Lim, Phillip Wonhyuk
Wo king Pape
The E olu ion o Ko ea's De elopmen Pa adigm: Old
Legacies and Eme ging T ends in he Pos -C isis E a
ADBI Resea ch Pape Se ies, No. 21
P o ided in Coope a ion wi h:
Asian De elopmen Bank Ins i u e (ADBI), Tokyo
Sugges ed Ci a ion: Lim, Phillip Wonhyuk (2001) : The E olu ion o Ko ea's De elopmen Pa adigm:
Old Legacies and Eme ging T ends in he Pos -C isis E a, ADBI Resea ch Pape Se ies, No. 21, Asian
De elopmen Bank Ins i u e (ADBI), Tokyo,
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ADB INSTITUTE WORKING PAPER 21
The E olu ion o Ko ea’s
De elopmen Pa adigm:
Old Legacies and Eme ging
T ends in he Pos -C isis E a
Phillip Wonhyuk Lim
July 2001
ADB INSTITUTE
TOKYO
ASIAN DEVELOPMENT BANK INSTITUTE
ASIAN DEVELOPMENT BANK INSTITUTE
Focusing on co po a e go e nance and inancial esou ce
alloca ion mechanisms, his pape uses pa h dependence and
compa a i e ins i u ional analyses o ace he e olu ion o
Ko ea’s de elopmen pa adigm and o assess he ex en o
changes in he economy since he 1997 c isis. Howe e , he
ansi ion om an es ablished go e nmen -business isk pa -
ne ship o a ma ke -o ien ed pa adigm has no p o ed easy.
Al hough he go e nmen deal wi h he nonpe o ming loans
p oblem, he au ho con ends ha i has been less willing o ake
subs an i e measu es o enable inancial ins i u ions o lead
co po a e es uc u ing based on ma ke p inciples. As long as
Ko ea con inues o ha bo s uc u al p oblems in co po a e
go e nance and he alloca ion o inancial esou ces, he
in es men e iciency o he economy is likely o su e . Ins ead
he e o m p og am should concen a e on imp o ing he
au onomy o he inancial sec o and in oducing p i a e
emedies o add ess he pe sis en p oblems o co po a e
go e nance.
ADB Ins i u e
Wo king Pape Se ies
No. 21
July 2001
The E olu ion o Ko ea’s
De elopmen Pa adigm:
Old Legacies and Eme ging
T ends in he Pos -C isis E a
Phillip Wonhyuk Lim
II
ADB I
NSTITUTE
W
ORKING
P
APER
21
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De elopmen Bank Ins i u e. They should no be a ibu ed o he Asian De elopmen Bank, i s Boa ds, o
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Copy igh © 2001 Asian De elopmen Bank Ins i u e. All igh s ese ed. P oduced by ADBI Publishing.
ABOUT THE AUTHOR
Phillip Wonhyuk Lim is a esea ch ellow a he Ko ea De elopmen Ins i u e, a policy-o ien ed
economic esea ch ins i u e in Seoul. An economic his o ian by aining, he ob ained his Ph.D. deg ee
om S an o d Uni e si y in 1993 and lec u ed a he Ko ea Mili a y Academy un il 1996. A KDI, he
conduc s esea ch on he mode n economic his o y o Ko ea and p o ides policy ecommenda ions on
issues ela ed o he chaebol and s a e-owned en e p ises.
III
PREFACE
The ADB Ins i u e aims o explo e he mos app op ia e de elopmen pa adigms o Asia
composed o well-balanced combina ions o he oles o ma ke s, ins i u ions, and go e nmen s in
he pos -c isis pe iod.
Unde his b oad esea ch p ojec on de elopmen pa adigms, he ADB Ins i u e Wo king
Pape Se ies will con ibu e o dissemina ing wo ks-in-p og ess as a building block o he p ojec
and will in i e commen s and ques ions.
I us ha his se ies will p o oke cons uc i e discussions among policymake s as well
as esea che s abou whe e Asian economies should go om he las c isis and cu en eco e y.
Masa u Yoshi omi
Dean
ADB Ins i u e

IV
ABSTRACT
Focusing on co po a e go e nance and inancial esou ce alloca ion mechanisms unde
a ious egimes, his pape uses he concep o pa h dependence and compa a i e ins i u ional
analysis o ace he e olu ion o Ko ea’s de elopmen pa adigm and o assess he ex en o changes
in he Ko ean economy since he 1997 economic c isis.
In he ea ly 1960’s, Ko ea add essed he policy challenges o economic de elopmen by
essen ially combining a s a e-led alloca ion o inancial esou ces and an expo ma ke o ien a ion.
The go e nmen na ionalized banks and es ic ed inwa d o eign di ec in es men while p o iding
epaymen gua an ees o o eign inancial ins i u ions on loans ex ended o Ko ean i ms, mos o
which lacked he s anding in he in e na ional inancial ma ke s o aise capi al on hei own.
Sc apping he impo -subs i u ion bias o he 1950’s, he go e nmen emo ed a ious ma ke
dis o ions ha had made i di icul o i ms o exploi p o i able in es men oppo uni ies. Ko ea’s
de elopmen pa adigm, which cen e ed on he idea o go e nmen -business isk pa ne ship, p o ed
an e ec i e choice gi en he coun y’s esou ce endowmen a he ime.
F om he ou se , he go e nmen sough o con ain idiosync a ic mo al haza d, bu
sys emic isks began o build up as appa en ly success ul i ms kep bo owing o expand hei
business. When an economic slowdown h ea ened o opple hea ily indeb ed i ms in 1972, he
go e nmen decided o bail ou he deb -plagued co po a e sec o and imposed a deb mo a o ium on
cu b loans−wi hou holding he incumben manage s and owne s esponsible o hei p e ious
business decisions. The ensuing hea y and chemical indus y d i e u he weakened in es men
discipline as he go e nmen inc easingly di ec ed p i a e i ms o ca y ou a ge ed p ojec s.
Dis u bed by he dis o ion o he go e nmen -business isk pa ne ship, some
echnoc a s began o ad oca e a ansi ion o a mo e ma ke -o ien ed pa adigm as ea ly as he end o
he 1970’s. Al hough domes ic and o eign p essu e o libe aliza ion and democ a iza ion did lead
o he weakening o go e nmen con ol, ins i u ional e o ms equi ed o imp o e co po a e
go e nance and inancial esou ce alloca ion we e no implemen ed. In ac , wha migh be called
“de-con ol wi hou de-p o ec ion” p oceeded as amily-based business g oups known as he chaebol
ook ad an age o libe aliza ion and he go e nmen ’s implici gua an ee agains hei bank up cy.
The 1997 c isis should be unde s ood wi hin his con ex .
In he pos -c isis e a, changes in he isk p o iles o economic ac i i ies, combined wi h
he collapse o he au ho i y hie a chy a e he c isis, seem o be he p ima y d i e s behind Ko ea’s
e ol ing de elopmen pa adigm. The ansi ion om he old go e nmen -business isk pa ne ship
o a mo e ma ke -o ien ed pa adigm, howe e , has been di icul . Al hough he go e nmen has
swi ly deal wi h he massi e nonpe o ming loans p oblem, i has been a less willing o ake
subs an i e measu es designed o pu inancial ins i u ions in a posi ion o lead co po a e
es uc u ing based on ma ke p inciples. As long as Ko ea con inues o ha bo s uc u al p oblems
in he a eas o co po a e go e nance and he alloca ion o inancial esou ces, howe e , he
in es men e iciency o he economy is likely o su e , making i ex emely ulne able o
mac oeconomic shocks. The e o m p og am should ocus on imp o ing he au onomy o he
inancial sec o and in oducing p i a e emedies o add ess he p oblem o co po a e go e nance.
