Industrial Policy In Korea

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ECO 631: DEVELOPMENT ECONOMICS

Industrial Policy in Korea
The Debate, Interventions and Lessons
Submitted For:

Dr. Mausumi Mahapatro Khan
Assistant Professor
North South University

Submitted By:

Imrul Huda
ID#1411986653

December 12, 2014

North South University
Dhaka, Bangladesh

Abstract
In this paper, I try to introduce the policy debate regarding the particular set of policies that the
Republic of Korea followed to promote its state selected industries. I have studied the impact of
these industrial policies from the arguments of both side – the trade liberalists and the
interventionists. A desk study was conducted on selected works of the economists from both side
of the debate. Many of their finding can be extrapolated to other economies of East Asia region. I
find the industrial polices as a successful set of tools to promote an industry driven growth. By
sharing risk and guiding investing patterns, these policies can lead the economy to the direction
which would‟ve been difficult if the economy was only based on market incentive. However, this
requires a visionary planning and strong bureaucratic body.

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1.0 Introduction
Growth and Economic development of the East Asian Countries is marked as a miraculous
phenomenon of the last century. Starting in the 60s, economies of that region grew faster than
any observed rate in recent history. Japan, The “four tigers”1 and three Newly Industrializing
Economies2 (NIEs) of Southeast Asia attributes to the most of it. The policy debate that came out
of this spectacle ranges from free market policy of Hong Kong to state led highly targeted
strategy of Japan and the Republic of Korea (hereafter Korea) (Page, 1994). This unprecedented
rise in living standard is attributed to differing factors by different scholars.
This paper will attempt to give a summary of the various ranges of policies taken by the
Republic of South Korea roughly from 1960s to early 1990s. Section two introduces the debate
centered on the Industrial Policy of Korea. Section three discusses various aspects of the
industrial policy which defined the relation between state and private firms. It will look into how
state setup various instruments of financing the rapid industrialization, how the state pushed the
private firms to venture into the selected industry, how corporate restructuring created industry
leaders. Section four will summarize the takeaways for Bangladesh in the form of policy lessons.
Finally, in the concluding remarks future path for Korea will be anticipated. No primary analysis
was conducted and this paper will heavily draw from the works of Korean heterodox economist
Ha-Joon Chang and „Rethinking the East Asian Miracle‟3. A discussion on historical political
economy of Korea or Financial Crises of 1997 is beyond the scope of this brief paper4.
2.0 The Industrial Policy Debate
Perhaps the most debated aspect on the growth of Korea and other East Asian economies is the
adoption of certain industrial policies. While the definition of industrial policy itself is
questioned there is no avoiding of the central issue in analyzing the policies taken by Korea,
especially in justifying policy lessons (if any) for a developing country like Bangladesh.

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Hong Kong, the Republic of Korea, Singapore, Taiwan.
Indonesia, Malaysia, Thailand.
3
‘Rethinking the East Asian Miracle’ is collection of 13 papers published by World Bank(2001)
4
Interested reader can look into Kohli (1994)
2

