Transcript POL 221: Introduction to Comparative Politics

POL 387: Political Economy of
East Asia
Instructor: Dr. Gang Guo
E-mail: [email protected]
Course Overview

Political Economy of East Asia

What is political economy?

What is East Asia?
Politics and Economics
``In all the political systems of the world,
much of politics is economics, and most of
economics is politics” -- Charles Lindblom
 ``Economics does not usefully exist apart
from politics” -- John Kenneth Galbraith
 ``There is no such thing as a purely
economic issue” -- Milton Friedman

Role of the State
Government
intervention in the
economy
 Whether and How?

East Asia
Geographically
 Politically
 Economically

East Asia & Southeast Asia
Economic
connections
since middle
ages
 Economic
integration in
modern times

Basic Concepts: Government’s
Role in Economy
Government

organizations of individuals
–

authorized by formal documents
–

particular set of institutions and people
legally empowered
make binding decisions on behalf of a
particular community
–
–
externally: war, trade, border control, ...
internally: tax, education, health, welfare, ...
Good Governance

Rule of law
 government
can take no action that has not been
authorized by law
 citizens can be punished only for actions that violate
an existing law
Property rights
 Regulatory regime
 Macroeconomic policies
 Absence of corruption

Government’s Power

Power
–

ability to get people or groups to do what they
otherwise would not do
Government’s power
–
–
–
–
to develop institutions
to carry out policies
sometimes unpopular
has to be sufficiently strong
Government’s Power
sufficient power
 constrained power
 Madison: oblige the government to control
itself
 restraints to check arbitrary and corrupt
behavior by the government


Key: building effective political institutions
Political Institutions
Organizations, individuals, & agencies
 Electoral rules

–
–

single-member district & first-past-the-post
system
proportional representation system
Constitutional rules
–
–
–
division and limit of power
between branches of government
between central and local governments
Political Institutions

Constrain arbitrary exercise of power by
politicians and bureaucrats
–
–
–
–
delineate property rights between state and
private sector
enforce property rights
influence competition in political process
hold public officials accountable for their
actions
Economic Policy Outcomes
Economic Policy Outcomes
Political institutions play important role
 Resolve redistribution conflict from
economy policies
 Three examples of policy choices

–
–
–
budget deficit
financial market
trade policy
Budget Deficit
Difference between revenue and
expenditure
 Government influence on budget

–
–

muster political support for taxation
resist demands for expansion of spending
Political institutions of budget procedures
–
–
balanced budget rules
power of finance ministry
Balanced Budget Amendment

Never passed U.S. Congress
Balanced budget rules in U.S.
All U.S. states but Vermont have
constitutional (41) or legal (8) requirement
for balanced budget
 Gramlich (1995:180) holds that all realworld balanced budget amendments have
significant enforcement problems
 even with the “tricks”, constrained state
fiscal policy is more responsible than
unconstrained state fiscal policy

Balanced budget rules

are more likely to be effective if
–
–
–
–
voluntarily adopted
impose hard constraints
difficult to reverse
effectively enforced by
a
credible third party or
 higher level government
Influence of Electoral Rules
Minority (coalition) governments tend to
have higher budget deficit than majority
government
 States with systems of proportional
representation tend to have higher budget
deficit than states with majoritarian
systems.
 Budget deficit tends to rise in election years

Financial market regulation

Influence of political institutions
–
independent financial regulatory agencies
 central
–
–
bank independence
checks and balances in political process
among developing countries, central bank
independence doesn’t seem to affect inflation
outcomes
International trade liberalization
Government’s trade policy influenced by
domestic political conflict between gainers
and losers from trade liberalization
 Industries that tend to have tariff protection

–
–
–
–
industries in decline
industries that are highly unionized
make substantial campaign contributions
more geographically dispersed
Corruption
Exercise of public power for private gain
 has large costs for economic development
 undermines well-functioning markets

–
–
–
–
a tax that distorts competition & lower returns
a barrier to new entries in market competition
subvert state’s legitimacy
weakens state capacity to provide institutions to
support markets
Causes of corruption
Distorted policy environment (opportunity)
 Weak judiciary (credible threat to punish)
 Poor civil service management
 Low public sector pay (not evident)
 Other factors

–
–
–
Openness to international trade
Complexity of regulatory environment
High and variable inflation
Political institutions

Political institutions can help reduce the
opportunities and incentives for corruption
–
–
Restrain politicians from arbitrary actions
Hold politicians accountable for their action
Decentralization
 Electoral rules
 Press freedom
 Civil society

Taxation institutions & policies
Tax provides the state with resources to
build market-supporting institutions
 Weak tax collection institutions lead to
disproportionate reliance on tax revenue
from more visible and easier sources