V
TABLE OF CONTENTS
Abou he Au ho II
P e ace III
Abs ac IV
Table o Con en s V
1. In oduc ion 1
2. Basic Analy ical F amewo k 3
(1) De elopmen Pa adigms 3
(2) Compa a i e Ins i u ional Analysis 4
(3) Pa h Dependence 6
3. The Eme gence o Ko ea’s De elopmen Pa adigm 6
(1) The Fo ma ion o he Go e nmen -Business Risk Pa ne ship 6
(2) The Consolida ion and Dis o ion o he Risk Pa ne ship 11
4. The Road o C isis 15
(1) The Dange s o De-Con ol wi hou De-P o ec ion 15
(2) The 1997 C isis in Pe spec i e 18
5. Al e na i e Scena ios in he Pos -C isis E a 21
(1) Fo eigne s Take O e : The “Fo eign Dominance” Scena io 21
(2) Old Habi s Die Ha d: The “Go e nmen In ansigence” Scena io 21
(3) The Empi e S ikes Back: The “Chaebol Resu gence” Scena io 22
(4) The New Economy Takes O : The “Fundamen al Re o m” Scena io 22
6. Ko ea’s Pos -C isis Pa adigm: Wo k in P og ess 23
(1) D ama ic Changes in Indi idual Men ali y and Beha io 23
(2) Ins i u ional Re o m: Accomplishmen s and Limi a ions 25
(3) Dashed Hopes and Remaining Challenges 27
Tables and Figu es (in body o ex )
Table 1 Economic T ends Be o e and A e he 1972 Eme gency Dec ee 12
Table 2 Value Added o he Chaebol as a sha e o GDP 14
Table 3 T ends in Co po a e Financing in Ko ea (Based on Flows) 16
VI
Table 4 Ma ke Sha e o Financial Ins i u ions in Ko ea 17
Table 5 In-G oup Owne ship Sha e o he Top Chaebols 18
Figu e 1 Ko ea’s Expo s, Impo s and In es men as sha e o GDP 10
Figu e 2 In e es Ra es and In la ion 13
Figu e 3 P o i abili y and Oppo uni y Cos s o Capi al
o Ko ean Manu ac u ing Fi ms 20
Figu e 4 FDI Flows in o Ko ea (No i ica ion Basis) 25
Figu e 5 The In e ne Boom in Ko ea 29
Re e ences 31
1
The E olu ion o Ko ea’s De elopmen Pa adigm:
Old Legacies and Eme ging T ends in he Pos -C isis E a
Phillip Wonhyuk Lim
1. In oduc ion
The economic c isis ha swep h ough Asia in 1997-1998 sha e ed wha had been
accep ed as he con en ional wisdom on Asia’s “mi acle economies,” and led o a
se ious eapp aisal o hei economic sys ems. In no o he c isis-s icken coun y was
his end mo e p onounced han Ko ea. Widely ega ded as a wa e shed in he
e olu ion o Ko ea’s de elopmen pa adigm, and no jus as a one- ime shock, he c isis
cas in o doub he iabili y o he old sys em based on go e nmen -business alliances
and he public managemen o p i a e isks. The old sys em migh ha e con ibu ed o
apid capi al accumula ion and helped ca apul Ko ea om one o he poo es coun ies
in he wo ld o he anks o OECD coun ies in a li le mo e han h ee decades;
howe e , he c isis made i clea ha his sys em, augh as i was wi h he isks o
mo al haza d and ou igh co up ion, could no be sus ained in a new economic
en i onmen cha ac e ized by libe aliza ion and democ a iza ion.
Ko ea is now in sea ch o a new de elopmen pa adigm. Wi h ega d o he u u e
o he Ko ean economy, a spec um o iews seems o exis , anging be ween wo
ex emes. Appalled by he eno mous cos ha he old sys em exac ed, p oponen s o he
Anglo-Saxon model a e calling o a comp ehensi e p og am o libe aliza ion in capi al,
labo , and p oduc ma ke s. In con as , champions o he old Ko ean sys em a e ying
o p ese e he s a us quo, appealing o na ionalis sen imen s and in la ing public ea s
abou po en ial job losses. These wo ex emes, which ep esen he impe a i e o he
ma ke and he weigh o his o y, espec i ely, se e as use ul e e ence poin s in
discussing he e olu ion o Ko ea’s de elopmen pa adigm. No cohe en pa adigm has
ye o eme ge in he pos -c isis pe iod, bu i is ce ainly possible o lay ou al e na i e
scena ios o he u u e based on he eme ging ends ha a e changing he Ko ean
economy.
I is he objec i e o his pape o ace he e olu ion o Ko ea’s de elopmen
pa adigm and o iden i y eme ging ea u es o he new sys em, using he concep o pa h
dependence and compa a i e ins i u ional analysis. The pape is o ganized as ollows.
Chap e 2 p esen s an o e iew o he majo concep s and me hodology used in
he pape . A de elopmen pa adigm is iewed as being shaped by he combina ion o
he oles and unc ions o ma ke s and non-ma ke ins i u ions as a na ion esponds o
he de elopmen al challenges o in es men , con lic managemen , and engagemen
wi h he ou side wo ld. This pape employs compa a i e ins i u ional analysis o
highligh he dis inguishing ea u es o a ious de elopmen pa adigms, and uses he
concep o pa h dependence in a poli ical economy con ex o demons a e how “his o y
ma e s” in hei e olu ion.
8
membe i ms. Membe ship in hese associa ions was manda o y. As o labo , all
unions we e disbanded ollowing he 1961 coup, and he es uc u ed Fede a ion o
Ko ean T ade Unions (FKTU) was o ced o ake a mode a e s ance.
In jus o e one yea , hus, he mili a y go e nmen es ablished a ious le e s o
con ol. Al hough he size o he s a e — as measu ed by he sha e o go e nmen
spending in GNP — emained ela i ely small, i s powe was o e whelming. A
ques ion emained, howe e , as o wha kind o s a e-led sys em Ko ea would ha e.
The mac oeconomic e o ms launched in la e 1962, a he insis ence o he Uni ed
S a es, ensu ed ha Ko ea’s s a e-led de elopmen pa adigm would no de ia e
signi ican ly om a ma ke -based one. Building upon he s abiliza ion policies o 1963-
64, he go e nmen de alued he Ko ean won om 130 o 255 o he dolla in May
1964. Also, in o de o p o ec deposi o s om in la ion and o encou age domes ic
sa ings, i aised he ceiling on he one-yea ime deposi a e om 15 pe cen o 30
pe cen on Sep embe 30, 1965 [C. Kim (1995: 114)].
These o hodox polices, which we e designed o educe dis o ions in
mac oeconomic a iables, we e accompanied by di igis measu es ha delibe a ely
in oduced dis o ions in o he mic oeconomic incen i es. The Pa k go e nmen knew
ha Ko ea lacked he domes ic esou ces o ca y ou i s ambi ious economic
de elopmen p og am; howe e , unlike La in Ame ican coun ies a he ime (o
Sou heas Asian coun ies in he 1980s), i was no willing o depend on o eign di ec
in es men (FDI). In a bid o ap in o o eign capi al while limi ing he in luence o
o eign mul ina ionals, he ie cely na ionalis ic go e nmen decided o ely hea ily on
o eign loans.7 Howe e , as domes ic i ms lacked he s anding o go o he
in e na ional capi al ma ke s alone, he go e nmen decided o deal wi h he p oblem o
lack o s a u e and asymme ic in o ma ion and o allow s a e-owned banks o gua an ee
p i a e-sec o o eign bo owing.
In adop ing his measu e, he Pa k go e nmen signaled ha i was willing o o m
a isk pa ne ship wi h business leade s. Al hough Pa k Chung Hee and his ollowe s
had ini ially condemned mos o hese businessmen as “illici weal h accumula o s,”
hey appa en ly concluded ha a combina ion o s a e moni o ing wi h p i a e
en ep eneu ship would be he mos e ec i e means o ca ying ou i s economic
de elopmen plans. The al e na i e, o using s a e-owned en e p ises o accele a e
indus ializa ion, as in he case o Taipei, China was no ac i ely pu sued. The
go e nmen decided o use i s c edibili y o aise capi al on he in e na ional ma ke and
alloca e inancial esou ces o p i a e i ms, in e ec con ac ing ou he p o ision o
goods and se ices o he p i a e sec o unde a sys em o go e nmen moni o ing and
gua an ees on loans. Th ough di ec moni o ing and ma ke es ing based on expo
pe o mance, he go e nmen ied o con ain he po en ial cos s o mo al haza d c ea ed
by s a e-backed deb inancing. Expo pe o mance, in pa icula , p o ided he go e n-
men wi h a ela i ely objec i e c i e ion o selec ing p i a e i ms when i made i s
decision on ex ending i s epaymen gua an ees.
7 Cho and Kim (1997: 103) es ima e ha had in es men been inanced exclusi ely by domes ic sa ings,
he a e age economic g ow h a e du ing 1962-82 migh ha e been only 4.9 pe cen pe annum, well
below he ac ual g ow h a e o 8.2 pe cen which was achie ed wi h he injec ion o o eign capi al.

