Social and Economic Policies in Korea: Ideas, Networks and Linkages (Routledge Advances in Korean Studies, 3)

Social and Economic Policies in Korea

‘This book relates the emergence of social policy in East Asia to the “economic miracle” and its driving force – state-directed economic intervention. Dong-Myeon Shin’s book breaks new ground in charting the linkages between economic and social policy in post-war Korean history and in theory.’ Professor Ian Gough, University of Bath The sustained remarkable economic growth in the East Asian countries – Japan, South Korea, Taiwan, Hong Kong and Singapore – has brought about a great deal of debate over the role of the state in the market and society. In this book, Shin analyses the dynamic process of state interventions in the economy and social affairs in Korea from the early 1960s until the present with special reference to five policy areas: macro-economic policy, industrial policy, social security policy, labour policy, and education and training policy. He discusses issues such as: • • • •

Why has the state changed its economic and social policies? What are the political and social consequences of state interventions in the market and society? What are the characteristics of the social security system in Korea? How, why and to what extent has the Korean government come to adjust its economic and social policies?

Social and Economic Policies in Korea develops a unique explanation about the development of Korean social policy using the concepts of ‘policy idea’, ‘policy network’ and ‘policy linkages’ to examine the causes, patterns and consequences of state interventions in the economy and social affairs over time. It should interest students and researchers of East Asian Studies, Social Policy and Development Studies. Dong-Myeon Shin is a Senior Lecturer at the Department of Public Administration, Kyung Hee University, Korea. He has published numerous articles in both English and Korean and is a member of the Editorial Advisory Board for International Social Security Review.

RoutledgeCurzon Advances in Korean Studies

1. The Politics of Economic Reform in South Korea A fragile miracle Tat Yan Kong 2. Market and Society in Korea Interest, institution and the textile industry Dennis McNamara 3. Social and Economic Policies in Korea Ideas, networks and linkages Dong-Myeon Shin

Social and Economic Policies in Korea Ideas, networks and linkages

Dong-Myeon Shin

First published 2003 by RoutledgeCurzon 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by RoutledgeCurzon 29 West 35th Street, New York, NY 10001 This edition published in the Taylor & Francis e-Library, 2003. RoutledgeCurzon is an imprint of the Taylor & Francis Group © 2003 Dong-Myeon Shin All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Shin, Dong-Myeon, 1966– Social and economic policies in Korea: ideas, networks and linkages / Dong-Myeon Shin. p. cm. Simultaneously published in the USA and Canada. Includes bibliographical references and index. 1. Korea (South)–Economic policy–1960– 2. Korea (South)– Social policy. I. Title. HC467.S4525 2003 338.95195–dc21 2002013406 ISBN 0-203-44996-7 Master e-book ISBN

ISBN 0-203-45761-7 (Adobe eReader Format) ISBN 0–415–27917–8 (Print Edition)

To my parents and my wife, Moona Choi

Contents

List of tables List of figures Acknowledgements List of abbreviations 1

Introduction

xi xiii xv xvii 1

The scope of the research and some definitions 6 Research methods 8 Organisation of the book 9 2

The roles of the state in the economy and social welfare

11

Characteristics of globalisation 12 State intervention in the market 14 Welfare states and changing roles of the state 20 Conclusion 28 3

A theoretical framework for analysing the process of policy formation and change

29

Theories on the role of the state in policy-making 29 A model for analysing policy formation and change 40 Conclusion 46 4

Social and economic policies during the export-led industrialisation of the 1960s Policy legacy of the 1950s 47 Changes of institutions and setting veto points 52 Export-oriented industrialisation and state intervention 55 Social welfare: an etatist welfare system 62

47

viii Contents Policy linkages between economic and social policies 68 Conclusion 75 5

Social and economic policies during the heavy and chemical industrialisation of the 1970s

77

Policy legacies of the 1960s: take-off without social welfare 77 The authoritarian developmental state and the state–business relationship 79 HCI and state intervention: a model of the developmental state 85 Social welfare: a residual welfare system 88 Policy linkages between economic and social policies 94 Conclusion 104 6

Stabilisation, liberalisation and social policies: 1980–1992

105

Policy legacies of the 1970s 105 Democratic transition and the growth of chaebols 107 Economic stabilisation and liberalisation 112 Social security: towards a regulator 118 Policy linkages between economic and social policies 125 Conclusion 134 7

Social and economic policies under globalisation: 1993–1997

136

Globalisation, policy network and public policies 136 Globalisation and economic policy 143 A Korean welfare model? 147 Policy linkages between economic and social policies: towards a business-friendly social policy? 155 Conclusion 169 8

Financial crisis, economic policy and social policy: 1998–present Crony capitalism versus the punishment of international capital 172 The demise of the Korean development model 175 From an economic crisis to a social crisis 179 The paradox of Korea: towards an institutional welfare system 182 Policy networks, public perceptions and social policy 188 Conclusion 192

171

Contents ix 9

Conclusions

193

Policy networks, policy ideas and policy changes 193 Policy linkages: embedded social policy 198 The welfare regime in Korea and its viability 202 Epilogue: assessment of the existing social security system in Korea

206

Coverage 206 Feasibility 207 Financial sustainability 207 Gender equality 208 Costs of administration 209 Targeting 209 Accountability and transparency 210 Notes Bibliography Index

211 215 236

Tables

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 6.1 6.2 6.3

US economic aid to Korea in the 1950s Magnitude of foreign relief aid in the 1950s Proportion of social expenditure in selected countries Income distribution in four selected countries Labour statistics in the 1960s Main economic indicators during the First and Second Plans Export loans by deposit money banks during the period of EOI Inflow of foreign capital during the period of EOI Magnitude of state investment and loans during the period of EOI Pilot medical insurance schemes Social expenditure in the 1960s Social security spending in the 1960s Revenue of the social security system in the 1960s Increase in school enrolments in the 1960s Vocational training achievements, 1967–71 Distribution of the economically active population Top four chaebols’ participation in the heavy and chemical industries Labour disputes and organisation rates in the 1970s Inflow of foreign capital during HCI Magnitude of state investment and loans during HCI Trend of medical care coverage Composition of social expenditure in central government in the 1970s Trend of revenue for the social security system in the 1970s Comparison of the drafts for the pension programme Distribution of household income, 1965–76 School enrolment rates in the 1970s Sources of educational expenditure in various years Vocational training achievements in the 1970s Labour disputes in the 1980s Basic indicators in the four largest chaebol groups, 1981–8 Distribution of sources of funds raised by the corporate sector

48 50 50 51 54 56 58 59 60 65 67 67 68 74 75 78 84 84 86 87 91 92 93 95 96 102 103 104 109 111 112

xii Tables 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14 6.15 6.16 6.17 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14 8.1 8.2 8.3 8.4 8.5 8.6 8.7 9.1 9.2 9.3 E.1 E.2

The size of government budget and the fiscal balance M2 annual growth rate Annual growth rates in real wages, productivity and GNP deflator Financing methods of medical systems in Korea and Taiwan in 1996 Share in co-payments of the medical insurance programmes Medical Assistance system in 1992 Health expenditure of selected countries in 1990 Trend of social expenditure, 1983–92 Trend of social security spending, 1981–92 Trend of revenue for the social security system, 1981–92 Dual price system for rice in the 1980s Enrolment rates by school level Vocational training achievements in the 1980s Ratio of education budget to GNP and government budget FDI ratio of major Asian countries in 1997 Share of chaebol groups in mining and manufacturing Labour statistics in the Kim Young-sam government Unemployment benefit systems in selected countries Employment Insurance Fund in 1996 Comparison of the National Pension Programmes, 1995 Comparison of pension programmes in selected countries Trend of social expenditure during the Kim Young-sam government Comparison of social security expenditure Social security expenditure according to programmes Types of elderly households, 1990 Trend of real wages in manufacturing industries Number of vocational trainees during the Kim Young-sam government Educational spending and attainment in selected countries in 1994 Major economic indicators, 1995–8 Characteristics of the unemployed Requirements for entitlement to public assistance Change of social assistance programme Difference of contributions in the national health system in Korea Comparison of pension programmes in selected countries Attitudes to the state’s responsibility for individual welfare Summary of findings Social security expenditure as a percentage of GDP Comparison of household income structure Coverage of social insurance programmes according to employment status Coverage in number of workers

114 114 115 119 120 121 121 123 124 124 126 133 133 134 138 140 141 149 150 151 152 153 153 154 156 161 167 168 180 181 183 184 186 187 192 194 203 204 207 210

Figures

2.1 3.1 4.1 5.1 5.2 5.3 6.1 7.1 8.1

Annual increases in export volume, FDI and financial markets in the world economy Process of policy formation and change Growth rate of real wages and productivity in the 1960s Real interest rates on various loans in the 1970s Trend of social security spending in the 1970s Trend of wages in the 1970s Trend of wages in the 1980s Trends in democratic support during the Kim Young-sam government Trend of unemployment rates after the financial crisis

12 41 72 87 93 101 129 137 180

Acknowledgements

The research for this book was conducted from 1996 when I began my second Ph.D. at Bath University. This book had several patrons. My first acknowledgement is owed to Ian Gough, my supervisor at Bath. I was lucky enough to benefit from his excellent scholarship and venerable personality. He taught me how to analyse social affairs with logical rigour without losing sight of politics, economics and history. His insightful comments on my work were always invaluable, and his guidance was constructive and encouraging. He also showed me how to tackle social problems as well as how to live as a scholar. I also thank Dr Bryn Jones and Dr Barry Gills for their helpful comments and their encouragement to transform this project into a book. Thanks are due to the University of Bath for providing me with a University Research Studentship, which enabled me to concentrate on my study without financial concern during my Ph.D. years. I am grateful to my English friends, Dr Chris Brace, Nigel Barn, and Angela and Derek who are my adopted family in England, for their hospitality and help. Without them, my life would have been rather lonely in Bath. Thanks also to Dr Eleanor Thompson and Paul Spencer for their help with proofreading. I would like to thank Kyung Hee University, where I took up my first academic post in 2001, for providing me with the financial support to finish this book. Special thanks go to my colleagues in the Department of Public Administration, who have helped me to settle down easily in a new environment. I would like to thank my editors at Routledge, who have been very supportive of the book project. My daughters, Joo-Eun and Hae-Eun, have provided a lot of joy and pleasure, and have often lightened the burden of my research work. Lastly, I want to thank my parents and my wife, Moona, for their great support, forbearance and sacrifice. No amount of words can express my gratitude. Despite the best of intentions, doing research is a selfish process. Though this book is almost nothing compared to their support, I nevertheless gratefully dedicate this book to them. Dong-Myeon Shin

Abbreviations

ALA BOK CSPL DJP DLP EIL EIP EOI EPB EU FDI FKI FKTU GDP GMF GNP HCI IACI IACIL IDL ILO IMF ISI JADS JSA JSS KCIA KCTU KDB KDI KEDI KEF KIHASA

Agency of Labour Affairs Bank of Korea Civil Service Pension Law Democratic Justice Party Democratic Liberal Party Employment Insurance Law Employment Insurance Programme export-oriented industrialisation Economic Planning Board European Union foreign direct investment Federation of Korean Industries Federation of Korean Trade Unions gross domestic product Grain Management Fund gross national product heavy and chemical industrialisation Industrial Accident Compensation Insurance Industrial Accident Compensation Insurance Law Industrial Development Law International Labour Organisation International Monetary Fund import-substitution industrialisation Job Ability Development Scheme jobseeker’s allowance Job Security Scheme Korea Central Intelligence Agency Korean Confederation of Trade Unions Korea Development Bank Korea Development Institute Korean Educational Development Institute Korean Employers Federation Korea Institute for Health and Social Affairs

xviii Abbreviations KLI KOTRA KSWA LDAL LMRRC LSL LSMNS LUL MA MIP MIPF MNCs MOE MOF MOFE MOHSA MOHW MOL MPPL NBFI NCTU NCU NICs NIF NIO NKDP NKP NPC NPL NPP NPPFF NPRB NSO NWPB NWPL OECD PAP PCER PELFIF SCNR SCNS SSIC SSRL TNCs

Korean Labour Institute Korean Trade Promotion Corporation Korean Social Welfare Association Labour Dispute Adjustment Law Labour–Management Relations Reformation Committee Labour Standard Law Law Concerning Special Measures for National Security Labour Union Law Medical Assistance Medical Insurance Programme Machine Industry Promotion Fund multinational corporations Ministry of Education Ministry of Finance Ministry of Finance and Economy Ministry of Health and Social Affairs Ministry of Health and Welfare Ministry of Labour Military Personnel Pension Law non-bank financial institutions National Council of Trade Unions National Conference for Unification newly industrialised countries National Investment Fund National Information Office New Korean Democratic Party New Korea Party National Pension Corporation National Pension Law National Pension Programme National Pension Programme for Farmers and Fishermen National Pension Reforming Board National Statistics Office National Welfare Planning Board National Welfare Pension Law Organisation for Economic Co-operation and Development Public Assistance Programme Presidential Commission on Educational Reform Provisional Exceptional Law Concerning Labour Unions and the Settlement of Labour Disputes in Foreign Invested Firms Supreme Council for National Reconstruction Special Committee for National Security Social Security Investigation Committee Social Security Related Law transnational corporations

Abbreviations xix TUL TULRAL UIS UN UNDP WTO

Trade Union Law Trade Union and Labour Relation Adjustment Law Unemployment Insurance Scheme United Nations United Nations Development Programme World Trade Organisation

1

Introduction

The past three decades have witnessed the emergence of East Asian economies on to the world stage: Japan, followed by the East Asian newly industrialised countries (NICs) – South Korea (henceforth Korea), Taiwan, Hong Kong and Singapore. According to the International Monetary Fund (IMF), in 1997 these five countries accounted for 11.1 per cent of the total world GDP and 17.4 per cent of total exports (IMF, 1998: 133). This sustained remarkable economic growth has brought about a great deal of debate over the role of the state in the market or society. Within this ongoing debate, there have been three controversial issues which, I believe, should be explored in more depth. The first one is concerned with the role of the state in the economy. As acknowledged, an astonishing economic performance in this region has brought forth a new paradigm in the field of development economics and comparative political economy, which has been centred around the concept of the developmental state. The supporters of the developmental state paradigm argue that East Asia’s remarkable economic success can be mainly attributed to the active role of the state in formulating a vigorous economic system that promotes capital accumulation, innovation and productivity growth.1 In addition, they maintain that the failure of manufacturing in many advanced capitalist economies, especially the USA and the UK, is not just the result of macro-economic mismanagement but of lagging investment, innovation and productivity growth. In other words, it is argued that the manufacturing sector in these countries can only effectively be revived through an industrial policy similar to those of the East Asian countries. The developmental state paradigm appears to be successful not only in providing a vivid proof to challenge neo-classical economics but also in bringing the state back into politics by elucidating the causal nexus between political institutions and economic performance. In addition, the developmental state paradigm has offered a powerful empirical foundation for refuting the fatalism of dependency theory. The influence of this paradigm on academic debates became prominent enough for even the World Bank, normally regarded as a citadel of neo-liberalism, to acknowledge the importance of industrial targeting in promoting economic growth in the East Asian countries (World Bank, 1993). However, the developmental state paradigm has faced increasing criticism due to its misleading assumptions with regards to major theoretical concepts such as state structure, state capacity and state

2 Introduction autonomy (Haggard and Moon, 1990; Evans, 1995; Moon and Prasad, 1994; Shin, 1996; E. M. Kim, 1997).2 On the other hand, the virtue of the East Asian developmental model has always been criticised by neo-classical economists. The financial meltdown in East Asia in 1997–8 has made their criticism more persuasive. The East Asian financial crisis had indeed dramatic effects not only on the countries of the region itself but also on the scholarly debates over the sources and limits of the ‘East Asian miracle’ model of development. The methods used by the East Asians in constructing this miracle are put into question by the financial chain-reactions of 1997 and in many cases have been found wanting. When the Korean financial crisis broke out in November 1997, many commentators arrived at the view that the East Asian developmental model had reached an impasse. All these features make it worthwhile to revisit the ongoing debates on state intervention in the economy. The first objective of this book is to examine the changing role of the state in the economy with special reference to economic policies in Korea. In order to achieve this aim, I will discuss the following questions: (1) What are the main policy instruments of the state for economic development? (2) Why have state economic policies changed? (3) What are the political and social consequences of state intervention in the economy? The second peculiar feature of the existing literature is that, compared to numerous studies of economic development in these East Asian countries, there have been few studies of their welfare systems. It is widely acknowledged that in Western industrialised countries, the welfare state became an integral feature of development after World War II. Castles (1989) has maintained that, whatever country is under investigation, welfare state development is in large part a function of economic development, demographic change and democratic socialist rule (Castles, 1989: 6). Thus, one would expect East Asian countries to have also developed welfare states just like Western countries, though they have not experienced social democratic governments. On the other hand, they might be expected to develop a welfare model distinct from Western welfare states, since they have experienced a unique version of capitalism. There are few studies on the subject produced by Western scholars, and most of them tend to focus on the issue of whether or not there is an East Asian welfare model distinct from Western counterparts. However, there has not been general agreement over the characteristics of the East Asian welfare systems. Some argue the distinctiveness of these welfare systems, supporting the ‘East Asian welfare model’ (Jones, 1990, 1993; Goodman and Peng, 1995). Jones (1990, 1993) has argued that the Confucian tradition of familial piety and loyalty has been the overpowering force behind welfare policy, so that East Asian countries have contrived ‘Oikonomic welfare states’. Goodman and Peng (1995) have also argued that these countries have incorporated many aspects of Western social welfare ideas, but in practice deviate fundamentally from Western experience. On the other hand, others argue that there is little to indicate a distinct ‘East Asian welfare model’ that cannot be grasped with the standard conceptual tools of welfare state theory (EspingAndersen, 1999; Goodman and White, 1998). Esping-Andersen maintains that the

Introduction 3 social welfare systems in this region (though most of his examination was confined to Japan) appear a hybrid case of the ‘three worlds’ typology (Esping-Andersen, 1999: 92). According to Goodman and White, East Asian countries are welfare laggards, which is regarded as ‘the West’s past rather than its future’ (Goodman and White, 1999: 20). However, both sides paint only a partial picture of the welfare systems in East Asian countries. They tend to pay little heed to the political economy of each country in which social welfare programmes have developed. As a matter of fact, East Asian welfare systems have developed in circumstances distinct from their Western counterparts; they have developed within economic contexts characterised by stateled growth economies with sustained nearly full employment, in political contexts characterised by a conservative ‘one-party’ democracy with relatively weak civil society and opposition, and in social contexts characterised by rather authoritarian employment practices and gender inequality. Also, little is in fact known about their substantial welfare programmes. Probably, these weaknesses are due to the lack of information written in English available to scholars. Thus, a political economic explanation of the welfare system of each country in this region is particularly worthwhile in order to enhance the opportunities for comparative social policy study. If we confine our attention to the studies of the Korean welfare system, there are also few studies written, either in English or in Korean. In Korea, academic debates on the subject began to develop in the second half of the 1980s,3 which tend to focus on highlighting determinants to explain the development of the Korean social welfare system rather than examining the degree of its uniqueness through comparison. The relative youth of this interest is hardly surprising given the fact that by 1987 Korea had introduced only two social security programmes, namely the Industrial Accident Compensation Insurance Programme (1964) and the Medical Insurance Programme (1977) for limited social groups, together with a modest social assistance programme (1969). I will now review the studies dealing with the development of the Korean welfare system in order to highlight the necessity of this study. There have been by and large three contending perspectives in this area: the Marxist approach, the statist approach and the political economy approach. The first perspective derives from Marxism and sees politics and power in class terms, and the economy as a source of contradictions, exploitation and hence of collective conflict. Adopting a theoretical framework developed in the Neo-Marxist school, several scholars, especially among junior groups, have argued that social policy in Korea has been developed as an instrument of social legitimation in the face of intensified contradictions in monopolistic capitalism (Health and Social Research Committee, 1989; R. H. Kim, 1989; Y. M. Kim, 1989).4 There is little doubt that they have contributed not only to undermining the modernisation thesis that had been dominating social policy studies in Korea but also to understanding structural causes of social policy. Nevertheless, their explanations tend to be a priori reasoning, given that Korean capitalism has worked on the foundations of highly regulated labour markets and industrial structure, authoritarian employment practices, weak labour movements and underdevelopment of the political party system, especially the absence of left-wing parties.

