was only selling $320 million worth of exports in 1967—and these were exports of relatively simple or primary products.44 If Park wanted to earn $1 billion by 1970, exports would have to grow by 212 percent in just three years, and their value added would have to be enhanced. While such rapid growth sounds unimaginable, the $1 billion dollar goal was in fact achieved in 1971, within Park’s proposed four-year time frame. In the pursuit of such rapid export growth, Park advocated a central role for the state in fostering and supporting Korea’s export industries: “The government will not spare efforts in order to augment the nation’s exports by taking all possible steps, including instructions to all personnel of diplomatic missions overseas to take charge of economic diplomacy and assume the role of a feeler to expand the market for Korean

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      41

products, improvement of the quality of export items, reinforcement of the facilities of export industries, and establishment of the mass production system.”45 In addition to providing administrative and financial support, large firms were encouraged to increase their export capacities through the assignment of export targets by the Ministry of Trade and Industry (MTI). According to Song, “The export targets were seen by firms as virtual ‘orders’ or ‘missions.’ If they succeeded in fulfilling their export goals, they obtained numerous benefits reserved for exporters, including preferential credit and loans, administrative support, and tax and other benefits. Thus, Korean exporters saw the over-fulfillment of their ‘export targets’—usually determined jointly with the government—as the keystone of their business strategy” (Song 1990, 71–72). Park also fostered an export culture by tying national recognition and admiration to export success, introducing awards for the nation’s top exporters, and personally attending the award ceremonies to hand out the medals. The president also invoked businessmen’s sense of nationalism and competitiveness with the Japanese, appealing to Korean exporters to make their products better than the Japanese, so that “Japanese goods can not bear comparison with ours.”46 Rapid export expansion however was just one side of Park’s industrialization strategy; the flip side was the creation of “mammoth” industrial enterprises. These he saw as essential for the economies of scale needed to achieve international competitiveness in strategic export industries. The promotion of “mammoth” private enterprise under the close supervision of the state: Park’s writings clearly reflect his belief in large-scale enterprise as key to rapid industrial transformation: “One of the essential characteristics of a modern economy is its strong tendency toward centralization. Mammoth enterprise—considered indispensable, at the moment, to our country—plays not only a decisive role in the economic development and elevation of living standards, but further, brings about changes in the structure of society and the economy” (Park 1970b, 217). Park’s view of the role of “mammoth enterprise” in spearheading Korea’s development was heavily influenced by his admiration for Japan’s achievements during the Meiji period and in the later industrialization of Manchuria. He notes in his 1962 treatise that “the Meiji imperial restoration will be of great help to the performance of our own revolution. My interest in this direction remains strong and constant” (Park 1970a, 120). In terms of the lessons learned regarding the role of big business in Japan’s development, Park observes how during the Meiji revolution, “Millionaires who promoted the reform were allowed to enter the central stage, both politically and economically, thus encouraging national capitalism” (1970a, 120). Park was also heavily influenced by his firsthand experience of Japan’s pre–World War II industrialization of Korea. The purpose had been to

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enhance Japan’s military capacity for regional expansion in the lead up to World War II. From the early 1920s, the colonial government thus sponsored the growth of massive industrial enterprises in Korea (both Japanese and Korean owned). The strategy involved providing firms with finance in exchange for their compliance with the state’s industrialization plans (Woo 1991, 32–35). By the end of the 1930s, about two-thirds of total output in Korea was produced by a mere handful of Japanese conglomerates (Zaibatsu). Some of the Korean chaebols that thrived under Park, such as Samsung, were actually established under Japanese rule (Kohli 1994, 1282). Bruce Cumings argues that it was explicitly the “Manchurian model of military-backed force-paced industrialization that Park had in mind” when he set about engineering Korean industrialization (1997, 310). It is hard to overestimate the influence of Japan on Park’s ideas about economic development; Park has been described as a ‘ “Japanophile,’ fascinated by the ‘Meiji model’ [also built on the back of mammoth enterprise groups], and bent upon steering Korea along the Japanese path to modernity” (Kohli 1994, 1286).47 His experience of the Japanese colonial model of industrialization clearly influenced his beliefs about the strategy most appropriate for Korea. Importantly, however, Park’s experience under the Rhee regime had taught him that big business, left to its own devices, was unlikely to be a champion of national economic advancement. Under Rhee, business corruption was rife, and firms had focused largely on speculation and war profiteering. Park thus saw a central role for the state in enlisting big business—by force if necessary—into the national development drive, and in using carrots and sticks to keep them on track. Upon assuming power, Park’s revolutionary government arrested most of the country’s leading businessmen, confiscating their assets and issuing massive fines for illicit wealth accumulation.48 Following their arrest, in a meeting held with jailed business leaders, Park struck a deal: they would be exempt from criminal prosecution and allowed to keep all of their assets (except for bank shares), as long as they agreed to make personal statements of intent to work for the good of the country and channel future investments into basic industrial firms and to donate shares of those firms to the government as part-payment for their fines (Jones and Sakong 1980, 70). This highly unorthodox method of securing business support proved effective. Despite the fact that only a few plants were established under the program, and most fines were eventually paid in cash, not shares, this quid pro quo had the impact of putting business in a decidedly subordinate role to the government and securing their compliance with the government’s growth priorities. Samsung’s founder and CEO Lee Byung-Chull, widely reviled as a war profiteer in the sugar industry, was one of the first of the chaebol leaders to sign up; he showed his intent by immediately founding one of Korea’s largest paper mills, as the first of many new industrial initiatives (Mathews and Cho 2007, 105–7).

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      43

Nevertheless, as the literature on Korea’s subsequent economic and political development has shown, the state’s ability to discipline big business diminished over time as chaebol size and wealth grew, and their autonomy from the state increased. The state’s capacity to pursue its developmental strategy would later come under intense pressure, a topic I revisit in later chapters.49 Nevertheless, at the time that Park seized power, prevailing economic and political circumstances (not least the business community’s lack of moral capital owing to their corruption under Rhee) enabled the president to effectively secure the compliance of larger firms with his developmental objectives. In these ways, historical experiences and situational imperatives combined to shape Park’s preference for a growth-first developmental strategy. Significantly, Park faced little popular resistance to his seizure of power, or to his stated intention to prioritize growth over all other goals—even democratization. Within weeks of the coup, Park publicly declared his belief that to restore social stability and ignite the nation’s development drive, authoritarian guidance rather than democratic rule was essential: If the nation develops a representative political system without economic development to back it up, while . . . citizens’ life remains unstable, ugly political incompetency [sic], injustice, and corruption would certainly rear their heads again. With this allowed to happen, politicians would, like they did in the past, indulge in selfish factional strife and favoritism for their own interests in utter disregard of people’s welfare. Returning to such old days, as a matter of course, would mean that our country would either degenerate into an impotent, inferior nation, or fall victim to the communists. For this reason, our most urgent task is economic reconstruction. (Park 1961, 225) Even upon his resignation from the military in 1963 and his election as civilian president in the return to limited democracy,50 the promotion of national economic development remained Park’s key strategy for maintaining popular support. As Cole and Lyman observe (1971, 80), The most significant political development in the economic policy of the Park administration as it developed after 1963, was that economic policy became the central thrust of the regime’s entire political effort at home, and to a large extent, abroad. . . . As the government faced press and student opposition from 1963 onwards and realized the need to compromise the use of its power . . . it began to turn increasingly to economic development as the means by which it could accept, shape, and live within, a civilian and largely democratic political structure.

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By the end of 1964, this became its fundamental political strategy and the cornerstone of its drive for consensus and, finally, re-election in 1967. Given Korea’s experience during the 1950s, one can understand why Park believed that the pursuit of growth above all other goals was a viable legitimization strategy. The democratic governments that had held office for the thirteen years prior to his coup had delivered little in the way of security or prosperity to the people.51 As a result, there was remarkably little domestic reaction to Park’s seizure of power by military means.52 Also minimizing initial opposition to the coup and the suspension of democracy was the fact that the Korean military had reasonably good relations with the Korean population (Cole and Lyman 1971, 35); the army had no negative colonial legacy (the original Korean Army having been dismantled under Japanese occupation and only having grown in size and importance during the Korean War). Because memories of the war and the heroics of the military were still fresh in Korean minds, and because of its silent support for the popular April revolution, the military enjoyed “a relatively favorable image” in 1961 (Cole and Lyman 1971, 35). Initial support for the military government may also have been buttressed by its pledge to return to democracy under a civilian government once economic and military security had been achieved (SCNR 1961, 202). The relatively homogenous ethnic base of Korean society also helps explain why Park saw growth as a viable legitimization strategy. It meant that Park was able to appeal to Korean nationalism—in a form of collective pride in national economic advancement—as a unifying factor in his developmental project. Dissidents who were jailed under Park would of course not share this perception—they were the casualties of an otherwise successful nationalist project.

Translating Ambition into Action How did Korea’s first developmentally minded policymakers navigate, manipulate, and transform their existing institutional environment in pursuit of their goals? The preceding analysis has taken us some way toward answering this question, revealing the dynamics of developmental policy making in Korea and highlighting some of the most significant institutional underpinnings of its fledgling developmental state. As we saw in the earlier discussion of Park’s approach to developmental consensus building, policy making was essentially top-down in nature and underpinned by a set of institutions extending beyond Korea’s bureaucratic “pilot agency,” the EPB. This last point is well understood by some critics of

MAKINGS OF A MINDSET AND EMERGENCE OF STRATEGY MARK I      45

OFFICE OF THE PRESIDENT (includes Presidential Secretaries)

Special Temporary Committees (e.g., Heavy and Chemical Industry Promotion Committee)

Regular Senior Staff rotation

Senior Economic Ministries (EPB, MOF) Regular Senior Staff rotation Less Senior Economic Ministries (e.g., MCI)

Bank of Korea (subordinate to MOF)

FIGURE 3.1  Some key institutional features of Korea’s fledgling developmental state

the developmental state literature and its emphasis on this particular aspect of the state apparatus.53 Yet as we saw in chapter 2, an institutionally fixed conceptualization of developmental states was never true to classical theorizing on the topic.54 Inspired by classical theorizing and its attention to the ideational dimension, I have focused on Korea’s first developmentally oriented policymakers and how they sought to build a consensus around developmental ways of thinking and to execute their strategic vision. This has served to broaden our view beyond the bureaucracy and, in doing so, revealed a more comprehensive picture of Korea’s developmental state as it first emerged. The network of linkages established between the Presidential Office and the core economic bureaucracies under Park (as well as links with the chaebol CEOs) institutionalized a particular way of “doing developmentalism” in Korea.55 In short, the president determined the direction and pace of the nation’s developmental strategy, while the bureaucracy executed that vision, translating strategies into industry-specific plans and policies and effecting their implementation. And should bureaucratic conflict

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or intransigence frustrate that translation, the president was able to resort to special committees to drive through his policy preferences. The following picture thus emerges of some of the most significant institutional foundations of Korea’s developmental state upon its creation and consolidation in the 1960s. Yet this still is not a complete portrait of Korea’s emergent developmental state. For policymaker’s ability to execute “growth first” ultimately hinged on their ability to finance this strategy. Completion thus requires an examination of the emergence of financial activism and its ideational and institutional underpinnings.

4 RISE OF FINANCIAL ACTIVISM I learned a great many things in observing first hand the reconstruction of the Japanese economy. To undertake something as momentous as reconstructing an entire economy, the first thing I realized was that the keys to success were a robust and decisive plan . . . and a resolute government that would steadfastly execute the plan. I also realised the important role of industrial policy, which at times could be more important than policies on banking, foreign exchange, and finance that I specialized in. —Kim Chung-yum, From Despair to Hope

The fact that states can—and Northeast Asian states did—manipulate their financial systems to effect rapid industrialization is well established. The most groundbreaking studies in this vein have their roots in the work of Alexander Gerschenkron (1962). Observing the experiences of numerous European late industrializers, Gerschenkron concluded that financial sector manipulation had been central to their success. John Zysman (1983) went further, showing how a state’s capacity for strategic intervention depended on the structure of the nation’s financial system. Focusing on industrialized countries, Zysman argued that bank-based financial systems afforded governments greater scope than capital market-based systems to adjust their economies in times of crisis. Robert Wade (1985) extended this logic to developing countries. Credit-based systems, he argued, provide numerous developmental advantages. They allow for higher levels of investment than would be possible if firms had to rely on profit growth to fund expansion. They are also easier to manipulate for strategic purposes. For example, by controlling or influencing their management and mandate, governments can direct banks to lend to firms in particular industries and to eschew speculative endeavors, maximizing productive investment. In the mid-1980s, similarities between the financial systems of Japan, Korea, and Taiwan led Wade (1985) to suggest that they constituted an East Asian model of a financial system. This model included a state-controlled banking sector, government command over interest rates and international financial transactions, limited choice of financial instruments (to ensure savings flowed into banks), 47

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and a good guidance (pilot) agency. Since that time, numerous studies have argued in impressive detail how centralized control over finance enabled the Korean state to coordinate the economy in pursuit of its development objectives (Amsden 1989, Woo 1991). These analyses broke new ground in revealing how certain financial sector arrangements facilitated rapid industrial transformation in post–World War II Korea. Their findings are extensively canvassed in the literature and do not require reiteration here. My purpose in this chapter is to examine the mindset that shaped Korea’s approach to financial activism from the early 1960s. For without an appreciation of this mindset, we cannot explain why Korean policymakers were motivated to establish control over finance in the first place. Nor can we understand why they used that control to pursue national economic advancement rather than self-enrichment, as occurred in many Latin American and African countries over the same period.1 I thus begin this chapter by tracing the origins of developmental ways of thinking about finance in Korea. To do so, I draw on the personal reflections of one of Korea’s most influential economic policymakers of the 1960s and 1970s, Kim Chung-yum, and on some secondhand accounts of the country’s politico-economic history. To further develop my mindset-strategy analysis, I also show how Korea’s growth first strategy involved a particular approach to financial activism—that is, one centered on injecting low-cost capital into Korean firms in strategic industries, with little regard for the impact on price (or indeed social or political) stability. I pay particular attention to the circumstances that led Korean policymakers to perceive this as a desirable and viable strategy. I then identify the main institutional innovations that enabled their pursuit of growth first financial activism over the 1960s and 1970s. I conclude by teasing out the implications of my analysis for our understandings of the institutional architecture of Korea’s fledgling developmental state.

A Developmental View of Finance A key contention of this book is that a developmental mindset entails a particular way of thinking about finance: the role of finance is to serve the productive economy, and thereby to advance broader transformative goals. In the early 1960s, this mindset was shared by a number of Koreans—especially those who had served in state-run banks established by Japan during its colonial rule, such as the Bank of Chosun (BOC) and the Industrial Bank of Chosun (IBC). These bankers had experienced firsthand the aggressive deployment of financial resources by state-owned financial institutions for nationalistic, industry-development purposes. Some had even received their finance training in Japan before taking up

RISE OF FINANCIAL ACTIVISM      49

their banking positions and were heavily influenced by their exposure to Japanese economic history, especially the experience of state-led development during the Meiji period. Following the 1961 coup, many of these ex-colonial bankers were appointed to key positions of power in the Park Chung Hee administration and exerted considerable influence over the direction of financial policy during the 1960s and 1970s.2 These men drew on their knowledge and admiration of the Japanese approach to national economic development in crafting their policies for Korea. Kim Chung-yum, who between 1962 and 1979 served variously as the vice minister and minister of finance, the vice minister and minister of commerce and industry, and Park’s chief of staff, is representative of such policymakers. During the 1940s, Kim had trained at Japan’s Oita College of Commerce before returning to Korea and to deployment at the BOC. During his tenure at the bank, Kim was recruited into the Japanese Imperial Army, and in 1945 suffered the atomic bombing of Hiroshima, which he barely survived. Understanding the formative experiences of men such as Kim under Japanese rule is crucial to understanding why they thought about finance in such strategic terms—as a tool for national advancement. In the early 1900s, Japan’s colonial administration created a fairly sophisticated financial system in Korea.3 In 1909, the BOC was established to function as a central bank, and later played a major role financing Japan’s expansion into, and industrial development of, Manchuria.4 The Japanese also established a host of specialized development banks in Korea, including the IBC in 1918, along with a number of savings and commercial banks and trust and insurance companies.5 The financial system was explicitly geared toward encouraging commercial and industrial investment rather than toward short-term profit making (McNamara 1990, 67). Yet prior to the 1930s, the developmental function of that system was not fully exploited by the colonial state. Indeed, between 1905 and 1919, the colonial administration intentionally suppressed the development of manufacturing in Korea, so as not to create direct competition with Japan (Kohli 1994, 1297).6 This suppression was relaxed following World War I, which transformed Japan from a debtor to creditor nation. At that time, Japan began to permit industrial investment by some Japanese firms in Korea, even offering subsidies for such investments. It also permitted some wealthy Koreans to invest in medium-scale manufacturing, subsidizing these investments as well. The motivation here was political; following a nationalist backlash in 1919, the governor-general wanted to foster the support of the local elite for the colonial regime.7 However it was only in the 1930s that the Korean financial system was fully mobilized by the colonial state for strategic purposes. At that time, following its annexation of Manchuria in 1931, Japan sought to rapidly industrialize Korea as

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an advanced military supply base to support its war with China. This prompted the Japanese leadership in Korea to launch a series of major industrial development plans aimed at creating war-related industries. From this point, colonial state control over the financial sector was used to direct capital into strategic industries. While the BOC turned its attention toward financing the rapid industrialization of Manchuria, the IBC focused on financing Korean development. Throughout the 1930s, the IBC was the prime mechanism by which long-term, low-interest loans were channeled into Japanese and (select) Korean firms investing in strategic industries.8 The rate of Korean industrial transformation during this period was remarkable. With the IBC opening its tap of funds into industrial expansion, industrial production more than doubled between 1936 and 1939, and by 1940 industrial production accounted for 40 percent of total national production, with nearly 50 percent of industrial production in heavy industries.9 As American historian Karl Moskowitz points out, as the 1930s progressed, many Koreans found themselves promoted into nonclerical roles in the IBC and BOC through the exigencies of wartime development. Many of these banks’ Korean staffers would later assume positions of policy influence in Park Chung Hee’s revolutionary government.10 According to Jun-en Woo, under Park, the IBC eventually became “the inevitable referent for those men who plotted economic development in post-colonial Korea” (1991, 29). Indeed Korea’s most important policy bank for industrial development from the 1960s, the Korea Development Bank (KDB), was modeled closely on the IBC, with many former IBC staffers assuming positions of power within the KDB.11 However it was the BOC that produced some of Korea’s most influential financial policymakers of the 1960s and 1970s, including Chang Ki-Yong, who served as head of the EPB and deputy prime minister in the 1960s, and Kim Chung-yum, who as already noted served in numerous senior roles, not least vice minister and minister of finance, as well as Park’s chief of staff in charge of economic policy. Indeed, Kim was involved in every major economic policy decision in Korea between 1953 and 1979. His personal reflections are revealing—and arguably representative—of how the experience of Japanese colonialism and exposure to Japanese history shaped the mindset of Korea’s top economic policymakers: their desire for a strong and independent Korea, their belief that a strong economy was key to that independence, and most significantly for this book, their developmental view of finance.12 For example, of his time training as an officer at the Japanese military academy in Kumamoto in 1944, Kim wrote: I was employed by the Bank of Chosun but was given leave . . . to fulfil my military service. . . . Officer training at the Academy was gruelling. . . . By then I had formed my own philosophy on life and death . . .

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I came to realise that man was mere mortal. I was forced into military service by the Japanese, and if I was going to die, I was going to die a brave man, more brave than any Japanese man. I hoped I would not die in vain but fighting for Korea’s independence. So I made the very best of the circumstances, put my best effort into everything. (Kim C-y 2011, 24) Upon graduating from the academy in 1945 (ranking twenty-first out of fifteen hundred graduates) Kim was immediately deployed to a regiment of the Japanese Imperial Army situated in Hiroshima. Kim was only two kilometers from the epicenter of the atomic bomb that was dropped by the Allied forces on Hiroshima on August 6, 1945. He miraculously survived and on returning to Korea many months later, a physically weakened Kim resumed his post at BOC (renamed the Bank of Korea in 1950, following Korea’s establishment as an independent nation in 1948).13 Now liberated from Japan, the Korean government had to grapple with a host of questions related to the financial management of an independent nation, from structuring the Treasury fund to currency reform. From his position at the Central Bank, Kim threw himself into researching and writing policy proposals on these topics. His reflections reveal the degree to which his ideas were shaped by his understanding and appreciation of Japan’s economic model: I frequented the used bookstores that were overflowing with Japanese books that the retreating Japanese had sold . . . I found a three-volume book on the regulations governing the treasury fund at the Bank of Japan [and] about ten books on national bonds, public accounts law, and the public accounting systems of European and American countries. . . . After reading the volumes on the Bank of Japan’s treasury fund regulation several times, I thought I had fully grasped the topic . . . I learned that Japanese regulations, written during the Meiji restoration, were based on the French system. . . . I drafted a proposal for the central bank’s treasury fund regulations [which] later became the foundation of the Bank of Korea’s regulations. (2011, 6–7) Over the 1945–49 period, Kim played the lead role in drafting the major financial reforms of the fledgling independent nation, from the currency reforms to the Bank of Korea Act to the National Bonds Act.14 When the Korean War broke out in 1950, Kim was posted to the Tokyo branch of the Bank of Korea as a reward for his role in writing those acts. He devoted his time in Japan to further studying the Japanese economy and the relationship between financial and industrial policies in particular. He developed close working and personal relationships with

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officials at the Bank of Japan and also spent much time reading in the Research Division of the Japanese Ministry of Finance (Kim C-y 2011, 51). This period of study and discovery further cemented Kim’s belief that state-led industrialization was key to the creation of a strong and independent nation, and his perception that the principle purpose of finance is to support the productive economy. Kim’s studies of Japan also shaped his belief in the viability and necessity of a growth first (i.e., stability later) developmental strategy. In particular, they inclined him toward the view that in a war-ravaged economy characterized by capital scarcity and the urgent need to rebuild the nation’s productive base, the state should directly intervene to expand productive capacity regardless of the inflationary effects. For these effects would eventually dissipate as production expanded and growth resumed. This was precisely the experience of postwar Japan.15 At that time the Japanese government established the Reconstruction Fund and ordered it to pump vast amounts of money into expanding priority production areas. The fund raised its investment capital through the issuance of bonds purchased mostly by the Central Bank. In turn, the Central Bank simply printed money to make these purchases, resulting in serious inflation. Nevertheless, as Japanese production expanded and growth resumed in 1948, Japanese inflation began to ease. It was only under American pressure that a reluctant Japanese government intervened to bring it under control more quickly (Kim C-y 2011, 58–59). Japan’s colonial state had shown a similar tolerance for inflation during its rapid industrialization of Korea and Manchuria in the 1930s, as Kim would have observed during his BOC tenure. These, then, were the origins of Kim’s belief in the developmental purpose of finance and the desirability and viability of growth first financial activism (i.e., directing volumes of capital into industrial expansion, regardless of the potentially destabilizing inflationary side effects). When Park Chung Hee seized power in 1961, Kim brought these ideas to his initial role as economic advisor to the revolutionary government.16 Of course, Kim was not alone in these views. This mindset was shared by other Koreans who had served in the BOC and IBC under Japanese rule—and indeed by Park himself, who as we saw in chapter 3 was an avid Japan-watcher.17 It is thus not surprising that many of the earliest reforms implemented by the Park regime reflected the intention to manipulate the financial sector for industrial development purposes. For example, following the 1961 coup, the government quickly assumed direct control of existing banks.18 It then revived many of the specialized development banks that had been established during the colonial era and breathed new life into those established following the Korean War. This included the KDB, which had been established in 1954 to facilitate postwar reconstruction, but the developmental potential of which had not been exploited. State-controlled banks were

RISE OF FINANCIAL ACTIVISM      53

then staffed with bureaucrats rather than financiers who measured their success in terms of their contribution to national economic growth. In Jung-en Woo’s words: “Every bank in the nation was owned and controlled by the state; bankers were bureaucrats and not entrepreneurs, they thought in terms of GNP and not profit, and they loaned to those favored by the state” (1991, 159). The institutional infrastructure for financial activism was thus laid early on. The question remained: From where would come the capital required for rapid industrial development? In the early 1960s, Korea was extremely capital poor; it was almost entirely dependent on U.S. aid and had almost no export capacity. Moreover, Korea’s long history of foreign exploitation had soured attitudes toward foreign direct investment; this was not an option. Foreign borrowing was the only means by which the government could pursue its transformative vision. Yet given its parlous economic position, American and European lenders were unwilling to step in. Moreover, diplomatic ties had yet to be normalized with Japan, ruling out that option. It was in this context that Kim Chung-yum proposed to President Park a novel idea to secure the foreign capital required: a system of state-backed loan guarantees. According to Kim, Park took this suggestion on board and implemented it within the month (Kim C-y 1994, 21). From July 1962, whenever a private Korean company signed a loan contract with a foreign financial institution, the KDB and the Bank of Korea were authorized to guarantee that loan—so long as the Economic Planning Board and the National Assembly had approved the project in question. With the loan guarantee system in place, the KDB soon emerged as a critical institution facilitating the borrowing of international funds and their channeling into strategic industries. As the economy grew and the demand for foreign loans increased, other Korean banks were given the right to offer such a guarantee, and in 1967 the Bank of Korea’s guarantee responsibilities were transferred to the Korea Exchange Bank, which assumed responsibility for managing the country’s rapidly expanding foreign exchange dealings. From the early 1960s, the progress of projects funded by policy loans were strictly monitored in monthly export promotion meetings chaired by the president and attended by key economic ministers, bankers, and industrialists. The following reflection by Kim, who routinely participated in these meetings as minister of finance, minister of commerce and industry, and later presidential chief of staff, is revealing of the mindset that informed the practice of policy lending under Park, who was acutely aware of maximizing the development potential of such loans: The President established a situation room next to his office in the Blue House to keep abreast of progress. With frequent phone calls he

54       CHAPTER 4

encouraged government officials to complete assigned projects. The Ministry of Finance provided a sizeable number of preferential loans through the banks to enterprises that did not have enough collateral, while ministries supported them through preferential allocation of transportation and construction materials. The President believed that even private projects in the First Five Year Economic Development Plan should be completed as scheduled, because the government fully guaranteed the foreign loans so that they would not become burdens on the government, and ultimately the Korean public. (Kim C-y 1994, 21) Kim Chung-yum’s advice on the foreign loan guarantee system secured him the president’s trust and an influential role in economic decision making throughout Park’s tenure. Indeed between 1953 and 1979, Kim participated in every major economic policy decision in Korea (Austin 2009, 155). In 1962, Park personally appointed Kim vice minister of finance. From that position, Kim proposed and executed the nationalization of the Korean stock exchange with a view to reigning in speculative activity. It was a long-fought battle after which an exhausted Kim submitted his resignation as vice minister. Yet within months, Kim was called on by the president to conduct negotiations with Japan for reparations claims. Joining Kim on this trip to Japan was Chang Ki-Young, who was also a former BOC employee and a close associate of President Park. Again, this Japan visit would prove formative for Kim and his ideas about the economic strategy and policies most appropriate for Korea. According to Kim, during the month-long trip, he and Chang Ki-Young met every day, their personal discussions centering on the topic of Japan’s rapid development and Korea’s economic future. Based on those discussions, Chang encouraged Kim to write a report on the future of the Korean economy that Chang could present to the president. Kim’s reflections on writing that report are worth citing at length, as they reveal the extent to which his ideas were shaped by his admiration of the Japanese model: I reflected on the economies of the US and Japan as models. The US was a big country with lots of land, a huge population . . . abundant natural resources, all of which allowed it to organically develop its economy relying on local markets, not on exports . . . [it is] well suited for a market-based economy, which is further reinforced by American’s deeply ingrained mindset of protecting individual freedom and minimizing the role of government. . . . On the other hand, Japan had a population of more than 100 million, not a lot of land and few natural resources. Japan also has had to import the resources needed to produce goods for domestic demand and for exports to acquire foreign currency. Japan pursued an export-oriented industrialization, led by the government,

RISE OF FINANCIAL ACTIVISM      55

to develop its economy, efficiently deploying its limited resources and capital. In particular, Japan made the development of the heavy and chemical manufacturing industries the centrepiece of its industrialization. [These] are high-tech oriented, consume fewer resources, and earn more foreign currency, making it much better for exports. Korea was like Japan. . . . It only made sense that Korea’s economy should go in the way of Japan’s. . . . I wrote down my thoughts and gave them to Chang Ki Young. (2011, 122–23) In May 1964, one month after Kim and Chang had returned to Korea, President Park appointed Chang Economic Planning Board minister and deputy prime minister. Chang immediately asked Kim to assume a ministerial position. However Kim was committed to a professorship at Yonsei University and declined. Nevertheless, two months later, Kim was appointed, without notice, as vice minister of commerce and industry. From that point, Kim and Chang worked closely together designing and executing the export-led strategy they had discussed in Japan, with the president’s full support.19 Then in January 1966, Kim was suddenly promoted to minister of finance. The rotation of financial policymakers like Kim through senior industry ministry roles could only have reinforced their belief in the developmental function of finance. Indeed, whether Kim was working in the Finance or Industry ministries, his recollections indicate that he was principally concerned with the question of how to raise capital and channel it into industrial and export expansion. For example, Kim’s appointment as finance minister coincided with the end of the first five-year plan and the beginning of the second, under which demand for financial resources was much greater. Upon taking office, Kim immediately set about reforming the National Tax Service with the sole aim of dramatically boosting revenues to fund industrial infrastructure development and export growth. He also oversaw the creation of the Korea Exchange Bank as a specialized bank with the mandate of contributing to the growth of exports and improving the international balance of payments (Kim C-y 2011, 137). The same question consumed him upon his subsequent appointment as minister of commerce and industry in October 1967. Now Kim was responsible—along with the EPB director—for launching Korea’s first foray into heavy and chemical industries, including the construction of POSCO (an integrated steel and iron mill) and the Ulsan petrochemical and industrial complex. Although he was industry minister, Kim’s primary task was to secure the finance for these projects, in the presence of deep skepticism from the IMF and World Bank about the viability of such industries in Korea. With American and European banks refusing to take part, the president instructed Kim and EPB minister Kim Hak

56       CHAPTER 4

Ryul to travel to Japan to negotiate its financial cooperation. A financing deal was eventually secured,20 at which time Kim and his EPB counterpart began negotiating financing for the Ulsan petrochemical complex.21 Loans for these projects were disbursed through Korea’s network of policy banks, led by the KDB. To further fund HCI expansion, the government began to direct commercial banks to deposit their funds with the KDB; to purchase long-term, KDB issued bonds; and to extend credit to firms with KDB loan guarantees (Kim and Cho 1995, 31). From 1968, Korea’s deteriorating geopolitical circumstances further galvanized the developmental ambitions of Korea’s political and policy elite and their commitment to growth first financial activism.22 As incursions by North Korean guerrillas increased and American military support waned, a powerful view took hold among key segments of that elite that self-sufficiency in military weapons was a must for Korea, and that the rapid development of HCI industries was the prerequisite for this goal (Kim C-y 2011, 401–9; Horikane 2005). As President Park remarked in an August 1970 press conference, following America’s announcement of its intention to withdraw troops from Korea: The future of our country can only be ensured by having a self-reliant national defense capability. We must not make ourselves dependent on US policies. Our economy should be developed first since building up our national defense capabilities will require huge domestic and foreign investment. Foreign investment should be focused on inducing only new high-performance weapons because advanced weapons are too costly. Instead, we must localize conventional arms and weapons as soon as possible. (cited in Kim C-y 2011, 398–99) As I discuss in the following chapter, the perceived need to rapidly develop HCIs for security purposes ensured Park’s steadfast commitment to growth first financial activism, even as Korea lurched into its first major debt crisis in 1969, triggering domestic political turmoil. Kim Chung-yum also oversaw Korea’s ambitious push into HCIs during the 1970s, though now as chief of staff to the president, charged with full responsibility for economic policy.23 To enable this push, two major financial policies were implemented. First, the creation of the National Investment Fund (NIF), which through the issuance of bonds mobilized funds from banks, insurance companies, and public funds and directed them into HIC projects. As the 1970s progressed, the NIF became the major source of financing for Korea’s HCI push, providing more than 60 percent of term finance for HCI equipment investment from 1975 to 1980 (Kim and Cho 1995, 34). Second, the Bank of Korea extended its rediscounting facilities for HCI firms. Loan terms were also extended for such firms, and HCIs added to the list of industries prioritized for financial support, encouraging banks to increase

RISE OF FINANCIAL ACTIVISM      57

their lending (Kim and Cho 1995, 35). The promotion of HCIs through aggressive financial activism remained the primary economic policy focus of the Park regime until the president’s assassination in 1979. There were a number of influential policymakers under President Park. However, I have focused on the formative experiences of just one, Kim Chung-yum, for the purpose of showing how Japanese colonialism and exposure to Japanese history shaped this policymaker’s understandings about the developmental function of finance and the viability and desirability of growth first financial activism. Yet Kim’s experiences and perceptions were not unique; they were shared by many colonial-era bankers who later rose to positions of policy influence under Park.24 To emphasize the significance of the developmental mindset and how it shaped financial activism is not to deny the presence of tensions both within and between economic ministries under Park over the intricacies of particular policies, or indeed over policymakers’ personal political ambitions. However, what I have sought to demonstrate, and what should now be evident from the analysis, is the existence of an elite consensus around his government’s economic policy priorities (rapid industrial transformation and export expansion) and the necessity and desirability of manipulating the financial sector to advance these goals. This consensus informed the sustained pursuit of Park’s growth first strategy and the financial activism it involved over the 1960s and 1970s. I examine the fracturing of this consensus and its consequences in the following chapter. First, however, it is necessary to consider the most significant institutional innovations and broader structural conditions enabling the pursuit of growth first and financial activism under President Park.

Growth First Financial Activism: Key Institutional Enablers The sustained pursuit of Korea’s growth first strategy and its associated financial activism was enabled by three main institutional innovations. The first was the centralization of economic policymaking power in growth-oriented state agencies (the Presidential Office, the EPB, and the MOF). As we saw in chapter 3, from the early 1960s the EPB was responsible for formulating and overseeing the drafting and implementation of Korea’s five-year economic plans within the broad strategic vision set by the Presidential Office. For its part, the MOF acted as the “hands of the EPB.” It was responsible for manipulating macroeconomic fundamentals in ways that would facilitate the pursuit of the president’s (and thus the EPB’s) longer-term developmental strategy. The MOF was therefore granted ultimate discretion over interest rates, foreign exchange policy, and the inflows

58       CHAPTER 4

and outflows of capital (including the regulation of foreign borrowing). From the 1960s to the 1990s, the overwhelming majority of MOF staff were Korean educated. While the EPB experienced an influx of U.S.-trained economists from the 1970s onward, prior to 1993 virtually no MOF bureaucrats had been educated outside Korea, except politically appointed ministers (Amsden and Euh 1993, 379). MOF officials thus tended to look to their old colonial master, Japan, for economic policy inspiration. The idea of manipulating the financial sector to promote rapid growth came naturally to MOF staffers. The second institutional innovation of significance was the subordination of the Bank of Korea (BOK) to the Ministry of Finance in 1961. Following the conclusion of the Korean War, on June 5, 1950, a newly independent BOK was established under the Bank of Korea Act. The act was developed in heavy consultation with financial experts sent expressly for this task by the U.S. Federal Reserve Board. The act enshrined the pursuit of price stability as the basis for national economic development. The BOK was thus granted extensive control over the currency, credit, and foreign exchange so that it could effectively maintain price stability. It was also granted independent control over the formulation of monetary policy, free from government instruction or intervention. Almost immediately following the 1961 military coup, however, the Bank of Korea Act was amended to make the bank’s charter more consistent with the government’s growth first strategy and to bring control over monetary and credit policies back under the government’s direction. To begin, under the May 24, 1962, revision, the role of the BOK’s Monetary Policy Committee was scaled back from policy making to policy implementation. This move was coupled with the shifting of responsibility for monetary and credit policy to the government executive, bringing monetary and credit policy under complete executive control; under the amended act, all decisions made by the BOK’s Monetary Policy Committee were subject to reconsideration by the minister of finance. In the event of disagreement between the two, the final decision was to be made by the cabinet, giving the government the final word on all financial policies. The MOF was also given the right to audit the BOK once a year and was given final say over the BOK’s budget. The government also transferred the BOK’s responsibility for foreign exchange policy development and management to the MOF.25 The BOK also had to follow the government’s instructions in its dealings with international financial organizations such as the World Bank and IMF, with whom it had previously maintained independent relations. Finally, the MOF had the power to direct the BOK to purchase securities issued by government agencies with redemption guarantees. This enabled the government to raise significant volumes of capital to finance its economic development plans (Kim and Cho 1995, 31). The effect of these

RISE OF FINANCIAL ACTIVISM      59

measures was to subordinate the BOK to the growth-oriented MOF. Combined, the 1962 reforms brought Korea’s brief era of central bank independence and autonomy to an abrupt end, enabling the government to manipulate the BOK to further its developmental strategy. The third institutional reform of significance was the expansion of existing and establishment of new development banks (or policy finance institutions as they are now known), with the primary mandate of channeling low-cost, long-term capital into strategically designated industries. I have already examined the role played by the KDB. As the years progressed, new policy banks were established that would later come to play a major role in the financing of industrial and export expansion. This included the Korea Export Import Bank (KEXIM), established in 1976 for the explicit purpose of providing medium- and long-term loans to Korean exporters in the HCI sector (Ahn 2005, 35). I discuss KEXIM’s evolving developmental role in chapters 5 through 9. Suffice to note here that the combined significance of these three institutional reforms for the direction of financial activism in Korea was enormous. They stripped away the powers of the only governmental institution committed to price stability, and made it entirely answerable to growth-oriented ministries. This allowed the almost unfettered pursuit of growth first financial policies from the 1960s to the 1980s. As we have seen, the consensus among the country’s top economic policymakers was that the function of government-controlled banks was to channel large volumes of cheap credit to select large firms in strategic industries, with little concern for inflationary pressures, particularly from the 1970s. As long as financial sector arrangements were effective in channeling funds to the massive chaebols for investment in strategically designated industries, the financial sector was seen to be performing at its peak. The negative by-products of these arrangements, such as inflationary pressures and the starving of funds for small- and medium-sized firms in nonstrategic sectors, were simply accepted by the government as trade-offs for growth, or otherwise viewed as problems that continued growth would correct. It is worth noting here Korea’s striking contrast with the experience of other developmental states, particularly Taiwan. As previously noted, in that country, the political leadership’s devastating experience of inflation on mainland China led them to prioritize stability alongside growth as an unwavering policy priority. This priority, established in 1949, endures even today. As a result, as I have argued elsewhere, Taiwan’s Central Bank (the Central Bank of China, or CBC) has always enjoyed a far greater degree of independence than Korea’s, while also playing a critical role in executing Taiwan’s original “growth with stability” strategy. That is, the CBC has defended the goal of stability while also playing an important developmental financing function, recycling Taiwan’s

60       CHAPTER 4

significant foreign exchange reserves into industrial development projects in strategic industries (Thurbon 2007). Owing to their growth with stability priorities, Taiwanese policymakers have been far more cautious in their pursuit of a debt-driven development strategy than their Korean counterparts. They relied less on policy lending (preferring to use tax-breaks as investment incentives) and were also less tolerant of high debt-to-equity ratios—a point I revisit in later chapters. Returning to Korea, the point is that the institutional architecture of Korea’s financial policymaking apparatus, including subordination of the BOK to growth-oriented ministries and the establishment of policy banks staffed with developmentally minded bankers, was critical in enabling the translation of the government’s growth first strategy—and the financial policies it involved—into action.

Growth First Financial Activism: Key Structural Enablers To the institutional enablers of financial activism in 1960s Korea, we must also add a significant structural enabler—the emergence of a hegemonic power more open to the idea of developing country governments adopting interventionist financial policies to support their development initiatives, especially in Latin America and East Asia. As Eric Helleiner has shown, drawing on archival evidence, from the 1930s onward, a significant shift in attitude emerged among key segments of the U.S. financial policymaking elite, especially members of the Federal Reserve. At that time, policymakers such as Robert Triffin began to question the wisdom of the kinds of orthodox monetary policies advocated by the United States to developing countries in Latin America over the 1930s, which had resulted in severe economic dislocation for many.26 From the early 1940s onward, Triffin and his associates in the U.S. Fed thus began to advocate a nonorthodox approach to monetary policy not only in Latin America but also East Asia—including the idea that central banks should play an active role in harnessing capital and channeling it toward national economic development initiatives. According to Helleiner, there were two main drivers of this shift in U.S. approach (2003, 254–55). The first was ideological—the growing influence of Keynesian and “embedded liberal” ideas in the United States, which resonated particular strongly in America in the wake of the Great Depression and New Deal. The second was political—the desire to develop Latin American and East Asian economies as bulwarks against communism as cold war tensions emerged and grew

RISE OF FINANCIAL ACTIVISM      61

after 1945. The United States was also sensitive to growing nationalist sentiment in many Latin American countries in the 1940s and increasing support among local policy elites for “economic nationalist” policies, including import substitution industrialization and the establishment of national currencies. Some members of the U.S. policy elite feared that if America strongly rejected or resisted such policies, it might marginalize nationalist governments and lead them to align with Axis powers (2003, 255–56). As a result, the monetary advice dispensed by the U.S. government over the 1940s and 1950s to the governments across Latin America and East Asia (from Guatemala to the Dominican Republic, Honduras, the Philippines, and South Korea) diverged significantly from the previous orthodoxy, and U.S. attitudes toward development banking became far more permissive.27 This is certainly not to suggest that U.S. policymakers were entirely approving of the aggressive financial activism deployed by Japan in the 1940s and Korea in the 1960s. As we saw earlier, the United States had insisted that Japan shift its focus from growth to inflation management in the late 1940s. It also refused to extend finance to Korea for what it saw as overly ambitious development projects in the 1960s. Moreover, the relationship between U.S financial advisors and the Korean government was far from smooth. For example, the Korean government left U.S. advisors completely out of the loop during its first effort at currency reform in the early 1960s, much to the frustration of the Americans (Kim C-y 2011). Nevertheless, the presence of a more permissive international environment from the 1940s onward was an important structural factor enabling the pursuit of growth first financial policies in Korea. As noted above, those policies have been detailed at length elsewhere, but a brief summary of the key elements is helpful here. First, interest rate manipulation emerged as a key instrument in the government’s developmental policy arsenal. Through that manipulation, the government was able to boost domestic savings (thus mobilizing funds for productive investment), encourage foreign borrowing,28 and increase investment in strategic industries.29 To promote domestic savings, in September 1965 the MOF doubled the time-deposit interest rate from 14 to 30 percent (Choi 1991, 45). This encouraged savings to be transferred to banks and led to a sevenfold increase in total bank deposits between 1965 and 1969, substantially increasing the pool of funds available for productive investment. To encourage foreign borrowing, the interest rate reform of 1965 created a large gap between domestic and international lending rates (of about 19 percent per annum), leading to a massive increase in foreign borrowing. Foreign funds were then channeled through government-controlled banks, including development banks like the KDB, into

62       CHAPTER 4

strategic industries. The strategy of maintaining high domestic interest rates was also useful for encouraging conversion of the country’s huge foreign exchange earnings into time deposits, thus recycling export earnings into domestic credit (Choi 1991). The government preferred to rely on foreign borrowing rather than foreign direct investment as it wanted to avoid the foreign ownership and control (particularly Japanese) of Korean companies, an important strategic goal (Park 1991, 47). Second, by maintaining controls over interest rates (and foreign borrowing approvals at the same time), the government was also able to encourage the flow of finance into strategic industries via the provision of low-interest rate loans. As we will see in the chapter that follows, these “policy loans,” or loans with exceedingly low interest rates, long maturity, and a nonconditional guarantee by the government, made up more than 40 percent of domestic credits by the mid-1970s. Policy loans were strongly biased toward export industries, as table 4.1 reveals. However if a company refused to follow the government’s enticements to divert their loans into strategic industries, the government could “discipline capital” (Amsden 1989), for example, by rejecting applications for credit, or via other mechanisms such as subjecting recalcitrant firms to “more stringent observation” at tax time (Jones and Sakong 1980, 119).30 Coupled with this “administrative guidance,” the establishment of centralized control over interest rates provided the government with a powerful developmental tool. As Jones and Sakong conclude, “Allocation of under-priced credit has been by far the most important single instrument of government microeconomic control” in Korea (1980, 101). Alice Amsden (1989) famously argued that this amounted to a strategy of “getting prices wrong”— in contrast with the prevailing World Bank strategy. She illustrated this with the manipulation of the price of steel, reducing the price for targeted sectors such as automotives. Third, to encourage exports, the government shifted from a multiple to a unified exchange rate in 1964. Under the traditional multiple exchange rate system, different rates were applied to importers and exporters. This system had discouraged exports and encouraged rent-seeking (Sakong 1993, 40). When the exchange rate was unified, it immediately led to a massive depreciation of the won, from ₩130 to ₩265 to the dollar in 1964, thus providing a major incentive boost for exporters. The government also used exchange rate manipulation to maintain Korea’s export competitiveness. The government’s export promotion policy did not specifically involve exchange rate manipulation—but the government was always quick to intervene in the foreign exchange market to correct overvaluations or to offset other unfavorable conditions that threatened Korea’s export drive.31

RISE OF FINANCIAL ACTIVISM      63

TABLE 4.1  Indicators of Korean growth, 1962–80 YEAR

GNP GROWTH RATE*

GNP PER CAPITA ($)**

EXPORT GROWTH RATE*

EXPORT VALUE (US$ MILLIONS)**

1962

2.2

87

31.7

1963

9.1

100

61.1

87

1964

9.6

103

37.9

119

1965

5.8

105

45.8

175

1966

12.7

125

42.9

250

1967

6.6

142

34.0

320

1968

11.3

169

45.1

455

1969

13.8

210

35.4

623

1970

7.6

243

34.0

882

1971

8.8

285

28.5

1132

1972

5.7

316

47.9

1676

1973

14.1

396

95.9

3271

1974

7.7

535

37.5

4515

1975

6.9

591

10.8

5003

1976

14.1

800

56.2

7715

1977

12.7

1028

28.6

10047

1978

9.7

1406

26.5

12710

1979

6.5

1662

15.7

14705

1980

–5.2

1589

17.1

17214

55

Source: * adapted from Amsden 1989, 56; ** adapted from Song 1990, 80, 60.