–
–
international trade
large firms
Tax collection institutions

Poor countries tend to have weaker tax
administration and higher reliance on tariffs
Conclusions

Political institutions matter

Good governance is essential to economic
development

Effective State
–
plays a catalytic, facilitating role
–
encourage and complement the activities of
private businesses and individuals
Asian Century?
East Asia’s pre-1997 high growth
Overview of East Asia’s Growth
Average growth rate higher than those of
any other region in the world
 Superior performance of the eastern half of
Asia

–
–
–
Japan, South Korea
China’s mainland, Hong Kong, Taiwan
Indonesia, Malaysia, the Philippines,
Singapore, and Thailand
Overview

Large degree of
variance
between the
individual
economies
Geographical division
Growth in East Asia
Japan’s economy took off in 1960s
 NIE’s (newly industrialized economies)

–
Hong Kong, Taiwan and Korea
 “very
high” growth in the 1960-1975 period
 “outstanding” growth in the 1975-1990 period
–

Singapore: opposite pattern
Irony of Myanmar and the Philippines
Growth in NIE’s
NIE’s accumulated capital and increased
labor participation at a much faster rate than
other economies
 The increase in these two factors far from
fully explains their exceptional growth rates
 productivity growth also accounts for a
significant fraction

Growth in NIE’s: I
Growth of labor participation
 “high” for the NIE’s in general

Growth in NIE’s: II
Growth of capital
 Hong Kong: “high”
 Taiwan & Singapore: “very high”
 Korea: “outstanding”
 Public investment/GDP similar to other
developing economies
 Private investment/GDP much higher

Growth in NIE’s: III
Productivity growth
 Higher than that of United States
 Proportion of growth of GDP per person
that is explained by productivity growth
was not systematically different from those
of Japan and the United States

Paper tigers?

Soviet Union growth pattern
–

mobilization of resources
Asia growth pattern
–
–
two-thirds of the growth is input-driven
the remaining third is attributable to increased
efficiency or total factor productivity (TFP)
The World Bank study
To international technological progress
 South Korea was keeping pace
 Hong Kong, Japan, Taiwan and Thailand
were catching up
 The investment-driven economies of
Indonesia, Malaysia, and Singapore fell
behind

Increase in Productivity
Imports of foreign knowledge and
technology
 Expanding education opportunities
 Better organization
 Improved work practices

Increase in Productivity
Interlocking cooperation
 free enterprise
 government financial intervention
 guidance-minded technocratic bureaucracy

Korea’s growth path
High rates of saving with funds channeled
into the industrial sector
 Strong export orientation
 Strict limits on “non-essential” imports and
direct foreign investment
 Strict zoning laws and other restrictions on
the distribution system

Hong Kong

Entry port to China
Singapore
State Intervention
Ability
Low
High
High
India, Philippines Japan, Taiwan
Intent
(weak)
(strong)
U.S., U.K
Hong Kong
Low (minimalist)
(market driven)
Asian Values?
commitment to hard work
 sense of thriftiness
 emphasis on education
 well-defined family structure
 filial piety
 respect for political authority
 society above self

Political stability

Strongman rulers
–

Single-party dominance
–

North Korea, South Korea, Singapore,
Malaysia, the Philippines, Indonesia ...
Japan, Taiwan, Malaysia, Singapore …
Trading civil rights and freedoms for
economic growth
–
presumption of basic material well-being
Development Strategies
Evidences from East Asia
Developmental state
Paradigm of developmental state in
development economics and comparative
political economy
 mostly bred by experiences of Japan and
NIE’s from 1960s to 1980s

–
–
choice of efficient, coherent, and flexible
economic policies
effective implementation
Developmental state

place top priority on economic development
–

actively intervene in market
–
–
–

growth, productivity, and competitiveness
guide, discipline, and coordinate private sector
strategic allocation of resources
use of diverse policy instruments
rational and competent bureaucrats
–
insulated from political pressures
Paradigm

Departure from traditional neoclassical
development strategies
–
–
–
government intervene only to correct market
failure
“Washington consensus” of US Treasury, IMF,
and World Bank
free market, free trade, free capital mobility,
and limited government
Paradigm

Deviation from “dependence” school of
thought
–
–
–
integration into the international capitalist
division of labor
developing economies at the periphery depend
on developed economies at the core
developing economies are denied the
opportunity for self-sustained growth
Incomplete conceptualization

State is not an internally cohesive and
unitary actor
–
–
–

divisions within executive leadership
executive-bureaucracy relationship
inter-bureaucracy conflicts
State-society relationship
–
bureaucrat-constituent links
Problematic premises

