Park Chung Hee Era

by Byung-kook Kim

  Broad similarities of approach were particularly visible in key industrial sectors such as electric power, steel, and two of the major consumers of steel: shipbuilding and automobiles. Four themes reappear in the development of steel and autos in Northeast Asia: (1) underlying similarities across the leading East Asian capitalist economies in crucial developmental sectors; (2) the influence of sectoral requirements in determining policy approaches and patterns of industrial organization in all three countries; (3) repeated but incomplete attempts in Korea to reverse the hard-charging, high investment policies just before and after Park’s death; and (4) the lasting effects of South Korea’s aggressive use of subsidized credit in both private and public sectors.

  In autos and steel, a surprising degree of commonality in ownership, firm size, and relations with the government joined the three countries.

  South Korea, like Taiwan, found little alternative to creating a state-owned enterprise to promote its integrated steel industry. In autos, Korea relied on private firms, but so did Taiwan. At several critical junctures, industrial requirements clearly curbed divergent political tendencies. Both countries

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  encouraged private firms to participate in the founding of integrated steel mills, but the capital requirements were too daunting for the private sector in either economy. In the late 1970s and early 1980s, Taiwan attempted to use a state-owned enterprise, China Steel, to energize a stagnant auto industry, but eventually recognized that the requirements of the two industries were too different. The large scale required for modern steel plants made it difficult for small economies like South Korea and Taiwan to have more than one integrated steel company. The Japanese economy was large enough by the late 1950s that it could allow several companies to develop large modern steel plants. High Japanese officials were convinced of the dynamism of private companies competing with each other and permitted several private companies to make steel, always in close interaction with the government, which helped ensure adequate financing.

  Creating and Promoting Big Steel

  Integrated steel mills process iron ore and coal into iron and steel. They are highly capital intensive, with a few firms operating at massive economies of scale. The crucial technology largely has come embedded in capital equipment imported from Europe (and later occasionally Japan). As a result, the key to economic success is not innovation or cheap labor costs, for with the new technology few workers are required. Rather, the key is effective construction and management of production capacity, combined with stable and sustained growth in demand.11 In Northeast Asia, increasing demand, partly a function of economic growth in rapidly developing countries and partly a function of government protection and promotion, sustained a virtuous cycle of profitability, continued investment, and increasing economies of scale and productivity. This led to declining costs and even more robust profits and investments.

  In all three of the industrialized economies of Northeast Asia, integrated steel production was founded, protected, and promoted by the government. The Asian steel mills bore little resemblance to the politicized and inefficient state-owned enterprises often seen in other developing countries and even in less crucial sectors in Northeast Asia. In the 1950s and 1960s the Japanese steel industry was somewhat more diverse and competitive, but state-sanctioned cartels among the oligopoly of six major producers were pervasive, and after Fuji and Yawata recombined to form Nippon Steel in 1970, market shares in the industry settled into an extraordinarily stable balance, thanks in good measure to close cooperation and support

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  from the Ministry of International Trade and Industry (MITI, after 2001

  renamed METI). To provide the economies of scale, Korea and Taiwan created state-owned enterprises and blocked competing investments by private firms, but they accorded the national champions quasi-private status to ensure that they would remain competitive in global markets.

  Japan

  Local and central governments were central to the modern Japanese iron and steel industry from its origins in the 1850s.12 The government founded Yawata Steel, the first large-scale integrated mill, at the time of the Sino-Japanese War (1894–95) with the explicit goal of creating an autonomous munitions capability. Private niche producers appeared as well, often linked to user industries such as shipbuilding or machinery, many of which were also dominated by the military. One of these producers, Nippon KÃkan, became the second major integrated mill, but remained far smaller than Yawata. In 1934 Yawata absorbed several smaller mills and changed its name to Nippon Steel. After the war, the Allied Occupation broke up Nippon Steel into Yawata and Fuji Steel, resulting in three integrated steel mills. Nippon Steel had largely complemented and supported the private firms, but the new, privatized offspring competed directly with them. In response, Kawasaki Steel, a small, maverick company, mobilized support from Liberal Democratic Party (LDP) politicians to overcome opposition from the Bank of Japan, the existing integrated makers, and parts of MITI, to create a large integrated mill on the waterfront in Chiba Prefecture, across the bay from Tokyo.13 Kobe Steel and Sumitomo Metals soon followed with giant seaside plants. Over the course of the 1960s the Japanese steel industry expanded from 30 million tons of capacity to over 100 million tons, making it the most productive and sophisticated and second largest (after the Soviet Union) in the world.