4 Introduction The second perspective evolves from the statist approach and emphasises the role of the state in social policy development. This perspective has gained wide support among Korean scholars, since the Korean social welfare system, in particular before the late 1980s, was determined by a state politically insulated from society. This perspective can be subdivided into two forms, which I will refer to as the actor-centred approach and the institution-centred approach. The first has focused on the political interests of the state elite and argues that the development of social policy in Korea has been primarily determined by the politics of ‘legitimacy’ (S. N. Ha, 1989; H. J. Kwon, 1995). There is little doubt that the introduction of a social security programme was a result of a political process where political incumbents tried to use the power and resources of government in order to recapture the allegiance of disaffected blocs in society. On the other hand, the second approach has focused on the configuration of the executive branch, especially between economic and social ministries, and argued that differences in this configuration in turn have varied consequences for social policy (M. K. Chung, 1993). It is true that the imbalance between economic and social ministries in terms of organisational power and capacity has brought about the limited development of social security in Korea. However, both ‘political legitimacy’ and ‘power imbalance’ explanations offer a partial picture with regard to the development of social policy in Korea. They still need a more comprehensive examination of the causes of social policy development. For a thorough examination of the development of social policy, we need to take into account other factors prompting policy development such as changes in both socio-economic structures and international markets, social coalitions, requirements of economic policy, and policy legacies. The third perspective has been developed by those who apply the political economy approach to the development of welfare systems. According to this perspective, welfare system development was in large part a function of political and economic changes (Deyo, 1992; Kang, 1993; H. K. Lee, 1992, 1999; Joo, 1999). H. K. Lee (1992) has argued that since the late 1980s the social security system in Korea has transformed from a residual one to a corporatist welfare state. According to her, this transformation was a result of the changed power balance between the capitalists and the workers, but also of the political transition from conservative and authoritarian to democratic regime. Those who support this perspective share with Marxism a keen eye for issues such as power, inequalities and conflict but do not automatically assume that ‘class struggle’ is the engine of change or that capitalist institutions are repressive. Its great analytical asset lies in its sensitivity to the historical transformation of social welfare systems. With one substantial reservation, this perspective is in fact guiding this study. My reservation has to do with the blindness of most political economy studies on Korean social policy development towards policy linkages between economic policy and social policy. We should bear in mind that the development of social policy in Korea has been greatly influenced by the requirements of economic policy. Thus, the theoretical perspectives surrounding explanations of the development of the welfare system in Korea, which could contribute to our understanding of East Asian welfare regimes, still need to be developed further for a systematic

Introduction 5 understanding of it. I will develop a more comprehensive explanation in the pages that follow. The second objective of this book is to investigate the evolution and characteristics of the welfare system in Korea in order to ascertain the changing role of the state in social welfare provision. I will investigate possible answers to the following questions: (1) What are the characteristics of social welfare? (2) Why has social security policy changed? (3) What are the outcomes of state intervention in social welfare? Finally, but most importantly, academic inquiry into developmental processes and conditions in East Asian countries has produced a substantive body of theory, but the implications for social policy have not been properly examined. Though there has been a growing concern in the literature with the social dimensions of economic growth and restructuring in the region (Deyo, 1987, 1989; Koo, 1987; MacPherson, 1992; Vorgel and Lindauer, 1998), the theoretical issues surrounding explanations for the policy linkages between economic and social policies have not yet been the subject of extensive inquiry or debate. It is acknowledged that in Western welfare states during the Golden Age of post-war expansion, Keynesian economic policy had been compatible with the extension of the welfare state, especially with regard to automatic stabilisation through unemployment and other social security benefits (Hall, 1989a and b). If this is the case for Western welfare states, which patterns of policy linkages have East Asian countries developed? One would expect that the systematic use of social policy to pursue economic development goals has been most pronounced in this region, since East Asian states have intervened more directly in the economy. If so, what are social policy outputs as a consequence of policy linkages? Regarding this issue, Deyo’s (1992) study is possibly the only discussion available. He has urged that East Asian social policies have been more strongly shaped by the developmental priorities of politically insulated states. He has also highlighted the compatible relationship between exportoriented industrialisation and social policy, especially in the areas of social wage and income policy. His work gave me some insights with regard to the idea of policy linkages. Yet his study tends to be motivated by substantive policy issues with little analytical framework so that it needs to be elaborated further for a systematic understanding of the policy linkages. Thus, very little systematic work has been done in this area. Policy formation and changes are dynamic and sequential processes. Changes in both social-economic structure and international political economy will affect the configuration of social groups and rearrange social coalitions by shifting their underlying material interests. The ideological outlook and material interests of a social coalition by and large shape policy objectives. Yet, the choice of policy instruments is not necessarily the result of the social coalition. Several aspects of institutional features can influence the choice of policy options. It should also be noted that the policy choice made in economic policy subsequently has an important effect on shaping the form and content of social policy. Given the fact that economic and social policies are not determined in isolation from each other, it is necessary to explore the policy linkages between economic and social policies in order to understand the development of social policy. We could benefit from the examination

6 Introduction of the policy linkages between economic and social policies in developing general statements with regard to the role of the developmental state in social policy, which could be applied to other East Asian welfare regimes. From this understanding, the third objective of this research is to examine how, why and to what extent Korea has come to adjust its economic and social policies. The following questions will be investigated: (1) What are the characteristics of policy linkages between economic policy and social policy? (2) What are the requirements of economic policy at different moments in time? (3) What are the consequences of policy linkages with respect to the development of social policy?

The scope of the research and some definitions In order to achieve the above research objectives, this study deals with the dynamic process of state intervention in the economy and social affairs in Korea since the early 1960s when the state started to pursue industrialisation according to the Economic Development Plan. Thus, the time span is four decades, including five political regimes: the Park Chung-hee regime (1961–79); the Chun Doo-hwan regime (1980–7); the Rho Tae-woo regime (1988–92); the Kim Young-sam regime (1993–7); and the Kim Dae-jung regime (1998–present). The case of Korea can be seen as especially worth investigating among the East Asian countries, given the fact that it developed so fast and so effectively up to the end of 1997 and then fell so heavily in the wake of the financial crisis. As The Economist has described: Few countries have grown so rich so fast compared to Korea. During the last three decades, Korea has grown at an average of 8.6 per cent a year. A nation of muddy subsistence farmers was transformed, in a single generation, into the world’s largest producer of ships and memory chips, its fifth-largest car maker, its 11th largest economy, and a member of the OECD in 1996. (The Economist, 29 November 1997: 25) Nobody had expected such an extraordinary economic development in Korea, just as nobody thought Korea would be hard hit when the Asian crisis began in the summer of 1997. However, Korea had to ask for a bailout by the IMF by the end of 1997, which has been followed by a great economic recession for the first time in Korean modern history. In order to explore the changing roles of the state in the market or society, I will explore state policies, which are by and large divided into economic policy and social policy. There is much debate about the boundary between economic and social policy. For some, the distinction is made by policy goals: for example, efficiency (economic policy) versus distribution (social policy). For others, it concerns policy areas: for example, fiscal policy and health care. Yet, none of these distinctions is clear. We should thus clarify both sets of terms relating to economic policy and social policy in order to avoid confusion. Let us start with economic policy. I shall draw on Gough’s definitions with regard to these concepts. According to him, economic policies are forms of state intervention

Introduction 7 in the sphere of production, which are directed at economic enterprises (Gough, 1996: 212). In this research, I intend to deal with macro-economic policy and industrial policy under the heading of economic policy. Macro-economic policy refers to a set of policies to stabilise or develop the national economy, including fiscal policy, monetary policy, exchange rate policy and so on. The concept of industrial policy is a more controversial issue in terms of its boundaries. The existing definitions of industrial policy tend to be too over-loaded to be useful in practice.5 So, I shall define industrial policy as a policy aimed at particular industries or specific firms to achieve the outcomes that are desired by the state with the use of public resources, ranging from regulation to subsidisation. In other words, I shall concentrate on specific industrial policy rather than general industrial policy. On the other hand, there is much confusion surrounding social policy. In Britain, the most common and conventional approach to social policy is that which concentrates on the big five social services: education, health care, housing, personal social services and social security. Therefore, social policy is concerned with how these services are organised and administrated, how they perform, and whom they benefit (Erskine, 1998: 17). Yet, this service-centred definition of social policy may not provide a proper understanding of the well-being or welfare of individuals or groups, since it does not include social regulations, such as labour protections, wagesetting regulations, environmental regulations and so on, which are also crucial factors in well-being or welfare. Thus, following Gough’s definition, I will consider social policy as a set of state interventions in the sphere of reproduction of the labour force and the household (Gough, 1996: 212). This study deals with social security policy, labour policy and education and training policy under the heading of social policy. I define social security policy as specific policy outputs of government or quasigovernmental organisations to protect people from the risks in the market by providing sources of income. In this research, the input for social security policy means state social expenditure or the taxation required to finance it, whereas the output refers to the form and content of social security programmes which can be measured via indicators of programme coverage, benefit replacement rates and so on. The outcome of social security policy concerns welfare outcomes that can be assessed in a variety ways, but in this research we look at the level of equality with reference to the Gini-coefficient. However, it is important to note that government or quasi-governmental organisations are just one of the providers of social welfare in respect of individual well-being or welfare. Individuals inhabit a world in which, besides the state sector, there also exist other sectors contributing to their welfare, namely family, enterprise, market and voluntary organisations. But the term social welfare in this study means the final outcome of state welfare, since we deal with the provision of social welfare only by the government or quasi-governmental organisations. The domains of labour policy are generally concerned with wage and industrial relations. Wage policy refers to state intervention in the sphere of wage negotiation to influence or control wage developments. Industrial relations policy can be defined as forms of state intervention to structure the relationship between trade unions

8 Introduction and the formal employing organisations of the labour market, to regulate procedures of collective bargaining, and to protect labour rights under labour law. Finally, education and training policy can be defined as forms of state intervention through service provision or regulations in the area of human capital development.

Research methods This research is a single case study on state interventions in Korea in the economy and in social affairs since the early 1960s. To make clear the research methods of this study, let me start with two related issues: the use of historical approach in policy studies and the validity of a single case study. According to Skocpol (1984: 362–86), there have been three major research strategies for bringing history and theoretical ideas to bear on one another: applying a general model to history, using concepts to interpret history and analysing causal regularities in history. Each of these strategies may be applied to a single historical case or to two or more cases through comparative historical investigations. To classify this study in Skocpol’s terms, it can be regarded as a single case study adopting an interpretative research strategy. The historically oriented interpretative research strategy is a type of empirical study in that it attempts to account for specific historical outcomes or processes chosen for study because of their significance for current institutional arrangements or for social life in general (Ragin, 1987: 3). Thus, this study primarily involves meaningful interpretations of broad historical patterns with respect to state interventions in Korea since the early 1960s. However, one might question the validity of an interpretative historical approach applied to a single case since it risks plunging into story-telling or historical narratives. In particular, from the perspective of those concerned with universally applicable deductive theory, any studies choosing historical interpretations can be criticised as non-theoretical, since they have been motivated by substantive issues rather than a theoretical programme (Immergut, 1998: 27). The danger is probably greater for single case studies, since they are not concerned with establishing explanations that hold well across other countries (Skocpol, 1984: 372). It is therefore important to be very cautious in designing research with an interpretative historical approach. To avoid the above-mentioned risks, I apply the following research strategies to the study. First, as Ragin points out, the most valuable feature of the case-oriented approach is that it engenders an extensive dialogue between the investigator’s ideas (theory) and the data (evidence) (1987: 49). This feature is also a crucial aspect of the historical approach. In order to produce historically interpretative, causally analytical explanations, the investigator needs to pay attention to matters of conceptual clarification and apply explicit concepts to the study. I shall, hence, put forward the concepts of ‘policy network’, ‘policy idea’, ‘policy feedback’ and ‘policy linkages’, most of which have been developed in the school of historical institutionalism, and then use these concepts to examine the causes, patterns and consequences of state interventions in the economy and social affairs over time. It is deductive in a way that these theoretical concepts serve as guides in the examination of causally relevant

Introduction 9 patterns in the policy changes. Thus, this study is not only aimed at historically interpretative investigation; it also seeks to develop causally analytic explanations that can contribute to stimulating the development of substantive theories. Second, the historical approach attempts to account for significant historical outcomes or processes by piecing evidence together in a manner sensitive to historical chronology and by offering limited historical generalisations which are sensitive to context (Ragin, 1987: 3). Thus, the choice and use of historical evidence are crucial for doing the research. There is a wide variety of documentary sources at our disposal for the research, but we should pay attention to particular materials due to a limited time. Scott suggests four criteria that can be taken into account in assessing the quality of historical materials: authenticity, credibility, representativeness and meaning (Scott, 1990: 6). Bearing these criteria in mind, primary sources for this study are collected from government documents, official statistics, legislation, presidential annual speeches, business associations’ and trade unions’ documents, and reports and comments in magazines and newspapers. The fieldwork for the primary sources has been done mainly in the National Assembly Library in Korea and the British Library and several internet web-sites of the Korean government or private organisations. Secondary sources, including books, journals, working papers, Ph.D. dissertations, and politicians’ biographies and memoirs, are collected from the National Assembly Library in Korea and the Library of the University of Bath, and through interlibrary loans. In particular, biographies whose relation to policy-making is unmistakable are perhaps among the richest sources of detailed, micro-level information about policy-making. According to Ashford, biographies help clarify how uniquely placed figures manipulate authority, perceive policy choices, and use political institutions through time in a way that behavioural analysis cannot (Ashford, 1992: 27–35). Finally, given the fact that many theories on the development of the welfare state have emerged from studies of single cases, such as Gough (1979) on the British welfare state, O’Connor (1973) and Skocpol (1992) on the USA, Korpi (1978) on Sweden and so on, there is no reason to reject the single case study as a compelling approach to the substantive theories of welfare state development. However, as Castles (1989) points out, we should bear in mind that comparison makes possible a simultaneous focus on both similarity and difference, so that the antinomy of national uniqueness and general trends could be analysed and resolved in terms of variations on a common theme (Castles, 1989: 4). Comparison may be essential for highlighting the distinct features of each individual case. In this respect, I shall use comparisons of Korea with other countries as an auxiliary research method. Comparisons in this research will be concerned with quantitative data of welfare inputs and outcomes that are readily available. This cross-national comparison will allow us to find out both similarities and differences with regard to the provision of social welfare in Korea.

Organisation of the book This book is organised into nine chapters, including this introduction. The second chapter reviews the literature on the state’s role in the economy and social welfare.

10 Introduction Without claiming to be exhaustive or to be doing justice to all individual theories, I examine four perspectives or types with regard to the state’s role in the economy, namely the public-goods state, the Keynesian state, the developmental state and the competitive state. I then turn to the role of the state in social welfare provision, paying special attention to the impact of changes in the international market. Three types of welfare systems are reviewed: residual, institutional and business-friendly welfare systems. They all involve not only normative perspectives in that they suggest the ideal role of the state, but also analytical perspectives in that they help us understand the evolving roles of the state. In the third chapter I develop a conceptual framework for analysing the process of state interventions in the economy and in social affairs. I first critically review the existing theories explaining the role of the state in the process of policy-making, that is pluralism, neo-Marxism, the state-centred approach, rational choice and historical institutionalism. Historical institutionalism has largely concentrated the effects of political and social institutions on political outcomes, but, as I wish to demonstrate in that chapter, it can provide many useful insights in understanding the dynamic process of policy change. Building on the insights of this discussion, I attempt to develop a new conceptual framework for analysing policy formation and changes, which includes concepts of ‘policy network’, ‘policy idea’, ‘policy feedback’ and ‘policy linkages’. In this framework, policy formation and change are understood as a fundamentally dynamic and sequential process. The next five chapters look at the processes of policy change in the Korean political economy since the early 1960s in order not only to understand the changing roles of the state in the economy and social affairs but also to clarify and explain the policy linkages across the different policy areas. The phases of Korean economic development since the early 1960s are divided into four: (1) export-oriented industrialisation (1962–72); (2) heavy and chemical industrialisation (1973–9); (3) liberalisation and stabilisation (1980–92), and (4) globalisation (1993–present). Interestingly enough, this division is consistent with the changes in the political regime in Korea. Given that the financial crisis of 1997 severely hit the Korean economy, the globalisation period is further subdivided into two phases, the first before the financial crisis (1993–97) and the second afterwards (1998–present). These five chapters are organised according to these different phases of Korean development. Most of the chapters consist of five sections. The first section deals with the policy legacy from the previous political economy on the grounds that previous policies do not just create a new politics which might require a new policy, but also have an influence on policy-makers, business and the public. The second section examines the change in institution settings with particular attention to policy networks and policy ideas. The next two sections examine the roles of the state in the economy and social welfare respectively. The fifth section highlights the policy linkages between choices made in economic and social policies with special reference to three social policy areas: social security policy, labour policy, and education and training policy. In the final chapter I draw together some conclusions, and in the epilogue I consider developments in the first few years of the new millennium.

2

The roles of the state in the economy and social welfare

The role of the state in the economy has been a central issue in politics and social theory for centuries. The role of the state in social welfare has also been one of the most controversial matters in modern capitalist society since the end of World War II. Almost everyone agrees that the modern state has a role to play in both areas, but there is little agreement as to when and how it should act. Perhaps the reason why there is such little agreement is that state interventions are complex and dynamic phenomena. Nevertheless, there had been a broad consensus among Western industrialised countries until the early 1970s that universal social programmes were not only compatible with economic growth, but also helped to drive it. For the past two decades, however, the world has witnessed the fact that the combination of growing economic strain and maturing social programmes has created a harsh climate for the welfare state. It was apparent by the mid-1980s that the ‘modern’ welfare state created during the Golden Age of post-war expansion had reached an impasse (Myles and Pierson, 1997: 443). Esping-Andersen (1999: ch. 6) has maintained that the compelling reasons for this ongoing shift can be explained under two labels: ‘globalisation’ and ‘de-industrialisation’ or ‘service economy’. That is to say, the role of the state will be constrained by changes in international markets as well as by domestic socio-economic structures. On my reading, more emphasis should be put on the impact of globalisation on the state’s role, since recent economic restructuring in most countries has been driven by the necessity for international competitiveness within the dynamics of increased economic integration in world markets. In this chapter, I shall organise the discussion into three sections to make this complex topic manageable. In the first section, I shall explore the nature of globalisation in order to highlight the changes in international markets. In the second section, I shall examine the role of the state in the economy. In the third section, I shall discuss the role of the state in social welfare. They all involve not only normative perspectives, in that they suggest the ideal role of the state, but also analytical perspectives, in that they help us understand the role of the state constrained by changes in international markets.