Insulated bureaucrats make rational policies
–
–
often not insulated: under political pressures
often not rational: politicized
Efficient, coherent, and consistent policies
 State policies determine economic
performance and outcomes

–
supply-side factors, demand-side conditions,
corporate structure and strategy, luck, etc.
Network theory

Developmental state is embedded in society
–
–

Policies result from interactions
–
–

functional links
exchange of information
interdependence of private sector and state
intermediate organizations
State and private sector merged into an
internal organization
Problems solved and created
Networks are dynamic
 Networks create opportunities for
corruption
 Networks are not naturally efficacious and
benign

–
What factors lead to dysfunctional and
malignant networks?
Case study 1

Hong Kong and Singapore
–
–
–
both are entry ports to mainland
both are former British colonies
both are mostly ethnic Chinese societies
Profoundly different development strategies
 But, both invested heavily in human capital
and public spending to enhance
international competitiveness

Case study 2

Hong Kong and the Philippines
–
–

both are “weak” states
difference in economic performance
A weak state
–
–
–
doesn’t necessarily lead to free market
can be dominated by powerful economic
interests
creates opportunities for powerful economic
groups to manipulate and distort economy
Dependency theory

International capitalist economy
–
–

exploit weak third-world countries at the
periphery
perpetuate poor nations’ dependence on rich
nations at the core
Multinational corporations and foreign
capital play significant role in the
economies of Hong Kong and the
Philippines, with different consequences
Case study 3
South Korea and India
 both states are strongly committed to
promoting economic growth
 both states had significant intervention in
the industrialization

–
India was one of the first states in the
developing world to produce a detailed
development plan (1952)
Restriction on foreign capital
South Korea and India
 both states restrict multinational
corporations and foreign capital
 different economic outcomes

–
–
–
protection of domestic industries
build up efficiency of domestic firms
increase competitiveness of domestic firms
Different strategies

Import-substituting industrialization
–

tariff and non-tariff barriers to protect domestic
industries
Export-oriented industrialization
–
selective protection and free trade regime
State intervention in financial and labor
market
 State-owned enterprises

Case study 4
Firm size & competitive strategy
 Hong Kong and Taiwan

–

China’s mainland
–

small and medium enterprises
township and village enterprises
South Korea and Japan
–
large integrated conglomerates
Strong states, weak states
1997 - 1998
Economic success
Annual GDP growth in the ASEAN-5
(Indonesia, Malaysia, the Philippines,
Singapore, and Thailand) averaged close to
8 percent over the decade before the crisis
 Almost half of total capital inflows to
developing countries

–

nearly $100 billion in 1996
inflation & unemployment rates both low
Ramifications

Negative consequences
–
–
–
–

Environmental degradation
growing inequality between rich and poor
rampant corruption
social malaise
Significant and real benefits
–
–
great majority of the peoples’ standard of living
have not been erased by the crisis
Weaknesses in financial system
inadequate financial sector supervision
 poor assessment and management of
financial risk

–
–
growth of bad loans
state-directed lending
relatively fixed exchange rates
 violent asset price cycles

–
property boom bubbles
Weaknesses in financial system

Large amounts of
short-term
international capital,
denominated in
foreign currency
Corruption

Transparency International’s 1999 survey of
corruption
–
–
–
–
–
–
Singapore
Malaysia
South Korea
Philippines
Thailand
Indonesia
7th
31st
50th
54th
68th
96th
crisis countries
Diary of the crisis: I
Diary of the crisis: II
The cause of capital outflows
Bank failure in Thailand
 Corporate failure in Korea
 Political uncertainty due to the potential for
a change in government in Korea, Thailand,
the Philippines, and Indonesia
 net outflow of $105b from Thailand,
Malaysia, South Korea, & Philippines
between 1996 and 1997

The cause of capital outflows


Contagion effects hit
Malaysia, the
Philippines and
Indonesia
The IMF’s
intervention actually
helped to incite panic
Causes of financial crisis
macroeconomic imbalances
 structural deficiencies in financial sector
 loss of market confidence
 rising political risk

IMF's immediate response
Help Indonesia, Korea, and Thailand
arrange programs of economic stabilization
and reform
 Approve IMF financial support for reform
programs in Indonesia, Korea, and Thailand

IMF’s immediate response

Consult with other
members that needed
to take policy steps to
ward off the contagion
effect
Asian programs
comprehensive reform of financial systems
 closure of unviable financial institutions

–
associated write down of shareholders' capital
recapitalization of undercapitalized
institutions
 close supervision of weak institutions
 increased potential for foreign participation
in domestic financial systems

Reforms in governance
break the close links
between business and
governments
 ensure that the
integration of the
national economy with
international financial
markets is properly
segmented