As already noted, my purpose is not to give an exhaustive review of the financial policies employed by the Park regime. Rather, it is to show how financial activism (from the 1960s to mid-1970s) sprang logically from the shared developmental ambition of the policy elite supported by the political consensus that surrounded Park’s growth first strategy, and ultimately by the institutional architecture of the Korean state (along with permissive structural conditions). As we saw in chapter 3, that architecture was constructed in a way that helped to create and reinforce a consensus around developmental goals broadly, and Park’s developmental strategy in particular (for example, via staff rotations through the Presidential Office). It was also assembled in a way that helped to translate the president’s developmental strategy into action (for example, through the subordination of the BOK to growth-oriented ministries, and through the establishment of policy banks responsible for issuing and monitoring policy loans). We now have a more accurate profile of the architecture of Korea’s developmental state upon its creation. In addition to institutional arrangements situated above and alongside the economic bureaucracy, we must also include Korea’s

64       CHAPTER 4

OFFICE OF THE PRESIDENT (includes Presidential Secretaries)

Special Temporary Committees (e.g., Heavy and Chemical Industry Promotion Committee)

Regular Senior Staff rotation

Senior Economic Ministries (EPB, MOF) Regular Senior Staff rotation Less Senior Economic Ministries (e.g., MCI)

Bank of Korea (subordinate to MOF)

State-Controlled Banks FIGURE 4.1  The most significant institutional features of Korea’s fledgling developmental state

development banks—and not least the bankers who staffed them, with their particular view of the financial sector as a tool for developing the economy. Taken together, these institutional arrangements enabled Korea’s first developmentally minded policymakers to pursue their original growth first strategy. It is not an overstatement to say that this strategy produced one of the most outstanding industrial transformations in world history. Over the space of two decades, Korea was transformed from a war-torn wreck to one of the world’s most rapidly growing and wealthy industrial economies. Between 1962 and 1979, Korea’s GNP grew at an average rate of 9.1 percent per year, in some years reaching as high as 14.1 percent. Exports grew at an average rate of approximately 40 percent per annum over the same period. This growth was accompanied by the structural transformation of Korea’s economy, including a shift from light industries in the 1960s to heavy and chemical industries in the 1970s and 1980s, and the ever increasing levels of technological sophistication that this involved (see Amsden 1989).

RISE OF FINANCIAL ACTIVISM      65

Nevertheless, as time wore on, the costs of growth first became increasingly apparent—to the extent that in the late 1970s the developmental consensus began to fracture. The eventual consequences of that fracturing were the abandonment of financial activism in the early 1990s and Korea’s embroilment in the 1997–98 financial crisis.

5 FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM [We] planned joining the OECD to use it against the government— the committee knew that some areas were not ready [for financial liberalization], but it needed the reform impetus. —Park Se-Il, author interview

In this chapter I analyze the fracturing of Korea’s developmental consensus from the late 1970s and its consequences. My purpose is to show how that fracturing shaped Korea’s approach to financial regulation and reform in subsequent decades, culminating in the abandonment of financial activism in the early 1990s. That abandonment, and the circumstances leading up to it, have been well documented.1 But an account of the fracturing of the developmental consensus and its role in that process is sorely lacking. To construct this narrative, I draw on insights from interviews with key policymakers2 and from existing scholarship to show how intrastate conflict from the 1970s turned largely on perceptions about the desirability of Korea’s growth first strategy and its associated financial policies.3 To anticipate, from the late 1960s, the costs of “growth first” began to weaken popular support for the president and his developmental strategy. However, rising geopolitical challenges led Park to intensify that strategy in the early 1970s. As the 1980s approached, continuing financial instabilities had undermined faith in financial activism among key segments of the bureaucracy. This was particularly true of the EPB, which began to experience an influx of American-trained economists in the 1970s. Yet the ability of liberally minded policymakers to influence Korea’s developmental strategy and the financial policies it involved was constrained over the 1970s and 1980s by prevailing political, institutional, and structural conditions. Those conditions enabled developmentally minded bureaucrats in the Ministry of Finance and Ministry of Commerce and Industry to retain the upper hand in the policymaking process and to push ahead with “growth first.” Even the 1979 assassination of Park Chung Hee, the lead architect and advocate

66

FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM      67

of growth first, did not displace Korea’s original developmental strategy, which was continued by presidents Chun Doo-hwan and Roh Tae-woo as they grappled with increasingly volatile international and domestic conditions. It was not until the election of President Kim Young-sam in 1993, Korea’s first liberally minded president since the 1960s, that growth first and financial activism were seriously challenged. At that point, the planets aligned to favor liberal reformists. Their newfound influence under President Kim led to the abandonment of financial activism and ultimately delivered Korea into the maelstrom of the 1997 financial crisis.

Emerging Costs of Korea’s Original Developmental Strategy The fracturing of Korea’s developmental consensus can be traced to the economic and social costs that emerged from Park’s growth first developmental strategy. Between 1961 and 1969, there was little serious domestic resistance—within or without the state—to the strategy of nurturing large, export-oriented firms in strategic industries via the provision of low-cost capital. Over this period, high rates of economic growth and the relatively fair distribution of its fruits secured substantial popular support for the military regime and its economic policies.4 As a result, Park easily won the 1967 presidential election.5 It was not until the outbreak of Korea’s first major debt crisis in 1969 that the economic costs of his developmental strategy became apparent. The origins of this crisis lay in the financial reforms of 1965, which raised interest rates to encourage domestic savings. The intention was to expand the pool of capital available for local investment. However the reforms created a large gap between (high) local and (low) international interest rates, and thus created a major incentive for foreign borrowing. From the mid-1960s, Korea was flooded with foreign loans, which were mainly channeled to large export-oriented firms. This led to the build-up of inflationary pressures and the emergence of large debt-to-equity ratios among Korean companies. In 1962, the average debt to equity ratio of manufacturing firms was 154. By 1969 this had reached 270 (Amsden 1989, 104). In 1969, Korea’s high-growth, high-debt model came under fire—for what would be the first of many times. A rash of corporate bankruptcies and the buildup of nonperforming loans forced Korea into the arms of the IMF, which insisted on harsh stabilization policies. These measures limited foreign borrowing and devalued the currency, which exacerbated capital scarcity and amplified the burden of foreign loan repayments. Local banks, overwhelmed with

68       CHAPTER 5

nonperforming loans, were unable to help the chaebols meet these repayments. The chaebols thus turned to the unregulated, high-interest “curb” for loans, which did little to resolve their mounting debt burden. By 1971, more than two hundred firms that had received foreign loans were insolvent, and foreign debt had climbed to 30 percent of GNP (Woo 1991, 109). The economic turmoil of the late 1960s created a public backlash against the Park regime.6 In rural areas, support for Park’s Democratic Republican Party (DRP) remained strong.7 But in urban areas, worker, student, and church groups—all opposed to Park on social justice grounds—provided plentiful rallying points for economically disaffected Koreans. In 1971, these groups were successfully united by Kim Dae-jung under the banner of the New Democratic Party (NDP) (Cheng 1990, 165). It was at that time that Kim began to publicly call for financial liberalization, as a means of severing the cosy relationship between the state and large firms. The NDP posed a serious challenge to Park in the presidential election that same year. In a major shock, Park won the vote by only a narrow margin, despite extensive limitations on opposition campaigning.8 Yet this poor election outcome did little to shake Park’s faith in the necessity of his developmental strategy. For while he faced major political challenges at home, Park was simultaneously confronted by serious security challenges from abroad that called for continued vigilance. Korea’s 1969 financial crisis coincided with America’s announcement of the Nixon Doctrine, and its withdrawal of troops from Vietnam. This profoundly changed Korea’s geopolitical circumstances. The basic thrust of the Nixon Doctrine was that Asian nations should be primarily responsible for their own national security. These changes raised fears that the United States was intending to reduce military support for Korea as well, which would increase the country’s vulnerability to attack from the North. These fears were well founded. In the spring of 1970, the United States announced its intention to withdraw troops from Korea, the first phase of withdrawal beginning in March 1971. In Park’s view, there was only one solution to these snowballing security challenges. Korea would have to rely on its own resources for national defense. From 1968, the theme of defense self-reliance became a constant in Park’s speeches.9 Yet self-reliance in defense required self-reliance in defense-related industries such as steel, munitions, and transport. Security challenges thus largely shaped Park’s eventual response to the 1969 financial crisis—the intensification of his growth first strategy. In August 1971, Park declared a moratorium on corporate loan repayments to the curb, providing the relief that the chaebols had been demanding (and ruining money-lenders to the bargain). The moratorium sent shockwaves through the curb market, which rapidly filtered out its traditional constituencies—households and small businesses. The public backlash was

FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM      69

palpable and fueled already high levels of public anger with the government. Park’s response to growing political unrest was decisive. On October 17, 1972, he once again declared martial law, suspending “democracy” and introducing the Yushin Constitution which, among other things, removed the limitations on his tenure as president, allowing him to stay in power.

Intensification of Growth First To deal with the chaebols’ financial problems, Park announced the Emergency Economic Decree of 1972. Firms’ short-term debts were rescheduled or written off. Banks were plied with additional funds and instructed to extend new loans to the chaebols to facilitate further expansion (thereby increasing their indebtedness). Then, to rapidly expand Korea’s defense capabilities, Park promoted a shift toward the development of heavy and chemical industries (HCIs). Steel especially was seen as critical for defense capabilities, hence Park’s catch-cry of the 1970s, “Steel equals national strength.” Yet while Park tended to emphasize the security imperative in justifying the HCI push, there were also compelling economic reasons for this shift that played into Park’s calculations. In the late 1960s, developed countries became increasingly protectionist toward many of the light industries that Korea had originally promoted to spearhead its export drive, particularly textiles, which made up about 40 percent of Korea’s exports by the late 1960s. As export potential in light industries declined, it was obvious that they could no longer be relied on to sustain rapid growth (Lee 1991, 436; Horikane 2005, 380–81). At the same time, developed countries were losing competitiveness in a number of heavy industries such as shipbuilding, as well as phasing out the production of pollution-causing industries such as petrochemicals (Cheng 1990, 163), creating an opportunity for latecomers like Korea to enter the market. The development of HCIs would also allow Korea to produce previously imported intermediate goods at home, which would have a positive balance of payments effect (Haggard 1994, 33). Intensifying military threats and changing economic conditions thus produced the perfect storm of HCI drivers. The HCI plan was launched officially on January 12, 1973, though as we saw in chapter 4, projects such as the Pohang Iron and Steel Mill were already well underway. Under the plan, six key industries were selected for promotion: steel, nonferrous metal, machinery (including automobiles), shipbuilding, electronics, and chemicals. More than ever before, the HCI drive necessitated economies of scale, and the fostering of companies large enough to undertake mammoth projects (Lee 1991, 436). However the idea of launching such an ambitious drive into HCIs met with some skepticism and

70       CHAPTER 5

resistance—from both within and outside the state. Economists within the Economic Planning Board proved wary of the risks involved in the levels of borrowing and investment envisaged by Park. Beyond the state, Korea’s largest business groups were also wary of the risks involved in making such enormous outlays in technologically unfamiliar industries and expressed their reluctance to participate (Choi 1991, 51). The president, however, was able to effectively neutralize this resistance—albeit in different ways—by drawing on the institutional resources at his disposal. To neutralize EPB resistance, Park used his presidential powers to create a special presidential committee—the Heavy and Chemical Industry Promotion Committee—that sat directly under and reported directly to the Presidential Office. As noted in chapter 3, Park staffed this committee with bureaucrats he believed to be dedicated to his “growth first” strategy and granted the committee responsibility for designing and monitoring all aspects of the HCI drive. In doing so, Park effectively demoted the EPB in the industry policymaking process. Special presidential committees have subsequently emerged as key institutional mechanisms available to Korean presidents for overcoming bureaucratic blockages to controversial developmental plans. As for recalcitrant business groups, Park was able to cajole them into participating in the HCI drive by turning these industries into “privileged sectors,” offering low and even negative interest rate loans to those willing to invest, and extending government guarantees to all HCI investments to reduce risks (Choi 1991, 51). Korea’s state-owned banks, including specialized development banks, emerged as critical institutional resources in this regard. Over the 1970s, the Korea Development Bank significantly increased its international borrowing and domestic lending activities. Moreover, in 1976, the Korea Export Import Bank (KEXIM) was established, for the explicit purposes of providing medium- and long-term loans to Korean exporters in the HCI sector (Ahn 2005, 35). As we will see in the chapters that follow, the KDB and KEXIM have featured strongly in the revival of financial activism in the post 1997–98 crisis period, and since the 2008 crisis in particular. The massive expansion of policy lending from the mid-1970s under the HCI drive heralded the real growth and consolidation of the chaebols.10 Some of Korea’s most famous chaebols did not even exist before the mid-1960s. Daewoo, for example, was created in 1967 with only seven employees and a value of eighteen thousand dollars. By 1979, the conglomerate was worth $2 billion and employed more than sixty thousand people (Hwang 1996). Between 1970 and 1977, the fastest growing chaebols, Hyundai, Daewoo, and Ssangyong, expanded at average annual rates of 33, 35 and 34 percent respectively (Woo-Cumings 1999b, 120). By 1987, Korea’s top ten chaebols accounted for 63.5 percent of the country’s GDP (Gereffi 1990, 96).

FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM      71

The HCI drive was deeply symbolic of the developmental purpose that shaped economic policy making in Korea. Rapid, large-scale industrialization was routinely depicted by Park as critical for ensuring national security and gaining international prestige. And with concerns about U.S. withdrawal intensifying, it was pace and size that was seen to matter; the bigger and better the industrial plants and the faster the rate of growth, the more secure and admired Korea would become. The leap into HCI was accompanied by the setting of new and seemingly impossible goals for export-led growth. At a New Year’s press conference in 1973, Park announced the goal of achieving $10 billion in annual export earnings and an annual per capita income of one thousand dollars by 1980. This was a mammoth task; per capita income stood at only $396 in 1973, and annual exports earned just over $3 billion. In the event, Korea surpassed both targets. Per capita income reached the $1000 mark in 1977, and by 1980 was $1,589.11 The $10 billion export goal was also reached in 1977, three years ahead of schedule. By 1980, Korea earned more than $17 billion from exporting. Yet despite these successes, the intensification of Park’s strategy also intensified its costs. The massive investments required for its HCI drive compelled the government to actively encourage foreign borrowing by raising domestic lending rates. The majority of chaebol investment was thus financed by foreign borrowing. This, combined with firms’ massive export dependency and their tendency toward overproduction, left the Korean economy very vulnerable to domestic inflation and downturns in international demand. These vulnerabilities were exposed during the oil crisis of 1973–74. Inflationary pressures at home coupled with mounting overcapacity, huge increases in oil prices, and a downturn in global demand squeezed chaebol profits. This made it difficult for the chaebols to service their debts, threatening major corporate bankruptcies and financial sector crisis. In a clear reflection of its growth first priorities, the government responded to this crisis in the most unconventional of ways—expanding and inflating the economy to grow its way out of trouble (Cheng 1990, 163).12 Debt-ridden firms were rescued, foreign borrowing expanded, and investment in export capacity increased. Between 1973 and 1974, Korea’s foreign debt grew by 42 percent, while investment increased from 26 to 32 percent of GNP (Woo 1991, 128). The results were staggering. In 1975, Korea’s GNP growth rate was 6.9 percent. In 1976, it jumped to 14.1 percent. While successful in promoting a recovery, the longer-term impact was to intensify structural pressures by further fueling foreign debt and export dependence and reinforcing Korea’s tendency toward crisis. Between 1969 and 1972, the average debt to equity ratio in manufacturing had increased from 270 to 313. The intensification of growth first saw that ratio climb to 488 in 1980 (Amsden 1989, 104). In 1978, overcapacity, inflation, falling export earnings, and corporate

72       CHAPTER 5

bankruptcies snowballed into the country’s second debt crisis of the decade.13 Again, Park’s response to this crisis was informed by geopolitical challenges, this time the 1977 announcement by U.S. president Carter that he planned to withdraw American ground troops from Korea, starting in 1978. In Park’s eyes, this necessitated the immediate expansion of national defense capabilities, which of course meant the expansion of HCIs. Park’s immediate response to the 1978 crisis was thus a rerun of 1973–74—to inflate and expand the economy and grow Korea out of crisis. This time, however, there was more marked opposition from within the bureaucracy. The fracturing of the developmental consensus had begun.

Fracturing Consensus and Calls for Liberalization As we saw in previous chapters, from the early 1960s Park had surrounded himself with like-minded economic officials. By circulating high-ranking staff from the Economic Planning Board (EPB) and Ministry of Finance (MOF) through the Presidential Office, he was able to foster a shared mindset among the economic policymaking elite concerning the state’s primary goals and the most appropriate means of their pursuit. Should any resistance emerge to these ideas, Park was able to neutralize it through the creation of special presidential committees and the effective demotion of problematic elements within the bureaucracy. As a result, by 1978, almost all high-ranking government officials were unified in their support for Park’s growth first strategy, and his export-oriented HCI drive in particular. Like Park, these bureaucrats tended to view the problems associated with that strategy—including inflation and overcapacity—as temporary side effects that would eventually disappear with continued growth (as we saw in chapter 4). However the 1978 crisis—the second in the decade—served to fracture Korea’s developmental consensus. This fracturing is particularly evident in the growing tensions between the EPB on the one hand, and the MOF, Ministry of Commerce and Industry (MCI), and the president himself on the other. It was out of this conflict that serious calls for financial liberalization and the abandonment of financial activism emerged and grew louder. In the mid-1970s, the EPB began to experience an influx of young, U.S.trained economists, who had been exposed to liberal economic ideas. As the 1978 crisis gripped the nation, a small group of these young economists took it on themselves to undertake a critical evaluation of the problems facing the Korean economy.14 Based on their evaluations, in March and August 1978, the group led by Assistant Minister of Planning Kang Kyung Sik produced two internal reports, both entitled “Current Problems of the Korean Economy.” The contents of these

FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM      73

reports were the first sign of the emergence of a new set of ideas within the EPB about the state’s role in the economy. These ideas were fundamentally different from the developmentally oriented dirigisme that had informed economic policy making since 1961. The reports identified Park’s growth first strategy as the source of Korea’s economic weaknesses. They proposed that the government abandon its growth priority and set stabilization as its primary goal. Accordingly, they recommended an immediate reduction in both growth and export rates, and thorough reform of the financial sector via liberalization, including the privatization of state owned banks and the normalization of interest rates. These new ideas, however, fell on deaf ears, at least initially. First, there was no consensus within the EPB; the new way of thinking of the young reformists was different from that of the rank and file of developmentally oriented EPB staff. Furthermore, Park himself remained firmly committed to Korea’s existing developmental strategy, as did officials within the MOF and MCI—neither of which had experienced an influx of foreign-trained economists. The reports of the EPB reformists thus failed to make an impact. In August 1978, Park publicly announced that Korea would push ahead with its ambitious growth strategy, regardless of its impact on price stability. As the debt crisis deepened, the reformists won some solid institutional support. In December 1978, the growth-oriented head of the EPB was replaced by Shin Hyun Hwak, an advocate of the reformists’ agenda. From that point, stabilization based on financial and import liberalization became a “dominant strategy” within the EPB (Rhee 1994, 96).15 On January 11 1979, the EPB presented to Park another report advocating (among other things) financial liberalization, including the abandonment of policy loans (especially to HCIs) and investment coordination. Yet again, the EPB failed to convince Park and other powerful economics ministries of its ideas. The MCI continued to push for the expansion of financial support to existing HCI projects, while also announcing ambitious new investment plans. In January 1979, Park also publicly reiterated his unwavering commitment to the HCI program, rejecting outright any plans to cut the growth rate or exports. External pressures in the shape of the second oil shock in April 1979 intensified Korea’s already serious debt and inflation crisis. When the shock hit, Park initially appeared to waver in his commitment to growth first. At that time, he issued a call to independent think tanks to report their views on Korea’s current economic problems and policy priorities. He also permitted the EPB to submit another report on its concerns. Upon receiving the reports, all of which argued for stabilization, Park allowed the EPB to propose its Comprehensive Measures for Economic Stabilization (CMES). The cornerstone of the CMES was tighter monetary and fiscal policy, particularly the scaling back of financial support

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to HCIs. However, strong opposition to the EPB’s recommendations continued to emanate from other key agencies. The MCI, the Heavy and Chemical Industry Promotion Committee (HCIPC), and the MOF all firmly maintained their support for the existing growth strategy and continued to put forward expansionary policies for consideration. Significantly, the increasingly powerful chaebols also strongly opposed the EPB’s proposals and vocally supported the continuation of financial support for HCIs, of which they were key protagonists and prime beneficiaries. In this sense, neither international nor domestic political conditions were conducive to a substantive change in Korea’s developmental strategy or the financial policies it involved. In light of the opposition from the president, all other economic ministries, and the chaebols, the stabilization measures finally agreed on in May 1979 fell short of the EPB’s expectations. Liberal reformists had proposed the rationalization and adjustment of all HCI sectors, including the suspension of current projects and the postponement of planned projects until further notice. Under the final measures, only some planned projects in a small number of HCI sectors were postponed.16 Park also made it clear that the adoption of stabilization measures did not imply a fundamental change in strategy. In Park’s own words: “In spite of the economic stabilization policy, there is no change of the basic orientation in government economic policy. The [stabilization package] was just to slightly reduce economic growth speed as a partial policy adjustment in order to subdue the overheated economy and to stabilize people’s daily life.”17 In any case, this brief flirtation with stabilization did not last long. The intensifying economic troubles from mid-1979 led to the so-called “economic coup d’état” of June 25, 1979. The “coup” took place while EPB head, Shin Hyun Hwak, and Assistant Minister Kang Kyung Sik (the core supporters of the EPB’s stabilization plan) were overseas. During their absence, the government suddenly dumped the CMES in favor of the expansionary and inflationary policies of old. By late 1979, the MCI had wrested back control of industrial policy from the EPB, and together with the MOF began to breathe new life into export promotion policies for HCI industries. The MCI reversed the earlier decision under the CMES to postpone some HCI projects, pumping public funds into idle plants to bring them back online. The MOF followed suit. In August 1979 it announced a plan to aggressively expand the domestic supply of credit in both the public and private sector from July to December 1979.18 These reforms were passed in secret and without obtaining a consensus with the EPB. The subsequent spike in credit provision and policy lending also served to reinforce the structural weaknesses associated with Korea’s developmental strategy and the tendency toward inflation and financial crisis. In the summer of 1979, the effects of soaring inflation and slowing growth triggered widespread riots.

FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM      75

TABLE 5.1  Policy loans as percentage of total credit in Korea MONETARY INSTITUTIONS (INCLUDING CREDIT TO KDB AND KEXIM)

OTHER FINANCIAL INSTITUTIONS

TOTAL

1973

48.2

52.8

49.3

1975

40.9

52.4

43.5

1980

49.1

43.9

47.4

1981

45.7

41.1

44.1

1982

40.3

38.8

39.7

1983

41.2

36.1

39.4

1984

40.7

31.7

36.8

1985

39.3

30.2

35.3

1986

40.6

21.4

33.1

1987

45.7

20.5

33.6

1988

46.4

17.3

31.9

1989

46.4

14.1

29.2

1990

46.3

12.7

27.8

1991

41.9

12

24.9

Source: Adapted by the author from Park 1996, 255.

In the midst of social, political, and economic disarray, on October 26, 1979, Park was assassinated by the head of the KCIA, bringing to an end seventeen years of dedicated developmental rule.19

Developmental Consensus and Financial Activism Post Park The assassination of Park, the originator and the most fierce and constant defender of growth first, had the potential to derail the pursuit of that strategy and to usher in an era of liberal economic reform. This was particularly true given the emergence of liberal ideas within small but potentially powerful segments of the economic bureaucracy from the mid-1970s and growing foreign calls for financial liberalization from the early 1980s. However, as we shall see, a number of factors thwarted the attempts of liberal reformists to reshape Korean financial policy along more liberal lines over the 1980s and early 1990s. Of these, the most significant were the personal characteristics and orientations of subsequent presidents Chun Doo-hwan and Roh Tae-woo. Both military men who had long served under Park Chung Hee, their personal commitment to liberalism generally, and liberal economic policy in particular, was limited to say the least. That interest turned largely on the extent to which they believed the embrace of financial liberalization might bolster their political legitimacy. In this

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context, the ability of liberally minded bureaucrats to advance their financial reform agenda depended on their ability to convince these presidents of the agenda’s legitimacy-enhancing payoffs. However, in both instances, these efforts were thwarted by the deterioration of geopolitical and domestic circumstances. Combined, such pressures would lead presidents Chun and Roh to return to growth first and its associated financial policies. The five months following Park’s death became known as the Seoul Spring—a time of hope and anticipated new beginnings. During this period, civilian bureaucrat Choi Kyu-hah, who had served as prime minister under Park, was elected president. Upon his election, Choi moved to dismantle many of the Yushin restrictions, including the banning of antigovernment activity, which raised hopes for a new period of democracy. But changing geopolitical conditions doomed these aspirations. The late 1970s marked a shift in the U.S. government’s Cold War strategy. Following President Carter’s normalization of relations with China in 1979, the United States again put Northeast Asia at the center of its plans for managing the Soviet threat. It could thus be argued that it would be in American interests to have a military general at the helm in Korea. In 1979, Carter suspended the withdrawal of troops from the peninsula, and with America’s tacit blessing, General Chun Doo-hwan seized power in a military coup in May 1980, declaring martial law in Korea. The Korean people erupted in protest against the military’s reinvolvement in politics. Eventually, students and unionists succeeded in taking over the town of Kwangju, about 150 kilometers south of Seoul. In response to this “civil disobedience,” on May 18, 1980, armed forces moved in to the town and were given permission to put down the uprising. The U.S. military also released some of its troops stationed in Korea to help “restore order” in Kwangju. The result was the bloody Kwangju massacre of May 18, in which more than 240 people were killed.20 With his leadership secured—but political legitimacy in tatters—Chun turned his attention to addressing the debt and inflation crisis still gripping the nation. The liberally oriented EPB came back into favor—at least in the financial policy sphere—during the first three years of the Chun regime. As a high-ranking general, Chun was no expert in economic affairs and relied heavily on a small group of advisors for guidance. Leading this team was Presidential Economic Secretary Kim Jae-ik, a former director-general of the EPB’s Planning Bureau. An “unflinching believer in the free market,” Kim was Chun’s “closest and most trusted economic advisor” from 1980 to 1983, and mastermind of the government’s economic liberalization plans, discussed below (Choi 1987a, 107). Kim’s support cast included EPB assistant minister of planning Kang Kyung Sik, who was among the young reformists who had first recommended financial

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liberalization to Park Chung Hee. To convince the president that stabilization and liberalization were necessary, Chun’s advisors routinely emphasized the link between stabilization and political legitimacy—which Chun’s leadership was sorely lacking.21 In the words of Kim Ki-hwan, then economics professor and one of Chun’s economic advisors, “How did we convince [Chun] that stabilization was good? We used the experience of Germany after World War I and the experience of the nationalist Chinese government during the end of World War II. We said that if you want [to maintain] political power you shouldn’t have any inflation. Income distribution will deteriorate and if inflation continues the people who suffer the most will be those without the money to hedge against inflation. That argument was very effective” (cited in Clifford 1994, 181). Chun’s advisors were not alone in calling for liberalization. The United States too was pressing hard for Korea to open its import and financial markets. These calls were hardly new. But they were hard for Chun to ignore—given his reliance on U.S. support for his violent seizure of power. American calls for liberal reform were echoed by the IMF and World Bank, which in combination extended a total of five stabilization and structural adjustment loans to Korea during the 1980–85 period, each bringing with it reform expectations. Thus, in an attempt to build domestic political support at home and to placate demands from abroad, President Chun affirmed his commitment to “stability first” at every public opportunity. Importantly, staunch dissent from the idea of abandoning growth first and embracing financial liberalization continued to emanate from the MOF and MCI. However, by appealing to the political benefits of stabilization, EPB reformists managed to persuade the president to pass a number of unpopular reforms as presidential decrees to cement their policy leadership over growth-oriented ministries.22 The most significant of these involved the establishment of the Investment Deliberation Council (later renamed the Industrial Policy Deliberation Council), chaired by the head of the EPB; this centralized coordination of other economic ministries under EPB control. Under this decree, the MOF and the MCI had to gain prior approval from the EPB for any major policy proposals, and the EPB could demand that the MOF and MCI change existing progrowth policies in line with the board’s overall economic objectives (Choi 1987a, 115–116). This cemented the EPB’s power as the top economic policymaking body and paved the way for the introduction of a range of liberalizing measures aimed at dismantling supports for strategic industries and at ending financial activism. These new measures also reflected a way of thinking about the role of the state in the economy that was very different from the mindset that informed the Park administration. In the EPB’s view, industry assistance should be strictly limited to certain activities (such as technology development) without preference for

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any industry or sector. Moreover, that support should be limited to tax breaks. Policy loans, which distorted the allocation of resources and encouraged overinvestment, would be discontinued. Other measures proposed by the EPB clearly reflected the rejection of a developmental view of finance. Under the Measures for Deregulating Commercial Banks, passed on November 17, 1980, commercial banks would be gradually privatized and interest rates liberalized. Measures would also be put in place to prevent the chaebols from gaining excessive control over financial institutions (Choi 1987a, 195–96). The EPB saw such measures as the beginning of the end of government control over, and intervention in, the financial system for developmental projects. Not surprisingly, the chaebols responded furiously to the announcement of these measures. They interpreted Chun’s support for them as a thinly veiled attempt to bolster his political legitimacy by publicly attacking the chaebols’ economic dominance.23 Through the Federation of Korean Industries (FKI)—their industry association—the chaebols launched a series of attacks on the government, starting in 1983. In reports released during 1983 and 1984, the FKI vigorously defended the big push and its associated financial policies, while emphasising the importance of large firms to the Korean economy.24 Significantly, these reports revealed the chaebols’ conflicted attitude toward financial liberalization. Where liberalization meant the reduction of policy loans—the chaebols were opposed. But where it meant the removal of restrictions on their access to finance, they were strongly supportive. The point to emphasize here is that the chaebols were correct about Chun and the political pragmatism that informed his early support for the EPB’s liberalization agenda. For Chun was by no means a blind follower of the EPB and the liberal ideology it espoused. Indeed, in the earliest days of his presidency, Chun had sought to neutralize the EPB’s influence in areas where its liberal views conflicted with his broader objectives—including developmental ones. For example, in the late 1970s, a fledgling idea emerged within some segments of the Korean bureaucracy that the government should begin heavily investing in information technology (IT) industries in order to establish a viable Korean presence. The EPB was strongly opposed to this idea. It was unconvinced that Korea had the ability to make the transition into technology-intensive sectors and unwilling to shoulder the cost of trying (Lim 2013, 361). However, upon assuming the Presidency, Chun became a strong advocate of this IT-promotion vision. To neutralize EPB resistance, the Blue House’s economic secretariat was restructured in the early 1980s to make IT promotion a top priority. Chun’s presidential advisors began to recruit to the Blue House “those who believed that Korea had a realistic chance in the IT industry” (Lim 2013, 361). Under Chun, the Blue House thus emerged as the key agency from which Korea’s

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push into IT-related industries, particularly semiconductors, was coordinated. In fact, the visibility of the Presidential Office in Korea’s famous VLSI semiconductor project saw it referred to as the “Blue House Project” by industry officials (Ungson et al. 1997, 142). This again highlights the role of the Presidential Office in neutralizing bureaucratic conflict over key developmental initiatives. It is also revealing of the influence of the Presidential Office in determining the direction of Korea’s developmental drive, and the pace and scope of its liberalizing reforms.25 In a broader perspective, it shows the role played by the Blue House in maintaining institutional continuity in Korea’s evolving developmental mindset. In sum, the influence of the EPB over the direction of financial reform in the early 1980s hinged on President Chun’s receptiveness to their reform ideas. And as the decade unfolded, Chun’s receptiveness decreased, thanks to deteriorating economic and political circumstances. Economically, the intensification of the chaebols’ financial difficulties in 1983 shook Chun’s faith in stabilization. That same year, many of Chun’s most influential economic advisors, including Kim Jae-ik, were killed by North Korean commandos during a presidential visit to Burma on October 9. That event, known as the Rangoon Bomb incident, left twelve of Chun’s sixteen-member delegation dead, including many of his senior cabinet members. It also reminded the president of the imminent threat from the North. The policy leadership vacuum left by the incident was swiftly filled by Korea’s developmentally oriented ministries, particularly the MOF. From this point onward, the momentum of the government’s liberalization plans slowed significantly. In 1983, the MOF declared the government’s bank privatization program “complete”—after only two years and four bank privatizations (Kim B-K 2003, 18).26 The economy continued to falter over the course of 1984. By 1985, seventy-eight firms with a total debt of ₩9.8 trillion were close to failure (Kim B-K 2003, 16). As companies were unable to service their debts, Korean banks were again squeezed, threatening financial crisis. At that time, the government shelved the idea of stabilization altogether, enthusiastically reembracing the preferential credit policies of the 1970s. In early 1985, it embarked upon a round of massive financial interventions, pumping approximately ₩1.7 trillion into the banking sector (which then passed the funds on as policy loans) and writing off no less than three-quarters of banks’ nonperforming loans. The government also reduced the policy loan interest rate from 6 to 3 percent, unlocking further flows of investment funds and enhancing its strategic control. Then, indicating a full resumption of developmental ways of thinking, Kim Mahn Je, an advocate of expansionary policies, was appointed the head of the EPB, and the slogan of “stability first” now gave way once again to an emphasis on “growth and employment” (Haggard and Moon 1990, 229).

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In addition to these economic factors, from 1985 onward there was also a strong political rationale driving Chun’s decision to support the aggressive expansion of preferential credit. Starting in 1983, the Chun administration was plagued by financial scandals. At the height of the scandals, it seemed that no corner of Chun’s regime was untouched by corruption, and the entire cabinet offered their resignation to the president. These scandals—along with Chun’s often brutal repression of labor27—further damaged his reputation among the Korean population. His political legitimacy in tatters, Chun sought to cement support from big business by the only means he knew how—extending favorable finance. However, the financial relationship between the state and the chaebols that emerged during Chun’s final years of rule was arguably based more on corruption than strategic guidance of the economy. Chun made preferential finance dependent on political donations, the majority of which ended up allegedly in Chun’s own hands.28 It was the burden of such political contributions that fostered increasing support among the chaebols for financial liberalization, if only to get the government “out of its hair” (Woo 1991, 198). Yet the chaebols remained stuck between a rock and a hard place, wanting the state’s financial supports to continue on one hand, but relief from “political contributions” and the freedom to make their own investment decisions on the other. As Amsden and Euh (1993, 380) point out, conflicting business sentiments over the desirability of financial liberalization helped to shape its “halting, half-way nature” over the 1980s. The enthusiastic reembrace of policy lending in 1985 coincided with a favorable changes in the international economy, including the establishment of the Plaza Accord, forcing the appreciation of the Japanese yen against the U.S. dollar.29 The accord ushered in the era of the so-called “three-lows” for Korea: a low won (good for Korean exporters), low international interest rates (good for Korean borrowers/ debtors), and low commodity prices (good for Korean importers). The result was a new period of rapid growth and low inflation, the economy turning in double-digit growth rates between 1986 and 1988.30 Yet this did nothing to increase Chun’s popular appeal. These results led to increasing and insistent demands for higher wages so that labor could share in the prosperity. As labor riots erupted in 1987, Chun’s party agreed to a return to democratic elections. Chun, who had little hope for reelection, was replaced with General Roh Tae-woo as the party’s presidential candidate. The failure of civilian candidates Kim Young-sam and Kim Dae-jung to contest the presidential election with a single slate split the Democratic vote. As a result, in December 1987, General Roh was narrowly elected on the basis of the promise to expand democratic rights and pursue liberal economic reform. Like Chun, Roh came to power promising to reform the relationship between the state and the chaebols, which had been predicated on these firms’ preferential financial treatment. Like Chun, Roh suffered poor domestic legitimacy from the

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outset, owing to his military background, his role in engineering the 1980 coup, as well as his long association with Chun as a military comrade and friend, which meant that Roh was damned by association with Chun and his corrupt activities. Such suspicion of Roh’s integrity was well founded; Roh was to be jailed under Kim Young-sam for extensive corruption. Roh left office with a personal fortune of $150 million, and left behind a “slush fund” of $654 million (Pye 1997, 222). However Roh’s reforms—like those of Chun before him—came to naught in terms of substantially changing the government’s financial policy approach, or its longstanding developmental strategy. Roh initially rode on the fortunes delivered by the “three lows,” announcing plans to reform the chaebols and liberalize the financial sector. However, the appreciation of the won in 1989 gave rise to a further massive trade deficit (the first in four years), compelling the state once again to recraft its interventionist financial policies to revive export earnings. By the time of Roh’s demise in 1993, little had changed in Korea’s state-guided financial system. The government maintained control over most financial institutions. The majority of bank credit was still being directed by the government into strategic industries.31 And policy loans continued to grow, accounting for nearly 50 percent of the rise in domestic credit in 1990, for example (Fields 1995, 96). As Korean public administration scholar Byung-Sun Choi concluded in the early 1990s: “A considerable progress of financial liberalization not withstanding, the financial system of Korea still serves as the fulcrum of Korean industrial policy and as a fundamental tool with which Korean policymakers can induce business cooperation and compliance” (1991, 41). Clearly then, despite the instabilities wrought by Korea’s development strategy, a fractured developmental consensus, and persistent calls for financial liberalization from the late 1970s, a combination of structural, institutional, and political factors ensured that the growth-oriented ministries were able to maintain the upper hand in the policymaking process until the early 1990s (apart from a few brief periods of flirtation with stabilization). As such, despite a strong battle of ideas over the government’s financial policy approach, reforms introduced under presidents Chun and Roh did not substantively change Korea’s original developmental strategy, or the financial policies on which it rested. All of this was to change, however, with the ascendency of civilian Kim Young-sam to the presidency in 1993.

Kim Young-sam and the Abandonment of Financial Activism As we saw earlier, since the early 1980s state activism in finance had become negatively associated with antidemocratic values. This was partly because such

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activism had been carried out by military leaders masquerading as civilians (Park, Chun, and Roh), and in part because it tended to favor the massive chaebols over small- to medium-sized enterprises, and had come at the expense of economic stability. By the time Kim came to power, despite much talk of reform under Chun and Roh, little had been achieved. The chaebols were as dominant as ever, and widespread financial corruption under Chun and Roh had further undermined people’s confidence in Korea’s mode of economic governance. It was within this climate of discontent with the past military regimes and their long association with financial activism that Kim Young-sam assumed the presidency in 1993.32 A career-long campaigner for democracy, Kim immediately sought to distance himself from his predecessors’ authoritarian legacies and to reframe the role of the Korean state in the economy. At the behest of the economic advisers who had counseled him through the election campaign, Kim’s first actions as president reflected new ideas about the appropriate scope, role, and methods of government intervention in the economy. These ideas were essentially liberal in nature, emphasizing the need for rationalization of the policymaking apparatus and the reduction of government intervention in the economy in the quest for small and efficient government. Kim’s first policy changes reflected this liberal orientation; one of his first steps was to merge the EPB and the MOF—a major shift in policy orientation and in institutional strategy. These were Korea’s key economic planning ministries, and the merger was symbolic of the president’s intention (or at least the intention of his key advisors) to scale back the government’s role as economic coordinator and to hand over the reins to the invisible hand of the market. What was widely acknowledged to be the end of the EPB met with little resistance, even from within the EPB itself. This is not particularly surprising given the EPB’s increasingly neoliberal inclination since the 1970s. The influx of U.S.trained neoliberal economists had already resulted in some soul searching within the board about its future role and the role of the state in the economy more generally. By the 1990s, a general consensus had emerged among EPB staff that their primary task of guiding and promoting Korea’s economic development had reached its endpoint, and that there was little more they could do other than withdraw. The MOF-EPB merger met no opposition from other bureaucracies for the obvious reason that the EPB, as budget controller, was notoriously unpopular as a result of the financial constraints to which it routinely subjected other ministries. So, in 1994, with little ado, the EPB and the MOF were merged to create the Ministry of Finance and Economy (MOFE). This new superministry subsequently emerged as a mixed bag of developmentally and liberally minded officials—still unable to reach a clear direction over the desirability of further financial liberalization.33

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It is important to note here that the dismantling of the EPB did not signal the end of strategic industry policy under Kim Young-sam. Indeed, the new resident of the Blue House emerged as a vocal supporter of some key industry development projects, particularly the Korea Information Infrastructure (KII) Project (see Lee 2009). This project aimed to develop and install a high-speed broadband network that would first link government agencies and then be rolled out nationally; it would lay the foundation for Korea’s emergence as an IT powerhouse. The project was an extension of the vision for IT development in Korea that had emerged under Chun. But in the early 1990s the vision was still being vehemently opposed by the EPB. So, to overcome bureaucratic resistance, under Presidential Order No. 14275, the Korea Information Infrastructure (KII) Steering Committee was established. Chaired by the prime minister, the Steering Committee (and the Working Committee and Planning Board it oversaw) took responsibility for the nuts and bolts of the KII project, from designing the master plan to securing the funding to developing the requisite indigenous technologies. It is fair to say that Kim’s personal support for the KII Project was motivated more by political pragmatism than a deep-seated commitment to the idea of strategic activism. For as we will see, Kim readily supported the abandonment of five-year industry policy planning later in his rule. The main point is that despite the EPB’s dismantling, the practice of industry policy making that had become routine under presidents Park Chung Hee and Chun Doo-hwan, continued in some areas. The Ministry of Information and Communication, established in 1994 to lead Korea’s KII project, became the most significant institution in this regard. However, the economic benefits of these ongoing efforts were negated by Kim’s pursuit of contradictory policies in other spheres—not least in the area of finance. These policies were first announced in President Kim’s 1993 Blueprint for Financial Reform and the 1994 Foreign Exchange Promotion Act. These proposals outlined a new vision for Korea, one of a fully liberalized, fully integrated player in the world economy. In the eyes of some, this was the entirely appropriate direction in which Korea should move, given the success of its earlier catch-up efforts. While the policy commitments outlined in the liberalization blueprint were relatively vague (the blueprint did not include a timetable for implementation, for example), the plan provided the most comprehensive vision for financial reform in Korea to date and, most importantly, signified a fundamental rethinking of the economic role of the state. Policy commitments under the blueprint included the phased deregulation of interest rates, signaling the government’s intention to phase out all policy loans, as well as the easing of regulations governing foreign exchange transactions and, perhaps most significantly, the liberalization of the capital account, particularly short-term transactions.

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However, despite these policy commitments, it was not until 1995 that a new language was developed to articulate the changing role of the state envisaged by the government. This new language situated the government’s financial liberalization package in a much broader context of social and economic reform. This was the language of segyehwa. Loosely translated, segyehwa means “globalization.” However segyehwa was much more than a description of changes taking place in the world economy. The term also implied a national strategy intended to prepare Korea to meet the challenges of globalization and, most important, new ideas about the appropriate role of the state in achieving that goal.34 Segyehwa became the catch cry of the Kim Young-sam regime. While Kim is often seen as the father of segyehwa, the term was actually coined and emphasized by Seoul National University Law professor Park Se-Il, who in 1995 was appointed as Kim’s senior secretary for policy planning. Park’s interest in globalization had been ignited in 1991 after reading Robert Reich’s The Work of Nations. Park became convinced that profound changes were taking place in the world economy, and that in order to remain a player in the twenty-first century “Korea needed to rethink its national strategy from scratch.” After visiting Columbia Law School in 1992–93 to devote time to studying globalization, Park returned to SNU and formed a small study group comprising a core of six professors from fields including economics, sociology, international relations, and law. The group met once a month to discuss the challenges presented by globalization and strategies for meeting them. Senior government, business, and academic figures were also invited to address the group and to convey their understandings of and concerns about the changes taking place in the world economy. This was a tested institutional formula for effecting policy change in Korea. So, by the time Park Se-Il received a call from President Kim in January 1995 requesting that he join the new administration, his ideas about the long-term challenges facing Korea, and how best to meet them, were clearly formed. As senior secretary for policy planning, Park impressed on Kim the idea that globalization was Korea’s greatest challenge, and nothing short of drastic reforms in every area of society would ensure Korea’s survival in the global economy. On the role of the state in meeting these challenges, Park understood the picture thus: in terms of economic policy, which lay outside his personal expertise, the less state intervention the better. Immediate retreat from the market by the state was of utmost importance. In terms of social policy on the other hand, which was of greater personal interest to Park, a much more strategic approach was needed in order to buffer the costs of economic openness. To this end, Park developed comprehensive reform plans in such areas as education and welfare, recommending state expansion in these sectors. It is, however, segyehwa’s prescriptions for financial policy that are of greatest concern to this book, as these fall clearly under the

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banner of economic policy. Park’s segyehwa vision had simple but important financial policy prescriptions; for Park, segyehwa meant financial liberalization or bust. The idea of segyehwa was not difficult to sell to Kim Young-sam, who had no real idea about the practicalities of economic governance. Unlike his military predecessors, Kim had never managed an army, let alone an entire nation, and in opposition had never been required to delve into policy specifics, dealing instead in big picture rhetoric. Kim thus relied heavily on his senior advisers for policy guidance. The idea of segyehwa appealed to Kim for numerous reasons. It was politically expedient, creating a much needed diversion from numerous domestic problems facing Kim at the time, including the collapse of a government-constructed bridge over the Han River, which resulted in numerous deaths and was met with public outrage. Segyehwa was also highly commensurate with Kim’s liberal orientation, and he seized on it with such enthusiasm that it seemed he had a degree of personal belief in and commitment to the idea. At nearly every public occasion, Kim emphasized the challenges at hand and the need for dramatic and far-reaching economic and societal reform.35 To institutionalize this new policy orientation, Kim established the Segyehwa Committee. The committee met every month with the president and was composed of some twenty-five people, including professional economists as well as numerous business people, academics, journalists, and ministers from ministries exposed to foreign affairs. Kim acted as chairman of the Segyehwa Committee, which shaped his economic policy agenda. But while the Segyehwa program was strongly supported by Kim and the majority of his closest economic advisors, there was by no means a government consensus surrounding these new liberal ideas about the state’s role in the economy. Not surprisingly, given a history of MOF opposition to financial liberalization, staunch opposition to these ideas continued to emanate from several areas of the state apparatus, including key economic bureaucracies. MOFE and the Bank of Korea were particularly concerned that a full throttle financial liberalization process would leave an unprepared Korean economy vulnerable to financial crisis. These bodies remained stalwart repositories of the developmental orientation. Even some of Kim’s close personal advisers, including the senior secretary for economic policy, were wary of the idea of segyehwa and of lending their full support to the program.36 In the face of ongoing bureaucratic opposition to its financial liberalization agenda, the Segyehwa Committee developed a strategy of a different kind to give the liberalization program a boost. It proposed to push for OECD accession and to use the anticipated external pressure to liberalize as a weapon against its own bureaucracy. In short: align with an international reform coalition (the OECD) in order to gain leverage over domestic opposition and push reforms through.37

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Of course, OECD accession was also of immense political value at home, symbolizing the attainment of developed country status—a new twist on the quest for prestige that had animated Park Chung Hee’s development strategy.38 But its immediate value to the government was its potential to drive through its liberalization agenda. Korea’s financial reforms thus went much further than OECD accession required. According to Kim Tae Dong, chairman of the Presidential Committee on Policy Planning under subsequent president Kim Dae-jung, on one of their visits to Paris the Korean negotiating team surprised the OECD by offering to adopt many more liberalizing measures than the OECD had ever anticipated.39 The idea of joining the OECD to force the bureaucracy into reform was discussed only among a small number of Segyehwa Committee members. However when Park suggested the idea to President Kim, he agreed immediately and, as was his style, insisted that the project be launched straight away. Not surprisingly, the decision to push ahead with OECD membership met with substantial opposition from the MOFE and BOK, in addition to numerous well-respected economic observers. Kim Tae Dong, then an economics professor at Sunggyungwan University, even traveled to an International Heads of State meeting in Copenhagen, Denmark, in 1995 to protest against financial liberalization on the grounds that it would almost definitely trigger a foreign exchange crisis in Korea.40 However the opposition made little difference. The decision to pursue OECD accession was announced in late 1995, and immediately the government stepped up the pace of its financial liberalization schedule. The scope of these liberalizing measures, and their impact on the Korean economy, has been well documented.41 To briefly summarize, in 1995 the government adopted a new policy of nonintervention in the foreign exchange market. Even when the Japanese yen began to depreciate against the U.S. dollar in 1995, undermining Korean competitiveness and slowing exports, the government did not react. The abandonment of exchange rate intervention helped to erode export income, making it hard for Korean firms to service their debts. This heightened Korea’s exposure to the economic downturn that was to engulf the region in mid-1997. The Kim regime adopted a similarly hands-off approach toward the overseas borrowing activities of financial institutions. Prior to 1993, the government had maintained strict control over the foreign borrowing activities of domestic financial institutions. Under Kim’s 1993 liberalization blueprint however, Korean financial institutions were allowed to borrow directly from overseas without limit or oversight, leading to an explosion in foreign borrowing (see table 5.2 below). Thanks to the design of the reforms, most of this borrowing was short-term. The maturity structure of foreign loans presented a major threat to Korea’s financial

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stability, especially as so much of the borrowing was being done by inexperienced and underregulated nonbank financial institutions (NBFIs). The number of such institutions—merchant banks in particular—had exploded under Kim, thanks also to liberalization measures introduced by the government. In the absence of any regulation of their activities, merchant banks were permitted to build up huge volumes of short-term debt, further heightening Korea’s vulnerability to a financial crisis. Finally, the Kim government abandoned investment coordination—the clearest signal as to the sidelining of an instrumental view of finance. As noted earlier, the move away from investment coordination in Korea began in the 1980s under President Chun Doo-Hwan. However both the Chun and Roh administrations retained the ability, if not always the will, to undertake sectoral rationalization programs via financial sector interventions in times of economic downturn (Chang et al. 1998, 740).42 The Kim Young-sam government’s approach was far less ambiguous. Under Kim’s Plan for the New Economy, the government explicitly sought to end government “guidance” of the private sector. In 1994 the government announced the termination of all policy loans by 1997. Under the Law on Industrial Development, all subsidized loans in hitherto “strategic” industries including iron and steel, petrochemicals, electronics, machinery, and shipbuilding were removed (IMF 1998, 14). It is estimated that by 1997, policy loans as a percentage of total bank credit in Korea had fallen to a tiny three percent (IMF 1999, 15). The government also abolished the practice of five-year planning that had provided the framework for policy coordination in Korea since 1962. In 1995, it also abandoned its “industry specialization” policy, the original aim of which was to curb the chaebols’ excessive expansion and family dominance (Kim Y.T. 1999). As a result, the chaebols were allowed to spread into new strategic sectors including telecommunications, automobiles, and steel. The result was overcapacity and declining export earnings.43 When falling profits eventually constrained TABLE 5.2  Korea’s external debt, 1991–97 YEAR (END OF)

TOTAL EXTERNAL DEBT (US$ BILLIONS)

SHORT-TERM DEBT (US$ BILLIONS)

SHORT-TERM DEBT AS % OF TOTAL EXTERNAL DEBT

1991

39

17

43

1992

42

18

43

1993

43

19

43

1994

56

30

53

1995

78

45

57

1996

104

61

58

1997

120

51

42

Source: Adapted from Oh 2001, 129.