12 The roles of the state

Characteristics of globalisation The concept of globalisation, which is generally used to describe the existing process of transformation in international arenas of politics, economics and culture, is obviously a topical issue. In a sense, it looks like a discourse or even a paradigm in social sciences. However, as Cerny (1995: 595) pointed out, surprisingly globalisation is neither a uniform nor a homogeneous concept. Indeed, terms such as ‘global economy’, ‘global politics’ and ‘global society’ used to describe the changes in international arenas vary in their effects (Mann, 1997: 473). Despite these differences, there is agreement that the nature of globalisation can be depicted not only as economic integration in world markets, but also as a strategy containing ideological characteristics. I will now examine the nature of globalisation by dealing with these two aspects of globalisation. According to the perspectives emphasising economic integration in world markets, it is generally argued that structural changes have been made in three types of markets in the world economy: in trade, investment and financial markets. Figure 2.1 shows how these markets have been significantly expanded to produce a more integrated world market since the 1980s. There is no doubt that there has been an increasing volume of trade in the world market. As Figure 2.1 illustrates, world trade has significantly expanded, recording an average annual growth rate of 5.5 per cent in export volume since the 1980s. We have also seen a fast growing number of businesses moving towards global configurations. For the period from 1981 to 1993, the outward stock of foreign direct investment (FDI), which means a

50

% of annual increase

40 30 20 10 0

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

–10 –20

Year

Export volume

FDI outflow stock

Funds raised in finacial market

Figure 2.1 Annual increases in export volume, FDI and financial markets in the world economy Note: FDI outflow stock between 1981 and 1985 is replaced by an average value of this period due to the lack of data sources. Sources: WTO, 1995; UN, 1993, 1995; OECD, 1996b.

The roles of the state 13 productive capacity of multinational corporations in foreign countries, increased at an average annual growth rate of 10.8 per cent, reaching over US$2.1 trillion in 1993. Moreover, international financial markets have grown from a negligible level to a volume where they now dwarf international trade flows. Figure 2.1 illustrates that, despite a big fluctuation in the annual growth rate of total funds raised in the international market, they have increased at an average annual growth rate of 15.8 per cent since the 1980s. This figure was much higher than the average annual growth rate of GDP in the world, which was 3.2 per cent during the same period. All these changes are said to have significantly reduced national control over boundary-crossing economic transactions and thus exposed national producers to world-wide competition. It is generally acknowledged that economic integration in world markets has been an interactive consequence driven by technological-informational innovations, market competition and state policies (Cerny, 1994; Helleiner, 1995). Technological innovations, especially the growth of global telecommunications networks, have reduced the costs and difficulties involved in transferring funds globally, providing the infrastructure for a global society (Wriston, 1988). Market practices are also said to have contributed to economic integration: for example, the restoration of private confidence in international financial transactions in the late 1950s, the growth of multinational corporations from the 1960s onwards, the response of market actors in the 1970s to the introduction of the floating exchange rate system and the 1973 oil price rise, and finally the competitive pressures emerging from the unravelling of domestic financial structures across the advanced industrialised world in the 1970s and 1980s (Helleiner, 1995: 319). In the last two decades, moreover, the world has witnessed a general trend towards the liberalisation of domestic capital markets by states. This has dramatically reduced the barriers to international capital mobility, resulting in a liberalised global financial system. We have also increasingly seen an explosion of competition among nation-states seeking to attract FDI and to keep firms that have invested within their borders. Both the widespread abandonment of capital controls and the liberalisation of domestic markets, which have been adopted by advanced industrial states since the late 1970s, have thus been rationales for economic integration in the world markets. However, for some scholars, the reality of globalisation is problematic (Hirst and Thompson, 1992, 1995; Mann, 1997). Regarding the magnitude of trade, in most countries in the OECD (Organisation for Economic Co-operation and Development), trade ratios measured as a percentage of GDP in 1900 and 1990 are very similar at around 10 per cent. FDI-related employment has also remained largely unchanged despite the rapid surge of FDI flows and stocks in the late 1980s, accounting for just less than 2 per cent of total employment (OECD, 1995a). In addition, over-concentrations of both trade and FDI in the world economy have been countering globalisation in the strict sense of the word. Within the contemporary regime of international trade, the important relationships remain between the more developed economies. In 1996 over 65 per cent of world trade was conducted between OECD countries. Furthermore, flows of FDI seem to be

14 The roles of the state confined to the triad of the European Union (EU), Japan and the USA rather than being world-wide. FDI flows into the EU accounted for nearly half of the world-wide inflows and outflows since the late 1980s, with roughly 20 per cent of world-wide FDI flows going to the UK and France (European Communities, 1998: 160). It should also be noted that although the developing countries’ share of total inflows was at a record level, four-fifths of the inflows were focused on ten developing countries, with China taking a large proportion of the inflows (UN, 1995). Thus, FDI flows are overwhelmingly concentrated between advanced states and a few favoured, NICs and consequently the rest have become economically marginalised. Based on these facts, in one of the most sceptical responses to globalisation, Hirst and Thompson (1992: 393–4) argue that the world economy is far from global but rather it is substantially confined to the triad of the EU, Japan and the USA. They insist that it is not a change in the balance of global forces but rather the myth of globalisation itself that has led the political elite to conclude that almost nothing can be done (Hirst and Thompson, 1995: 413–15). Ohmae (1995), one of the enthusiasts of globalisation, has argued the necessity for globalisation as follows: ‘If a country genuinely opens itself up to the global system, prosperity will follow. If it does not or if it does only half-heartedly, relying instead on the heavy, guiding hand of central government, its progress will falter’ (1995: 123). It is clear that this argument for globalisation relies on a neo-classical view. The ideas of the Free Trade School in the nineteenth century, which argued that free trade is the royal road towards freedom, peace, and welfare for every citizen in the world, appear to have been revived by enthusiasts of globalisation. In this regard, Hirst and Thompson (1995: 414) argue that for the Right in the advanced industrial countries, the rhetoric of globalisation is a godsend. Pierson and Smith (1993: 487) also point out that globalisation may be a watchword for ‘bourgeois revolution’. It seems that globalisation is a strategy containing aspects of capitalist ideology (Andrews, 1994: 197–203). Though globalisation, in a sense, is an elusive concept, it seems clear that growing economic integration now exercises a greater constraint upon the discretion of national political actors, bringing about a change of state policies. It also seems that globalisation is a strategy containing pro-business ideology. We shall next review the state of debate on the impact of globalisation on economic affairs of the state.

State intervention in the market There is little agreement as to when and how the state should intervene in the market under capitalism. Regarding the state’s role in the economy, Block has classified five old paradigms: the socialist state, the developmental state, the social right state, the macro-economic stabilisation state and the public goods state (Block, 1994). He has rejected these five paradigms and instead argued from a ‘market reconstruction perspective’ on the grounds that economic activity always involves a combination of state regulation and market activity. Yet, his new ‘market reconstruction perspective’ seems to pay little heed to the effect of globalisation on the state’s role in the economy. Moreover, his new approach does not provide any analytical tools to

The roles of the state 15 explain the changing role of the state in the economy. From this point, I shall classify the role of the state in the economy into four types – the public goods state, the Keynesian state, the developmental state and the competitive state – which are not far removed from Block’s observations but include the effect of globalisation. The public goods state The most defined justification for the public goods state is based on the idea of market failures, that is to say the state will be needed to correct market failures, including public goods, externalities and concentrations of market power that prevent the optimal allocation of scarce resources in accordance with consumers’ preference. The state thus must provide only public goods that the market cannot produce by itself. This conventional idea of the public goods state was adapted by ‘neo-classicalism’ in the second half of the 1970s. In particular, government failure, public-choice theory, rent-seeking theory and supply-side economics all have a commonality in not only favouring the minimal role of the state in the economy but also adopting individualist methodology. ccording to supporters of neo-classicalism, the engine of economic development is the efficient allocation of resources which is realised only in competitive markets, particularly domestic markets integrated with international markets (Wade, 1990: 11). Hence, they argue that the state should leave private producers operating through market mechanisms to supply all but certain public goods. The state should limit its own activities to improving the functioning of markets and to providing only those goods and services where the state has a clear comparative advantage relative to private agents. Therefore, it is maintained that the ideal role of the state in the economy is a minimal one. As a result, they believe that the policy options for economic development should be based on a market-friendly approach, and that public provision should be kept to a minimum. For instance, the World Bank endorsed that the key development policy is an outward-oriented trade regime, characterised by low or negligible impediments to imports, relatively uniform incentives for different production activities, and incentives for export sale equal to the incentives for domestic market sale (World Bank, 1991: 9). These policy prescriptions are based on comparative advantage, which is usually assumed to depend on relative factor proportions or availability, under the assumption that all countries have access to the same production technology and differ only in their endowments of factors of production (Zysman and Tyson, 1983: 24). In addition, supporters of neo-classicalism prefer a functional or horizontal industrial policy, strongly denying the benefits of a sectoral or industry-specific industrial policy which aims to direct resources into selected industries and give producers in specific industries a competitive advantage (Wade, 1990: 234). It is maintained that market failures are often due to sectoral industrial policies, which distort market prices to protect efficient allocation of resources. Hence, they believe that structural adjustment should take place according to shifting comparative advantage, being free from state intervention.

16 The roles of the state It cannot be denied that supporters of a minimal state are likely not only to have a prejudice against state interventions, but also to fail to recognise the role of the state in the market. The state does not necessarily play parasitically and wastefully in the markets (Block, 1994: 696). The principle of a ‘self-adjusting market’ as being determined by the forces of supply and demand has come under serious challenge, with the emergence of NICs in the East Asian Pacific Rim (Wade, 1990: 232). In addition, the collapse of rapid growth and full employment in most of the Western economies in the wake of oil crises, in particular in the UK and the US economies, was probably enough to bring about various new attempts to consider alternative ways of running the economy. As a result of these attempts, a minimalist state has increasingly lost its theoretical validity. The Keynesian state In the face of the Great Depression in the 1930s in nearly all of the West European and North American capitalist economies, classical economists had few explanations to offer, and furthermore the policies they suggested to the governments of the depressed economies met with little success (Wolff and Resnick, 1987: 28). However, John Maynard Keynes, who was able to cast a critical eye on the classical economics upon which he was brought up, did produce a theoretically important reaction to the Great Depression. In his work, The General Theory of Employment, Interest, and Money (1936), Keynes tried to persuade classical economists – he dubbed them ‘orthodox’ in the book’s preface – ‘to re-examine critically certain of their basic assumptions’ (1973: xxi). Keynes’s reaction to the world-wide depression of capitalism took the form of a critical reassessment of classical economics. Keynes’s work has deeply affected public discussion of economic problems and policies throughout the world since its publication. Indeed, Keynes’s ideas have been central to the major debates about economic policy across nations (Hall, 1989a: 3). It is beyond the scope of this research to review Keynes’s critical reformulation of the classical theory and the intense debates among neo-classical economists over the legacy of Keynes. Instead, I shall examine the role of the state in the economy proposed by Keynes. Two strands of his argument are important here. Firstly, Keynes argued that, because of market imperfections, the economy is not able to correct itself and restore the full-employment equilibrium it would otherwise be destined to achieve. Therefore, the state’s visible hand guides the economy to moderate the fluctuations of the private economy and to restore full-employment (Keynes, 1973: ch. 3). His therefore proposed a major shift from the doctrine of laissez-faire to the argument that the state has a responsibility to manage aggregate demand. Secondly, he specified what kinds of policies are likely to be most useful for managing economic fluctuations. He rejected conventional views of the relationship between savings and investment, which held that the best way to increase investment was to lower interest rates and to increase its supply by limiting the amount absorbed by the public debt (Keynes, 1973: ch. 7). Instead, he argued that investment responds to many factors and government might best deal with economic depression by raising the propensity to consume (Keynes, 1973: chs 8, 9). He also argued that

The roles of the state 17 the government could itself exercise some control over this by increasing its own expenditure or by lowering taxes because these injections of funds would increase the aggregate purchasing power of consumers. Put differently, his analysis put a new emphasis on the role of fiscal policy (Keynes, 1973: ch. 8). There are subtle links of an economic and political nature between Keynes’s macro-economic aims and the extension of the welfare state, especially with regard to automatic stabilisation through unemployment and other social security benefits. There are also more historically contingent connections which can be documented in the British case by reference to the collaboration between Keynes and Beveridge during World War II (Winch, 1989: 109). Nevertheless, it is still worth noting that Keynes was by no means responsible for the expansion of the welfare state that is sometimes linked to his name (Hall, 1989a: 4). In other words, when commentators speak of ‘social Keynesianism’ or of ‘the Keynesian full-employment welfare state’, it is clear what they mean, but the connections with Keynes should not be taken as clear-cut. There is a traditional distinction between macro-economic management in the Keynesian manner, designed to exercise general control over the economic environment for economic stabilisation, and more detailed forms of interventions designed to modify economic ownership and control, influence the allocation of economic activities and redistribute benefits, which often extend well beyond anything envisaged by Keynes (Winch, 1989: 110). In this sense, Block regarded the Keynesian state as a macro-economic stabilisation state (1994: 693). The developmental state After the arrival of successful late industrialisers in Western Europe, one of the most spectacular changes in the world economy was the emergence of the East Asian economies. Japan became one of the world’s leading industrial countries in the postWorld War II period. The East Asian NICs, that is Korea, Taiwan, Hong Kong and Singapore, have also became major economic actors in some world markets for the last three decades. The remarkable economic success in these countries has brought a rapid rise in interest in the role of the government in industrialisation so as to create a new paradigm of the developmental state in the field of development economics and comparative political economy. According to this paradigm, these countries’ economic successes are largely attributed to the choice of coherent and flexible economic policies and effective implementation by the state. That is to say, in general the following three factors are said to have resulted in the considerable economic growth: a state structure characterised by executive dominance, bureaucratic unity and the technical competence of bureaucrats; a large pool of policy instruments being selective and strategic; and political capacity to insulate economic decision-making and implementation from contending political and social interests. For Chalmers Johnson (1982), who was the first scholar to apply a developmental approach to the East Asian setting, Japanese economic success was mainly due to state intervention in the market, which has developmental, plan-rational and effectiveness-oriented properties led by the powerful economic bureaucracy, known

18 The roles of the state as the MITI (Ministry of International Trade and Technology), which has its own goals and visions independent from social pressure. Following his lead, a lot of studies on Korean economic development were carried out and emphasised the critical role of the state in the developmental process (Amsden, 1989; Wade, 1990; Haggard, 1990; J. E. Woo, 1991; Y. S. Ha, 1992). By and large, they have all explained the spectacular economic success of Korea in terms of direct state interventions. That is to say, a series of five-year economic development plans, total control over the banking system, direct intervention in heavy and chemical industry through industrial policy, and the technical competence of bureaucrats, in particular economic bureaucrats including the economic secretariat of the Chong Wa Dae (Korean Presidential House) and the Economic Planning Board (EPB), are the main factors which brought about the spectacular economic growth. Developmental state theorists have thus commonly argued that the minimalist state in the economy is not only undesirable but also unsuitable to explain the experience of economic development in this region. The developmental strategies undertaken by a strong, development-oriented state commited to economic expansion differentiate these NICs from other developing countries better endowed in terms of domestic markets and natural resources. Therefore, developmental state theorists believe that state intervention in the market can be an engine to accelerate the development. In particular, industrial policies are said to be the main factor. It is argued that sectoral industrial policy designed to develop or retrench specific industries in a national economy is necessary for maintaining competitiveness (Wade, 1990: 234). Indeed, there is little doubt that East Asian economic success rests on ‘governed markets’ in which government concentrates scarce resources in strategic industries. The state played the role of a strategic actor in the pursuit of economic growth. Even the World Bank (1993: 79–103), normally a citadel of neo-classicalism, pointed out that industrial targeting, along with heavy investment in education and solid macro-economic management, was most helpful in promoting economic growth in these countries. There is, however, growing recognition that a developmental state inevitably creates some social costs, such as lack of transparency of financial institutions and a government–business relationship permeated with corruption and so on. This criticism has been highlighted by the financial crisis in the East Asian countries in 1997. In addition, with respect to its ability to analyse economic development, the developmental paradigm has not been free from critics. Moon and Prasad (1994) provided a useful summary of some serious drawbacks of developmental state paradigms as follows: their failure to explore the internal dynamics of the state, their inability to capture the dynamics of the state–market linkage, and their poor construction of the interrelation of institutional configuration, policy choice and implementation and economic performance. The competitive state Since the mid-1980s, the world has witnessed the further liberalisation of capital markets and the creation of a single European market with a single currency, which

The roles of the state 19 imposed additional constraints, especially on macro-economic policy. Growing economic integration caused by globalisation now places a greater constraint upon the discretion of nation-states. However, the directions of the state’s role in the economy according to the impact of globalisation have been controversial. According to supporters of globalisation, nation-states are eroding as economic actors, becoming unnatural, even dysfunctional units for organising human activity and managing economic endeavour in an age of globalisation (Ohmae, 1995: 125). Along with the globalisation of production and investment, whether any given territory is included in global production networks or excluded from them depends on the decisions of private actors. Ohmae (1995) has argued, that only two forces, i.e. global market forces and TNCs (transnational corporations) matter in the global economy. As a result of a logical progression, therefore, globalisation will lead to the demise of the nation-state. It is maintained that the period of the dominance of the nation-state as an agency of governance is now over, and thus we are entering into a period in which governance and territory will be independent of one another. The development of international financial markets and the globalisation of production undercut the rationale for capital controls, leading to a great deal of doubt regarding the use of capital controls and sustainable macro-economic policy options available to states. Nevertheless, there are at least two major problems with the argument of those who foresee the demise of the nation-state. First, they pay little attention to the domestic institutional and political factors which have played an important role in the process of globalisation. As Helleiner (1995: 337) pointed out, the state should be brought back in explaining the globalisation of financial markets, given the behaviour of states in encouraging and permitting the process. Furthermore, the state has indeed considerable scope for influence at the micro- and meso-levels of economic organisation, even if its influence at the macro-level is increasingly waning. States attempt to boost the productivity of firms operating within their territories through public policies for education, infrastructure, incentives for industrial adjustment and so on. A glance at the nations that have been the most economically successful over the last three decades suggests a high level of state intervention may create a competitive advantage in the world market. For instance, economic successes in East Asian NICs force us to re-examine the idea that effective participation in a global economy can be best achieved by restricting state involvement in economic affairs. Successful participation in global markets may be best achieved through more intense state intervention in the economy. Therefore, the nation-state is not disappearing, and the scope of government, taken overall, will expand rather than diminish as globalisation proceeds. As Wade (1996) and Evans (1997) suggest, the arguments for the demise of the national state as a result of globalisation are greatly exaggerated. Second, those who predict the demise of nation-states rely on the unrealistic assumption of the predominance of TNCs over states. Most major companies are still only operated from distinct national bases and wish to retain a distinct national identity, even though they trade in world markets and locate a significant part of their operations abroad (Hirst and Thompson, 1995: 424). There are thus few truly TNCs. Multinational companies (MNCs) continue to be dominant in FDI. Most

20 The roles of the state MNCs still retain a clear national home base and are subject to national regulations in their mother country. National level economic processes still remain central and thus the international economy is far from ungovernable. Contrary to the argument supporting the demise of the nation-state, the degree of economic integration in the world markets is likely to reinforce the need for the nation-state to take up a different role from that of the traditional sole sovereign power. Most states are not only focusing on the competitiveness of national enterprise in the world markets, but also are competing against each other in order to increase desirable inflows of direct investment and capital. In this context, paradoxically, the total amount of state intervention will tend to increase. The state will be increasingly involved in the promotion, support and maintenance of an everwidening range of economic activities. This trend can be explained by the concept of ‘the competitive state’, following Cerny (1990). According to Cerny, the competitive state has forced three sorts of changes as follows: (a) a shift from macroeconomic to microeconomic interventionism, reflected in the conceptualisation and operationalisation of ‘industrial policy’; (b) a shift in the focus of interventionism from the development and maintenance of a range of ‘strategic’ or ‘basic’ industries – which are supposed to underpin and sustain the overall ‘comparative advantage’ of a national economy and which presumes that each nation state must possess some minimum level of industrial self-sufficiency – to one of flexible response to competitive conditions in a range of diversified and rapidly evolving international marketplace (what has been called ‘competitive advantage’); and finally (c), a shift in the focal point of party and governmental politics from the general maximisation of welfare within a national society to promotion of enterprise, innovation, and profitability in both private and public sectors. (Cerny, 1990: 205) In the face of economic integration, states will be increasingly asked to maintain the ‘business confidence of national firms’ by creating ‘policy-induced competitive advantage’. This transformation in the role of the state seems to be inevitable for economic prosperity, increased employment and more public revenue. In summary of the above, I have classified the roles of the state in the economy into four types: the public goods state, the Keynesian state, the developmental state and the competitive state. Each represents a different approach to state intervention in the economy. It is possible to justify different approaches at different times in response to the changing economic environment. With increased economic integration in the world markets, however, the imperative of international competitiveness has been the chief influence on shifts in the state’s role in the economy.

