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the liquidity crisis. The manufacturing sector’s average financial cost stood at 5.7 percent of its total sales in 1973, still too high to make the chaebol financially stable, but 3.5 percentage points lower than during the height of the liquidity crisis in 1971.
Rescuing the chaebol through this politically orchestrated income transfer was intensely criticized by the opposition political party and the dissident chaeya. The twin strategy of business rescue and monetary contraction was, however, a logical outcome of Park’s industrialization strategy.
The financially vulnerable growth machine of the chaebol had been kept afloat since its inception only because Park had the EPB and the MoF underwrite its financial liabilities and socialize adjustment costs through the coercive mechanism of forced saving and even politically engineered income transfers to the chaebol. Herein lay the EPB’s organizational distinctiveness. The superministry made mistakes—sometimes grave blunders, as in the case of Chang Ki-yông’s reverse margin system that trapped South Korea in a liquidity crisis by 1972. Yet the EPB always emerged triumphant in the interministerial race to solve the issues at hand, because it could flexibly adjust its policy stand over time from expansion to contraction and vice versa on the basis of its organizational mission of macroeconomic planning. As a planning agency, the EPB had the entire economy as its turf and was not a captive of any sectoral interest, which enabled it to switch sides from expansion to contraction as South Korea went through a business cycle. Moreover, as planners, EPB staff always searched for stabilization measures that did not threaten the growth potential of the South Korean economy.
By contrast, the MoF—with its mission to maintain financial stability and its constituency residing in the weak state banks—was disadvantaged in assuming the role of macroeconomic coordinator when Park geared for high growth in 1964. Ironically, the same organizational characteristics also prevented the MoF from winning Park’s trust when the opposite situation of contraction developed in the 1969–1972 period. Park then feared that the MoF would irreversibly damage the real sector in its pursuit of financial goals. To run to the other end of the policy spectrum and empower the MCI was equally inadvisable in 1969, because the adjustment policy required to deal with corporate distress directly collided with the expansionary ethos of the MCI. Whereas the MoF-centric coordination was likely to threaten corporate interests, the MCI was by definition excluded from Park’s choice of institutional leadership because of its intrinsically expansionary organizational character.
The EDESG of 1972, however, brought only a brief respite. The chaebol escaped from their worst liquidity squeeze, but the recovery was soon
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swept away by the global oil crisis of that era. The timing of supply shock could not have been worse, hitting South Korea precisely when its unregulated informal curb markets—South Korea’s more efficient financial sector, which had provided up to 40 percent of loans to chaebol—were paralyzed by the EDESG. The oil crisis again forced the MoF to dampen the effects of interest hikes on the chaebol by tightening its bureaucratic control of credit allocation. The double shock of the 1972 decree and the 1973 credit control put SMEs in a harsh credit crunch. From this pressing structural condition, Park drew up a strategy that directly contradicted orthodox economic thinking: if a company’s low sales volume was the cause of high costs and low earnings, expand its production capacity further with policy loans and realize economies of scale through an aggressive export drive.
Accordingly, Park geared himself up for what Yung Chul Park and Dong Won Kim have called the “gambler’s approach” to growth: a strategy to
“literally grow out” of a liquidity trap by engineering a new round of state-subsidized chaebol growth.27 The new hypergrowth drive, launched only four months after the 1972 EDESG and continued in spite of the 1973 oil shock, however, was inseparable from and driven by the domestic political and economic turmoil that had been engulfing South Korea since 1969. The catalyst for the turmoil came from abroad.
HCI, 1973–1979
As Richard M. Nixon sought an exit from the Vietnam War, he set forth plans for a U.S. military disengagement from Asia in his 1969 Guam Doctrine. As part of this larger regional adjustment, Nixon unilaterally withdrew a third of the American armed forces stationed in South Korea by 1971, causing a deep sense of security crisis within Park’s inner policy circle.28 The same year, moreover, saw South Korea’s long anticipated graduation from U.S. economic aid. The ending of aid programs was fully in line with Washington’s foreign aid policy, but its timing was inauspicious. The termination of the aid strengthened Park’s lifelong distrust of U.S. intentions. Ever since Secretary Dean Acheson publicly placed South Korea outside the U.S. defense line in the western Pacific in January 1950, thus inadvertently inviting the North Korean military invasion of the South five months later, South Korea looked at the United States as an ally who would abandon it when put under political pressure.