9
In o de o inc ease economic independence h ough expo p omo ion, he
go e nmen also in oduced a numbe o expo incen i es. The sho - e m expo c edi
sys em was s eamlined as ea ly as 1961. The essence o he new sys em was he
au oma ic app o al o loans by comme cial banks o companies wi h an expo le e o
c edi (L/C). In o de o p o ide ins i u ional suppo in he a ea o o eign ma ke ing
and echnology impo s, he go e nmen es ablished he Ko ea T ade P omo ion
Co po a ion (KOTRA) in 1962, while an elabo a e ne wo k o expo e s’ associa ions
p o ided mo e indus y-speci ic se ices. A nea ly 50-pe cen de alua ion o he
Ko ean won in 1964 ga e a emendous boos o expo s, and a pa ial impo
libe aliza ion, which was designed o allow Ko ean i ms o pu chase in e media e
goods a wo ld p ices, ga e an addi ional impe us. The go e nmen also ga e expo e s
a ious ax deduc ions, gene ous was age allowances, a i exemp ions, and
concessional c edi s. In o de o moni o expo pe o mance in e e ence o indica i e
a ge s se a he beginning o each yea , he p esiden himsel chai ed mon hly expo
p omo ion mee ings. S ong expo pe o me s we e e en gi en medals and na ional
ecogni ion on Expo Day, which was es ablished in 1964 o commemo a e he day
when Ko ea’s annual expo s exceeded 100 million dolla s o he i s ime. Wi h an
awa eness o Ko ea’s compa a i e ad an age in he 1960s, he go e nmen encou aged
p i a e i ms o concen a e on labo -in ensi e indus ies.8
Ko ea’s de elopmen pa adigm p o ed an e icien choice gi en Ko ea’s esou ce
endowmen a he ime. In 1965, p ima y and seconda y school en ollmen s in Ko ea
we e simila o a es in coun ies wi h h ee imes i s pe capi a income [Wo ld Bank
(1993: 45-46)]. Cheap and high-quali y labo could be eadily employed o p oduce a
high a e o e u n on in es men in physical capi al, as long as he coun y could ap
in o o eign capi al and echnology o compensa e o he sho age o domes ic
esou ces and exploi i s compa a i e ad an age. The go e nmen ’s decision o issue
selec i e gua an ees on he o eign bo owing o p i a e i ms and o p omo e expo s
was a solu ion o his de elopmen al challenge. The go e nmen hus compensa ed o
capi al ma ke impe ec ions and emo ed he cons ain s ha had made i e y di icul
o i ms o exploi p o i able in es men oppo uni ies in he 1950s.
8 In 1962, labo -in ensi e manu ac u es accoun ed o less han 15 pe cen o Ko ea’s o al expo s o
$54.8 million. In 1963, expo s inc eased by $32 million (a 58.4% jump!) o each $86.8 million, and
labo -in ensi e manu ac u es such as ex iles and oo wea accoun ed o mo e han 80 pe cen o his
inc ease. O e all, expo s inc eased a an a e age annual a e o 35 pe cen in eal e ms om 1963 o
1969 [Yoo (1996: 8-9)].
10
Figu e 1 Ko ea’s Expo s, Impo s and In es men as Sha e o GDP
0
10
20
30
40
50
60
53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Yea
Expo s/GDP
Impo s/GDP
In es men /GDP
Sou ce: Bank o Ko ea, Na ional Accoun s, a ious issues.
No e: In es men he e e e s o g oss ixed capi al o ma ion.
Thus, wha he Ko ean go e nmen did “ igh ” in he ake-o s age was o a
di e en na u e han is usually poin ed ou in he exis ing li e a u e.9 The ma ke ailu e
ha was e ec i ely add essed by he go e nmen in he 1960s was due o he
“impe ec ions in he in e na ional capi al ma ke ” a he han coo dina ion ailu es in
he domes ic manu ac u ing sec o . Fa mo e impo an o Ko ea’s economic g ow h,
howe e , was he go e nmen ’s e o o co ec o he go e nmen ailu es o he pas :
policies designed o gene a e a bi age oppo uni ies ha had made i i ually
impossible o i ms o exploi Ko ea’s compa a i e ad an age in he 1950s. Wi h he
go e nmen add essing inancing p oblems as well as mac oeconomic imbalances,
p i a e i ms could now in es and expo o ake ad an age o unexplo ed p o i
oppo uni ies. Rapid capi al accumula ion, combined wi h lea ning by expo ing, was
he key o Ko ea’s economic success.
The coun y’s de elopmen pa adigm was a popula choice in poli ical economy
e ms as well. In his ega d, i is impo an o no e ha i a na ion has a compa a i e
ad an age in he labo -in ensi e sec o , as Ko ea did in he 1960s, expo o ien a ion can
9 Mos neoclassical pe spec i es ypically ace Ko ea’s economic success o a se o ma ke -o ien ed
mac oeconomic e o ms ca ied ou in 1964 and 1965 [K uege (1979)]. Bu hese measu es by
hemsel es would no ha e been e y e ec i e in co ec ing o he “impe ec ions ( eluc ance) in he
in e na ional capi al ma ke ” (i.e. i was basically impossible o li le-known Ko ean i ms o ap in o
o eign esou ces on hei own, wi hou go e nmen gua an ees). S a is pe spec i es, by con as , poin o
he pe asi e dis o ion o go e nmen mic oeconomic incen i es (“ge ing he p ices w ong”), and a gue
ha his co ec i e in e en ion p omo ed apid economic g ow h [Amsden (1989)]. I is unclea ,
howe e , whe he he Ko ean economy g ew hanks o o in spi e o go e nmen in e en ion. Al hough
mo e sophis ica ed s a is s udies ad ance “coo dina ion ailu e” a gumen s, hey a e less han con incing
in showing he exis ence o essen ial, non adable in e media e inpu s in he “ ake-o ” s age and
demons a ing he ole o he go e nmen in coo dina ing he p oduc ion o hese goods.
11
imp o e he wel a e o wo ke s. In addi ion, poli icians, bu eauc a s, and business
leade s na u ally a o ed he go e nmen -business isk pa ne ship because i p o ided
hem wi h a la ge deg ee o con ol o e esou ces. As a p oduc o s ong U.S.
demands o mac oeconomic s abiliza ion, on he one hand, and a na ionalis ic Ko ean
esponse designed o enhance economic independence, on he o he , Ko ea’s
de elopmen pa adigm could hus secu e wide suppo .
(2) The Consolida ion and Dis o ion o he Risk Pa ne ship
Ko ea’s de elopmen pa adigm, which cen e ed on he go e nmen -business isk
pa ne ship, encou aged apid capi al accumula ion and p oduced spec acula economic
g ow h. Reassu ed by go e nmen gua an ees and subsequen economic g ow h,
o eign inancial ins i u ions expanded loans o Ko ean i ms and p o ided he lion’s
sha e o he necessa y capi al o in es men p ojec s.10 Ko ean i ms, o hei pa ,
d ama ically inc eased hei le e age while hei p o i abili y ac ually declined: he deb -
equi y a io o manu ac u ing i ms, as measu ed by hei o al liabili ies di ided by ne
wo h, ose om 92.7 pe cen in 1965 o 328.4 pe cen in 1970.11 While encou aging
in es men conduci e o apid economic g ow h, he Ko ean sys em hus led o a highly
le e aged co po a e sec o ha became ex emely ulne able o shocks.
Al hough he Ko ean sys em was designed o minimize idiosync a ic mo al haza d
by making go e nmen suppo con ingen on ma ke pe o mance, i was no p epa ed
o deal wi h he inc eased sys emic isks mani es ed by he highe le e age o mos
p i a e i ms. Fi ms ha we e appa en ly success ul kep bo owing o expand hei
business, unde go e nmen gua an ees on o eign deb , and nei he he go e nmen no
he p i a e sec o s opped o hink se iously abou he po en ial oll ha a majo
economic down u n would ake on he hea ily indeb ed i ms.
When, in 1972, a se ious economic slowdown ollowing he in es men explosion
o he la e 1960s h ea ened o opple he deb -plagued co po a e sec o , P esiden Pa k
decided o bail hem ou . He issued he P esiden ial Eme gency Dec ee o Economic
S abili y and G ow h, on Augus 3, 1972. This Dec ee placed an immedia e mo a o ium
on he paymen o all co po a e deb s o cu b lende s, and called o an ex ensi e
escheduling o bank loans a a educed in e es a e. The mo a o ium was o las h ee
yea s, a e which all cu b unds would ha e o be u ned in o i e-yea loans a a
mon hly in e es a e o 1.35 pe cen , o an annual a e o 16.2 pe cen — a a ime when
he p e ailing ma ke a e exceeded 40 pe cen . The Augus 3 Eme gency Dec ee
o ced “usu ious” cu b lende s and diso ganized axpaye s o sha e losses, bu le he
owne s and manage s o i ms and banks in ac . Fu he mo e, no go e nmen o icials
ook esponsibili y o he mac oeconomic mismanagemen o he la e 1960s, and he
10 In he Fi s and Second Fi e-Yea Economic De elopmen Plan pe iods (1962-71), o eign sa ings
accoun ed o 52.8 pe cen and 39.4 pe cen o o al in es men , espec i ely. The sha e o o eign
sa ings in in es men emained signi ican h ough he 1970s, ho e ing a ound 20 pe cen .