Welfare states and changing roles of the state The interventionist welfare state has become an integral feature of all advanced industrial countries. Yet, the content and form of the welfare state differ across these

The roles of the state 21 countries, in spite of the same label of welfare state. Furthermore, even developing countries often raise the welfare state as an ideological more than a practical promise. What then does the welfare state really mean? The main reason for so much confusion surrounding the concept perhaps lie in the relationship between social policies and the welfare state: is the latter merely a sum total of a nation’s social policy repertoire, or is it a distinct institution above and beyond a given policy array? For the pioneers of the welfare state concept, such as Gustav Möller in Sweden or T. H. Marshall in Britain, the answer is quite straightforward. The welfare state is an institution with its own distinct identity: granting citizens social rights and claims on government and guaranteeing that it would uphold the welfare of the entire social community. From this perspective, the welfare state cannot be regarded as the sum total of social policies. In this respect, Esping-Andersen maintained that even the poorest Third World nation has some form of social policy, but if by the welfare state we mean citizens’ rights across a comprehensive array of human needs, the concept can hardly be stretched beyond the OECD countries (Esping-Andersen, 1994: 712). It is therefore necessary to distinguish the state’s roles in social welfare from the role of the welfare state. Every state plays a crucial part in the provision of social welfare, but it is not necessarily classified as a welfare state. From this, I shall first classify the roles of the state in social welfare provision. Then, I shall discuss the transformation of the welfare state in the face of changes in international markets. The state’s role in welfare provision Given the fact that each country has a quite distinct welfare system in accordance with its historical structural context, it is not easy to classify the roles of the state in welfare provision. According to Gough and Eardley (1996), there are three basic mechanisms by which the state can directly allocate income or services to individuals or households: The first mechanism is the universal or contingency benefit allocated to all citizens within a certain social category. These benefits are not related to income or employment status. Secondly, there is social insurance, where the benefit is related to (a) employment status and (b) contributions paid in to the scheme. Both of these contributions can be interpreted more or less stringently. The third comprises means-tested or income-related benefits where eligibility is dependent upon the current or recent resources of the beneficiary, though other categorical conditions may also apply. (Gough and Eardley, 1996: 2–3) On the other hand, beyond the above direct provision of social benefits and services, the state has an important effect on welfare provision through indirect methods including tax allowances and mandated private benefits or services by state regulation. Private or commercial sectors are often considerably modified by the use of subsidies, allowances and vouchers, along with regulations of the state, because of the market’s potential for abuse and exploitation.

22 The roles of the state Building on this discussion, I shall examine the state’s roles in welfare provision, dividing them into four types: transferor, provider, financier and regulator. First, the state has played the role of a transferor in the area of welfare provision by transferring incomes from one group to another through tax. The social security system is indeed involved in redistributing money to various groups in the fiscal system: the elderly, families with children, the sick, the unemployed and so forth. There is no doubt that this transferring is a most important form for income redistribution in favour of the bottom levels of the income ladder. The social security system may thus enable the state to create more integration and solidarity among social groups. Second, the state has played the role of a provider in welfare provision by providing social services, such as education, health care and personal services. As a matter of fact, government is the biggest employer in all modern states. The government employs workers to provide services to all citizens who are in need of or are entitled to them. In this sense, it is not peculiar to call public workers public servants. The role of the state as a provider may be necessary for the reproduction of labour forces, though this will vary across countries. Third, the state has indirectly affected welfare provision through the fiscal system, which can be explained as the role of a financier. As noted, fiscal affairs of the government consist of two distinct dimensions: spending and revenue-raising. Regarding state revenue, taxation must be considered as an instrument of social policy rather than merely as a source of finance (Pond, 1980: 47). Taxation can be used to redistribute money and other resources as well as to encourage or discourage various activities and practices. For example, in a progressive tax system, tax allowances and tax exemptions can be used to a similar effect as spending on welfare provision. In addition, many countries have tax deduction schemes in respect of gifts to approved public institutions, which has the obvious intention of facilitating the donation of money for charitable purpose (Bryson, 1992: 143–54). On the other hand, the state allocates public expenditure to provide subsidies for non-state welfare sectors, that is the private sector, enterprises and voluntary organisations. Finally, the state has also played the role of a regulator in welfare provision by setting regulations which non-state welfare sectors should observe. Non-state sectors need to be regulated, as they have some problems mainly generated by market failures. Hence, the state establishes legal rules with which private markets or enterprises should comply. For instance, some problems in private insurance could be tackled by a regulation obliging insurers to take all applicants, to charge premiums according to certain rules for low income or risk groups, or to limit contracts in certain ways. Therefore, according to the extent that social regulations succeed in correcting the market failures they address, the state can also increase each citizen’s welfare. These four roles of the state in welfare provision can be found in all capitalist states. Yet, the relative significance among them varies across different welfare systems. And within the same country the state’s role in welfare provision is continually changing over time. I will now discuss these changes.

The roles of the state 23 Change of welfare states It is widely acknowledged that both the logic-of-industrialism thesis and the nationbuilding and democratisation thesis suggested a broad international convergence around the welfare state ideal. As Perrin (1969: 262–8) observes, there was a common trend among all countries towards generalisation of protection, effective protection from most risks and strengthening social solidarity. The belief in convergence, however, did not last long. As Esping-Andersen (1994: 715) maintains, if anything, perhaps the most intensive activity of welfare state theorising has now shifted to identifying a diversity of welfare state typologies. The earliest and most influential typology of welfare states was established by Titmuss (1974: ch. 2). According to him, welfare states can be distinguished by three types: residual, industrial achievement-performance and institutional redistributive. His classification has generated great interest, especially amongst academics in comparative social policy studies, and has prompted several subsequent works. Furniss and Tilton (1977) distinguished the positive state (more of less Titmuss’s residual model), the social security state (exemplified by the comprehensive, yet only basic approach of post-war Britain), and the social welfare state (basically the institutional model as it found expression in Sweden). Korpi (1980, 1983) also classified welfare states close to Titmuss’s institutional-residual distinction. Another approach is to identify welfare state/economy relations in terms of political economy. Probably one of the most influential studies in this trend is Esping-Andersen’s typology of welfare regimes. He distinguished three welfare state regimes in terms of political economy according to their policy outputs, their welfare effects on de-commodification (the degree to which social policy makes individuals independent of the market for income and consumption), and their feedback effects on systems of stratification (Esping-Andersen, 1990: 37). They are the liberal, the conservative and the social democratic regimes. His model of welfare state regimes has provided a vantage point in comparative social policy studies. Indeed, most comparative social policy studies have appeared to remain substantially within Esping-Andersen’s framework of welfare state regimes. Some approach it by applying his model to specific countries, while others try to vindicate his neglect of gender or of religion, status and ethnicity in shaping the welfare mix (Castles and Mitchell, 1993; Room and 6, 1994; Lewis and Ostner, 1994). Doubt has also been raised about the applicability of his model to specific countries. For instance, East Asian countries, including Japan, though they may be a hybrid, are said to be a deviant case that cannot be explained by one of his models (EspingAndersen, 1999: 90–2). Furthermore, welfare states are always changing according to shifting domestic socio-economic structures as well as changes in the international markets. There have been various accounts of the changes in welfare states: they have been in crisis, under threat, in transition, resilient, reshaped, refashioned, restructured, residualised, rolled back, transformed and even dismantled (Powell and Hewitt, 1997). In fact, for the past two decades, the confidence of an earlier generation that universal social programmes were not only compatible with, but also helped to drive, economic growth has been seriously eroded (Myles and Pierson, 1997: 443).

24 The roles of the state It is necessary therefore to include the reform trend of welfare states, which has been greatly affected by globalisation, in devising a typology of welfare states. I shall introduce an emerging form of social policy around the welfare states, arguably ‘a business-friendly social policy’, into the arena of welfare state theorising. I shall thus distinguish three types of welfare system: residual, institutional and business-friendly. The residual welfare system According to Titmuss (1974: 30–1), the residual model is distinct in its minimalist approach to the state’s welfare provision, its active encouragement of private welfare in the market and its adherence to the classical liberal view that social protection should be targeted to only those groups demonstrably incapable of working. State intervention in the sphere of social welfare has been consistently criticised on the grounds that any kind of socially guaranteed means of livelihood for the able would distort work incentives and hinder labour market mobility. Hence, it has been maintained that state welfare provision should come into play only when there is a breakdown in the natural mechanisms for the support of individuals – the family, the market and voluntary charities. This view of a residual welfare model has been advocated and consolidated by the New Right in the 1970s and 1980s. According to New Right theorists, state welfare exemplifies the errors of excessive state interference, and represents one area in which market alternatives could be constructed. There are by and large three main areas of debate. The first is the nature of state provision itself. New Right theorists argue that not only does state welfare require heavy taxation, but welfare provision by the state also involves economic waste. This critique has been fuelled by public choice theorists who stress two forces driving interventionism forward: first, the competition between parties for votes which stimulates parties to promise more and more, and second, the self-interested, budget-maximising behaviour of bureaucrats and professionals (George and Wilding, 1993: 19). It is maintained that welfare provision by state monopolies is insulated from the efficiency-inducing pressure of market competition and is more likely to serve the bureaucratic and professional interests of their staff than the needs of their consumers. Indeed, in the UK these arguments led to the creation of a mixed economy of welfare in which the state ceased to be a major direct provider of health care and welfare services, and greater reliance was put upon commercial and voluntary sector providers (N. Johnson, 1998: 150). The second area of debate concerns the behavioural effects of state welfare. Exponents of the New Right believe that the expansion of state welfare provision leads to a growing population dependent on state benefits, undermining work incentives. They criticise the welfare state for stressing rights rather than responsibilities and obligations. This is the essence of Mead’s criticism of the welfare system of the USA. He maintained that the US government gives too much to the poor, in the sense of benefits given as entitlements, but at the same time it gives too little in the sense of meaningful obligations to go with the benefits (Mead, 1986: 3). On the grounds that satisfied needs are never cut back but rather are expected to be

The roles of the state 25 further satisfied, it is argued that it is impossible for welfare states to afford increasing social needs. Third, beyond the consideration of costs, the New Right theorists have strong doubts about the ability of the state to recognise and to meet social needs. They are highly dubious of successful central planning (George and Wilding, 1993: 22). This concern has been adopted by supporters of welfare pluralism, though they are less negative towards the welfare state (N. Johnson, 1987; Svetlik, 1991). They basically refute that the state sector can effectively substitute other welfare sectors without serious consequences in terms of quality of services and of socio-economic costs. Even when state sectors are successfully meeting a range of social needs, state welfare services can also acquire complex, remote and bureaucratic structures that can alienate or exclude some potential service users (N. Johnson, 1998; 149–50). It is maintained that the state can neither provide nor regulate all welfare services because it cannot know all the needs or control all actions. Consequently, it is suggested that the market, enterprise and family sectors should be dominant in welfare provision, whereas the state should play only a limited role. Social needs as a minimum rather than social rights should be the basis of state provision. The institutional welfare system According to Titmuss (1974: 31), the institutional model is distinct in emphasising that the state has an obligation to ensure optimal living conditions and an equitable distribution of welfare and life chance for the entire population. There is no stigma, no emergency, no abnormality in welfare provision, as the state guarantees social rights for all citizens. The institutional model assumes that the market must be controlled and modified wherever its functioning risks social well-being. Unlike the residual model that assumes that market failure must be proved before the state intervenes in social welfare provision, the institutional model presumes that market solutions can be legitimate only if demonstrably superior. Institutional welfare states can be divided into two distinct forms: the social insurance model and the social democratic model (Castles, 1997). The oldest model underlying welfare state provision is the Bismarckian social insurance system (Perrin, 1969: 250–1). The major institutional feature of this model is the nexus between contribution and the right to benefit, putting a special emphasis on ironing out fluctuations in the income stream over each individual life-cycle. That is to say, only people who make contributions can acquire entitlement to a benefit. Hence, the social insurance model has to leave out those in no position to make contributions. In the post-war era, this problem was tackled by providing some forms of social assistance for those whose earnings record would not justify benefit. The great attraction of the social insurance model was in the financing method (Castles, 1997: 26). The funding of contributions has been attractive to governments as a means of alleviating their burden of social welfare provision. Thus the social insurance welfare state is more likely to be a transfer state rather than a provider state. The other institutional model is the social democratic welfare state exemplified by Scandinavian countries. The social democratic model has a variety of distinctive

26 The roles of the state features that clearly differentiate it from the social insurance welfare state. According to Esping-Andersen and Korpi, this model has three essential features: first, social policy is comprehensive in its attempt to provide welfare; second, the social entitlement principle is institutionalised; third, social legislation has a solidaristic and universal nature (Esping-Andersen and Korpi, 1987: 42). Thus, social democratic welfare states in general have universal and relatively generous income support benefits to all citizens in addition to high levels of earnings replacement. They also provide a progressively wider range of free services in accordance with demonstrated needs, such as health care, housing, care for the elderly, child care and so forth. To afford these social provisions, they normally employ progressive taxation and thus put an emphasis on vertical equity as strong as on horizontal equity. Dual equities, namely equity between individuals at any one time and equity for individuals across the life-cycle, are endorsed (Castles, 1997: 26). Despite the varieties of institutional settings, the institutional welfare model has a common thread in that welfare for the individual is the responsibility of a social collective. That is to say, the market’s or family’s capacity to secure an optimal distribution of welfare is seriously questioned. Therefore, the state plays a dominant role in welfare provision and the other sectors are regarded as auxiliary supporters of state welfare. The business-friendly welfare system I have maintained that with economic integration in the world markets, welfare states have been increasingly required to play the role of a competitive state in economic affairs. As a result of this, welfare states have been competing against each other more than ever before. What do they then compete over? I shall discuss two kinds of economic affairs over which states compete against each other: promoting competitiveness in trade markets and attracting mobile capital from international capital markets. At the same time, I shall seek to answer how changes in the role of the state in economic affairs will be reflected in the process of social policy formation, and as a result what kind of restructuring of welfare state would be expected. With globalisation, welfare states have become involved in the process of promoting competitiveness in trade markets. In the long term, the international competitiveness of a country is mainly determined by the innovative potentiality of its enterprises and the qualification of its labour force. In the short and medium term, the level and the evolution of labour costs also play an essential role in maintaining competitiveness. In the domain of social policy, therefore, it should be expected that maintaining low wages, low social security contributions and a weakly regulated labour market, ceteris paribus, facilitates competitiveness for domestic firms in world trade markets (Shin, 2000a: 22–3). It is also likely that greater emphasis will be placed on human capital investment, such as public education and training programmes. In particular, in the face of rapid change in production technologies, states will emphasise the necessity for vocational training and retraining to provide businesses with a well-skilled labour force, which will be crucial to facilitate structural

The roles of the state 27 competitiveness. National prosperity becomes ever more dependent upon the skills and competitiveness of nations (OECD, 1998a, 1998d). Investment in the qualifications and skills of the present and future workforce is as indispensable as investment in real capital. On the other hand, with ever-increasing movement of mobile capital across national borders, encouraging inflows of FDI as well as reducing de-localisation of capital have become important policy objectives which most states have to take into account (OECD, 1995a, 1995b). Indeed, since more investment of capital not only means fuller employment and economic prosperity in future but is also necessary for the re-election of incumbents and public revenue, governments cannot afford to ignore the competition for more inflows of FDI. In the face of much greater opportunities to relocate production, states should consider the need for ‘business confidence’ within the nation, as otherwise the enterprises will move to other countries that can give them a better return (Shin, 2000a: 23). Investment decisions are fundamentally driven by comparisons of the potential returns from an investment, together with the level of risk. There are many considerations in decisions about investment location, including the size of the market, the legal and regulatory framework, the macro-economic environment, access to basic inputs, the tax system, political stability and labour force militancy and so on (OECD, 1995b: 18–34). However, it is not possible to assess the relative importance of the different factors in a quantitative manner. Certainly the ordering would be different for different sectors and different circumstances. Nevertheless, it is important to recognise that some of these factors are outside the control of the state, whilst other factors are within the control of the state or at least can be influenced by state policies so that ‘comparative institutional advantage’ might be created. In fact, states have played important roles in bringing about incentives to attract FDI through various policy measures. These can be distinguished by three kinds of incentive measure: tax incentives to eliminate or reduce the tax burden for a foreign investor, deregulation incentives for increased labour flexibility, and other, often infrastructure-related incentives designed to enhance the profitability of the local affiliate of a foreign investor (Shin, 2000a: 23–4). It is thus frequently argued that foreign capital may be discouraged from or even exit countries in the face of high tax and social security contributions financed by business (Goodman and Pauly, 1993: 57–8). It is argued that a larger part of the welfare burden must be shifted to taxes on consumption. It is also maintained that since regulation of the labour market essentially hinders business from using the labour force efficiently, investors who are trying to maximise the profitability of their invested capital assets will be reluctant to invest in any countries with tight labour market regulations. Accordingly, ‘social dumping’ will be more likely to occur, particularly in the less developed welfare states in order to attract more foreign investment and/or to secure existing benefits for home-based firms (Adnett, 1995). Even for advanced economies, there may be greater importance attached to cost considerations for labour-intensive, low-skill production activities. There will also be a general tendency towards deregulation and labour flexibility across all welfare states in order to make themselves more attractive to foreign capital

28 The roles of the state investors. Human capital development via public education and training will be an inevitable policy goal, because a high level of qualifications in the labour force has a positive effect on productivity. After all, social policy may well become increasingly subsumed by the hand to promote competitiveness for business. In this context, Jessop (1993, 1994) suggested that along with the transitions to a post-Fordist state, we have increasingly witnessed the emergence of ‘a Schumpeterian workfare state’ subordinating social policy to the needs of labour market flexibility and/or the constraints of international competition. Although the advancement of a post-Fordist regime, together with adopting Jessop’s term, is very controversial and even problematic (Hay, 1998), there seems little doubt that one reason for this ongoing shift would be the imperative of international competitiveness within the dynamics of increased economic integration. Accordingly, welfare states may need to reform their social policy towards ‘a business-friendly welfare system’.