The South Korean domestic political situation was also becoming unstable. The opposition New Democratic Party (NDP) rallied around its presidential candidate, Kim Dae-jung, successfully mobilizing the urban electorate and Chôlla regional voters into a formidable electoral coalition in
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1971. The victory went to Park, but after 1971, the future defeat of the ruling Democratic Republican Party in a presidential election looked like a very real possibility. Most important, Park was scheduled to step down from the presidency in 1975 given the South Korean constitution’s limitation of three terms for the president.
It was in this uncertain domestic and international context that Park declared the yushin constitution in October 1972, giving himself what was for all intents and purposes dictatorial power for life. The president viewed his “palace coup” primarily in terms of military security. The double crisis of military security and domestic instability, Park argued, called for a further concentration of power in the presidency. Once a new regime was put in place, moreover, there should follow a major reappraisal of South Korea’s modernization strategy. The new regime, with its dramatically enhanced capabilities, deserved more challenging goals and strategies: heavy and chemical industrialization, or HCI. In Park’s eyes, regime change and policy change were two sides of the same coin. In the “revolutionary” situation of 1972 and 1973, the experts’ advice on budgetary balance and monetary discipline was brushed aside as a luxury before what Park judged to be a crisis threatening South Korea’s very survival as a sovereign nation. This rationale of regime change and policy change made Park even more unresponsive—if not outright hostile—to market norms.
The loss of monetary policy discipline was a cost he was willing to bear if it won him regime stability and military security.
The man he chose to orchestrate economic policy change on the basis of dramatically strengthened regime capabilities was O Wôn-ch’ôl. An MCI bureaucrat since 1962, and an engineer by training, O Wôn-ch’ôl possessed a thorough insider’s knowledge of MCI’s mechanisms of industrial policy, administrative guidance, and export promotion that was bound to assume a central role in Park’s HCI drive. Personal ties between the two men went back to 1961, when O Wôn-ch’ôl served Park’s military junta as a researcher. In 1971 he was brought in as the senior secretary on industrial affairs at the Blue House to prepare for developing a strategy to expand the heavy and chemical industries as the infrastructure for military security. Once the worst effects of the oil shock were met by 1974, Park appointed O Wôn-ch’ôl to oversee the newly established interministerial Heavy and Chemical Industrialization Planning Corps (HCI Planning Corps, or HCIPC). Holding these two posts until Park’s death in 1979, O
Wôn-ch’ôl left a lasting mark on South Korea’s industrial policy.
O Wôn-ch’ôl was well prepared to act as Park’s alter ego on behalf of the industrialization drive. In 1970, on the basis of a decade of
service at MCI as an expert on industrial policy, O Wôn-ch’ôl, then assistant vice
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minister, had drawn up an overall blueprint for shifting the focus of development from the light to heavy and chemical industries in keeping with the Japanese model.29 Much of the blueprint was to be formally incorporated into the strategic thinking of the HCI Planning Corps.30 In contrast to orthodox economists’ advice to wait until domestic demand reached the level of supporting mass production in the heavy and chemical industries, O Wôn-ch’ôl believed that supply was a greater bottleneck than demand, and that demand could be created abroad if production capacity was expanded to allow economies of scale. In his view, downscaling HCI projects to fit the South Korean domestic demand level would make the projects a losing proposition and deprive South Korea of its opportunity to join the club of industrial societies. The only option, as he saw it, was to expand HCI projects to internationally competitive scales for export promotion, with state-guaranteed foreign loans and state-subsidized bank loans.
