The Political Economy of Change and Continuity in Korea: Twenty Years after the Crisis

143 Pages·2019·1.41 MB·English

by  Seungjoo Lee

The Political Economy of the Asia Pacific
Seungjoo Lee
Sang-young Rhyu
The Political
Economy of Change
and Continuity in
Korea
Twenty Years after the Crisis
The Political Economy of the Asia Pacific
Series editor
Vinod K. Aggarwal
More information about this series at http://www.springer.com/series/7840
Seungjoo Lee • Sang-young Rhyu
The Political Economy
of Change and Continuity
in Korea
Twenty Years after the Crisis
Seungjoo Lee Sang-young Rhyu
Chung-Ang University Yonsei University
Dongjak-gu, Seoul, Korea (Republic of) Seodaemoon-gu, Seoul, Korea (Republic of)
ISSN 1866-6507 ISSN 1866-6515 (electronic)
The Political Economy of the Asia Pacific
ISBN 978-3-319-71451-6 ISBN 978-3-319-71453-0 (eBook)
https://doi.org/10.1007/978-3-319-71453-0
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Preface
Twenty years has passed since South Korea fell victim to the Asian financial crisis.
Although Korea officially announced in 1999 that it overcame the crisis to repay the
IMF loans, it still suffered from the specter of the crisis. The crisis profoundly
changed the nature of the Korean political economy, igniting numerous discussions
and debates. What has changed in the political economy in Korea since the crisis?
How did such changes proceed? Numerous scholars argued that the crisis served as
a catalyst in transforming the political economy in Korea, but failed to reach a gen-
eral consensus on the nature of the transformation and the consequences the crisis
left. It was because the Korean political economy did not take unidirectional changes
to neoliberalism, departing away from the traditional developmentalism. In contrast
to conventional wisdom, we present a novel interpretation of the political economy
in Korea since the crisis. We particularly shed light on the fact that the Korean
political economy demonstrated the dual dynamics of changes and continuity in the
process of institutional transformation.
To explore this unique phenomenon, we had to go through numerous discus-
sions. The dual dynamics resulted from a variety of factors: discrepancy between
formal structures and informal networks, changing government-business relations,
and path-dependent nature of institutional change. We attempted to show the way in
which the dual dynamics has played out in making institutional transition in impor-
tant areas such as chaebol reform, the privatization of public corporations, and the
impact of informal networks on newly formed institutions. The dual dynamics also
emerged in the process of industrial restructuring such as the IT and aircraft
industries.
Generous institutional support helped us explore the primary nature of the trans-
formative process in the Korean political economy. The Kim Dae-jung Presidential
Library and Museum, Yonsei University, was instrumental in bringing our long
intellectual effort to fruition. Also, this book would not have been complete without
Lorraine Klimowich’s patience and utmost professionalism.
Dongjak-gu, Seoul, Korea (Republic of) Seungjoo Lee
Seodaemoon-gu, Seoul, Korea (Republic of) Sang-young Rhyu
v
Contents
1 Introduction: Change and Continuity in Institutional
Transformation in Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Asian Financial Crisis and the Korean Development
Model at a Crossroads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Changes in Developmentalism and Institutional Transition . . . . . . 4
1.3 Dynamic Interaction Between Developmentalism
and Neoliberalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.4 Organization of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2 Policy Ideas and Interest Alignment in the Process
of Institutional Change in Chaebol Reform . . . . . . . . . . . . . . . . . . . . . 15
2.1 Why Has Chaebol Reform Undergone Diverse Paths? . . . . . . . . . . 15
2.2 The Politics of Institutional Change: Policy Ideas,
Interest Alignments, and the Role of External Pressure . . . . . . . . . 17
2.3 Lifting the Ban on Holding Companies: The Conflict of Ideas
Between the Government and Foreign Investors . . . . . . . . . . . . . . . 23
2.3.1 Divergent Ideas Between the State and Foreign
Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.3.2 Converging Interests Among Stakeholders . . . . . . . . . . . . . 25
2.4 Regulatory Politics on the Gross Amount of Investment:
Various Matches of Policy Ideas and Interests. . . . . . . . . . . . . . . . . 31
2.4.1 Divergent Policy Ideas Among Domestic Actors . . . . . . . . . 31
2.4.2 Changing Interest Alignments Among Domestic
Actors Over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.5 Deregulation of the 4 Percent Rule: Interest Alignments
Between the President and Chaebol . . . . . . . . . . . . . . . . . . . . . . . . 37
2.5.1 Traditional Policy Ideas on Competition Policy
in the Financial Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.5.2 Interest Alignments Between the President
and Capitalists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
vii
viii Contents
