The death of Park also helped strengthen chaebol power, because Chun Doo-hwan lacked the charisma, experience, and expertise that Park developed over the eighteen years of his rule. The strong state could no longer have its way when the private sector’s interests and preferences diverged substantially from state priorities. The state needed the chaebol’s cooperation more than ever before.
With the breakdown of negotiations between Hyundai and General Motors, the automobile industry came to have a dual structure, with Hyundai and Saehan (its name now changed to Daewoo Motors) dominating the passenger car sector and Kia Motors producing commercial vehicles as a monopoly assembler. The nullification of the Saehan-Hyundai merger proved to be beneficial to South Korean national interests. The stagflationary crisis soon ended, and the auto industry entered another period of dynamic growth by the mid-1980s. The remarkable turnaround was brought
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by a boom in both domestic and export markets. In particular, Hyundai’s successful entry into the North American market in 1984 constituted a turning point, enabling South Korea to possess an independent automobile industry that competed with MNCs under its own national brands. The success in exports had several causes.
First, the South Korean producers overcame some of their production and marketing deficiencies by strengthening their strategic alliance with MNCs. After 1982 Daewoo returned to its joint venture with General Motors and Kia developed an alliance with Ford and Mazda with the goal of obtaining advanced technologies and key parts and components, as well as securing access to the multinationals’ marketing networks to enter the global marketplace. It was, however, the Hyundai-Mitsubishi axis that posed the greatest challenge to the MNC-centric order of the world automobile industry. In return for its support for Hyundai’s export strategy, Mitsubishi took a 10 percent ownership of Hyundai in 1981 and raised its share to 14.7 percent by 1985. The Japanese automaker benefited from Hyundai’s export growth through its role as a licensor of key technologies and a supplier of major parts and components. In 1987 Mitsubishi upgraded its alliance with Hyundai by selling Hyundai’s Excel under the name of Precis through its marketing network in the U.S. market. Whereas Hyundai’s close collaboration with Mitsubishi proved crucial to its export success in the small-size passenger car sector, the alliance offered Mitsubishi Motors an opportunity to catch up with Toyota and Honda in the U.S. market.
Second, U.S. trade policy toward Japanese automobile exports helped Hyundai’s penetration of the North American market. The United States began pressuring Japan to impose voluntary export restraints in 1982.
Faced with these rising protectionist challenges, but also under the pressure of a shift in comparative advantage away from low-end toward high-end automobiles, the Japanese automakers began shifting the focus of their production from small-size cars to medium-size and even luxury cars.
This situation enabled Hyundai to enter the U.S. market for small-size cars in the mid-1980s.
Third, once the overseas markets for small-size cars opened up, it was the South Korean automakers, not other developing country producers, that rapidly filled the vacuum, because they possessed a relatively cheap but productive labor force. Until the “Great Workers’ Strike” broke out in the aftermath of a democratic breakthrough in June 1987, moreover, the workers in the automobile industry, as in other heavy and chemical industries, were legally prohibited from organizing labor unions. The quiescent labor sector, depoliticized through military-like labor practices, was an-
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other contributor to the competitiveness of the South Korean automobile industry.21 Labor productivity was much higher in South Korea than in Mexico and Brazil, although their wages were higher.22
Fourth, the auto industry’s export success owed much to Park’s original decision to develop a locally owned automaker within the structure of c haebol conglomerates. By encouraging local ownership, Park hoped to create an automaker that saw its interest to lie in challenging MNCs. By choosing his partner from chaebol groups, Park sought to build an automaker that tapped the resources of its affiliate companies in unrelated industries to overcome managerial, technological, and financial barriers. As he intended, Hyundai Motors, lacking resources, developed on the basis of pooling resources and sharing risks at the level of the entire Hyundai Group. The organizational strength of the group offset the weakness of the automobile company. Even Daewoo, the South Korean partner to General Motors in the joint venture, which presumably faced fewer organizational limitations than Hyundai Motors because it could draw on the resources of the world’s largest multinational, was one of the newly emerging chaebol conglomerates in the 1970s. The organizational features of the chaebol, including cross-shareholding and cross-loan guarantees that put affiliate companies under the tight control of a single owner-manager, made it possible to mobilize resources for the targeted automobile sector in spite of, or because of, high business risks.23
Fifth, with the ambition to grow into a MNC-like producer of indigenous models, South Korean automakers strove to develop autonomous technological capabilities through extensive research and development programs and technological licensing. Total R&D expenses increased six times, from 36.6 billion won in 1984 to 228.3 billion won in 1990.24 To be sure, the technological gap still remained huge into the mid-1990s, preventing Hyundai Motors from competing against global firms on an equal footing. Similarly, the construction of a stable long-term relationship between the assemblers and vendor firms in the spirit of kyeyôlhwa improved the quality of parts and components and lowered their prices, but until the mid-1990s, this was not enough to make Hyundai stand on a par with the best of the global players. Nonetheless, the institutional infrastructure of Hyundai Motors’ spectacular export success after the mid-1990s was being constructed during the 1980s and early 1990s by its investment in R&D, technological licensing, and integration of parts and components producers into its network of kyeyôlhwa.