The idea of export-led HCI instantly caught Park’s attention. A soldier more than a politician and a dreamer with the eyes of a realist, much like the Japanese Meiji oligarchs, Park had seen iron and steel as symbols of national strength ever since he had seized power in 1961. After the yushin regime was imposed, HCI became more than a personal preference; it provided Park with an opportunity to solve the twin crises of military security and regime legitimacy, as well as to rescue the chaebol from their slide into a deep recession in the middle of the oil crisis.31 In January 1973, Park publicly announced the spectacular goal of achieving more than a sixfold increase in exports and more than a threefold growth in GNP by 1981. Initially, the EPB and the MoF reacted with incredulity to O Wôn-ch’ôl’s idea of investing over $9 billion in six strategic heavy and chemical industries by 1981 to deliver Park’s promise of hypergrowth. Because South Korea was in the midst of the oil crisis, which shook its economy to the core, the EPB and the MoF were then putting into place a sharp monetary contraction to adjust to post-oil-shock realities.32 O Wôn-ch’ôl’s plan seemed to counter all that they were trying to do.
Park let the EPB and the MoF stabilize the badly shaken South Korean economy by issuing the Presidential Emergency Measure for Stabilizing People’s Livelihood in January 1974. Even before the economy was stabilized, however, Park began laying the institutional groundwork for an aggressive pursuit of HCI. Aware of the EPB’s skepticism regarding his HCI drive, Park dramatically strengthened the power of his presidential Secretariat by relying on chief of staff Kim Chông-ryôm (1969–1978) as a de facto macroeconomic coordinator and O Wôn-ch’ôl as the engine for HCI. O Wôn-ch’ôl’s post of senior secretary on industrial affairs had been newly created to balance the post of senior secretary on economic affairs
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that typically went to an EPB or MoF career bureaucrat. Parallel to the strengthening of Blue House capabilities, Park also transformed both the EPB and the MCI into colossal organizations, with newly created sectoral bureaus in charge of heavy and chemical industries, in order to back the Blue House-initiated HCI drive bureaucratically. Their organizational growth gave the EPB and MCI an institutional stake in HCI too.
At the same time, Park knew that given the huge scale of resource mobilization required for HCI, no one ministry could propel the drive. To prevent projects from getting lost in bureaucratic bickering, Park established the interministerial Council for Promoting Heavy and Chemical Industries (CPHCI). Personally chaired by Park himself and with cabinet ministers recruited as regular council members, the CPHCI was given the mission of setting the agenda, designing a concerted effort of resource mobilization and allocation, and laying out a division of labor among the economic ministries in that push toward HCI. The real driver of HCI was, however, not the council but O Wôn-ch’ôl’s HCI Planning Corps, which Park organized as the secretariat of CPHCI. Moreover, to win bureaucratic support for HCI, draw on the expertise and resources of each of the line ministries in the direction of HCI, and achieve even greater control over the policy agendas, Park had O Wôn-ch’ôl’s Planning Corps work directly with Grade 1 and 2A bureaucrats (assistant vice ministers and bureau directors) from the relevant line ministries in weekly working-level meetings, thus enabling the Planning Corps to go over the heads of cabinet ministers to influence sectoral policy directly.
The organizational change brought clear winners and losers. The biggest winners were the two members of the presidential staff, Kim Chông-ryôm and O Wôn-ch’ôl, who exercised discretionary power over macroeconomic and industrial policy, respectively, to move the state bureaucracy toward heavy and chemical industrialization. The EPB and especially the MCI also benefited a great deal, each adding four or more new sectoral bureaus and doubling their Grade 2A slots in January 1973.33 Park had to strengthen the presidential Secretariat and the EPB because the institutional vehicle of industrial policy, the MCI, was a relatively weak agency, frequently captured by its chaebol clientele, “robbed” of the best of newly appointed haengsi bureaucrats by the elite EPB and MoF, and tilted decisively toward expansion without an eye to macroeconomic issues. More critically, the MCI possessed an arsenal of license powers with which to design industrial policy, but those powers could not be actualized unless the EPB backed its license decisions with budget and foreign loans and the MoF with tax relief and bank subsidies. The MCI could fight off MoF re-
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sistance only if the EPB, now transformed into a planning agency with sectoral expertise, put its weight behind the MCI.
