The EPB prepared policy by working backward from Park’s directives.
Once the targets were set by Park, the EPB worked to calculate the resources required for implementation and meet any expected shortfall in capital, first by internal adjustment of budget policy and foreign capital licenses and second by influencing the MoF to change fiscal and monetary policy. A period of intense monitoring of industrial projects and regular feedback from the MCI, sectoral ministries, and auxiliary agencies would follow. The feedback allowed the EPB to prepare the necessary revisions of the original targets and measures of resource extraction and mobilization.
In this way the superministry constantly revised its industrial targets to hit the right mix of goals and instruments that would get them nearer to fulfilling Park’s directives. Targets were not sacred. On the contrary, frequent revision was believed necessary if Park’s goals were to be realized.
It is important to emphasize that the significance of economic planning lay less in offering a technical master plan of industrial growth, with intricate modeling of targets and instruments, than in establishing institutional channels of communication and cooperation and institutional procedures for systematic agenda formation, resource mobilization, and policy feedback among the EPB, the MoF, the sectoral ministries, and the auxiliary ministries on an ongoing basis. Through these channels and procedures, the EPB effectively evaluated performance and adjusted policy strategies in a timely manner, as well as rapidly diffused new policy ideas and techniques throughout the state bureaucracy. In fact, as technical blueprints forecasting South Korea’s future economic path, the EPB-formulated FYEDPs were more failures than successes. The first FYEDP (1962–1966)
Politics
214
had to be revised downward after a year of implementation, only to see its new targets surpassed by actual policy results in 1963. In the case of the second FYEDP (1967–1972), the original targets were revised by the EPB
upward only a year after its launch, in order to catch up with unforeseen hypergrowth. The real significance of economic planning was not technical but political, authorizing the EPB to intervene in other ministries’ affairs and inculcate society with Park’s brassy “can do” spirit and his daring “grow-at-all-costs” strategy. The EPB itself was well aware of the instrumental political role of economic planning and drew up its second FYEDP with a sense of political purpose and loyalty to Park.
Once the EPB extracted resources from society through its checks and balances against the MoF, it next needed a strategy for resource allocation.
Again Park set the overall framework for ministerial decisions. Having learned during the junta years that coercion was counterproductive, only raising anxiety and distrust among chaebol groups, the USAID, and state ministries, the Park of the mid-1960s came to emphasize more carrots than sticks in his dealings with the chaebol. At the same time, however, Park kept three other parts of his earlier formula for state-business relations developed during the junta years. Those rules that survived were: (1) select a “national champion” from among the chaebol for each of the strategic industrial sectors and provide an integrated package of state assistance for its development; (2) rescue the national champion when it became trapped in a liquidity squeeze as a result of following Park’s ambitious industrial policy, in order to make economic policy credible; (3) but also encourage one or another chaebol group to challenge the front-runner with an entry into the strategic industrial sector at an appropriate time, lest too much monopoly profit accrue to the front-runner, or lest the frontrunner become too satisfied with monopoly profits and lose the incentive to expand, causing its performance to fall below the target level.
This mix of rules was a product not only of economic necessity but also of political choice. The concentration of resources in a few chaebol groups was unavoidable, as long as Park doggedly insisted on developing a full line of modern industries on an internationally competitive scale. Capital was too scarce, entry barriers too high, and investment too risky for big business to invest in industrial projects unless it was granted monopoly profits. At the same time, however, Park undermined this rule of monopoly by endorsing the principle of eventually establishing a system of oligopolistic competition among chaebol groups. This internal tension in Park’s rules of resource allocation was to cost him much in the 1970s.
The chaebol responded enthusiastically. To secure a piece of the pie be-
The Leviathan: Economic Bureaucracy 215
fore the front-runners carved out their sectors of monopoly and shut down the entry points to strategic sectors, each of the chaebol aggressively lobbied for state licenses that would create the means to grow in a big way.
With a stable supply of subsidized loans secured through the reverse margin system, and with the noncommercial grants and reparation funds provided through the tripartite regional security alliance that Park forged with Washington and Tokyo, Park had the credibility to promise the chaebol the growth opportunity of a lifetime. There developed an investment boom beginning in 1966. The ratio between target and actual investment stood at 124.7 percent in 1966 after annually averaging 161.3 percent for four years. Then, for the next five years, the same ratio averaged 73.4
percent.
Hitting the right balance between concentration and competition, however, was a difficult economic and political issue. Frequently Park ended up causing excess competition for state licenses and subsidies among the chaebol, making surplus capacity virtually a systemic trait of the South Korean political economy as early as 1969. This led to a severe liquidity crisis whenever export sales slackened and interest rates rose. But reducing surplus capacity with an exit policy for insolvent companies was not an easy option from Park’s perspective. Allowing any of the state-backed chaebol to go under would not only create a systemwide panic by saddling state banks with huge nonperforming loans and disrupting production in vendor firms and affiliate companies vertically and horizontally integrated to the faltering chaebol but also bring Park’s political credibility into question. Closing down a chaebol would be seen as a breach of his promises to other chaebol and to foreign and local lenders, which could cause a run on state banks, thus throwing the country’s entire manufacturing sector into a liquidity squeeze.