2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3 Privatization and a Lingering Developmental State: Case Studies
of POSCO, KT, and Korea Development Bank . . . . . . . . . . . . . . . . . . 49
3.1 Introduction: What Shapes the Politics of Privatization?. . . . . . . . . 49
3.2 Contending Perspectives on Privatization
and Institutional Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.3 POSCO: A Paradoxical Success of Privatization . . . . . . . . . . . . . . . 56
3.4 KT: Limits to Formal Institutions and Repetitive
Rent-Seeking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.5 The Korea Development Bank: Return of Developmental
State and Reversal of Privatization . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4 Between Legalization and Democracy: A Transitional
Irony of Informal Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.1 Introduction: What Has Caused the Informal Network
to Proliferate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.2 Theoretical Overview: Globalization, Democratization
and Legalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
4.3 The Historical Evolution of Informal Networks . . . . . . . . . . . . . . . 83
4.4 The Politics of Legalization and Informal Networks:
The Case of Kim & Chang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
5 The Dual Dynamics of the IT Industry Transformation . . . . . . . . . . . 93
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
5.2 The Korean Government Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.3 Institutional Transformation in the IT Industry . . . . . . . . . . . . . . . . 97
5.4 Self-Reinforcing Mechanism of Policy Network
in the IT Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
6 Restructuring and Continuity in the Aircraft Industry . . . . . . . . . . . 107
6.1 Brief Historical Overview: The Quest for Industrial
Upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
6.2 The Asian Financial Crisis and the Restructuring
of the Aircraft Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
6.3 Between Indigenous Development and International
Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
6.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Contents ix
7 Dynamics of Policy Shift and Path Dependence in Foreign
Economic Policy: Between Strategic Choices and Domestic
Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
7.1 The First Stage: Gradual Approach to FTAs . . . . . . . . . . . . . . . . . . 124
7.2 The Second Stage: Global FTA Hub Strategy . . . . . . . . . . . . . . . . . 125
7.3 The Third Stage: Linkage between Economy and Security . . . . . . . 128
7.4 Conclusion: The Politics of Path Dependence and Domestic
Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Chapter 1
Introduction: Change and Continuity
in Institutional Transformation in Korea
The political economy in South Korea (hereafter Korea) has dramatically trans-
formed since the Asian financial crisis in 1997. Interestingly, since the crisis, the
political economy of Korea has displayed two diametrically opposed features (Park
2015). One the one hand, the institutional foundations that spearheaded high eco-
nomic growth until the 1980s eroded in the face of the forces of globalization
ushered in by the crisis (Pirie 2006, 2012; Moon and Chung 2014). It seems that
under the exponentially increasing complexity of the world economy, the Korean
government is no longer able to provide a strategic guidance for the national econ-
omy, rapidly converging into the Anglo-American model of political economy. The
track record of liberalization measures such as financial liberalization, corporate
governance reform, and labor reform suggests that the empirical basis of these
arguments is robust.
On the other hand, a close look into the economic reform process in Korea dem-
onstrates that in meeting these new challenges the Korean political economy has
showed a great deal of adaptive capability (Lim 2008; Kim 2013; Kalinowski 2015).
In this regard, the main thrust of the Korean political economy is kept intact rather
than converging into the Anglo- American model. In the aftermath of the economic
crisis, the restructuring of Korean political economy was implemented not through
the retreat of the state but by active state intervention. For example, the IT industry
went through strategic restructuring that aimed to introduce competition among
domestic companies before opening up the market to foreign firms (Lee 2004).
Why and how do the two different features – convergence into the Anglo-
American model and the state-led strategic restructuring of industries – coexist in
Korea? That is, the political economy of Korea since the Asian financial crisis has
shown the dual dynamics of change and continuity. To answer this question, we
argue that under the crisis situation, ideological shift within the political leadership
and institutional transformation of the Korean state combined to determine this
unique outcome.
© Springer International Publishing AG, part of Springer Nature 2019 1
S. Lee and S. Rhyu, The Political Economy of Change and Continuity in Korea,
The Political Economy of the Asia Pacific, https://doi.org/10.1007/978-3-319-71453-0_1