The history of the South Korean automobile industry represents the general pattern of industrial development under Park Chung Hee. Like the
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macro economy that successfully upgraded its industrial structure through state intervention and export promotion, the auto industry developed from the assembly to the manufacturing stage and progressed in the local manufacture of capital- and technology-intensive parts and components. Both the macro- and the micro-industrial stories tell of a developing country that changed its comparative advantage with a mix of private entrepreneurship and public initiatives. The costs of dirigiste hypergrowth were as high as its benefits. The economy ran into severe stagflationary crises in 1969–1972 and 1979–1982, and the automobile industry suffered from chronic surplus capacity. As the change of General Motors’ partner in its joint venture from Sinjin to the Korea Development Bank to Daewoo in the 1970s, as well as the bankruptcy of Saenara in the 1960s, demonstrated, the South Korean automobile industry was not only the incubator but also the burial ground of would-be chaebol. The rise of Hyundai Motors and the demise of Sinjin were the different sides of the same high-risk, high-cost, high-payoff HCI drive.
The cases of Hyundai and Sinjin give a clue to South Korea’s eventual success in forging national champions. Certainly, state subsidies, industrial policy, local ownership, chaebol governance structures, transnational alliances, “can do” spirit, and disciplined workforces put its infant automakers on a path to hypergrowth. But hypergrowth also inevitably ended in a bust, dragging many of its automakers to the brink of bankruptcy. To explain how South Korea’s auto sector was able to get back on the track of hypergrowth rather than remain paralyzed, we need to look at Park’s dealing with chaebol failures, not just chaebol successes. When faced with an automaker under severe distress, Park tried to jump-start it with state support as part of his end of his political bargain. However, Park was willing to let an automaker go under when he thought he had exhauste
d his options. Then he rammed through an extensive restructuring program, replacing its owner-managers with state-designated caretakers, rescheduling its debts, streamlining its lines of production, and laying off workers with an eye to recreate it into a business asset attractive enough for a takeover by a third party. Obviously such a restructuring entailed a huge cost.
Nonetheless, it was an effective way to adjust without throwing away the failed automaker’s production facilities, technologies, and skilled workers.
Those assets were now in possession of its acquirer, to be used for the next window of opportunity for hypergrowth. In short, the hypergrowth was possible because Park was politically capable of and prepared to pay for the adjustment costs of hypergrowth.
c h a p t e r
e l e v e n
Pohang Iron & Steel Company
Sang-young Rhyu and Seok-jin Lew
In explaining south korea’s macroeconomic takeoff, Park Chung Hee’s leadership was one of many factors. By contrast, in the development of POSCO (the Pohang Iron & Steel Company), his leadership was the pivotal variable, dwarfing all others in determining the scale and speed of the effort. To recount the story of POSCO is to retell the story of Park as the soldier and the modernizer. When his people yearned to escape from the hunger they endured during the lean months of spring, Park envisioned the building of an industrialized nation, with the steel industry as the engine of growth for the rest of the heavy and chemical industries, from machinery to automobiles to shipbuilding to the defense industries.1
“Steel is national power,” said Park at the celebration of POSCO’s tenth anniversary. Park put the steel industry at the top of his list of strategic industries as early as 1961, when he promulgated the first of his Five-Year Economic Development Plans (FYEDPs).
Beyond Park’s own identity as a modernizer of South Korea in the style of Meiji Japan leaders, there were also domestic political factors that drove Park to the construction of a modern integrated steel mill. Lacking the credentials of a liberal democrat, Park portrayed his Democratic Republican Party (DRP) regime as a political force that promised to lift South Korea out of its poverty and military insecurity. Constructing an integrated steel mill on the scale of POSCO fit in perfectly with Park’s strategy of legitimization based on performance. Steel was a measure of military
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prowess, economic modernization, and technological progress. By extension, it was also a living proof of Park’s political leadership.
This is not to claim that Park’s construction of an integrated steel mill constituted a mere instrument of political legitimization. On the contrary, it legitimized his rule only because it served real needs. Seoul lagged far behind P’yôngyang in military capabilities when Park seized power through a military coup in May 1961. Military deterrence was secured only with support from his U.S. ally, but his relationship with that patron was anything but secure. Washington cracked down on his junta for toying with
“socialist” economic ideas in June 1962 and even withheld aid to dissuade Park from extending military rule in March 1963. Moreover, as the Vietnam War escalated, there spread rumors of the United States relocating some of its troops stationed on the Korean Peninsula to South Vietnam.
Anxious to tie his ally’s hands, Park dispatched military troops to Saigon in 1965, thus forging a “honeymoon” (milwôl) with Washington—
but only for three years. South Korea’s security dilemma worsened on all fronts. The North Korean guerrillas staged their mini “war of liberation,”
even coming close to attacking the Blue House in January 1968. The same year P’yôngyang captured a U.S. reconnaissance naval vessel, the Pueblo, in the waters of the East Sea and again dispatched its highly trained guerrillas into Kangwôn Province to test South Korea’s military preparedness.