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Ha-Joon Chang‟s definition of industrial policy excludes the initiatives taken for human
development as well as any generic non-discriminatory state interventions. He limited the scope
by defining it in terms of any particular industry which the state thinks to be efficient for the
economy as a whole (Chang, 2006). So by definition he excludes the generic policies
(infrastructure, education, health care for example) and also specifies that even though it will
target one or few industries, economy as a whole will be befitted.
From the early 80s, when the economic growth of Korea started to generate mainstream literary
interest, the very existence of industrial policy in East Asia region (except Japan, which was
widely acknowledged) was a matter of debate among the economists. Mainstream trade
economists argued that Korea was involved in infrastructure building rather than following an
„industrial policy‟ (Balassa, 1988). Active state interventions were only acknowledged within a
limited scope of shipbuilding and steel industry. The publication of two volumes of work by
World Bank in 1993 and 2001 sealed that debate and acknowledged the active role of
government as an organizer of industry and capital to generate economic growth. But the result
of such role by the state argued to be insignificant in terms of generating growth.
Drawing from empirical evidence, experts in these two publications argued that industrial
policies had little or negligible effect on the growth of East Asian economies and these policies
cannot be replicated in other developing region. Success was attributed to many institutional
factor rather than policy. They questioned the theoretical justification of such policies and
showed that it was trade that had more significant positive impact on growth. They argued, close
relation between government and corporate distorted the market and eventually led to the crises
in the late 90s.
Many critics of industrial policy draw their conclusion based on econometric analysis of Total
Factor Productivity and selective industrial promotion (Robert Z. Lawrence, 2001). Interestingly,
these neoclassical economists find the growth of Korea and Japan more miraculous than others
as it happened in spite of protectionist measures. Arguments against the industrial policy sums
up to: there is no empirical evidence that promoted industries had higher growth than other ones.
But broader analysis indicates, these policies had turned „potential‟ and „risky‟ industries into

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most contributing industries to the GDP5. Supporter of the state interventions provided valid
theoretical and analytical answer to many of these questions that came out of the World Bank
initiative. Chang (1993) strongly advocated for monopolistic firms who produce at optimal level
than many „competitive‟ firms who produce at suboptimal level. And state played a significant
role as a co-coordinator to minimize „wasteful investment‟ by forming cartel in selected industry.
Critics of industrial policies of Korea focuses only on the state led interventions which focused
to „develop‟ certain industries. But there is another side of these policies, the „protectionist‟ role.
In many times state provided social insurance to producers with temporary liquidity crises.
Companies with positive net value but facing short term threat of asset liquidation were often
saved by government. Also, some intervention was needed to smooth the „phasing out‟ process
of certain industries. For example, textile industry was given policy support to meet target
against some technological up gradation. These interventions in depressing industries were also a
mean to control political resistance by the workers.
3.0 The State and the Chaebols
In the late 60s, World Bank turned down a request by the Korean government for support to
establish a modern steel mill. Korea at that point had neither the raw materials nor the industrial
history needed to make such attempt plausible. Korean government decided to run it as state
owned enterprise and in ten years, Pohang Steel Company (POSCO) became the most efficient
steel mill in the world6 (Amsden, 1989).
However, having giant state owned enterprises as agent of economic growth was not the strategy
for Korean government. Korean government wanted a private sector led growth with full control
over their investment and growth pattern. So, strong state-business tie was needed and it was
facilitated by channeling resources and forcing to enter into selected industries. But to achieve
the envisioned growth, Korean firms needed to capable of adjusting to such policies.
The development of big Korean firms, chaebol happened in multi stages. When they started,
Gold Star used to make radios and Samsung made clothes. They were family owned oligopolistic
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Hyundai, one of the biggest shipbuilding companies was reluctant to enter into the industry in 70s. But Korean
Government pushed Hyundai to venture in this industry. Korea, currently the second largest shipbuilder in the
world had the number one spot till 2008 when it lost its position to China.
6
th
POSCO is currently the 4 largest still mill by production and it was privatized in 2000.