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firms’ abilities to meet their financial obligations, Korean financial institutions were left with huge volumes of nonperforming loans, leading to the near collapse of the entire financial sector. The reforms detailed above amounted to the abandonment of financial activism in Korea and inadvertently helped to deliver the country into the maelstrom of the financial crisis that engulfed the region in 1997. Importantly, however, while developmental ways of thinking about finance were effectively sidelined under Kim, they were not eradicated altogether. While Korea’s first era of financial activism came to an end under Kim Young-sam, the devastation wrought by the 1997 crisis heralded the beginning of a new era of financial activism, led ironically by a longstanding advocate of liberal economic reform, Kim Dae-jung.

6 RETURN OF THE STATE We will forge a nation where businessmen who earn a great deal of foreign currency by manufacturing the best quality but cheapest products in the world are respected. Acting on our determination to build a leading nation in technology, we will resolutely pursue a policy to make our nation strong in state-of-the-art technologies. Venture companies are the flower of the new century. By actively fostering them, we must produce high value-added products and make our economy develop in leaps and bounds. Venture companies will create a lot of jobs and greatly contribute to reducing unemployment. —President Kim Dae-jung, inauguration speech, 1998

The 1997 crisis that began in Southeast Asia and eventually engulfed Korea, created massive financial dislocation and triggered a further round of IMF intervention. At one stage, in early December 1997, it seemed that Korea would default and trigger a worldwide financial collapse. But an IMF package was arranged at the last minute and stemmed the tide.1 The crisis in question has been widely depicted as the beginning of the end of Korea’s developmental state. The government’s postcrisis financial reforms are typically assumed to have severed the link between the state and local banks, undermining one of the government’s key policy instruments—control over finance. Some thus argue that postcrisis financial reforms transformed Korea into a “neoliberal” or “regulatory” state (e.g., Jayasuriya 2005; Pirie 2008). Others acknowledge that Korea’s banking system still falls far short of Western/liberal regulatory standards, but nevertheless consider developmental policy lending as a thing of the past (Hamilton-Hart 2008), or entertain the view that increased foreign bank ownership may have negated industry policy efforts.2 Underpinning all such views is the assumption that Korea’s postcrisis reforms either ended or severely constrained financial activism in that country. In these next four chapters I propose a very different picture of the direction of Korea’s postcrisis reforms. My argument is that the 1997–98 financial crisis produced two seemingly contradictory outcomes for Korea—at least as far as financial reform was concerned. The first was the creation of high levels of financial 89

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openness via the implementation of extensive liberalization measures, including the removal of most capital controls and many foreign investment restrictions, even in the banking sector. The second was the return of the state to the center of the Korean financial system via the nationalization of local banks, the expansion of state-owned policy finance institutions such as the Korea Development Bank and the Korea Export Import Bank (KEXIM), and the deployment of new modes of strategic financing, including state-backed venture capital funds. This return was not temporary. Still today, the Korean state maintains an unusually large presence in the Korean financial system compared with most developed economies. For example, in 2013 Korea’s policy finance institutions (PFIs) accounted for more than 25 percent of all loans in the Korean banking sector.3 Many of their loans target local firms in strategic industries and—like policy loans of old—are extended on a conditional basis, which requires a firm’s willingness to upgrade technologically and to meet export targets. Evidently, while post-1997 reforms created a more open financial system, they also left space for policymakers to experiment with and expand financial activism if they chose to do so. In these chapters, I examine the extent to which policymakers have been motivated to use this space in the decade and a half since 1998, drawing largely on author interviews conducted with senior Korean bureaucrats and presidential advisors over the 2001–14 period.4 As my ultimate aim is to provide a comprehensive explanation for the revival of financial activism since 1998, I focus not only on the factors that have motivated that revival (by galvanizing developmental ambitions), but also on the factors that have shaped the focus of that activism and enabled its execution. To this end, considering developments under each president since 1998, I ask in the chapters that follow: What factors contributed to a strengthening or a weakening of the developmental consensus amongst the policy elite in this particular period? What factors helped in each case to shape their developmental strategy? And what factors facilitated (or frustrated) pursuit of that strategy, especially its financial policy aspects? Throughout these chapters, I argue that since 1998, Korean policymakers have faced significant international and domestic pressure to create a more liberal financial regime. Yet they have also faced intensifying economic and political challenges, particularly growing competitive pressures and energy insecurity. These pressures have galvanized the developmental ambitions of Korea’s policy elite, motivating them to devise a new developmental strategy and to intervene in financial markets for strategic ends. Growing levels of financial market intervention have proven contentious, both within and outside Korea. Yet, somewhat ironically, the developmental cause has been further served by the unintended consequences of liberal market reform, especially those associated with financialization. Growing financial instability and shrinking corporate lending have

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shaken faith in freer financial markets and raised questions about their compatibility with developmental goals. The perception that market-oriented reforms have compromised the vital link between the financial and productive sectors has reduced the appetite for further liberalization among Korean policymakers and bolstered support for strategic activism—most notably since the 2008 global financial crisis. Today, a developmental view of finance—that its primary purpose is to serve the productive economy—remains pervasive amongst key segments of the policymaking elite. The Korean state thus continues to intervene extensively in financial markets to ensure that adequate funds reach local firms in strategic industries. Policymakers have faced significant domestic and international resistance to their effort, and as a result have been unable to translate every aspect of their strategy into action. However, a combination of agential, institutional, and structural factors—from the successive election of developmentally minded presidents to the existence of a healthy set of policy-finance institutions and an increasingly permissive international environment—have nonetheless enabled a striking revival of financial activism. Given my emphasis on the role of the president in shaping the direction of developmental state evolution in Korea, I divide the chapters that follow by presidential administration. The remainder of this chapter examines the return of the state to the center of Korea’s financial system under President Kim Dae-jung. I then explore the emergence of a new developmental strategy and the financial activism it involved under President Roh Moo-hyun in chapter 7. Finally, in chapters 8 and 9 I examine the return of development bankers and the full flowering of financial activism under President Lee Myung-bak. I also consider the future of financial activism under current president Park Geun-hye, the daughter of Korea’s first developmentally minded president, Park Chung Hee.

Kim Dae-jung and the Return of the State When President Kim Dae-jung came to power in 1998, he inherited an economy in crisis. He also inherited an agreement with the IMF that had been signed and sealed by the Kim Young-sam administration. That agreement committed Korea to sweeping financial sector reforms, including the near complete liberalization of its capital account and the removal of almost all foreign investment restrictions, even in the banking sector. It also included far-reaching corporate reforms, particularly the imposition of strict debt-to-equity limits on commercial borrowers. To the extent that these reforms severed the historic links between banks, the chaebols, and the state, critical scholars interpreted them as the embodiment

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of Western imperialism.5 Yet such readings underestimate the autonomy exercised by the Koreans during the IMF negotiations; it was in fact the Korean negotiating team that proposed the inclusion of sweeping financial, corporate, and labor market reforms, extending far beyond initial IMF demands.6 Critical accounts also overlook the extent to which aspects of the IMF deal aligned with the longstanding reform agenda of incoming President Kim Dae-jung. Kim came to office with an ambitious vision for transforming the Korean economy. A long-time prodemocracy, anticorruption campaigner, Kim’s ultimate objective was to create a “democratic market economy,” principally by reforming the chaebols.7 To Kim, these firms were living legacies of the nation’s authoritarian past. They were also symbols of corruption and sources of the nation’s recurrent financial crises—its 1997 catastrophe included. Kim did not want to destroy the chaebols. Rather, his intention was to streamline these corporate behemoths, to limit their ability to engage in corrupt and destabilizing financial practices, and to establish an environment favorable to the flourishing of smaller firms. Only this would allow Korea to transition to a truly democratic society and end its vicious boom-bust growth cycle. Yet Kim also understood that to downsize the chaebol and discipline their borrowing activities, financial and labor market reforms were essential—which were likely to spark intense political opposition.8 Fortunately for Kim, as we saw, the IMF agreement included many such reforms. Kim thus viewed the 1997 crisis and the IMF’s subsequent intervention as a “blessing in disguise.”9 Upon assuming the presidency, he enthusiastically pursued implementation of aspects of the deal that aligned with his own reform vision.10 One of those aspects was commercial bank reform. Kim and his small circle of economic advisors were strongly in favor of increasing foreign involvement in the Korean banking sector. From their perspective, such involvement would positively influence chaebol reform by enforcing transparency in lenders and disciplining firms’ investment behavior.11 It was also expected to promote consolidation and the transfer of skills, resulting in a more stable and sophisticated banking system. Some even hoped that it would expedite the development of globally competitive Korean banks able to compete with foreign banks in the local market and hold their own on the international stage.12 Kim thus enthusiastically embraced the task of commercial bank reform. Under initial stabilization measures, the nation’s most troubled financial institutions were closed while others were merged and nationalized. The immediate outcome was a significant increase in state ownership in the Korean banking sector—from 33 percent in 1996 to 54 percent in 2000. The ensuing sell-off, however, transformed the local banking landscape by massively increasing foreign ownership. Between 1998 and 2006, foreign ownership in the commercial

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banking sector ballooned from 18 to 65 percent. This was viewed at the time as a means of disciplining domestic banks—but this view was quickly discarded when it became clear that foreign banks were interested only in short-term profits and displayed little regard for the long-term development of Korea, as we will see. Kim’s rush to introduce foreign investment in the banking sector had important implications for local attitudes toward privatization and liberalization among both the Korean population and the wider policymaking community. In the late 1990s, willing foreign buyers of Korean banks were thin on the ground. Kim’s desire to secure foreign participation eventually saw him extend to overseas investors very generous acquisition deals.13 The outcome was a public backlash and allegations of a “fire sale” directed at the Kim administration.14 The generous terms agreed to by Kim also elicited strong reactions from the Ministry of Finance and Economy (MOFE) and the Bank of Korea, highlighting the continuation and persistence of a developmental mindset within important segments of the economic policymaking elite. As we saw in chapter 5, that mindset had been severely questioned but not erased by the growing influence of mainstream economists prior to the 1997 crisis. Those economists hailed largely from the Economic Planning Board, which as we saw in chapter 5 had been merged with the Ministry of Finance in 1993 to create the superministry MOFE. Following that merger, MOFE had been plagued by in-fighting between liberally oriented bureaucrats hailing from the EPB and developmentally inclined officials from the MOF. Insofar as this discord distracted from policy matters, it was partly responsible for Korea’s exposure to the 1997 crisis. However following the crisis, this conflict did not disappear. While President Kim had a preference for appointing former EPB men as MOFE ministers (such as Kang Bong-kyun) there remained within MOFE a large community of developmentally minded bureaucrats who were strongly inclined toward a more activist role for the state in the financial system.15 The potential influence of these bureaucrats over future economic policy was understood and feared by some of President Kim’s more liberally minded economic advisors. Many of the governmental reforms introduced under Kim were thus aimed at neutralizing the potential future influence of traditional Finance Ministry bureaucrats. The bid to create an independent financial sector regulator, the Financial Services Commission (FSC), is a case in point.16 The tensions between the president’s liberally minded advisors and MOFE over this proposal provide important insights into the ongoing influence of developmentally minded bureaucrats within that ministry following the 1997 crisis, and is thus worth examining briefly here. The creation of the FSC was an important part of President Kim’s plan to sever the links between the chaebols, government, and banking sector and to create a more transparent and rules-based financial system. However, the establishment

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of an independent FSC was fiercely opposed by MOFE bureaucrats from the plan’s first announcement. Since the 1960s, the Finance Ministry had been primarily responsible for financial sector supervision. The proposal to create an independent FSC was thus interpreted as a significant infringement on the Finance Ministry’s responsibilities and an attempt to curtail its influence over the financial sector. Finance bureaucrats were of the view that the FSC should be located under the Finance Ministry and be accountable to the finance minister. Of course, the Finance Ministry’s interpretation was correct—reducing the influence of Finance bureaucrats in the financial system was precisely the intention of the architects of an independent FSC. This was especially the view of Kim Tae Dong, first economic secretary to President Kim.17 In Kim Tae Dong’s view, the interventionist inclinations of Finance bureaucrats, particularly those who predated the Ministry’s merger with the EPB, was one of the main obstacles to severing the link between the state, finance, and the chaebols, against which President Kim and his close advisors and supporters had long fought. The FSC’s independence from the Finance Ministry thus emerged as a key battleground in the early days of the Kim Dae-jung regime. It was a battle led primarily by Kim Tae Dong, who viewed any direct reporting relationship between Finance and the FSC as entirely inappropriate. Kim eventually got his way, with the FSC established as an independent body reporting directly to the president. However, this institutional arrangement was not sufficient to insulate the FSC from Finance influence. For finding a suitably qualified person to chair the FSC without previous links to the Finance Ministry or to former state-owned banks would prove extremely difficult. As I show in later chapters, the FSC has since been chaired by former Finance Ministry bureaucrats sympathetic to a much stronger role for the state in the financial system than more liberal economists like Kim Tae Dong would be comfortable with. The broader point to note here is that in 1998, many developmentally minded policymakers remained within MOFE. The privatization debacle of 1999 seemed only to galvanize these bureaucrats—and not just within MOFE. From the early 2000s, both MOFE and the Bank of Korea began to warn publicly against further banking sector privatization and liberalization, which they depicted as a giveaway of Korean financial assets and a threat to local investment (as foreign-owned banks often shunned domestic lending to smaller firms).18 MOFE even proposed the relaxation of longstanding restrictions on chaebol bank ownership to help keep local banks in local hands. The unanticipated result of Kim’s approach to banking sector reform was thus the stalling of the liberalization process and the strengthening of skeptical attitudes toward further market opening within key segments of the policymaking elite. As one American observer lamented in a telling statement in 2002:

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In September 1999, significant foreign competition was introduced into the South Korean financial services sector, when . . . the government sold the failed Korea First Bank to Newbridge Capital for $415 million, after indemnifying the firm against debts hidden by opaque, and at times, illegal, accounting practices. The government was severely criticized for the indemnification . . . [and] after the Newbridge takeover, things slowed down considerably . . . the government missed 10 deadlines in three years to sell nationalized Seoul Bank. . . . In October 2001, the Ministry of Finance and Economy eased restrictions on chaebol ownership of financial institutions, and now speak of engineering an intra-Korean merger as a solution to Seoul Bank’s problems—an outcome that one suspects many preferred all along. (Noland 2002) In these ways, postcrisis financial reforms returned the state to the center of the Korean banking sector, from which retreat proved increasingly unpopular.

An Expanding Role for PFIs The state’s growing involvement in the financial system was not limited to the commercial banking sector. Kim’s chaebol reform efforts also served to revitalize and expand the activities of Korea’s PFIs, particularly the Korea Development Bank (KDB). To recall briefly from chapter 4, PFIs are state-owned financial institutions. Their primary mission is to lend to or invest in Korean firms to advance government-set goals. Accordingly, PFIs provide low-interest loans to, or make investments in, Korean companies operating in so-called “strategic” industries.19 As their core mission is to advance policy objectives rather than to make profit, PFIs are more willing than commercial banks or private venture companies to support firms in new or emerging industries, where the promise of profit is more distant and uncertain. Historically, the existence of a healthy set of PFIs has enabled Korean policymakers to put money where their mindset is, ensuring that adequate capital reaches local firms in industries considered crucial to the nation’s future techno-industrial competitiveness. PFIs have also played an important role in industrial restructuring in times of crisis, helping firms in strategic industries restructure bad debts and consolidate business lines, laying the foundation for new growth. Like presidents Park, Chun, and Roh before him, Kim Dae-jung drew heavily on PFIs, particularly the Korean Development Bank (KDB), in his quest to restructure the chaebols. Kim took an aggressively interventionist approach to chaebol restructuring, which involved the significant exercise of state power (Hundt 2009; Kalinowski

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and Cho 2010, 229). Indeed Kim’s strong-arm approach to this task drew comparisons with that of previous authoritarian presidents Park and Chun.20 Overextended firms were ordered to swap or sell assets or risk bankruptcy. Billions of dollars in public funds were then pumped into efforts to deleverage and downsize overextended companies, principally via state-owned PFIs. Here the KDB played a particularly important role, extending debt-to-equity swaps and corporate bond guarantees to firms in key export industries such as semiconductors and shipbuilding. These efforts facilitated the chaebols’ swift consolidation of business lines and allowed them to rapidly resume export activities—just as they had done in the 1970s and 1980s. The KDB’s role in chaebol restructuring did not go unnoticed by Korea’s trading partners, who loudly objected to the volume and type of support provided by the bank. KDB support for Korean semiconductor firms proved particularly contentious and eventually resulted in the imposition of countervailing measures by both the United States and the European Union, who argued that KDB loans and guarantees constituted illegal subsidies.21 Somewhat surprisingly however, criticisms of the KDB’s role did not spark widespread foreign calls for its dismantling or privatization. These would come later. Nor was there local appetite for privatizing PFIs under Kim’s tenure—they were simply too central to the government’s restructuring efforts. The KDB’s geopolitical importance also grew under Kim’s presidency. The Kim admin­ istration extended the bank’s role to the diplomatic sphere, to facilitate his bold pursuit of reunification with North Korea. Kim’s Sunshine Policy involved a number of joint economic initiatives with the North, designed to promote coop­ eration and ease tensions. The KDB took the lead in financing those initiatives. Kim also used the KDB to channel secret payments to the North Korean government in the lead up to the landmark Peace Summit of 2000 in a bid to secure the regime’s participation. The subsequent revelation of these payments did much to discredit Kim in the eyes of the South Korean public—but they did not tarnish the KDB. As I discuss in chapter 9, the KDB’s increasing importance from a geopolitical perspective would later serve as a buffer against growing calls for privatization. In addition to its restructuring and geopolitical roles, the KDB’s industrypromoting role was also expanded. The goal here was to meet the challenges involved in the flip side of Kim’s chaebol reform agenda: nurturing smaller firms. SME promotion was important to the Kim administration for several reasons, not all of which were developmental. Employment creation was a major driver, especially in light of the desire to downsize the chaebols and rebalance the economy. But while many of the SME support programs established under Kim were “generic” (designed to assist all SMEs), some were targeted exclusively at firms in strategic industries—especially IT (that is, electronics and semiconductors and

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their supply chains), in which President Kim took a particular interest. This feature sets Korea apart from other advanced countries, where support for SMEs tends to be more generic (i.e., offered to all SMEs that fulfill certain criteria, regardless of the industry in which they operate). Given the focus of this book, I limit my attention to the emergence of strategically targeted forms of SME financing under Kim; these provided the foundations for the expansion of financial activism under subsequent administrations. The most significant development in this regard was the creation of statebacked venture capital funds aimed at SMEs in strategic industries. Between 1997 and 1999, funds spent by the Kim administration on new SME creation increased by thirty-six times, from ₩34.4 billion ($28.7 million) to ₩1,237 billion ($1.03 billion). Most of these funds were disbursed through state-backed VC funds (Shin and Chang 2003, 109). And many of these were specifically targeted at industries designated as strategic, particularly IT and semiconductors. At this time, the KDB emerged as the lead player in Korea’s VC industry. The KDB had been experimenting with venture financing on a small scale since 1984, when it established the Korea Technology Finance Corporation (KTFC). However, in 1999 the KDB merged the KTFC with a number of other affiliates to create KDB Capital—now the most successful VC firm in Korea. Given the strategic significance placed on IT by the Kim administration, the majority of the KDB’s venture investments were concentrated in that area.22 In addition to running its own venture funds, KDB Capital also took stakes in other government-backed funds overseen by the newly created Knowledge and Creation Ventures (K&C Ventures). The government established K&C Ventures in 1999 for the sole purpose of running government-backed venture funds. These funds were directly linked to industry ministries, including the Ministry of Information and Communication (MIC). Starting in 1999, K&C oversaw the ₩12.5 billion MIC-IT fund, which was 40 percent invested by the Ministry of Information and Communication and aimed exclusively at nurturing Korean IT firms.23 The government also encouraged the establishment of private VC funds. Under VC laws, all private VC companies had to register with, and report their annual financial results to, the Small and Medium Business Administration.24 This gave the government remarkable insight into and oversight of the local VC industry. Through the Special Law to Promote Venture Capital Companies, the government was able to influence demand for both public and private venture capital, ensuring that investment was concentrated in strategic industries. Under the Special Law, the Kim administration extended generous incentives for the creation of venture businesses.25 However the law also provided a very narrow definition of what constituted a venture business—including the industries in which a business had to be invested.26 Only firms investing in industries

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nominated by the government qualified for financial incentives. This helped to concentrate venture investment in industries considered strategic by the state, most notably the IT sector. The outcomes were positive. In the late 1990s, chaebol downsizing flooded the Korean labor market with highly skilled workers. The existence of plentiful venture capital enabled many to try their hand as high-tech entrepreneurs, taking advantage of the dot-com boom. As a result, by 2000, 9 percent of Korean adults owned or managed new firms—double the percentage of any other country in the world—with many new firms spending more than 20 percent of revenues on R&D, indicating a high level of technological intensity (Noland 2002). The bursting of the dot-com bubble in 2000 proved fatal for many of Korea’s smaller IT firms. Nevertheless, the reforms implemented by Kim laid a foundation for the expansion of financial activism under subsequent administrations. Here again, the analytical utility of the developmental mindset/strategy distinction that I have insisted on and developed in this book becomes apparent. From the preceding discussion, it is reasonable to conclude that Kim’s approach to financial reform reflected his rejection of Korea’s “growth first” strategy. It did not, however, reflect his rejection of a developmental mindset. To the extent that Kim’s financial reform agenda was shaped by developmental considerations, it was intended to address the main costs of “growth first”: namely, a grossly imbalanced industrial ecosystem dominated by financially fragile conglomerates with an appetite for overexpansion. Through banking reform, Kim hoped to discipline the chaebols’ borrowing and investing habits. Through (PFI-facilitated) corporate reform, he hoped to address the problem of overdiversification and to resolve overcapacity in key export industries. And through the creation of new forms of financing for smaller firms—including those in strategic industries—Kim hoped to create an economy that was as equitable as it was competitive. These reforms were developmentally significant because taken together, they returned the state to the center of the financial system and revived and reoriented Korea’s PFIs, leaving them ripe for more strategic deployment under subsequent president Roh Moo-hyun.

7 EMERGENCE OF STRATEGY MARK II Economic theory isn’t always right. . . . What works is what’s right. And what works is government playing an important role as a facilitator for new technologies. —Chin Daeje, “In Korea, Bureaucrats Lead the Technology Charge,” New York Times

In this chapter, I examine how intensifying economic and political challenges associated with financialization and China’s rapid rise served to galvanize the developmental ambitions of Korea’s policy elite under President Roh Moo-hyun, leading them to devise a new developmental strategy—and to expand financial activism in its support. When President Roh came to power in 2003, Korea was again facing a set of unprecedented economic challenges. Reforms implemented by the Kim Dae-jung administration had helped Korea rapidly rebound from the 1997 crisis, thanks largely to booming chaebol exports. Having registered negative growth in 1998, the Korean economy grew by an impressive 10.7 percent in 1999 and 8.8 percent in 2000, enabling the country to pay off its IMF debt in 2001, nearly three years ahead of schedule. However Kim’s reforms also created some new problems for Korea, which by 2003 were readily apparent. The most pressing of these problems related to snowballing financial sector instability, the by-product of a growing financialization trend. Somewhat ironically, this trend had been fueled by regulatory reforms implemented in response to the 1997 crisis and designed to make the Korean economy more stable. These reforms included the imposition of strict debt-to-equity limits on the chaebols, which were intended to prevent the excessive leveraging practices that had left these firms so vulnerable to the regional downturn. To the extent that the chaebols’ debt-to-equity ratios were dramatically reduced post-1997, these reforms achieved their goals. Yet they also had an unintended consequence: rendering the chaebols debt-averse. This in turn had significant knock-on effects for the lending practices of commercial banks.1 With large corporate clients drying up and smaller firms considered a risky bet (especially given the 2000 dot-com bust), commercial banks began to shun corporate lending and to aggressively pursue more profitable consumer-oriented lending, with a particular focus on 99

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household and credit card lending. Between 1997 and 2006, bank lending to Korean households increased from 20 percent to nearly 60 percent of total loans.2 The shift away from corporate lending toward riskier consumer and real estate lending was particularly pronounced among foreign-owned banks.3 As a consequence of this shift, by the early 2000s Korea was in the midst of a consumer credit bubble. This bubble burst in 2003, just as Roh Moo-hyun assumed the presidency. In his inaugural year, around 10 percent of the Korean population defaulted on personal or credit card loans. Roh thus inherited an economy in crisis for the third time in five years, considering the 1997 meltdown, the 2000 dot-com bust, and the 2003 credit card crisis. This new crisis compounded preexisting antiliberalization sentiment within the state, particularly as it was foreign banks and branches that were driving excessive consumer borrowing. From 2003 onward, the Bank of Korea intensified its calls to delay further banking sector liberalization. For example, in December of that year, the BOK released a statement declaring that “the need for foreign capital in Korean banks has significantly fallen in view of the country’s foreign currency reserves and the healthy state of financial industry.” The statement also warned that, given the clear preference of foreign-owned banks for consumer lending, a further increase in foreign ownership “could lead to lower corporate lending . . . and therefore weaken the country.”4 Korea’s snowballing financial sector instabilities were only exacerbated by the emergence of new competitive pressures. By 2003, the impressive growth rates achieved in the immediate postcrisis period had slowed significantly—from over 10 percent in 1999 to just 4 percent in 2002. Meanwhile, in 2002, Japan appeared to emerge from its long period of stagnation and was making significant investments in developing advanced technology industries such as biotechnology and nanotechnology. Korea on the other hand was still reeling from its dot-com bust and had not seen an increase in its per capita income since it hit the $10,000 mark in 1996. Almost overnight, the nation’s longstanding ambition of overtaking Japan seemed in doubt. The renewed challenge from an old rival was exacerbated by a newly emerging threat—China’s rapid rise. China’s WTO accession in 2001 had dramatically boosted its export competitiveness and its attractiveness to foreign investors. This intensified China’s already significant challenge to Korean firms in traditional strategic industries, from semiconductors to automobiles and shipbuilding. The challenge from China was particularly intense for Korean parts and materials suppliers in key export industries. These firms accounted for a large proportion of Korea’s manufacturing output and exports.5 However Korean parts and materials firms were far less technologically advanced than their counterparts in advanced economies, particularly Japan and Germany. Indeed, major Korean semiconductor and auto producers such as Samsung and Hyundai tended to rely

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on Japanese and German imports for their most technologically sophisticated components. The comparatively low technological level of Korean suppliers made them extremely vulnerable to competition from China, whose determined march up the technological ladder had taken many by surprise. WTO accession promised only to hasten that march. Thus from the early 2000s fears about Korea’s declining techno-industrial competitiveness vis-à-vis China really began to emerge. They were exacerbated by the actions of the chaebols, many of which responded enthusiastically to the opportunity to relocate production activities to China. Policymakers knew that Korea would never be able to compete with China on cost. The critical challenge was to secure and sustain technological competitiveness in existing industries and to pioneer new advanced technology industries, just as Japan was doing. In the early 2000s, a pervasive view took hold—both within and outside the country—that Korea had only a narrow window of opportunity in which to buffer itself from the China challenge and propel itself into the ranks of the advanced countries. In the lead up to the 2002 presidential election, the question of how Korea would handle this challenge dominated Western media commentary. As one BBC business journalist observed, Economists believe that how bold the new government is about expanding economic reforms could decide if Asia’s third biggest economy steps into the ranks of the world’s top ten richest nations within the decade or not. Get it right and Korea’s sophisticated hi-tech economy could rival that of France or Germany in 10 years. . . . Mess it up and Korea’s window of opportunity could slam shut as its fast-growing neighbour China corners a bigger slice of trade and investment.6 These economic apprehensions defined the context in which President Roh Moo-hyun came to power. The urgency of the situation was not lost on Korea’s new leader. In his inaugural address, Roh explicitly recognized the imperative of upgrading existing industries and of pioneering new high-tech industries if the country was to meet the challenge from competitors old and new. As he said in his inauguration speech: The international economic situation is also deteriorating. Developed nations are continuously exploring new frontiers and new markets while developing countries are rapidly closing the gap. Our nation, therefore, is in urgent need of a new economic growth engine and viable development strategies. . . . I will help the rebirth of our country by promoting uninterrupted innovation in science and technology. I will promote the continued expansion of the infrastructure for a knowledge and information-oriented society and cultivate new industries.7

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A New President, a New Developmental Strategy Roh was in many ways the president for the times. With a thorough understanding of technology, he was probably the world’s first president to be proficient in HTML coding and to regularly update his own presidential website with letters to the nation (Lee 2009, 574). Roh relied heavily on online campaigning in the 2002 election and came to power on the back of support from Korea’s IT-savvy younger generation.8 He thus embraced the challenge of technological upgrading with nationalistic fervor. One of his first actions as president was personally to telephone Chin Daeje, president and CEO of the Digital Media division of Samsung Electronics.9 It was 11:00 a.m. February 27, 2003, the very day that Roh had to announce his new cabinet members, by late afternoon. Roh told Chin that he was looking for someone capable of devising a plan to make Korea the world’s leading IT nation and of thus delivering the twenty-thousand-dollar per capita GDP goal, which was seen as the level at which a country had attained advanced economy status. Roh’s advisors had told him that person was Chin Daeje. Roh asked Chin if he would accept the role of minister of information and communication (MIC). According to Chin, both the phone call and the ministerial invitation came as a big surprise, as he and Roh were not previously acquainted. Nevertheless, Chin accepted the job offer with little hesitation. Later that day, Chin was inaugurated as MIC minister, and then on the same day, late in the afternoon, resigned from Samsung Electronics. Chin would become the chief architect of Korea’s now internationally admired and emulated IT-839 initiative. It is my argument that IT-839 was the first expression of Korea’s Mark II developmental strategy, which I call its “balanced growth” strategy.10 As I shall show in chapter 9, this strategy continues even to this day, having been extended by presidents Lee Myung-bak and Park Geun-hye.

Origins of Balanced Growth Immediately upon his inauguration as MIC minister, Chin initiated a process of consultation and deliberation with experts from the worlds of industry, research, and government. The outcome was the IT-839 initiative. The preface to that initiative, penned by Chin, reflects the competitive challenges that prompted its development: We cannot afford to be complacent with the past achievement of the Korean IT industry, since Today’s winner-takes-all society allows only a company or a country with world’s best technologies to survive the fierce competition across international borders. To cope with the

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challenge and make a leap toward a global leader in the IT field, Korea should take a road untraveled by its competitors. Against the background, the Ministry of Information and Communication formulated . . . IT-839 . . . to help Korea stay ahead. . . . I hope all of you play a role in carrying out . . . IT-839 . . . and open the era of $20,000 GDP per capita!11 Under IT-839, the government would promote the development of eight new services (including wireless broadband [WIBRO] and wideband code division multiple access [W-CDMA]) and three new networks (including a broadband convergence network).12 These services and networks would provide the infrastructures or platforms required to support nine new growth engine (NGE) industries, including next-generation mobile devices, embedded software, and intelligent robotics. By aggressively promoting the development of these interrelated services, networks, and industries, Chin and the MIC anticipated that Korea could rapidly secure techno-industrial competitiveness and advanced economy status. In Chin’s words (2003), “[IT-839] is a project for national development. . . . Through the strategy . . . the government will foster the nation’s IT industry as the No. 1 industry in the world. Through [IT-839] we will achieve the nation’s economic development and promote quality of Korean people’s living, while attaining the long-cherished dream of the $20,000 era in terms of per capita GDP.”13 IT-839 is often cited as an example of developmental ambition on the part of the Korean government.14 It stands alongside industry promotion initiatives launched by Roh in other areas that were similarly techno-nationalist in motivation, such as biotechnology.15 The execution of these initiatives by the Roh regime was by no means straightforward; they sorely tested the coordinating capacities of the Korean state—beyond its limits, according to some (for example, Wong 2011).16 As my principal focus is finance, and as these initiatives have been well examined elsewhere, they need not detain us here. However, I will briefly discuss IT-839 as I argue that it represented a fundamentally new approach to industrial promotion in Korea and marked the birth of a new developmental strategy, one that lasted well beyond Roh’s tenure of office and well beyond IT-839: Korea’s balanced growth strategy. What are its features and what are the factors that shaped it? These are the issues we must next consider, as well as the larger, more pressing question of how the pursuit of this strategy shaped attitudes toward and opportunities for financial activism. The design of IT-839—and the balanced growth strategy it embodied—reflected the international constraints facing Korea in the early 2000s, particularly those associated with WTO membership. Those constraints determined the emphasis placed in IT-839 on service and network infrastructure development—areas

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largely outside of the WTO’s scope at that time. As Chin noted in a recent interview, the WTO did not seem particularly interested in what Korea was doing in services in the early 2000s, making it logical for the government to focus direct investments there.17 This did not completely insulate Korea from foreign pressure to abandon key initiatives in these areas. For example, the United States strongly objected to the government’s effort to create advantages for Korean firms in the local market by mandating locally developed technologies as industry standards. The vocal U.S. objections to the standardization of WiBro technology as the wireless broadband service standard is a well-documented case in point.18 Yet in the absence of explicit international rules in these areas, the Korean government was able to resist that pressure and push ahead with its standardization efforts regardless (along with other service and network infrastructure development efforts, including the national broadband infrastructure). In Chin’s view, the government was much more likely to come under international scrutiny for the ways in which it tried to support local firms in new growth engine industries. Funding R&D aimed at creating and commercializing technologies in these industries was an obvious WTO-compliant role that government could play. The Koreans embraced this role with gusto, dramatically increasing R&D spending under Roh’s tenure. However, encouraging firms to enter NGE industries, which by their very nature were characterized by small or nonexistent markets, would take more than funding of R&D. The risks were too high, and rewards too distant and uncertain—even for large firms with deep pockets. This was no more apparent than in the area of intelligent robotics. In the early 2000s, policymakers had high hopes that the chaebols—particularly Samsung—would rise to the challenge of pioneering this new growth engine industry; Japanese firms were already making investments in intelligent service robots, and time was of the essence if Korean firms were going to capture early market share. Yet the chaebols proved entirely unwilling to make large investments in this area. The bureaucrat in charge of devising Korea’s intelligent robotics development strategy, Oh Sang-Rok, met numerous times with Samsung to ask them to increase their commitment to the industry, but Samsung’s leadership steadfastly refused. In Oh’s view, the barrier was more than financial.19 It was also psychological. The chaebol had been “fast followers” for so long that they had not yet developed a “frontier spirit” needed for industrial leadership. Their tried and tested strategy had been to identify an existing market in which they had transferable competencies, then to rapidly acquire, adapt, and improve existing technologies to capture market share. The idea of pioneering a new industry from scratch was a different game entirely, and well outside their comfort zone. But in the early 2000s, Oh and other likeminded officials believed that this was

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a serious problem for Korea, not least because firms like Samsung were running out of industry leaders to follow. Oh Sang-Rok relays his frustration during regular meetings with chaebol leaders thus: In 2003 the government began to put a big budget into robots. . . . At that time, I met with people from the company side and . . . I said “Samsung! What are you doing? Come on!” But their basic spirit is not trained. They just sit, watching. Once smaller companies get in, they will go too. But they don’t go first. Look at Korean and Japanese companies at the end of the [1990s] and beginning of the [2000s]: all the big Japanese companies announced service robots, but no Korean companies. Because they are not being trained to lead the market. It’s not that they are wrong—they are right; they watch a reference model and then track fast behind. . . . But now Korean companies are big companies. We need to change R&D strategies from fast follower to first mover. But this takes time. Sometimes I say their DNA, their genes are trained as followers, as “wait and see” companies. . . . They don’t have frontier spirit. In view of the chaebols’ reluctance to pioneer the industry, the question for the government became how to start growing a service robotics market so that local firms might be willing to enter it. Oh and his colleagues decided that the government would have to lead the charge, to shoulder the risk and show firms what might be achieved in this potential growth area. In short, the government would have to grow the market and model the “frontier spirit” itself; in doing so it hoped that local firms would follow its lead.20 A comprehensive “market creation” role was thus envisaged for the government: it would act as a developer, procurer, and promoter of new robotics technologies and products and a financier of local firms’ efforts to pioneer markets for these products. Specifically, the government would team up with local firms and fund the development of new robotics technologies and products. It would then help grow markets for these products through extensive government procurement programs. Finally, it would provide patient capital to keep pioneering firms afloat until markets became large enough to sustain firms through sales. A summary of the key steps involved will be sufficient to illuminate the marketcreation role adopted by the government. First, a large R&D budget was allocated to service robotics and made available to local firms participating in consortia with government-funded research institutes. These consortia were put to the task of developing robot prototypes across a range of potential service applications. One notable prototype was “Mero,” a robot capable of teaching English; it was eventually named one of the world’s top fifty inventions by Time magazine in 2010.

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The next step was to create and grow a domestic market for such robotics products. One part of this strategy was to use public sector demand to drive market growth and develop consumer awareness. For example, in 2006 the Ministry of Knowledge Economy (MKE) joined forces with the Ministry of Education in a pilot project to deploy the above-mentioned English teaching robots in a small number of kindergarten classrooms. Given young children’s natural inquisitiveness, kindergarten classrooms were seen as an ideal place to test robotic capabilities while simultaneously fostering future generations of robot enthusiasts (i.e., consumers). The success of the initial pilot saw the project gradually scaled up and by March 2012, no fewer than 1,500 of Korea’s 8,400 kindergartens had robot assistants—placing them in the world vanguard.21 In light of this success, the government launched a $90 million two-year pangov­ ernmental pilot program in 2011. Under the plan, ten ministries committed to develop and utilize robots in areas from firefighting to medical care. The government simultaneously pursued a targeted export strategy aimed at meeting the particular needs of specific foreign markets, explained by an official from the MKE in 2010: The robotics market will shift its focus from today’s mass-production models to service models down the road. We must strive to pre-empt the trend through brisk efforts. . . . We will come up with tailor-made strategies in tapping into the international market. For instance, we will attempt to export robots caring for senior citizens and helping with surgery to advanced markets such as the EU and the United States. . . . Surveillance robots would be attractive to the African buyers and those helping with household chores and education would target the Southeastern Asian and Chinese markets.22 In line with this goal, from 2012, trials of Mero adaptations began in Denmark, under the sponsorship of the (former) Ministry of Knowledge Economy; in this incarnation, the robot is assisting in the care of the elderly, playing word and number games with seniors in nursing homes to help ward off Alzheimer’s.23 Such extensive government support for the research, development, and commercialization of service robotics saw a large number of Korean firms entering the sector, totaling around two hundred in 2012. One of the largest challenges facing these firms in light of the infancy of the industry was operational financing; while the market was expected to boom in the future, in the mid-2000s earnings from sales were still very small. The government thus become actively involved in fostering patient capital willing to keep firms afloat until the anticipated boom might arrive.

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Balanced Growth and the Expansion of Financial Activism In these ways, the Roh government’s new developmental strategy, and its emphasis on developing new growth engines in particular, demanded the expansion of financial activism, and along with it the expansion of the role of PFIs. This demand saw PFIs dramatically extend their role as lenders to, and investors in, Korean firms in NGE industries. Korea’s balanced growth strategy saw the Korea Development Bank cement its role as the nation’s lead venture capitalist; in 2005 the KDB received a presidential award for its support of the Korean venture industry (KDB 2008, 24). Yet the KDB’s new role was not without controversy. From the mid-2000s, the bank also began to push up against public resistance to its expanding VC activities, as private firms became increasingly wary of receiving direct investment from the government and homegrown VC firms agitated to gain access to the market.24 In 2005, in response to this challenge, the government established the Korea Venture Investment Corporation (KVIC) for the exclusive purpose of managing the newly created a $1.6 billion Korea Fund of Funds (KFOF). The KFOF removed the government’s direct fingerprints from VC funding by creating a large pool of funds made up of contributions from various government bodies, such as the Small and Medium Business Administration (SMBA) and the Intellectual Property Office (IPO)—known as “limited partners.” The Fund of Funds, managed by the KVIC, could then be deployed to create much smaller VC funds with private investors (“partnership funds”). These smaller, public-private funds in turn could be used to make investments in Korean firms. Importantly, however, the government would still be able to ensure that these government-invested funds were directed toward particular industrial activities. For when a partnership fund was established with a private sector (or other public) player, the limited government partner could stipulate which industries the fund would target—for example, new growth engine industries, or even something as specific as equipment devices. Legally, at least 40 percent of all funds would have to be dedicated to the strategic purposes specified by the limited (government) partner. The KFOF was thus a new form of policy financing, as it enabled the government to harness private capital, combine it with government funds, and ensure it was directed toward a particular industry sector—while remaining within WTO guidelines. Evidently, the IT-839 initiative, as the landmark initiative of Korea’s new developmental strategy, called for significant expansion of financial activism on the part of the Korean government. The key features of Korea’s new balanced growth strategy are summarized in table 7.1.

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TABLE 7.1  The substance of a developmental mindset and key features of Korea’s developmental strategies SUBSTANCE OF A DEVELOPMENTAL MINDSET (UNITES ALL DEVELOPMENTAL STATES)

(1) Primary purpose of economic activity: to build national strength (read: national security and autonomy and international prestige) (2) Primary goal of industrial governance: rapid industrial

KOREA’S MARK I DEVELOPMENTAL STRATEGY (1961–93)

KOREA’S MARK II DEVELOPMENTAL STRATEGY (2003-PRESENT)

Growth first, based on,

Balanced growth, based on

(a) promotion of a

(a) rapid, export-led

self-reliant economy, via (b) rapid-export-led industrialization, led by (c) mammoth private enterprise under close supervision of the state

techno-industrial transformation, via; (b) promotion of new growth engine industries; populated by (c) chaebol and nonchaebol

transformation, underpinned

firms (working closely

by local manufacturing

together where possible

capacity, technological

in mutually beneficial

autonomy, and export

supplier relationships)

competitiveness

proactively supported by

(3) Economic role of the state:

the state, both indirectly

State can and should

(e.g., through massive

intervene in the industrial

infrastructure/R&D

economy in pursuit of

spending and standard

transformative goals

setting) and directly (e.g. through strategic public purchasing and financial activism).