11 Du ing he same pe iod, he ne p o i - o-ne wo h a io o manu ac u ing i ms declined om 15
pe cen o 11 pe cen . No mally, a i m wi h a high deb -equi y a io would be expec ed o ha e a high
a e age e u n in o de o compensa e o he high isk o de aul . F om 1970 o 1997, he deb -equi y
a io o Ko ean manu ac u ing i ms gene ally exceeded 300 pe cen while hei p o i abili y ba ely
imp o ed.
12
o e hea ing o he economy ha se ed as he backg ound o he c isis o 1972.
Viola ing he p ope y igh s o he c edi o s in he in o mal cu b ma ke , he
go e nmen elie ed he deb bu den o he p i a e i ms i had come o ely on as
agen s o ca y ou i s ambi ious economic de elopmen plans.
Table 1 Economic T ends Be o e and A e he 1972 Eme gency Dec ee (1964-1978)
(Pe cen Pe Annum, %)
G ow h Ra e
o
In es men Ra e o In la ion In e es Ra e on
Bank Loans
In e es Ra e
on
Cu b Loans
To al
Liabili ies/
Ne Wo h
Ne P o i /
Ne Wo h
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
13.3
19.3
84.0
25.2
52.3
45.1
11.3
24.9
3.7
40.7
30.2
24.9
77.1
43.1
45.1
30.0
5.8
14.6
15.9
16.1
15.5
15.5
12.5
16.7
13.6
30.5
25.2
21.3
16.6
22.8
16.5
18.5
26.0
26.0
25.8
24.5
24.0
23.0
17.7
15.5
15.5
15.5
16.1
15.0
17.1
61.80
58.92
58.68
56.52
56.04
51.36
50.16
46.44
39.00
33.24
40.56
47.88
40.47
38.07
41.70
100.5
92.7
117.7
151.2
201.3
270.0
328.4
394.2
313.4
272.7
316.0
339.5
364.6
350.7
366.8
15
15
17
17
16
14
11
4
17
30
23
17
22
21
23
Sou ce: Bank o Ko ea, Economic S a is ics Yea book and Financial S a emen s Analysis, a ious issues; Cho, Je and Kim (1997).
No e: The las wo columns a e he a e age igu es o manu ac u ing i ms (weigh ed by ne wo h).
In e ospec , he Augus 3 Eme gency Dec ee o 1972 was a u ning poin in he
e olu ion o Ko ea’s de elopmen pa adigm. I es ablished he p eceden o he
go e nmen aking ex ao dina y measu es o elie e inancial dis ess when necessa y
— wi hou holding he managemen o i ms and banks accoun able o hei p e ious
in es men and lending decisions. Mo eo e , he Dec ee seemed o imply ha an
excessi e dependence on deb would no only go unpunished bu migh ac ually be
ewa ded by he go e nmen — as long as o he companies also depended hea ily on
deb . The Dec ee hus undamen ally changed he na u e o s a e gua an ees, and
ushe ed in a new e a cha ac e ized by he deepening o he go e nmen -business isk
pa ne ship.
The ensuing Hea y and Chemical Indus y (HCI) d i e agg a a ed mo al haza d
as he go e nmen was inc easingly apped in a icious cycle o in e en ion [S e n e
al. (1995)]. Du ing he la e 1970s, HCIs accoun ed o almos 80 pe cen o all ixed
in es men in he manu ac u ing sec o , hough hei sha e in manu ac u ing sec o
ou pu was a ound 40 pe cen . The banks, as well as he newly es ablished Na ional
In es men Fund, suppo ed he HCI d i e by p o iding policy-o ien ed loans a a
nega i e eal in e es a e. As Figu e 2 shows, his was a d ama ic depa u e om he
second hal o he 1960s. As a esul , he in e es a e was no longe allowed o se e as
a p ice signal, and se ious mac oeconomic imbalances ensued.
13
Figu e 2 In e es Ra es and In la ion
Sou ce: Bank o Ko ea, Economic S a is ics Yea book, a ious issues; KDI in e nal da a.
No e: The cu b ma ke a e is he in e es a e applied o “G ade A ” i ms.
Fo he 1954-1995 pe iod, he bank loan a e is he in e es a e a he end o each yea on gene al
loans wi h a ma u i y o one yea o less, o gene al en e p ises. E ec i e July 1996, he mon hly
bank loan a e is calcula ed as he weigh ed a e age o he in e es a es on new loans incu ed in
ha mon h. The annual bank loan a e is equal o he Decembe a e.
In o de o minimize ime and exploi scale economies in es ablishing he capi al-
in ensi e HCI sec o , he go e nmen elied on a selec g oup o la ge conglome a es,
p o iding hem wi h ex emely gene ous inancial suppo . Known as chaebol, hese
amily-based business g oups d as ically inc eased hei sha e o GDP hanks p ima ily
o he gene ous go e nmen suppo .12 Du ing he heyday o he HCI d i e, om 1974
o 1978, i was no uncommon o chaebol o iple hei numbe o a ilia es h ough
new acquisi ions in he hea y and chemical indus ies.
12 The chaebol, which li e ally means “a weal h clique,” could be de ined as “a la ge business g oup ha
owes a signi ican po ion o i s g ow h o s a e suppo and is disp opo iona ely con olled by a amily
wi h pa ial owne ship.” Al hough he chaebol has become no o ious o i s la ge size and high deg ee o
di e si ica ion in o un ela ed ields, hese cha ac e is ics a e p ima ily he consequences o he chaebol’s
compe i i eness as well as dis o ions in capi al and p oduc ma ke s (due o s a e in e en ion in inancial
esou ce alloca ion and weak domes ic compe i ion). The essence o he chaebol has much mo e o do
wi h i s cha ac e is ic co po a e go e nance (i.e. pa ial owne ship bu comple e con ol by a amily
dynas y) and i s poli ical powe , which in luences he s a e in economic decisions. Gi en hese de ining
ea u es, he chaebol may beha e mo e like a ule-se e han a ule- ake , and may ha e an objec i e
unc ion ha di e ges signi ican ly om p o i maximiza ion o he i m as a whole.
-10
0
10
20
30
40
50
60
70
54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
Yea
cu b ma ke a e bank loan a e in la ion a e(GNP de la o )

14
Table 2 Value Added o he Chaebol as a Sha e o GDP (%)
1973 1974 1975 1976 1977 1978 1979 1980 1981
Top 5
Top 10
Top 20
Top 46
3.5
5.1
7.1
9.8
3.8
5.6
7.8
10.3
4.7
7.1
9.8
12.3
5.1
7.2
9.4
12.3
8.2
10.6
13.3
16.3
8.1
10.9
14.0
17.1
-
-
-
16.6
-
-
-
19.5
-
-
-
24.0
Sou ce: SaKong (1993).
The HCI d i e in he 1970s ans o med he go e nmen -business isk pa ne ship
decidedly in a o o hese amily-based business g oups. Unlike in he 1960s,
in e na ional compe i i eness (i.e., he “ma ke es ”) no longe ope a ed as a selec ion
c i e ion. The go e nmen simply belie ed in he en ep eneu ship o a ew chaebol
ounde s and di ec ed massi e esou ces in o hei i ms. Al hough Pa k Chung Hee
migh ha e el ha he could always con ol he chaebol like “quasi-SOEs,” he was in
ac c ea ing behemo hs ha would e en ually come o domina e he Ko ean economy
and change he go e nmen -business isk pa ne ship in hei own a o .
Ha ing channeled massi e esou ces in o he chaebol o ca y ou high-p io i y
in es men p ojec s — some imes o e he ini ial objec ion o hei owne -manage s,
he go e nmen had o ake esponsibili y when he p ojec s u ned sou . Mo eo e , he
gigan ic size and high le e age o he chaebol s eng hened he case o a “ oo big o
ail” a gumen when c isis s uck.13 In addi ion, a peculia model o co po a e
expansion and es uc u ing seems o ha e been bo n in his pe iod: (1) he chaebol
elies on s a e-backed deb inancing o unde ake massi e in es men p ojec s; (2) he
going-conce n alue o he i m u ns ou o be g ea e han i s liquida ion alue bu less
han i s deb — i.e. he i m canno eally se ice i s deb obliga ions; (3) he s a e s eps
in o w i e o a la ge po ion o he deb and ei he sells he “clean” company o a
di e en chaebol o p ese es he owne ship in e es s o he o iginal i m; and (4)
axpaye s wind up paying he bill.