Park constantly warned the chaebol of cuts in state assistance if they failed to meet their end of the political bargain to develop an internationally competitive business, but in reality he did not have an effective exit policy. Once the EPB guaranteed the foreign debts of an industrial producer and the MoF backed the EPB by continually rolling over loans provided by state banks despite a business’s losses, the state banks lost the incentive of prudent regulation. Rather than making loans on the basis of their estimate of the future stream of the borrower’s income, the state banks focused on securing the collateral to cover potential losses. The lack of prudential regulation encouraged the debtor to expand into uncompetitive industries with the expectation that it would be rescued with state subsidies if its business venture faltered. Consequently, Park faced the formi-
Politics
216
dable task of weeding out moral hazards from the very start of economic growth processes. His choice of policy instruments was once again bureaucratic rather than market forces.
To induce big business to take risks in the direction of his goals, but at the same time to ensure the chaebol’ s efficient allocation of productive resources, Park built a system of bureaucratic supervision and surveillance in the hope that it would serve as a functional substitute for the market’s disciplinary mechanism of bankruptcy. This need to build a bureaucratic mechanism to minimize the problem of moral hazards constituted another prime driver in transforming the South Korean state bureaucracy into a Leviathan that had the capacity to reach deep down for control in virtually all aspects of business activities. The MCI began checking the status of export sales by commodity, company, and destination on a daily basis in 1962, in order to hold t
he chaebol to their export pledges. The EPB progressively strengthened the price stability law in 1961, 1962, 1973, and 1975, with the twin goals of countering inflation by establishing the “market price” in oligopolistic sectors and of taxing the “excess profits” accruing from international supply shocks. To bring down the level of state subsidies by encouraging major chaebol to go public, the Ministry of Finance provided tax breaks for business firms listed on the stock exchange beginning in 1968; established legal sanctions and financial penalties for the firms that rebuffed the MoF directive to go public in 1972; and set a detailed time schedule for the public listing of the subsidiaries and holding companies of each of the major chaebol after 1975. More important, the EPB made unfair and competition-limiting business practices the object of regulation by drawing up a Price Stability and Fair Trade Law in December 1975.
The effort to replace market discipline with bureaucratic supervision failed. The number of companies listed in the South Korean stock market reached 251 by October 1976, a tenfold increase since 1968, but because state banks were always ready to provide the chaebol with subsidized loans, the chaebol did not feel the need to raise funds through the stock market, which could threaten the majority shareholder’s control over ownership and management. Moreover, in spite of bureaucratic threats, compliance with listing on the stock market was low, especially among the largest chaebol, because no matter how frequently the EPB threatened them with sanctions, they knew that the EPB would eventually back down and resume its role as an underwriter for their ventures.
Like the policy of encouraging firms to go public, the regulatory regime that the EPB constructed over prices was bound to lose its originally reformist purpose. Because Park built a profoundly expansionary export
The Leviathan: Economic Bureaucracy 217
machine, the EPB had no choice but to use its regulatory power to control price hikes rather than to tax excess profits in oligopolistic industrial sectors. Moreover, big business always found legal loopholes to evade the EPB’s directives on pricing policy and to neutralize its regulations. When the EPB did regulate prices at the expense of chaebol interests, the EPB’s sister coordinating agency, the MoF, found itself granting more subsidies to the chaebol to compensate for the losses they accrued from complying with EPB requirements. The MCI, too, frequently joined in to compensate chaebol for their losses with the adjustment of its policy on production quotas and regulations. The chaebol were simply too weak financially for the EPB to use its regulatory power for the purpose of fair trade. On the contrary, rather than confronting the chaebol, the EPB and the MCI chose to work with them and harness the chaebol’ s monopoly power to establish a “rationalization cartel.” It was hoped that the cartel established among chaebol through the EPB’s mediation would dampen the South Korean economy’s dangerously expansionary bias and save it from a vicious circle of boom and bust.
Similarly, in an effort to replace market signals with administrative guidance, Park zeroed in on export targets to bring about economically functional firm behavior. To a certain extent, export targets did play that role.
As Alice Amsden has argued, export targets were relatively objective and transparent criteria that helped economic policymakers in countering the South Korean economy’s proclivity for rent-seeking, surplus capacity, and cyclical liquidity crisis.22 In a similar way, Anne Krueger has distinguished the South Korean export machine from the Latin American import substitution model as an economic system with its own mechanism to correct policy biases and reestablish the market equilibrium. Fierce competition in export markets, Krueger argues, forced state ministries to readjust and restructure their expansionary policy periodically before it became too late to avoid the boom’s becoming a dangerous bubble.23
At the same time, it is important to emphasize the limitation of export targets as a policy instrument to measure business performance and market efficiency. The firm’s achievement of export targets did not necessarily mean that the firm’s international competitiveness was on the rise, because with license privileges, bank subsidies, and tax deductions directly tied to the level of export sales, any increase of exports could mean rent-seeking as much as productivity-enhancing business activity. The factor and product markets were so systematically distorted to favor exports that an increase in exports did not necessarily imply a strengthening of international competitiveness. Nor did it mean Park’s export machine had an internal corrective mechanism that corrected its own mistakes to avoid a danger-
Politics
218
ous bubble economy. On the contrary, with all policy instruments geared to concentrate resources in a few strategic industrial sectors and back their export sales, prices no longer accurately mirrored the South Korean resource endowment. Similarly, the rise of exports could have resulted from the firms’ efforts to protect their licenses, subsidies, and tax privileges at home rather than from their competitiveness abroad. With the failure of the state’s administrative efforts to weed out moral hazards, a number of strategic industries became financially insolvent, creating huge nonperforming loans that threatened macroeconomic stability.