Since the Roh regime, despite each successive president coining a new title for their “flagship” industry development initiative, there has been remarkable continuity in the balanced growth developmental strategy underpinning them (from the “IT-839” initiative under Roh to the “green growth” and “creative economy” initiatives under presidents Lee and Park). Despite their different titles, the new growth engine industries selected for strategic promotion under these initiatives have remained relatively constant. So too has the focus on developing the core infrastructures needed to support these industries (from broadband under Roh to the smart grid under Lee and Park). Moreover, the overriding goal under each administration has been the localization of technologies related to these industries and the boosting of domestic production and exports—especially by nonchaebol firms. I examine the continuities in Korea’s balanced growth strategy since 2004 in more detail in chapter 9. Suffice to note here that the outcomes of the IT-839 initiative (the first expression of Korea’s balanced growth strategy) were impressive in many respects and have been widely documented.25

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Nevertheless, by the end of Roh’s tenure, despite government efforts, Korea’s reliance on imports of advanced technology components remained high, eroding export earnings. In 2007, the Ministry of Commerce Industry and Energy released a report entitled “Analysis of Localization and Technical Power,” co­ authored with the Korean Electronics Technology Institute. It showed that localization rates in key electronics industries had not improved, and it highlighted the reliance of domestic manufacturers on imports for advanced technology components.26 This report was followed by a Bank of Korea report highlighting the ongoing problem of import reliance in the IT industry and expressing fears about the industry’s future as a growth engine because of this. The report prompted alarm-sounding editorials in the Korean business press, which also bemoaned the IT industry’s lack of foundational technologies and reliance on component and materials imports. As one example stated: The Bank of Korea shockingly reported that Korea’s IT industry reached a limit as a growth source for Korean economy. The earning rate of IT-related companies is dropping rapidly while the problems with materials and components have not been solved. We need to pay attention to the warning that we should develop new sources of growth. . . . the government announced its plan to select 15 sectors of next generation strategic technology for development projects. However, it is hard to get out of the hole only by depending on the government.27 Added to the competitive pressures on export earnings, by the mid-2000s, Korean industry faced a seemingly relentless increase in the price of oil. Korea relied heavily on imports to meet its energy needs, given its lack of natural resources. During Roh’s presidency, Korea was importing around 95 percent of its energy resource requirements, mostly oil and coal.28 From 2001, the price of fossil fuel imports began to climb rapidly, thanks largely to increasing demand from China following its entry to the WTO. Between 2003 and 2007 the global oil price jumped from approximately thirty dollars to more than one hundred dollars per barrel. By the end of Roh’s tenure, the costs of fossil-fuel imports exceeded the combined income of Korea’s top export industries—automobiles, semiconductors, and ships—sparking serious concerns about the impact on Korea’s export competitiveness and fears about Korea’s long-term energy security. Oil was not the only market overheating toward the end of Roh’s tenure in office. By 2006, Korea was in the midst of another lending bubble—this time in real estate. Following the 2003 credit card crisis, commercial banks began following the trend set in the United States of aggressively expanding mortgage lending. In 2006, Roh faced the second financial crisis to erupt on his watch as the mortgage bubble burst. The government responded swiftly, putting in place new

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lending requirements to prevent future overlending in this area. Commercial banks in turn shifted aggressively into lending to SMEs concentrated in real estate and construction. Between 2005 and 2007, lending to real estate and construction SMEs by commercial banks almost doubled, accounting for 27 percent of their lending in 2007 (Cho 2010, 30). Commercial banks also began to expand into capital market-related activities, selling installment type equity funds for fees. This helped to feed a stock market frenzy, which in turn fueled capital inflows, putting upward pressure on the exchange rate and further undermining export profits.29 These financial sector instabilities were compounded by ongoing unemployment concerns and public angst about decreasing job security—further strengthening calls for financial intervention. Thus despite concerted government efforts on the industry development front, by the end of Roh’s rule the Korean population was reeling from a decade of successive financial implosions and jobless growth. Freer financial markets had delivered little in the way of stability and prosperity for the population as a whole—resulting instead in high levels of speculation and weak corporate investment, key symptoms of financialization.30 Reliance on advanced technology and energy imports continued to undermine export profits, leaving Korea vulnerable to the China challenge and heightening perceptions of insecurity. The intersection of these events had an intriguing impact on the national psyche, resulting in the now well-documented phenomenon of “Park Chung Hee nostalgia” (Chang 2012b). The incoming president Lee Myung-bak seized on that sentiment in his campaign for the presidency, offering himself as a Park Chung Hee for the twenty-first century and promising to revilatize the nation through a renewed emphasis on expanding local manufacturing capacity and technological autonomy and rapid, export-led growth. In his pursuit of these goals, President Lee would oversee the most significant expansion in financial activism since the Park Chung Hee era.

8 RETURN OF DEVELOPMENT BANKERS I declare the year 2008 as the starting year for the advancement of the Republic of Korea. . . . We must move from the age of ideology into the age of pragmatism. —President Lee Myung-bak, inauguration speech, 2008

In this and the following chapter I tell the story of the return of development bankers and the full flowering of financial activism under Lee Myung-bak, the first former chaebol CEO ever to be sworn in as president of South Korea. I pay particular attention to the snowballing domestic and international pressures that led Lee to intensify the balanced growth strategy of his predecessor and relatedly to pursue an ambitious financial activism agenda. The most significant pressures involved intensifying competitive challenges, which were amplified in 2008 by a hike in global oil prices, growing climate change concerns, and the onset of the global financial crisis (GFC), which broke within months of Lee’s inauguration as president. In response to these challenges, the Lee administration embraced a three-dimensional financial activism agenda. Its central pillars were the creation of a Korean “megabank” to fund the aggressive overseas expansion of large Korean firms; the reregulation of short-term capital flows to reign in speculative activities, secure domestic financial stability and boost productive investment; and the wholesale expansion of policy financing to Korea’s nonchaebol firms. A key aim of the latter was to create an army of globally competitive midsized firms, labeled “Korean Hidden Champions,” which were viewed as the key to Korea’s future techno-industrial success. It is important to emphasize at the outset that the financial activism agenda pursued under Lee was multidimensional in scope, and that certain aspects met with fierce domestic resistance, some of which was insurmountable. In particular, the idea of creating a Korean-owned megabank to fund major overseas industrial projects was eventually abandoned in the face of fierce local opposition (although not because of any principled opposition to financial activism, as we will see). Yet other aspects of the agenda, namely reregulating short-term capital flows and expanding policy financing for nonchaebol firms proved far less controversial, especially following the outbreak of the GFC. The GFC had an important enabling effect. It not only neutralized ideational and political 111

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obstacles to financial activism of this kind (i.e., aimed squarely at supporting the nonchaebol sector), but by intensifying an already prevalent Park Chung-Hee nostalgia amongst the wider population, the GFC also generated widespread public demand for developmental activism. And as already shown, the institutional architecture required to support such activism—the existence of a healthy set of policy finance institutions (PFIs)—was already in place. Yet chief among the factors driving and enabling the expansion of financial activism from 2008 were the developmental mindset and personal character of President Lee himself. Raised in P’ohang, the steel-making capital of Korea, Lee trained as an engineer before joining Hyundai Construction in 1965, just as President Park Chung Hee was launching Korea’s first major export push. At the time, Hyundai had fewer than one hundred employees. By the time Lee resigned as CEO in 1992, the Hyundai Group was Korea’s largest chaebol, having been a major beneficiary of Park’s “growth first” developmental strategy and the aggressive financial activism it involved. Given his firsthand experience of Park-style developmentalism, it is not surprising that Lee developed during his time at Hyundai a passion for big, bold industrial development projects, and a belief that almost anything is possible with hard work and determination (and, no doubt, access to capital). He brought this passion and worldview with him to the presidency. For example, during the 2007 presidential campaign, Lee proposed the construction of the Pan Korea Grand Waterway linking the country’s capital Seoul in the North with the port city of Busan in the South, and allowing the passage of cargo freighters right though the middle of the country. This particular vision never got off the ground, being widely judged too massive an undertaking—even for Korea.1 But Lee’s willingness to propose such an endeavor gives a sense of the ambition and “can do” spirit he brought to his leadership. In light of Lee’s passion for gargantuan construction projects, his nickname “the Bulldozer” seems apt. Significantly, however, this was not its derivation. Rather, Lee earned his moniker at Hyundai when he took it upon himself one day to dismantle and reassemble a malfunctioning bulldozer to understand how it worked and thus how to fix it. Like President Park, Lee was widely recognized as a problem solver and pragmatist (hence his inauguration-day call for an era of pragmatic policy making, noted in the epigraph).2 Indeed upon his ascension to the presidency, Lee set as his primary goal “fixing” the Korean economy by whatever means necessary. Those means principally involved appointing like-minded officials to key positions of power within the bureaucracy and extending and intensifying the balanced growth strategy initiated by the Roh regime—under the banner of the “Green Growth” initiative. The intensification of balanced growth in turn called forth the striking expansion of policy financing for local firms in strategic industries, typically on a conditional (performance-linked) basis.

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This vast increase in developmental financing might be considered one of the defining features of Lee’s presidency, and chapter 9 is devoted to documenting and explaining this development in detail. In the remainder of this chapter, I focus on the other two aspects of Lee’s financial activism agenda: the creation of a Korean megabank and the reregulation of short-term capital flows. I start by introducing the key financial policymaking figures under President Lee and the ideas about finance that informed their approach. I then examine policymakers’ efforts to execute the two initiatives in question, focusing on the factors that facilitated the pursuit of some aspects but frustrated others. My argument is that while the GFC galvanized the developmental ambitions of the policy elite and boosted the receptiveness of the broader population to financial activism, that receptiveness had its limits. In particular, financial policies that appeared to benefit the chaebol at the expense of nonchaebol firms and the wider Korean populace met with fierce local resistance. However policies that were aimed at nonchaebol sectors, or that balanced the interests of chaebol and nonchaebol firms, were tolerated or welcomed. The emergence of an international environment more permissive of financial activism post-2008 was also an important factor enabling the reregulation of short-term capital flows discussed in this chapter, and the expansion of policy financing documented in the following.

Development Bankers Redux On February 26, 2008, Lee Myung-bak was elected as president, following his successful stint as mayor of Seoul.3 Lee came to power with a strong progrowth, probusiness agenda and the promise of delivering his “7–4–7” goals for Korea within five years: 7 percent annual GDP growth, forty-thousand-dollar per capita income, and the rank of world’s seventh largest economy. These were ambitious goals by any measure. But as the GFC was yet to reach Korea’s shores, the electorate did not deem them unrealistic. During his inauguration speech, Lee vowed to be guided by “pragmatism” rather than ideology in the pursuit of his vision for Korea’s economic advancement. His selection of advisors confirmed that—in the sphere of finance at least—the president’s policy approach was unlikely to be dictated by liberal economic principles. Perhaps the most influential of these advisors was former career bureaucrat Kang Man-Soo. Kang had joined the Ministry of Finance in 1970 after graduating from Seoul National then New York University. Kang remained a MOF man until 1997, the year in which he assumed the position of vice minister of finance. He took on the position just as the crisis hit. The ministry’s mishandling of the

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crisis saw Kang leave bureaucratic life to become an economic advisor to, and close confidante of, Lee Myung-bak during his term as Seoul city mayor. Kang continued in this role during Lee’s 2007 presidential campaign, and remained Lee’s closest economic advisor in the earliest days of his presidency. In 2008, Lee appointed Kang to be minister of finance. At the same time, the Finance Ministry was remerged with the Ministry of Planning and Budget, reversing the 1998 separation and significantly enhancing the powers of the newly named Ministry of Strategy and Finance (MOSF). As finance minister, Kang thus exerted considerable influence over the Lee government’s early approach to financial reform. Many aspects of the Lee administration’s approach reflected Kang’s traditional developmental worldview and bureaucratic inclination toward an activist role for the state in the Korean financial system. This activist inclination was particularly evident in Kang’s approach to the privatization of the Korea Development Bank (KDB). During his election campaign, presidential candidate Lee had promised to speed the privatization of a host of government assets, in line with his promarket self-presentation. Importantly, however, the motivation for KDB privatization was not as straightforward as reducing government involvement in the financial system—at least as far as Kang was concerned. Kang had long been an advocate of transforming the KDB, as part of efforts to create a Korean megabank—a financial national champion able to compete with foreign investment banks and to support the global advance of Korea’s industrial firms. This was very much in the spirit of developmentalism that underpinned financial policy through successive administrations. The context of Kang’s megabank idea was the relatively poor performance of Korean banks since the 1997 crisis. The entry of foreign financial institutions had led neither to the significant transfer of financial skills and know-how nor to the creation of a globally competitive Korean bank, as the original architects of banking sector liberalization had anticipated. As Kang observed in 2008: “Korea is the third-largest economy in North-East Asia but our biggest bank ranks at around seventieth. There should be at least one bank that ranks among the top 10 in Asia.”4 In Kang’s view, the lack of a globally competitive investment bank was a serious weak spot for Korea, in that local firms looking to undertake major overseas investment projects didn’t have a strong local backer on which they could rely. Kang was not alone in this view, which was echoed in the local business press: “South Korea ranks 10th and 3rd in the world and Asia, respectively in terms of economic power, yet has no domestic financial company that ranks among the world’s 50 largest firms. As a result, South Korea’s limitations in supporting its domestic companies in large-scale overseas projects such as the construction of nuclear power plants, high-speed railroads, and industrial plants has been exposed.”5

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Thus, during its transition period in January 2008, the Lee government proposed a plan to privatize the KDB in a way that would significantly increase its size, ensure majority Korean ownership, and protect the bank’s policy lending functions. To this end, the government planned to merge the KDB with its affiliate financial companies to create a larger entity that could then be privatized. But to ensure it stayed in Korean hands, the government would also relax restrictions on banking sector investment by local pension funds and the chaebols. Moreover, and significantly for the future of policy lending in Korea, it was proposed that income from the sale of the KDB to local investors would be used by the government to create a new, state-owned policy bank to take over the KDB’s policy lending functions. This bank would focus specifically on financing small-to-medium sized (i.e., nonchaebol firms), which as we saw in the previous chapter had been struggling since the 1997–98 crisis and subsequent dot-com bust to access capital on reasonable terms. For its part, once relieved of its policy-lending functions, the KDB would focus on building and expanding its investment banking operations. Kwak Seung-jun, a member of President Lee’s transition team, explained the rationale behind the privatization plan in 2008 thus: We proposed the [KDB privatization] plan at a meeting with the Ministry of Finance and Economy this afternoon. Both sides agreed that the purpose for privatizing KDB will be to create a homegrown investment bank as well as to strengthen its function as an institution that provides privileged loans to small- and medium-sized companies as well as long-term financing for public projects. . . . The privatization of KDB is an example of Lee Myung-bak’s plan to revitalize the economy with private capital. . . . The privatization of KDB and the relaxation of rules that limit investments in banks by industrial groups are tied to one another. . . . If the rules aren’t relaxed, domestic capital, such as pension or other kinds of funds, won’t become part of the process of privatizing KDB, so the possibility exists that it could be bought with foreign capital.6 It is thus fair to say that Finance Minister Kang held deeply developmental views about finance. He believed that the government could and should play an active role in the financial system, ensuring the availability of sufficient capital for industrial investment by Korean firms both abroad (through a Korean-owned megabank), and at home (through domestically focused, state-owned policy banks). This view was further reflected in the reorientation under Kang of the activities of Korea’s Sovereign Wealth Fund (Korea Investment Corp) and National Pension Fund toward facilitating the overseas expansion of large Korean

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firms and making direct investments in strategic industries, including clean energy technology and advanced materials.7 Moreover, as I show below, Kang also advocated an interventionist role for the government when the GFC hit, taking a hard line against speculative investors and clamping down on short-term capital flows. On this matter, Kang had the strong support of other like-minded officials who were also appointed to positions of power by President Lee. For example, Lee’s team of top economic advisors included Park Jae-wan,8 former MOF bureaucrat, public administration scholar, and graduate of Harvard’s Kennedy School. Park was appointed Lee’s first economic secretary for policy planning from 2008, and then minister of strategy and finance in mid-2011 (following Kang’s departure, discussed below). As Kevin Gallagher (2015, 91) has pointed out, Harvard’s Kennedy School not only emphasizes a problem-solving over theoretical approach to economics, but is the home of such economists as Danny Rodrik and Andreas Velasco, some of the world’s strongest advocates of the reregulation of international capital flows. As finance minister, Park too was a vocal advocate of capital controls.9 Lee’s economic advisory team also included Oxford-trained Korean financial economist Shin Hyun-song, one of the world’s most respected proponents of capital controls. In 2009, Shin returned from his academic position at Princeton University to serve as President’s Lee’s chief advisor on international finance, and was one of the chief architects of the new regulatory measures introduced by Korea in the years following the 2008 turmoil, which I discuss later.10 However, despite President Lee’s explicit and consistent backing of Kang and his financial policy agenda, some aspects of that agenda faced serious domestic resistance while others proved far less controversial and easier to put into effect. In the sections that follow, I tease out the main political and institutional obstacles to the megabank idea before turning my attention to the factors that enabled the reregulation of short-term capital flows.

Megabank Idea and Its Obstacles It is important to note that when first released, Kang’s megabank plan did not spark serious domestic opposition—not even from the nation’s top financial regulator, the Financial Services Commission (FSC). As we saw in chapter 6, the FSC was established under President Kim Dae-jung as part of his aim to sever the links between the chaebols, government, and banking sector and to create a more transparent and rules-based financial system. This move had been vehemently opposed by the Finance Ministry, which eventually lost its battle against the

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creation of an independent regulator. However, finding suitably qualified people to chair the FSC without previous links to the Finance Ministry or to former state-owned banks subsequently proved extremely difficult; since 1999, the FSC has at times been chaired by former Finance Ministry bureaucrats sympathetic to a strong role for the state in the financial system.11 Yet this was not the situation in early 2008. At that time, the FSC was a vocal supporter of further banking sector privatization and liberalization. Nevertheless, Kang’s megabank idea was deemed acceptable by the FSC. Why? The reason is that it was structured in a politically palatable way—one that appeared to be simultaneously moving banking sector privatization forward while also creating new mechanisms for supporting nonchaebol firms. As we saw in chapter 7, the issue of rebalancing the economy by supporting the development of nonchaebol firms emerged as an issue of immense political and economic significance in the post 1997–98 crisis period. And the circumstances in which Korea found itself in 2008 only heightened this as a political issue. For these reasons, there was little for the FSC to object to in Kang’s original megabank plan. All of this changed, however, in early April 2008. At that time, Finance Minister Kang mooted a significant shift in approach to KDB privatization, in line with his megabank vision. Instead of simply merging the KDB with its existing affiliates, Kang proposed merging it with two other significantly sized state-owned banks—Industrial Bank of Korea and Woori Financial Holdings—to create a truly “mega” new entity.12 The assets of this merged entity would exceed $500 billion—more than double the assets of any existing private Korean bank. Privatization would then be pursued once this merger was complete. The plan to create a new state-owned policy bank to take over KDB’s policy lending functions would remain the same, allowing the megabank to focus on investment banking activities. The release of Kang’s megabank plan drew immediate criticism from the FSC. It had no problem with the idea of creating a large Korean investment bank.13 Rather, the FSC feared Kang’s new proposal would stall the privatization process by creating an entity too large for any buyer. Private banks and policy commentators also objected to the proposal. They complained that although superficially a decent-looking plan, the intent appeared “suspicious” and that if implemented, the government would “control the financial market.”14 Analysts reportedly agreed that “the sheer size of the new entity” seemed designed to ensure that no buyer for the public banks could be found and noted that “the government is unlikely to want to sell the new entity to foreign investors amid prevalent concerns about the increasing foreign influence over the financial sector.”15 In the face of mounting public criticism and objection from the FSC, Kang’s megabank idea was shelved in late April 2008 in favor of the government’s original plan.16

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In line with those plans, in 2009, the KDB financial holding company was created, in preparation for future privatization. At the same time, the Korea Finance Corporation (KOFC) was established as a new policy financing institution (PFI). The stated intention was for the KOFC to absorb the KDB’s traditional policy financing roles and to focus its activities exclusively on small- to medium-sized firms. However, as I show in chapter 9, the KBD did not relinquish its policy lending functions as planned. Rather, from that point on, both the KDB and the KOFC (along with the Korea Export Import Bank) rapidly ramped up their policy lending activities to support the Lee government’s ambitious Green Growth initiative—the signature initiative in its balanced growth developmental strategy. Yet this was not quite the end of Kang’s megabank ambitions. For as 2008 progressed, so did the GFC, with significant implications for public perceptions about the appropriate role of the state in the financial system. The crisis had the ideational consequence of undermining faith in freer financial markets, thereby creating new possibilities for the expansion of financial activism in the shape of capital account reregulation.

Capital Flow Reregulation and Its Enablers Korea was hit hard by the GFC—thanks largely to the activities of foreign bank branches in Korea. Following the 1997 crisis, these branches had been exempt from new regulations imposed on local banks and their short-term borrowing and derivatives trading activities in particular. When the 2008 crisis hit, the extent of foreign branches’ involvement in these two activities was exposed. These foreign-owned institutions thus became the main transmission belt via which GFC contagion spread to Korea (see Cho 2010, 27). By the end of 2008, Korea was in the grip of a major credit crunch, reeling from short-term capital flight and the rapid build-up of nonperforming loans. While financial institutions were struggling, industrial firms in key export industries also found themselves facing enormous losses thanks to their heavy involvement in derivatives trading. This trading was linked to exporters’ efforts to hedge against the appreciation of the Korean won, which had in 2005 began an upward trend. Foreign banks had been especially active in encouraging industrial firms to engage in such hedging—and profited greatly from these activities (Cho 2010, 39). As financial instabilities intensified in 2008, the Korean government laid the blame for the rapidly deteriorating situation squarely at the feet of private banks—and foreign private banks in particular. In one public meeting, Finance Minister Kang labeled banks engaging in currency trading “crooks that mislead innocent market participants by taking advantage of their expertise, and making

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money out of it. . . . They try to earn commission fees by recommending currency hedging and telling companies that the local currency will continue to appreciate over the next two or three years.”17 Kang also indicated the government’s resolve to intervene in foreign exchange markets to challenge speculators: “It is not right for the government to overlook those who exercise wrongful power in the currency market, and if there are speculators, the situation needs to be corrected.”18 The finance minister’s hypercritical statements targeting private banks drew severe criticism from bank officials, who accused him of ignoring market principles and engaging in excessive intervention in the economy.19 Yet Kang was undeterred, his frustration with foreign banks in particular exacerbated by their unwillingness to cooperate with the government’s efforts to restructure nonperforming loans and secure liquidity for Korean firms, particularly SMEs. Smaller firms were by far the worst affected by the credit crunch, with private bank loans effectively drying up in late 2008, pushing many to the brink of bankruptcy. Foreign banks simply ignored numerous government appeals to keep lines of credit open to smaller firms, whereas local banks were far more obliging.20 The role of free capital flows and of foreign financial institutions in precipitating, then exacerbating, the crisis exerted a profound impact on Korean attitudes toward the freeing of financial markets. While all private banks had exhibited a tendency toward speculative investment since 1997, speculation by foreign banks had been far more pronounced.21 From early 2009, with the extent of foreign banks’ speculation apparent, a chorus of calls for financial reregulation emerged, even from (then) more liberal quarters such as the Financial Supervisory Commission. For example, in the words of then FSC chairman Kim Seok-Dong (a former MOF bureaucrat in the 1990s): New liberalism, which advocates market autonomy as its highest value, has served as a solid background for the expansion of the financial industry. . . . New liberalism has also undermined the safety of the world financial market due to excessive autonomy and the relentless pursuit of profit. . . . Additionally, minimal government intervention has resulted in repeated financial bubbles, and this has led to small and large economic crises. . . . The financial paradigm will likely shift away from maximizing market autonomy and toward autonomy more in synch with market regulations.22 In early February 2010, Finance Minister Yoon Jeung-hyun gave a speech emphasizing the need to rethink the function of the financial sector and to make urgent efforts to relink the financial system and the “real” economy—a call he would repeat throughout his ministership.23 For example, in a televised interview in October 2010, Yoon argued: “There is a risk of a systemic problem in the

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financial system. . . . Capital must flow into productive use, such as corporate investment. We are closely monitoring [capital flows].”24 This sentiment was reinforced by President Lee himself, who also argued in a public lecture in early 2010 that the principal role of finance needed to be reconsidered, and that finance had to be closely linked to the productive economy.25 From this point onward, the government began harshly criticizing banks for paying out dividends to shareholders instead of extending loans to cash-strapped local firms to boost productive investment.26 Key policymakers also began making a public case for the development of new kinds of capital controls that might limit capital flight and encourage funds toward productive activities. Many of these new measures were proposed by Shin Hyun Song. As already noted, Shin was one of the world’s leading thinkers in this area, and in 2009 had returned to Korea from his academic position at Princeton to serve as a top economic advisor to President Lee. The measures proposed by Shin during 2009 and 2010 included a tax on the nondeposit liabilities of banks (intended to discourage banks from holding too much dollar-denominated debt), as well as taxes on foreign purchases of government bonds and government intervention in the foreign exchange market “when the market is in disorder.”27 These ideas found significant support within Lee’s advisory team. Moreover, in considering these measures, Korea had domestic and international law on its side. Domestically, under Korea’s 1961 Foreign Exchange Transactions Act, the Finance Ministry retained the legal right to intervene in foreign exchange market in times of instability. Internationally, Korea had been sure to exclude the Foreign Exchange Transactions Act from coverage of the U.S.-Korea Free Trade Agreement (Gallagher 2015, 93). The interventions thus would not violate any of Korea’s international obligations. Yet despite their legality, in early 2010 there was some serious concern within the government about moving too quickly to reregulate, especially given Korea’s impending role as host of the G20 Seoul Summit, scheduled for early November. The fear was that the imposition of controls at that time might trigger a negative market response and tarnish “Korea’s image as promoter of the market economy.”28 In light of these concerns, and with an eye to bolstering local and international support for its reregulatory objectives, policymakers within the MOSF and Lee’s personal advisory team took a highly strategic approach to their execution. To begin, on the domestic front, the MOSF engaged in what one ministry official described as “market testing” approach. This involved gradually leaking to the media the fact that such controls were being considered by the government in order to see how the market responded and to test the level of opposition that the government was likely to face.29 Second, policymakers framed their interventions in “market-friendly” language in order to neutralize foreign opposition and, they

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hoped, even build support for such measures.30 So, while the proposed regulations were initially described by MOSF officials as “capital controls,” this label was soon jettisoned and replaced by the more internationally acceptable term “macro-prudential regulations.” Korea was also fortunate that in 2010, international attitudes toward such regulations were already softening, thanks to the GFC and its serious impact on many emerging economies.31 For example, in early 2010, the IMF issued a paper entitled Capital Inflows: The Role of Capital Controls, which argued that such controls are important tools in emerging economies in times of rapid capital inflow. The World Bank and Asian Development Bank also released statements in 2010 supportive of “macroprudential” capital controls. The fact that it was Princeton-based scholar Song who was leading Korea’s sales pitch for these regulations no doubt also played an important legitimizing role. Nevertheless, despite evidence of softening international attitudes from early 2010, apart from some minor market-testing measures,32 the government waited until after the November G20 Seoul Summit (where it secured endorsement of “defensive capital controls”) to roll out its reregulatory package.33 But it did not wait long. The G20 Summit was held on November 11. Less than a week later, on November 16, the MOSF announced a tax on the foreign currency borrowings of banks.34 Then, on November 20, the ministry pledged to reintroduce a tax on foreign money invested in government bonds.35 And finally, on December 26, it significantly lowered the foreign exchange derivatives ceilings for local and foreign banks.36 These measures, aimed at limiting currency trading, minimizing the buildup of short-term debt, and preventing capital flight, all seem to have worked in Korea’s favor by shielding the country from some of the worst effects of the GFC. Korea also succeeded in winning key segments of the international community over to its agenda. In early 2011, the measures received the explicit endorsement from the IMF, which released a report highlighting the positive impact on capital control in Korea.37

Limits of Financial Activism: Balanced Growth the Key Despite the success of capital controls, however, and importantly for the larger argument I advance in this study, other aspects of the government’s response to the GFC proved deeply contentious at home. For example, Finance Minister Kang’s interventions in the foreign exchange market in 2008 to push down the value of the won proved particularly unpopular. The result—higher import prices which helped fuel inflation, resulted in widespread calls for his resignation, from both the public and liberal academics who depicted Kang’s attempt to

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engineer a rapid export-driven recovery by keeping exchange rates low as a hangover from Korea’s past.38 Those efforts certainly revealed the limited extent of Bank of Korea independence in post-1997 crisis Korea.39 Eventually, Kang’s approach to exchange rate management undermined his popularity to the degree that President Lee reluctantly stood him down in early 2009. This story highlights the significant constraints that domestic politics now places on the pursuit of financial activism in Korea, even in the presence of an institutionally powerful and popular president. Politics matters, obviously. But how? What the public reaction to Kang’s exchange rate interventions suggests is that where financial activism is seen to exacerbate existing disparities between chaebol and nonchaebol sectors of the economy, it is unlikely to receive support. Exchange rate interventions were obviously intended to boost the fortunes of exporters. But at the time, more than 80 percent of all Korean exports came from its top thirty firms. The negative by-products of a falling exchange rate—most significantly inflation—were shouldered by the nonchaebol segment of the economy, leading to a serious public backlash and fueling concerns that President Lee, with his chaebol background, was biased toward this sector. However, this is not to say that the Korean public will not tolerate government support for the chaebols. As we have seen, Kang’s megabank idea, which would have created a locally owned bank to support the international advance of its largest firms, faced little public opposition when first announced. This was, I suggest, because that idea was accompanied by a proposal to create a specially designated policy bank aimed exclusively at nonchaebol firms. What brought Kang’s megabank idea unstuck was not its chaebol focus, nor any principled opposition to the idea of financial activism. Rather, it was Kang’s reframing of that proposal in a way likely to stall the entire banking sector privatization process. This raised the ire of private banks worried about excessive government control over the financial market. As we will see, these banks were able to secure the support of liberally oriented opposition parties and mounted an effective campaign against the idea. Nevertheless, the megabank idea did not die until the president himself had done everything in his power to enhance Kang’s chances of realizing the vision. This included supporting Kang’s appointment to chairperson of the KDB, and the appointment of Kang’s close friend and ally (and former MOFE colleague) Kim Seok-Dong to chairperson of the Financial Services Commission. Thus, while this particular aspect of the government’s financial activism agenda was not realized in full, the story serves to highlight the enduring presence of developmentally minded bureaucrats in key positions of power and to illustrate the role of the Presidential Office in perpetuating a developmental mindset through strategic institutional appointments.

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Moreover, no such opposition emerged to the plan to expand policy financing for nonchaebol firms under the president’s signature Green Growth initiative. We must bring the megabank story to its conclusion before turning to Lee’s developmental strategy and the expansion of financial activism it encompassed.

Death of the Megabank Idea Kang’s efforts to support Korea’s exporters through aggressive currency devaluation brought an end to his tenure as finance minister in January 2009. Nevertheless, despite his resignation, Kang remained Lee’s closest personal economic advisor, and it was reported that Kang’s influence continued to outweigh that of his old ministry.40 Kang continued in his advisory role until the expiration of Korea’s two-year ban on former bureaucrats taking jobs in industries related to their role. Upon that expiry in early 2011, President Lee approved Kang’s appointment as head of the Korea Development Bank.41 At the same time, Kang’s long-time former finance ministry colleague and previous vice finance minister, Kim Seok-Dong, was appointed as chairman of the Financial Services Commission (FSC). Like Kang, Kim was widely regarded as an advocate of a much stronger role for the government in the financial system.42 These appointments sent a clear message about the future direction of financial reform under President Lee. Not surprisingly, from his new institutional position of power, Kang pursued his megabank vision with renewed enthusiasm, angling to take over state-owned Woori Bank. In his inaugural speech as KDB Chairman, Kang reinforced the idea that Korea needed a large bank to support the advance of Korean firms in global markets: “We need a lender, which supports growth engines, which can reach global markets. It is KDB Financial’s calling to take this role.”43 With Kim Seok-Dong now in charge of the FSC, it seemed at first that the deal would get the go-ahead from the nation’s top regulator.44 But these developments did not take place in a political vacuum. The megabank idea continued to face strong domestic opposition—particularly from private bankers who were convinced it would push them out of the market. As the Financial Times reported, “Several prominent South Korean policymakers have suggested Seoul should forge a heavyweight domestic lender to support industrial conglomerates such as Samsung, Hyundai and LG. . . . But financial investors have complained the formation of a giant state bank could reverse South Korea’s commitment to make its banking sector more competitive.”45 Moreover, private bankers’ concerns were soon seized on by liberal opposition parties, whose parliamentarians began to voice their rejection of the idea. In an effort to build domestic political support for the megabank plan, KDB officials

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began highlighting the importance of a large national bank for geopolitical purposes, particularly reunification with the North. In the words of one KDB official in June 2011: “Unification expenses will post astronomical figures. . . . If KDB acquires Woori, it will give birth to a mammoth bank that can afford to sponsor unification costs.”46 However in the face of growing opposition from the investment community, the FSC eventually rejected the KDB’s bid to acquire Woori, on the grounds that there was simply too much local opposition to the idea. At the same time, Korea was facing strong international pressure to speed up the privatization of state-owned banks—including the KDB. These calls—led by the IMF—were met with strong local resistance, with some newspapers even devoting editorials to the topic: It may be anachronistic to oppose privatization. There is one bank that should remain under the control of the government, the Korea Development Bank (KDB). . . . The IMF may criticize Korea for retaining the state-run bank in violation of the global trend toward privatization. It may chide KDB for its subsidized lending. The IMF has not always been correct in its remedies for the troubled economies worldwide. It has already apologized to Korea for its misguided policy recipes during the economic crisis in 1997. . . . The government may wrongly think that KDB has outlived its original purpose in the knowledge economy era. Even now, manufacturing industries are necessary. . . . The current woes troubling the United States and many European countries are traceable to lack of a solid manufacturing base. Despite advancing to economic maturity, the country should retain manufacturing as a core backbone of the economy. . . . Privatization is not a panacea. It is not always true to think privatization is good and state-control is bad.47 While Kang was obliged to abide by FSC rules, he proved more than willing to ignore foreign pressure for the KDB’s privatization. Indeed in mid-2012, Kang backed away from the idea of full privatization altogether, proposing instead the Singapore DBS model as the preferred approach. Under this system, the Development Bank of Singapore was only partially privatized, the government maintaining a majority stake. In Kang’s words: “The new model is the DBS, in which the government there holds an anchor stake after the IPO. It is a much better strategy. Chinese state-run banks are still controlled by the government even after being listed on the bourse.”48 Thus while Kang’s efforts to create a megabank were thwarted by domestic political opposition, the KDB’s investment banking and policy finance functions were nonetheless strengthened under Lee’s presidency. Accordingly, these institutions were ripe for deployment when deteriorating international and economic conditions led Lee to intensify Korea’s balanced growth developmental strategy, under the banner of Green Growth.

9 FULL FLOWERING OF FINANCIAL ACTIVISM If this electric vehicle is of higher quality than the one from Japan, it is a great achievement. However in the Green Growth era, it is important for us to have original technology. There is not much competitiveness to manufacturing products with others’ technology. —President Lee Myung-bak, “Full Speed Electric Car Unveiled,” Korea Herald

This chapter documents and explains the wholesale expansion of policy financing under Lee Myung-bak, the third pillar of the new president’s ambitious financial activism agenda. The expansion was the flip side of Lee’s decision to extend and intensify the balanced growth developmental strategy initiated by his predecessor, albeit under a new banner: “Green Growth.” The Lee administration’s internationally admired Green Growth initiative necessitated the aggressive expansion of policy lending by the nation’s policy finance institutions (PFIs). By the end of Lee’s reign, state-owned PFIs would account for fully one-quarter of all loans in the Korean financial system. Between 2008 and 2012, large volumes of these loans were channeled to local firms in strategic industries, typically on a performance-linked basis. In the pages that follow, I examine the origins of President Lee’s Green Growth initiative and explain how it extended and intensified Korea’s new balanced growth developmental strategy. I pay particular attention to the domestic and international pressures that stimulated the developmental desires of the policy elite under Lee and that shaped their Green Growth policy response. Chief among these pressures were ongoing concerns about Korea’s techno-industrial competitiveness, which were amplified in 2008 by the global financial crisis, along with growing fears about energy insecurity and climate change. The desire to enhance Korea’s international prestige by taking a leadership role on this latter, global issue of concern was also a motivating and shaping factor of significance. I then turn my attention to the execution of Green Growth and the financial activism it involved and ask, What were the institutional, political, and structural factors that enabled the Lee administration to translate their developmental strategy into action, especially its financial policy aspects? My answer starts with the existence of a powerful Presidential Office able to dictate the pace and 125

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direction of Korea’s developmental initiatives, and the staffing of that office by an ambitious, developmentally minded president. It extends to the presence of a skilled and increasingly centralized bureaucracy inclined to strictly follow presidential orders, a healthy set of PFIs capable of rapidly expanding policy financing, and a domestic political environment receptive to a more active role for the state in economic governance. I conclude by considering the future of such activism under current President Park Geun-hye.

Green Growth as an Expression of Korea’s Balanced Growth Developmental Strategy While Lee Myung-bak presented himself as a president with a Park-like vision for Korea’s economic revival, the exact details of that vision were unclear prior to his election. Indeed, President Lee did not publicly present a fully formed industrial development plan until August 15, 2008. The date of the announcement was intentional—this was the sixtieth anniversary of the establishment of Korea as a Republic. The number sixty is also an auspicious number in Korea, so Lee was especially anxious to mark it with a big announcement. That was to be his landmark Low Carbon, Green Growth initiative (hereafter the Green Growth initiative). Green Growth was the flagship initiative of Lee’s presidency. It grew out of discussions Lee held over 2008 with a small but eclectic group of trusted advisors drawn together from his local and international networks.1 Lee asked the group to help him identify a “big idea” on which he could hang a major industry promotion agenda. The group thus spent time pondering the range of pressing challenges facing the nation: energy insecurity, intensifying competitive pressures, unemployment, an ageing population, and Korea’s relatively low international profile compared with its economic strength.2 The vision that emerged from subsequent discussions was a comprehensive techno-industrial development plan that centered on the creation, commercialization, production, and export of green technologies, products, and processes. The potential benefits were multi­ dimensional. First, it would help Korea overcome its energy security problems by actually manufacturing its own sources of power—not just nuclear power, but renewable energies, particularly wind and solar.3 This idea was particularly appealing to the president in 2008, for in that year the oil price had skyrocketed to US$150 per barrel. Korea was also facing major energy shortages and had reached capacity in terms of power generation. A new way of thinking about energy supply had to be found. Second, the creation and commercialization of green technologies and products would open up a whole new set of manufacturing and

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export opportunities for Korea—helping to drive future industrial capacity and export competitiveness. Japan was already moving in this direction and Korea did not want to be left behind.4 Third, as addressing climate change was a major international issue, enthusiastically embracing green growth would be a huge boon to Korea’s international status. Korea could establish itself as a leader in helping to solve one of the world’s most pressing problems. This would thrust Korea into the international spotlight, significantly bolstering international prestige. Green Growth would thus advance three goals all at once: manufacturing and export competitiveness, energy security, and international status building. Lee could also be confident that his embrace of an ambitious developmental initiative would meet widespread popular approval. For in 2008, Korea was in the grip of an unprecedented wave of “Park Chung Hee nostalgia”—or perhaps more aptly, developmental nostalgia: the longing for a strong and motivated leader who would prioritize and aggressively pursue Korea’s economic revival above all other goals. This nostalgia had emerged in the wake of the 1997 financial crisis, which many Koreans blamed on the economic mismanagement of the more liberally oriented Kim Young-sam administration. From 1997 onward, national opinion polls routinely rated Park Chung Hee as the most competent president in Korean history, and the number of popular and scholarly books favorably recalling the Park era ballooned.5 As the 2000s progressed and Korea’s economic situation deteriorated, developmental nostalgia only intensified, to the point that it became the focus of both media and scholarly attention. Korean sociologist Seungsook Moon (2009) has described the origins and dimensions of the phenomenon thus: The celebration of economic growth as the source of self-affirmation and pride, accompanied by the selective erasure or overlooking of brutalities and negative consequences, characterizes Park Chung Hee nostalgia and underscores the hegemony of economic developmentalism in the current era of globalization. . . . While the centrality of economic prosperity to the popular view of a good society is not peculiar to Korea, it is . . . accentuated in Korea by the recent history of rapid economic development and the subsequent dramatic downturn. A majority of Koreans feel deeply vulnerable in this era of “unlimited competition,” with little social security to rely on other than their own families, whose capacities for providing individuals with welfare have been profoundly undermined by structural changes in society. . . . Such popular sentiments of vulnerability and insecurity serve as fertile soil for nostalgic longing for a “strong” leader who can deliver economic stability and preferably growth.

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It has been widely remarked that Lee Myung-bak strategically seized on this pervasive public sentiment in his presidential election campaign, implicitly offering himself as a “Park Chung Hee for the 21st Century”6—even to the point of donning Park-style dark sunglasses and adopting language reminiscent of Park by calling for a “national renaissance” and “economic revolution” driven by Green Growth.7 Lee must have known that his announcement of an ambitious developmental initiative would fall on fertile soil, and even earn him significant political capital.8 For all of these reasons, the president seized on the Green Growth idea with enormous enthusiasm and immediately put together a team of advisors to draw up Korea’s Low Carbon, Green Growth initiative. One of the first recommendations of this advisory group was the recentralization of the policymaking apparatus to facilitate a coordinated, multidepartment approach to the development and implementation of Green Growth plans. In February 2009, the Presidential Commission on Green Growth (PCGG) was created to serve this function.9 Chaired by the president and drawing together high-ranking representatives from all government agencies involved in economic, energy, and environmental policy making, the PCGG was responsible for formulating and overseeing Korea’s National Strategy for Green Growth (2009–50) and the Five Year Plan for Green Growth (2009–13), and for reviewing policy drafts submitted by policy-level ministries, such as the Ministry of Knowledge Economy.10 In this sense, the PCGG served the function of a developmental pilot agency, albeit without the full budgetary control that Korea’s first pilot agency, the Economic Planning Board, had enjoyed prior to its dissolution in 1994 (Kim and Thurbon 2015, 228). The PCGG released Korea’s Five Year Plan for Green Growth in July 2009. At the center of the plan was an ambitious set of goals to reduce reliance on fossil fuels and transition to green and renewable energies.11 To meet these goals, twenty-seven core technologies would be developed and form the basis of twenty-two new Green Growth engines. It is important to point out that Lee’s Green Growth engines supplemented rather than displaced the new growth engines that had been identified and nurtured by the previous Roh administration under its IT-839 initiative (such as robotics). Indeed Lee’s Green Growth initiative can be seen as an extension and intensification of the balanced growth developmental strategy launched by Roh under IT-839. Under Lee’s Green Growth plan, the government would focus on developing and rolling out massive infrastructures that would support the development of new growth engine industries—just as it had under IT-839. In the Green Growth initiative, the major infrastructure was to be the smart grid. The smart grid would enable consumers to regulate their energy consumption, and energy providers to move resources

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more efficiently around the grid. It would also create demand for Green Growth engine products, particularly energy storage devices, smart meters, electric vehicles (which could be charged via the grid), and renewable energies. To support the development of such products, the government would play the roles of producer, procurer, promoter, and financier—just as it had under IT-839. Through government funded R&D programs and pilot projects, new technologies and products would be created. Government would then drive demand for these products through government purchase programs. State-owned PFIs and VC funds would help finance Korean firms as they sought to expand private markets at home and overseas.12 From 2009, Korea’s PFI’s began to introduce special policy financing programs targeted directly at Green Growth industries. These programs existed alongside those targeted at new growth engine industries (reflecting that fact that Lee’s Green Growth initiative effectively added to the list of NGE industries already being nurtured by the government—thanks to the previous Roh administration—such as robotics); it did not displace those existing initiatives. I discuss these policy financing programs in detail in the following section. As far as both Green Growth and new growth engine industry development was concerned, localization remained the key measure of success under Lee, with ambitious goals set to increase local technology levels and local equipment, part and component use.13 Over 2009, the Ministry of Knowledge Economy released lists of the specific equipment and component items that it wanted to have localized within a certain period of time and put in place a host of supports to encourage localization.14 The government’s R&D budget was significantly expanded and a host of public-private consortia established with the explicit aim of localizing materials, parts, and components in NGE industries.15 In addition to boosting R&D aimed at localization, incentives were introduced to encourage Korean firms to acquire foreign firms holding exclusive technologies. Korean companies investing in government-designated areas were also exempted from tax audits, while state-run institutes and medical centers were encouraged to purchase equipment made in Korea.16 The drive to localize came from the top down. For example, during the unveiling ceremony of Korea’s first full-speed, fully-electric vehicle, President Lee emphasized what he saw as the car’s main limitation: it was not 100 percent Korean. The government-funded consortium had achieved only 90 percent localization of technology, parts, and materials. Lee’s intensification of Korea’s new balanced growth strategy under his Green Growth initiative involved the enormous expansion of both government spending and state-backed policy financing.

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Green Growth and the Expansion of Policy Financing In 2010, laws were introduced requiring the national government to spend at least 2 percent of GDP annually to promote Korea’s transition to a low-carbon economy. To put this figure into context, 2 percent of GDP approximates the annual military expenditure of most developed country governments (Kim and Thurbon 2015). Between 2009 and 2013, around one-fifth (19 percent) of this budget allocation was dedicated to promoting the development of “new green growth engines” (Kim S-H 2013). The GG strategy also saw the massive expansion of financing activities of Korea’s PFIs. Between 2007 and 2012, PFIs’ share in total banking sector loans increased from 20 to 25 percent (figure 9.1).17 By the end of 2012, the volume of policy financing was greater than it had been in either 1990, prior to the enthusiastic embrace of liberalization under Kim Young Sam, or 2000, following the post-1997 reforms noted earlier (figures 9.2 and 9.3). By 2012, the combined liabilities of Korean PFIs approximated 78 percent of GDP (Fitch 2013, 1). 90 80 80

78

77

77

76

75

22

23

23

24

25

70 60 50 40 30 20 20 10 0 2007

2008

2009

2010

Commercial banks

2011

2012

PFIs

FIGURE 9.1  Policy bank loans as percentage of total loans in Korean banking system Source: Chart produced by the author with data from Fitch 2013, 3.

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600,000 500,000 400,000 300,000 200,000 100,000 0 1990

2000

Volume of funds sourced

2010 Funds used for loans

Funds used for securities FIGURE 9.2  Policy financing by Korea’s PFIs, 1990–2010 (excluding KEXIM) (in billions of won, where ₩1 billion = close to US$1 million in 2014) Source: Compiled by the author from Bank of Korea 2013, 95.

60,000 50,000 40,000 30,000 20,000 10,000 0 1990

2000

Volume of funds sourced

2010 Funds used for loans

Funds used for securities FIGURE 9.3  Expansion of policy financing by KEXIM, 1990–2010 (in billions of won, where ₩1 billion = close to US$1 million in 2014) Source: Compiled by the author from Bank of Korea 2011, 96.

Of course, some of that expansion can be attributed to GFC management, as PFIs stepped in to expand the economy and support distressed companies in troubled sectors like shipbuilding. Yet a significant proportion of new policy loans and investments were dedicated to expanding investments in Green

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Growth engine and new growth engine industries. Consider the financing activities of the KDB. When the GFC hit, the KDB quickly expanded lending to manufacturing firms, so that new loans in this category jumped from ₩10.3 trillion in 2005 to ₩16.5 trillion in 2008, a 160 percent increase over five years. While some funds were devoted to stabilization, more than 60 percent were earmarked for expanding investments by Korean firms in new lead sectors like green energy.18 Since establishing its Green Industry Development Fund in 2009, the KDB has channeled over ₩4000 billion (around US$4 billion) in low-interest loans to firms investing in ten green industries identified as strategic by the Ministry of Knowledge Economy.19 The KDB’s role in financing the government’s green industry development initiatives was widely reported (and generally favorably) in the Korean media.20 The KDB was not the only PFI involved in supporting Lee’s Green Growth initiative. The aforementioned Korea Finance Corporation (KOFC) along with the Korea Export Import Bank (KEXIM) also emerged as central players. Between 2009 (the year of its establishment) and 2013, KOFC funds dedicated to Green Growth industries more than doubled, increasing from ₩500 billion to ₩1.1 trillion, or around US$1 billion (figure 9.5). The KOFC also reserved a special fund for new growth engine industries, which grew from ₩3 trillion (just under US$3 billion) in 1999 to ₩5 trillion (just under US$5 billion) in 2013 (figure 9.6).21 As a policy bank devoted exclusively to SME (i.e., nonchaebol) firms, the KOFC’s has played a particularly important role in advancing the government’s balanced growth strategy. KEXIM has been particularly aggressive in green financing, increasing its low-interest, long-term lending in this area from just over ₩1 trillion in 2009 to 2,500 2,000 1,500 1,000 500 0 2009

2010

2011

2012

FIGURE 9.4  KDB funds allocated to Green Growth, 2009–12 (in billions of won, where ₩1 billion = close to US$1 million in 2014) Source: Compiled by the author from data in KDB Annual Report, various years.