Conclusion In a capitalist society, the state intervenes in the market by implementing various public policies, which can be broadly classified as economic policy and social policy. However, it is recognised that, though there are some similarities across nations, different countries have employed different policies, which have led to different patterns of economic performance and welfare regime. Even within the same country, policies have changed over time, which suggests that the role of the state has steadily changed. With growing economic integration, states are increasingly competing against each other in order to promote competitiveness and attract FDI from international capital markets. The state has been required to play the role of a competitive state in economic affairs. These factors in turn influence social policy formation, requiring the redesign of the role of the state in welfare provision. Thus welfare states may need to reform their social policy towards a business-friendly stance. From the above discussion of the changing role of the state, one can raise several questions. Why does the state play different roles in the economy as well as in the provision of social welfare? By the same token, why does the state adopt a specific policy among the various policy options at a certain time? What are the main factors that affect the process of policy-making in the government? Is there any relationship between economic policy and social policy? These questions will be dealt with in the next chapter.

3

A theoretical framework for analysing the process of policy formation and change

Not only policy diversity across nations but also policy change within the same country has drawn a great deal of academic interest, mainly in the discipline of economics and politics. These are generally concerned with either highlighting the role of the state in the market or advocating the desirable role of the state. Despite numerous studies, however, there has been very little discussion about how the policy linkages between economic policy and social policy take place. Given the close linkages between economic policy and social policy, the policy choice made in one policy area subsequently has an important effect on shaping the content and scope of reform efforts in the other area. In other words, the role of the state in the economy should be reflected in the role of the state in social affairs. The object of this chapter is to provide a conceptual framework to analyse the process of policy formation and change. In the first section, I will critically review the existing theories or approaches explaining the role of the state in the process of policy-making, and demonstrate the problems with each of them. Building on the insights of this discussion, in the next section I will attempt to develop a conceptual framework for analysing the process of policy formation and change, paying particular attention to the linkages between economic policy and social policy.

Theories on the role of the state in policy-making I will begin by dealing with two contending theories concerning the role of the state in policy-making that initially became prominent from the 1950s to the 1970s: pluralism and neo-Marxism. I will then move on to two other approaches, the statecentred approach and rational choice theory, which both gained a lot of support during the 1980s. Each of these four perspectives is significantly distinctive in important analytical respects, and thus in their own way each one provides many useful insights for understanding the role of the state in the policy-making process. However, they all have important limitations in providing a comprehensive account of the state’s role. From this criticism, I finally turn to historical institutionalism (or ‘new institutionalism’1 ), which was developed during the 1980s and has been especially prominent in the analysis of the state’s role.

30 A theoretical framework Pluralism Although there have been various attempts to revise pluralism (Smith, 1990, 1995), pluralists all place emphasis on the role of interest groups in understanding politics. As Bentley, one of the most representative pluralists, has argued, ‘the analysis of politics is the analysis of groups because the society itself is nothing other than the complex of the groups that compose it’ (Bentley, 1995: 200). For pluralists, therefore, public policy is nothing more than a response of the government or political system to the push and pull of interest groups articulating various interests. They believe it is necessary to focus on the ‘observable behaviour’ of interest groups in order to understand the political process; that is to say, all we have to do in order to understand politics is to observe who is involved, how they act and who makes the final decision in the area of government. Pluralists also insist pluralism should be a prescriptive approach to the policy process. Though inequality of power distribution between groups has been acknowledged by a few pluralists (Truman, 1951; Dahl, 1961), most pluralists have argued that no one group systematically dominates political outcomes since the existence of one group is usually matched by an alternative counter group. They believe power is non-cumulative and dispersed. Therefore, they assert that the state should be neutral in the policy-making process. It is true that, in an advanced capitalist society, the interaction between interest groups is an important component in politics. In this regard, pluralism can provide a useful account of the policy-making process in modern liberal democratic societies consisting of a variety of groups with different interests. Nevertheless, pluralism has been criticised due to its problematic propositions concerning political power, the state’s role and methodology as follows. First, pluralism has a great deficiency with respect to its view on the distribution of power. As we can see clearly in the title of a book written by Dahl (1971), Polyarchy: Participation and Opposition, pluralists maintain that political power is not concentrated in the hands of a few groups but distributed to many groups, and so has an open and fluid nature. However, this claim has been criticised chiefly by neo-Marxists, who argue that politics in capitalist society is subsumed by the business class’s need for capital accumulation. Accordingly, the state is not neutral to various interests of different groups but prejudiced in favour of capitalist interests. Public policy should also be understood in association with the structural context of capitalism. Second, pluralists underestimate the role of the state in politics. According to Dunleavy and O’Leary (1987: 43–9), pluralists have at best used three kinds of images with respect to the state’s role in the policy process: the cipher state, the neutral state and the broker state. Yet, none of them properly grasps the state’s role in the modern democratic political system. This deficiency stems from the fact that they exclusively concentrate on the observable behaviour of groups in order to understand politics, with the exclusion of state actors. Accordingly, the pluralist approach can at best only give a partial picture of the policy process. Third, ‘behaviourism based on methodological individualism’ advocated by pluralists has also been criticised. Due to focusing on the observable behaviour of

A theoretical framework 31 interest groups, pluralists fail to recognise the way in which the activity or influence of pressure groups is greatly constrained by the institutional context within which they operate. For pluralists, institutions are at best regarded as arenas that are not accorded much explanatory value. In this regard, March and Olsen (1984: 735) argue that pluralism has a methodological problem of reductionism that tends to see political phenomena as the aggregate consequences of behaviour at individual or group level. In addition, pluralists also fail to treat systematically the structural and economic influences in the policy process (Smith, 1993: 23). This is because most pluralists fix their analytical concerns on observable interest group politics and thus cannot understand the way in which political outcomes are shaped by unobservable structural influences and economic situations. In summary, pluralism falls short of providing a comprehensive account of the role of the state in politics. Beyond the obvious merit of pointing to pressure group politics, it has paid little attention to the state in shaping political outcomes. It contains an incomplete account of political power and has disregarded the importance of institutional factors and structural determinants in the understanding of policy outputs. Therefore, pluralism needs to bring the state into analyses of politics as an independent variable to explain political outcomes. As noted, this criticism was vigorously made by neo-Marxists. Neo-Marxism The idea of the ‘capitalist state’ gives a succinct account of the view of neo-Marxists on the role of the state in a capitalist society. According to them, in the long run any kind of public policy of the state can only act in ways that favour capitalism and capitalists. This perspective reflects Marx’s notion that ‘the state is an executive committee for managing the common affairs of the whole bourgeoisie’ (Marx, 1977: 223). Within neo-Marxist literatures, however, there remains deep disagreement about the nature of the linkages between classes and the state. This tends to congregate around three theoretical confines: the instrumentalist approach, the structuralist approach and the class struggle approach. The debates between these perspectives are too well-known to require much elaboration. According to the instrumentalist approach, the state in a capitalist society acts on behalf of ‘the expressed preferences’ of a relatively cohesive capitalist class. This argument is based on the class situation of bureaucrats. It is maintained that the capitalist class has both the needs and the resources to influence the state to do its bidding (Miliband, 1969). Thus the development of political outcomes has a voluntarist form, as all state policies are assumed to be a response to the changed needs and preferences of the capitalist class. Alternatively, in the structuralist approach, the state is supposed to have a good deal of autonomy from the expressed preference of capitalists. Instead, it is claimed that the state should reflect the structural needs of capitalism as a system because the role of the state in a capitalist society is to ensure the reproduction of capitalism and its social relations of production (Poulantzas, 1969, 1973). Thus, it is not the class situation of bureaucrats but the changing functional requirement of capitalism

32 A theoretical framework that determines political outcomes. In particular, as modern capitalism begins to lose its self-correcting capability, the state has to intervene (O’Connor, 1973; Offe, 1975; Gough, 1979). That is to say, the state is supposed to be relatively autonomous from the capitalist class in the policy-making process in order to correct and manage the contradictions in capitalism and impediments to the accumulation process. According to the class struggle approach, the state is constrained by the political power of the working class. Hence, the state, together with the capitalist class, has to accommodate the working class, particularly during the period when the extent of its political mobilisation is high. It is argued that changes in state policy are associated with the evolving relationship between social classes. In this respect, Gough (1979: ch. 4) has argued that the welfare state was partly brought into existence and maintained by the struggle of the working class. He does not see the welfare state as a form of automatic response by capitalist interests and thus attempts to avoid the problem of a functionalist position and determinism seeing welfare provisions as introduced simply to support capital accumulation. The class struggle approach can be seen as an attempt among the neo-Marxists to include consideration of the agent. After all, the neo-Marxist approach’s great strength is its accounting for the structural aspects of the state in capitalist society: namely the state’s institutional commitment to continuing capital accumulation and the protection of the basic institutions of capitalism. Neo-Marxism has made an important contribution in providing a macro- analytical framework about the state role in capitalistic democracies. As Levi has pointed out, neo-Marxism provides ‘the best guidance for determining the most significant macro-level variables affecting a political economic system’ (1988: 34). However, neo-Marxism has a real problem in its tendency to lapse into functionalism and determinism. For neo-Marxists, the state only acts for the interests of the capitalist class because it is a capitalist state. There is no option other than business being the final victor in all policy areas. This creates great problems in explaining situations where capitalists do lose. As a result of this dilemma, neoMarxists have introduced a new concept of short-term concessions which are necessary for the long-term survival of capitalism or functional for the production of capital. Yet, as Smith indicated, this interpretation inevitably leads Marxism into tautology, arguing that all state actions or policies, whatever form they take, are in the interest of capital (Smith, 1993: 44). Like pluralism, the perspective of neo-Marxists on the role of the state has deeply retained society-centred assumptions, with no question that all political outcomes of the state are intrinsically shaped by the interests of the capitalist class. In other words, the arrow of political causation flows from society to the state but not the other way. Consequently, many possible forms of autonomous state action are thus ruled out by definition (Skocpol, 1985: 5). Neo-Marxists have failed to recognise the various ways in which state actors can shape or create policies. In summary, there can be little doubt that neo-Marxism has provided important insights concerning the macro-level constraints that affect political outcomes in the political economic system. Nevertheless, it tells us little about the dynamic of the

A theoretical framework 33 political process in which state actors will act according to their own preference that may deviate from the interests of the capitalist class. During the 1980s, both the state-centred approach and public choice theory considered the state’s role in the policy process as a significant independent variable. The state-centred approach Scholars arguing for the state-centred approach criticise both pluralism and neoMarxism for over-relying on social factors outside of the state for explaining politics. According to such scholars, the state in capitalist democracies is neither a neutral referee nor a capitalist state. It is instead argued that the state should be understood as an autonomous entity with its own interests and goals, and with its own capacities to achieve them through a variety of policy instruments. This perspective is clearly summarised by Nordlinger’s well-known remark: in determining public policy, the state will act according to its own preferences ‘even when its preferences diverge from the demands of the most powerful groups in civil society’ (1981: 1). This approach essentially has its roots in the Weberian view of the state. Yet, according to Skocpol (1985: 8), the state-centred approach has two unique features. First, it emphasises the importance of institutional factors of the state in politics, such as the degree of state autonomy, state capacities and state coherence. Second, it stresses the path-dependency of policy choice in the way that the previous policy shapes or constrains current policy options. It cannot be denied that the state-centred approach has greatly contributed to bringing the state back into studies of the policy-making process. In particular, this approach has gained a lot of support in explaining the economic successes in the East Asian countries, including Japan and the NICs, especially Korea and Taiwan. Nevertheless, the state-centred approach has some problems in understanding the role of the state in the policy process because of its assumptions regarding state autonomy and state capacity. First, the state-centred approach presumes that the state is a separate entity, opposed to and set apart from a larger entity called society (Mitchell, 1991: 77). However, the state is never insulated from society. As Evans pointed out (1992), state autonomy must be understood as ‘embedded autonomy’ because the state is closely connected with social actors in the policy-making process. Public policy is hardly determined in a social vacuum. It is instead decided by reflecting the nature of social coalitions. In this sense, the autonomy of the state should have a social basis: for state autonomy to exist for specific purposes, the state must be able to obtain support, of differing kinds, from social actors (Gourevitch 1986: 238–9). Second, according to state-centred theorists, state autonomy is said to be in a stable condition. Yet, state autonomy is a dynamic feature continuously changed by policy outcomes. For instance, one of the important effects of industrial policy during the Park Chung-hee regime in Korea was to stimulate the growth of chaebols (big conglomerate groups). By the end of the 1970s, chaebols, which were in part products of state policy, were sufficiently central to the economy that they were in a position to successfully resist the guidance of state planners (Evans and

34 A theoretical framework Stephens, 1988: 751). Thus, there exists a double-edged relationship between state intervention and state autonomy. That is to say, the state’s success in building its role as a corporate actor may undercut its ability to remain autonomous and that effective intervention may increase the extent to which the state becomes an arena of social conflict (Rueschemeyer and Evans, 1985: 49). Therefore, the autonomy and capability of the state can be altered and transformed over time. Third, the state-centred approach fails to recognise the fact that the autonomy of the state is essentially limited by the structural requirements of the capitalist system, since it needs to keep ‘business confidence’ (Block, 1977). Although the state is neither a servant nor an instrument of any one class, the state needs to implement and guarantee the collective interests of all members of a class society dominated by capital (Offe, 1984: 120). The political strategies of state actors will thus be constrained by the requirements of structural factors. In summary, the state-centred approach has been useful in re-focusing attention on the state in politics. However, it fails to establish itself as a coherent theory of the state because it relies for its distinctiveness on a false dichotomy between state and society. It has also disregarded the dynamics and complexity of the interorganisation of the state through the assumption that the state has a unified preference as an actor. The state-centred approach, by adopting a voluntarist form, also fails to recognise the economic and structural factors which constrain the political strategies of state actors in the policy-making process. Rational choice theory Another important approach to the state’s role in the policy-making process was developed by rational choice theorists in political science. Like the statecentred approach, the rational choice perspective, which focuses on the analysis of choices made by political actors, also emphasises the active role of state actors in policy-making. In this sense, rational choice can be differentiated from the two society-centred approaches, that is pluralism and neo-Marxism. Yet, it is also different from the state-centred approach in the sense that, for rational choice theorists, state actors are regarded as rational actors who seek to maximise their own utilities. That is, rational choice theory, which emerged in the 1960s and 1970s, makes general assumptions about the motivations of people in order to predict how, generally, they will behave in certain social situations, usually assumptions of interest maximisation. In the conventional or normative rational choice studies, therefore, politicians, bureaucrats and voters are said to act in a self-interested way to maximise their own preferences rather than pursuing public interests. For instance, Niskanen has maintained that a combination of the self-interest of bureaucrats in maximising their budgets and bureaucratic control over information on the cost structure of state provision of public goods results in their over-provision, at the expense of the citizenry (Niskanen, 1973). Buchanan has also claimed that state interventions incur not only traditional dead weight losses but also costs when resources are diverted into unproductive activities by private agents in order to capture rents generated

A theoretical framework 35 by state intervention (Buchanan, 1980). Accordingly, rational choice theorists argue that state intervention in the economy has brought about undesirable results and so should be minimised. As Dunleavy and O’Leary have pointed out, it is not surprising to find a strong correlation between using rational choice perspective and espousing New Right values, even if there is no necessary or intrinsic connection between the two (1987: 75). However, rational choice theory has been subjected to a great deal of criticism regarding its assumptions about rational actors and its methodological limitations. Ward summarised these criticisms into the following four points (1995: 80–92): (a) the internal critique of rational choice ‘heretics’ who wish particularly to emphasise bounded rationality; (b) the sociological critique, which centres on the way rational choice theory appears to play down social structure and holistic modes of explanation; (c) the psychologists’ argument that individuals often do not act rationally in the standard sense and are motivationally and psychologically complex; and (d) the critique from mainstream political science, based on the implausibility of the assumptions made and the predictive failures of the model. There have been responses to this criticism from both the behavioural and rational choice camps. Rational choice institutionalism, which is one of the efforts to modify rational choice theory, has arisen from American political science since the 1980s. Initially this approach started to explain the discrepancy between the conventional rational choice postulates and the political outcomes in US Congress. Applying Arrow’s impossibility theorem to political action, some rational choice theorists raised the point that explanations based only on maximising behaviour were necessarily insufficient to capture legislative outcomes that displayed systematic features (Riker 1980; McKelvey, 1976). Rational choice theorists have thus turned to institutions. Especially influential was Shepsle’s argument that the institutions of the Congress solve many of the collective action problems so that legislators make the passage of stable legislation possible (Shepsle, 1979, 1986). He argued that all the ‘action’ was not in the straightforward aggregation of preferences, but rather was found in the sometimes subtle influence provided by control over structure and procedure, which is called ‘structure-induced equilibrium’ (Shepsle, 1989: 137). In this sense, rational choice institutionalism is the study of rational decisions in a context of political and economical institutions. The rational choice institutionalists also drew fruitful analytical tools from the transaction costs school or neo-institutional economics, which emphasises transaction costs to the operation and development of institutions (Olson, 1982; Bates, 1989; North, 1990). The neo-institutional economists in general are likely to pay attention to institutional design which minimises transaction costs and encourages co-operation among individuals pursuing self-interest. Affected by neo-institutional economics, the rational choice institutionalists stress institutional design by focusing on how political and economic institutions constrain, direct and reflect individual behaviour. It is a great theoretical development in rational choice studies to incorporate institutions with rational behaviour. As Dunleavy pointed out, rational choice institutionalism offers ‘compelling, applied and relatively detailed accounts of how

36 A theoretical framework the core processes of liberal democratic politics operate’, compared to the conventional rational choice theory, which uses ‘abstract conjunctures which are modelled so stripped down, so uncomplicated and so unambiguously specified that in many uses it is hard to think of analogous political situations’ (Dunleavy, 1991: 2). Perhaps most important, rational choice institutionalists have developed a more precise concept of strategic interaction in the determining of political outcomes and a highly generalisable set of concepts that lend themselves to a systematic theory. As Hall and Taylor have argued, this approach takes ‘a calculus approach’ to the problem of explaining how institutions affect individual action: Rational choice institutionalists postulate, first, that an actor’s behaviour is likely to be driven, not by impersonal historical forces, but by a strategic calculus, and second, that this calculus will be deeply affected by the actor’s expectations about how others are likely to behave as well. Institutions structure such interactions, by affecting the range and sequence of alternatives on the choice-agenda or by providing information and enforcement mechanisms that reduce uncertainty about the corresponding behaviour of others and allow ‘gains from exchange’, thereby leading actors toward particular calculations and potentially better social outcomes. (Hall and Taylor, 1998: 945) Rational choice institutionalists have developed the most distinctive accounts of institutional origins, focusing on the functions that the institutions perform and the benefits they provide (Hall and Taylor, 1996: 952). They are concerned with different institutional settings and arrangements, which may help the relevant actors overcome essentially similar social problems. They believe the process of institutional development is a process of voluntary agreement in order to gain co-operation and to reduce transaction costs. In this sense, rational choice institutionalism may have great potential for explaining why existing institutions were created and continue to exist. However, the approach of rational choice institutionalism has some limitation in understanding political outcomes because of several of its basic features. Like the conventional rational choice theory, rational choice institutionalists employ a characteristic set of behavioural assumptions relying on the perspective of humans seeking interest maximisation. Thus, they recognise that behaviour occurs in the context of institutions. However, they assume that political actors have a fixed set of preferences or tastes and behave entirely instrumentally in order to maximise the attainment of their own preferences. The reliance on a simplistic notion of utility maximisation seems to constitute a return to the behaviouralism that the institutionalists set out to criticise. In addition, they presume the actors’ goals or preferences are given things in the institutional analysis (Thelen and Steinmo, 1992). Yet, they are not given but shaped by the institutions. In other words, the strategy of the actors should be structured by the degree to which asymmetries of power vest some actors with more influence than others. Consequently, this widely vaunted micro-foundation in rational choice institutionalism inevitably misses many important dimensions concerning human behaviour.