Real GDP Growth (%)
Inflation rate (%)
GDP growth rate (%)
Impact on Japan
Impact on World
Three schools of thought
Three schools of thought

Revisionist: “developmental state”
–

Market must be mediated, regulated and guided
by the state
Culturalist
–
–
“Asian values”
Culture context of East Asia explains the
miracle
Recovery from the Crisis
Lessons from the Crisis



Better information
Regulation and
restraint
Controlling capital
flows
International Organizations
Authority vis-à-vis sovereign governments
 Access to information
 Risk of ``creating” a crisis
 Globalization and interdependence

Political Foundations of
Economic Management
Economic development

Factors promote growth and development
–
–
–
–
Political stability
Political consensus
Political freedom
Economic freedom
Financial crisis

Cope with causes and consequences of
financial crisis
–
–
political liberalization
broad-based economic reform
Puzzle of uneven growth
Puzzle of uneven growth
In 1960 the East Asian developing
economies had lower per capita income
than developing economies in either Latin
America or sub-Sahara Africa
 1975 - 1990 average growth rate of real
GDP per capita was 5% for East Asian
developing economies

–
–
0.04% for Latin America
0.3% for sub-Sahara Africa
Crisis in South Korea

corporate failures in 1997
–
Hanbo Steel, Sammi Steel, & Kia automobile
capital flight
 credit downgrading
 currency depreciation

Adjustments in South Korea
reform of banking system
 improvement in financial sector
 modification of labor laws
 modification in social security program

South Korea’s Recovery
South Korea’s Recovery
Taiwan and Singapore

less damage from (or less vulnerable to)
financial crisis
–

economic growth slowed down
solid macroeconomic fundamentals
–
current account surpluses
 export
–
of goods and services
low inflation rates
Lessons from Philippines
In 1950s, best performer and most
promising economy in East Asia
 1960 - 1997, lowest growth rate (1.4% on
average) in East Asia
 two periods of negative growth

–
–
1983 - 1986 and 1991 - 1992
political turmoil and military coups
Economic growth
accumulation of reproducible capital
 decisions by individual economic agents

–
–

investment
consumption
conditioned and constrained by politics
–
–
–
political instability
political polarization
government repression
Political uncertainty

political instability
–

political polarization
–

likelihood of the current regime being replaced
in the future
degree of polarization between opposing
political parties
uncertainty in the consistency of public
policy reduces agents’ incentive to invest
Government repression

Political structural factor
–
political freedom
 human
rights
 civil rights
–
economic freedom
 property
rights
 special interests
–
–
security of agents’ gain from investment
impose social cost on economic growth
Theoretical hypotheses

Ceteris paribus,
–
–
–

the lower the probability of the survival of the
current regime,
the more polarized the policy positions of
opposing parties,
the more repressive the government,
the lower the growth rate
Political instability

0.33 revolutions per year on average
–
0.14 without the Philippines
Political freedom

1975 - 1990 average political freedom level
–
–
–
–
OECD economies
Latin America
East Asia
sub-Sahara Africa
0.946
0.5
0.454
0.215
Democracy and growth
Democracy and growth
Democracy and growth
Robert J. Barro 1996

“Democracy and Growth”, in Journal of
Economic Growth, volume 1, pages 1 - 27,
March 1996.
–
–
–
The middle level of democracy is most
favorable to economic growth
The lowest level comes second
The highest level comes third
Economic freedom
Japan in 1960s
conservative politics
economic growth
The Occupation
August 1945 - April 1952
 Supreme Commander of the Allied Powers
(SCAP) - General Douglas MacArthur
 Two main tasks:

–
–
demilitarization
democratization
Korean War (1950-3)

Economic turning point for Japan:
–
–
–
–
war supplies to Korea
industrial resurgence
foreign currency
economic reconstruction
1945 - 1950 growth rate: 9.4%
 1950 - 1955 growth rate: 10.9%
 In 1952 Japan’s GDP matched prewar high

High Growth of 1955-62
Large investment in heavy industry
 Imports of energy and raw materials
 Government’s economic goals:

–
–
–
–
achieve economic self-sufficiency
achieve full employment
improve export competitiveness
keep domestic demand high
High Growth of 1963-73
Government’s plan to “double the national
income in ten years”
 scheduled 9% annual growth rate
 large-scale infrastructure construction

–
–
–
–
Shinkansen (bullet train)
Olympic Games
port, road, & rails
human infrastructure
High Growth of 1963-73

labor-intensive in decline
–
–
–

agricultural subsidies
textile bankruptcies and
“excess capacity”
coal industry in serious decline
capital-intensive on the rise
–
large firms had 10- and 20-fold
growth
 electronics
and automobile
Government response
government responded to some sectors’
decline with reorganization and
subsidization
 technological improvement and facility
modernization under government protection