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1,600 1,400 1,200 1,000 800 600 400 200 0 2009

2010

2011

2012

2013

FIGURE 9.5  KOFC funds allocated to Green Growth, 2009–13 (in billions of won, where ₩1 billion = close to US$1 million in 2014) Source: Compiled by the author from KOFC Annual Reports, various years.

6,000 5,000 4,000 3,000 2,000 1,000 0

2009

2010

2011

2012

2013

FIGURE 9.6  KOFC funds allocated to “New Growth Industries,” 2009–13 (in billions of won, where ₩1 billion = close to US$1 million in 2014) Source: Compiled by the author from KOFC Annual Reports, various years.

more than ₩5 trillion in 2013—around US$5 billion (figure 9.7). Most recently, KEXIM has pioneered new ways of harnessing international capital for the government’s developmental purposes. In February 2013, KEXIM became the world’s first national bank to issue a government-backed Green Bond—a five-year global security that meets U.S. Security and Exchange Commission standards (Mathews 2013).22 The $500 million issuance was quickly oversubscribed—attracting $1.8 billion in demand, mostly from international institutional investors. Under the terms of the bond, all funds raised by KEXIM from its issuance must be channeled into overseas green investment projects that involve Korean firms.23 In this

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6,000 5,000 4,000 3,000 2,000 1,000 0 2009

2010

2011

2012

2013

FIGURE 9.7  KEXIM funds allocated to Green Growth, 2009–13 (in billions of won, where ₩1 billion = close to US$1 million in 2014) Source: Compiled by the author from KEXIM Annual Report, various years.

way, KEXIM has created a significant new source of government-backed financing for Korean firms and their global advance in this new strategic industry. Beyond Green Growth industries, KEXIM also operates special funds for Korean firms investing in NGE industries, in a similar fashion to the KOFC and the KDB. As one would anticipate, policymakers have tended to take a selective rather than scatter-gun approach to channeling developmental finance. Under Lee, PFIs’ lowest interest loans—along with high levels of nonfinancial support—were extended not to every firm in a strategic industry, but to selected firms based on their technological sophistication, export potential, and ability to meet performance criteria, including export targets. KEXIM’s Hidden Champions program, launched in 2009, is an example of such selective forms of financing. It is also illustrative of the emphasis placed by the Lee government on nonchaebol firms, and of the intensification of the balanced growth strategy more broadly. It is thus worth explaining the origins and function of the Hidden Champions program in detail.

Hidden Champions Initiative: An Example of Balanced Growth KEXIM’s Hidden Champions program originated from its Research Division, a group of around twenty full-time researchers (most with Ph.D.s from Korean universities) that post-GFC was tasked with devising new ways of supporting the development and global advance of Korean SMEs.24 In early 2008, a researcher in this team came across the 1996 book Hidden Champions: Lessons from the World’s Best Unknown Companies, by German business consultant Hermann Simon.

FULL FLOWERING OF FINANCIAL ACTIVISM      135

Simon’s aim was to explain why Germany was the world’s leading exporter—and his answer centered on the role of an army of innovative, export-oriented SMEs, many of which were suppliers of parts or components to larger firms (and thus “hidden” from public view). These “hidden champions” were firms with annual sales of less than $4 billion and a product ranked number one, two, or three in the world. Often family-owned, Germany’s hidden champions shared numerous characteristics. They had all achieved market leadership through an unwavering focus on innovation. They all tended to avoid outsourcing, strategic alliances, and diversification, focusing instead on engineering a world-class product with in-house expertise and setting bold targets for export expansion. Simon’s book was not about German government policy. Its focus was on highlighting the role of “hidden champions” in Germany’s export success story and identifying these firms’ common characteristics from a business management perspective. But for KEXIM researchers, the story had clear policy implications. If the Korean government could identify local firms with potentially world-leading technologies, then perhaps it could provide them with enough financial and technological support to turn them quickly into Korean “Hidden Champions.”25 KEXIM’s research department pitched the idea to management in 2008, who swiftly approved it for a 2009 start. Five employees from the research department were seconded to the newly formed hidden Champions team to get the program up and running.26 Firms qualifying as Hidden Champion candidates would be granted access to large volumes of low-interest, long-term finance to support R&D, facility expansion, production, and overseas sales costs. The Hidden Champions program opens a window onto the activist-cumdevelopmental role of the state. Here we see it not only extending financial support on a conditional basis to technology-based, export-oriented local firms, but also targeting firms in strategic industries. Upon entry, candidate firms negotiate a “master plan” with the Hidden Champions Team and the assistance of a KEXIM-appointed technology consultant.27 This lays out a long-term development plan for the firm, including annual R&D goals and annual sales, export and global-ranking targets. Each candidate’s progress is reviewed against its master plan annually. If a firm falls behind in its targets, it is given a chance to explain why and to propose a recovery strategy. Continual underperformers have their Hidden Champion candidate status canceled and are ejected from the program. Between 2009 and 2013, 302 candidate firms were selected. Of these, 15 had graduated by 2014 as Korean Hidden Champions. KEXIM provided these 302 firms with close to $17 billion in discounted loans and guarantees. In 2013 alone, KEXIM provided 287 candidates with $7.9 billion in discounted loans and guarantees (figure 9.8). Approximately 20 firms have been ejected for underperformance.

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10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

2010

2011

2012

2013

2014

FIGURE 9.8  KEXIM financing for Hidden Champion candidates (in billions of won, where ₩1 billion = close to US$1 million in 2014). Funding was directed to 302 firms in 2013 Source: Compiled by the author from KEXIM 2014.

Regarding the strategic focus of the Hidden Champion Program, while applications are accepted from firms operating in any sector, additional incentives are extended to strategic industry candidates. For example, firms in NGE and Green Growth industries are judged against a much lower entry threshold than those operating in other areas. To qualify, they need to demonstrate only $10 million in annual sales instead of the standard $40 million. As of 2013, there were twenty-nine Hidden Champion candidates from NGE industries, and thirty-seven from Green Growth industries. The majority of other candidates were electronics firms. The Hidden Champions program is important because many of these firms would find it impossible to secure such substantial volumes of finance from conventional sources, given their size and credit standing.28 To launch the kind of aggressive growth strategies expected of Hidden Champions, smaller firms can only secure the volume of funds required from PFIs like KEXIM. The KEXIM Hidden Champions program is just one example of more than twenty such programs offered by a range of PFIs and other government entities, such as the Small and Medium Business Administration. Significantly, the expansion of extensive financial supports to firms in strategic industries has been relatively uncontroversial in Korea. As the CEO of Korea Venture Investment Corporation noted in 2011: The Korean government selected areas with great potential and concentrated its support on these areas. . . . Because these new industries cannot

FULL FLOWERING OF FINANCIAL ACTIVISM      137

create profits in the short term, the private sector cannot be expected to carry out large-scale investments. This makes the government’s continuous investments and infra-building efforts even more important. While other developed nations experience harsh political oppositions, Korea could successfully gain bipartisan support for these endeavors.29 The Korean experience contrasts strongly with that of countries lacking a developmental consensus. The Australian case is illustrative. When the Labor government led by Prime Minister Kevin Rudd was elected in 2007, it too announced a “Green Growth” style initiative aimed, among other things, at nurturing local firms with innovative green technologies. This included the 2012 creation of the Clean Energy Finance Corporation (CEFC)—a government-backed investment fund tasked with evaluating and investing in promising green-tech projects. This was a significant development in the Australian context, where policy finance institutions such as the Korea Development Bank do not exist. Yet the establishment of the CEFC was strongly challenged by the conservative opposition, who argued that the government had no right to spend taxpayer dollars backing high-risk entrepreneurial activities. This was the role of the market—not the government—it was argued. As such, upon assuming power in 2013, the conservative coalition attempted to dismantle the CEFC, despite it delivering solid returns on its investments. The government’s initial attempts failed to pass the Senate. Nevertheless, dismantling the CEFC remains a key policy platform of the ruling coalition. As we shall see, the story has been very different in Korea, where Lee’s successor, Park Geun-hye, has continued many of her predecessors Green Growth policies.30 None of this is to suggest that all of Korea’s efforts have been, or will be, successful (an assessment of the successes and failures of these initiatives is beyond the scope of this book). But the existence of the kinds of financial supports discussed reveals how developmental ways of thinking about the state’s role in the economy continued to shape the Lee administration’s approach to financial policy. By the end of his five-year term, Lee’s Green Growth efforts won international plaudits and established Korea as one of the leading nations seeking to shift toward a low-carbon economy.31 Korea’s efforts were rewarded with the decision to establish the international climate fund headquarters in Seoul. Yet certain aspects of Lee’s Green Growth initiative proved deeply unpopular at home. The controversial Four Rivers Restoration project—promoted by Lee as the flagship of his Green Growth agenda, was widely condemned for its potentially damaging environmental impacts. As his presidency wore on, the Four Rivers project became a focal point for public anger with Lee, significantly undermining Lee’s popularity and tarnishing the Green Growth brand.32

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However it is important to note (as I have elsewhere with Sung-Young Kim) that the Green Growth initiative was broad in scope, and not all aspects were developmentally motivated (Kim and Thurbon 2015). For example, the Four Rivers project just mentioned was essentially Keynesian in motivation. That is, it was aimed principally at job creation in the wake of the GFC, not at securing Korea’s long-term techno-industrial competitiveness, as were the developmental aspects of the initiative (centered on the smart grid and the promotion of new Green Growth engine industries). As Lee’s presidency wore on, it was the nondevelopmental aspects of Green Growth—especially the Four Rivers project—that attracted increasing public ire and that eventually served to undermine public support for the Green Growth idea.33 The developmental aspects of the Green Growth initiative remained relatively immune from public criticism, and indeed were largely continued under Lee’s successor (albeit under a new label).34 Nevertheless, as the idea of Green Growth had become the defining aspect of Lee’s presidency, the term itself became politically poisonous as his popularly waned and was abandoned altogether by Lee’s successor, Park Geun-hye, the daughter of Park Chung Hee. It is to the future of financial activism under Park to which I now turn.

The Future of Financial Activism under Park Geun-hye My father was criticized as a dictator, but that should not overshadow his accomplishments in restructuring the country. He brought Korea out of 5,000 years of poverty. What he left unaccomplished was democratization of the system. —National Assembly member Park Geun-hye, 2003

I will revive the legend of the economic miracle, making the country a place where people have no worry about living and young people merrily go to work. —President Park Geun-hye, 2012

Upon assuming the presidency in 2013, Park Geun-hye did not shy away from her famous father’s legacy of strategic industry promotion. Indeed, President Park sought to extend that legacy, promising to produce a “Second Miracle on the Han River” by executing her “creative economy” vision.35 That vision centered on harnessing Korea’s existing strengths in information and communications technologies (ICT) and encouraging the application of these technologies to other industries and sectors in order to create new engines of growth.36 Rhetorically,

FULL FLOWERING OF FINANCIAL ACTIVISM      139

Park’s “creative economy” idea represented a clean break with the previous government’s emphasis on Green Growth. Upon assuming power, Park assiduously avoided any mention of her unpopular predecessor’s catch cry, while public bodies went about expunging the word green from their titles and policies, replacing it with the new president’s preferred emphasis: “creative.” At the same time. Korea’s key Science and Industry ministries were reorganized to reflect the new government’s explicit emphasis on science, technology, and ICT. The Ministry of Science, ICT, and Future Planning (MSIP) was established as a “control tower,” responsible for planning and overseeing Park’s creative economy vision. The MSIP absorbed the ICT and science and technology policy functions held by the former Ministry of Knowledge Economy (MKE), which was renamed under Park the Ministry of Trade, Industry, and Energy (MOTIE).37 Yet, despite this rhetorical shift and institutional reshuffle, the Park administration’s substantive approach to industrial governance was a continuation of the balanced growth strategy pursued under Lee and Roh. As we have seen, that approach centers on fostering a select number of NGE industries via targeted financial and nonfinancial supports. Indeed, the NGE industries identified for strategic promotion under Park basically mirror those chosen by the Lee government in 2008—including the Green Growth engines of renewable energy, smart-grids, electric vehicles, and energy storage devices. While these erstwhile “green” growth engines were rebranded “creative” engines under Park, the amount of money allocated to their promotion and the details of their development plans remained largely unchanged (Kim and Thurbon 2015). Many other NGE industries promoted by both the Roh and Lee governments—from service robotics to biotechnology—also retained their strategic designation under Park, despite some changes to the ways in which NGE industries are selected.38 Continuity in the Park government’s strategic industry focus is not surprising, given the importance of energy security and competitive pressures in shaping their original selection. Despite Korea’s recent change in political leadership, these serious challenges remain. The volume of public and private funds sunk into developing new growth engines under Lee—particularly Green Growth engines—also made any significant change in strategic focus under Park unlikely. So have high international expectations of Korea’s continued leadership role in the area of green growth. Given the government’s sustained commitment to the promotion of NGE industries, President Park has emerged as a serious supporter of Korea’s policy finance institutions, promising to expand their already significant strategic role. Upon assuming power, the Park government reversed the decision to privatize the KDB. In mid-2014, the KDB was remerged with the KOFC in an effort to consolidate and strengthen these institutions’ industrial development

140       CHAPTER 9

functions—particularly their programs targeted at SMEs.39 Of course, Park’s promise to expand state-backed financing for SMEs has an important political driver, motivated in part by the legitimacy challenges associated with slower than expected job creation and the chaebols’ continued economic domination. As we have seen, these issues had a disastrous impact on her predecessor’s popularity. Park has thus staked her political career on boosting employment and rebalancing the economic ecosystem; the expansion of SME financing is an important means to those ends. Thanks to the vast expansion of government financing for SMEs in recent years, the Korean government now stands out among both developed and developing countries in the amount of financial support it provides to such firms. Yet there is also a significant strategic dimension to the expansion of SME financing under Park, as there was under Roh and Lee, which reflects the government’s enduring emphasis on strengthening local manufacturing capacity, technological autonomy, and export competitiveness. Park has emerged as a major advocate of Hidden Champion–style programs that link financial support to technological upgrading and export expansion, continuing her predecessor’s emphasis. Since coming to power, Park has continually referenced Germany as the ideal model for emulation, identifying the creation of an army of globally competitive, technology-based manufacturing SMEs as one of her government’s key goals. Following her return from a state visit to Germany in early 2014, Park routinely used the term “Hidden Champions” in public addresses about her future vision for the Korean economy.40 The result of the president’s intense personal interest in the German model has been the proliferation of Hidden Champion–style programs by Korean PFIs, which continue to be biased toward strategic industries.41 The effect has been to vastly expand the pool of resources

(at end-2011) 5

Korea

4

Portugual

3

Hungary

Chile

2 1 Serbia

0 B

BB

Thailand Turkey

Czech. Rep.

BBB

A

France UK AA

FIGURE 9.9  Government SME financing as a percentage of GDP Source: Chart reproduced with permission from Fitch 2013, 2.

Finland US Denmark Canada AAA

FULL FLOWERING OF FINANCIAL ACTIVISM      141

available to Korean SMEs in NGE industries with proven technology and export track records.42 However some bureaucrats view this development as problematic. They believe it has led to unnecessary overlap between the functions of PFIs. Such overlaps are one of the reasons behind the aforementioned KOFC-KDB remerger. The Park government’s decision to expand the strategic role of PFIs has not been without controversy at home. In particular, local financial institutions have expressed the fear of being “crowded out” by government banks. Park’s intention to expand financial activism is also likely to attract further criticism from international institutions such as the IMF, which as we saw in chapter 8 believes that PFIs already play too large a role in the Korean economy. Yet other international observers see little reason to doubt that the government’s plans will proceed. Credit ratings agencies have certainly taken the government at its word, factoring PFI expansion into their projections for Korea and acknowledging the continuing importance of these institutions to the government’s manufacturing-based, export-oriented development strategy: “Korean policy banks are important to the domestic banking system, representing close to a quarter of system-wide total assets and loans. [They are expected to] continue to play a critical role meeting the funding needs of important sectors, especially the manufacturing industry, in order to facilitate Korea’s export-led economic development” (Fitch 2013, 1). Success for Korea’s continued efforts at strategic activism broadly, and financial activism in particular, is by no means guaranteed. Examples of disappointing outcomes are not difficult to find. In the area of service robotics for example, ten years of dedicated government support has encouraged many SMEs into the market, but few firms are profitable, and none have yet qualified for Hidden Champion status. Nor has the government succeeded in luring larger firms into the industry, as the originators of this particular industry’s development plan had hoped. To slower than expected performance in service robotics we might add lackluster progress in biotechnology, examined at length by Wong (2011). As Wong astutely observed, a possible outcome of such failures is that they reduce the appetite for strategic interventionism on the part of the policymaking elite and the wider public. At this stage, however, there is little evidence to suggest that failures are having such an effect. In the case of service robotics for example, despite disappointing outcomes, the government’s view of its catalytic role has barely altered. According to Oh Sang-Rok, who has sat on the strategic industry selection committee under the Roh, Lee, and Park governments, and who designed Korea’s original service robotics development strategy, this industry simply needs a new policy. There is no intention to abandon its strategic promotion.43 Furthermore, disappointing outcomes in some areas are currently being balanced by impressive

142       CHAPTER 9

progress in others—particularly in Green Growth–related industries. The huge investments made by the government in these industries now appear to be paying off. Even by the end of Lee’s presidency, local green technology levels were rapidly improving. Now in some areas, Korean technology levels approximate those of the world’s most advanced nations, including solar cell technology, high efficiency–low pollution vehicles, and LED lighting (GTC 2013, 18–19).44 Thanks to dedicated public efforts to commercialize these technologies, Korea is now able to produce, amongst other new exports items, world-class, fully electric vehicles. Progress has also been made in expanding the production and export of renewable energy technologies. Between 2007 and 2011, the number of Korean manufacturing firms in the renewable energy industry increased by 22 percent, while their sales increased by 67.5 percent and exports by more than 60 percent, to over $5 billion.45 Efforts to localize manufacturing equipment and devices in key industries have also begun to bear fruit. For example, since the government’s LED equipment localization projects began in 2008, the trade balance of the Korean LED industry has significantly improved. Indeed, between 2010 and 2011, Korea’s LED trade surplus grew from $420 million in 2010 to over $1.1 billion in 2011, while the value of LED exports increased from $960 million in 2008 to $3.5 billion in 2011.46 Again, not all efforts at equipment and device localization will be successful. And even if Korean firms do manage to localize and commercialize equipment and device-related technologies, there is no guarantee that large Korean producers will always make the switch to Korean-made inputs. The point to note is that thus far, failures do not appear to have been sufficiently large so as to dampen the appetite of policymakers (or indeed the public) for strategic interventionism broadly, or financial activism in particular.

10 WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?

My aim in this study has been to document and explain the striking revival of financial activism in Korea since the 1997 financial crisis. This development, I have argued, deserves analytical attention for two main reasons. First, the sizeable role played by state-owned policy banks in the nation’s financial system now distinguishes Korea from other developed nations. Second, the resurgence of financial activism goes against many conventional accounts of the direction of financial reform in Korea since the 1997 meltdown, which is often claimed to have resulted in a neoliberal or regulatory makeover of its developmental state. My explanation for this revival has centered on the enduring presence of a developmental mindset among key segments of the Korean political and policy elite. I have shown how this mindset involves a set of shared beliefs and understandings about the state’s primary goals (national strength via manufacturing capacity, technological autonomy, export competitiveness) and the appropriate role of the state in achieving them (strategic interventionism, including financial activism). My analysis has involved identifying the international and domestic conditions that have sustained this mindset over time. It has also paid attention to the mix of factors (political, institutional, and structural) that have enabled Korea’s developmentally minded policymakers to pursue their strategies, even in the presence of local and international pressures for liberal reform. I have argued that since the late 1990s a variety of old and new security challenges have served to galvanize the developmental ambition of the Korean elite, keeping them ever-focused on the goals of techno-industrial upscaling and export competitiveness, and ever-willing to intervene in the economy in their 143

144       CHAPTER 10

pursuit. However, the developmental strategy pursued by Korea’s policymaking elite has shifted over time, from one of “growth first” based primarily on supporting the chaebols to one of “balanced growth” centered largely on nurturing nonchaebol firms. This has necessitated the revival and expansion of financial activism. A number of factors precipitated this strategic shift, not least the negative economic and political by-products of the “growth first” strategy itself. As shown in chapter 5, while delivering unprecedented rates of industrial transformation and export expansion, Korea’s original strategy produced a disruptive “boom-bust” cycle of growth. The strategy also gave rise to massive conglomerates, the chaebols, resulting in an increasingly bifurcated economic structure and a growing sense of inequity among the wider population. A key consequence of these developments was the fracturing of the developmental consensus from the mid-1970s and growing calls for the abandonment of financial activism from key segments of the policy elite. Public dissatisfaction with growth first also saw the cozy state-chaebol-bank relationship it entailed become the target in the 1980s and 1990s of sustained political attack by liberal opposition parties led by Kim Young-sam and Kim Dae-jung. Yet, as I also argued, in the absence of presidential support for their agenda, and in the presence of deteriorating geopolitical and domestic conditions, liberal reformists were unable to effect a shift away from growth first financial activism over the 1970s and 1980s, even in the face of intensifying international pressure for financial liberalization. It was not until 1993 that liberal reformists were finally able to realize their goals, thanks largely to the election of Korea’s first liberally inclined president, Kim Young-sam. However the nation’s brief flirtation with full-blown financial liberalization did not last long. As a result of an accumulation of unsustainable debts and capital volatility, Korea plunged into the regional turmoil of 1997. In response to that crisis, President Kim Dae-jung reasserted state control over the banking sector and laid the foundations for a new developmental strategy, one centered on strategically nurturing nonchaebol firms while still engaging and supporting the chaebols. As I demonstrated in chapters 6 through 9, this “balanced growth” strategy was consolidated, elaborated, and extended under developmentally minded presidents Roh Moo-hyun, Lee Myung-bak, and most recently Park Geunhye, whose regimes each contributed to the attendant revival of financial activism via the creation of new, and a continuation of old, modes of developmental financing. These included the creation of new kinds of state-backed venture capital funds and the expansion of preferential lending by Korea’s main policy finance institutions (PFIs) to local firms in strategic industries, often on a performance-linked basis. Following the analytical framework developed and deployed herein, I summarize in table 10.1 my key findings regarding factors that have, since 1998,

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      145

served to galvanize the developmental ambitions of the policy elite; to shape their developmental strategy; and to enable their execution of that strategy, especially its financial policy aspects. To round out the argument, table 10.1 also identifies the factors that precipitated the abandonment of Korea’s growth first developmental strategy and financial activism in the early 1990s.

TABLE 10.1  Factors sustaining, shaping, and enabling financial activism in Korea DOMESTIC

Factors precipitating

Economic/political

INTERNATIONAL

External pressures for

abandonment of growth

Negative economic and social

financial liberalization/

first & financial activism

outcomes of growth first

liberal economic reform

pre-1997

undermine support for financial

intensify from mid

activism among policy elite

1980s, especially

and fuel widespread calls for

from U.S.

financial liberalization. Agential/Institutional 1993 election of liberally minded president allows reformists within bureaucracy to advance liberalization agenda. Factors fueling /sustaining developmental ambition post 1998

Political/economic * Chaebols’ reluctance to boost domestic investment post AFC combined with their growing

* Rise of new economic competitors (esp. China) * Rising oil prices

tendency to offshore and to

undermines

leave local suppliers behind

competitiveness of

increases fear of industrial

traditional industries

hollowing out.

and increases

* Growing financialization (rise in speculative activity + rolling

perceptions of energy insecurity.

financial crises over 2000–8 period) intensifies perceptions of economic insecurity/waning industrial capacity. Factors shaping new balanced growth strategy (and

Political/economic * Chaebol no longer in need

New international legal constraints (WTO) = many

financial activism as part

of direct gov’t support (but

traditional industry policy

of that strategy)

still critical to future strength

practices obsolete.

of Korean economy and still

However significant legal

dependent on SME-dominated

scope to support

supply chains)

smaller firms remains. (Continued)

Table 10.1 (Continued) DOMESTIC

INTERNATIONAL

* Grave fears about competitiveness of Korea’s nonchaebol firms = logical to extend strategic activism to these firms. * Private financial institutions shun industrial for speculative investment = requires government to step in with financial activism. Factors enabling pursuit of balanced growth strategy &

Political/economic Recurrent financial crises

GFC = emergence of international order

associated financial

undermines faith in freer

more permissive of

activism.

financial markets and creates

financial reregulation

demand/political space for

(so long as it is framed

strategic/financial activism.

in “market friendly”

Agential/ Institutional * Existence of powerful

terms). Persistent threat from

Presidential Office able to

North Korea/possibility

dictate pace and direction of

of future reunification

developmental strategy.

provides South Korean

* Election of developmentally

government with

minded presidents who in turn

justification to maintain

appoint like-minded officials

strong network of

to positions of power within

development banks

policymaking apparatus (e.g.,

(to help fund future

as presidential economic

reunification).

secretaries/finance and/or industry ministers/ heads of PFIs such as KDB). * Existence of highly skilled, meritocratic bureaucracy with strong developmental tradition inclined to strictly follow presidential and ministerial orders. * Existence of healthy set of PFIs enabling mobilization of finance for strategic ends.

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      147

Factors galvanizing developmental ambition: As I argued in chapters 6 through 9, we can attribute the post-1998 resurgence of developmental ambition in Korea to a combination of international challenges, including the rapid rise of new economic competitors, especially China, and the spiking of global oil prices, which undermined the profitability of Korea’s traditional export industries and amplified energy security concerns. We can add to this list growing financialization, which weakened industrial investment and amplified concerns about Korea’s techno-industrial competitiveness. However, policymakers’ response to these challenges was not predetermined. Rather, the balanced growth strategy that emerged to address them was shaped by a number of economic and political factors that were domestic and international in origin. Factors shaping Korea’s new balanced growth strategy: Domestically, as already noted, there was little appetite among the Korean public or political leadership for a growth strategy focused exclusively on large firms—certainly not under Kim Dae-jung. Moreover, following Kim’s postcrisis debt restructuring and streamlining efforts, it was not logical or necessary for the government to center its strategic efforts on the chaebol; after all, these firms were already globally competitive exporters (thanks in no small part to Korea’s original growth first strategy). On the other hand, Korea’s nonchaebol firms lagged far behind both local conglomerates and foreign firms in technological sophistication and export orientation, making them the logical focus of renewed strategic activism. International developments further drove Korea’s new developmental strategy in the direction of balanced growth. As explained in chapter 7, China’s entry into the WTO in 2001 hastened the speed with which its firms scaled the technological ladder. This served to heighten Korean concerns about the relative competitiveness of nonchaebol firms. These fears were amplified by the actions of the chaebols, which began replacing their Korean suppliers with foreign ones when expanding overseas. If Korea was not only to avoid losing its techno-industrial base to China but also to achieve its longstanding ambition of catching up with Japan, a shift in strategic focus toward nonchaebol firms was imperative. To these international pressures we can also add the emergence of new legal constraints under the WTO. As we saw in chapter 7, WTO rules were high in policymakers’ minds when devising the IT-839 initiative, the centerpiece of developmental activism under President Roh. As the 2000s progressed, government initiatives aimed at technologically upgrading nonchaebol firms proliferated— all within WTO guidelines. However while balanced growth extended strategic activism to nonchaebol firms, it did not ignore the chaebols. Rather, it transformed the way in which the state sought to engage these firms in developmental initiatives.

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The question remains, What factors motivated the revival of financial activism as part of Korea’s new balanced growth strategy? Again, domestic economic and political conditions were key. Balanced growth centered on nurturing nonchaebol firms in new growth industries. However as chapters 6 and 7 revealed, post1997 financial reforms transformed the Korean financial system and made life very difficult for nonchaebol firms. Specifically, liberalization created incentives for private financial institutions to shift their focus toward nonproductive investment opportunities (especially real estate and consumer lending), leaving Korea’s smaller manufacturing firms starved of capital. This problem intensified following the dotcom bust of 2000, which also undermined private investors’ interest in the productive sector and pushed them further toward speculative endeavors. In this context, to realize their developmental ambitions, the Kim Dae-jung, Roh Moo-hyun, Lee Myung-bak, and Park Geun-hye regimes had no choice but to step into the void and expand state-backed financing for nonchaebol firms in strategic industries. Factors enabling the execution of balanced growth and the financial activism it involved: The existence of a constitutionally powerful Presidential Office combined with the elections after 1998 of successive developmentally minded presidents has been an enabling factor of primary importance. These presidents used the power afforded to them by their institutional home to staff key policymaking positions with like-minded officials, from the Presidential Secretariat to Industry and Finance ministries to policy finance institutions such as the KDB. From 2003 in particular, the drive to consolidate, expand, and intensify a new developmental strategy and to revive financial activism as part of that strategy came from the top. The second enabling institutional factor was the existence of a highly skilled, meritocratic bureaucracy characterized by a strong developmental tradition and inclined to follow presidential and ministerial orders. As I noted in chapter 3, the traditional role of Korea’s economic bureaucracy was not to set the direction or pace of strategic activism. Rather it was to loyally devise and execute policies to advance the strategic visions of the president (or of presidentially appointed ministers or committees). In the event that bureaucratic opposition did emerge, or that bureaucratic infighting blocked policy progress, Korean presidents have been able to bypass bureaucratic channels altogether through the creation of presidential committees responsible for driving the preferred policy agenda forward. By the 2000s, little had changed in this dynamic, at least in the industrial governance sphere. I argued in chapter 9 that one of President Lee’s first moves after settling on the Green Growth initiative was to create the Presidential Committee on Green Growth, chaired by the president and given ultimate responsibility

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for devising and executing policy plans. The recentralization of industry policymaking responsibility under Lee was a key factor enabling the swift execution of developmental programs. The PCGG took in members from Korea’s key policy finance institutions (PFIs), and oversaw the massive expansion of policy financing by these PFIs aimed at local firms in strategic industries, with a particular focus on nonchaebol firms. Which brings me to the final institutional factor enabling the revival of financial activism: the availability of a healthy set of PFIs. These proved a boon to developmentally minded policymakers under presidents Kim, Roh, Lee, and Park, who moved to greatly expand the policy-financing activities of the KDB, the KOFC, and KEXIM, directing them toward nonchaebol firms in strategic industries. This began with IT industries under Kim Dae-jung and Roh Moohyun and extended to green technology industries under Lee Myung-bak and Park Geun-hye. Korea’s PFIs have served as the front line in the advance of financial activism since 1998, even as financial liberalization efforts proceeded. Indeed, it is worth restating here the (ironically) enabling role played by financial liberalization in the expansion of financial activism. By creating a profithungry but risk-averse commercial banking sector with a strong preference for household, real estate, and speculative lending, liberalization served to starve nonchaebol industrial firms of investment capital. Moreover, post-1998 financial reforms made the chaebols more risk averse and less willing to heed government calls to expand investment. These developments fueled fears among the policy elite about Korea’s declining industrial capacity and export competiveness, fears already high thanks to China’s rise. In these ways, liberalization created political conditions that both compelled and enabled the revival of financial activism, reminding us that economic integration can enable states as much as it constrains them (c.f. Weiss 2003). This brings me to the wider political and structural conditions enabling the execution of Korea’s new developmental strategy, especially its financial policy aspects. Given public dissatisfaction with chaebol dominance, there was little domestic political resistance to the idea of expanding state financing for smaller firms after 1997. Moreover, as we saw in chapter 7, the 2008 GFC crisis further undermined faith among the Korean policy elite and the wider public about the benefits of freer financial markets, creating a domestic political environment not only permissive but supportive of financial activism. President Lee Myung-bak swept to victory in 2008 on a powerful wave of developmental nostalgia, promising to redouble the government’s efforts to revive the Korean economy by whatever means necessary. While some aspects of his government’s financial activism agenda proved controversial (exchange rate manipulation in particular), objections were aimed largely at those aspects that appeared to benefit the chaebols

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over the nonchaebol sector of the economy. Strategic efforts aimed at nonchaebol firms met with minimal domestic resistance, and indeed strong public support. Similarly, international political conditions became more permissive of the expansion of financial activism as the 2000s wore on. The GFC again emerged as an important factor. As explained in chapter 8, the crisis significantly weakened international objections to financial reregulation, giving confidence to policymakers around the globe to experiment with nonliberal modes of financial governance (so long as it was framed in “market friendly” language). While this growing international permissiveness did not extend to the increasing activism of Korea’s PFIs, we saw in chapter 8 that Korea was able to resist increasing international calls to privatize its key PFI, the KDB, by appealing to the possibility of future reunification with North Korea—a geopolitical challenge that would indisputably require a high degree of policy finance capacity on the part of the Korean government. I thus conclude that the revival of financial activism in post-1997 Korea reflects the resurgence of developmental ambition and the pursuit of a new developmental strategy on the part of the political and policy elite. My analysis raises a number of questions about developmental state transformation in Korea and beyond. These include the implications of the changing state-chaebol relationship for the future of Korean developmentalism and the utility and wider applicability of the mindset-strategy distinction. These are the questions I next address before turning to the implications of my study for two wider debates: the inevitability of industrial decline in developed economies, especially given financialization trends, and the future of financial activism in an economically integrated world.

The Changing State-Chaebol Relationship and Its Implications A central, if underlying, theme of this study has been the evolving state-chaebol relationship and its implications for developmentalism in Korea. It is obvious that as the size and influence of these firms has grown, their relationship with the state and their role in the developmental project has become more complex and contested. Less obvious, however, is what this means for the Korean state’s ability to pursue a developmental strategy. Much has been written on this topic over the past two decades. The most enlightening contributions move beyond the assumptions of the gravedigger thesis popularized by Evans (1995): that as business power increases under developmental state sponsorship, the state’s power over business declines, compromising its capacity for strategic activism and precipitating developmental

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      151

state demise. Linda Weiss (1995) was among the first to challenge the idea at the heart of this thesis: that a strong state presupposes a weak society.1 For Weiss, the East Asian reality of the 1990s proved this false. She coined the term governed interdependence to describe that reality: the coexistence of a strong state and strong business sector working together in a negotiated relationship toward state-designated developmental goals. Weiss’s key point was that the emergence of a strong business sector does not necessarily erode a state’s developmental capacities. This message informs more recent analyses of changing government-business relations in Korea (e.g., Hundt 2008; 2014). Hundt delivers a contingent understanding of the relationship between the growing structural power of the chaebols and the infrastructural power of the state.2 He argues that since the 1960s, the “developmental alliance” between these parties has moved in a cyclical fashion through periods of conflict and cooperation thanks largely to the interaction of five key variables.3 There has been nothing linear about the evolution of this alliance; the state’s ability to keep the chaebol on board with its developmental project has waxed and waned over time. However Hundt’s most recent conclusion is that while the developmental alliance persists, the state’s ability to secure chaebol compliance with its strategic initiatives has weakened to the extent that Korea is now a “degraded developmental state,” one largely constrained in its ability to pursue major transformative projects (2014). Hundt’s analyses illuminate the developmental alliance dynamic, and I agree with his characterization of the state-chaebol relationship as intense but unwieldy. I also agree—and have argued in this study—that the state’s ability to secure the chaebols’ positive participation in developmental initiatives has been patchy since the 1990s, thanks in no small part to these firms’ growing financial independence. For example, in chapters 6 through 9 I noted chaebol resistance to government calls to expand industrial investment, both in the early 2000s following the dotcom bust and in 2008 following the GFC. The chaebols also disappointed developmentally minded policymakers by refusing to lead the charge into some strategically designated new growth industries. Samsung, for example, flatly rejected government appeals for it to pioneer Korea’s intelligent robotics industry, forcing policymakers to devise a different strategy for this industry’s creation. And while the chaebols have been willing participants in governmentinitiated R&D projects aimed at component import substitution, there is no guarantee that they will actually substitute local for foreign suppliers when these projects come to an end. Yet this is not to say that the chaebols never (or even rarely) collaborate with the government in ways that advance developmental goals. For instance, the chaebols willingly made very large investments in a host of state-initiated projects under the Green Growth strategy, a prominent example being the green car

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initiatives discussed in chapter 9. Indeed, it is worth noting that the coordinated pursuit of the Green Growth initiative under Lee, designed to shift Korea off its fossil-fueled, brown growth trajectory and onto a more sustainable energy footing, contradicts Hundt’s claim that the Korean state no longer pursues major transformative projects. Nevertheless, it is fair to conclude, as Hundt does, that cooperation between the state and chaebols in pursuit of such goals has become more variable. The question remains however: What does this tell us about the future of developmentalism in Korea? The most obvious implication is that the pursuit of a developmental strategy centered on the chaebols is no longer viable. However, as I have argued throughout this study, developmental states are not distinguished by the strategy they adopt but by the goals they pursue, and their commitment to strategic interventionism. Changing political and economic circumstances have certainly made a chaebol-centered strategy less viable (and less necessary). But they have also galvanized developmental ambition and given rise to a new strategy, one centered primarily on nonchaebol firms. This strategy does not ignore the chaebol, and some dimensions depend on chaebol participation for their success (such as those aimed at upgrading local suppliers, which require that chaebols procure from local firms). Yet other aspects of balanced growth move beyond the chaebols altogether, particularly those inspired by the German model and aimed at creating an army of mid-sized, export-oriented firms outside the chaebol sphere. The chaebols still have the potential to act as spoilers of such initiatives, by aggressively acquiring or undercutting Hidden Champions for example. But whether a clear trend in this direction will emerge remains to be seen. Moreover, should the chaebols behave in this “spoiling” way, the more imbalanced Korea’s industrial structure is likely to become, creating even greater economic and political imperatives for the state to intervene to redress the issue. However it eventually plays out, the point to emphasize here is that Korea’s new developmental strategy extends the focus of strategic activism well beyond the chaebols. This means that we too must look beyond the state-chaebol relationship in order to fully appraise the future of developmentalism in Korea. Yet very few studies take this step. Rather the tendency in the literature has been to ignore policy developments beyond the chaebol sector, or to dismiss them as developmentally irrelevant. For example, while Hundt acknowledges that nonchaebol firms now attract serious government attention, he suggests this is driven principally by redistributive rather than developmental concerns (2014, 507). Similarly, Hamilton-Hart (2008) has observed the significant role played by PFIs in supporting Korean SMEs but concludes that this is largely for welfare purposes. My research findings presented in chapters 6 through 8 firmly contradict such conclusions. Some SME policy programs are obviously welfare motivated.

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But these are not the programs I have focused on. Rather, I have examined policyfinancing programs aimed directly at Korean firms in strategic industries that are often tied to technology- and export-improvement targets. Such programs are clearly developmental in motivation and indicative of policymakers’ ongoing concern with local techno-industrial capacity and export competitiveness. These initiatives may not always be successful and there are plenty of obstacles to their realization, not least the potential spoiling actions of the chaebols. But this does not detract from the central point of this study: that financial activism persists and that it reflects an enduring developmental mindset and a renewed developmental strategy of the policymaking elite. We thus arrive at an important question raised by my analysis: What is the utility of the mindset-strategy distinction and its broader applicability?

The Mindset-Strategy Framework I have advanced in this book a conceptualization of developmentalism that is ideationally informed. Further, I have proposed a mindset-strategy framework to explain how developmental states might change over time. This framework is useful, I have argued, because it frees us from a fixed, institutions—and policy— centric conceptualization of developmental states and accommodates the idea of developmental state evolution. As I argued in chapter 2, such a fixed conceptualization has led many to misinterpret institutional and policy change in post-1997 Korea as evidence of developmental state dismantling. The mindsetstrategy framework helps to avoid such determinism, allowing us to imagine the possibility that as political and economic circumstances change, so developmentally minded policymakers might respond by adapting their strategies (and thus institutions and policies), without relinquishing developmental ambition. The mindset-strategies framework also implies a particular methodological approach to the study of developmentalism—one centered on interpretive agents (developmentally minded policymakers) but attentive to the political, institutional, and structural factors that give rise to and help to sustain developmental ways of thinking, and that enable (or constrain) the translation of developmental ambition into action. Applying this approach to the Korean case extends analysis beyond the typical focus of the developmental state literature (the bureaucracy) and draws attention to an additional set of institutions: the Office of the President, special presidential committees, and policy finance institutions. These institutions have been no less central than the bureaucracy to the routine functioning and evolutionary dynamics of developmental policy making in Korea since the 1960s. These institutional aspects of Korea’s developmental

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state featured strongly in my explanation of the revival of financial activism in Korea in the post-1998 period. My approach has also drawn attention to the role played by particular agents— most notably Korean presidents—in the creation and evolution of Korea’s developmental state. In chapter 3, I identified President Park Chung Hee as the most influential originator of a developmental mindset in Korea. Park’s firsthand experience under Japanese military rule gave him and his military associates an appreciation of how a state could manipulate the economy for nationalistic development purposes. Over the 1960s and 1970s, Park navigated and manipulated his institutional environment in ways that centralized presidential control over the economic policymaking process, allowing the almost unfettered pursuit of his personal developmental visions. Park’s direct influence over the original architecture of Korea’s developmental state and the shape and pace of its first developmental strategy cannot be overstated. I thus agree with scholars who identify the mindset and character of Park himself as a key variable in the Korean story of late development (e.g., Vogel 2011). Transformative leadership mattered in Korea, just as it mattered in other countries pursuing aggressive developmental goals (on Japan and Italy, see Samuels 2003). However I have further argued that one of Park’s most significant legacies was the creation of a state architecture that afforded subsequent presidents— developmentally minded or otherwise—a comparatively high degree of influence over the country’s development trajectory. As a result, the mindset and character of subsequent Korean presidents has emerged as a swing factor shaping the direction of developmental state evolution and the evolution of financial activism in particular. For example, I argued in chapter 5 that, despite growing international and domestic pressures for financial liberalization over the 1980s, the absence of presidential support made it impossible for liberal reformists within the bureaucracy to execute their policy agenda. It was not until the election of a more liberally minded president, Kim Young-sam, in 1993 that reformists were finally able to realize their goals of full-blown financial liberalization. Similarly, I argued in chapters 8 and 9 that the personal character and ambition of Lee Myung-bak—a self-styled Park Chung Hee for the twenty-first century— was a key factor that reinforced Korea’s balanced growth developmental strategy and the wholesale expansion of financial activism. I conclude that agential and structural factors are central to any full explanation of the direction of developmental state evolution in Korea. The president’s personal character and orientation has often been a swing factor, but only because of the power afforded to this “agent” by virtue of the latter’s institutional home. The role of the president in determining the direction and momentum of strategic activism in Korea arguably sets it apart from other developmental states in the region.

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This brings us to the wider applicability of the mindset-strategy framework. As already noted, an important advantage of this framework is that it allows one to accommodate the idea of institutional and policy variation within developmental states over time. In a similar fashion, the framework can account for the emergence of institutional and policy variation between such states, and why some have appeared more resilient than others at different historical moments. The Korea/Taiwan comparisons developed at different points in this study are particularly illuminating in this regard. As noted in chapters 3 and 4, the historical experiences and domestic political challenges facing Korea’s first developmentally minded policymakers led them to pursue a very different strategy from Taiwan’s. In Taiwan, the political elite’s negative experience of inflation on the mainland and their political legitimacy challenges saw them commit to a “growth with stability” strategy from the outset. This gave rise to very different institutional arrangements and financial policy choices, including the creation of a powerful and independent central bank and a strong preference for nondebt inducing industry policy measures (e.g., tax concessions rather than policy lending). As a result, financial activism never became as politically contentious in Taiwan as it did in Korea. This meant local calls for financial liberalization were more contained and motivated largely by the desire to expand local firms’ access to capital than to do away with strategic activism (Thurbon 2007). The government’s ongoing commitment to “growth with stability” and the enduring legitimacy of that strategy helps to explain why Taiwan took a much more cautious and gradual approach to financial liberalization than Korea over the 1990s, and why it was less exposed to the regional crisis of 1997.4 Importantly, however, such differences may not all have worked in Taiwan’s favor. A lower tolerance for debt-driven developmental initiatives may also leave the Taiwanese state less scope to embark upon rapid strategic shifts in response to changing external conditions, such as increasing oil prices and climate change (not to mention the growing power of China). As I showed in chapter 9, the existence of a healthy set of state-owned policy banks and a willingness and ability to significantly expand policy lending allowed Korea to embark upon its green techno-industrial transformation initiative to address such concerns. No such policy initiative has been forthcoming in Taiwan. “Growth with stability” may have served Taiwan well to this point, but we cannot assume that the strategy will continue to serve it well in the future. This brings me to my final point about the mindset-strategy framework and its emphasis on the ideational aspects of developmentalism: namely, the conditions under which this mindset is likely to be diminished or displaced. My focus has been on the endurance of a developmental mindset as a factor explaining the revival of financial activism. However, in emphasizing endurance, I am not suggesting that this mindset is impervious to change. Rather, my argument has

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sought to identify the factors that originally produced this mindset, along with those that have both sustained and at times weakened it. I argued in chapter 5 that Korea’s developmental consensus was seriously fractured in the 1970s as a result of the negative outcomes of strategic interventionism: an unstable and unsustainable boom-bust pattern of growth, and an increasingly bifurcated industrial structure with its attendant economic inequities. This draws our attention to the point made by Chalmers Johnson himself —that the future of developmentalism is likely to turn on perceptions of its success (along with the presence of circumstances believed to demand a strategic response). Perceived failure is likely to undermine the legitimacy of the developmental project and support for strategic activism. In Johnson’s words: “Legitimacy based on projects or goals is, of course, fragile in that it normally cannot withstand failure. Equally serious, it cannot adjust to victory and the loss of mission. The legitimacy of the leaders of a developmental state is like that of field commanders in a major military engagement. It comes from people working together, and it probably cannot long survive either defeat or victory” (Johnson 1999, 53).5 As discussed in chapter 2, Joseph Wong (2011) has most recently argued this point in relation to Korea. He suggests that high-profile failures in biotech during the 2000s have derailed the developmental state by undermining faith in its ability to achieve its goals. I agreed with Wong that failures in biotech might have diminished faith in the government’s strategy for that particular industry. But I questioned whether those failures had undermined faith in the developmental project more broadly. The government’s willingness to embark upon the massive Green Growth initiative in 2008 despite its biotech failures suggests that such was not the case. This highlights an additional benefit of the mindset/strategy distinction: it allows us to more clearly specify the source, and interpret the significance, of the conflicts surrounding the developmental project. Too often, I suggest, has conflict over the Korean state’s developmental strategy been misinterpreted as conflict over developmental philosophy. Such misinterpretation is most obvious in analyses of the Kim Dae-jung administration, which typically depict President Kim as a detractor of developmentalism because of his criticisms of the cozy state-chaebol-bank relationship and his support for financial liberalization.6 Yet, as I argued in chapter 6, while Kim fiercely objected to his predecessors’ growth first developmental strategy, it is difficult to sustain the idea that he rejected their developmental philosophy. Otherwise how can we explain Kim’s combination of financial liberalization aimed at reducing chaebol dominance with his expansion of strategic activism broadly (largely aimed at promoting Korea’s IT industry) and financial activism in particular (including the expansion of VC financing for smaller IT firms)? The developmental mindset/strategy distinction may thus prove helpful for scholars interested in exploring the direction of developmental state evolution in different national contexts.