A theoretical framework 37 The approach of rational choice institutionalism tends to follow a highly functionalist view with respect to the origins of institutions. That is to say, it explains the origin of the institution largely in terms of the benefits that follow from its existence. According to Hall and Taylor, though such benefits may account for the persistence of an institution, the problem of explaining persistence should be a different matter from the problem of explaining an institution’s origins. This is because unintended consequences are ubiquitous in a social world, and one cannot safely deduce origins from consequences (Hall and Taylor, 1996: 952). In summary, the conventional rational choice theorists in general have a negative perspective on state intervention in the market. Concerning the role of state actors in the policy-making process, it is argued that bureaucrats or policy-makers act as a self-interest maximiser so as to bring about only undesirable results and so their intervention should be minimised. On the other hand, rational choice institutionalism as a modified form of rational choice theory may provide a distinctive explanation of institutional developments. However, rational choice institutionalism cannot be free from criticism that it overemphasises the choice of the individual in the process of policy-making limited by the institutional context and understates the structural constraints which shape the strategies and goals of political actors. The applicability of the approach of rational choice institutionalism in the analysis of institutional developments hold only for a limited number of settings. Historical institutionalism Historical institutionalism, which emerged at the same time during the 1980s as rational choice institutionalism, developed in response to the two prominent perspectives in political science during the 1960s and 1970s, namely pluralism and neo-Marxism. Yet, historical institutionalists adopted pluralism’s idea that conflicts among rival groups for scarce resources lie at the heart of politics. They also borrowed the insight of structuralism from neo-Marxism: that is, that institutions structure actors’ behaviour and produce distinctive political outcomes. However, the state-centred approach had a more crucial effect on the development of historical institutionalism. Many historical institutionalists initially looked more closely at the state as a complex of institutions capable of structuring the character and outcome of group conflicts (Krasner, 1978: Katzenstein, 1978; Evans, Rueschemeyer and Skocpol, 1985). However, historical institutionalistm is distinct from the previous perspectives in that in general it focuses on the interactions between the state and society rather than exclusively focusing either on society or on the state. Thus, in the approach of historical institutionalism, the old state-versus-society dichotomy that rests on a view of power as a zero-sum conflict between state and society was dropped. For historical institutionalists, the state is neither a neutral broker nor a capitalist agent. The state is also hardly a strategic planner isolated from society. Historical institutionalists began to explore how social and political institutions could structure interactions between state and society so as to generate distinctive national trajectories (Hall, 1986; Steinmo et al., 1992). Much of this work consists

38 A theoretical framework of cross-national comparisons of public policy, arguing that differences in the political institutions of countries produce different policies. For instance, Hall (1986: ch. 9) has maintained that differences in institutional settings (divided into five aspects: the organisation of labour, the organisation of capital, the internal organisation of the state apparatus, the position of the nation within the international economy and the organisation of its political system) make differences in state intervention in the economy. With respect to policy developments within the same country, historical institutionalists claim that the differences in institutions from time to time bring about changes of policies. Thus, within the historical institutionalist school, the eclecticism and diffuseness of institutions are, to an extent, unavoidable. Nevertheless, by and large the approach of historical institutionalism represents attempts to illustrate how the institutional structures mediate the interests and capacities of individuals or groups within them – by the large-scale and historically evolving organisational structures of state and society (Ikenberry, 1988: 243). Thus, historical institutionalists largely associate institutions with organisations and the rules or conventions promulgated by formal organisation, which constrain the behaviour of individuals (Thelen and Steinmo, 1992: 2–3). Yet, they rarely insist that institutions are the only causal force in politics. Some historical institutionalists have been especially attentive to the relationship between institutions and ideas or beliefs (Hall, 1989a; Goldstein and Keohane, 1993). Like rational choice institutionalism, the central concern of historical institutionalists is how institutions affect the behaviour of individuals. This is because the institutions have an effect on political outcomes through the actions of individuals. Yet, historical institutionalists reject the view of the rational actor which presumes that each individual actor has a fixed preference set and is a self-interested and selfserving utility maximiser. Instead, they believe that ‘institutions can shape and constrain political strategies in important ways, but they are themselves also the outcome (conscious or unintended) of deliberate political strategies, of political conflict, and of choice’ (Thelen and Steinmo, 1992: 10). In this regard, the approach of historical institutionalism is largely structuralist. According to Pontusson (1995: 118), historical institutionalists proposed at least four kinds of causal linkages between institutions and political outcomes. Perhaps the most common claim is that institutions determine the capacity of the state to legislate and implement policies. The second claim is that institutions determine the strategies of state or social actors by virtue of the opportunities and constraints that they provide. The third claim is that institutions determine the distribution of power among state or social actors. In particular, historical institutionalists have been especially attentive to the way in which institutions distribute power unevenly across social groups. Finally, the fourth claim is that institutions do matter in an even more profound sense: institutions determine who the actors are and/or how the actors conceive their interests. Taking into consideration these causal relations, historical institutionalists, as Hall and Taylor have pointed out, in general have devoted more attention to explaining macro-political outcomes than to developing the micrologic that links institutional structures to action (Hall and Taylor, 1998: 958).

A theoretical framework 39 Historical institutionalists have also paid a good deal of attention to the way in which institutions structure a nation’s response to new challenges, arguing the ‘pathdependency’ of institutional change. Early analysts emphasised the impact of policy legacies on subsequent policy choices (Weir and Skocpol, 1985). In particular, Pierson (1993) has developed this concept further by introducing the concept of policy feedback, which I will discuss later in more detail. Hence, historical institutionalists largely recognise the importance of existing institutional templates to processes of institutional creation and reform. There is little doubt that historical institutionalism can be especially helpful in illuminating cross-national differences and the persistence of patterns or policies over time by focusing on the institutions that shape political strategies among contending groups in the process of politics and policy-making. In this regard, Thelen and Steinmo pointed out ‘historical institutionalists have constructed important analytical bridges: between state-centred and society-centred analyses by looking at the institutional arrangements that structure relations between state and society, and between grand theories that highlight broad cross-national regularities and narrower accounts of particular national cases, by focusing on intermediatelevel variables that illuminate sources of variation on a common theme’ (Thelen and Steinmo, 1992: 10). Historical institutionalism can be said to provide a comprehensive approach to analyse the role of the state in policy-making. However, historical institutionalism has also not escaped criticism. First, according to the rational choice theorists, historical institutionalism suffers from a lack of universally applicable concepts based on deductive theory. As mentioned, historical institutionalists generally develop their arguments by inductive explanation. As Hall and Taylor pointed out, they are eclectic in their use of both a calculus approach and a cultural approach to the relationship between institutions and individual behaviour rather than depending on a single theoretical base (Hall and Taylor, 1996: 939). In this respect, rational choice theorists criticise historical institutionalism as non-theoretical and sometimes even dismiss it as story-telling or historical narratives, because many studies in this school have been motivated by substantive issues rather than a narrow theoretical programme (Immergut, 1998: 27). Historical institutionalists should be aware of the criticism that their approach is no more than a synthesis or summing up of various existing theories and so loses theoretical coherence to a certain extent. Second, there are increasing criticisms in comparative political studies, arguing that historical institutionalism is too political biased in its research. It is commonplace for historical institutionalists to assign analytical primacy to political or intermediate level, and so socio-economic institutions or structural variables in capitalist society are dismissed or at best treated as given things. Yet, the causal significance of economic-structural variables ought to be an object of empirical analysis rather than being dismissed. As Pontusson has suggested (1995), historical institutionalists should pay more systematic attention not only to economic institutions but also to a range of economic structural variables that lie beyond the conventional confines of institutional analysis. This is not because there is a necessary or direct causal connection between economic change and policy output

40 A theoretical framework but rather because economic change is potentially an important factor in shaping the environment in which policy choice occurs. Summary To sum up, each perspective – pluralism, neo-Marxism, state-centred theory, rational choice theory and historical institutionalism – has provided many useful insights into understanding the role of the state in the policy-making process. However, I have argued that historical institutionalism provides the best approach to analyse the changes in state intervention constrained by either domestic political, social and economic institutions and/or changes in the international economy. There is little doubt that the strength of historical institutionalism in explaining political outcomes lies not only in considering the structural constraints of capitalist societies but also in explaining the institutional level determined by the relationship between state and society. However, when we reflect on our primary research concern in this study – the relationship of economic and social policies in Korea – we should develop a new framework to grasp the dynamics of policy adjustments. This is because most studies within historical institutionalism pay little attention to the interrelationship between economic policy and social policy, focusing on the regularities of policy reform that are typical of the resilient institutional characteristics of different political economies. Thus, there is little explanation about the dynamics of policy linkages between them. Yet, if we look at the policy choices in social policy areas, we can discover that the reforms of social policy are affected not only by institutional structures but also by economic policy profiles and vice versa.

A model for analysing policy formation and change Policy formation can be said to be a dynamic and sequential process that is driven not only by changes in the international political economy but also by domestic socio-economic circumstances. This understanding is basically based on the proposition of historical institutionalism that ‘history matters’, and in particular that political institutions and earlier policy choices shape the constraints and opportunities for consecutive policy choices. However, in addition, I propose that policy choices in different areas of social and economic policy are not made in isolation from each other but are inextricably linked so as to shape the policy form and content of each of them. The model I have proposed here is pictured in Figure 3.1. The model has several implications for how the process of policy formation and change should be considered. It implies that the existing institutional structure of political economy will affect the selection of policy instruments. It also shows that economic and social policies are inextricably intertwined in the policy-making process, affecting reciprocally the form and content of each other in direct or indirect ways. It also suggests that the development and results of a policy process can ultimately change the circumstances in which that policy process operates some

A theoretical framework 41

Policy feedback

Economic policy – Socio-economic structure – International markets

Institutional settings Socio groups and coalitions

– policy network – policy idea

Policy linkages

Social policy

Policy feedback

Figure 3.1 Process of policy formation and change

years later. Put differently, there can be particular policy paths and institutional adjustment paths which the state will follow. I shall discuss here the process of policy paths in detail with special attention to institutional settings, policy linkages and policy feedback. Policy network and policy idea Figure 3.1 suggests that changes in both the socio-economic structure and international markets will affect the configuration of social groups and rearrange social coalitions by shifting their underlying material interests. The ideological outlook and material interests of a social coalition by and large shape policy objectives. However, the choice of policy instruments is not necessarily the result of social coalition. Several aspects of institutional settings can influence the choice of instruments in the process of policy formation. Regarding these, I shall propose that policy formation is greatly affected by the characteristics of policy networks and policy ideas. The concept of policy network has been used as a model of state/society relations in a given policy area in order to explain parts of policy actions in recent years (Katzenstein, 1978; Rhodes and Marsh, 1992; Manning, 1993; Scharpf, 1993; O’Toole, 1997; Bressers and O’Toole, 1998). According to Bressers and O’Toole (1998: 215), the concern with the idea of a policy network has been fuelled in part by recognition of the complex array of actors involved in policy choices as well as the inability of contemporary government to move unilaterally without incorporating the constraints, preferences and resources of other social actors. Thus, the policy network consists of the relationship between the state and social groups in which actors develop comparatively durable patterns of interaction and communication aimed at developing policy programmes. I shall use the concept of policy network to explain variance in policy processes and output over time rather

42 A theoretical framework than simply depicting policy networks. Given the very complexity of networks around policy issues, however, we need to simplify the notion of network to develop an explicit framework that can explain policy changes. First, following Bressers and O’Toole (1998), I use the notion of network in a narrow sense to denote the pattern of relationship between the state, on one hand, and the set of actors (‘target group’) towards which the state policy efforts are directed on the other. Though the state actors are not simply and unilaterally authoritative but rather often divided and internally competitive, I ignore these bureaucratic dynamics to avoid rendering the analysis overly complex. I also ignore the details of the networked interdependence across target groups and concentrate instead on the pattern of relationships among the state, business and labour. Second, I will address the issue of exclusiveness in policy networks. The policy network operates through exclusion so as to give privileged representation to some sets of interests over others. For instance, when the state has a reciprocal relation with big business groups concerning economic affairs, those groups would have a considerable influence during the process of policy formation so that policy instruments might be limited to serve their interests. This does not mean of course that policy instruments cannot be chosen to subvert or change an existing network. Policy networks can be changed according to the policy instruments chosen before. In other words, policy networks can constrain the choice of policy instruments, but policy instruments can have a great influence on policy networks. This networkbased perspective can offer a connection between the distribution of power among social actors and the selection of policy instruments. The model I have illustrated also suggests that ‘policy ideas’ have a great effect on the choice of policy instruments. As many historical institutionalists have pointed out, a prevailing set of policy ideas defines not only what strategies are available but also what problems exist. Hall (1989b: 383) argued that policy-making takes place within an institutional framework whose configuration varies from nation to nation, but it also occurs within the context of a prevailing set of policy ideas. Building on this argument, he defined policy ideas as follows: Policy ideas include shared conceptions about the nature of society and the economy, various ideas about the appropriate role of government, a number of common political ideals, and collective memories of past policy experiences. Together, such ideas constitute the political discourse of a nation. They provide a language in which policy can be described within the political arena and the terms in which policies are judged there. (Hall, 1989b: 383) The nature of predominant policy ideas can work to the advantage or disadvantage of new policy proposals. Therefore, like the structure of policy networks, the nature of a new set of policy ideas can have a major impact on the likelihood that a certain set of policy options will be accepted.

A theoretical framework 43 Policy linkages between economic and social policies It is not easy to grasp the dynamics of policy linkages in a wide variety of policy areas of economic and social policies. Perhaps the material foundation of the linkages can be found in the bureaucratic dynamics in government. There is often conflict between the various government agencies and departments. There may be conflict over who is responsible for a particular policy or issue, who should be involved and what action should be taken. There is clearly a need for co-ordination between the government agencies and departments. In this respect, first of all, the policy linkages are likely to be structured by the power distribution among the governmental agencies. When the power of coordination is given to a single department within the government, co-ordination may be achieved without serious problem (Rueschemeyer and Evans, 1985: 56). Yet, policy co-ordination is more likely to occur in such a way that one policy area is sacrificed for another area. For instance, when the economic ministries have a predominant position in the government, it may be more difficult to get social affairs onto the policy agenda. On the other hand, when the power of co-ordination is equally distributed between the governmental departments, sectoral policy actors are more likely to take part in a more encompassing project of policy adjustments. Thus, substantive policy inter-dependence will become the object of policy coordination. In order to examine policy co-ordination between government ministries, I shall use the analytical concept of veto points. Veto points are institutional devices that may or may not be used by political actors depending on their strategies (Kaiser, 1997: 436). In this regard, political systems can be interpreted as containing institutional veto points which shape the strategies of political actors and thus affect policy outcomes. According to Immergut (1992: 27–8), they are ‘points of strategic uncertainty where decisions may be overturned’. With the concept of veto points, we can understand the relationships between the state actors or departments in the policy process, which might affect the policy linkage between economic and social policies. Economic and social policies themselves are, however, inextricably linked in the process of policy-making so that they reciprocally affect the content and development of each other. The simplest explanation of this interrelation is provided by Offe (1984: ch. 3). He argues that although some state policies, in particular social policy, can be seen to have little connection with capital accumulation, the necessity of capital accumulation is already embedded in policy-making. In other words, the necessity of capital accumulation does not form directly the contents of social policy, but it cannot be denied that it is potentially an important factor in shaping the terrain on which social policy is decided. Though this explanation provides an invaluable insight concerning the essence of social policy in the capitalist polities, it fails to illustrate the dynamics of policy linkages across different policy areas over time. In this context, Gough (1996: 209) has maintained that economic policy and social policy are actually two sides of the same coin. A change in one policy area thus confines the outcomes of the other policy. In terms

44 A theoretical framework of new institutionalism, one might be regarded as a form of institution for the other, which constrains the choice of policy options. In the following empirical chapters of this thesis, I will deal with the policy linkages between economic and social policies, with special reference to the impact of economic policy on three social policy areas: social security policy, labour policy and education and training policy. First, I propose that the goals and contents of economic policy should be reflected in the state’s role in the provision of social welfare. According to Gough (1998), the shifts in economic policy should have a profound impact on the environment of social policy. Looking at the British case in the past two decades, he has argued that economic policy became more detached from social policy and in some cases diametrically opposed to it. Because the government shifted the goals of economic policy to give priority to the fight against inflation, maintaining sound public finance and facilitating competitiveness, it simply washed its hands of any responsibility for pursuing the goal of full employment (Gough, 1998: 110). This is a clear example of changes of economic policy having a great effect on the formation of social security policy. Second, I propose that the characteristics of economic strategy should have a profound impact on the form and content of labour policy. According to Edwards (1979), the intervention of the state in labour affairs has come into being along with the transformation of labour controls within the workplace. He argued that as bureaucratic control became a dominant way to control workers in the workplace, the working class has turned away from unions and turned instead to the state to amend, shape and dictate the rules of bureaucratic control. Unions continued to be important in this process, but their role has changed: more and more what is important is their political strength and not their industrial power (Edwards, 1979: 161). Thus, the domains of labour policy, including wages, industrial relations and labour regulations, have been greatly constrained by the degree of working-class mobilisation (Korpi, 1983: ch. 3). However, the economic strategy has generated a distinct strategic response in labour policy. Soskice (1999) has identified differences in labour policy that, he argues, largely mirror institutional legacies, especially economic strategies. In what Soskice calls ‘uncoordinated’ economies (largely the Anglo-Saxon, liberal regimes), deregulation through wage flexibility, declining trade unionism, and weakened employee protection has predominated (Soskice, 1999: 106). In contrast, ‘coordinated’ economies, which represent most EU member countries, have opted for a high-wage, quality production strategy that privileges a core of skilled, stable, mainly male workers at the expense of the ‘outsiders’ (Soskice, 1999: 110). This contrast implies that there are ample reasons to believe that economic strategy should have a profound impact on labour policy. Third, I propose that the changes of economic developmental strategy should be reflected in the reforms of education and training policy. According to Bowles and Gintis (1976), education policy in the USA over the last century was mostly driven by the need to produce an adequate labour force. They have maintained that as a result of this embeddedness the history of school reforms in the USA appears less as a story of an enlightened but unsuccessful corrective and more as an integral part of the process of capital growth itself (Bowles and Gintis, 1976: 49). It is still contested whether

A theoretical framework 45 higher educational achievements in aggregate bring about higher economic growth (Rubinson and Browne, 1994), and yet there is growing recognition of the key role of human capital in economic growth and social cohesion. The expansion of public education and training, which brings about an increase in the stock of human capital in the economy, is said to be crucial to facilitate competitiveness and economic growth (OECD, 1998a, 1998d). At the same time, the increasing industrialisation and technical efficiency of the economy are expected to lead the state to place more emphasis on education and human capital investment. Therefore a change in development strategy may well be associated with a change in the focus of education and training policy. Policy feedback In Figure 3.1, we have seen that the model I have proposed emphasises ‘policy feedback’ in the process of policy changes.2 The model treats policy outputs as the results of choices made for influencing the behaviour, and sometimes the institutional arrangements, of policy targets into the future. Indeed, the state exerts a major influence on social relations through a variety of regulations and policies. Yet most political scientists following behaviouralism treat public policy simply as the result of interaction between political forces and rarely as the cause of those forces. Therefore the effects of state policies on politics and socio-economic institutions are not recognised. As mentioned earlier, however, historical institutionalists have brought political institutions and state policies back as crucial factors in producing policy outputs. In particular, they emphasise that past policies themselves influence political struggles by recognising the legitimacy of particular claims or even by limiting the opportunity of special groups to voice their complaints (Pierson, 1993: 597). Consequently, it is hard to deny that state policies are not only outputs of the political process but also crucial inputs, reshaping socio-economic conditions and institutional arrangements. In this sense policy can be a form of institutional design. Following Pierson’s lead (1993) I shall examine two aspects of the policy feedback mechanism. First, policies provide social groups and state elites with resources and incentives that may influence political actions. The organisational structure and political goals of social groups may change in response to the nature of the policies they confront and hope to sustain or modify. This is because policies provide both incentives and resources, which may facilitate or inhibit the formation or expansion of particular groups (Pierson, 1993: 599). Skocpol (1992), citing the case of the Civil War pension in the USA, has maintained that policies often create ‘spoils’ that provide a strong motivation for beneficiaries to mobilise in favour of maintaining or expanding programmes. Rothstein (1992), in an essay on the development of the Swedish labour movement, has demonstrated that policy designs that gave unions authority over unemployment funds provided a crucial impetus to the development of a powerful labour confederation. In addition, policies transform or expand the capacities of the state (Skocpol, 1992: 58). They change the administrative possibilities for official initiatives in the future and affect later prospects for policy implementation.