These de elopmen s in he 1970s had a p o ound impac on Ko ea’s de elopmen
pa adigm. In he 1960s, when he go e nmen was o ging a isk pa ne ship wi h
p i a e i ms by gua an eeing he epaymen o hei o eign bo owing, i ce ainly did
no in end o gua an ee he go e nance igh s o he incumben owne -manage s. The
Eme gency Dec ee o 1972 and he HCI d i e, howe e , ans o med he na u e o he
go e nmen -business isk pa ne ship and exace ba ed mo al haza d. The ins alled base
o business in e es s, wi h i s high deb bu den, pushed he go e nmen o mo e in his
di ec ion. Subsequen ly, he indus ial a ge ing app oach adop ed du ing he HCI d i e
apped he go e nmen in a icious cycle o in e en ion, and he massi e inancial
suppo ex ended o he op chaebol i ms ans o med he go e nmen -business isk
pa ne ship in a o o hese amily-based business g oups.
13 The Daewoo expe ience in he 1970s p o ides an example. Du ing he HCI d i e, he Pa k go e nmen
asked Daewoo, a ex ile and ading company, o ake o e a machine- ool manu ac u e and a shipya d,
as well as o en e he au omobile indus y. In he p ocess o complying wi h he go e nmen ’s wishes,
Daewoo’s deb -equi y a io climbed o 900 pe cen . When Daewoo could no mee i s deb obliga ions,
he go e nmen had o bail i ou .
15
4. The Road o C isis
(1) The Dange s o De-Con ol wi hou De-P o ec ion
By he 1980s, i had become possible o success ul Ko ean i ms o aise capi al
in e na ionally on hei own. I had also become inc easingly di icul o he
go e nmen o iden i y p o i able in es men oppo uni ies and moni o he pe o mance
o indi idual i ms. Mo eo e , inc eased domes ic and o eign p essu e o
libe aliza ion and democ a iza ion was beginning o o ce he go e nmen o elinquish
some o he impo an policy ins umen s i had used o mo i a e and discipline p i a e
i ms. Gi en he educed desi abili y and e ec i eness o go e nmen in e en ion in
he economy, policymake s should ha e undamen ally e-de ined he ole o he
go e nmen .
In ac , as ea ly as he beginning o he 1980s, many echnoc a s had s a ed o
ad oca e a ansi ion o a mo e ma ke -o ien ed sys em. They we e clea ly awa e o he
dilemma aced by he go e nmen . Since he collapse o any la ge chaebol would bu y
he inancial sys em in nonpe o ming loans, he go e nmen was mo e o less obliged
o gua an ee hei s abili y. This implici gua an ee, howe e , encou aged he chaebol
o unde ake excessi e in es men s. Wi h he expec a ion ha hey would be bailed ou
should a c isis s ike, hey discoun ed he downside isks and in es ed wildly — unless
es ained by he go e nmen . In o de o main ain economic s abili y, he go e nmen
hus ound i sel o ced o in e ene in he in es men decisions o p i a e i ms.
The echnoc a s belie ed ha he only solu ion o his appa en dilemma would be
o he go e nmen o le ma ke o ces ope a e and o allow non iable chaebol o go
bank up while con aining he allou om hei collapse. The echnoc a s also hough
ha he go e nmen would ha e o hold he incumben owne -manage s accoun able o
hei p e ious decisions and o e ain om in e ening in he in es men decisions o
p i a e i ms in he u u e. Mo eo e , au onomous inancial ins i u ions, ee om he
con ol o he go e nmen and indus ial capi alis s, would ha e o be allowed o make
decisions on hei own and bea he ull consequences o hei ac ions. The go e nmen
would ha e o e-de ine i s ole and ocus on compe i ion policy and p uden ial
egula ion a he han on alloca ing inancial esou ces acco ding o i s indus ial policy
objec i es. In o he wo ds, he go e nmen would ha e o s op p o iding di ec ion and
insu ance o p i a e i ms, and limi i s ole o se ing and en o cing “ he ules o he
game” and p o iding a social sa e y ne . This se ies o decisi e measu es would se e
as a c edible signal ha he egime had indeed changed.
By his ime, howe e , he Ko ean economic sys em had p oduced a coali ion o
economic playe s who we e mo e in e es ed in consolida ing and main aining he
go e nmen -business isk pa ne ship. Poli icians and bu eauc a s wan ed o hold on o
he le e s o con ol, especially in he a ea o inancial esou ce alloca ion. Business
leade s wan ed he go e nmen o con inue p o iding loan gua an ees and o he suppo .
Ce ainly, as e idenced by he expe ience o Taipei, China and Singapo e, among
o he s, he Ko ean economic sys em was no he only sys em ha could p oduce apid
g ow h.14 Whene e e o m-minded policymake s ad oca ed a ansi ion o a mo e
14 No e ha Ko ea’s go e nmen -business isk pa ne ship helped o c ea e an economic sys em ha was
s uc u ally ulne able o cyclical shocks. Al hough Taipei,China and Singapo e depend hea ily on
expo s and a e exposed o ex e nal shocks, hey end o deal wi h hese shocks qui e well. In con as ,
16
ma ke -o ien ed sys em, howe e , he ins alled base o economic playe s wi h sys em-
speci ic in e es s blocked e o ms. In he end, e o m-minded policymake s we e
pushed aside by bu eauc a s who we e mo e willing o accommoda e he wishes o he
es ed in e es s.
In ac , while he e we e signi ican changes in Ko ea’s de elopmen pa adigm
om 1980 o 1997, hese changes we e no necessa ily o he be e . The coun y’s
in es men s a egy began o ely inc easingly mo e hea ily on he p i a e sec o , bu
he ins i u ional e o ms equi ed o imp o e co po a e go e nance and he alloca ion o
inancial esou ces we e no implemen ed. A e Ko ea was democ a ized in 1987, i s
con lic managemen s a egy had o be based on democ a ic p ocesses, bu needed
measu es o add ess campaign inancing p oblems and co up ion we e no adop ed, and
he esolu ion o con lic s o en in ol ed p o ac ed g idlocks (e.g., be ween labo and
managemen ) [Mo and Moon (1999)]. And Ko ea’s ex e nal s a egy emained hea ily
gea ed o expo ma ke s and s ongly discou aged inwa d o eign di ec in es men .
Mo eo e , p oduc and inancial ma ke libe aliza ion was a he selec i e. Ko ea’s
de elopmen pa adigm du ing he Pa k e a, in which he s a e p o ided bo h di ec ion
and insu ance, o bo h con ol and p o ec ion, was becoming inc easingly dys unc ional
as wha may be called de-con ol wi hou de-p o ec ion p oceeded. The old sys em o
p o iding incen i es and managing isks had b oken down, and he p oblems o mo al
haza d and ou igh co up ion g ew as undamen al e o ms we e delayed.
Table 3 T ends in Co po a e Financing in Ko ea (Based on Flows)
(%)
1970 1975 1980 1985 1988 1990 1991 1992 1993
Indi ec inance
39.7
27.7
36
56.2
27.4
40.9
41.8
36.3
32.8
Bo owing om banks
30.2
19.1
20.8
35.4
19.4
16.8
19.8
15.1
13.7
Bo owing om NBFIs
9.5
8.6
15.2
20.8
8
24.1
22.0
21.1
19.0
Di ec inance
15.1
26.1
22.9
30.3
59.5
45.2
37.9
41.4
53.3
Comme cial pape s
0.0
1.6
5.0
0.4
6.1
4
-3.8
7.6
14.7
Co po a e bonds
1.1
1.1
6.1
16.1
7.5
23
24.2
12.5
15.0
S ocks
13.9
22.6
10.9
13
40.6
14.2
15.1
15.9
16.5
Fo eign bo owings
29.6
29.8
16.6
0.8
6.4
6.8
4.4
5.0
-2.3
O he s
15.6
16.4
24.5
12.7
6.7
7.1
15.9
17.3
16.2
To al
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Sou ce: Bank o Ko ea (1994), Unde s anding he Flow o Funds in Ko ea; e-ci ed om Hahm (2000)
No e: “O he s” include go e nmen loans and ade c edi s among co po a e i ms
The chaebol we e no longe s ic ly con olled by he s a e, bu implici p o ec ion
agains hei bank up cy emained. The na u e o his explosi e combina ion was mos
e iden in Ko ea’s in es men s a egy. S a ing in he 1980s, he chaebol expanded
hei in luence in he inancial sec o h ough he owne ship o non-bank inancial
because o he high deb load ca ied by he Ko ean i ms ela i e o hei p o i abili y, hey ended o be
much mo e ulne able o ex e nal shocks.