–
Ministry of International Trade and Industry
 constant
industry
and critical role in developing the computer
The Iron Triangle
bureaucrats
LDP politicians
big business
executives
High Growth of 1963-73

Aggressive export strategy
–
businesses compete with foreign counterparts
under government protection
domestic market sealed off from
competition
 Strict limitations on government
expenditures
 1965 Japanese exports exceeded imports for
the first time in two decades

Government policies

Macroeconomic success through
internationally competitive firms in certain
industries
–
–
–
–
–
reduce the reliance on agriculture and small
industry
capital-intensive industries
technically sophisticated products
improve national economic infrastructure
improve human infrastructure
Protection of domestic market
U.S. products and capital dominated world
markets to an unprecedented extent in
1950s and 1960s
 Japan remained virtually unpenetrated

–
–
–

by foreign firms
by foreign products
or by foreign capital
Bretton Woods system (1949 - 1971)
Japan’s Economic Growth
GDP (constant 1995 US$)
1E+13
9E+12
8E+12
7E+12
6E+12
5E+12
4E+12
3E+12
2E+12
1E+12
Germany
France
Japan
UK
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0
USA
GDP per capita (constant 1995 US$)
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
Germany
France
Japan
UK
USA
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0
Political & economic institutions

Japan compared with other industrialized
democracies
–
–
–
–
–
economic institutions dramatically different
economic performance was superior
longest dominance by one political party
far greater egalitarianism in political economy
foreign and security policy tied to that of US
Golden age of LDP Politics
Liberal Democratic Party
 1963, LDP won 55% of vote & 60% of
seats in lower house elections
 LDP benefited from

–
–
–
–
the economy’s stellar performance
internal leadership coherence
fragmentation of political opponents
compensation of economically disadvantaged
Evolution of party system
Combination of multiparty system with
sustained dominance of one majority party
 Chaotic political party system 1946-55

–
2 conservative parties, 2 socialist parties,
communist party, & micro-parties
Party merges in 1955
 “One-and-a-Half Party System”

Major Political Parties

Liberal Democratic Party (LDP)
–
–

Japan Socialist Party (JSP)
–

conservative catch-all party
single largest party
“Japan Peace Party”
Japan Communist Party (JCP)
–
–
anti-emperor, anti-capitalism, anti-military
only party untainted by money politics
National Vote Share
Suggested Readings
http://www.kantei.go.jp/foreign/indexe.html
 Journals in the UM library:

–
–

Japan Echo
Japan Quarterly
New books in the UM library:
–
–
Japan in Transformation, 1952-2000
Japan's Emergence As A Global Power
Japan in 1990s
Changes in political economy
Changes in political economy

Challenges to stability of equilibrium
–
–

domestic socioeconomic or political problems
external economic or security problems
Changes of different magnitude
–
–
–
–
adjustments in public policy
changes in socioeconomic basis
changes in economic or political institutions
major shifts in two or three spheres
Bubble burst (1990-01-01)
Bubble burst (1990-01-01)
Massive stock and land price collapse
 annual GDP growth rate around 1%
 manufacturing productivity decreased
 corporate bankruptcies
 unemployment rate
 economic performance at bottom of
industrialized democracies

–
opposite from 1960s
Japan slows down
GDP (constant 1995 US$)
1E+13
9E+12
8E+12
7E+12
6E+12
5E+12
4E+12
3E+12
2E+12
1E+12
Germany
France
Japan
UK
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0
USA
GDP per capita (constant 1995 US$)
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
Germany
France
Japan
UK
USA
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0
International competitiveness
World Economic Forum ranking
 Japan was No. 1 in 1990
 14th in 1997
 15th in 2001

Political earthquake of 1993-95
Economic stagnation since late 1980s
 Major corruption scandals of LDP leaders

–
–
–

2.5 billion yen contribution from a company
1 billion yen income tax evasion
media revelation of systematic corruption
Businesses’ demand for political reform
–
–
high cost of doing business
political bribes and contributions
Industrial contributions
Party Realignment (‘90s)
Prime Ministers 1993-2001

non-LDP Prime Ministers 1993 - 1996

LDP coalition cabinets since 1996
New Electoral Rules (1996)

480 members in House of Representatives
–
–

300 elected from single-member districts
180 elected from 11 proportional representation
districts
252 members in House of Councillors
–
–
100 elected from proportional representation
district
152 elected from 47 prefecture constituencies
More shocks in 1990s
Large and rising government deficit and
debt (~150% of GDP)
 Aging population
 Banking crises and non-performing loans
 Asian financial crisis (1997-8)
 “Hollowing out” of industry
 natural disasters and terrorist attacks