Adjustment Strategy, 1967–1972
In 1967, only three years after Chang Ki-yông’s “rationalization reform,”
a number of chaebol with government-guaranteed foreign loans became lost causes, incapable of even paying back the interest they owed. Park sent a clear signal for policy change by dismissing Chang Ki-yông. Pak Ch’ung-hun, a former army general of soft temper, who had headed the Ministry of Commerce and Industry since 1964, became the deputy prime minister. Unfortunately, Pak Ch’ung-hun diagnosed South Korea’s economic woes only in administrative terms. He saw the crisis as having been brought about by the lack of a bureaucratic mechanism for prudent supervision rather than by the intrinsic limitations of the state’s expansionary modernization strategy.
In an attempt to ensure more effective supervision over foreign loans, Pak Ch’ung-hun established a foreign capital management bureau within the EPB. In 1968, he announced a rationalization program to merge or sell insolvent industrial companies to third parties with the goal of putting the companies on a financially sound basis as well as minimizing bank losses.
But the liquidity crisis did not abate, because the corporate and financial distress South Korea was experiencing was on a scale that required extraordinary measures. To roll over foreign loans, it was not adequate just to merge insolvent companies into what was likely to be another business entity of financially questionable character. The industrial rationalization program faltered because no third party came up with the money to shore up the failing firms and the dangerously exposed state banks. The World Bank expressed serious concern over the state of the South Korean economy in 1969. More drastic measures were needed if Park was to prevent a market panic over the faltering chaebol and state banks.
Forced by events, Park replaced Pak Ch’ung-hun with Kim Hak-ryôl as the deputy prime minister in 1969. Kim Hak-ryôl was an elite MoF bureaucrat who had been dismissed from his finance ministership in 1966 for
The Leviathan: Economic Bureaucracy 219
criticizing Chang Ki-yông’s hyperexpansionary policy. A personal confidant of Park’s since 1961, when he served as a private tutor on economic issues for the then SCNR chairman, Kim Hak-ryôl was an advocate of economic contraction. Reflecting the unusual nature of his times, however, the
“monetary conservatism” Kim Hak-ryôl put forth was of an unorthodox kind. Rather than championing disciplined monetary policy to guard the interests of state banks, Kim Hak-ryôl pulled the emergency brake on South Korea’s overheated economy with the goal of saving industrial producers through the socialization of business losses. The emergency relief measure made the MoF intervene even more—not less—extensively into everyday business affairs with the effect of undermining the MoF’s own banking constituency.
To deter the MoF from assembling a more orthodox adjustment policy package of interest h
ikes, which would have driven insolvent industrial producers into bankruptcy, Kim Hak-ryôl set up a Blue House Task Force for Handling Insolvent Firms in 1969. Run jointly by the EPB and the MoF, the task force rescued ailing chaebol through bank subsidies and tax relief. The MoF reduced deposit interest rates cumulatively by over 60 percent and loan interest rates by almost 40 percent between 1969 and 1972, even when inflationary pressures were visibly deteriorating.24 On the other hand, the rescue operation required the MoF to tighten its control over credit allocation to the SME sector, if it was to avoid colliding head-on with Park’s other goal of macroeconomic stabilization. To cool down inflationary pressures in the midst of running a rescue operation for the chaebol, the MoF had to exclude small- and medium-sized firms as well as individual households from its extensive rationing of credit, and channel even more resources to the chaebol. In a similar spirit of emergency, the MoL forced the workers to shoulder an inordinate share of adjustment costs through wage restraints and even layoffs.25
Despite Kim Hak-ryôl’s adjustment strategy, the chaebol were on the brink of collapse and the South Korean economy was near default on foreign loans by 1972. In the face of these threats, Park drew up an Emergency Decree for Economic Stability and Growth (EDESG) on the recommendation of Chairman Kim Yong-wan of the Federation of Korean Industries. To rescue big businesses, the decree transformed informal curb-market loans into bank loans, repayable over five years with a grace period of three; forced state banks to cut interest rates by issuing special stabilization bonds; drastically raised depreciation ratios on fixed investment; and introduced tax exemptions on income for strategic industries.26 This integrated effort to transfer income away from both informal curb-markets and formal state banks to ailing industrial producers effectively alleviated
Park Chung Hee Era Page 31
