• Japan’s colonial rule (1910 - 1945)
– bitter memories
– normalization in relationships (1965)
• Japan’s economic model
– import substitution
– large interlocked corporations
– protection of domestic market

• Strong presidency, center of state
– legacy of Park Chung Hee
– control over policy process
• Bureaucracy and business interests
• other political institutions underdeveloped
– legislature
– political parties
– interest groups

• Served in Japanese air force in WWII
• became a general in South Korean army
• led a bloodless military coup in 1961
• became president after 1963 election
• imposed martial law in 1972
– presidential decree
• assassinated in 1979 by the head of KCIA

• prosperity and independence by pursuit of a high-growth economic strategy
• Park took accepted economic theory
• Park’s observation of the wartime
Japanese economic model
• Park’s fervent nationalistic exhortations
• Korean people’s willingness to accept, obey authority, and to sacrifice

• Park nationalized all the Korean banks
• reinforced the system of chaebol
– a few specially selected large companies
– encouraged to tailor their growth and production targets to meet government objectives
– dependent on those state-owned banks for the credit they needed to operate and grow

• A conglomerate of many companies
• companies hold shares in each other
• concentration of national economy
• does not have own financial institution
• spreads across industries
• has centralized structure and control
• tends to be family-based

• state controlled virtually all economic activities in South Korea
– government approved all bank loans
– granted licenses for virtually all businesses
– controlled many prices
• copied much of the Japanese model
– with a heavier emphasis on political and military influence in running the economy

• Park’s personal involvement
• Elaborate economic plans
– five-year plan
– annual economic management plan
• added more responsibilities
– price policy
– fair trade administration
– reviews of projects

• Ministry of Commerce and Industry
– later known as the Ministry of Trade and
Industry, or MTI
• Ministry of Finance
– nationalization of the banks
– centralization of the financial system
• day-to-day contact with businessmen who wanted approval for projects

• International export market to make sure that companies were competitive
• industrial expansion needed to be financed by foreign bankers
• foreign companies were the best source of competitive technology
• normalized diplomatic relations with Japan in 1965

• The administration made exporting into a national campaign, almost a patriotic duty.
• export producers were given priority in investment decisions, credit allocations, and other benefits
• strategy of forcing domestic consumers to subsidize exports
• Korea Traders Association

• chaebol crisis (bankruptcies)
• financial crisis
– credit rating downgraded
– exchange rate of won
– stock market
• economic crisis
– economic growth rate and GNP per capita
– unemployment rate

• Governance structures of chaebol
– centralized control and management
– lack of monitor or sanction by shareholders
• Organizational advantages
– mobilization of resources for new businesses
– economy of scale through sharing resources
– safety-net for member companies in crisis

• Park’s economic policy
– promotion of export-oriented industries
– promotion of heavy industry
– suppression of labor movements
– protection of domestic market
– allocation of resources to chaebol
• heyday of chaebol growth
– mid-1960s to mid-1980s

• Chaebol’s diversification
– unrelated new industries
• strategic consideration
– reduction of financial risk
• environmental incentive
– “industrial vacuum”

• Challenges since 1980s
• political regime shifts
• foreign pressure to open domestic market
• rise in labor cost
• competition from other Asian countries
• chaebol became multinationals
• industrial shift and competition

• 1987 election, former general Roh Tae
Woo defeated opposition leaders Kim Dae
Jung and Kim Young Sam
• 1987, Declaration of Political Reforms
• 1988 election, opposition parties won majority in National Assembly
• Kim Young Sam won presidential election in 1992 (1st elected civilian president)

• Democratization
• deregulation
– land use (1990)
– import liberalization (1992)
– open stock market to foreigners (1992)
– open domestic capital market (1994)
– deregulate loan financing in foreign market
(1994)

• Unrelated diversification in new industries
– diversion of resources
• from technological innovation
– demand for domestic financial resources
• accumulated bank loans
– demand for foreign financial resources
• opening of the domestic financial market
• centralized control and management

• Chaebol’s expansion
– lack of transparency and accountability
• domestic loans
– government pressure on banks
• foreign loans
– government opened capital market yet controlled exchange rate

• President Kim
Dae Jung (1998 -
2003)
• free market
– minimizing government intervention
– deregulation

• borrower government makes commitments on economic and financial policies
• Most loans feature phased disbursements
– prior actions
• before approval and initial disbursement
– performance criteria
• quantitative and structural
• condition for agreed credit to be disbursed
– program review

• Troubled banks
– bankrupt
– sold to foreign banks
– merged
• Financial Supervisory Board
– power to replace top managers of banks
– resurrection of Park’s policies?

• reduce debt-capital ratio
– sale of assets
– foreign investors
• prohibit cross-investment
• prohibit internal trading
• consolidated financial statements

• Transform governance structure
• weaken the centralized control and management in chaebol
– owner became formal CEO
• full legal responsibilities
– outside board members
– legal right for minority shareholders
• restrict unrelated diversification

• Government intervention to establish free market economy?