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      157

Manufacturing Decline and the Future of Financial Activism The findings of this book also intersect with two wider debates: those concerning the inevitability of manufacturing decline in advanced countries, especially in the presence of strong financialization tendencies, and the future of financial activism in a globalized era. Since the 1980s, mainstream economists have predicted that increased capital mobility will transform the industrial structure of developed economies and lead to the shrinking of the manufacturing sector, as production is moved to lowerwage economies.7 The observable trend toward deindustrialization in OECD economies since the 1990s (apparent in figure 10.1) lent weight to this prediction. This trend has been hastened in recent times by the rise of financialization and the attendant ideology of “maximizing shareholder value” (c.f. Lazonick and O’Sullivan 2000).8 This ideology has driven financial institutions to privilege speculative over productive investment in order to maximize short-term returns. It has also led producers in many developed economies to downsize manufacturing operations and to distribute the savings from offshoring to shareholders, rather than expanding their productive endeavors—a tendency especially observable in the United States, the originator of the financialization trend.9 Significantly however, the trend toward deindustrialization in OECD nations has been far from even. In some countries, such as Germany and Japan, the decline in manufacturing’s share of the national economy has been less pronounced than in others, such as the United States and United Kingdom (see figure 10.1). And in Korea, the size of the manufacturing sector has actually increased since the 1990s, despite heightened levels of financial openness. My findings help to explain sustained divergence in the industrial structures of advanced economies, highlighting the role of the developmental mindset in shaping some governments’ perceptions of the importance of productive capacity and in motivating policymakers to strengthen the link between the financial and industrial sectors of their economies. Existing explanations of sustained divergence often underplay or ignore the significance of ideational elements. For example, scholars working in the varieties of capitalism (VoC) tradition have long predicted continued divergence between so-called “liberal market economies” (LMEs) like the United States and United Kingdom and “coordinated market economies” (CMEs) like Germany, even regarding patterns of financialization (Hall and Soskice 2001). However in accounting for divergence, VoC scholars typically take a firm-centered approach, emphasizing the longstanding institutionalized relationships between banks and firms in CMEs. Such arrangements provide firms with incentives to maintain relational banking systems and long-term investment horizons. Yet while this explanatory framework may partly

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40 35 30 25 20 15 10 5

19 9 19 0 9 19 1 92 19 9 19 3 94 19 9 19 5 9 19 6 9 19 7 98 19 9 20 9 00 20 0 20 1 02 20 0 20 3 04 20 0 20 5 0 20 6 0 20 7 08 20 0 20 9 10 20 1 20 1 12

0

China

Korea

Germany

Japan

UK

France

USA

Australia

FIGURE 10.1  Manufacturing value added as percentage of GDP Source: Compiled by author with data from World Bank Development Indicators Online Statistical Database, data.worldbank.org.

explain comparatively high levels of manufacturing investment in Germany,10 it does not translate well to the Korean case. For there, as we saw in chapters 5 through 9, historic relationships between local banks and large firms have long been dismantled, while smaller manufacturers have tended to be shunned by private financiers. Under these circumstances, the developmental ambitions of Korean policymakers have motivated them to step in to fill the void, supporting manufacturing investment through the expansion of policy financing. The developmental mindset thus emerges as an important factor shaping government responses that contribute to divergent industrial structures between Korea and a number of other advanced economies. In the mid-1990s, Richard Samuels made a similar argument about Japan. Samuels wanted to explain why deindustrialization in Japan had failed to proceed as predicted by Western commentators, despite a protracted recession and a strong yen. In stark contrast to those predictions, between 1990 and 1995, Japan recorded a net gain in manufacturing jobs, while the United States lost 12 percent of its industrial base—despite the benefit of a cheap dollar. In accounting for this outcome, Samuels emphasized the role of national values, arguing that it “suggests that Japanese strategists

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      159

place a different value on manufacturing and are therefore willing to pay a higher cost to maintain it” (Samuels 1996).11 The same can be said for Korea. As we saw in chapter 6, following the liberalization efforts of the 1990s, declining corporate investment levels sparked deep concerns about the impact of freer financial markets on the productive sector. The political leadership soon began to rethink the role of finance in the national economy. Serious government efforts then emerged to support productive investment through the expansion of financial activism. This is not to suggest that government support for productive investment is the sole explanation for the continuing importance of the manufacturing sector in the Korean economy. It is however one very likely contributing factor—especially in an environment dominated by reluctant private financiers (see figure 10.2). To make this observation is not necessarily to argue that this is an entirely positive development; indeed some perceive it in a negative light. The Korean government’s persistent focus on manufacturing has been the target of significant international and domestic criticism. In the words of two Seoul-based

60 50 40 30 20 10 0 Manufacturing

Non-manufactuirng Commerical banks

Mortgage and nonmortgage consumer loans PFIs*

FIGURE 10.2  Loan breakdown of PFIs versus commercial banks (end of 2012). *Includes KDB, KEXIM, and IBK, excludes KOFC. Nonmanufacturing includes construction, real-estate, transport, wholesale, mortgage and non-mortgage consumer loans. Source: Figures from Fitch 2013, 4; chart compiled by author.

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McKinsey consultants, “[Korea’s] manufacturing growth model is less durable than the products it has created. If South Korea is to generate new jobs and continue raising its living standards in the decades to come, it must stop relying so much on manufacturing and place a greater emphasis on developing its services sector. South Korea must embrace the notion that its future prosperity will depend less on the production of physical things and more on intangibles such as skills, knowledge and information” (Dobbs and Villinger 2010, 39). To this end, Dobbs and Villinger suggest Korea needs to start “scrapping the many fiscal, financial, and development policies that have favored manufacturing over services. . . . The government, for example, should end . . . tax breaks and subsidies for manufacturing” (2010, 46). There is no question that Korea could significantly improve job growth and productivity by further developing its services sector (a large and varied category).12 Indeed, the Park Geun-hye regime has focused on service sector productivity improvement. Whether this new focus should displace Korea’s historic emphasis on manufacturing capacity is a question beyond the scope of this study. My point is that in the presence of a developmental mindset, such an outcome is unlikely, especially as geopolitical and competitive pressures intensify. Which brings me to one final issue relevant to my analysis: the future of financial activism in an era of financial globalization. Early debates about financial globalization centered on what were believed to be its constraining and homogenizing impacts. The conventional view was that increased capital mobility placed states under intense pressure to adopt policies and regulations that were attractive to mobile capital, lest they be punished by capital flight.13 Those policies (including low spending, low taxation, and low inflation) implied a highly constrained state with minimal scope to pursue an autonomous economic policy agenda. This in turn implied the gradual convergence of distinctive national and regional varieties of capitalism toward a single Western/liberal model. These assumptions underpinned the most influential accounts of the causes and consequences of East Asia’s 1997 crisis. On this reading, Asian governments were punished by mobile capital for their excessive intervention in the market and their failure to confirm with “best practice” modes of corporate and financial governance.14 Yet even before the 1997 crisis scholars had begun to question the idea that financial globalization signals the triumph of markets over states and the erosion of policy autonomy. In 1994, Eric Helleiner reminded us that globalization is the product not just of technological and market forces but of purposive state action.15 While technological developments enabled economic integration over the 1980s and 1990s, states willingly created the conditions that allowed financial globalization to flourish.16 Subsequent studies have seriously challenged the depiction of states as passive players in the financial globalization process. We now know

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      161

that while capital mobility imposes some constraints, these tend to be overstated, and that many governments have pursued expansionary policies without triggering capital flight (Oatley 1999, Mosley 2003). We also know that numerous states have strategically pursued financial liberalization in order to advance developmental goals.17 And, most recently, our attention has been drawn to a more explicitly activist role for the state under financial globalization, one beyond that of market regulator or mediator of market pressures; some states are now emerging as major financial market players in their own right, via publicly owned financial institutions and funds (such as development banks and national pension and sovereign wealth funds) (c.f. Helleiner and Lundblad 2008, Helleiner and Kirshner 2009, Kirshner 2009). Not surprisingly, the states in question appear to be using these vehicles to pursue a range of national objectives, from the geopolitical to the developmental. The findings of this book certainly lend weight to such conclusions. 40 35 30 25 20 15 10 5 0 2007

2008

Germany’s Kf W

2009

2010

China Development Bank

World Bank Group

KEXIM + KDB

2011

2012 Brazil’s BNDES

Asian Development Bank

European Investment Bank FIGURE 10.3  Selected development bank financing of Green Energy projects (US$ billion) Source: Compiled by author with data from Bloomberg New Energy Finance, “Clean Energy White Paper,” September 10, 2013.

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160 2007−2012

140 120 100 80 60 40 20 0

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k an

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’s K ny

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FIGURE 10.4  Cumulative financing of Green Energy projects by selected development banks, 2007–12 (US$ billion) Source: Compiled by author with data from Bloomberg New Energy Finance, “Clean Energy White Paper,” September 10, 2013.

All of these studies point us to the fact that even under conditions of financial globalization, nationalism (in its various guises) continues to shape financial policy choices and processes (c.f. Helleiner and Pickel 2005). They also remind us of the political foundations of globalization, which are far from immutable. For as this book has shown, as economic, political, or strategic conditions change, so too might policymakers’ appetite for freer financial markets change, along with their willingness to intervene in those markets for strategic purposes. The 1997 crisis planted the seeds of such a change in Korea. A decade later, the global financial crisis reinforced this shift—not just in Korea but in many non-Western economies struggling with the instabilities wrought by financial integration and a host of new pressures. From spiking oil prices to climate change, these pressures are demanding a rethink of fossil-fuel-intensive industrialization strategies and intensifying the search for ways to finance alternative development pathways. In this context, the revival of financial activism in Korea can be seen as part of a broader resurgence across the globe. State-owned policy finance institutions (PFIs) in a number of Asian, Latin American, and European countries are playing

WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?      163

an increasingly important developmental role, especially in financing the transition toward more sustainable energy systems.18 As figures 10.3 and 10.4 reveal, the national development banks of Germany, China, and Brazil each spent more financing green energy projects than the World Bank and Asian Development Bank over the years 2007–12. German and Chinese investments also exceeded those of the European Investment Bank.19 The question raised by many observers following the 1997 financial crisis— whether there is a future for financial activism in a globalized world—now seems outdated. That future has arrived. Its arrival calls for a new focus, one centered on the state’s growing role as a financial market player, especially as countries like Korea move to address their energy security and manufacturing capacity concerns through state-backed investments. Attention must be paid to the role of PFIs not just in advancing states’ strategic objectives but also in influencing the priorities of global markets (c.f. Helleiner and Lundblad 2008, 76–77). This may even include the role of PFIs in effecting a shift away from fossil-fueled industrialization and toward a more sustainable mode of capitalism. This study represents one small step in that direction.

Acknowledgments

This book is the culmination of a twenty-year fascination with the countries of Northeast Asia and their remarkable industrial, social, and political transformations. My interest was sparked when, as an early undergraduate, I enrolled in a course on “comparative capitalisms.” For the first time, I became aware of just how differently economic, social, and political relations are ordered around the globe—and how such differences might help explain divergent economic and social outcomes. This was a big discovery for a youngster who had grown up on a relatively isolated fringe of the Australian South Coast! As the years went on, my fascination with Australia’s northern neighbors—and with the idea of different modes of capitalism—was complemented by a growing interest in the idea of the developmental state and its capacity to transform a political economy. As a doctoral student, during several rounds of fieldwork interviews in South Korea and Taiwan, I was regularly struck by the propensity of policymakers in these countries to think big picture and long term, in striking contrast with government officials I had contact with in my own country. Upon entering academic life, I maintained a scholarly interest in East Asia and its modernization—an interest that was intensified by the onset of the GFC in 2008, which Korea and Taiwan both seemed to weather better than many other countries. Indeed, this book was originally conceived as a comparative analysis of these countries’ experiences over two major financial crises—1997 and 2008. Eventually however, I found the revival of financial activism in Korea so striking as to demand a stand-alone story—and one that called for theoretical and conceptual elaboration, in contrast to the ready dismissals of developmentalism that have emerged from many sources. I could not have hoped to find a better home for this book than the Cornell Studies in Money Series, under the excellent editorship of Eric Helleiner and Jonathan Kirshner. Despite its Korea focus, this book was written in a comparativist spirit, with one eye always to the generalizable aspects of the case and to the lessons—positive and negative—that it might hold for policymakers around the globe now grappling with the challenges of late or continuous techno-industrial transformation in an era of financial openness, resource scarcity, and climate change. As for the comparative story, that remains to be told.

165

166       ACKNOWLEDGMENTS

This book could never have been a solo effort, not least because its execution has depended on the willingness and insights of so many interviewees. Thus my first round of thanks must go to those Korean government officials and policy practitioners who have shared their time and expertise so generously over the years—some over the space of a decade or more. Of those I can mention by name, I am especially indebted to Kim Tae Dong, Oh Sang-Rok, Young Soogil, Kim Sang-hyup, and Chin Daeje; others will know who they are, and I hope know how grateful I am to them. I would not have enjoyed so many productive and insightful field trips to Seoul over the past fifteen years without the supreme hospitality and kindness of the wonderful Chang Kyung-Sup. In addition to making me so welcome at his SNU base, Professor Chang also introduced me to the beauty of Seoul and environs on countless walking, driving, and eating tours. I am also indebted to Professor Yoon Young-kwan at the Center for International Studies at Seoul National University who sponsored my extended 2012 visit as a Korea Foundation Fellow. Many thanks also to the Korea Foundation for its generous financial and practical assistance during that stay. On the Australian side, this project would not have been possible without the financial support of the School of Social Sciences at UNSW Australia and without the constant encouragement of my Head of School, Chris Walker. I’d also like to thank my UNSW colleagues for their warm friendship and solid support over the life of this project. Especial thanks go to Marc Williams, Laura Shepherd, and Will Clapton, along with Gavin Kitching, Stephen Fortescue, Kath Gelber and Susan Park. As the project evolved, I was fortunate to be offered the opportunity to present aspects of my argument at a number of seminars and symposia, and gained much from the helpful suggestions of my coparticipants. I send special thanks to the hosts of those events: Chang Kyung-Sup (Seoul National University); Chu Yin-wah (Hong Kong Baptist University); Darryl Jarvis and Toby Carroll (Hong Kong Institute of Education/City University of Hong Kong); Wes Widmaier (Griffith University); David Hundt (Deakin/APSA); and to my many colleagues in the UNSW Globalization and Governance Research Network who have provided ongoing feedback and support. I am also grateful to Stephen Bell, whose work I have found so inspiring over the years, and to Mark Beeson, Fred Block, Pauline Debanes, Steve Feng, Sebastien Lechevalier, Richard Stubbs, Jason Sharman, and Joe Wong for thoughtful commentary and probing questions along the way. My heartfelt thanks to Dr. Karl Moskowitz, who so kindly took the time to talk me through the intricacies of inter-bank staff rotations in post-colonial Korea, and to staff at Fitch Ratings who pro-

ACKNOWLEDGMENTS      167

vided generous help with data. For outstanding research assistance, I thank my doctoral students Fabio Jiménez Castro and Michael Peters. Towards its conclusion, the project benefited enormously from the insights and suggestions of two anonymous reviewers, and from the exceptional editorial guidance of Roger Haydon. I am also grateful to Emily Powers, Karen Hwa, Jack Rummel, and Mahinder Kingra for their assistance in the production and marketing phases. My fantastic collaborator and dear friend, Sung-Young Kim, has contributed much to my thinking on developmentalism over the years and also provided spot-on feedback on various iterations of this project. The “in earnest” commencement of this project coincided with the arrival, in quick succession, of two cheeky cherubs, Xander and Amélie—further ensuring it could not be a solo effort. My brilliant brothers, Joe and Dom, and sisters-inlaw, Roses and Em, have been sources of serious support (and fun) as I’ve juggled writing with kid wrangling. My extended family—Bear, Babs, Pete, and their tribes, along with Ellie and Joe—have similarly smoothed the journey. My mum-in-law, Angie, has been a source of constant support. I am ever grateful for her loving kindness and good humor—and boundless energy! John Mathews—generous mentor and Gopa extraordinaire—not only commented on countless drafts but then invariably took the kids on a monster hunt while I got back to work. My amazing parents, Carolyn and Tony, regularly relocated to Sydney during my Korea trips to entertain the kids and did so in their own inimitable style: in full character as Tiddles and Bonzo, or Uncle and Aunty Jetty, or Queen and Old Knight—bringing the same light and love to my children’s childhood as they did to my own, and enabling me to travel without worrying that I’d be anything more than mildly missed. They have shaped my world—and me—in more ways than they could know. Ken Wallace, my longtime partner in crime and recent partner in parenthood, has played both roles to perfection. Hilarious, wise, creative, loving—I count my blessings every day. And finally, Linda Weiss. Much more than a mentor and beyond a best friend, she was invariably there listening, questioning, inspiring, and encouraging as I walked and talked this book into life around the Sydney Harbor foreshores and through the bustling streets of Seoul. Millions of steps over many years—often culminating in a lili shuffle! I can’t thank her enough, so will simply say: thank you.

Notes

1. REBIRTH OF THE DEVELOPMENTAL STATE

  1. On the recent expansion of Korean PFIs in the local financial system, see Fitch 2013, 1. The revival of financial activism in Korea has gone largely unremarked in the scholarly literature; I present evidence regarding the nature and extent of that revival in chapters 5 through 9.   2. A number of developed countries maintain large development banks, including Germany, Japan, and Canada (de Luna-Martinez and Vicente 2012, 5). For example, in 2010, the total assets of Germany’s main development bank, the KfW ($591.4 billion), exceeded those of Brazil’s BNDES ($330.4 billion) and indeed the World Bank ($428.3 billion) (Lazzarini et al. 2011, 36). What distinguishes Korea from other developed countries, however, is not the existence of development banks per se but the relative size of their role in the national banking system, which was most recently noted by international credit ratings agency Fitch (2013). Comprehensive comparative data on the role of development banks in developed countries is scarce; neither Korea nor Japan responded to a 2012 World Bank survey of development banks conducted in an attempt to fill a data void. However, Fitch data (2013, 3) reveal that in 2012, Korean PFIs accounted for 25 percent of total bank loans in that country. The IMF put the figure for Japan at 11 percent in 2010 (down from 21 percent a decade earlier) (IMF 2012, 6). Germany appears to be the only other developed country in which such state-owned institutions continue to play such a significant role; Griffith-Jones and Cozzi (forthcoming, 6) indicate that German PFIs account for approximately 25 percent of banking sector credit, which is similar to Korea. They also note German exceptionalism in this arena, at least in Europe.   3. I elaborate and evaluate such claims in detail in chapter 2; for indicative studies, see Jayasuriya 2005 and Pirie 2008.   4. See chapter 10 for comparative figures.   5. For a lucid discussion of the financial/productive economy distinction, and the relationship dynamics between these economic spheres under conditions of financialization, see Krippner 2011. Krippner defines financialization as “the tendency for profitmaking in the economy to occur through increasingly financial channels rather than through productive activities” (2011, 4).   6. In a 2009 article dedicated to reviewing the history of developmental state debates, Richard Stubbs noted the absence of a commonly agreed on definition while drawing attention to two apt observations about the very loose way in which the term is often employed in the literature. In the words of Mark Beeson, “developmental state” has become “a generic term to describe governments that try to actively ‘intervene’ in economic processes and direct the course of development rather than relying on market forces.” For Linda Weiss, “the term ‘DS’ is so loosely applied that it has become virtually synonymous with ‘the state in East Asia’ ” (cited in Stubbs 2009, 5).   7. There are parallels between this aspect of my argument and the arguments of scholars working in the new economic nationalist (NEN) tradition who criticize the international relations literature for erroneously conflating “economic nationalism” with protectionist policy practices (and indeed with “statism”/“realism”); see for e.g., Crane 1998, Abdelal 2001, Helleiner and Pickel 2005. As NEN scholars point out, the economic 169

170       NOTES TO PAGES 5–9

policies pursued by nationalists have varied markedly over time and place, depending on nationalists’ (historically contingent) goals. Economic nationalism is thus best distinguished not by its policy content but by its nationalist content; any set of policies that “follow the national purpose or direction . . . (or) result from a shared national identity” can be considered expressions of economic nationalism (Abdelal 2001, 33). I discuss the parallels between economic nationalism and developmentalism in chapter 2.   8. Johnson elaborates on these institutional aspects in chapter 9 of his foundational MITI and the Japanese Miracle (1982).   9. For pioneering studies on Korea, see Amsden 1989 and Woo 1991; on Taiwan, see Wade 1990; for comparisons, see Evans 1995 and Weiss 1995. 10. Indeed, numerous contributors to the recent edited collection The Park Chung Hee Era: The Transformation of South Korea (Kim and Vogel 2011) criticize the developmental state literature for overemphasizing autonomous bureaucracies and neglecting other factors deemed central to the execution of a coherent developmental strategy, at least in Korea. These authors, however, do not attempt to reconcile the idea of a powerful Presidential Office with the developmental state model (as I do in this book). Rather, Kim and Vogel’s collection is dedicated to analyzing—in impressive detail—the historically significant role played by former president Park Chung Hee in the economic policymaking process and beyond. 11. In the late 1990s, Hahm and Plein (1997) highlighted the role of the Presidential Office in determining the dynamics of developmental policy making in Korea. They argued, however, that the influence of that office had begun to diminish in the 1990s; this book takes a different view. 12. In examining the ways in which individual presidents have shaped the evolution of financial activism in Korea the 1960s to the present, I draw inspiration from Samuels’s illuminating analysis of the role of leadership in Japan and Italy, and the conditions under which individual leaders might “use and even perturb the inertia of great forces” to shape a country’s development trajectory (2003, 2). 13. Since the mid-1990s, a number of scholars working within both the constructivist and historical institutionalist traditions have sought to theorize the role of “interpretive agents” in both mediating structural pressures for policy convergence and in shaping the process of incremental institutional change. Bell (2011) provides an excellent overview of recent contributions to, and debates in, this field. 14. The framework I develop in this book draws particular inspiration from the “agents in context” approach that Bell has, since 2005, elaborated and applied with his collaborators Hui Feng and Andrew Hindmoor to explain a range of empirical puzzles, from monetary policy expansion in Australia (Bell 2005) to the rise of the People’s Bank of China (Bell and Feng 2014) to the origins of the global financial crisis and its varied cross-national impacts (Bell and Hindmoor 2015). 15. For example, Korea relied far more extensively on state-directed lending (“policy loans”) than did Japan or Taiwan. From the 1950s to the 1980s, the ratio of policy loans to total deposit money bank loans in Japan was no more than 14 percent. In Korea, the ratio reached almost 60 percent (59.78) at the height of its industrialization drive in the 1970s (World Bank 1993, 280–81). On the divergent developmental strategies pursued by Korea and Taiwan in the sphere of finance, see Fields 1995, chaps. 4 and 5. On their dramatically different approaches to financial liberalization in the early 1990s, see Thurbon 2001. 16. The developmental aspects of Korea’s SME policies are typically ignored or downplayed in the literature positing developmental state demise, which focuses overwhelmingly on the state-chaebol relationship and its evolution. I take up this point in chapter 10.

NOTES TO PAGES 11–16      171

2. DEVELOPMENTAL STATES

 1. An earlier version of this chapter appeared in French as “L’État développeur: défense du concept,” Critique Internationale 63 (2) (2014): 59–75.   2. See, e.g., Pang 2000; Pirie 2005, 2008; and Jayasuriya 2005.   3. In this way, the declinist literature falls into a trap that befalls the wider comparative capitalism literature; Crouch (2005) contends that the practice of conflating theoretical models and empirical cases is endemic in this field, particularly in studies of the “liberal market economy” model, which is essentially drawn from a single empirical case—the United States. Yet Crouch does not discuss in detail studies of the developmental state model, nor does he have anything to say on the Korean model.   4. See, for example, Johnson 1987, Wade 1990, Weiss and Hobson 1995.   5. Wade’s landmark (1990) study on Taiwan provides a comprehensive examination of the key institutional and policy features of that country’s late industrialization experience. For an illuminating comparison of Korea and Taiwan’s approaches to industrial development, see Fields 1995.   6. See, for example, Weiss 2003; Amsden and Chu 2003; Pekkanen 2003; Kim B-K 2012a, 2012b; and Hundt 2014.   7. For example, Jayasuriya 2005, 9.   8. For example, Pirie 2008 and Cerny 2005.   9. Johnson (1982) offers the United States as an example of the former and Soviet Union as the latter, though his depiction of the U.S. state as “market-rational” is arguably outdated; Block (2008) and Weiss (2014) provide compelling critiques of the idea of the United States as a “regulatory” state, although they arrive at very different conclusions about its true nature. 10. Drawing on the conceptualization of economic nationalism articulated by Rawi Abdelal (2005, 21). This conceptualization is useful because it emphasizes the motivations rather than methods of economic nationalists and can thus accommodate the fact that the specific goals (and thus preferred policies) of nationalists have varied over time and space. For example, for nineteenth-century British nationalists, the goal was to establish a global manufacturing monopoly. To this end, they advocated the liberal economic policies of free trade based on comparative advantage (owing to Britain’s advantage in manufacturing). For nineteenth-century American and German nationalists on the other hand, the goal was industrial catch-up with Britain, which led them to prefer more protectionist policies, at least for infant industries (see Helleiner 2005). The call to define “economic nationalism” in terms of its nationalist rather than policy content characterizes the “new economic nationalism” literature, epitomized by the work of Crane 1998; Abdelal 2001, 2005; and Helleiner and Pickel 2005. 11. Members of the Meiji elite also spent time touring America and Germany in the late 1800s to see firsthand how policymakers were translating such ideas into action. On the influence of Listian ideas in particular on the Meiji elite, see Samuels 1994 chapter 2. Austin (2011) similarly traces the engagement of Northeast Asian policymakers with the work of Alexander Hamilton. 12. For Joseph Schumpeter, technology is the central component of economic competitiveness, and as Samuels has pointed out, this idea proved enormously influential in Japan. Indeed, Samuels coined the term “technonationalism” to describe the ideology that has informed Japan’s quest to build a “rich nation, strong army.” He argues that in so prioritizing and consistently pursuing the goals of acquiring, diffusing, and nurturing technology since the end of World War II, Japan has followed a kind of “national Schumpe­ terianism” (Samuels 1994, 14). This would no doubt have pleased Schumpeter who, according to biographer Richard Swedberg, was much enamored of Japan and received

172       NOTES TO PAGES 16–21

an “enormously enthusiastic” reception from Japanese scholars during a lecture tour there in 1931 (1991, 1899). At the same time, Schumpeter developed (in his own words) a “very good impression” of Japanese politicians and business leaders, pointing to his direct engagement with them. 13. Park Chung-Hee personally visited Germany throughout his presidency in order to grasp the ways in which its government had engineered such remarkable post–World War II economic reconstruction. Park even devoted a whole chapter in his 1970 treatise, The Country, the Revolution and I, to “the German Miracle.” In that chapter, Park made the argument that Germany’s success was no “miracle.” Rather, it was the result of the dedicated, collective effort of the government and the people to restore national strength and pride by focusing all of their attention and resources on economic reconstruction, for example, by living frugally, by saving for the purpose of investing, and by consciously raising global demand for German commodities “by putting out precision goods, firm in construction and cheap in price” (Park 1970a, 150). 14. On this important point, see Mann 1979. 15. Vogel (2006) similarly distinguishes between the ideational, institutional, and policy realms when discussing the differences between the unique “Japanese” and “U.S.” models. However I am concerned with specifying the ideational features common to developmental states. 16. Some notable exceptions exist: on the origins and substance of developmental ideas in Japan, see Samuels 1994 and Gao 1996; in France, see Loriaux 1999; in Taiwan, see Wade 1990, chapter 7. In Korea, see Moskowitz 1979 and Woo 1991 (drawing on Moskowitz). For an analysis that considers the relative strength of elite cohesion around developmental goals in Korea, Taiwan, Syria, and Turkey, see Waldner 1999. Sikkink (1991) has also examined the influence of “developmental” ideas in Brazil and Argentina. However the constellation of ideas that Sikkink identifies in that context and labels “developmentalism” differ significantly from the ideas that I describe in this book, which emerged and prevailed in post–World War II Northeast Asia. In particular, the quest for technological autonomy, export competitiveness, and “catch-up” with the developed West were key components of the developmental mindset that I describe herein. This was not the case in Latin America, where import substitution was seen as the key to national strength and autonomy. The term developmental mindset does not seem to appear in the developmental state literature. There do exist some scattered and general references to a “developmental mindset” in the development studies literature, by scholars highlighting the need for an elite consensus around development goals and the necessity of strategic activism to achieve them. See, for example, Rodrik 2001, 3; and Mintzberg 2006, 9. 17. Cf. Weiss and Thurbon 2004; Pekkanen 2003, 212–13. 18. See, for example, Wong 2011. 19. Developmental ambition is not unique to East Asia; policymakers in many other countries have held such ambitions but failed to translate them into institutional capacity (see, for example, Waldner 1999). 20. On the many sources of neoliberalism, see Mann 2013, 129–78. 21. The South African government is one that has explicitly claimed a desire to be a developmental state, but this came to naught over conflicting economic goals. 22. Pekkanen’s masterful (2003) study of the motivations underpinning the selection of “strategic industries” in Japan highlights this point. Drawing on quantitative and qualitative methods, she finds that on balance, throughout the World War II period, industries were chosen for support on the basis of their potential to strengthen the nation’s techno-industrial base (i.e., for developmental reasons) rather than their potential electoral significance. 23. On this point, see Johnson 1982, 17–18.

NOTES TO PAGES 22–29      173

24. In the mid-1990s, Scott Callon (1995) predicted the demise of Japan’s developmental state for precisely this reason. 25. To foreshadow, where firms were once required to meet export targets, they are now also required to meet R&D benchmarks to qualify for further support. See, for example, Kim S-Y 2012b, 306, and chapter 9 of this book. 3.  MAKINGS OF A DEVELOPMENTAL MINDSET AND EMERGENCE OF STRATEGY MARK I

  1. Landmark studies that emphasize the significance of external (mainly Japanese colonial) influences include Eckert 1991; Cumings 1981, 1984; and Kohli 1994. Other analyses examine the role of external and local factors, some emphasizing the former (for e.g., Woo 1991), and some the latter (such as Amsden 1989). For a remarkably detailed recent examination of the role played by President Park Chung Hee in the rise and consolidation of Korea’s developmental state see the edited collection by Kim and Vogel 2011.   2. On the relationship between external threats and the emergence of a developmental state in Japan see Samuels 1994 and Gao 1996; in other states, including Korea, see Zhu 2001, Doner et al. 2005, and Woo-Cumings 2005.   3. Indeed, the approach has relevance for the investigation of a shared mindset, developmental or otherwise, in any context.   4. Unless otherwise stated, the following paragraph, including direct quotes, also draws on Kohli 1994, 1273–74. Similarly, Wade (1990, 217) considers the shared experiences of Taiwan’s first developmentally minded economic policymakers and how it made for “an uncommon amount of personal and professional empathy among top officials . . . this in turn helps to create a broad consensus among them on the general goals of Taiwan’s economic policies (and an) esprit de corps.” These experiences included previous employment in the prestigious National Resources Commission on the mainland, along with their common membership of the Kuomintang Nationalist Party, and later, common attendance of a handful of Taiwan’s elite universities, especially Taiwan National University, from which most top bureaucrats were recruited.   5. Japan’s economic exploitation of Korea actually dates back to 1876 when it coerced Korea into signing a commerce treaty that would open Korean ports and land to Japanese (and other foreign) interests. Korea became a protectorate of Japan in 1905, then a colony from 1910 until 1945. From the 1930s, Korea was rapidly industrialized as a military supply base for Japan.   6. Cumings (1981) describes the weakness of the Yi dynasty state that existed prior to Japanese colonization.   7. Many Koreans were conscripted (or enlisted) in the Japanese Imperial Army; by 1945, the number of Koreans that had served in the Japanese army since the colonial rule began reached around fifty thousand, with several hundred serving as officers (Brazinsky 2007, 108).   8. There exist a number of excellent personal and political histories of Park that canvass, among many other things, his motivations for enlisting in the Japanese Army. See, for example, Keon 1997 and Kim H-A 2004. Keon argues that Park joined the Japanese Army with the intention of gaining the skills to help overthrow the colonial powers: “The acquisition of military skills and disciplines was the only road that promised eventual freedom from alien domination” (Keon 1997, 62).   9. Moon and Jun 2011, 117. The following quote also from this source. 10. Moon and Jun (2011) provide an excellent analysis of the various factors that shaped Park Chung Hee’s personal “ideational complex,” including the influence of his exposure to Japanese history, the colonial experience, and the U.S. occupation of Korea post–World War II.

174       NOTES TO PAGES 29–33

11. Upon assuming the presidency, Park routinely expressed an unshakable belief in economic advancement as the key to national survival and international recognition. Park’s developmental philosophies were detailed in the handful of books he wrote during his presidency, particularly The Country, the Revolution and I (1970a), Our Nation’s Path (1970b), and To Build a Nation (1972), as well as in the many speeches he made during his seventeen-year reign. Speeches cited in this chapter are from the Shik (1970) collection. 12. President Rhee delayed rebuilding the South’s economy—including critical infrastructures such as electric power—as he had his hoped pinned on early reunification with the North (Cole and Lyman 1971, 166). 13. Korea lost over 1 million civilians in a war that did an estimated $3 billion worth of damage along the peninsula. In the south, the war left more than 150,000 South Korean and UN troops dead, 300,000 wounded, 100,000 forcibly moved to the north, 2,000 missing, and 2 million homeless (Keon 1977, 37). 14. South Korea’s per capita income increased from $67 in 1953 to only $81 in 1959 (Oh 1999, 35). 15. Brazinsky 2007, 107. The following two sentences also draw on this source (133–34). 16. Indeed, Brazinsky argues that feelings of ambivalence toward the United States and the desire for greater national autonomy was common among the younger generation of Korean military men who were trained by the United States but who had served in the Japanese army. Brazinsky provides a fascinating analysis of American efforts to transform the skills and psyche of Korean military officers during the late 1940s and 1950s, drawing on firsthand accounts of Americans and Koreans involved in the training. 17. According to the Supreme Council for National Reconstruction, there was already evidence of increasing communist activity under Chang’s leadership, including the proliferation of communist newspapers financed by the Japanese Communist Party between 1960 and 1961 (SCNR 1961, 8). 18. Park reaffirmed his commitment to the economic “modernization of the fatherland” as the basis of nation building and national security in nearly every major speech throughout his reign. See, for example, Park’s inauguration speech following the 1963 election (“The Dawn of a New Era”); 1966 speech on Independence Movement Day (“The Spirit of March 1 Independence Movement Day”); Inaugural Address following the election of 1967 (“Wishing for Success in Repeating a Great, Positive Harvest”); New Year’s Message for 1967 (“The Torch is Burning Bright”); “Will to Self-Dependence” radio speech of April 15, 1967; and 1968 New Year’s Message (“Modernization of Man, Economization of Life”), to name but a few. 19. On Park’s extraordinary influence over the country’s economic and political development during the 1960s and 1970s, see the edited collection by Kim and Vogel 2011. 20. Atul Kohli reports that by 1939, there were about forty thousand Koreans who had trained and qualified as government officials under Japanese rule. Most of these served in junior positions, but as World War II intensified and the demand for Japanese officials grew in other conquered territories, the number of Koreans at higher levels began to increase (1994, 103). Under the Rhee regime, corruption emerged and flourished within the bureaucracy, as it did among the political elite. Yet as we will see, upon assuming power, a purge of the bureaucracy was undertaken to send a clear message that this would no longer be tolerated. Chibber adds that the purge was aimed not at completely eliminating bureaucratic corruption, but at confining it to key segments so that it would serve the political ends of the regime without disrupting the pursuit of its developmental strategy (1999, 318). 21. Archival materials on the Park years is patchy; however, a recent collection of masterful essays edited by Byung-Kook Kim and Ezra Vogel (2011) analyses in intricate detail the economic and military strategies adopted by Park to advance both his national and

NOTES TO PAGES 34–35      175

personal-political goals, particularly in his earliest years. I draw on a number of these essays and other historical sources, as indicated, to help piece together Park’s cohesion-building strategy and to answer the question addressed in the final part of this chapter: How did Korea’s first developmentally minded policymakers navigate and (re)create their institutional environment in pursuit of their objectives? 22. The broader context of the reforms to the bureaucratic machinery (and indeed to wider government machinery and to the business sector, discussed below) must also be acknowledged: Park’s drive to shore up his own personal power base vis-à-vis potential political rivals, both from within and outside the military. These motivations and strategies are discussed in detail by Kim H-A (2011). My focus here is the mechanisms by which Park sought to build a consensus around his developmental ambitions and strategies. 23. On this point, and for a detailed study of bureaucratic restructuring in the earliest days of the Park administration, see Kim H-A 2011. The purge was led by the Korean Central Intelligence Agency (KCIA), under the leadership of Park’s right hand man, Kim Chong-pil. The purge also targeted older bureaucrats, making way for the younger, more impressionable members to fill their shoes. That these younger bureaucrats owed their rapid career progression to the military junta was likely to have bred a sense of loyalty to Park (Kim B-K 2011, 93). 24. Over the 1963–79 period, only one in every fifty-two applicants passed the exam (Kim B-K 2011c, 204). 25. The old-school ties connecting Korea’s bureaucratic elite thus arguably run even deeper than they do in Japan, where the Tokyo University–Ministry of Finance connection is widely remarked (Austin 2009, 156). On the educational backgrounds of Korean and Japanese bureaucrats and its relationship to employment and promotion patterns, see Kim P. S. 1992. 26. Wade (1990, 217) similarly emphasizes, in the context of Taiwan, the importance of common university ties and recruitment methods in creating among the bureaucratic elite a common worldview and broad consensus around economic policy goals. 27. Unless otherwise noted, the remainder of this paragraph also draws on Kim B-K 2011b. 28. The EPB was established in 1961 and staffed with civilian economic experts in a display of Park’s commitment to sound economic policy making. However given the immediate challenge of securing Park’s power, the EPB was initially marginalized in the policymaking process, the KCIA instead taking a lead role (see Kim H-A 2011, 91–99). However the KCIA’s bungling of currency conversion in 1962 cemented Park’s belief that civilian expertise was critical for good economic policy. The EPB was thus at that time formally endowed with responsibility for designing and implementing the national development drive. As Korea’s developmental “pilot agency,” the board was charged with formulating the nation’s five-year development plans, the first of which began in 1962. To this end, the EPB was granted extraordinary powers, absorbing the budgetary powers of the Ministry of Finance (MOF), the planning powers of the Ministry of Reconstruction, and statistical collection from the Ministry of Home Affairs. The MOF was also granted senior status within the bureaucratic apparatus, while remaining subordinate to the EPB. For a thorough examination of the EPB’s structure, developmental function, and powers over the postwar period, see Choi 1987a and 1987b. I discuss the role of the MOF in greater detail in the following section. 29. Kim B-K 2011c, 208. Unless otherwise noted, the remainder of this paragraph also draws on Kim B-K 2011c, 208–10. 30. Byung-Kook Kim (2011c, 207) provides illuminating statistics on the rotation of EPB bureaucrats through the leadership positions of the economic ministries that it oversaw over the 1961–80 period. He argues that “by manning this strategic network of policy

176       NOTES TO PAGES 36–43

feedback and information flow with its own officials, the EPB could detect and correct cross-cutting ministerial actions early on, as well as hold the leaders of line ministries individually accountable to the president and his EPB confidants.” 31. Korea’s first economic secretary, Oh Won-chol, was an engineer by trade, with more than ten years of factory experience (mainly in the machinery sector). His specialist knowledge allowed him to play an active role in the microdetails of HCI project formulation (Stern et al. 1995, 22). 32. Woo 1991, 129. The following quote also from this source. 33. This feature was singled out as a prime characteristic of the developmental state by Alice Amsden (1989 and 2001). 34. Fields (1995) provides an illuminating discussion of the differences between Korea’s and Taiwan’s industrialization strategies from the 1960s to the 1990s. 35. Foundational studies of Korea’s industrial policies include Amsden 1989 and 2004; and Woo 1991. 36. See Park´s speech “A Will to Self-Dependence,” April 15, 1967, in Shik 1970, 191. 37. See Park´s speech “New Year’s Message for 1967,” December 31, 1967, in ibid., 172. 38. “Business Morals and Ethics,” speech on the occasion of the third annual Commerce-Industry Day, May 12, 1966, in ibid., 153. 39. As president, Park visited Germany to observe and draw lessons from its post–World War II reconstruction effort and was an enormous admirer of that government’s ability to galvanize the nationalistic sentiment of the German people and direct it toward the goal of national economic advancement. Indeed Park’s 1970 treatise devotes an entire chapter to the German experience, and he routinely made reference to the (export-led) “German miracle” in his presidential speeches. 40. See Park’s “State of the Nation Address,” January 16, 1965. 41. See Park’s “Speech commemorating Korea’s Fourth Export Day,” November 30, 1965, in Shik 1970, 149. 42. Geopolitical pressures included the announcement of a planned reduction in U.S aid to Korea. Economic pressures included the emergence of a balance of payments crisis. Incentives to encourage exports had been in place from the earliest days of the Park administration, but it was not until the emergence of these pressures in 1962 that exporting became firmly established as the government’s top economic priority. 43. In Shik 1970, 147. Emphasis added. 44. Unless otherwise stated, all figures in this book are in U.S. dollars. 45. “New Year Message for 1968,” in Shik 1970, 129. 46. “On the Basis of the Second Economy,” Speech commemorating Korea’s fourth Export Day, November 30, 1967, in ibid., 149. 47. See also Moon and Jun (2011) for a detailed examination of Park’s admiration of the Japanese industrialization experience and of how the Japanese ideology of “Rich Nation, Strong Army” influenced his approach to the development of Korea. On that ideology in Japan, see Samuels 1994. 48. The SCNR issued an act relating to illicit profiteers on May 28, 1961. Under this act, in August 1961 the government fined twenty-seven businessmen a total of 47.7 billion for illicitly accumulated wealth and collected a further 1.35 billion though the taxation office under tax evasion provisions. Three days later, it fined twenty-four former government officials and political party leaders a total of 7.2 billion for their illicit dealings. In all, 56.6 billion was collected under the illicit means laws in 1961 (SCNR 1961, 97). 49. The growing material power of the chaebols and their increasing willingness and ability to challenge the state’s developmental directives gave rise to the so-called “gravedigger” thesis of the DS, popularized in the 1990s. In this view, by so supporting the development of powerful business groups, developmental states would eventually sow the

NOTES TO PAGES 43–49      177

seeds of their own demise. While there is little question that the state-chaebol relationship became more complex from the 1980s, scholars such as Linda Weiss (1998, 38–39) have since effectively critiqued the “gravedigger” idea for its rather narrow conception of state capacity as power “over” the business sector. Weiss (1995, 1998) developed the concept of “governed interdependence” to describe the reality in which a strong state and a strong society (i.e., business sector) coexist and collaborate in the pursuit of transformative goals which are nonetheless set and monitored by the state (1998, 38–39). I take up these debates in later chapters. 50. Park’s return to democracy (limited as it was) was probably more the result of U.S. threats to withdraw aid unless elections were held (Cumings 1997, 354) than his personal commitment to democratic principles. 51. Indeed, in justifying the suspension of democratic rule, Park attributed the failure of Korea’s first two democratic regimes to the absence of economic development (Park 1970b, 190–91). 52. As Timothy Lim notes, “The coup did not initially succeed because of overwhelming military might, or even brilliant execution, but because there were, in essence, no compelling reasons to oppose it. . . . Most Koreans were ready for a fundamental change and the coup seemed . . . the only viable way to achieve [it]” (1998, 467). 53. To recall from chapter 2, Hahm and Plein (1997), Kim H-A (2011), and Kim B-K (2011c) all critique the developmental state literature along these lines, and highlight the key role of the Korean president in the policymaking process. 54. Indeed, on the possibility of other countries replicating Japan’s development experience, Johnson wrote: “The priorities and social supports for cooperation among the Japanese might not be replicable in other societies, but it is easy to imagine that they might be matched—that is, a different society might be able to manipulate its own social arrangements in ways to comparable to postwar Japan in order to give top priority to economic development” (1982, 314). This points to the idea of developmental states being comprised of varied, and variable, institutional arrangements that are nonetheless directed toward the same end goal. 55. It should be noted that almost all chaebol CEOs and senior managers had been in the Korean military and thus were sympathetic to a president who had come from their own ranks. 4. RISE OF FINANCIAL ACTIVISM

  1. In this regard, an example of the traditional neglect of ideas in the developmental state literature is Evans’s (1989) study, which distinguishes between the developmental states of East Asia and the “predatory” states of Africa purely in terms of “structural variation,” or organizational differences. The analysis focuses on how the absence of a meritocratic bureaucracy and institutionalized links with the private sector (“embedded autonomy”) negates the possibility of developmental policies in Zaire. Yet the prior existence of a developmental mindset is surely a necessary precursor to the establishment of such arrangements.   2. Moskowitz 1979. See footnote 11 below for further details.   3. These financial system reforms were designed and overseen by Harvard-educated, Meiji era bureaucrat Megata Tanetaro, who in 1904 was transferred from Japan’s Ministry of Finance to Korea to serve as the financial advisor to the governing administration (Moskowitz 1979, 26). For an overview of key developments see McNamara 1990, 41–43; and Woo 1991, 24–26. For an excellent detailed history see Moskowitz 1979, 26–41.   4. Or Bank of Chosen in Japanese transliteration. It was originally established as the Bank of Korea in 1909, under a joint agreement between the Japanese resident-general

178       NOTES TO PAGES 49–51

and the Korean Empire. However the BOK was reorganized as the Bank of Chosen in 1911, shortly after Japanese occupation, to lay the foundations for Japanese economic hegemony and to “strengthen the financial organization needed to exploit the Korean economy effectively” (BOK 2000, 9).   5. Local banks were not dismantled under Japanese rule—however they did not play a significant role in financing large-scale industrial projects during this period.   6. Unless otherwise noted, the remainder of this and the following paragraph are based on Kohli’s excellent examination of the impact of Japanese colonialism on Korea’s subsequent economic development (1994, especially 1280–82).   7. Here lie the origins of some of Korea’s own massive conglomerates, the chaebols. On the colonial origins of Korean enterprise groups, see McNamara 1990.   8. The IBC raised its funds for long investment loans mainly by issuing bonds that were underwritten by the Deposit Bureau of Japan’s Ministry of Finance, a special fund that mobilized finance from the Postal Savings and other special accounts of the Japanese government, investing them into public projects (Moon 2003). From the 1930s, as the Japanese war effort with China intensified, government-mobilized savings deposits became an increasingly important source of IBC funds, though industrial investments continued to be financed mainly by bond issuances. On the origins and functions of the IBC, see Moon 2003.   9. Kohli 1994, 1282. So great were the financial incentives and rewards involved in investing in key industries that both Korean and Japanese businessmen came to refer to the governor-general as “jifu” (loving father) (Kohli 1994, 1281). 10. For a detailed study of the movement of Korean BOC and (particularly) IBC officials into positions of policymaking influence under Park see Moskowitz 1979. His study is based on personal interviews with many dozens of influential Korean policy, political, and finance figures in the mid-to-late 1970s—all of whom served in either the BOC or IBC (or the Chosen Ginko and Shokusan Ginko in Japanese, respectively). Moskowitz’s study did not include Kim Chung-yum—for the reason that Kim’s tenure in the BOC (i.e., post-1940) was later than the period in which Moskowitz was primarily interested (the 1930s). I am indebted to Dr. Moskowitz for explaining this point and elaborating on his findings, in personal correspondence. 11. Indeed, Moskowitz argues that the KDB emerged after 1961 as “the direct institutional extension and elaboration” of the IBC as it existed in 1930s Korea (1979, 362). This is perhaps not surprising, given the number of 1930s IBC officials who went on to assume senior roles in the KDB under Park Chung Hee. For example, in 1971, no less than 140 former IBC officials were employed at the KDB, mostly in managerial positions, including the KDB’s president Kim Yong-Hwi. And the KDB was by no means the only Korean financial institution to receive an influx of former IBC staffers into managerial positions after 1961. On the basis of interviews with many such men, Moskowitz concludes that from “the Bank of Korea . . . to the regional banks, special banks, and securities firms established in the 1960’s and 1970’s, it is virtually impossible to identify a financial institution in which men from the (IBC) core elite have not performed important roles in executive or managerial capacities” (1979, 368). 12. Kim’s reflections have been published in both truncated and extended form by the World Bank (Kim C-y 1994) and the Korea Development Institute (Kim C-y 2011). I draw on both in the sections that follow. 13. Kim spent many months recovering at the home of his Japanese barracks roommate who Kim had rescued from the blast, and whose family felt indebted to Kim. Kim’s account of his recovery period with the assistance of this Japanese family is moving indeed (2011, chapter 2). The friendship forged between Kim and his Japanese military associate, Makoto Hidehira, lasted their lifetime.