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firms. From the early 70s Korea focused on developing six industries: steel, chemical, machine
tools, automobiles, shipbuilding and power generation. By the end of 80s most of these chaebols
were big international players with in these selected industries. One of the major outcomes of
this transformation was the learning of transferable management knowledge of technology
driven manufacturing industry. In the early 90s, these family owned chaebols began to diversify
their business and their success can be judged by today‟s market share of Samsung or LG.
Often times, Korean government pushed inefficient firms into merger and acquisition. KIA
Motors was forced into making trucks and buses instead of its business as usual passenger cars.
A re-entry was promised and currently it is the second largest automobile maker in Korea with a
well-established passenger car line. Three companies were competing in the naval diesel engine
industry. One was forced to exit while the industry was divided between the rests to push
specialization. (Hyundai in over-6,000 hp and SsangYong in under-6,000 hp). Each of the four
companies in the electronic switching system industry (Samsung, Gold Star, OPC, and Daewoo)
was forced to specialize in a different product (Chang, Industrial Policy in East Asia: Lessons for
Europe, 2006).
This relation between business and government creates a commitment from the state part too.
Industrial policy was the key strategy to intervene in the financial sector to shift resources to the
selected industry players and create highly leveraged firms. Later these firms carried the flag for
Korean capitalism (Woo-Cumings, Miracle as Prologue: The State and Reform of the Corporate
Sector in Korea, 2001).
Many times state had to intervene and provide bailout loans to these firms. Government
gradually became insurer, underwriter and guarantee of the chaebols and their investments.
While many critics argued and point out to the interest of key politically favored individuals, a
further study shows other rational motives of the government. Most of these corporations are in
the manufacturing sector. In 2001, this sector contributed 43% of the GDP in Korea compared to
30% of the OECD countries. The top five chaebol employed 600,000 workers, without counting
the suppliers. These large firms practically provided a welfare function that is vital to the
economy as a whole. A typical Hyundai worker drives a Hyundai car, lives in a Hyundai
apartment, gets credit from Hyundai credit, get health care from Hyundai hospital, sends kid to

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school on Hyundai loan or scholarship and eats meal at Hyundai cafeteria (Woo-Cumings,
2001).
Equity market in any developing country requires strong legal protection for the small
shareholders. Few new industrial countries could provide such. Besides, Asymmetry of
information that is prevalence in this kind of economy implies that, most investment asks for
bank financed debt. In Korea, most banks were owned by government till early 80s and even
after privatization they were kept under strong supervision. Due to an embryonic equity market,
these banks played the role of financer. Korean firms were operating highly leveraged because
Government played the key role in facilitating long-term investment loan through various
instruments7. Due to their high debt-to-equity ratio; a little change in discount rate could make
large impact in the firms‟ cash flow. For this reason, Korean firmed followed the macroeconomic
policy goals of the state. This role as financer also gave the state the mobility to guide the invest
patterns and sectoral movement.
However, this access to credit was tightly controlled and implemented in very strict regulatory
manner. After the financial crises of 1972, government selected some „blue chip‟ firms and
forced them to public threatening to push up the corporate tax to 40 percent from 27 percent if
they don‟t. The number of publicly listed company increased by 50 percent overnight8. Bank
credit was strongly monitored and a web of credit ceiling was established. Capacity of the
government itself was improved in terms of credit evaluation and default management (WooCumings, 1991).
This government led risk management policy was an effective instrument to finance the rapidly
growing industries. Many free-market fundamentalist are very critical of this role of government
in financing capital. On the other hand, some argued further that, It was the liberalization of
capital market, under the pressure of International Monetary Fund (IMF) and U.S. Treasury (
who have strong influence in OECD membership), that allowed the banking sector to seek riskier
venture (Stiglitz, 2001).

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Many long-term loans were sectioned through development banks, long-term credit banks etc. For example,
Korea Development Bank, the state owned development bank practically owned majority of the shares of certain
companies.
8
The owners acquired most of the new shares. So the equity market stayed small.