17
ins i u ions (NBFIs) such as me chan banks, secu i y companies, in es men us s, and
insu ance companies. By o e ing a much highe a e o e u n han he banks, he
NBFIs we e able o a ac a g ea deal o inancial esou ces. In es o s appa en ly
belie ed ha hei in es men s in he NBFIs we e p o ec ed by he go e nmen — jus
as sa e as bank deposi s. Tables 3 and 4 show how he low o unds changed o
s eng hen he posi ion o he chaebol. Pa ial inancial libe aliza ion, combined wi h
he legacy o implici go e nmen insu ance, led o g ea ly inc eased o e all isks in he
inancial sys em.15
Table 4 Ma ke Sha e o Financial Ins i u ions in Ko ea
(End o pe iod, %)
1980 1985 1990 1995 1998
Deposi s
Comme cial Banks 42.8 31.2 25.5 19.9 22.6
Specialized Banks 28.1 22.4 15.5 7.9 5.2
NBFIs 29.1 46.4 59.0 72.2 72.2
Loans & Discoun s
Comme cial Banks 38.8 34.2 29.3 23.9 27.9
Specialized Banks 24.5 24.2 19.0 12.6 10.0
NBFIs 36.7 41.6 51.7 63.5 62.1
Sou ce: Hahm (2000)
P oblems in he co po a e go e nance o p i a e i ms we e no less se ious han
inc eased isks o ine icien in es men due o he excessi e supply o c edi o he
chaebol. Many chaebol-a ilia ed i ms ha e gone public since he mid-1970s, and as
Table 5 shows, he owne ship sha e o he ounde amilies has d as ically allen o e
ime. As is well known om he co po a e go e nance li e a u e, his inc easing
sepa a ion o owne ship and con ol has ended o agg a a e he agency p oblem.16
When owne ship and con ol a e sepa a ed, i is impo an o de ise an incen i e and
moni o ing scheme o ensu e ha he manage s wo k in he in e es s o he owne s
a he han hei own.17 As he gap be ween owne ship and con ol widened in chaebol-
15 Wi h he bene i o hindsigh , Ko eans now app ecia e (1) he impo ance o sepa a ing banking and
comme ce, (2) he p oblem o he implici deposi insu ance ex ended o NBFIs combined wi h
asymme ic in e es - a e de egula ion, and (3) he need o de elop au onomous inancial ins i u ions
libe a ed om he con ol o he go e nmen and he chaebol.
16 In c i icizing he chaebol, mos casual obse e s, as well as some schola s, dec y he concen a ion o
owne ship and con ol by he ounde amilies. They ypically a gue ha he sepa a ion o owne ship and
con ol will ans o m he chaebol in o genuinely mode n business co po a ions. Appa en ly, hey ha e
nei he looked a he ac ual owne ship da a no s udied co po a e go e nance issues. Thei pe cep ion
migh ha e been shaped by he conduc o he chaebol g oups be o e he 1980s, when hey we e closely
owned and held.
17 In combina ion wi h Ko ea’s secu i ies laws, ha discou aged ou side s om accumula ing o ing
igh s, he gene al lack o anspa ency in accoun ing in o ma ion ac ed as a ba ie agains me ge s and
24
had p ese ed he in e es s o exis ing sha eholde s and manage s. People began o
accep he idea o p i a izing isks and ewa ds.
In addi ion o e oding he legi imacy o he exis ing hie a chy o au ho i y, he
collapse o he old pa adigm based on he public managemen o p i a e isks
d ama ically changed he isk p o ile o economic ac i i ies. The se ies o majo
bank up cies seems o ha e had he desi ed e ec o inducing i ms, inancial
ins i u ions, and in es o s o beha e mo e cau iously, while he massi e semi- o ced
e i emen s in he wake o he c isis seems o ha e led indi iduals o make e o s o
imp o e hei ma ke alue.
As i became clea ha he s a e would no longe bea p i a e isks and p o ec
exis ing sha eholde s, p i a e i ms began o ealize he impo ance o isk managemen .
Since he ou b eak o he c isis, mos i ms ha e ied o imp o e hei deb -equi y a ios
and cash lows by issuing new equi y and selling asse s. Acco ding o he Bank o
Ko ea, he a e age deb -equi y a io o he Ko ean manu ac u ing sec o declined om
396.3 pe cen in 1997 o 210.6 pe cen in 2000. The in e es co e age a io (ope a ing
p o i / in e es expenses) imp o ed om 1.29 o 1.57 du ing he same pe iod. The end
o he “ oo big o ail” my h, oge he wi h in ensi ying global compe i ion, began o
o ce companies o exe cise p udence in in es men planning and o concen a e on
de eloping co e compe encies.
In he inancial sec o , he unp eceden ed closu e o banks and NBFIs changed he
a i udes o in es o s owa d isk. Deposi o s came o unde s and ha he go e nmen
would no p o ide uncondi ional deposi insu ance, and hey began o check he
soundness o bank balance shee s be o e making hei deposi s. The banks, o hei
pa , eassessed he isks in ol ed in lending o highly-le e aged i ms and began o
shi hei business ocus owa d consume loans. This shi aised a an alizing
p ospec ha he chaebol would ha e o imp o e hei co po a e go e nance and
anspa ency in o de o ob ain mo e capi al h ough di ec inancing channels.
In he labo ma ke , he end o he my h o li e ime employmen also d as ically
changed he isk p o ile o job al e na i es. As “s able” jobs in he public sec o and a
chaebol-a ilia ed i ms u ned ou o be no so s able, he pe cei ed isk gap be ween
“s able” jobs and “uns able” jobs na owed. As a esul , wo ke s became mo e willing
o mo e om he “s able” o he “uns able” sec o , making pe sonal e o s o enhance
hei “ma ke alue” o mobili y. Fo example, some o he bes and he b igh es
among public se an s mo ed o he p i a e sec o in he wake o he economic c isis,
and many op-no ch college g adua es began o conside job choices o he han
chaebols. The IT e olu ion and he inc easing endency o alue abili y a he han
senio i y ein o ced his end. In his ega d, i may be use ul o no e ha he economic
c isis also damaged he au ho i y o he olde gene a ion. T adi ional p ac ices such as
senio i y-based wages no longe seemed enable in an inc easingly compe i i e
en i onmen , and i became inc easingly di icul o jus i y au ho i y based on
some hing o he han abili y.

25
(2) Ins i u ional Re o m: Accomplishmen s and Limi a ions
Wi h he au ho i y o he chaebol bosses g ea ly weakened by he c isis, p esiden -elec
Kim Dae-jung announced i e p inciples o co po a e es uc u ing in Janua y 1998.
These p inciples included: (1) enhancing anspa ency in co po a e managemen ; (2)
elimina ing c oss deb gua an ees; (3) imp o ing inancial s uc u es; (4) imp o ing
co po a e go e nance; and (5) s eamlining business ac i i ies. P inciples (1) and (4)
we e designed o add ess he p oblem o “a bi a y impe ial ule” by he chaebol bosses,
mos o whom a he ime, hough no e en legally egis e ed as chie execu i es,
exe cised comple e con ol o e hei i ms. The in en o p inciples (2), (3), and (5)
appea ed o be o b eak up he “con oy-s yle” s uc u e o he chaebol.
In his ea ly pe iod, a se ies o policy measu es designed o imp o e co po a e
go e nance and p o ec he p ope y igh s o mino i y sha eholde s was implemen ed.
F om 1998, all publicly lis ed i ms we e equi ed o ha e a leas one ou side di ec o ,
in o de o p omo e he e ec i e moni o ing o managemen . Ins i u ional in es o s
we e no longe equi ed o ollow a sys em o “shadow o ing,” in which hey had o
cas hei o es in p opo ion o o he o es cas ins ead o exe cising hei ull o ing
igh s. Also, minimum sha eholding equi emen s we e signi ican ly educed o
sha eholde s’ igh s, such as he igh o ile de i a i e lawsui s agains company
execu i es o mismanagemen , o eques he dismissal o di ec o s and in e nal
audi o s, o e iew accoun ing books, o o call o a gene al sha eholde s’ mee ing
[Pa k (2001)]. Non-go e nmen al o ganiza ions (NGOs), such as People’s Solida i y
o Pa icipa o y Democ acy, led a campaign o in oduce e o ms designed o imp o e
co po a e go e nance.
Sou ce: Minis y o Comme ce, Indus y and Ene gy
(uni : mil. US$)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Figu e 4 FDI Flows in o Ko ea (No i ica ion Basis)
26
In addi ion o ins i u ional e o ms designed o imp o e co po a e go e nance, he
go e nmen in oduced majo changes o he FDI egime. The go e nmen enac ed he
Fo eign Exchange T ansac ion Ac in Ap il 1999 o libe alize o eign exchange con ol.