46 A theoretical framework Second, policies have ‘learning effects’ on individuals at the centre of the policymaking process. Policy learning arguments focus on individuals at or near the centre of the policy-making process and emphasise problems of ‘bounded rationality and uncertainty’ (Pierson, 1993: 611). Indeed, in the policy-making process, the setting of a new agenda and the design of an alternative policy may build on past successes or reflect lessons ‘learned from past mistakes’, as the perspective of incrementalism in the policy-making process has postulated. Policies may also provide incentives that encourage individuals or social groups to act in ways that lock them into a particular path of policy development. For instance, during the developmental process, enterprises may come to learn how they would lower product costs by following the governmental initiatives of developmental strategies. With the analysis of policy feedback which shows that policies once enacted restructure subsequent political processes, we are able to treat state policies as the starting points as well as the end points of analysis. In particular, the issue of timing can be included in the analysis of policy outputs. The initial policy response made in one policy area at time 1 subsequently has important consequences in shaping the content and scope of consecutive reform efforts at time 2. Thus, there are pathdependencies in the process of policy changes.

Conclusion The mutual adjustment of economic policy and social policy is a fundamentally dynamic process. The model I have developed here can help to understand the dynamic and sequential process of policy formation and change. Policy changes are generated by changes in domestic and international affairs, constrained by social coalitions and institutional structures, and influenced by the policy linkages across different policy areas. The concept of policy linkage can help to widen our analytical perspectives by enabling us to understand the interactions between economic and social policies. I will now move on to the empirical study on social and economic policies in Korea.

4

Social and economic policies during the export-led industrialisation of the 1960s

There appears to be little doubt among scholars studying Korean economic development that the industrial capital of Korea began to get into a significant stride towards capital accumulation in the 1960s. It was also in the early 1960s that the social security system first came onto the policy agenda of the government. This is the reason why I will start my discussion with the experiences of the 1960s.

Policy legacy of the 1950s The US aid-led economy and import-substitution industrialisation Korea, occupied by Japan since 1910, was finally liberated in 1945 at the end of World War II. Yet the liberation from Japanese rule did not present either political or economic independence for the Korean people. On the contrary, even before the joy of liberation disappeared, the country was forcefully divided along the 38th parallel line and entered a three-year United Nations (UN) trusteeship; North Korea was governed by the USSR and South Korea was under the US military government. In 1948, South Korea became independent as a divided country and Rhee Syngman came to power as the first president of the First Republic of Korea. However, this was soon followed by the catastrophe of the Korean War between 1950 and 1953. This devastating war destroyed two-thirds of all production facilities in Korea, which was the equivalent of three times its gross national product (GNP) in 1953,1 and almost one million people were killed. In addition to this enormous physical damage, the war resulted in the permanent division of the Korean peninsula, profoundly affecting the formation of political and social discourse in Korea up to the present. After the Korean War, the economic agenda in Korea was simply survival and respite from the ravages of the war. It was entirely dependent on foreign aid, mostly from the USA. As Table 4.1 shows, US aid played a critical role in the Korean economy, recording an average 15.9 per cent of GNP throughout the 1950s. In 1957, it reached the peak of 22.9 per cent of GNP, which was more than half of the general revenue of the central government. Thus, the proportion of foreign savings in total investment was inevitably much higher than national savings, accounting

48 Export-led industrialisation in the 1960s Table 4.1 US economic aid to Korea in the 1950s (US$ million) Year

GNP (A)

US Aid (B)

B/A (%)

1953 1954 1955 1956 1957 1958 1959 1960

1,361 1,467 1,414 1,459 1,672 1,897 1,980 1,996

194 154 237 327 383 321 222 245

14.3 10.5 16.8 22.4 22.9 16.9 11.2 12.3

Source: BOK, 1964, 1973.

for an average of 64 per cent of total investment during the period from 1953 to 1961 (KDI, 1995a: 46). This figure proves that the Korean economy in the 1950s was heavily dependent on US aid. In this situation, the Rhee government adhered to typical import-substitution industrialisation (ISI), depending on US aid. The US aid to Korea was extremely tight-fisted towards productive facilities such as capital goods, but generous with regard to consumer goods or raw materials. For instance, agricultural surplus products accounted for more than 30 per cent of total aid receipts (I. Y. Chung, 1984: 144). Thanks to ISI, the Korean economy grew at an average GNP growth rate of 4.5 per cent a year during the 1950s after the Korean War (KDI, 1995a: Appendix Table). The strategy of ISI, however, proved to be extremely vulnerable to changes in US aid policy. As we have seen in Table 4.1, US aid started to decline in 1958 due to the deteriorating balance of payments and rapidly rising federal deficits in the USA. This reduction in turn made the Korean economy face an impasse in ISI. For instance, the three white industries, namely sugar, flour and cotton textiles, which were developed as the most representative industries throughout the 1950s, met increasing difficulties in their production towards the end of the 1950s. It is worthwhile to note that the way in which Korea developed its economy in the 1950s left some important legacies. First of all, the Korean economy became more dependent on the USA. Yet, the consequence of ISI has been controversial among scholars. At the risk of over-simplification, scholarly approaches can be roughly divided into two perspectives: a modernistic perspective and a dependency perspective. The former emphasises the benevolent nature of foreign aid, so that US aid, as a type of foreign savings, made a significant contribution to domestic capital formation, leading to the economic development of Korea (Krueger, 1979; Mason et al., 1980). However, this perspective has been criticised by those who support a dependency perspective. According to them, we must consider the foreign nature of Korea’s capital formation and its consequences. Many of these commentators have argued that US aid to Korea caused the dependency of the Korean economy on the USA (H. Park, 1978; I. Y. Chung, 1984; D. G. Lee, 1984). Without justifying one of these perspectives, ‘dependent development’ may best describe the Korean developmental experience in the 1950s, as argued by Lim (1985).

Export-led industrialisation in the 1960s 49 Second, it is important to note that ISI dependency on US aid left some important legacies with respect to the relationship between the state and businesses. According to Evans’s study on Brazil’s economic development (1979), the state played the role of mediator between foreign and local capital, forming a ‘tri-pe’. The allocation of foreign aid enabled the state to build a powerful patronage constituency comprised of some specific groups. Throughout the 1950s Korea also had its own ‘tri-pe’, but different from those of Latin America countries: it consisted of US aid resources, local capital, and the state. This relationship was maintained through the management of the Counterpart Fund, which was established by the Korea–US Agreement on Aid signed in December 1948. According to this agreement, the Korean government had to deposit into the Counterpart Fund an amount in Korean currency (won) equivalent to the US current value of all US aid and use it either to finance private investment projects or to promote financial stabilisation (Korean–US Agreement on Aid, 1948: Article 5, in KDI, 1995a: 88). As a result, state allocation of the Counterpart Fund to private investments became a powerful tool (Cole, 1980). Given that every enterprise was suffering from a great shortage of capital for investment at that time (D. H. Kim, 1981), receipt of a loan from the Counterpart Fund itself was a preferential treatment for the entrepreneurs who were able to get them. Furthermore, the interest rate of these loans was very low: from 3 to 8 per cent in comparison with from 18 to 25 per cent for bank loans (Kim, 1981: 197). Hence, the allocation of the foreign aid was prone to cause rent-seeking activities among entrepreneurs. As Woo pointed out, Korean entrepreneurs learned that collaboration with political authority was the essential prerequisite for business survival and expansion (J. E. Woo, 1991: 66). Thus, for entrepreneurs during the ISI in Korea, rent-seeking activity was strongly adopted as one of the main business strategies, which in general led to political corruption. The state was inevitably penetrated by patron–client networks. The absence of state welfare Throughout the 1950s the Rhee government made little effort to satisfy the demand for state welfare, instead largely relying on foreign relief aid programmes, which were initiated by international aid organisations such as UNICEF, and massive US relief aid. Table 4.2 shows the magnitude of foreign relief aid in the 1950s in comparison to the social security expenditure of the central government. Foreign relief aid was equivalent to more than 80 per cent of the total social welfare expenditure of the government, reaching a peak point of 105 per cent in 1957. These figures provide clear evidence of the state’s neglect of its responsibility for social welfare during the 1950s. As a matter of the fact, no social programmes were implemented in the 1950s. This indifference of the Rhee regime to social welfare can be attributed to the underdevelopment of the Korean economy. In a situation in which more than half of the general revenue of the central government was filled by the Counterpart Fund mobilised from the sale of foreign aid goods, the government was not able to

50 Export-led industrialisation in the 1960s Table. 4.2 Magnitude of foreign relief aid in the 1950s (US$ million) Year

Foreign relief aid (A)

Government social welfare and service expenditure (B)

A/B %

1953–6 1957 1958 1959 1960

48.1 24.3 19.3 16.9 12.1

— 23.1 25.5 21.6 24.4

— 105 75 78 49

Note: The value of social welfare expenditure was gained by calculating into US current value $ according to average currency exchange rate at each year. Source: MOHSA, 1972.

Table 4.3 Proportion of social expenditure in selected countries (%)

Share of social expenditure in total state spending

UK (1910)

Germany (1910)

USA (1910)

Korea (1957)

27

29

23

13

Notes: (a) Social expenditure includes education, public health and social security expenditure. (b) In 1910, the ratio of government expenditure to national income or national product was the following: Germany 16% to NI, Great Britain 12% to GNP, USA 8.2% to GNP and Korea 17% in 1957. Sources: Mann, 1993: 379; KDI, 1995a: 28.

introduce state welfare in the 1950s. However, this justification cannot be acceptable when compared to the experiences of other countries. Table 4.3 shows that Korea had a much lower level of social expenditure as a share of total governmental expenditure than the UK, Germany and the USA in 1910, when their shares of state expenditure in GNP were similar to that of Korea in 1957. The extent to which each country has developed its social welfare system should be varied according to the difference in social structure in each country. As EspingAndersen (1990) claimed, the balance of power between different classes in a society and the political coalitions that are formed out of this structure define the functions of the state in the provision of social welfare. In this respect, we need to pay more attention to social classes to understand the development of the welfare regime. It is worth noting that in Korea an active union movement closely tied with socialist and nationalist groups during the Japanese occupation was prohibited in the period of American Occupation, resulting in the demise of an ideological labour movement.2 Thereafter, the division of the Korean peninsula followed by the Korean War reduced the independence of labour movements during the 1950s (Deyo, Haggard and Koo, 1987: 44). In this situation, workers witnessed a demise of their organisational power to articulate their economic or political interests and therefore the state was not under any pressure to develop social welfare. Thus, individual well-being had to depend entirely on family assistance, wages set by the market, and limited foreign relief aid without any state provisions.

Export-led industrialisation in the 1960s 51 Table 4.4 Income distribution in four selected countries

Lowest 40% Middle 40% Top 20% Gini coefficient

Philippines (1965)

Malaysia (1970)

Korea (1965)

UK (1970)

11.0 33.9 54.8 0.49

11.7 32.1 56.1 0.50

19.3 38.9 41.8 0.34

22.9 40.1 36.8 0.25

Notes: (a) All these data refer to pre-tax income. (b) All these countries except for the UK were in a similar state of economic development in 1970. Regarding per capita income in 1970, Philippines was 218, Malaysia 309, Korea 102, and the UK 1,986 US$. (c) I refer to the data of 1965 regarding the Gini coefficient in Korea since there is no available data in the 1950s. Sources: Paukert and Skolva 1981: 36; Choo and Kim, 1978; Goodman and Webb 1994: Statistical Appendix A3; UN, 1969: Table 182, 187.

Yet, it is interesting that, despite the indifference of the state towards social welfare, Korea had a relatively equitable income distribution at that time. Since the data on households’ income distribution for any developing country can hardly be described as exact, and the availability of them can be problematic, they can give only an approximate picture of the real situation. Table 4.4 shows the estimates given for income distribution in Korea in comparison with selected Asian developing countries and the UK. Among the three developing countries, Korea was the only country with a relatively equitable income distribution, showing a Gini coefficient of 0.34 in 1965. The income share of Korea’s top 20 per cent of the population was a spectacular record of 41.8 per cent, which was comparable to the UK, in which the top 20 per cent held around 36.8 per cent of total income. The reason for this relatively equal income distribution in Korea was, as some academics suggested (Adelman and Robinson, 1978; Paukert and Skolva, 1981), mainly due to a farreaching land reform which was carried out in the post-war situation, resulting in a rather egalitarian land ownership among rural households.3 In summary, the ISI during the 1950s brought about the development of a number of important Korean firms, notably in the three white industries. However, at the same time it left the negative legacies of deepening economic dependency, in particular on the USA, and rent-seeking activities of entrepreneurs. The government was poorly insulated from the demands of the private sector and was penetrated by patron–client networks. The economic bureaucracy was subject to political interference from both the executive and the ruling party. Regarding social welfare, the government did not introduce any social programmes, being heavily dependent on voluntary-based foreign relief aid. In April 1960, a massive student uprising in protest against the March election fraud, political corruption, and dictatorship, referred to as the April Revolution in Korea, led to the collapse of the Rhee government. A new democratic government was elected, led by Chang Myon, but it was short-lived (Han, 1974). Continuing economic difficulties combined with political instability under the Chang regime invited a military coup d’état on 16 May 1961 led by Park Chung-hee, who was a supreme ruler until 1979 when he was assassinated.

52 Export-led industrialisation in the 1960s

Changes of institutions and setting veto points The differences of the Park regime from the previous governments provide crucial insights into the institutional foundations of policy changes during the economic developmental period in Korea. The military coup broke the political networks of the Rhee period through a series of political ‘purification campaigns’ (Editing Board for History of the Korean Military Revolution, 1963). These campaigns led to the centralising of power into the hands of the Supreme Council for National Reconstruction (SCNR). Even after the transition to a nominally democratic system in 1964, the new political structure retained a high degree of executive independence from the demands of both legislators and interest groups (Haggard, Kim and Moon, 1991: 857–9). Building on this centralisation of political power, the Park government brought about two very important institutional changes which structured the policy-making process: restructuring the economic bureaucracy and forming new business–state relations. Restructuring the economic bureaucracy When General Park led the military coup in 1961, he justified his coup in economic rather than political terms. ‘Economic self-sufficiency and prosperity’ was the principal catchphrase for justifying the coup. It was well documented in his National Message after the coup: I want to emphasise, and re-emphasise, that the key factor of the May 16 Military Revolution was to effect an industrial revolution in Korea. Since the primary objective of the revolution was to achieve a national renaissance, the revolution envisaged political, social, and cultural reforms as well. My chief concern, however, was economic revolution. One must eat and breathe before concerning himself with politics, social affairs and culture. Without a hope for an economic future, reforms in other fields could not be expected to yield fruit. At the risk of repetitiveness, I must again emphasise that without economic reconstruction, there would be no such things as triumph over Communism or attaining independence. (1961 in Park, 1970c: 173) Economic development was pursued by the military junta not only as a way of justifying the military coup but also as a way of satisfying the urgent public need for freedom from poverty. In order to facilitate economic development effectively, the junta restructured government organisation soon after the coup. They established the Economic Planning Board (EPB), the Ministry of Finance, and the Ministry of Trade and Industry. In particular, the predominant role of the EPB in the process of economic development has been well recognised. The EPB was established by combining various plan-oriented departments (Jones and Sakong, 1980: 48–9). The Ministry of Reconstruction, which had been responsible for economic rehabilitation after the Korean War, was combined with the Bureau of the Budget (from the Ministry of Finance) and the Bureau of Statistics (from the Ministry of Home Affairs). The Bureau of Supply was soon brought under

Export-led industrialisation in the 1960s 53 the EPB, allowing the EPB to control the procurement, supply and management of all domestic and foreign capital goods. Thus, the EPB was not only able to set economic development plans; it was also able to manage and to regulate the execution of these plans by allocating budget, co-ordinating foreign aid activities, promoting foreign investments, and evaluating all major public and private projects. In addition, the EPB also conducted an annual scrutiny of every ministry, since it controlled the budget for each ministry in every detail. Moreover, in 1963 the special status of the EPB within the cabinet was further enhanced when its minister was made deputy prime minister, who also had direct chairmanship of the Council of Economic Ministers. Consequently, the EPB became the most influential ministry. This institutional setting, dominated by the economic bureaucrats, began to take veto points on social policy making. For economic bureaucrats, social welfare was at best regarded as a fruit of economic development. Thus, the policy idea of ‘growth first’ or ‘trickle down’ was predominant in all policy-making processes. Forming a new policy network Another important institutional change was made in state–business relations. Given that the patron–client relations between the state and businesses under the Rhee regime had resulted in substantial rent-seeking activities, a new state–business relationship was required to propel economic development. The very first measure was undertaken under ‘the charges of illicit accumulation of wealth’ after the military coup. Those who were charged were obliged to make large contributions to the government and in some cases were sent to prison. Among those included were owners of the major large firms, especially in the three white industries that had enjoyed preferential treatment under the Rhee regime. At the same time politicians and military officers who were involved in co-ordinating foreign aid activities or profited from illicit business activities were also charged and arrested (Clifford, 1994: 36–40). There is no doubt that the charge of illicit accumulation of wealth was introduced to gain some political support from the public. Yet, by punishing major businessmen the state was also able to exert its primacy in relations with businesses. However, this measure did not mean that the military junta tried to be distant from businesses. Rather, it formed a close working relationship with businesses. This was highlighted in an interview with Kim Jong-pil, a leading figure in the junta, which appeared in Wolganchosun, a leading monthly magazine: If we punished businessmen under corruption charges, it was evident that our economy would be paralysed. Of course, members of the revolutionary council insisted on persecuting them, but I opposed it. It was essential to co-operate with them in order to carry out revolutionary tasks. I personally persuaded General Park to release those arrested and to give them new tasks. Moreover it was I who helped these businessmen form a new business organisation, the Association of Korean Businessmen, the predecessor of the Federation of Korean Industries. (Oh, 1986: 339, in Haggard, Kim and Moon, 1991: 859).