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What is very important to note here is that the apparatus was bureaucratic not market driven. In
spite of the outcry of the liberal economist Korea relied on its civil forces. One reason suggested
by Woo-Cumings (2001) is that, Korea has one of the finest and oldest traditions of civil service.
So in the time of crises it is only natural that Korea relied upon on its strength rather than trying
out free market policies.
4.0 Transferability of the Model and Policy Suggestion for Bangladesh
Transferability of this state led model of Korea is a widely debated topic. Critics highlight two
key constraints for such. First, it is rare to find a developing country with such strong civil
forces. There is a unanimous agreement that, the Korean path cannot be replicated without a
strong bureaucracy. Second, the international environment of trade is very different from that of
70s or 80s. Globalization has set some rules of the game which gives a country like Bangladesh
very little bargaining power.
However, can we have laissez-faire with a weak bureaucratic system? If the Korean model is
hard to implement, does it make the Anglo-American model any less easy? In fact, evidences are
plenty that in early stages of capitalism a reformist role by the state is essential (Khan, 2003).
Further study needs to be done to draw a comprehensive policy lessons for Bangladesh. Within
the short scope of this study, I draw the following policy recommendations:
First, strong state involvement to ensure the social security, basic needs and a minimum living
standard of the working class. The exploitive nature of the owners of the factories needs to be
under supervision. And this has to be confirmed through the private owners. An NGO driven
approach will lack long-term sustainability.
Second, a modern recruiting mechanism for civil service to attract the top students at their early
years after graduation. If Bangladesh seeks to have a strong bureaucratic power, it must pump in
new blood in the system.
Third, planned urbanization in different parts of the country is needed to create student city,
industrial city and capital city. It may not stop the rising inequality but it can minimize the social
unrest and class conflict.

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Fourth, focus more on business management based study rather than R&D based field of study.
This is already happening. But study of business management must come out of western
influence and incorporate our social values and norms.
5.0 Conclusion
Industrial policies played a transforming role in Korea. State led interventions have successfully
turned some family owned oligopolistic firms into global market leaders. In the process,
government have pushed them into new industries, provided finance, restructured corporate
structure and saved them from being bankrupt. The success of the model generated a body of
literature which is as dynamic as the changes themselves. But the democratic transformation and
financial liberalization shows that, there are in fact multiple roads to economic development. But
if the whole process of economic development itself is the prologue, where will it lead Korea?
Some already suggested that Korea is moving towards a welfare state (Kim, 2006). Whatever the
outcome of Korea is, Bangladesh should catch up the speed towards a more industrialized
country.

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References
Amsden, A. (1989). Asia's Next Giant: South Korea and Late Industrialization. Oxford University Press.
Balassa, B. (1988). The Lessons of East Asian Development: An Overview. Economic Development and
Cultural Change, 36(3), 273-290.
Chang, H.-J. (1993). The Political Economy of Industrial Policy in Korea. Cambridge Journal of Economics,
16(2).
Chang, H.-J. (2006). Industrial Policy in East Asia: Lessons for Europe. EIB Papers.
Khan, M. H. (2003). State Failure in Developing Counties and Institutional Reform Strategy. Annual
World Bank Conference on Development Economics. The World Bank.
Kim, Y.-M. (2006). Towards a Comprehensive Welfare State in South Korea. Asia Research Centre
Working Paper.
Kohli, A. (1994). Where Do High Growth Political Ecocomies Come From? The Japanese Linage of Korea's
"Developmental State". World Development, 22(9), 1269-1293.
Page, J. (1994). The East Asian Miracle: Four Lessons for Development Policy. NBER Macroeconomics
Annual 1994, Volume 9 (pp. 219-282). MIT Press.
Robert Z. Lawrence, D. E. (2001). Trade and Growth: Import Led or Export Led? Evidence from Japan and
Korea. In S. Y. Joseph E. Stiglitz (Ed.), Rethinking the East Asian Mircale (pp. 379-408). Oxford
University Press.
Stiglitz, J. E. (2001). From Miracle to Crises to Recovery: Lessons from Four Decades of East Asian
Experience. In S. Y. Joseph E. Stiglitz (Ed.), Rethinking the East Asian Miracle (pp. 509-526).
Oxford University Press.
Woo-Cumings, M. (1991). Race to the Swift: State and Finance in Korean Industrialization. Columbia
University Press.
Woo-Cumings, M. (2001). Miracle as Prologue: The State and Reform of the Corporate Sector in Korea.
In S. Y. Joseph E. Stiglitz (Ed.), Rethinking the East Asian Miracle (pp. 343-378). Oxford University
Press.

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