Economic transformation

capital market and currency had become
deeply integrated into world markets
–
investment abroad
formal trade barriers and limits on foreign
direct investment largely eliminated
 Japanese-owned firms became multinational

–
overseas production, financing, R&D, and
technological alliance
Appreciation of yen
Changes in economic policies

New reliance on consumption taxes, on
borrowing, and on debt service
–

public debt higher than GDP
move away from monetary restraint
–
zero interest rate
privatization of nationalized industries
 official effort to support declining industries

–
protect the inefficient / promote the competitive
Zero interest rate
Inconsistent policies

Lack of cohesiveness and singularity in
economic policy
–
internal contradictions
no longer a cohesive strategy directed at
structural improvement of economy
 eclectic mixture of ad hoc efforts to deal
with economic problems

Still an outlier

Comparison with other industrialized
democracies
–
markets for imports remained skewed against
high value-added manufacturing goods
 imports
from overseas subsidiaries of Japaneseowned multinational corporations
–
limited amount of foreign direct investment in
Japan
 FDI
per capita in Japan is less than 10% of that in
Germany, less than 5% of that in UK
Shifts in Japan’s Political
Economy Regime
Adjustments and changes
Conservative dominance (1960s)

Power and influence of conservatives rose
–

at the expense of the political left
conservative supporters benefited
–
–
prosperity and peace
side payments
successes in economy and in politics
reinforced each other
 favorable international environment

Challenges (1970s & 1980s)

Socioeconomic bases of support
–
–
–
new political parties, independent movements,
and changes in voter patterns
divisions within regime supporters superseded
earlier left-right divisions
central concern of regime continuity
Socioeconomic challenges
Employment at Different Sectors in Japan
100%
90%
30%
80%
48%
60%
70%
60%
22%
50%
40%
35%
30%
48%
35%
20%
10%
17%
6%
0%
tertiary
manufacturing
agriculture and fishing
1950
1970
1995
30%
22%
48%
48%
35%
17%
60%
35%
6%
Socioeconomic challenges
Employment at Different Businesses in Japan
100%
90%
40%
80%
66%
70%
79%
60%
20%
50%
40%
30%
18%
40%
20%
11%
16%
10%
0%
firms
self-employed
family business
10%
1947
1970
1985
40%
20%
40%
66%
18%
16%
79%
11%
10%
Socioeconomic challenges
rise of large and technologically more
sophisticated industries
 rise of the service sector firms
 relative decline of agriculture sector
 relative decline of small businesses
 shrinking bases of the conservative regime’s
electoral coalition

Challenge 2: aging population
% of Japanese Population Aged 65 or Older
14%
14%
12%
10%
7%
8%
5%
6%
4%
Ratio of Retirees to Workers
2%
0%
33%
1945
1975
1995
35%
30%
25%
25%
20%
14%
15%
10%
5%
0%
1975
2000
2015
Challenge 3: labor shortage

Economic success
–

expanding influx of labor after WWII
–

rising demand for labor
low-cost, young, highly-skilled
changing age profile of the population
–
bargaining power shift from management to
labor
Challenges to LDP
Urbanization and rise of middle class
 Socioeconomic base of conservative
support shrank
 Mobilization capabilities of LDP supporters
declined
 People identified with party independents
increased

–
outnumbered LDP supporters in 1974
Challenges to LDP

Increased voter option in 1960s and 1970s
–
–
–
formation of new parties
transformation of existing parties
in both conservative & the political left
threatened both LDP and JSP
 threatened conservative electoral hegemony
 threatened conservative legislative
hegemony

LDP responses (1970s & 1980s)

Attract new electoral support
–
–
–
shore up conservative support
draw away organized labor from DSP & JSP
attract the new middle class
 non-voters

and non-partisan voters
LDP dilemma between traditional
supporters and new appeal
Infrastructure Spending as % of GDP
7
6
5
4
3
2
1
0
1970
1975
Japan
1980
1985
United States
1990
1991
1992
Japan
United States
1970
1975
1980
1985
1990
1991
1992
4.5
2.6
5.3
2.1
6.1
1.7
4.7
1.7
5.1
1.7
5.1
1.8
5.7
1.8
LDP responses
Adjustments in policy or institutions
 less tightly linked policy profile
 firm-level cooperation with labor
 substantial deficit finance for political target
 fiscal austerity and privatization
 manufacturing firms became multinational
 defense and security policies

LDP electoral recovery
Current composition in Diet
Public Support for Political Parties (1999)
LDP
26%
No party
52%
DP
8%
CGP
4%
JCP
SDP 4%
2%
LP
4%
Economic recovery (1980s)
Bubble burst
Stock market woes (2000s)
International challenge