In the face of the heightened North Korean military threat, the United States surprised Park by calling upon its Asian allies and client states to shoulder the burden of defending Asia from communist threats and swiftly moved toward an exit from the Vietnam War, one consequence of which was the withdrawal of the U.S. Seventh Infantry Division from South Korea by 1971.
South Korea was militarily vulnerable throughout the eighteen years of Park’s rule. The value of steel as a defense industry traced its origin to both real and perceived security threats. To cope with the country’s security challenges, Park argued, the South had to make building its own defense industry a national priority. Steel was the center of this political effort.
The powerful image of industrial linkage effects also gave added force to the plan for an integrated steel mill. As early as 1961, Park embraced the strategy of heavy and chemical industrialization (HCI) to surmount the obstacles of increasing trade deficits, dwindling foreign exchange reserves, and falling growth rates. Among the myriad heavy and chemical industries, it was the steel industry that Park had to develop first, because without a stable supply of quality steel, South Korea could not vertically diversify into other heavy industries upstream. Moreover, as a decade of hypergrowth dramatically raised the South Korean domestic demand for
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steel, much of which had been met by imports, producing quality steel products domestically would also alleviate balance-of-payments difficulties. By 1970, iron and steel were the country’s second largest imports, next to crude oil. These rationales of industrial linkage effects and import substitution made the military security strategy of steel industry development a good economic strategy as well.
Not only driven by his own ambition to become a “Meiji,” but also in need of justifying his rule with developmental showcase projects in addition to resolving military threats and clearing a way to HCI-led hypergrowth, Park never wavered from his goal of building an integrated steel mill after his seizure of power in May 1961. The issue was not whether, but how, to build it. Given the lack of capital, technology, and market, it was not surprising that Park’s search for a viable strategy ended in repeated failure, until the dynamics of economic modernization and regional military security converged to support his lifetime fascination with the steel industry in 1969. Implementation proved to be far more challenging than the formulation of the goal of constructing an integrated steel mill.
Yet within thirty years of its establishment, the Pohang Iron & Steel Company (or POSCO, as it came to be popularly known in the 1990s) completely changed the global map of steel production. The World Bank, which had turned down POSCO’s 1968 loan request on the grounds that South Korea had no comparative advantage in the production of steel, by 1981 called it “the world’s most efficient producer of steel.”2 The bank’s original assessment, however, was not without reason. During the 1960s just ten developing countries had integrated steel mills, half of which had an annual production capacity of more than half a million tons. South Korea trailed far behind, in possession of only small steel mills with electric furnaces. Depending on imported scrap iron, these mills all suffered from high production costs. Even by the standards of the third world, South Korea was a late-late developer, fit only for the production of light industry goods like textiles, shoes, and wigs. But it nevertheless plunged into the development of an integrated steel mill only a few years after horizontally expanding into light industry.
The transformation of the South Korean steel industry is the story of one single company, POSCO. Formally founded in April 1968, the construction of its integrated steel mill began in April 1970 and was completed in July 1973 with an annual production capacity of 1.03 million tons. This Phase I alone cost $123.7 million. The expansion of production capacity continued rapidly, culminating in the completion of Phase IV by May 1983, which endowed POSCO with an annual production capacity of 9.1 million tons. With the death of Park Chung Hee in October 1979, the task of turning POSCO into a world leader in the production of steel
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fell on the shoulders of Pa
k T’ae-jun (often transliterated as Park Tae-joon), whom Park handpicked in 1968 to construct and manage POSCO.
The company completed the building of its second mill, Kwangyang Integrated Steel, in 1992 to boost its total annual production capacity to 21.1
million tons. By 2000 POSCO was the second-largest steel producer in the world, surpassed only by Nippon Steel, with an annual production capacity of 28 million tons. To achieve this rank, POSCO had increased its production capacity by 28 times in twenty-seven years. More incredibly, from the very first year of its operation, POSCO was profitable. By 2000 its operating profit rate ran 18 percent. Only the China Steel Corporation of Taiwan performed better.3
How was this “miracle” possible? Or was it a miracle? The existing literature on South Korea’s industrial upgrading is firmly entrenched in either developmental state theories or neoclassical economics, but we argue that neither approach adequately explains the history of POSCO.4 Although works on South Korea’s developmental state bring out the centrality of the state’s mission, ideology, organization, strategy, and “embeddedness” in shaping its pathway from the periphery to modernity, they lack an analysis of the political process by which the South Korean state made strategic choices and implemented its chosen route of development. Moreover, they zero in on the study of POSCO development after 1973, when most of the politically challenging decisions on its scale of production, funding, ownership structure, transnational coalition, and marketing had already been made. Focusing on the process and including the pre-1973
period of strategic decisions brings out three stories that have been hitherto inadequately dealt with in developmental state theories and neoclassical economics.
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