NOTES TO PAGES 51–56      179

14. These reforms were carried out with the technical assistance of U.S. economic advisors hailing mainly from the U.S. Federal Reserve. As I discuss later, during the 1940s and 1950s, U.S. advisors were unusually supportive of what might be termed “development friendly” financial sector reforms, including the placement of looser constraints on central banks so that they might actively pursue growth-oriented policies (see Helleiner 2003, Alachevich and Asso 2009, and Helleiner 2014). In these ways, the emergence of financial activism in Korea was enabled by broader structural conditions. 15. On the origins of the idea that inflation is intrinsic to economic growth in Japan, see Metzler 2013. Metzler traces these ideas to the impact of Joseph Schumpeter’s theorizing on this topic on post–World War II Japanese policymakers. Schumpeter’s understandings were in turn influenced by his own experience of reconstruction in Austria post-1918. 16. As Kim had drafted and executed many of the major financial reforms of the Rhee regime, he was acknowledged as an expert in this area. Kim was first tasked with advising the Korean Central Intelligence Agency on currency reform. As we saw in chapter 3, over 1961 and 1962, the KCIA assumed responsibility for economic policymaking, while the revolutionary government focused on cementing Park’s political leadership. Kim single-handedly drafted Korea’s 1962 currency reforms but was bitterly disappointed with their botched execution by the KCIA (see Kim C-y 2011, 100–112). Following the KCIA’s bungling, Park realized the importance of having technocrats, not military men, in charge of economic policy. At that time he shifted responsibility to the EPB, which worked in close collaboration with the MOF. It was at this time that Kim Chung-yum was appointed vice minister of finance. 17. A number of scholars have alluded to this mindset in their studies of Korea. For example, Jung-en Woo has observed that in the 1960s and 1970s, Korea’s “economic architects were men who had been educated under the Japanese, who had cut their teeth in Japanese banks in colonial Korea, and who looked to Japan for guidance” (Woo 1997, 79). Jong-Chan Rhee has noted the tendency of Korea’s developmental elite to view the inflationary pressures caused by Korea’s massive investment push as “the temporary side effects of an economic stage, which could be overcome by a continuous export strategy” (1994, 94). Meanwhile Alice Amsden has observed that in Korea “a relatively high rate of inflation was tolerated by the standards of most backwards countries” (1989, 100), largely because the government believed that causality ran from growth to stability, not the other way round (1989, 49). 18. Under the presidency of Syngman Rhee and largely in response to U.S. pressure, Korean banks had been denationalized upon the surrender of the Japanese in 1945. Control was achieved through either outright nationalization or the limitation of shareholder voting rights which biased decision-making toward the government, thus rendering remaining commercial banks de facto state owned (Sakong 1993, 33). 19. As MCI vice minister, Kim’s focus was designing and implementing the selective import liberalization and tariff policies required to develop Korea’s first swathe of strategically designated export industries. There were thirteen in all, selected on the basis of their likely impact on the international division of labor, the balance of payments, employment, and spillover effects on other industries: silk, cotton, china, rubber goods, woolen goods, plywood, handicrafts, leatherwear, clothing, miscellaneous goods, radio and electronic devices, fish and shellfish, and canned button mushrooms. See Kim C-y 2011, 132. 20. Under the deal, the projects would be financed through reparation funds including $300 million in grants, $200 million in soft loans, and $300 million or more in commercial loans (Kim C-y 2011, 164–65). 21. Also as MCI Minister, Kim devised a novel means of raising funds to promote Korean exports: a 1 percent tax on all imports to be administered by the Korea International Trade Association, with only imports of raw materials for foreign exchange earning purposes being exempt. These funds were then funneled to the Export Promotion

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Special Account Fund administered by KITA and allocated to export projects that had been approved by the government’s regular export promotion meetings. The funds were used, among other things, to help Korean exporters improve the design and packaging of their products and to market them abroad, and later to expand the trade promotion activities of diplomatic offices. This policy measure still stands as one of Korea’s most effective means of raising funds for export promotion. 22. For a comprehensive analysis of how intensifying geopolitical concerns drove Korea’s HCI push from the late 1960s onward, see Horikane 2005. 23. In October 1969, Park’s entire cabinet, including Kim Chung-yum, stepped down to allow the president a fresh start with the public following some major political upheavals. However, later that day, Park called Kim to his office and appointed the former banker his chief of staff. Kim recalls that he was very reluctant, telling the president: “I may know something of economics, but I know nothing of politics. I dare say I am not up to the task of being the chief of staff to the president” (Kim C-y 2011, 183). Park is reported to have replied: “The economy is the fundamental basis of the nation. If the economy is well, people shall prosper. This is the basis for political stability and strong national defense” (cited in Kim C-y 2011, 183)—a statement revealing of the president’s developmental mindset. Park informed Kim that as president, he would devote himself to ensuing Korea’s national security and defense, while entrusting Kim to oversee the nation’s economic development (1994, 183). As chief of staff from 1969 to 1979, Kim acted as the gatekeeper to the president, and key economic proposals passed through him before reaching the president. For example, when Assistant MCI Minister O Won-chol, the principal architect of Korea’s 1970s HCI drive, wanted to pitch his ideas about the viability of military self-sufficiency to Park, he first had to secure a meeting with Kim. Pleased with the idea, Kim agreed to take the proposal to Park, who was also very receptive, later appointing O Won-chol as the head of the Heavy and Chemical Industry Promotion Committee, reporting directly to the Presidential Office. See Horikane 2005, 376–77. 24. On the movement of former IBC and BOC staffers into such roles, see Mosko­ witz 1979. 25. Under the 1962 amendments, the government deleted from the BOK Act most of the articles pertaining to foreign exchange policies and business, and under the new laws, the BOK could only carry out foreign exchange business that had been approved by the minister of finance. 26. In Latin America, these policies had included the embrace of the gold standard and the establishment of monetary authorities to maintain it, for example, by expanding the money supply in times of increased foreign capital inflow, and contracting it in times foreign capital outflow. However this approach served to reinforce rather than neutralize inflationary and deflationary tendencies, with devastating economic impacts on the Latin American countries that had accepted U.S. advice, such as Paraguay (Helleiner 2003, 251). 27. For an examination of the nonorthodox, “development-friendly” monetary policy prescriptions offered by the U.S. to Korea in the early 1950s and their ideological and geopolitical motivations, see Alachevich and Asso 2009. For an extended examination of the U.S.’s growing support for development-focused central banking more generally from the 1930s to the 1950s, see Helleiner 2014. In that book, drawing on archival evidence from the Bretton Woods conference, Helleiner argues that economic development was, contrary to popular perception, an important focus of U.S. policy discussions in the years leading up to and during the Bretton Woods negotiations. He also argues that during those negotiations, the United States worked closely and cooperatively with Latin American countries in an effort to establish a more development friendly international regime, being motivated by both ideological and geopolitical concerns.

NOTES TO PAGES 61–68      181

28. According to Choi, increased foreign borrowing was the intentional outcome of interest rate reform, in that “policymakers realized that there was a self-evident limit to domestic money creation and that foreign borrowing should be a major conduit of long-term development financing” (1991, 45). 29. For a comprehensive analysis of Korea’s interest rate reform and its developmental implications (especially but not only in relation to encouraging domestic savings), see Kim K. S. 1991. 30. It is widely acknowledged that control over finance constituted a significant “stick” that the state could use to secure chaebol compliance with its developmental strategy. However Chibber (1999) criticizes the tendency of scholars to imply that the state had to “force” these firms into compliance with sticks, arguing that the chaebols were often willing allies in the government’s initiatives. What control over finance did enable the government to do, Chibber argues, was to insist upon performance standards in the execution of tasks that the chaebols were quite willing to perform (such as exporting). Chibber’s argument is convincing as it relates to exporting, although as I discuss in the next chapter, the chaebols were far from willing partners in the government’s decision to launch a heavy and chemical industry push in the 1970s. In that instance, control over finance was central to securing the chaebols’ compliance. 31. At the time Japan was also maintaining a strongly undervalued yen, at 365 to the U.S. dollar—right up until the Plaza Accord of 1985. 5. FRACTURING CONSENSUS AND THE ABANDONMENT OF FINANCIAL ACTIVISM

  1. For a detailed examination of the financial liberalization measures adopted by the Korean government between 1993 and 1996, see Thurbon 2001. I have also examined elsewhere the drivers of the liberalizing shift under Kim Young-sam (Thurbon 2003). I draw on these works in the final section of this chapter to complete my historical narrative of the fracturing of the developmental consensus and its implications for financial activism from the 1960s to the 1990s.   2. This includes author interviews with bureaucrats from the (then) Ministry of Finance and Economy and the Bank of Korea in the years following the 1997–98 crisis, as well as key presidential economic secretaries under President’s Kim Young-sam and Kim Dae-jung, as specified in the text that follows.   3. There exist a handful of insightful studies of the bureaucratic conflicts that emerged from the 1970s to the 1990s—although their temporal focus is narrow. For example, Rhee (1994, ch. 4) provides an excellent account of the conflicts that emerged in the final years of Park’s rule (1978–79). Choi’s (1987b) examination of the emerging battles between the EPB and other ministries in the early years of President Chun (1980–84) is similarly illuminating, but temporally limited. Moreover, these studies do not explicitly assess the implications of these conflicts for the process of financial regulation and reform. For example, Choi’s study is primarily concerned with explaining the government’s shift toward import liberalization in the 1980s.   4. Woo 1991, 109. For a detailed discussion of the Park regimes’ financial policies over the 1963–72 period and their political implications see Woo 1991, 101–15.   5. Park had reinstated democratic elections in 1963, in line with his 1961 promise to do so once political and economic stability had been restored.   6. Which despite its “democratic” self-presentation was still an authoritarian dictatorship; protesters against Park were likely to end up in jail.   7. This was largely due to the government’s saemaul undong (new village) movement aimed at reinvigorating the rural economy.

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  8. There were 11,923,218 votes cast in the presidential election of April 27, 1971. Of these, Park won 6,342,828. His major opponent, Kim Dae-jung won 5,395,900 (Keon 1977, 119).   9. See for example, “The Source of Self-Reliant National Defence,” April 28, 1969, in Shik 1970, 241. 10. On the growth and consolidation of the chaebol over the 1970s and 1980s, see Lee 1986. 11. Song 1990, 80. The following figures from the same source (60–61). 12. Such actions contradicted the advice of international organizations like the IMF, which promoted stabilization policies (i.e., scaling back investment and reducing foreign debt) as the panacea for financial crises. 13. Woo (1991, 179–98) provides a useful overview of the combination of factors contributing to the 1978–79 crisis, including the coincidence of global recession and the coming on line of a number of large industries established under the HCI drive; the rapid rise of inflation fueled by massive HCI investments, the influx of export earnings, and wage increases associated with the Middle East construction boom and domestic labor shortages; and the onset of the second oil crisis which heavily impacted Korea’s oil-dependent export industries. 14. Unless otherwise stated, this and the following three paragraphs draw on Rhee 1994, 93–116. On the growing influence of liberally minded economists in the EPB and their financial policy recommendations, also see Haggard and Moon 1990, 218–19. 15. Why was the EPB so insistent that a “stability first” agenda be adopted? In addition to the influence of neoliberal ideas, the EPB was the only bureaucracy in Korea that was held responsible for inflation, given its jurisdiction over industrial planning. While the MOF could potentially be held responsible for inflation caused by fluctuations in the money supply, as inflation has many potential causes (such as structural or sectoral imbalances), the EPB was more open to public criticism over inflation than the MOF (Choi 1987b, 10). 16. For a full examination of the final measures agreed on, and how they compared with the EPB’s original proposals, see Rhee 1994, 105–9. 17. Park cited in Rhee 1994, 101. Statement made on April 27, 1979. 18. Rhee 1994, 116. The government had already secretly supplied about 83 billion to nine private HCI firms as a rescue package at the end of July, despite the CMES. 19. Park’s assassination followed months of demonstrations by students and workers, but it is widely believed that his assassin, KCIA chief Kim Jae Kyu, was motivated by personal-political reasons, not as part of an attempted coup. Reportedly, Kim feared that Park was about the relieve him of his position, given the KCIA’s failure to quell the ongoing social and political turmoil. On October 19, 1979, Kim invited Park to dinner at the KCIA safehouse in the presidential compound. There Kim shot Park dead, along with five others members of Park’s entourage. Kim was later arrested and executed for his actions. 20. Unofficial sources put the figure much higher than this. Hundreds were also arrested and tortured for their part in the protest. 21. For a lively journalistic account of the influence of liberal economists over Chun in the early 1980s, based largely on the author’s own interviews with a number of Chun’s advisors, see Clifford 1994, 177–85. 22. For a good analysis of the other mechanisms employed by the EPB to garner support for its liberalization polices and to establish its policymaking dominance in the early 1980s, including the promotion of personnel swaps between the EPB and MOF (significantly Kang Kyung Sik becoming minister of finance in 1982), the manipulation of the long-term planning system, and the launching of a nationwide economic education program, see Choi 1987a, 112–19. 23. In 1981, Chun had also given his blessing to the Monopoly Regulation and Fair Trade Act and the plan to establish a “real name transaction” system, in an effort to bolster

NOTES TO PAGES 78–85      183

public support for his regime. However, like the measures designed to limit chaebol influence over financial institutions, these two plans were doomed to failure. The real-name transaction system failed to win legislative support in 1982 and was abandoned. For its part, the antimonopoly law was rarely enforced; of the 3,664 reported violations between 1981 and 1987, only 15 cases were brought to court, and even fewer fined (Kim B-K 2003, 19–21). Efforts to limit the chaebols’ ownership of financial institutions were similarly ineffective. By 1984, the four largest chaebols owned a combined average of around 19 percent in Korea’s five largest banks (Kim B-K 2003, 24). Moreover, restrictions on share ownership in banking institutions quickly gave rise to a secondary financial sector that the chaebols soon came to dominate. By 1987 (the end of Chun’s rule), the cumulative share of assets of the top thirty chaebols in securities companies, life insurance companies, and loss insurance companies totaled 55.1, 41.2, and 58.2 percent respectively. 24. See Haggard and Moon 1990, 118, on the detail of these reports. 25. To oversee and execute the Chun regime’s national computerization plan, the National Basic Information System (NBIS) Steering Committee was established in 1989, with a view to neutralizing intraministerial conflict. 26. Kim B-K (2003, 18) argues that the MOF had only agreed to the privatization plan in the first place as a means of “perfecting” Park’s developmental state model. Privatization would give the chaebols a stake in the bank’s stability, while capping their ownership to avoid domination. As such, he argues that it is not surprising that the MOF declared the project “complete” before the government lost too much control. 27. In 1981, real wages fell, despite productivity increases of 18 percent. Between 1981 and 1984, while labor productivity increased by an annual average of 12.1 percent, real wages rose by an annual average of only 3.1 percent (Woo 1991, 180). 28. Of course, corruption between the state and big business certainly existed under Park. However, as Kang points out, under Park “the balance of power between businessmen and politicians kept corruption from spinning out of control” (2002, 178) and from impacting too negatively on national development. With the transition to democracy however, that balance of power was substantially altered, allowing “money politics” to come to the fore. For an overview of the massive scale of “political contributions” under Chun and Roh, see Kang 2002, 194–98. In fact, Chun Doo-hwan was brought to trial under Kim Young-sam for corruption and sentenced to death for amassing an astounding $1.2 billion secret fund (the penalty later reduced to a jail sentence on appeal) (Pye 1997, 222). 29. The Plaza Accord was an agreement between the governments of the United States, Japan, West Germany, the United Kingdom, and France to depreciate the U.S. dollar against the Japanese yen and German DM through currency market interventions. They largely spelt an end to Japanese industrial supremacy. 30. In 1986, 1987, and 1988, the economy grew at a rate of 12.3, 12.8, and 12.2 percent respectively, while inflation averaged 2.7, 2.7, and 4.3 percent. 31. On the Roh regime’s support for technology-intensive industries in particular, see Hahm and Plein 1997. 32. This section draws on Thurbon 2003, 349–53. 33. For an analysis of the bureaucratic conflicts that emerged within MOFE following its creation and the implications of these conflicts for the mismanagement of financial liberalization and the 1997 financial crisis, see Thurbon 2003. 34. This and the following two paragraphs are based on author interviews with Park Se-Il, senior secretary to the president for policy planning under Kim Young-sam, and father of the segyehwa project. Seoul, February and August 2001. 35. This trend is evident in the collection of Kim’s speeches released by the Presidential Secretariat, Korea’s Quest for Reforms and Globalization: Selected Speeches of Kim Young-sam (1997).

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36. This was not necessarily because they disagreed with the need for financial reform in the long term but more because they feared being held personally responsible for the reform proposals being generated by the politically unaccountable Segyehwa working group (Park Sae Il, author interview, Seoul, August 2001). 37. This strategy was again employed in the immediate postcrisis period, when Korean officials used the cover of IMF pressure to push through unpopular corporate reforms, as documented by Mathews 1998. 38. Kim was not the first Korean president to aspire to OECD accession. Roh Tae-woo had been a keen advocate of membership but was hamstrung by economic circumstance; it was impossible to carry out liberalization measures required for accession due to the balance of payments deficit that emerged under Roh. 39. Author interview with Kim Tae Dong, Seoul, February 2001. 40. Ibid. 41. See, for example, Chang et at. 1998 and Thurbon 2001. The remainder of this section draws on Thurbon 2001. 42. For example, in response to the financial crisis arising from the second oil shock of 1981, the Chun government implemented several major restructuring programs in a range of industries from automobiles and heavy construction machinery to textiles (Chang 1993, 142–44), providing troubled firms with “favorable financial packages” and bailout loans from government-controlled banks (Oh 2001, 125–26). Roh Tae-woo also made financial interventions when the petrochemical industry ran into serious trouble in 1991 (Chang et al. 1998, 740). 43. Kong (2000) provides an illuminating analysis of the ways in which liberalization measures of the 1990s intensified the economic dominance of the chaebols and exacerbated the already existing weaknesses of the Korean economy (especially an imbalanced industrial structure and high debt-to-equity ratios), exposing the country to crisis. 6. RETURN OF THE STATE

  1. My aim here is not to give a blow-by-blow account of the crisis. There are several good guides, see for example the edited collections by Pempel 1999, Agénor et al. 1999, and Beeson et al. 2000.   2. For example, in a 2009 study of Korea’s postcrisis banking reforms, Korean scholar Jongryn Mo concludes by asking “whether the Korean government will be able to achieve its industrial policy objectives with a foreign controlled banking sector” (270).   3. Fitch 2013, 1. International credit ratings agency Fitch recently noted that “Korea stands out among developed markets in terms of policy banks and non-bank policy FIs performing such significant roles in the financial system” (ibid. 1). For comparisons, see note 2 of chap. 1 of this book.   4. Over the 2001–14 period, I interviewed more than ninety people directly involved in financial and industrial policy making and implementation in Korea. This included many senior and middle-ranking bureaucrats (including ministers, vice ministers, and presidential economic secretaries) from the Kim Young-sam, Kim Dae-jung, Roh Moo-hyun, Lee Myung-bak and Park Geun-hye administrations, as well as employees of government-funded research institutes involved in policy-related issues, and employees of industry associations that work closely with the government devising and implementing developmental initiatives. A number of interviewees were consulted on numerous occasions over the thirteen-year period. Interviewees were located at the following institutions: Ministry of Finance and Economy (MOFE) (and later the Ministry of Strategy and Finance (MOSF)); Bank of Korea (BOK); Ministry of Information and Communication (MIC); Ministry of Knowledge Economy (MKE); Financial Services Commission (FSC); Presidential Committee on Green Growth (PCGG); Prime Ministerial Committee

NOTES TO PAGES 92–93      185

on Green Growth; Korea Finance Corporation (KOFC); Korea Export-Import Bank (KEXIM); Korea Venture Investment Corporation (KVIC); Small and Medium Business Administration (SMBA); Korea Institute of Finance (KIF); Korea Capital Market Institute (KCMI); Electronics and Telecommunications Research Institute (ETRI); Korea Institute of Science and Technology (KIST); Korea Advanced Institute of Science and Technology (KAIST); Korea Development Institute (KDI); and Korea Robotics Industry Association (KRIA). References are made to specific interviews throughout the following chapters.   5. On this reading, the IMF imposed its reform package on a desperate Korean government, with terms largely dictated by the United States and the financial interests it represents. The result was the forced dismantling of Korea’s state-guided development model and the establishment of a liberal market economy, primarily to the benefit of foreign firms (cf. Wade and Veneroso 1998).   6. While the IMF’s agreement with Korea certainly satisfied its major shareholders and delivered windfall gains to foreign companies, a number of studies have revealed the extent to which reformist elements within the Korean government successfully sought to shape the package and used it to advance their own domestic reform agenda, including Mathews 1998, Kim B. K. 2003, Hundt 2009, and Kalinowski and Cho 2010. Mathews (1998, 753) provides a list of the reforms demanded by the Koreans themselves, which related mainly to corporate governance and structure, labor market flexibility, easing of bankruptcy (to facilitate restructuring), and financial supervision. Looking further afield, Walter (2008) argues that not just Korea, but also Malaysia, Thailand, and Indonesia retained a (varying) degree of autonomy over the implementation of IMF-stipulated reforms after 1997; he argues in that many cases, the result has been a kind of “mock compliance” with international obligations.   7. Kim Dae-jung outlined his vision for the Korean economy in a number of treatises, including Kim 1996.   8. As B-K Kim (2003) explains, financial reform was needed to ensure that banks actually enforced the strict borrowing limits imposed on the chaebols and could resist potential pressure to do otherwise. Such pressure could potentially come from politicians with vested interests in the chaebols or from the chaebols themselves, which might attempt to bribe banks for special favors. Labor market reform was a prerequisite for chaebol downsizing and consolidation. Kim provides an excellent account of the political complexities involved in executing the troika of reforms pursued by the Kim Dae-jung administration.   9. As Mathews (1998, 749) notes, the IMF agreement thus provided Kim with a valuable political tool, allowing him to cite its conditions as a reason for pushing ahead with domestically unpopular reforms. In this regard, Kim’s actions echoed the previous administration’s manipulation of OECD membership. 10. This is not to suggest that every aspect of the IMF agreement aligned with the interests of the Korean government. Its strict austerity measures had been vigorously opposed by Korean negotiators and eventually inflicted serious and unnecessary pain on the country. Indeed, there is now little doubt that the IMF’s response to the 1997 turmoil served to exacerbate the crisis in Korea and elsewhere; the IMF itself has since acknowledged this fact (Independent Evaluation Office 2003). On the implications of its actions for the IMF’s legitimacy (and for an illuminating discussion of the IMF’s legitimacy challenges more broadly) see Seabrooke 2007. 11. Kalinowski and Cho 2010, 230–34. Figures presented later in the following paragraph are from the same source. 12. Author interview with BOK official who wishes to remain anonymous, conducted in Seoul, April 2012. As I explain in chapter 8, this “megabank” theory drove banking sector reforms under President Lee Myung-bak. 13. For example, in December 1999, the government sold a 51 percent stake in Korea First Bank to U.S. consortium Newbridge Capital for 500 billion—despite having spent more than

186       NOTES TO PAGES 93–97

8 trillion in public funds recapitalizing KFB. The government also agreed to a three-year guarantee to cover all liabilities resulting from KEB’s former loan portfolio, effectively committing the government to pumping further public funds into a bank that was majority foreign owned (Kalinowski and Cho 2010, 11). These authors provide an illuminating discussion of the lengths to which Kim felt he had to go to attract reluctant foreign investors. 14. The backlash was exacerbated by Kim having actively fostered a sense of personal investment on the part of Koreans in the future of the national banking system. At the height of the crisis, Kim had called on the Korean public to help stabilize the economy by donating their personal gold reserves—including jewelery—to the government or by selling them to local banks to help keep them afloat. He appealed strongly to nationalist sentiment to this end, with great success. Eventually, a staggering $2 billion was raised under the gold collection scheme, with many Koreans donating items of great personal significance, such as wedding rings. Kim’s decision to sell banks to foreigners at fire sale prices was thus deeply unpopular. 15. Infighting within MOFE between former EPB and MOF officials was occasionally noted in the Korean press under President Kim; see for example “ ‘Preacher of Reform’ to Spur on Restructuring,” Korea Times, May 25, 1999. 16. Other reforms aimed at reducing MOFE’s influence over economic policy included the reallocation of budgeting powers to the newly created Ministry of Planning and Budget, and the creation of an independent central bank (to reduce the scope for MOFE’s manipulation of monetary policy for developmental or other purposes). 17. This and the following paragraph based on author interviews with Kim Tae Dong in Seoul in 2012 and 2014. 18. See for example “Foreign Ownership Alerts Korea,” Korea Herald, December 22, 2003; “Seoul Keen to Promote Private Equity Funds-Investment Ombudsman Worried about Finance Ministry’s Anti-foreign Sentiments,” Korea Herald 6 February 2004. 19. Historically, such industries have included steel, automobiles, and semiconductors. Today they include renewable energy, intelligent robotics, and components for smart devices. 20. On such comparisons, see Cherry 2006. 21. For example, in 2003, the United States placed countervailing duties of 44.29 percent on all imports from Korean semiconductor firm Hynix, on the basis that loans to Hynix from the KDB amounted to illegal subsidies. Korea subsequently appealed to the WTO, which upheld the U.S.’s actions (USTR 2006, 402). 22. Between 2001 and 2002, new KDB investments in venture companies and SMEs increased from 79 billion to 121 billion, with the majority of investments going to high-tech firms in the early stages of developing IT products and services (KDB 2002, 15). 23. Details of the fund, which ran between 1999 and 2005, available at K&C Ventures. http://www.kcventure.com/eng/fund/mic_fund.asp. For a useful overview of the range of policies introduced by the Kim administration to support the development of the Korean VC industry, see Kenney, Han, and Tanaka 2004. 24. Author interview with SMBA official who wishes to remain anonymous, Seoul, April 2014. 25. Under the SLPVCC, employees of any public university or government organization were permitted to take three years leave from their positions to try their hand as entrepreneurs. If they did not succeed, they could return to their place of work without penalty. Moreover, if a business qualified as a venture-capital-backed business it became eligible for significant tax breaks and other financial incentives. 26. This is unlike the United States, where there is no definition of what constitutes a venture-backed company. For a good discussion of the Special Law and its targeted nature, see Ko and Shin 1999, 471–72.

NOTES TO PAGES 99–103      187

7. EMERGENCE OF STRATEGY MARK II

  1. The share of large corporations in bank lending fell from 27.4 percent in 1997 to between 4 and 5 percent over the 2000s (Cho 2010, 29).   2. Ibid.   3. For example, 2004 Bank of Korea data reveal that between late 1998 and 2003, the percentage of corporate lending by Korea’s three majority foreign-owned banks (Korea First, KoreAm, and KEB) dropped from an average of 83 percent to 50 percent. The average percentage fall was much smaller at banks with majority Korean ownership (where corporate loans fell by only 10 percent, compared with the 33 percent decline at foreign owned banks). See “Korea’s New Foreign-owned Banks Prove Stingy in Granting Bus. Loans,” Economist Intelligence Unit, February 29, 2004.   4. BOK cited in “South Korea Risk Alert: Calls for Curb on Foreign Ownership,” Economist Intelligence Unit, December 22, 2003. To justify its calls, the bank also noted that at 36 percent, the level of foreign ownership in the Korean banking sector far exceeded that of Japan, Malaysia, Thailand, and the Philippines (7, 19, 15 and 15 percent respectively). BOK calls to reign in foreign ownership received significant coverage in the foreign press. See, e.g., “Curbing Foreign Ownership of Korean Banks,” Business Times Singapore, December 23, 2003; “S Korea’s Central Bank Calls for Curb on Foreign Ownership,” Financial Times, December 22, 2003; “Bank of Korea Demands Curbs on Foreign Entry to Banking Industry,” Agence France Presse, December 22, 2003.   5. In the early 2000s, parts and materials firms accounted for more than 36 percent of Korea’s total manufacturing output and 46 percent of its exports.   6. “Watershed Vote for Korea’s Economy,” BBC News Online, December 18, 2002. The topic of Korea’s declining industrial competitiveness vis-à-vis China, particularly in the parts and materials industry, was also the focus of local newspaper debate, attracting editorial attention throughout the early to mid-2000s. See, for example, “Korea Should Keep Ahead of China in Parts and Materials Industry,” Dong-A Ilbo, May 9, 2005.   7. Roh Moo-hyun inauguration speech, http://news.bbc.co.uk/2/hi/asia-pacific/279 7053.stm.  8. See, for example, “World’s First Internet President Logs On” Guardian (UK), February 24, 2003.   9. The remainder of this paragraph based on author interview with Chin Daeje, Seoul, April 2014. 10. It is important to note that the “balanced growth” developmental strategy I identify and describe herein is not synonymous with President Roh’s “balanced national development strategy”; I define the “balanced growth” strategy in the section that follows. 11. Chin Daeje, “IT389 Strategy: Humanism in a Digital World,” Ministry of Information and Communication, 2004, 1. 12. The eight services were WiBro, Digital Media Broadcasting (DMB), home network, telematics, RFID-based service, W-CDMA, terrestrial digital TV, and Internet Telephony (VoIP). The three networks were the broadband convergence network (BcN), the ubiquitous sensor network (USN), and next-generation Internet protocol (Ipv6). 13. Chin Daeje cited in “IT Industry to Be Bolstered through IT839,” Korea IT Times, August 1, 2003. 14. See, for example, Lee 2009, Chu 2009, and Kim S-Y 2012a and 2012b. 15. Wong (2011) provides a detailed examination of the Roh government’s biotech industry development efforts. Keller and Pauly (2003) also emphasize the techno-nationalist underpinnings of the semiconductor industry development initiatives that folowed the 1997 crisis. 16. Of course, not all of these initiatives were executed by the MIC. Following the EPB dismantling in 1994, Korea entered into a relatively more decentralized period of

188       NOTES TO PAGES 104–107

techno-industrial governance, with responsibility for nurturing strategic industries divided between numerous (often competing) ministries. A coherent approach to strategic industry selection still persisted; upon the election of the new president, a select group of government, industry, and academic experts was appointed and charged with the task of deciding which industries and technologies will be nurtured. This process of strategic industry selection had existed since the Park era and continues to this day (albeit with some changes to the size and constitution of the industry selection group, discussed in chapter 9). However, responsibility for devising and implementing industry-specific plans was divided between a number of ministries, the most important under Roh being the MIC and the Ministry of Commerce, Industry and Energy (MOCIE). While the MIC was primarily responsible for the ICT sector, it often clashed with the MOCIE over lines of responsibility for particular industries. A number of interviewees involved in industry policy making during this period also mentioned to me that these interministerial clashes were amplified by personal-political conflicts; given Roh’s emphasis on ICT, the new president tended to privilege and place great faith in the MIC and its minister, and as a result, tensions between the MIC and MOCIE were often high. As we will see in later chapters, Roh’s successor President Lee merged the MIC and MOCIE into the Ministry of Knowledge Economy (MKE), ushering in an era of more centralized industry policy making, especially with the creation of the Presidential Commission on Green Growth as a new “pilot agency.” On the lead role taken by the MIC in ICT-related industry development in Korea, see Lee 2004, Jho 2007, Kushida and Oh 2007, and Kim S-Y 2012a and 2012b. 17. Author interview with Chin Daeje, Seoul, April 2014. 18. See Kim S-Y (2012a) for a pioneering analysis of Korean efforts to standardize DMB technology, and U.S. resistance. 19. Author interview with Oh Sang Rok, Seoul, April 2012. Unless otherwise stated, the following discussion of Korea’s robotics industry development initiative also based on this interview. 20. There are parallels here with the approach observed by Wong in the biotech sphere, where the government sought to nurture local biotech “stars” (in the form of standout technologies, projects, firms and/or people) primarily for the purposes of “creating stories and models for emulation, demonstration, and inspiration in the sector as a whole and over the longer term.” As Wong noted, this was different than the traditional strategy of manufacturing national champions in industries like semiconductors, where “the anticipated success of promoting particular technologies or firms was intended to commercially anchor the industry.” In contrast to this, “the success of a potential [biotech] star was its value for other positive externalities . . . the upside of this strategic rationale is that a star firm, lab or scientist can help revive and sustain a long-term appetite for what is an uncertain commercial endeavour” (2011, 139). 21. Another part of the strategy to create consumer awareness and uptake was the creation of Robot World, a robots-centered theme park where visitors (especially children) can interact with robots and learn what real-world robots are capable of. This is an important part of overcoming a serious barrier to the uptake of personal service robots in Korea; given the popularity of sci-fi entertainment, people tend to have unrealistic ideas about what real-life robots are capable of and thus are disappointed when personal service robots don’t meet their expectations. It is hoped that Robot World will not only help people become familiar with the idea of robots as a part of everyday life, but also give them a more realistic understanding of what robots can (and can’t) currently do. 22. MKE official cited in Korea Times, December 9, 2010. 23. “Danes Sought to Help with Robots,” Korea Herald, December 25, 2011. 24. As explained to the author by a KVIC FOF manager during an interview in Seoul in April, 2014.

NOTES TO PAGES 108–116      189

25. See, for example, Park 2013. 26. “Electronics Still Dependent on Overseas Component Manufacturers,” Financial News, February 26, 2007. 27. “Korea’s IT Crisis Report Shocking,” Financial News, March 13, 2007. 28. Data in this paragraph from Kim and Thurbon 2015. 29. It is noteworthy that this accords with argument made by Rodrik and Subramanian (2009) that financial liberalization often serves to aggravate investment constraints by leading to an appreciation of the exchange rate and reducing profitability in the traded goods sector, worsening industrial investment conditions, and undermining growth. For these reasons, these authors argue that financial globalization has disappointed developing countries, typically failing to deliver anticipated growth outcomes. 30. Gross fixed investment as a share of GDP in Korea actually fell from approximately 27 percent in 2003 to around 24 percent in 2008 (Shin 2012, 30). Shin provides a quantitative analysis of the relationship between “financialization” in Korea and declining corporate investment levels, arguing that there was a positive correlation between the two over the 2000s. 8. RETURN OF DEVELOPMENT BANKERS

  1. However, as I explain in chapter 9, the project proceeded in a more limited guise as the controversial Four Rivers Restoration Project.   2. Lee’s implication was that the Kim Dae-jung and Roh Moo-hyun regimes had unduly privileged the pursuit of (ideologically driven) liberal-democratic reforms at the expense of practical economic development initiatives. As chapter 7 reveals, I disagree with the idea that developmental initiatives were lacking under Roh in particular. Nevertheless, Lee’s statement serves to highlight his intention to focus his efforts squarely on revitalizing the Korean economy.   3. Lee left his role as chairman of Hyundai Construction in 1992 to enter politics. He was mayor of Seoul from 2002 to 2006.   4. “S. Korean Super-bank Idea Condemned,” Financial Times, April 9, 2008.   5. “Aiming to Become Asia’s Pioneer Financial Group,” Business Korea, April 29, 2012.   6. Kwak cited in “Lee Myung-bak to Privatise State-Run Bank,” Hankyoreh, January 8, 2008.   7. Korea’s SWF, the Korea Investment Corp (KIC), was established in 2005 as a reserve investment corporation, whereby its assets are counted as the reserve assets of the government and can be mobilized to cover payment imbalances or to make interventions in the foreign exchange market. Its initial allocation from the Bank of Korea was $20 billion (see IWG 2008, 2013). KIC investments are also intended to advance the strategic economic objectives of the government. In the words of former KIC chief investment officer Scott Kalb, who was hired by the Lee administration to improve the KIC’s operations (and who has subsequently remained a KIC advisor): “On one side, we are looking to invest in sectors where we see a structural deficit in the Korean economy, for example, natural resources . . . on the other side, we invest in sectors where we see some synergies for Korean firms—clean technology, industrials or advanced materials” (cited in Adamson 2012). On the increasing propensity of the KIC and National Pension Fund to help fund the overseas advance of Korean firms see “Korea Takes a Fresh Swing at M&A,” Wall Street Journal, August 1, 2011.   8. Sometimes transliterated as Bahk Jae-wan.   9. See, for example, “Finance Minister Calls for Curbing Excessive Capital Flows,” Korea Times, November 21, 2011. 10. Prior to his appointment by the Lee administration, Shin had advised the Bank of England and the Federal Reserve of New York.

190       NOTES TO PAGES 117–120

11. Indeed, the practice of the government parachuting Finance Ministry officials into senior leadership positions in the financial sector—from regulatory authorities to PFIs to government-invested commercial banks—is widely (and often negatively) remarked in Korea; since around 1998, the term Mofia has been used to describe this close-knit network of former MOF officials, who are assumed to look favorably on a strong role for the government in shaping financial sector activities. The earliest reference to the existence of a “Mofia” in the English language Korean press was 1998 (“Parachute Appointment Still Thriving,” Korea Times, December 30, 1998). However the phenomenon was commented on prolifically in the press under President Lee, during which time it was believed to have intensified. In 2013, it was reported that former MOF staffers were occupying 50 percent of CEO-level positions at twenty-six banking institutions (“Specter of Mofia,” Korea Times, June 19, 2013). See also the editorial “Return of the Mofia,” Korea Herald, June 20, 2013. 12. This would also help the government solve the problem of privatizing Woori, a political pledge proving difficult to fulfill in the absence of a willing local buyer and a reluctance to court foreign bids. 13. As a FSC spokesperson stated in April 2008: “We are no longer focused on just privatizing Korea Development Bank . . . but trying to find merits of having a large-sized [bank] along with a speedy privatization process. . . . The FSC is looking at a bigger picture rather than just privatizing state-owned financial institutions.” Cited in “Korea Regulator Looking At Merging State-Owned Banks,” Dow Jones International News, April 14, 2008. 14. “Megabank a Mistake,” Joonai, April 4, 2008. 15. “S Korean Super-Bank Idea Condemned,” Financial Times, April 9, 2008. 16. “Privatization of KDB Expected to Gain Speed Korea,” Joongang Daily, April 21, 2008. 17. Cited in “Finance Minister Slams Banks for Forex Dealings,” Korea Herald, April 17, 2008. 18. Ibid. 19. As one bank executive remarked to the press, “It is wrong to treat banks as if they are criminals. He simply ignored the market principle. . . . It represents an excessive market intervention. The market should be operated only by market principles.” Cited in ibid. 20. President Lee and Finance Minister Kang routinely called on banks to provide more liquidity for firms as the crisis intensified. See, for example, “Financial Sector Required to Inject ‘Enough’ Liquidity: Finance Minister,” OANA, January 5, 2009; “S. Korean Government Urges Banks to Ensure Liquidity” Xinhua News Agency, October 7, 2008. 21. Cho (2010) examines the influence of “shareholder value” ideology in the Korean banking sector over the 2000s, which had been nonexistent prior to 1997. The ideology was evidenced in the tendency of banks to pay out large dividends. Cho found that this tendency was greater among foreign owned than local banks in the Korean context over the 2000s. He also found that foreign-controlled banks showed lower loan growth than domestic banks and tended to shun lending to SMEs. 22. Cited in “Recession Accelerated Financial Safeguards,” Korea Joongang Daily, April 26, 2012. See also BOK 2009. 23. “MSF to Strengthen Korea’s Response to the Crisis,” Maeil Business Newspaper, February 3, 2010. 24. “Korea to Follow Europe in Capital Controls,” Korea Times, October 28, 2010. 25. “President Lee Stresses Reconsideration of Principle Role of Finance,” Maeil Business Newspaper, February 24, 2010. 26. See, for example, “Regulator Raps Banks Big Dividends,” Korea Times, October 21, 2011; “Timely Supply of Funds for Exporters Needed: FCS Chairman,” Maeil Business Newspaper, September 29, 2011.

NOTES TO PAGES 120–124      191

27. Shin, cited in “Intervention in Currency Market Is Warranted,” Korea Times, November 12, 2010. 28. “Korea to Follow Europe in Capital Controls.” 29. “Korea to Introduce Bank Tax,” Korea Times, December 16, 2010. 30. On this point see Gallagher 2015, 91–92. 31. Indeed, scholars such as Layna Mosley (2009) have argued that the GFC caused a rethink in many emerging economies about the desirability of free financial markets and of a “one size fits all” approach to financial regulation based on Western standards. Korea was thus but one many countries that sought to reregulate capital markets in the wake of the GFC. Gallagher (2014) examines this tendency in a number of emerging market economies, with a particular focus on the BRICS coalition. These developments have spawned a fascinating debate on the future of the international financial regime, including the possible end of efforts to establish universal standards and emergence of a more decentralized regulatory order. See Rodrik 2009, the excellent review essay by Helleiner and Pagliari 2011, and Mosley 2009. 32. For a succinct overview of these controls see Singh 2010. 33. The Seoul Action Plan that details the summit’s key outcomes affirms that “emerging market economies with adequate reserves and increasingly overvalued flexible exchange rates [may use] carefully designed macro-prudential measures” (i.e., capital controls) in times of excessive volatility in capital flows. See the Seoul Action Plan, https:// g20.org/wp-content/uploads/2014/12/Seoul_Summit_Document.pdf. 34. Under these measures, when banks borrow foreign currency from other banks they must pay a tax (unless the borrowing is offset by customer deposits). 35. Historically, foreign investments in government bonds were subject to a 14 percent withholding tax on capital gains. This tax was abolished in 2009, sparking a huge increase in foreign investment in government bonds—and government concerns that this inflow would destabilize the bond market. 36. This measure had been touted in June 2010, and some gradual reductions were implemented after that time, but the December announcement marked a 20 percent reduction. See “Seoul to Lower FX Derivatives Cap of Local Banks,” Korea Times, December 26, 2010. 37. IMF 2011. Further evidence of growing international support and respect for such measures was Shin’s 2013 appointment as head of research at the Bank of International Settlements for a five-year term. 38. See, for example, “Economists Call for Kang’s Resignation,” Korea Times, July 21, 2008. 39. For a detailed discussion on the variety of ways in which the Presidential Office and Finance Ministry continue to exert influence over the BOK, see Lim 2012. 40. See, for example, “South Korea to Reimpose Tax on Bonds,” Financial Times, November 18, 2010. 41. “Lee’s Aide to Take over KDB,” Korea Times, March 10, 2011. 42. “Czar!” Korea Times, January 10, 2011. 43. Cited in “New KDB CEO Has to Prove He Is More than ‘MB Man,’ ” Korea Times, March 14, 2011. 44. See, for example, “Megabank Duo’s Privatization Faux Pas,” Korea Times, May 27, 2011 45. “Seoul Bans KDB from Woori Bidding,” Financial Times, June 14, 2011. 46. “KDB Financial Group to Keep Dual Bank Structure for Long Term,” Ruliweb, June 2, 2011. 47. “KDB’s Privatisation,” Korea Times, February 1, 2011. See also “KDB as Industrial Doctor,” Korea Times, February 2, 2012, 48. Cited in “KDB Back-Pedaling on Privatisation Endeavour,” Korea Times, June 5, 2012.

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9. FULL FLOWERING OF FINANCIAL ACTIVISM

 1. This group was organized by Kim Sang-Hyup, then presidential secretary for National Future and Vision and a former journalist who had for years authored a column for a major Korean newspaper on Future Directions for Korea. It is also noteworthy that the group included Dominic Barton, the global managing director of the consultancy firm McKinseys, to whom Kim Sang-Hyup attributes the idea that climate change can be an opportunity and not just a burden for new growth. After deliberating on thorough research and expert input from the group, the Presidential Office adopted the slogan “Low Carbon, Green Growth” and related policy directions.   2. This paragraph based on an author interview with a key architect of the Green Growth initiative, Kim Sang-Hyup.   3. For the argument that the manufacturing of power sources is the real basis of energy security, see Mathews and Reinert 2014.   4. Indeed in 2008, the Samsung Economic Research Institute released a report discussing Japan’s plans to lead the world in environmental technologies. “Japan’s Rush to Claim Leadership in Environmental Technologies in Post Kyoto Era,” Korea IT News, August 26, 2008.   5. For example, in a survey by one of Korea’s leading newspapers conducted at the height of the 1997 crisis, 75.9 percent of respondents rated Park the most competent Korean president in history (only 3.7 percent voted for then President Kim). Later that year, a national survey on public consciousness and values saw Park named Korea’s “most respected historical figure,” ahead of the country’s two historically most revered leaders, the Great King Sejong and Admiral Yi Sun-sin (Moon 2009).   6. See, for example, Chang 2012, 85.   7. As I have argued elsewhere with Sung-Young Kim, developmental nostalgia was particularly notable in the years immediately preceding the election of President Lee Myung-bak in 2008; results of surveys conducted in 2006 indicate that nostalgia for the Park era was as strong as it had been in the immediate wake of the 1997 crisis (Kim and Thurbon 2015, 230, drawing on Kang 2010, 6).   8. Kim and Thurbon (2015) argue that Park Chung Hee nostalgia was an important factor enabling the execution of Korea’s Green Growth strategy.   9. For a detailed discussion of the origins, structure, and functions of the PCGG, and of Korea’s Green Growth strategy, see Kim and Thurbon 2015. On the GG policies of other Asian nations and their developmental motivations see Dent 2012. 10. Which was created under Lee by merging the Ministry of Information and Communication and the Ministry of Commerce and Industry, further consolidating and centralizing industry policymaking responsibilities. 11. The goals involved reducing the portion of fossil fuels of various energy sources from 82.5 percent of the nation’s usage to 60.7 percent, while increasing the portions of nuclear energy and renewable energy from 14.9 percent and 2.5 percent to 27.8 percent and 11 percent, respectively. As it was understood that fossil fuels would necessarily play a significant role in Korea’s energy mix in the short-to-medium term, Korea also sought during this time to expand its resource investments abroad, as did many other Asian countries with energy security concerns, including Japan, China and India. For an enlightening discussion of the securitization of energy issues in East Asia since the turn of the century and the implications for regional stability see Phillips 2013. On the relationship between economics and security more broadly in the region, see the 2013 special issue of The Pacific Review, edited by John Ravenhill. 12. Foreign aid and technical cooperation with less-developed countries would also help drive exports of Korean-made green technologies, products, and processes. 13. For example, under its 2009 new growth engine plan, the MKE announced its intention to “have Korean equipment widely used for new growth engine sectors by 2013.