  Most of the capital to build these impressive steel plants came from the abundant savings of Japan’s large domestic economy, channeled through private Japanese banks, but the Japan Development Bank and the World Bank provided vital assistance to Kawasaki, Kobe, and Sumitomo in their efforts to break into integrated production.14 Most of the crucial technology came in the form of equipment and licenses from Europe for such breakthroughs as basic oxygen furnaces and continuous casting. Unlike their American rivals, Japanese steel companies were unburdened by excess capacity and outdated plants, and avidly sought out advanced European technologies.15 Over time, Japan became a net exporter of steel tech-

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  nology and equipment, but most technology remained embedded in capital equipment and the most important technologies generally came from Europe.

  The economic viability of the Japanese industry thus depended less on innovation or product differentiation, the opportunities for which were limited in steel, and more on efficient siting and organization of giant coastal steel plants and maintenance of high levels of capacity utilization.

  As the industry embarked on gigantic and risky investments in the 1950s and 1960s, the government and leading firms tried to enforce controls and cartels on prices, production, and new investment. Rapid growth in demand created many opportunities to cheat on the cartels, however, especially for aggressive, newer companies such as Sumitomo. MITI and the firms (including Sumitomo) concluded that the industry needed stability.

  After the merger of Fuji and Yawata, Nippon Steel emerged as a clear price leader with the resources and will to modulate production to maintain order. The Japanese steel industry settled into a remarkably stable oligopoly, adjusting exports—often determined cooperatively—as necessary to maintain order in domestic markets, and threatening would-be importers of cheap foreign steel with loss of access to high-end products.

  Although the top five steel firms relished their independence and initiative, the Japanese government was intimately involved in all aspects of the steel business: siting, capacity forecasts, public works procurement, technology imports, and trade and investment relations with the outside world, including financing construction of Korea’s Pohang Iron & Steel Company and the Baoshan plant in Shanghai. For Japanese officials and steel executives, steel was the rice of industry. After the great expansion of the 1960s subsided, steel mills remained prized customers of the Japanese banking system, though they no longer received preferential capital from the government.

  Taiwan

  At first glance, t
he creation of the integrated steel industry in Taiwan looks like a virtually paradigmatic case of the Taiwan government’s insistence on using state-owned enterprises to provide inputs to small private processors downstream. China Steel Corporation was founded from a conviction that Taiwan needed to deepen its industrial structure and strengthen its defense capacity. China Steel became highly successful, producing steel of respectable quality at internationally competitive prices. It initially focused primarily on the domestic market while exporting as necessary to maintain high levels of capacity utilization and economies of scale. As in Japan and

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  South Korea, the growth of steel production was closely linked with shipbuilding, which absorbed a high proportion of steel production. China Steel expanded less aggressively and remained focused on serving its domestic customers. Unlike POSCO at the end of the Park era, it did not erect a second plant, so that by the beginning of the twenty-first century it produced less than one-third as much steel as POSCO in an economy over half as large as South Korea’s. If China Steel’s development was less spectacular (and less well publicized), for many years it was far more profitable than POSCO, which poured resources into expansion.

  Before becoming an archetype of domestically oriented state-owned enterprise, however, China Steel traveled a more complicated and revealing developmental path. Far from insisting on state ownership, the government of Taiwan pushed for well over a decade to create a private integrated steel mill.16 During the 1950s the government aggressively supported the expansion of Tangrong, a private, Taiwanese-owned minimill firm (minimills use electric arc furnaces to melt steel scrap, rather than making steel from iron ore as integrated plants do). In 1956 the government floated a plan to build a 200,000-ton integrated plant using raw materials from the Philippines, but ran into a veto from American aid officials. In 1968 the government established a preparatory office for an integrated steel mill, and in 1970 it signed a tentative agreement with Australia. In December 1971 China Steel was founded with more than 50 percent private capital. When international financial turmoil scotched the deal with Australia, China Steel turned to an Austro-German consortium, but in July 1973 that deal, too, fell through. As in Japan and South Korea, the domestic steel industry was considered so crucial for building downstream industries that the government persevered. Mired in the stagnation following the oil shock, private investors proved unable to make up for the loss of European capital, so when the government increased its investment to fund plant construction, China Steel automatically turned into a state-owned enterprise. With help from the engineering arm of United States Steel, the first stage officially reached completion in December 1977 with a rated production capacity of 1.5 million tons per year.

  Organizationally, the company retained its private form. The founding general manager of the company, William Chao (Zhao Yaodong), accepted the job from President Chiang Kai-shek only on the condition that the company not be treated as an SOE: “I’m willing to do my best. But any company, whether national or private, that is run according to the current national enterprises law will fail. So I have one request: let me run it on my own, and I will accept full responsibility.”17 Pushing the necessary provisions through the Legislative Yuan to secure independence in personnel

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  and procurement was not easy, but Chao brought impressive credentials and connections to the job. His father was closely associated with the CC

  (Central Club) clique, the most powerful faction in the Kuomintang, and served from 1942 to 1951 as general manager of the Chiao Tung Bank (Jiaotong Yinhang), China’s main development bank, while Chao himself earned a master’s degree in engineering from MIT before successfully constructing a clutch of textile factories in Taiwan and Southeast Asia. Even so, Chao relied upon the political support of China Steel’s chairman, the admiral-turned-politico Ma Jizhuang, to shepherd the special provisions for China Steel through the sometimes-recalcitrant legislature.18