External conditions
–
–

challenged conservative policies
threatened conservative socioeconomic support
challenges to exchange rate policies
–
Bretton Woods monetary system broke down
International challenge

international price of raw materials
–
–
–
–
–
–
Japan’s dependency on imported oil (99%)
oil prices quadrupled in 1973
oil prices rose by 2.8 times in 1979-80
inflation
balance of payments
domestic productivity
International challenge

Increasing pressure from US and Europe
–
–
–
–

reductions in Japanese tariffs, import quotas,
and non-tariff barriers
voluntary export restraints
open Japanese market
Japanese military spending
challenges to vital aspects of Japan’s
conservative economic policy profile
Development in South Korea
Japanese rule (1910-45)

Control educational system
–
Japanese language and culture
Control land (40% of entire country)
 Infrastructure

–
railroads and telegraph lines
Industrialization
 Provisional Government-in-exile (1919)

38th Parallel (1945-50)
Soviet & U.S. divided Korea along 38th
parallel after Japan surrendered in 1945
 1948-08-15, Republic of Korea established

–
–

43% area, 60% population
President: Rhee Syngman
1948-09-09, Democratic People’s Republic
of Korea established
–
Premier: Kim Il-Sung
Dulles, Rhee, & MacArthur

nationalist goals vs. Cold War strategies
Korean War (1950 - 1953)
Most fighting happened 1950 - 1951
 truce negotiations 1951 - 1953
 Military Demarcation Line (MDL) (1953 - )

Republic of Korea

President Rhee Syngman (1948 - 60)
–

autocrat resigned amid popular protests
1961 military coup by Park Chung-Hee
–
–
–
relations with Japan normalized in 1965
economic takeoff
assassinated in 1979
Army General Chun Doo Hwan (1980-7)
 1980 Kwangju massacre

ROK Economic Takeoff

Park’s authoritarian rule (1961-79)
–
–
annual economic growth rate of 9.2%
one of the four Asian “little dragons”
year per capita GDP (US$) export (US$)
1962
87
56.7 million
1980
1,503
17,500.0 million
2001
8,918
150,440.0 million
Development in South Korea

Development a matter of survival
–
–
–

high population density (48 mil./106km²)
few natural resources
external military threat
one of the “Four Tigers” of East Asia
–
–
an incredible record of growth
integration into the high-tech modern world
economy
Development in South Korea
Three decades ago GDP per capita was
comparable with levels in the poorer
countries of Africa and Asia
 Today its GDP per capita is roughly 20
times North Korea's and equal to the lesser
economies of the European Union

0
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
South Korea's GDP (in constant 1995 US$)
6E+11
5E+11
4E+11
3E+11
2E+11
1E+11
Success through the late 1980s

a system of close government-business ties
–
directed credit
–
import restrictions
 import
 at
of raw materials and technology
the expense of consumer goods
–
sponsorship of specific industries
–
a strong labor effort
Savings ratio


savings and investment over consumption
–
savings 36.2% of GDP
–
Japan 31.4%, US 16.2%
small social welfare expenditure
Social Welfare Expenditure / GDP
50
45
40
35
30
25
20
15
10
5
0
South Korea
USA
UK
Japan
France
Sweden
South Korea's Export & Import (in constant 1995 US$)
3E+11
2.5E+1
1
2E+11
1.5E+1
1
1E+11
5E+10
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
0
South Korea's Trade Partners
100%
5
90%
8
17
9
Other
80%
70%
32
28
East Asia
60%
50%
Europe
13
40%
Japan
14
30%
50
20%
North America
24
10%
0%
1970
1993
Trade Partners 2003
Asian financial crisis

The Asian financial crisis of 1997 - 1998

exposed longstanding weaknesses in South
Korea's development model

high debt/equity ratios

massive foreign borrowing

an undisciplined financial sector
South Korea's Economic Growth Rate (1998 - 2002)
12.00%
10.80%
10.00%
9.20%
8.00%
6.60%
6.20%
6.00%
4.00%
3.30%
2.00%
0.00%
1998
1999
2000
2001
2002
Democratization in ROK
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)

Last & Current Presidents

1997 presidential election: Kim Dae-Jung
–
–
1st peaceful, democratic transition of power
Asian financial crises of 1997-8
 IMF
–

branch in Seoul (1998-2003)
corruption scandals involved President Kim’s
relatives and friends
2002 presidential election: Roh Moo-Hyun
–
former lawyer & government minister
ROK’s Development Strategies
State-guided growth
South Korea’s political legacy

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
A developmental state?