NOTES TO PAGES 129–132      193

In ten years, the productivity of new growth engine equipment will surge four-fold and imports of equipment will be halved.” MKE official cited in Korea Herald, “Equipment Industry is Crucial to Growth,” August 27, 2009. 14. For an examination of the variety of ways in which the Korean government has used public purchasing and other policies to promote localization, see Thurbon 2015 and forthcoming. In these articles, I compare Korea’s activism to that of Australia, with a view to highlighting just how strategic the Korean approach has remained over the past decade, compared with other developed economies. 15. For example, in 2008, the Ministry of Knowledge Economy (now MOCIE) established a consortium with Samsung Electronics, LG Electronics, local research institutes, and a host of smaller firms with the explicit aim of localizing the technologies required to produce lithographic devices—one of the five key devices used to manufacture liquid crystal display and organic light emitting diode display screens. At that time, Korea relied on imports of such devices, mainly from Japan, which cost local producers around $570 million each year. In 2013, that consortium succeeded in its goal, creating a Korean-made device that is reportedly superior to the Japanese device and which also eliminates the need for an additional piece of equipment (a photo mask)—saving Korean producers another $475 million. Consortium members are currently in the process of commercializing the technology so that the devices can be applied in local production. Commercialization of Korean-made lithographic devices will lift the localization rate of display equipment from 60 percent to 90 percent while shortening manufacturing times, giving Korean producers a significant edge internationally. “Korean Research Team Develops Core Technology for Digital Exposure Equipment,” Business Korea, December 18, 2013. 16. “Govt to Pick 10 Strategic Products,” Korea Times, April 14, 2011. 17. PFIs raise the funds they extend to Korean firms via various means: accepting deposits, borrowing from the government or abroad, or issuing bonds or other instruments. Some also receive limited government funding. The fact that PFIs’ debts are effectively guaranteed by the state enhances their attractiveness to depositors and investors. As one international credit ratings agency noted in 2013: “Policy banks’ internal capital generation is limited due to narrow margins, given that they are not commercially driven. However the pressure on capitalization is mitigated by the extremely high probability of government support . . . the government [is likely to] provide capital injections to the policy banks and other policy FIs with de facto solvency guarantees in a timely manner. Policy banks are not necessarily profit maximizing entities, given that they focus on providing relatively cheap credit to corporates—not all of which are weak . . . nevertheless they are intended to be largely self-sustaining, without significant direct funding from the government for their operations” (Fitch 2013, 4). 18. Of the 10.2 trillion in new facility loans made by the KDB in 2008, 6.7 trillion (over US$6 billion)—or more than 60 percent—went to Korean firms investing in new strategic initiatives or to topping up existing strategic initiatives (KDB 2008, 38). 19. The ten green industries classified by the (former) Ministry of Knowledge economy are renewable energy, carbon reduction, advanced water resources, green IT, green cars, advanced green housing and cities, new materials, clean production, eco-friendly agriculture, and environmental protection and preservation (KDB 2011, 79). In 2012, 37 percent of the KDB’s green budget allocation went to companies investing in new and renewable energy development (KDB 2012, 64). 20. See, for example, “KDB spearheads Post-crisis Green Growth drive,” Korea Times, September 17, 2009. 21. The KOFC provides special financing to firms operating in these industries in three main ways: by directly issuing long-term, low-interest loans; by through lending via commercial banks on special terms; and by investing in venture capital funds that are specifically targeted at strategic industries (KOFC 2013). This includes investing in the

194       NOTES TO PAGES 133–138

Korea Fund of Funds, run by the state-owned Korean Venture Investment Corporation (KVIC), discussed in chapter 6. 22. The information in the remainder of this paragraph drawn from Mathews 2013. 23. Also under the terms of the bond, a project’s environmental credentials must be independently certified by the Center for International Climate and Environmental Research (CICERO) in Oslo before KEXIM will approve investment. 24. Unless otherwise stated, information in this section is based on April 2014 author interviews with KEXIM officials in Seoul who wish to remain anonymous. 25. To qualify for the title of “Korean Hidden Champion,” KEXIM requires that a firm’s annual exports exceed US$300 million and its product rank between number one and five in the world. Alternatively, its annual sales must exceed US$1 billion and exports compromise more than 50 percent of sales. 26. KEXIM’s Hidden Champion’s team in 2014 consisted of one economist and six administrative officers, recruited to KEXIM via Korea’s hypercompetitive Civil Service exam. The team is responsible for identifying potential hidden champions, overseeing the candidate selection process, negotiating and monitoring performance requirements of successful candidates, and managing the improvement of underperforming candidates, or their ejection from the program. 27. To qualify for entry to the program, firms have to pass a three-stage selection process, which includes a detailed evaluation of a firm’s technology, its growth potential, and the capability and commitment of the CEO. 28. Based on April 2014 interviews with KEXIM officials. 29. Jung Yoo-Shin cited in KVIC 2011, 1–2. Emphasis added. 30. Albeit under a different title, “Creative Economy,” to accommodate changing political circumstances. 31. For extended discussions of Korea’s GG strategy see Mathews 2012 and Kim and Thurbon 2015. 32. Moreover, Lee’s relaxation on the investment activities of the chaebols in the earliest days of the GFC (as a means of boosting investment activity) also elicited strong domestic opposition, further undermining his popularity. In particular, his decision to lift restrictions preventing the chaebols from operating in industries traditionally reserved for smaller, family-owned firms—such as corner stores and coffee shops—were widely condemned and cited as evidence of a prochaebol agenda. Lee’s subsequent efforts to undo the political damage by again ordering chaebol out of certain business lines were not sufficient to restore his popular appeal. 33. Interestingly some of Lee’s advisors had been unsure about the inclusion of the Four Rivers project in the Green Growth initiative from the outset for this very reason—its potential to elicit controversy and to discredit the other more strategically significant aspects of the plan (i.e., the creation of more sustainable energy sources and the development of new export industries). However, Lee’s desire to undertake a “nation-building” project involving Korea’s rivers long predated his election as president and the Green Growth plan. As noted in chapter 8, before coming to power Lee had mooted the idea of creating a major national canal system—a “nation-building” project that echoed the ambitious national highway projects of Park Chung Hee. Lee was thus determined to include the Four Rivers project as part of the Green Growth initiative. 34. Indeed, during fieldwork in the wake of Park’s election, in interviews with policy officials from various ministries who I had also interviewed under President Lee, I observed (and they confirmed) that they were in the process of “rebranding” Green Growth policy initiatives to render them compatible with the new president’s “creative economy” initiative. The reluctance of bureaucrats to replace existing policy plans (especially those related to green growth) with new ones upon the election of a new president was understandable,

NOTES TO PAGES 138–140      195

given the considerable strategizing and public and private sector investment that had gone into the projects in question under Lee—and the ongoing relevance of existing policies to the pressing competitive and energy security problems facing Korea. The bureaucratic practice of rebranding existing policy packages under new presidents (and under Park in particular) was also remarked in the Korean media. As one journalist noted in 2013, “Already, different ministries have been criticized for repeating policy plans by adding ‘creative’ in the title of their reports, regardless of the context of the measures.” “Creative Economy Guru Urges Caution,” Korea Herald, May 16, 2013. 35. Park’s election as president marked her return to the Blue House for the first time in more than thirty years. In her early twenties, she had assumed the role of Korea’s de facto first lady following her mother’s 1974 assassination with a bullet intended for her father. She spent five years in this role, until her father’s assassination in 1979. After that time, Park retreated from public life. However the 1997 crisis inspired her return to politics, this time in her own right. She was elected to the National Assembly as a member of the Conservative Grand National Party (GNP), which in 2011 was renamed the Saenuri (“New Frontier”) Party. She had hoped to run for president in 2008, but was narrowly defeated by Lee Myung-bak in her bid to become the GNP’s presidential nominee. 36. In her inaugural presidential speech, Park defined a “creative economy” somewhat vaguely as “the convergence of science and technology with industry, the fusion of culture with industry and the blossoming of creativity made possible by the breaking down of barriers between industries. . . . At the very heart of a creative economy lie science, technology and the IT industry, areas that I have earmarked as key priorities.” 37. MOTIE assumed responsibility for nurturing those industries in which ICT played an enabling rather than lead role. The MSIP was responsible for ICT-led industry initiatives. 38. Under Park, the size of the advisory committee responsible for strategic industry selection was significantly expanded, and the role of private industry representatives in that committee greatly enhanced. This reflected Park’s view that, given the rapid pace of technological change, businesspeople are better placed than bureaucrats to predict future market trends. Prior to 2014, the government took the lead role in indentifying new growth engine industries, in consultation with a select group of around forty advisors drawn from the private sector, universities, and research institutes. In 2014, a government-designated committee comprised of around two hundred people—mainly businesspeople and researchers—took the lead in identifying and proposing new growth engine industries. The government then confirmed the list, and assumed responsibility for devising and implementing detailed industry development plans. 39. In the words of the Financial Services Commission, the “plan [is] to reshape policy banks in order to streamline their overlapping functions and reinforce their policy financing roles for start-ups and SMEs, new growth industries and overseas projects” (FSC 2013). In justifying the decision to abandon KDB privatization plans, Park also cited the bank’s importance from a geopolitical perspective. It is expected that the KDB will play the lead role in financing South Korea’s eventual reunification with the North—a goal being actively pursued by President Park. 40. Indeed, Hermann Simon has now achieved a kind of semicelebrity status in the Korean business and policymaking community, having been invited to Korea a number of times for public and privately financed events to talk about the importance of hidden champions and suggest pathways for Korean firms and policymakers. 41. For example, the KOFC’s Frontier Champion program offered low-interest, longterm loans to Korean firms certified as having a good track record, a viable technology, and a marketable product. Frontier Champions are able to borrow 100 percent more funds

196       NOTES TO PAGES 141–156

than otherwise possible for firms their size. Funds must be used to purchase plant equipment or to further develop firms’ product offering. In 2012, in line with the government’s emphasis on Green Growth industries and the LED industry in particular, 20 percent of the KOFC’s Frontier Champion firms were LED focused. Author interview with KOFC who wishes to remain anonymous, Seoul, March 2012. 42. Hidden Champion–style programs tend not to be mutually exclusive, meaning that a single firm can harness support from numerous programs. Indeed, membership of one development program can help expedite access to another. For example, if a firm has qualified as a candidate for the Small and Medium Business Administration’s World Class 300 Program, it can automatically bypass stages one and two of the application process for KEXIM’s Hidden Champion program, advancing directly to stage three. In 2013, sixty-four Hidden Champion candidates were also WC300 candidates. The Small and Medium Business Administration’s World Class 300 Program is aimed at nurturing three hundred world-leading technology-based Korean SMEs by 2017. WC300 candidates are selected in a process similar to KEXIM’s Hidden Champions. The SMBA, however, is a government department rather than a PFI, so it does not lend money to its WC300 candidates. Rather, it awards them grants, largely to assist with R&D costs. For example, The SMBA might fund the salary of a full-time researcher to join WC300 candidate firms for one or two years to help expedite R&D goals. 43. Indeed, Korea’s technological prowess in this area was again demonstrated in 2015 when a team of Korean roboticists from KAIST (the same institution that produced Mero, the robot celebrated by Time magazine) won first place (and $2 million dollars) from the U.S. Pentagon’s research agency DARPA. The prize was for developing the best humanoid robot capable of operating in hazardous environments. See “Korean Robot Makers Walk Off with $2 Million Prize,” NY Times, June 6, 2015. 44. In 2008, the average technology level of the twenty-seven core green technologies selected for promotion by the government was 50.9 percent of advanced countries. By 2012, the average level of technology in these twenty-seven areas had increased to 79 percent of advanced country levels. 45. See “New and Renewable Energy” Invest Korea, 2013, http://www.investkorea.org/ ikwork/iko/eng/cont/contents.jsp?code=1020205#_2_1_2. 46. Attempts at localization were accompanied by other efforts to increase scale of local LED manufacturing. These efforts included expanding demand by mandating the installation of LED lighting in various public and private areas, including apartment buildings. See “LEDs and Smart Grids: Keys to Korea’s Green Technology,” Korea.net, March 8, 2012, http://www.korea.net/NewsFocus/Sci-Tech/view?articleId=99211. 10. WHAT FUTURE FOR FINANCIAL ACTIVISM IN KOREA AND BEYOND?

  1. See also Weiss and Hobson 1995, ch. 6.   2. Hundt uses the term structural power in its original Lindblomian sense, as the power that accrues to business on the basis of its position in the economy. To the extent that national economic performance had become synonymous with the performance of a handful of massive conglomerates in Korea by the late 1980s, the ability of those firms to resist or reject state directives was substantial indeed.   3. The five variables identified by Hundt are the bureaucracy, social pressures, national security, economic conditions, and globalization.   4. See Thurbon 2001, 2003, and 2007.   5. Michael Loriaux reached a similar conclusion about the relationship between the success of strategic activism and the persistence of a developmental mindset: “Both the

NOTES TO PAGES 156–163      197

myth and the moral ambition of the developmental state in France have survived the onslaught of globalization and liberalization in part because success in a number of ventures has sustained the authority and legitimacy of the myth and the ambition. Structural change has weakened the state’s interventionist powers. But a structure that changes once can change again. And structural change that was once inimical to the developmental state can be succeeded by structural change that is supportive of the developmental state” (1999, 274).   6. See for, example, Kim Y. T. 2005.   7. For a good overview of a history of these arguments and their logic, see Saeger 1997.   8. As noted in chapter 1, in her excellent study of this phenomenon, Krippner defines financialization as “the tendency for profitmaking in the economy to occur through increasingly financial channels rather than through productive activities” (2011, 4).   9. The pioneering work of William Lazonick is particularly revealing of the impact of financialization broadly and the ideology of maximizing shareholder value, especially on America’s productive base. See, for example, Lazonick 2009, 2010, and 2012. 10. Although Deeg (2011) questions the extent to which the VOC framework can adequately account for German patterns of financialization, arguing that an actor-structure centered framework—which more fully considers the role of the state—is more illuminating. 11. Deeg (2011) suggests a similarly critical role for the state in moderating the progression of financialization in Germany. On the national unevenness of patterns of financialization, see also Engelen et al. 2008. 12. It should also be recognized that a strong manufacturing base and a strong services base are not mutually exclusive goals. Indeed, the manufacturing sector is heavily reliant on particular kinds of services, from design and legal services to transport and logistics. A focus on the upscaling of certain services is thus not necessarily outside the ambit of a developmental mindset. 13. See, for example, Andrews 1994 and Cerny 1994. Helleiner and Lundblad (2008) provide a useful overview of the debate about financial globalization and its impacts. 14. See, for example, Frankel 1998, Yates 1998, and Lindsay and Lukas 1998. 15. See also Helleiner 1995. 16. States did so principally, Helleiner argues, by choosing to liberalize markets and to prevent major international financial crises, and choosing not to regulate volatile capital flows (1995, 316). 17. See, for example, Hall 2005, 125–29, in particular; Thurbon and Weiss 2006; and Thurbon 2007. Indeed Samuels traces Japan’s history of using liberalization to advance economic nationalist goals to the late 1800s (Samuels 2003, 185). 18. See, for example, Hochstetler 2014, and Hochstetler and Montero 2013. Recently, the Ford Foundation has funded an international project dedicated to the topic of Financial Institutions for Innovation and Development, with contributors examining, among other things, the role of development banks, http://fiid.org/. See, for example, Lo Dic et al. 2012. Most recently, Griffith-Jones and Cozzi (forthcoming) have made a compelling case for the expansion of development bank functions in Europe in response to protracted economic stagnation. They also note France’s recent creation of a new public development bank, a move that the UK is also now contemplating (forthcoming, 2). 19. As figure 10.4 reveals, Korea’s PFIs ranked sixth in the world in terms of the cumulative amount spent by national and regional/global development banks on green energy projects over the 2007–12 period (Bloomberg 2012).

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Index

Page numbers followed by f and t indicate figures and tables. Africa, 48, 169n6, 172n21, 177n1 Amsden, Alice, 62, 80, 179n17 Asian Development Bank, 121, 163 Australia, 137 Balanced growth. See Mark II (balanced growth) strategy Bank of Chosun (BOC), 48 – 52, 177n4 Bank of Japan, 51 – 52 Bank of Korea (BOK) Bank of Chosun and, 51 – 52, 177n4 foreign capital and, 100 Kang Man-Soo and exchange rates, 122 Kim Chung-yum and state-backed loan guarantees, 53, 56 Kim Dae-jung’s reforms and, 93 – 94 Kim Young-Sam’s liberalization and, 85, 86 Korea Investment Corp and, 189n7 subordinated to Ministry of Finance, 58 – 60 Bank of Korea Act, 51, 58 – 59 Beeson, Mark, 169n6 Biotechnology industry, 21 – 23, 100, 103, 139, 141, 156, 188n20 Blueprint for Financial Reform, 83 Brazil, 161, 162f, 163, 169n2 Brazinsky, Gregg, 30, 174n16 Capital flow regulation, under Lee Myung-bak, 111, 113, 116, 118 – 21, 122. See also Exchange rates Carter, Jimmy, 72, 76 Central Bank of China (CBC), 59 – 60 Chaebols, 13, 22, 30, 181n30 CEOs as policy elite, 45 changing twenty-first-century relationships with state, 150 – 53 conflicted attitude toward liberalization, 74, 78 – 81,  82 debt burdens of and growth first strategy, 68, 69 – 70 Kim Dae-jung’s reforms and, 92 – 95, 98, 185n8

policy lending to and expansion of, 70 – 71,  87 reluctance regarding robotics, 104 – 5 “three lows” reform and, 81 Chang Ki-Yong, 50, 54 – 55 Chang Myon, 31, 174n17 Chibber, Vivek, 174n20, 181n30 China competition from in early twenty-first century, 99, 100 – 101, 110 national development banks and, 161f, 162f, 163 World Trade Organization and, 100 – 101, 109, 147 Chin Daije, 102 – 4 Choi, Byung-Sun, 81 Choi Kyu-hah, 76 Chun Doo-hwan, 67, 75 – 81, 82, 83, 87, 95 – 96, 182n3, 183n28 Clean Energy Finance Corporation (CEFC), in Australia, 137 Climate change, economic policies and, 111, 125, 127, 155, 162, 165, 192n1 Cole, C. David, 43 – 44 Communism, 30, 31, 39 – 40, 60 – 61, 174n17 Comprehensive Measures for Economic Stabilization (CMES), 73 – 74 Consumer credit bubble, in early twenty-first century, 99 – 100,  109 Coordinated market economies (CMEs), 157 Country, the Revolution and I, The (Park), 172n13 Creative economy vision, of Park Geun-hye, 108, 138 – 39, 194n34, 195n36 Crouch, Colin, 171n3 Cumings, Bruce, 42 Daewoo, 70 Declinist perspective developmental mindset and, 17, 21 developmental state evolution and, 21 – 24 flawed methodology and model, 3 – 4, 13 – 15, 171n3

213

214       INDEX

Deindustrialization avoided in Korea, 2, 157 – 60, 158f, 159f in United States and United Kingdom, 157, 158, 158f Democracy Choi Kyu-hah and, 76 financial activism associated with antidemocratic values, 81 – 82 Kim Young-Sam and, 82, 92 money politics and, 183n28 Park Chung Hee and, 43 – 44, 69, 177nn50 – 51, 181n5 Roh Tae-woo and, 80 Democratic Republican Party (DRP), 68 Developmentalism architecture of Korean, 27, 44 – 46, 45f evolution of policies, 5 – 7, 14 – 15 factors galvanizing, 30, 145t, 147 institutional capacity and, 18 nondevelopmental state distinguished from developmental states, 19, 20f, 21 as political project, 16, 17 – 18 strategy distinguished from philosophy, 156 See also Declinist perspective; Financial activism; specific programs Developmental mindset applicability of framework, 155 – 56 declinist perspective and, 17, 21 defined, 2 development in Korea, 26, 27 – 33 evolution of, 24 – 25, 153 – 54 financial activism and, 48 – 57 key features, 108t Kim Dae-jung and, 98 political elite’s consensus and, 17, 26 – 27, 33 – 37 primacy of ideas and, 4 use of term, 172n16 Developmental states, generally characteristics of, 15 – 17 distinguished from other state types, 17 – 19, 20f, 21 lack of conceptual clarity about, 4, 169n6 Development Bank of Singapore, 124 Development banks. See Policy finance institutions (PFIs) East Asian financial system model, elements of, 47 – 48 Economic nationalism, 5, 39, 162, 169n7 conceptualization of, 171n10 developmentalism as, 16 – 17 Park Chung Hee’s Mark I strategy and, 44

Economic Planning Board (EPB) establishment of, 44 – 45, 175n28 financial activism and, 57 – 58 liberalization and stabilization in late 1970s and early 1980s and, 72 – 79, 182n15 merged with Ministry of Finance, 82 – 83, 175n28 Park’s neutralization of, 70 Park’s policymaking elite and, 35 – 37, 175n30 state-backed loan guarantees and, 53, 55 U.S. trained economists and, 58, 66, 72, 82 Energy insecurity, economic policies and, 2 – 3, 24, 90, 109 – 10, 125 – 29, 139, 142, 147, 163 European Investment Bank, 161f, 162f, 163 Evans, Peter, 150 – 51, 177n1 Exchange rates abandonment of manipulation and 1997 crisis, 86 Global Financial Crisis and, 110, 122, 149 manipulation of in 1960s, 61 – 63 See also Capital flow regulation Export competitiveness China and, 101, 149 exchange rates and, 62 financial activism and, 2, 4, 16, 24 – 25, 54 – 55, 62, 63t, 71, 143 – 44, 153, 172n16, 179nn19 – 20 financial activism’s costs and, 67 – 68 Green Growth initiative and, 127 Hidden Champions initiative and, 140 Mark I strategy and, 38, 39 – 41 Federal Reserve Board, of U.S, 58, 60, 179n14 Federation of Korean Industries (FKI), 78 Financial activism, 47 – 88 after Park Chung Hee’s death, 75 – 81 developmental view of finance and, 48 – 57 factors sustaining, shaping, and enabling of, 145 – 46t, 146 – 50 fracturing of consensus and abandonment of, 66 – 67, 72 – 75, 81 – 88,  144 globalization and future of, 160 – 63, 161f, 162f institutional enablers of, 57 – 60 revival of after 1997 financial crisis, 1, 2, 92 – 99 structural enablers of, 60 – 65, 63t, 64f See also Kim Dae-jung; Lee Myung-bak; Mark I (growth first) strategy; Mark II (balanced growth) strategy; Park Geun-hye

INDEX      215

Financial crises 1969, 67 – 68 1973 – 74,  71 1978, 72 1979, 73 See also Financial crisis of 1997 – 98; Global financial crisis (GFC), in 2008 Financial crisis of 1997 – 98 financial liberalization after, 11, 12 – 13, 17 globalization and, 160 – 61 revival of financial activism after, 1, 2, 88, 92 – 99 two outcomes in Korea, generally, 89 – 90 Financialization, 24, 110 defined, 169n5, 197n8 deindustrialization and, 150, 157 – 60 liberal market reforms and, 90 – 91, 99, 100, 147 since Global Financial Crisis, 2 – 3, 9, 10 Financial liberalization abandonment of financial activism for, 66, 67, 81 – 88 calls for, after Park’s death, 75 – 81 Economic Planning Board in late 1970s and early 1980s and, 72 – 79, 182n15 and path to 1997 crisis, 87 – 88 role in expansion of financial activism, 149 Financial Services Commission (FSC) megabank proposal and, 116 – 18, 122, 123 – 24, 190n13 tensions over establishment of, 93 – 94 Financial Supervisory Commission, 119 Financial Times, 123 Five Year Plan for Green Growth (2009 – 13),  128 Foreign banks consumer borrowing and, 100 Global financial crisis and currency trading, 118 – 20 Kim Dae-jung’s reforms and, 92 – 93 Foreign borrowing debt to equity ratio of industries and, 67 – 68, 71 – 72, 86 – 87, 87t,  99 financial activism and state-backed loan guarantees for strategic industries, 53 – 57, 58, 61 – 62,  71 interest rates and, 61 – 62, 67, 181n29 preferred over foreign direct investment, 53, 62 Foreign Exchange Promotion Act, 83 Foreign investments in banking sector, under Kim Dae-jung, 92 – 93, 185n13

Four Rivers Restoration Project, 137 – 38, 189n1, 194n33 Frontier Champion program, 195n41 G20 Seoul Summit, 120 – 21 Gallagher, Kevin, 116, 191n31 Germany competition from, in early twenty-first century, 100 – 101 deindustrialization and, 157, 158f hidden champions in, 134 – 35, 140 Park Chung Hee and, 39, 171n11, 172n13, 176n39 policy financial institutions in, 1, 161f, 162f, 163, 169n2 Gerschenkron, Alexander, 47 Global financial crisis (GFC), in 2008, 1 – 3, 149 – 50 Lee Myung-bak and, 111 – 13, 116, 118 – 21, 191n31 policy financing and Green Growth initiative, 131 – 32 Globalization, future of financial activism and, 84 – 86, 160 – 63, 161f,  162f Gold collection scheme, of Kim Dae-jung, 186n14 “Governed interdependence,” 151, 176 – 77n49 “Gravedigger” thesis, of developmental state, 150 – 51, 176n49 Green Bond, 133 Green energy, government support of, 132, 161f, 162 – 63,  162f Green Growth initiative, 137, 142, 156 chaebols and, 151 – 52 goals and benefits of, 126 – 28, 192n11 Lee Myung-bak and, 108, 112, 118, 123, 124, 126 – 29, 148 – 49 nostalgia for Park Chung Hee and, 127 – 28, 192n5, 192nn7 – 8 origins of, 125 – 28, 192n1 Park Geun-hye and, 194n34 policy financing and, 125, 129, 130 – 34, 130f, 131f, 132f, 133f, 134f, 193n17 public criticism of, 137 – 38, 194n32 Growth first strategy. See Mark I (growth first) strategy Haengsi (civil service) system, 34 Hamilton, Alexander, 16 Heavy and chemical industries (HCIs), 55 – 57, 59, 69 – 72, 73 – 74 Heavy and Chemical Industry Promotion Committee (HCIPC), 36, 70, 74

216       INDEX

Helleiner, Eric, 60, 160, 165, 180n27 Hidden Champions initiative, 111, 152, 196n42 balanced growth strategy and, 134 – 38, 136f, 194nn25 – 27 under Park Geun-hye, 140, 141 Hidden Champions: Lessons from the World’s Best Unknown Companies (Simon), 134 – 35 Hirobumi, Ito, 28 Hiroshima, bombing of, 49, 51 Hundt, David, 151 – 52, 196nn2 – 3 Hyundai, 70, 100 – 101, 112 Ideational element of developmentalism, 16, 17, 25 developmental state and other state types, 18 – 19,  20f Import substitution industrialization (ISI) strategy, 39, 61, 151, 172n16 Industrial Bank of Chosun (IBC), 48 – 50, 52, 178n8, 178n11 Industrial Bank of Korea (ICB), 117 Industrial governance declinist perspective and, 11, 21, 22 – 24 developmental mindset and, 25 developmental state and other state types, 18 – 19, 20f,  21 since 1997 – 98 financial crisis, generally, 1 – 3 Industrial Policy Deliberation Council, 77 Inflation Chun Doo-hwan and, 76 – 77 Global Financial Crisis and, 121 – 22 in Japan, 52, 61 Park Chung Hee’s growth first strategy and, 59, 71 – 75,  77 in Taiwan, 59, 155 Information technology (IT) industries, 78 – 79, 83, 96 – 99, 109, 138, 149, 156. See also IT-839 initiative Intellectual Property Office (IPO), 107 Interest rates in East Asian financial model, 47 financial activism and manipulation of, 50, 57, 61 – 62, 70, 71, 73, 78 – 80, 83, 181n28 financial activism’s costs and, 67 – 68 See also Foreign borrowing International Monetary Fund (IMF) Kim Dae-jung’s reforms and, 91 – 92, 185nn5 – 6, 185nn9 – 10 Korea’s financial activism and, 55, 58, 67 – 68, 77, 121, 182n12 1997 crisis and, generally, 89 IT-839 initiative, 102 – 4, 107 – 8, 128 – 29,  147

Japan declinists’ flawed methodology and, 12 deindustrialization and, 157, 158, 158f development banks and, 169n2 economic nationalism and, 16, 171n12 Johnson’s developmental state concept and, 11, 15 – 16 Korean protectorate of, 26 – 29, 33, 173n5, 174n20 Korea’s financial activism and, 49 – 52, 54 – 55,  58 Meiji Japan, 16, 28 – 29, 41 – 42, 49, 171n11 Parks’ lessons about industrialization from, 41 – 42,  154 robotics and, 104 technology investments in early twenty-first century, 100 – 101 Japanese Imperial Army, 7, 29, 49, 51, 173n7 Jayasuriya, Kanishka, 13 Johnson, Chalmers “collective conscious” of MITI bureaucrats and, 27 – 28 developmental state concept and, 5, 11, 17, 18, 156, 177n54 on United States, 171n9 “plan rational” intervention and, 15 – 16 Kang Bong-kyun, 93 Kang Kyung Sik, 72, 74, 76 – 77, 182n22 Kang Man-Soo appointed to Korean Development Bank, 123 background, 113 – 14 foreign private banks and, 118 – 19, 121 – 22 megabank and, 114 – 15, 117 – 18, 122 – 24 overseas expansion of large corporations and, 115 – 16 KDB Capital, 97, 186n22 Kennedy, John F., 39 Keynesianism, 3, 60, 138 Kim Byung-Kook, 34 – 35, 37, 170n10, 174n21, 175n30, 183n26, 185n8 Kim Chong-pil, 175n23 Kim Chung-yum government positions of, generally, 49 – 50, 55, 179n16, 179n19, 180n23 heavy and chemical industries and, 55 – 57 Japan’s influence on, 49 – 52, 54 – 55 state-backed policy loans and, 53 – 54, 56 Kim Dae-jung, 80, 86 economic reforms of, 88, 91 – 99, 144, 147 – 49,  156 Financial Services Commission and, 93 – 94,  116

INDEX      217

unintended consequences of reforms and, 99 – 100 Kim Hak Ryul, 55 – 56 Kim Jae-ik, 76, 79 Kim Jae Kyu, 182n19 Kim Ki-hwan, 77 Kim Mahn Je, 79 Kim Sang-Hyup, 192n1 Kim Seok-Dong, 119, 122, 123 Kim Sung-Young, 24, 167 Kim Tae Dong, 86, 94 Kim Yong-Hwi, 178n11 Kim Young-Sam, 80, 144, 183n28 abandonment of development strategy and, 67, 81 – 88,  154 International Monetary Fund and, 91 – 92 Knowledge and Creation Ventures (K&C Ventures), 97 Kohli, Atul, 28, 174n20 Korea Development Bank (KDB), 90, 149, 178n11 chaebol restructuring and, 95 – 96, 98 foreign banks and, 61 – 62 Green Growth initiative and, 132, 132f growth first strategy and, 50, 52 – 53, 56, 70 Kang Man-Soo and megabank, 114 – 15, 117 – 18, 123 – 24 Kang Man-Soo appointed to, 123 new growth industries and, 107 SMEs and, 96 – 97, 186n22 twenty-first-century loans and, 2 Korea Exchange Bank, 53, 55 Korea Export Import Bank (KEXIM), 59, 70, 90, 118, 149 Green Growth initiative and, 132 – 34, 134f Hidden Champions initiative and, 134 – 38, 136f, 194nn25 – 27 twenty-first-century loans and, 2 Korea Finance Corporation (KOFC), policy financing and Green Growth initiative, 118, 132, 133f, 149, 193n21, 195n41 Korea First Bank, 95, 185n13 Korea Fund of Funds (KFOF), 107, 193 – 94n21 Korea Information Infrastructure (KII) Project, 83 Korea Investment Corp (KIC), 115 – 16, 189n7 Korea Military Graduate School, 37 Korean Central Intelligence Agency (KCIA), 75, 175n23, 175n28, 179n16, 182n19 Korean Electronics Technology Institute, 109 Korean political history, generally division after World war II, 29 – 30 Japanese protectorate and, 26 – 29, 33, 173n5, 174n20

Korean War and, 30, 174n13 See also North Korea Korea Technology Finance Corporation (KTFC), 97 Korea Venture Investment Corporation (KVIC), 107, 193 – 94n21 Krippner, Greta R., 169n5, 197n8 Kwak Seung-jun, 115 Kwangju massacre, 76 Latin America, 48, 60 – 61, 162 – 63, 172n16, 180nn26 – 27 LED lighting, 142, 195 – 96n41, 196n46 Lee Byung-Chull, 42 Lee Myung-bak, 23, 110, 149, 154 background, 111, 112, 113 capital flow regulation and, 111, 118 – 21 and financial activism, generally, 111 – 13, 115, 144 Green Growth initiative and, 108, 125, 126 – 29, 129, 130 – 34, 130f, 131f, 132f, 133f, 134f, 148 – 49 Hidden Champions initiative and, 134 – 38 megabank opposed, 111, 122 – 24 megabank proposed, 111 – 12, 114 – 16,  122 megabank’s obstacles, 116 – 18 policy advisors of, 113 – 16 LG Electronics, 123, 193n15 Liberal market economies (LMEs), 157 List, Freidrich, 16 Lithographic devices, Green Growth and, 193n15 Loriaux, Michael, 17, 196n5 Low Carbon, Green Growth initiative. See Green Growth initiative “Macroprudential” capital controls, 120, 190n33 “Mammoth” private enterprise under state supervision, Mark I strategy and, 38, 41 – 43 Manchuria, 7, 28 – 29, 41 – 42, 49 – 50,  52 Market-rationality, versus plan-rationality, 15 – 16, 171n9 Market testing approach, to capital controls, 120 – 21,  150 Mark I (growth first) strategy, 52, 59, 196 – 97n5 economic and social costs of, 8, 67 – 68, 144, 156 formation and details of, 33, 37 – 44, 38t key elements of, 61 – 63, 108t Park’s intensification of, 68 – 72

218       INDEX

Mark II (balanced growth) strategy, 144, 187n10 expansion of, 107 – 10, 108t factors enabling, 146t, 148 – 49 factors shaping, 145 – 46t, 147 – 48 Green Growth initiative and, 126 – 29 Hidden Champions initiative and, 134 – 38, 136f, 194nn25 – 27 key features, 108t origins of, 102 – 6, 187n16 success of, 64 See also Kim Dae-jung; Lee Myung-bak Megabank obstacles to, 116 – 18 opposition to, 111, 122 – 24 proposed by Kang Man-Soo, 111 – 12, 114 – 16,  122 Meiji Japan, 16, 28 – 29, 41 – 42, 49, 171n11 “Mero” robot, 105, 106, 196n43 Microeconomic policy, developmental state and other state types, 20f Ministry of Commerce and Industry (MCI), 35, 36 – 37, 66, 72 – 74,  77 Ministry of Commerce Industry and Energy (MOCIE), 109, 187 – 88n16 Ministry of Finance (MOF) financial activism and, 35 – 36, 57 – 60, 66, 182n15 Financial Services Commission and, 93 – 94, 116 – 17 fracturing of consensus about financial activism and, 72, 73 interest rates and, 61 – 62 liberalization and, 77, 85, 86 merged with Economic Planning Bureau, 82 – 83, 175n28 remerged with Ministry of Planning and Budget, 114 Ministry of Finance and Economy (MOFE), 82, 85 – 86, 93 – 94 Ministry of Information and Communication (MIC), 83, 97, 103, 187n16 Ministry of International Trade and Industry (MITI) (Japan), 27 – 28 Ministry of Knowledge Economy (MKE), 187 – 88n16 Green Growth initiative and, 128, 129, 132, 192n13, 193n15, 193n19 renamed MOTIE, 139, 195n37 robotics and, 106 Ministry of Planning and Budget, 114 Ministry of Science, ICT, and Future Planning (MSIP), 139, 195n37 Ministry of Strategy and Finance (MOSF), 114, 120 – 21

Ministry of Trade, Industry, and Energy (MOTIE), 139, 195n37 Ministry of Trade and Industry (MTI), 41 “Mofia,” 190n11 Moon, Chung-in, 33 Mortgage bubble, in early twenty-first century, 109 – 10 Moskowitz, Karl, 50, 178nn10 – 11 Mosley, Layna, 191n31 National Basic Information System (NBIS), 183n25 National Investment Fund (NIF), 56 National Pension Fund, 115 – 16, 189n7 National Strategy for Green Growth (2009 – 50),  128 Neoliberalism declinist perspective and, 15 developmental state distinguished from neoliberal state, 18 – 19, 20f Korea after 1997 crisis and, 89, 143 See also Financial liberalization Newbridge Capital, 95, 185n13 New Democratic Party (NDP), 68 New economic nationalist (NEN) tradition, 169n7, 171n10 New growth engine (NGE) industries balanced growth strategy and, 103 – 8 Green Growth initiative and, 128 – 29, 192n13, 193n15 Hidden Champions initiative and, 136 nonchaebol firms and, 147 Park Geun-hye and, 139 – 40, 195n38 Nixon Doctrine, 68 Nonbank financial institutions (NBFIs), 87 Nonchaebol firms. See Small and medium-sized enterprises (SMEs) Nondevelopmental states, developmental state distinguished from, 19, 20f, 21 North Korea goal of reunification with, 96, 150, 195n39 security threats from, 30, 56, 79 Oh Sang-Rok, 104 – 5, 141 Oh Won-chol, 36, 176n31, 180n23 Oil prices, Korea and in 1970s, 71, 73, 182n13, 184n42 in twenty-first century, 109, 111, 126, 147, 162 Oil prices, Taiwan and, 155 Organization for Economic Cooperation and Development (OECD), 85 – 86, 157, 184n38, 185n9

INDEX      219

Pan Korea Grand Waterway, 112, 189n1 Park Chung Hee assassination of, 29, 66 – 67, 75, 182n19 declining support for, 68, 182n8 elections of, 67, 68, 182n8 financial activism and, 49, 52 – 54, 86, 154 Germany and, 171n11, 172n13 impact on power of Presidential Office, 37, 154 industry policy making and, 83 Japanese military training of, 26, 28 – 29, 31 Korea’s developmental mindset and, 26 Korea’s quest for independence and, 29, 174n11 Mark I (growth first) strategy and, 33, 37 – 44, 68 – 72,  112 military coup, direct control of banks and, 52, 179n18 military coup, economic conditions at time of, 31 – 32 military coup, public reactions to, 44, 177n52 nostalgia for, 23, 110, 112, 127 – 28, 192n5, 192nn7 – 8 policymaking elite’s developmental mindset and, 17, 26 – 27, 33 – 37 resistance to liberalization calls, 72 – 75, 77 security challenges of, 68 – 69 U.S. aid and, 30 Park Chung Hee Era: The Transformation of South Korea, The (Kim and Vogel), 170n10 Park Geun-hye, 23, 144, 149, 160 background, 192n35 Green Growth initiative and, 137 policy finance under, 138 – 42, 140f Park Jae-wan, 116 Park Se-Il, 84 – 85 Pirie, Iain, 13 Plan for the New Economy, 87 “Plan-rationality,” versus “market-rationality,” 15 – 16 Plaza Accord, 80, 183n29 Pohang Iron and Steel Mill, 69 Policy banks. See Policy finance institutions (PFIs) Policy finance institutions (PFIs) balanced growth strategy and, 149 exports and, 62, 63t Green Growth initiative and, 125, 129, 130 – 34, 130f, 131f, 132f, 134f, 193n17 Kim Dae-jung and expanding role of, 90, 95 – 99

in Korea versus other nations, 1, 169n2 loans and debate about financial activism and stabilization, 73, 78, 79, 81, 83 loans and Korean credit, generally, 1, 75t, 90, 159f Park Geun-hye and, 138 – 42, 140f preferential lending by, 41, 53 – 57, 54, 59, 62, 79 – 81,  144 See also Lee Myung-bak; specific institutions Policymaking elite balanced growth strategy and, 148 developmental mindset consensus and, 17, 26 – 27, 33 – 37 Johnson’s developmental state concept and, 16 POSCO, 55 Presidential Commission on Green Growth (PCGG), 128, 148 – 49, 187 – 88n16 Presidential Office development strategy architecture and, 27, 45, 45f importance of role of, 5, 7, 170nn10 – 11 Park’s impact on power of, 37, 154 role in developmental initiatives, 79 staff rotations within bureaucracy and, 35, 63, 72 See also specific presidents Price stability, Bank of Korea Act and, 58 – 59 Property registration system, of SNCR, 34 Rangoon Bomb incident, 79 Real estate, lending for, 100, 109 – 10, 148 – 49 Real-name transaction system, 182n23 Regulatory governance, 1, 13 – 14, 19, 89, 99, 116, 120, 143, 171n9. See also Neoliberalism Reich, Robert, 84 Renewable energy, 128 – 29, 139, 142, 166, 192n11 Rhee, Jong-Chan, 179n17 Rhee, Syngman, and regime of, 30, 31, 33, 38, 42, 43, 174n12, 174n20, 179n18 Robotics, 141 – 42, 151, 193n43, 196n43 government’s market creation and, 104 – 6, 188n21 Green Growth initiative and, 128 – 29 Rodrik, Danny, 116, 189n29 Roh Moo-hyun balanced growth strategy and, 102 – 6, 107 – 9, 144, 148, 149 economic challenges of, 99 – 101, 109 – 10 Green Growth initiative and, 128 – 29 Roh Tae-woo, 67, 75 – 76, 80 – 81, 82, 194n38, 194n42

220       INDEX

Sakong, Il, 62 Samsung Electronics, 42, 100 – 102, 104 – 5, 123, 151, 193n15 Samuels, Richard, 16, 158 – 59, 171n12 Schumpeter, Joseph, 16, 171n12, 179n15 Segyehwa. See Globalization “Self-reliant” economy, Mark I strategy and promotion of, 38 – 40 Seoul Action Plan, 191n33 Seoul National University (SNU), 34, 84 Seoul Spring, 76 “7 – 4 – 7” goals, of Lee Myung-bak, 113 “Shareholder value” ideology, 157, 190n21 Shin Hyun Hwak, 73, 74 Shin Hyun Song, 116, 120, 121 Simon, Hermann, 134 – 35, 195n40 Singapore, 11, 21, 124 Small and Medium Business Administration (SMBA), 97, 107, 136, 196n42 Small and medium-sized enterprises (SMEs), 115, 119 balanced growth strategy and, 9, 108, 134, 144, 147 – 48 mortgage bubble in early twenty-first century and, 110 Park Geun-hye and, 139 – 41, 140f policy financing and, 111 – 12, 113, 117, 122 – 23, 149 – 50 venture capital and, 96 – 97, 186n22 World Trade Organization and, 147 Song, Byung-Nak, 41 Sovereign Wealth Fund. See Korea Investment Corp Special Law to Promote Venture Capital Companies (SLPVCC), 97, 186n25 Ssangyong, 70 State-directed lending. See Policy finance institutions (PFIs) Steel industry, 55, 62, 68, 69, 87 Stubbs, Richard, 169n6 Subramanian, Arvind, 189n29 Sunshine Policy, of Kim Dae-jung, 96 Supreme Council for National Reconstruction (SCNR), 31, 174n17, 176n48 Taiwan, 7, 14, 21, 37, 47 common worldview in, 173n4, 175n26 growth with stability strategy and, 59 – 60,  155 Tanetaro, Megata, 177n3 Techno-industrial competitiveness China and, 101 as element of developmentalism, 2 – 4, 9 – 10, 16, 18, 23 – 25, 143 – 44, 147, 153, 172n16

Green Growth initiative and, 125 – 26, 138, 155 Hidden Champions initiative and, 111 IT-839 initiative and, 103 policy financial institutions and, 95 Textile industry, 69 “Three lows,” of Roh Tae-Woo, 80 – 81 Time- and space-specific financial sector arrangements, declinists and, 3, 13 – 15 Tokyo University, 28, 175n25 Triffin, Robert, 60 Ulsan petrochemical and industrial complex, 55 – 56 United Kingdom, deindustrialization and, 157, 158f United States, 76, 104, 179n14 aid to Korea, 29 – 30, 53, 174n13 announced intention to withdraw troops from Korea, 56, 72 deindustrialization and, 157, 158, 158f development policy toward East Asia, 60 – 61 Federal Reserve Board of, 60, 179n14 market-rationality and, 171n9 Park Chung Hee’s concerns about reliability of aid from, 38 – 39, 68, 176n42, 177n50 U.S. trained economists in EPB and, 58, 66, 72, 82 U.S.-Korea Free Trade Agreement, 120 Varieties of capitalism (VoC) tradition, 157 Velasco, Andreas, 116 Venture capital firms, 107, 144, 186n25, 193n21 Kim Dae-jung’s reforms and, 90, 95, 96 – 99,  156 Villinger, Roland, 160 VLSI semiconductor project, 79 Vogel, Ezra F., 170n10 Vogel, Steven, 12 Wade, Robert, 47, 173n4, 175n26 Weiss, Linda, 151, 169n6, 177 – 78n49 Wireless internet platform technology (WIPI), 24 Won appreciation of, 81, 118 benefits of low, 80 depreciation of, 62 See also Exchange rates Wong, Joseph biotechnology and, 141, 156, 188n20 decline of developmental state and, 21 – 24 Woo, Jung-en, 36, 50, 53, 179n17

INDEX      221

Woori Financial Holdings, 117, 123 – 24, 190n12 Work of Nations, The (Reich), 84 World Bank green energy and, 163 Korean capital controls and, 121 Korea’s financial activism and, 55, 58, 62, 77

World Trade Organization (WTO) China and, 100 – 101, 109, 147 Korea and, 103 – 4, 107 Yoon Jeung-hyun, 119 – 20 Yushin Constitution, 69, 76