I also comple ely elimina ed he ceiling on o eign equi y owne ship in he s ock
ma ke as o May 1998. In he same mon h, he equi emen ha o eigne s needed o
ob ain boa d app o al o owne ship o mo e han one- hi d o he ou s anding sha es o
a i m was emo ed. Mo eo e , he go e nmen ully libe alized o eign land
owne ship by amending he Fo eigne ’s Land Acquisi ion Ac in 1998.20 In No embe
1998, he Fo eign In es men P omo ion Ac was enac ed o eplace he Ac on Fo eign
Di ec In es men and Fo eign Capi al Inducemen . The new legisla ion ocused on
c ea ing an in es o - iendly en i onmen by s eamlining o eign in es men
p ocedu es, s eng hening in es men incen i es, and es ablishing an ins i u ional
amewo k o in es o ela ionship managemen , such as he “one-s op se ice.” The
go e nmen also sc apped i s impo di e si ica ion policy in 1999, which had been
used since 1978 o block he in low o Japanese consume impo s (jus i ied on he
g ound o Ko ea’s la ge bila e al ade de ici wi h Japan). Al hough his measu e was
no di ec ly connec ed wi h changes in he FDI egime, i ein o ced he imp ession ha
he go e nmen was se ious abou undamen ally eo ien ing i s ex e nal s a egy.
Compa ed wi h hese posi i e ins i u ional e o ms in Ko ea’s FDI egime, which
ha e esul ed in a d ama ic inc ease in FDI in lows (see Figu e 4), p og ess in co po a e
es uc u ing has been a he slow. Ou o conce n o e cha ges o e i ed
in e en ionism as well as possible li iga ion a ew yea s down he line, he bu eauc a s
minimized hei in ol emen in co po a e es uc u ing in he immedia e pos -c isis
pe iod. Ins ead, hey op ed o “bank-led co po a e es uc u ing”— an oxymo on in
iew o he ac ha he comme cial banks in Ko ea we e con olled by he go e nmen
and we e in no posi ion o lead. As hey had done be o e he c isis, he banke s looked
o he go e nmen o guidance on how o deal wi h dis essed i ms. Mo e o en han
no , “bank up cy suspension” was he esul , as he banks escheduled jus enough deb
o keep he i ms going and he go e nmen , which was he con olling sha eholde o
hese banks, p o ided li le guidance. A numbe o so-called “wo kou ” i ms we e
allowed o p olong hei li es in a s a e o limbo.21
Al hough he go e nmen did in oduce policy measu es (e.g., a igh e o wa d-
looking c i e ia [FLC] o asse classi ica ion and p o isioning) o encou age he banks
o ake decisi e ac ions agains inancially dis essed i ms, he speed o implemen a ion
le some hing o be desi ed. As he con olling sha eholde in he na ionalized banks,
he go e nmen should ha e aken mo e p oac i e measu es o acili a e co po a e
es uc u ing while quickly implemen ing e o ms designed o enhance ma ke
discipline. Ins ead, i has ended o be qui e eluc an o in e ene o acili a e he
o de ly exi o non iable i ms, hough has been a less hesi an o s ep in o p op up
ques ionable i ms in he name o s abilizing he inancial sys em. Inc easingly, i has
ended o pu o he day o eckoning o dis essed companies and nudge c edi o s o
20 In he wo ds o Pie o Do an, a eal es a e deale , Ko ea wen om one o he mos closed eal es a e
ma ke s in he wo ld (including PRC) o one o he mos libe al.
21 To he go e nmen ’s c edi , i did allow he Daewoo G oup o go bank up in 1999 a e ainly ying
o come up wi h a solu ion ha would ha e had a smalle ad e se impac on he inancial sys em.
27
op o bank up cy suspension, in he hope ha he companies hemsel es migh ake
ca e o hei p oblems h ough sel - escue p og ams. In many ways, his ep esen s he
sa es cou se o ac ion o bu eauc a s: in e ening jus enough o a e an immedia e
ca as ophe bu keeping hei hands o so as no o in i e cha ges o “killing o
aluable i ms” o “g an ing unjus i iable a o s o he well-connec ed.”
The es uc u ing o he inancial sec o was comp omised by simila p oblems.
Because o pas mis akes in ol ing weak p uden ial egula ion and a bi a y
in e en ion, he go e nmen was less han s ic in applying he p inciple o
accoun abili y o in es o s who had made hei decisions unde pas egimes. Conce ns
abou sys emic isks also played a pa . In ac , he esolu ion o he Daewoo c isis in
1999 was delayed due o hese conce ns. In he end, he go e nmen decided o e on
he “sa e” side, and used axpaye s’ money o bail ou indi idual in es o s a he
gene ously, allowing hem o edeem up o 95 pe cen o he ace alue o Daewoo
co po a e bonds. Many c i ics a gued ha he go e nmen ca ied he “pa h
dependence” logic oo a and ailed o ake ad an age o a golden oppo uni y o
add ess he p oblem o mo al haza d and o es ablish he p inciple o accoun abili y.22
As a esul , a e he end o he p omising s a in he ea ly phase o e o m,
co po a e- and inancial-sec o es uc u ing in Ko ea was p ima ily d i en by liquidi y
injec ion.23 In combina ion wi h a V-shaped eco e y in 1999, he Na ional Assembly
elec ions in Ap il 2000 slowed he momen um o undamen al e o m. The
go e nmen became inc easingly eluc an o close non iable i ms and inancial
ins i u ions. Bank p i a iza ion and he sepa a ion o banking and comme ce we e no
e en se iously conside ed.
(3) Dashed Hopes and Remaining Challenges
Since he ou b eak o he economic c isis, Ko ea’s de elopmen pa adigm has been
a ec ed by a con luence o changes in ins i u ions as well as changes in people’s
expec a ions. Al hough i is oo ea ly o d aw a de ini i e conclusion on he new
de elopmen pa adigm, i is becoming inc easingly clea which o he ou al e na i e
scena ios discussed in he p e ious chap e is mo e likely o un old.
The V-shaped eco e y in 1999 all bu ex inguished popula ea s abou comple e
o eign dominance. F eed om he ea o ha ing o sell asse s o o eigne s o pay o
deb , some Ko eans began o exp ess na ionalis ic sen imen s. Du ing he Na ional
22 Ne e heless, i mus be acknowledged ha imposing e en a 5-pe cen loss a e on in es o s
ep esen ed a d ama ic depa u e om he pas . In he p e-c isis pe iod, inancial ins i u ions had made
easy money by “gua an eeing” mo e han 90 pe cen o all ou s anding co po a e bonds, wi h an implici
unde s anding ha he go e nmen would come o hei escue in ime o c isis. Unne ed by he Daewoo
iasco, in es o s became awa e o de aul isks, and in e es a es on co po a e bonds began o e lec isk
di e en ials. P io o he economic c isis o 1997, no meaning ul a e sp ead exis ed in Ko ea’s co po a e
bond ma ke .
23 In o de o clean up nonpe o ming loans and main ain a unc ioning inancial sys em, a o al o 109.6
illion won, he equi alen o almos one- ou h o Ko ea’s GDP, was injec ed in he i s ound o
inancial-sec o es uc u ing. Almos wo- hi ds o his amoun was used o ehabili a e he banking
sys em, wi h he emainde spen in he non-bank inancial sec o . The second-s age plan en isages
ou lays o 50 illion won, o which 10 illion won would be ecycled money and 40 illion won
addi ional public money.
28
Assembly elec ion campaign in he sp ing o 2000, some e en a gued ha selling asse s
o o eigne s would amoun o “a d ain o na ional weal h.” The e i al o hese old
a i udes owa d o eign in es men has been limi ed in scope, howe e . Mos Ko eans
now accep inc eased o eign p esence as a ac o li e. Fo ins ance, he sha e o
o eign in es o s in he ma ke capi aliza ion o companies lis ed on he Ko ea S ock
Exchange inc eased om 14.6 pe cen in 1997 o 30.1 pe cen in 2000, and mos
Ko ean in es o s iew his as a posi i e de elopmen . Those o eign companies ha
ha e managed o es ablish a oo hold in Ko ea ha e also gene ally ecei ed posi i e
publici y. Companies such as Vol o and Cla k a e using hei Ko ean ope a ions as
p oduc ion bases o he po en ially luc a i e PRC ma ke , and hei managemen
echniques a e po ayed in a a o able ligh . Vol o Ko ea, in pa icula , was pu in he
spo ligh when i s chie execu i e was p omo ed on he g ounds o his success in Ko ea.