  With forceful and effective leadership from Chao and a little lucky timing, China Steel operated smoothly and profitably almost from the beginning. Three expansions brought capacity to eight million tons and used up the available space along Kaohsiung’s harbor. China Steel drew up plans to build a new plant in Southeast Asia, but the legislature blocked the plan on the grounds that it would “hollow out” Taiwan’s industrial base. China Steel retained a domestic monopoly on integrated production, but its grip on the market loosened in the late 1980s as the company lost the right to vet steel imports. In 1989 the government began to privatize China Steel.

  In 1995 it officially became a private company when the government’s equity share fell below 50 percent.19

  South Korea

  As in Taiwan, the decision to erect a giant integrated iron and steel plant reflected the South Korean government’s deep concerns about industrial upgrading and national security. During World War II, President Park Chung Hee had observed firsthand how the creation of the Manchurian industrial base sustained the Japanese war effort. A more puzzling question is why the government did not rely on the chaebol, as it had in so many other sectors.20 In fact, as in Taiwan, the Korean government initially tried to persuade private firms to participate in the construction of an integrated plant.21 The first plans to build an integrated plant gained the support of the ruling Liberal Party as early as 1958, but difficulties in acquiring international financial support and increasingly severe economic and political problems at home doomed the idea.22

  Park Chung Hee pushed for a public effort right after the military coup.

  In response, a business consortium proposed a private-sector alternative.

  By March 1962, a public-private joint venture appeared. After providing some initial encouragement, the Van Fleet Commission (1962–1963) con-

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  cluded that the plan would fail without support from USAID and the Ex-Im Bank. The U.S. mission’s commitment to economic stabilization meant that such support would not be forthcoming. As in Japan and Taiwan, the high barriers to entry in the steel industry made it crucial to obtain cheap capital. At least some of the financing would have to come from abroad, necessitating solid credit ratings.

  Despite these setbacks, the South Korean government remained committed to economic planning and self-sufficiency. The partition of the Korean Peninsula had left the North with most of the existing iron and steel plants, and through the 1960s the North outpaced the South in industrial development. Moreover, the South Korean government felt a new security threat after 1965, as the acceleration of the war in Vietnam, the outbreak of the Cultural Revolution in China, and the Pueblo incident heightened the all-too-recent memories of communist invasion. The perception of a growing security threat decreased political resistance to an essentially military regime.

  Rapid growth in demand for steel also made an integrated plant seem more feasible, and the South Korean government had some success in negotiations with the United States and Europe. During a visit to Pittsburgh in May 1965, President Park met with the head of Koppers, a leader in steel engineering, to explore plans for creating an international consortium to build an integrated plant in Korea. A year later, the World Bank issued a positive technical report on the feasibility of a 500,000-ton mill.23 Park incorporated plans for a steel mill in the second five-year development plan.

  In April 1967, an American-European consortium reached agreement on a 600,000-ton mill for South Korea. In rapid succession, the government selected Pohang as the site (June 1967), formed an integrated steel mill committee to develop detailed plans (November 1967), and established Pohang Iron & Steel Company (April 1, 1968).

  Heading the new company was General Pak T’ae-jun, Park’s chief of staff in the first year of the military junta’s Supreme Council for National Reconstruction. He enjoyed the complete trust of President Park.24 Even more than China Steel’s “Ironhead�
�� Chao in Taiwan, Pak T’ae-jun combined formidable technical and organizational skills with personal charisma. Stories of Pak’s extraordinary determination, energy, powers of observation, and obsession with cleanliness and order became legendary in Korea. Pak also brought to POSCO deep connections with Japan, where his family had moved shortly before the war. After graduating from high school in Japan, Pak received a degree in engineering from Tokyo’s prestigious Waseda University. He served as an emissary from President Park

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  to Japan in preparation for the normalization of diplomatic relations in 1965, and developed personal relationships with the heads of the Fuji, Yawata, and Kawasaki steel companies.25

  Pak T’ae-jun’s management style closely resembled that of large Japanese companies during Japan’s rapid growth period, but he also promoted military-like discipline and radiated passionate allegiance to “steel patriotism.” Military regimentation reflected not only Pak’s own background as a general but also the martial character of Park Chung Hee’s whole regime, which was reflected in the organization even of light industrial sectors such as textiles.26 As in Japan, Pak implemented a stiff examination system, offered permanent employment to white- and blue-collar workers alike, and based pay largely on seniority. Like China Steel’s Chao, Pak insisted on managerial independence as a precondition for accepting the daunting task of building an integrated steel mill. President Park gave Pak T’ae-jun complete control over procurement and personnel, and assented to his demand that POSCO remain free to refuse requests for political donations.