This is not to belittle the role of the EPB and the MoF. On the contrary, the success of increasing industrialization depended on Park’s winning their institutional loyalty to HCI. It was they who controlled strategic policy networks, commanded indispensable economic resources, and, most important, possessed South Korea’s best bureaucrats. Simply silencing the EPB’s voice of caution and ordering the MoF to obey Park’s HCI directives unswervingly could not ensure the mobilization of the bureaucracy in the direction of HCI. Fully aware of the importance of winning bureaucratic support, Park continued his old habit of showering the MoF and especially the EPB with organizational privileges. The 1973 presidential order issued to construct an institutional infrastructure for HCI expanded the organization of the EPB even more than that of the MCI. The HCI Planning Corps, moreover, sought active support from the EPB by bringing in its economic planning director, Sô Sôk-chun, as the deputy chief of the Planning Corps in May 1974.34 With his loyalty to HCI proven, Sô Sôk-chun saw his EPB career flourish, becoming the assistant vice minister for planning in December 1974 (when he was only thirty-six years old) and the vice minister by December 1977. Sô Sôk-chun was a symbol of success, becoming the first among EPB careerists to reach the EPB vice ministership.
Moreover, his promotions, after he briefly served in the HCI Planning Corps, were all made within the internal hierarchy of the EPB, which was also unprecedented. This extraordinary career trajectory, possible only with Park’s backing, sent out a clear message to EPB bureaucrats: work for HCI and be rewarded with power and honor.
With the center of power tilted toward the presidential Secretariat and away from the economic bureaucracy, and toward the EPB and the MCI within the economic bureaucracy, Park could embark upon HCI as soon as the immediate goal of stabilization to absorb the effects of the oil shock was achieved in 1974. The Council for Promoting HCI was personally presided over by Park himself once every month and by Prime Minister Kim Chong-p’il once every two weeks in between, approving the HCIPC-prepared overall timetable of investment and the HCIPC-formulated interministerial division of labor by April 1973. A flurry of rule making, sectoral planning, and institution building ensued throughout 1973. In May, the MCI announced a set of policy rules and guidelines on the debt-equity ratio, production capacity, joint ventures, foreign loan, export targets,
and technology licensing arrangements for firms entering the heavy and chemical industries. To bring about a timely execution of the MCI investment
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programs, the MoC drafted a Law for Promoting the Industrial Complex by July, with its discretionary power to expropriate land considerably strengthened. To maximize the benefits of industrial clustering, the MoC
also established an Industrial Complex Development Company to oversee the simultaneous construction of three massive HCI complexes in the southern provinces. More critically, after a long consultation with the EPB, the MoF drafted a controversial National Investment Fund (NIF) Law in July, which the DRP-controlled National Assembly duly enacted in August.35 The NIF was an outright forced savings program, legally requiring nonbank financial institutions with a “public character”—welfare pension funds, insurance, and trusts, among others—to purchase NIF bonds. The law also envisioned state agencies’ purchase of NIF bonds with budgetary funds, interest and dividend incomes, and capital gains. The money raised was subsequently channeled to the chaebol entrants in the heavy and chemical industries in the form of concessionary policy loans via state banks. To bring more funds under the NIF’s direct control, Park had the DRP legislate the MoF-drafted Law on National Welfare Pensions a month after the establishment of the NIF. Henceforth, 8 percent of wage income was to be levied as pension funds, with employers and employees each contributing half. Much of that money was to be used to back HCI.
The MoF also doubled the nominal capital of the Korea Development Bank and quintupled that of the Korea Export-Import Bank in December 1973 with an eye to increasing policy loans.36
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