In he inancial sec o , he Ko ea Fi s (Cheil) Bank, which was aken o e by he New
B idge Capi al, has appoin ed a o eign CEO, and comple ely changed i s way o doing
business, ocusing mainly on e ail banking. The Ko ea Fi s Bank has also been a he
o e on o ejec ing in e en ionis measu es by he go e nmen . Th ough equi y
pa icipa ion, a numbe o o eign inancial ins i u ions a e also exe ing a g ea deal o
in luence on he way Ko ean banks p o ide c edi .24
Al hough na ionalis ic sen imen s con inue o be exp essed, Ko eans a e g adually
coming o app ecia e he po en ial bene i s o o eign di ec in es men . In he case o
Daewoo Mo o s, o example, in he second hal o 1999 he e was a hea ed deba e on
he wisdom o selling i o a o eign company, such as Fo d o GM. A se ies o
success ul FDI cases, including Renaul ’s akeo e o Samsung Mo o s in ea ly 2000,
howe e , led he public o change hei iews on o eign companies. People a e now
clea ly less pe suaded by a gumen s in a o o injec ing massi e esou ces in o
inancially dis essed companies and ans o ming hem in o s a e-owned en e p ises o
indus ial policy easons. On he whole, he weake e sion o he “ o eign dominance”
scena io — which may be called he “ o eign p esence” scena io — has become
accep able in Ko ea.
Agains he backg ound o he V-shaped eco e y in 1999, he “go e nmen
in ansigence” and “chaebol esu gence” scena ios seem o ha e become e y likely
possibili ies. While ins i u ional e o ms in co po a e go e nance and inancial esou ce
alloca ion we e ce ainly less han adequa e o add ess undamen al p oblems, he
go e nmen enginee ed a ema kable u na ound in economic pe o mance wi h i s
liquidi y-d i en es uc u ing p og am. Wi h he assis ance o a o able ex e nal
condi ions, Ko ea’s GDP g ow h a e soa ed om minus 6.7 pe cen in 1998 o a
posi i e a e o 10.9 pe cen in 1999. The su i ing chaebol-a ilia ed i ms, o hei
pa , could p oudly poin o g ea ly inc eased p o i s. C i ics wa ning o he emaining
p oblems in he economy we e dismissed as Cassand as — as i a li le mo e han a yea
o e o m could ha e managed o emo e all s uc u al p oblems. The go e nmen and
he chaebol con inued o con ol he lion’s sha e o inancial ins i u ions. Al hough
P esiden Kim Dae-jung men ioned he need o a sepa a ion o banking and comme ce
in his speech o Augus 15, 1999, no conc e e ac ions we e aken. No was any p og am
24 Fo ins ance, as o end-2000, Goldman Sachs had a 11.1-pe cen equi y s ake in Ci izens (Kookmin)
Bank; he Bank o New Yo k and ING g oup espec i ely had 13.1 pe cen and 10.0 pe cen o he
Housing and Comme ce Bank.
29
o mula ed o acili a e he p i a iza ion o he banks. In he a ea o co po a e
go e nance e o m, he manda ed inc ease in he numbe o ou side di ec o s did li le o
change he es ablished p ac ices o he chaebol. The V-shaped eco e y educed he
pe cei ed need o undamen al e o m.
People inc easingly began o alk abou a na owe e sion o he “New
Economy” scena io, ocusing exclusi ely on he IT e olu ion and o e looking he
impo ance o e ec i e de egula ion and s able mac oeconomic policy. The e was a
g ea inc ease in he numbe o en u e i ms and an explosion o In e ne - ela ed
businesses, hanks in pa o go e nmen suppo . The numbe o en u e i ms nea ly
quad upled om 1,514 in Sep embe 1998 o 6,004 in Ma ch 2000. As shown by
Figu e 5, Ko ea’s in e ne e olu ion was uly imp essi e.
Buoyed by a s ock ma ke boom, en u e i ms e en began o a ac alen ed
wo ke s away om he chaebol. These en u e i ms seemed o o e an al e na i e o
he chaebol as many o hem ope a ed on p inciples close o he Anglo-Saxon model.
F om he s a , i seemed unlikely ha hese s a -ups would comple ely eplace he
indus ial gian s, bu he chaebol ound hemsel es ha ing o espond o he impo an
changes in oduced by hese s a -ups. Fo ins ance, hey inc easingly began o o e
employee s ock op ion plans and o he incen i es o e ain alen ed people and induce
hem o make i m-speci ic human capi al in es men s. I was hoped ha hese changes
would lead o enhanced anspa ency in co po a e go e nance and inc eased
di e en ia ion acco ding o abili y, hus educing he s uc u al p oblems.
Figu e 5 The In e ne Boom in Ko ea
0
100,000
200,000
300,000
400,000
500,000
600,000
1994 1995 1996 1997 1998 1999 2000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
(Thousand)
Hos s
In e ne use s
Domain
Sou ce: Re-ci ed om Sung (2001), p.126.
Numbe o Hos s / Domains (LHS)
Numbe o In e ne Use s (RHS)

30
These high hopes we e, howe e , all bu dashed by he middle o 2000. Unde he
e ec o de e io a ing ex e nal condi ions, he Ko ean economy began o slow down. In
pa icula , ising c ude oil p ices and alling semiconduc o p ices wo sened i s e ms o
ade. In addi ion, he bank up cy o he huge Daewoo G oup in 1999 g ea ly inc eased
nonpe o ming loans in he inancial sys em. Due o poli ical conside a ions in an
elec ion yea , howe e , he go e nmen was slow o make eques s o addi ional public
unds. The e was also a sense ha he ini ial ba ch o public unds, which exceeded 100
illion won, had been injec ed acco ding o bu eauc a ic disc e ion a he han a well-
de ined se o ules. Unde he bu den o nonpe o ming loans, inancial ins i u ions
began o educe hei supply o c edi .
Mo eo e , he Saehan G oup’s ab up iling o wo kou p oceedings in May
e i ed conce ns abou he eliabili y o c edi a ings, as he company had been
consis en ly a ed in es men -g ade. I once again highligh ed he need o enhance he
anspa ency o co po a e managemen and accoun ing. In addi ion, he Saehan case
aised unce ain y abou he iabili y o medium-sized chaebol, and esul ed in a ligh
o quali y in he inancial ma ke . The c edi c unch was agg a a ed by he con inued
exis ence o non iable wo kou i ms, which “sucked in” p ecious esou ces a he
expense o hei compe i o s. Bo h he bu eauc a s and he na ionalized banks had
incen i es o s ick o his o bea ance policy ins ead o adop ing s uc u al measu es
such as p i a iza ion which would make bank-led co po a e es uc u ing mo e c edible.
On op o hese eminde s o he incomple e na u e o he e o m in he inancial
sec o , he eudalis ic in igh ing o co po a e con ol a he Hyundai G oup illus a ed
ha Ko ean i ms had changed e y li le wi h ega d o co po a e go e nance. A
imes, e en he go e nmen seemed o dis ega d he basic p inciples o co po a e
go e nance and encou age he ounde amilies o e e o hei old ways, u ging
p o i able companies o come o he escue o hei “b o he ” companies in dis ess.25
In sho , as long as Ko ea con inues o ha bo s uc u al p oblems in he a eas o
co po a e go e nance and he alloca ion o inancial esou ce, he in es men e iciency
o he economy is likely o su e , making i ex emely ulne able o ex e nal shocks.
Unlike in he ea ly s ages o economic de elopmen , Ko ea no longe has an abundance
o unexplo ed p o i oppo uni ies. I needs o allow a b oad base o p ojec e alua ion
expe s o de elop. In pa icula , he e o m p og am should ocus on imp o ing he
au onomy o he inancial sec o and in oducing p i a e emedies such as class ac ion
sui s o add ess he p oblem o co po a e go e nance. Only hen will Ko ea be able o
ealis ically d eam abou ha ing a New Economy o i s own.
25 Fo he Hyundai case, he e is an in e es ing anecdo e ha is qui e symbolic o wha kind o change is
aking place in he co po a e go e nance o Ko ean i ms. In he la e au umn o 2000, i was umo ed ha
he go e nmen was u ging p o i able Hyundai a ilia es o p o ide assis ance o Hyundai Enginee ing &
Cons uc ion and o he a ilia es in inancial dis ess. People’s Solida i y o Pa icipa o y Democ acy
(PSPD), an NGO campaigning o co po a e go e nance e o m, sen a le e o Hyundai execu i es,
wa ning ha i would ake legal ac ion on behal o sha eholde s i unjus iable esou ce ans e s ake
place. The Hyundai execu i es a he p o i able a ilia es ci cula ed copies o his le e , emphasizing ha
sha eholde p essu e p e en ed hem om p o iding suppo o he oubled a ilia es. Ne e heless, i
was alleged ha he go e nmen was s epping up p essu e on hese execu i es, i only o a e a massi e
bank up cy and minimize po en ial axpaye cos . A ew days la e , PSPD ecei ed a elephone call om
a Hyundai execu i e. He asked he NGO o send a mo e s ongly wo ded wa ning le e .
31
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