Is the South Korean state a unitary actor?
–
–
–

President
state
bureaucracy
Is the South Korean state strong?
–
–
–
Variation over time
variation across issues
variation across social sectors
Japan & South Korea

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
Park Chung Hee (1917 - 1979)
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
Military coup of 1961
Park: “I want to emphasize, and reemphasize, that the key factor of the May
16 Military Revolution was to effect an
industrial revolution in Korea.”
 “Unless we can establish an ‘economy first’
consciousness, our dream of building a
strong national state will end in a dream and
nothing more”
 “Enrich the nation and strengthen the army”

Park’s strategies
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 Chung Hee
Economic growth was both
important and possible
 Economic growth was a
historic goal worth
suffering for
 “In human life, economics
precedes politics or
culture.”

Sacrifices
long work hours
 high rate of savings
 high rate of investment
 a hierarchical, authoritarian system

–
–
rewarded those who succeeded
punished those who did not cooperate
Chaebol

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
POSCO: a chaebol

Pohang Iron and Steel Company
state-owned company established in 1968
 opposed by World Bank

–

South Korea has no iron ore deposit
POSCO is now one of the lowest cost steel
producers in the world
Chaebol
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

A strong state

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 the running of the
economy
1st 5-year development plan (61)
“Throughout the plan period, the economic
system will be a form of ‘guided capitalism’
 “the principle of free enterprise and respect
for the freedom and initiative of free
enterprise will be observed
 “the government will either directly
participate in or indirectly render guidance
to the basic industries and other important
fields.”

Brains of the new economy

Economic Planning Council (1961)
–
–
–
renamed to Economic Planning Board (EPB)
centralized economic information
took over planning powers
 from
–
took over responsibility for the budget
 from
–
the former Ministry of Reconstruction
the Ministry of Finance
took over statistical collection
 from
the Ministry of Home Affairs
Economic Planning Board
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
Hands of the new economy

Ministry of Commerce and Industry
–

Ministry of Finance
–
–

later known as the Ministry of Trade and
Industry, or MTI
nationalization of the banks
centralization of the financial system
day-to-day contact with businessmen who
wanted approval for projects
Nationalism versus pragmatism
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

Export promotion
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

Structural Causes of South
Korea’s Economic Crisis
Crisis in South Korea 1997
chaebol crisis (bankruptcies)
 financial crisis

–
–
–

credit rating downgraded
exchange rate of won
stock market
economic crisis
–
–
economic growth rate & GNP per capita
unemployment rate
Chaebol’s advantages

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
Chaebol’s advantages

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
“Octopus companies”

Chaebol’s diversification
–

strategic consideration
–

unrelated new industries
reduction of financial risk
environmental incentive
–
“industrial vacuum”
Environmental changes
Challenges since 1980s
 political regime shifts
 foreign pressure to open domestic market

–
financial and product market
rise in labor cost
 competition from other Asian countries
 chaebol became multinationals
 industrial shift and competition

Democratization in ROK
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)

Regime shift
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)
Labor cost
Chaebol responses

Unrelated diversification in new industries
–
diversion of resources
 from
–
technological innovation
demand for domestic financial resources
 accumulated
–
demand for foreign financial resources
 opening

bank loans
of the domestic financial market
centralized control and management
–
new competitive environment
Negative consequences

Chaebol’s expansion
–

domestic loans
–

lack of transparency and accountability
government pressure on banks
foreign loans
–
government opened capital market yet
controlled exchange rate
Regime shift: continued
President Kim Dae
Jung (1998 - 2003)
 free market

–
–
minimizing
government
intervention
deregulation
Former & current Presidents

1997 presidential election: Kim Dae-Jung
–
–
1st peaceful, democratic transition of power
Asian financial crises of 1997-8
 IMF
–

branch in Seoul (1998-2003)
corruption scandals involved President Kim’s
relatives and friends
2002 presidential election: Roh Moo-Hyun
–
former lawyer & government minister
IMF conditionality
When a country borrows from the IMF, its
government makes commitments on
economic and financial policies
 Most loans feature phased disbursements

–
prior actions
 before
–
approval & initial disbursement
performance criteria (quantitative & structural)
 condition
–
for agreed credit to be disbursed
program review
Restructure the financial sector

Troubled banks
–
–
–

bankrupt
sold to foreign banks
merged
Financial Supervisory Board
–
–
power to replace top managers of banks
resurrection of Park’s policies?
Chaebol reforms

Improve financial structure
–
reduce debt-capital ratio
 sale
of assets
 foreign investors
–
–
–
prohibit cross-investment
prohibit internal trading
consolidated financial statements
Chaebol reforms
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
Dilemmas for government

Government intervention to establish free
market economy?