54 Export-led industrialisation in the 1960s In particular, as the state began to switch to an ‘export-oriented policy’ in the early 1960s, close state–business relations became evident. For instance, since the state completely controlled the allocations of domestic and foreign capital, enterprises had to be more dependent on the state for their businesses. Thus, throughout the 1960s, all policy measures for export promotions contributed to strengthening a statedominated alliance between the state and businesses. With regard to evaluating such relations, the arguments rage between those who focus on its beneficial effects on economic development and those who focus on its bad reputation for rentseeking activities. Yet, many commentators have come to the view that during the previous regimes state–business relations were personal and collusive, while during the Park government they became more of a formalised working relationship, reducing the opportunities for creating economic rent (Haggard, Kim and Moon, 1991; Chang, 1994; E. M. Kim, 1997). This change in state–business relations generally helped prevent corruption, thus improving chances for economic development. On the other hand, labour was in general excluded from the political process during the 1960s. After the coup, the military junta founded a nation-wide trade union association, called the Federation of Korea Trade Unions (FKTU), together with affiliated industrial unions under the umbrella of the FKTU (FKTU, 1979). Thereafter the FKTU, which was the only legally recognised nation-wide trade union having close relations with the government, has been generally regarded as a puppet of government until 1997 when multiple nationwide organisation was legally allowed. Therefore, the national organisation and its constituent industrial unions had little power and functioned mainly to moderate wage demands, implement government policies and discipline recalcitrant locals (Deyo, 1989). As Choi (1989) argued, the founding of the FKTU can be understood as an attempt by the state to establish corporatist patterns of worker control. It is also true that during the 1960s, labour market conditions were unfavourable to workers. In a situation of labour abundance, caused by an influx of rural emigrants to the cities as well as a shortage of jobs, many workers found themselves unemployed. The weak labour movements also meant that workers had little influence on the formation of state policies. Table 4.5 shows that throughout the 1960s labour militancy remained negligible and labour organisation went down as well. Workers were hardly in a position where they could raise a policy agenda in order to realise their interests at that time.

Table 4.5 Labour statistics in the 1960s

Unemployment rate (%) Number of labour disputes Union Organisation rate (%) Source: KLI, 1988, 1991.

1963

1964

1965

1966

1967

1968

1969

1970

8.1 70 20.3

7.4 7 23.3

7.4 12 22.4

7.1 — —

6.2 18 22.2

5.1 16 21.1

4.8 7 21.3

4.5 4 20.0

Export-led industrialisation in the 1960s 55 Therefore, the policy-making process was dominated by developmental bureaucrats, who were obsessed by the idea of growth first and had a close working relation with businesses. It is also necessary to note that this state-dominated alliance was generally set up with exporting businesses rather than specific industries throughout the 1960s. Yet, some selected large businesses benefited more from the relationship, so that they emerged as chaebols, which refers to family-owned big conglomerates in Korea. It is clear that the state–society configuration in the 1960s was favourable to businesses for production and profits. The following sections examine the roles of the state in the economy and social welfare that were constrained by the institutional changes discussed above.

Export-oriented industrialisation and state intervention The early 1960s in Korea was a period of political turmoil as well as great economic transition. The Korean economy was rapidly developed at an average annual growth rate of nearly 10 per cent during the 1960s. In this section, I will examine the state’s role in this rapid economic growth with special reference to the economic development plan and policy instruments for export-oriented industrialisation (EOI). Economic developmental plans: export-oriented industrialisation Unlike the previous governments, which displayed a lack of political initiative towards economic development, the military junta started to intervene in the developmental process with the First Five-Year Economic Development Plan implemented from 1962 (although it was originally prepared under the Second Republic) (S. J. Kim, 1991: 338–45; Jones and Sakong, 1980: 38–9). The Plan included at least two aspects of economic planning: first, the establishment of growth targets with respect to macro-economic performance, investment, industrial structure and trade balance; second, the government’s willingness to achieve economic growth by policy instruments including industrial policy, trade policy and macro-economic policy. In these points, Korean economic development can be understood as the process of realisation of planning rationality by the state. In the statement of the First Plan, it was explicitly stated that ‘the state should develop “guided capitalism” in which the state shall either directly participate or indirectly render guidance to the basic industries and in other important fields’ (EPB, 1962, in KDI, 1995a: 203). The emphasis of the First Plan was primarily on export promotion in labour-intensive light industries. As Table 4.6 shows, the state set specific objectives regarding macro-economic performance and employed policy instruments to promote exports. With the implementation of the Plan, the state came to play a crucial role in economic development. During the period of the First Plan, the Korean economy recorded GNP growth of 8.5 per cent per year, which was higher than the planned

56 Export-led industrialisation in the 1960s Table 4.6 Main economic indicators during the First and Second Plans (%)

GNP growth (annual average) Investment as share of GNP Domestic savings as share of GNP Foreign savings as share of GNP

First Plan (1962–6)

Second Plan (1967–71)

Plan

Performance

Plan

Performance

7.1 22.6 9.3 13.3

8.5 16.9 6.7 10.2

7.0 19.0 11.6 7.4

11.4 30.6 15.5 15.1

Source: KDI, 1995a: 206, 260.

rate of 7.1 per cent, as Table 4.6 illustrates. This rapid growth was undoubtedly led by manufacturing industries, which were developed by an annual growth rate of 15 per cent during the same period. Despite this remarkable economic performance, there were some problems with EOI in labour-intensive light industries during the period of the First Plan. The most cited problem was not only unbalanced development between industries but also growing current deficits. Furthermore, as foreign aid was dramatically decreased and substantially substituted by foreign loans, the redemption of foreign loans increasingly became a serious problem (EPB, 1966, in KDI, 1995a: 258). In this situation, the government, in the Second Five-Year Plan that lasted from 1967 to 1971, prioritised the modernisation of industrial structure and the promotion of a self-sufficient economy. In order to achieve these objectives, the emphasis of the Second Five-Year Plan was on further export promotion and the development of heavy and chemical industries including steel, machinery and petrochemicals (EPB, 1966, in KDI, 1995a: 258–61). The state introduced a series of laws to support these industries. They included the following: the Law for the Development of the Mechanical Industry (1967), the Law for the Development of the Ship Building Industry (1967), the Law for Promotion of the Textile Industry (1967), the Law for the Development of the Electronics Industry (1969), the Law for the Development of the Petrochemical Industry (1970), the Law for the Development of the Steel Industry (1970), and the Law for the Development of the Non-Metal Refining Industry (1971). During the period of the Second Plan, the Korean economy was able to realise a high GNP growth rate of 11.4 per cent, which was much higher than the planned rate of 7.0 per cent. There is little doubt that this rapid growth can be attributed to a high investment rate of 30.6 per cent as a share of GNP, and a great increase in exports recording an annual average growth of 39.5 per cent. This economic growth was led by the industrial policy of the state. I will now discuss further the role of the state in the process of economic development with regards to policy instruments. Policy instruments for export promotion The Economic Development Plans were implemented mainly by state intervention through various policy instruments. According to Ikenberry, the state by and large

Export-led industrialisation in the 1960s 57 employs four policy instruments: an organisational instrument, a credit instrument, a spending instrument and a market instrument, which are outcomes of large historical forces and conjunctures (Ikenberry, 1986: 122–3). Following this classification of policy instruments, I will look at four areas: restructuring financial institutions, mobilising and allocating domestic and foreign capital, spending and other measures including non-price intervention. Restructuring financial institutions Among all of the reforms implemented by the military junta, the most durable and significant was the reorganisation of the banking system (J. E. Woo, 1991: 84). Immediately after the military coup, all commercial banks were swiftly nationalised through the confiscation of wealth allegedly accumulated illicitly during the previous regime, paving the way for the state to exert direct control over commercial banks. The nationalisation of commercial banks was accompanied by bringing the Bank of Korea (BOK), the central bank, under government control. Monetary policy authority to check money supply and inflation was shifted from the BOK to the Ministry of Finance (MOF) by the amendment of the BOK Law in 1961. The governor of the BOK was to be appointed by the president under the amended law. Consequently, the central bank lost control of the monetary supply. The Law for the Korea Development Bank (KDB) was also amended in 1962 to strengthen KDB’s role in economic development. The KDB increased its capital base by borrowing from abroad, provided payment guarantees for foreign loans obtained by domestic enterprises, and supplied long-term loans to government and KDB-owned firms (Cho and Kim, 1995: 31). Other specialised banks established in the 1960s handled policy loans: the National Agricultural Co-operatives Federation in 1961, the National Federation of Fisheries Co-operatives in 1962, the Citizens National Bank in 1963, the Korea Exchange Bank in 1967 and the Korea Housing Bank in 1969. All of these institutional changes allowed the government to determine where, when and how much to invest in which industries. Mobilising and allocating domestic capital In order to mobilise domestic capital for investment and strengthen state control over finance, the government changed its interest rate policy significantly in 1965. Overnight, it raised the nominal interest rate on one-year deposits from 15 per cent annually up to 30 per cent, and the general loan rate from 16 per cent up to 26 per cent (EPB, 1965, in KDI, 1995a: 253–4). This negative margin between the deposit and the loan rates was to provide an important incentive for financial saving. Indeed this reform attracted private savings from the informal capital market into the banks, helping the government to tighten its control over financing. According to Amsden, household savings as a percentage of GNP increased from 0.18 per cent in 1965 to 4.15 per cent in 1966 (Amsden, 1989: 74). At the same time the government also actively intervened in the allocation of domestic capital through credit systems to support export industries. Although the

58 Export-led industrialisation in the 1960s Table 4.7 Export loans by deposit money banks during the period of EOI (%)

Ratio of export loans in total loans Export loan interest rate (A) General loan interest rate (B) (B) – (A)

1961–5

1966–72

4.5 9.3 18.2 8.9

7.6 6.1 23.2 17.1

Source: BOK, Economic Statistical Yearbook, various years.

export industries in Korea were supported by special credit programmes from the early 1950s, the size of export loans had been negligible. Yet, from 1961 when the military government started to give exporters ‘export incentive subsidies’ (EPB, 1961 in KDI, 1995a: 209), the export credit programme was rapidly expanded. Those who got export letters of credit were automatically entitled to export loans from commercial banks. The interest rate on export loans was heavily preferential. Table 4.7 shows a significant difference in interest rates between export loans and general loans. In particular, when the 1965 interest rate reform was implemented, the reform was selective with regard to loan interest rates, leaving out export loans: the interest rate on export loans remained at 6.5 per cent, while the general loan rate went up to 26 per cent (EPB, 1965, in KDI, 1995a: 253). Hence, the gap in interest rates between export loans and general loans widened sharply. Table 4.7 illustrates that there was an average difference of 17.1 per cent over the period between 1966 and 1972. Consequently, the share of export loans in total loans from deposit money banks increased from 4.5 per cent during 1961–5 to 7.6 per cent during 1966–72, along with the export growth. Despite all efforts of the government to mobilise domestic capital and to allocate it, the real problem was in the shortage of domestic capital available for investment. Domestic savings were never anywhere near sufficient to satisfy investment demand (Amsden, 1989: 74). Thus, the government actively sought to increase and diversify the sources and forms of foreign capital. Attracting more foreign capital In order to respond to the significant decrease of US aid from the end of the 1950s, the state sought to diversify the sources and forms of foreign capital for economic development. To attract more foreign capital, in 1962 the military junta amended the Law for Foreign Capital Inducement and provided government repayment guarantees to foreign lenders by legislating the Law for Payment Guarantees of Foreign Loans (EPB, 1962, in KDI, 1995a: 212–13). Yet, in the early stage of the First Plan, the Korean economy had not proceeded as envisaged due to its failure to mobilise capital (see Table 4.6). Hence, the state introduced the Complementary Plan in 1964. Its main difference from the original First Plan was more emphasis on the inflow of foreign capital, particularly borrowing

Export-led industrialisation in the 1960s 59 commercial loans. At the same time, the government was increasingly interested in diplomatic normalisation with Japan in order to find an alternative source of financial resources (D. G. Lee, 1984; S. J. Kim, 1991: 392). Though Korea did not restore diplomatic relations with Japan, by 1963 imports from Japan had leaped to US$162 million accounting for 30 per cent of total imports to Korea, and it was 70 per cent of total imports if aid imports were excluded. In addition, Korea’s debt to Japan reached US$130 million at that time (J. E. Woo, 1991: 85–6). Despite the massive public protest against the normalisation, which saw it as selling national sovereignty, the normalisation treaty was finally agreed in 1965, including reparations from Japan.4 This recovery created a large inflow of foreign capital, especially from Japan. It is also important to note that the cost of borrowing at home far exceeded the cost of borrowing abroad. According to Park’s study, during the period 1966–70, the interest rates on foreign loans was significantly lower than the rates paid on domestic borrowing by as much as 12.9 per cent (Y. C. Park, 1985: 295). This gap certainly led to a great increase of foreign capital. There was a significant change in the composition of foreign capital. Table 4.8 shows that during the 1960s the amount of foreign aid declined dramatically, while foreign loans significantly increased, substituting for foreign aid. In particular, the commercial loans continually increased to become the largest portion of total foreign capital from 1968. Table 4.8 also illustrates that despite the increase in foreign capital, foreign direct investment, which largely came from Japanese investors who needed to relocate declining industries to nearby countries, was not significant at all. Foreign loans thus became the main resources for mobilising foreign capital. In particular Japanese capital accounted for half of the total foreign loans since the mid-1960s. Not surprisingly, foreign capital played a crucial role in economic development in the 1960s. Between 1962 and 1971, more than 55 per cent of total investment was financed by foreign savings (see Table 4.6). Table 4.8 Inflow of foreign capital during the period of EOI (%) Year

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

Total (US$ million)

Foreign aid

208.1 205.0 273.1 169.7 186.7 327.2 371.7 478.4 744.2 727.8 755.5

99.4 97.5 75.9 83.0 72.0 37.3 36.1 25.2 13.9 11.7 8.4

Foreign loan Public loan

Commercial loan

0.6 0.9 14.7 8.7 2.7 22.3 28.5 14.7 28.7 28.8 40.2

— 1.3 7.5 7.8 22.3 36.3 33.4 56.1 55.2 50.4 45.7

Source: IMF, International Financial Statistics, various years.

Foreign direct investment — 0.3 1.9 0.4 3.0 4.1 2.0 4.0 2.2 9.0 5.7

60 Export-led industrialisation in the 1960s In addition to the magnitude of foreign capital, it should be noted that the government tightly controlled all allocation of foreign capital in order to lead the economic activities of enterprises. Korean firms that wished to borrow abroad were required to obtain the approval of the EPB. The EPB also determined the amount of required loans according to its investment priorities set by the Five-Year Plans, and the MOF closely monitored all approved foreign borrowing and its repayment (J. E. Woo, 1991: 102). Such a control over credit guarantees, together with nationalisation of the banks, clearly extended the government’s reign over all foreign capital flows. The state was able to use the allocation of foreign loans as a powerful policy instrument for economic development. Spending It is acknowledged that the most striking feature of government expenditure in Korea was its small size. This trend was already formed in the early 1960s. The share of the total governmental expenditure in GDP declined significantly from 34 per cent in 1962 to 16.9 per cent in 1964, and thereafter it was always less than 25 per cent of GDP, with an exception of 27.2 per cent in 1969 (KDI, 1995b: Table 4.8, 4.11). Despite the low level of state expenditure, however, the state played the role of important investor mainly through state investment and loan programmes during the 1960s. The military junta first established the Special Accounts for the Fiscal Capital in 1962 and the Special Accounts for Economic Development in 1963 in order to use state investment and loan programmes effectively for economic development. State investment was concentrated on infrastructure development projects, while state loans were mainly allocated at subsidised rates to large-scale state or private

Table 4.9 Magnitude of state investment and loans during the period of EOI (%) Year

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

Ratio to total government expenditure

Ratio in total investment Total

State investment

State loan

22.7 24.5 17.7 19.1 27.1 27.2 29.1 30.4 30.7 28.9

56.0 40.0 29.3 24.8 30.0 28.8 28.4 31.6 28.2 28.7

51.3 31.5 20.8 21.3 23.3 21.6 24.5 24.7 23.8 23.0

4.7 8.5 8.5 3.5 6.7 7.2 3.9 6.9 4.4 5.7

Note: Government expenditures include general government sector expenditure and special accounts. Source: MOF, 1982.

Export-led industrialisation in the 1960s 61 enterprises in the targeted industrial sectors. Table 4.9 shows the magnitude of state investment and loans during the 1960s. The state contributed around one-third of the total investment over the period 1962–71, though this gradually declined as private enterprises grew. Yet the ratio of this investment to government expenditures remained pretty much the same, around 30 per cent during the second half of the 1960s. Table 4.9 also illustrates that the share of state loans in the total state investment and loans was very low, compared to state investment. These figures suggest that in the 1960s the state was more likely to use indirect inducement for private enterprises rather than direct supporting measures as far as spending measures were concerned. Nevertheless, it is noteworthy that the spending was used as a powerful instrument of the state for facilitating economic growth during the 1960s. It is no exaggeration to say that the government played the role of an entrepreneur in the economic development. Other export-promotion measures and political leadership The intervention of the state to support export promotion was not limited to the process of mobilising and allocating resources. The state also actively employed the devaluation of the exchange rate and trade policy to seek export-led economic growth. Between 1964 and 1966, a series of reforms was implemented to restructure the Korean economy towards export promotion and away from the earlier emphasis on import substitution, which Krueger called ‘the most dramatic and vivid change that has come about in any developing country since World War II’ (Krueger, 1979: 82). The first reform was the elimination of multiple exchange rates in 1964. It was soon followed by a 100 per cent devaluation of the exchange rate against the US dollar (EPB, 1964, in KDI, 1995a: 245). The government also extended an export incentive system by granting the deduction of 80 per cent of corporate and income taxes for exporters (EPB, 1964, in KDI, 1995a: 249–50). The government also established a variety of export-supporting organisations. The best known of these was the Korean Trade Promotion Corporation (KOTRA), which was a quasigovernmental organisation supporting domestic entrepreneurs in the trade markets. All these measures enabled the state to lead business activities towards export promotion. In addition to all these policy instruments, non-price interventions such as political leadership for development and institutional factors have to be considered in understanding the dynamics of Korean development. As we mentioned earlier, the Park regime prioritised economic growth and ensured a favourable business climate. President Park’s remark ‘in human life, economics precedes politics and culture’ (C. H. Park, 1970c: 26) echoes this policy idea. There is little doubt that Park’s leadership on economic growth was a critical factor in Korea’s export spurt. For instance, President Park himself held the Monthly Export Promotion Meeting at Chong Wa Dae (Korean Presidential House) in order to facilitate export promotion. Park outlined his endeavours towards export promotion in his speech on the fourth Export Day:5

62 Export-led industrialisation in the 1960s We hold a conference on export expansion at Chong Wa Dae once every month. Attending the meeting are ministers concerned, officials at working level, and representatives of the export industry, productive installations, the Business Association, and the Chamber of Commerce, who discuss various means to boost further our export volume, how to develop further our industry, and how to explore overseas markets, and examine past merits and shortcomings, so as to find out what should be done in the future. (C. H. Park, 1970a, 148) All these measures provided a much more conducive environment for entrepreneurial activity, supporting a strategy of export-led economic growth. To summarise, in the 1960s Korea made a crucial transition towards a take-off of its economy, recording an annual economic growth rate of around 10 per cent. The state pushed ahead the economic development by export promotion along with the Five-Year Economic Developmental Plans. The state strengthened its control over finance and actively intervened in the process of mobilisation and allocation of domestic and foreign capital. In addition, the state introduced various policy measures to support export-led growth, which in general employed nonselective supporting measures for every exporter. Export producers were given priority in investment decisions, credit allocations and other benefits. Therefore, Korean economic development in the 1960s was not a triumph of laissez-faire, namely a minimalist state, but a powerful example of effective state intervention. In other words, a developmental state was established in Korea during the 1960s.

Social welfare: an etatist welfare system In 1960, when the per capita GNP in Korea was only US$80, the majority of Korean people were in absolute poverty, nakedly revealing themselves in the market without any social protection. Social welfare had never been in the policy agendas of the government. With the military coup in 1961, however, social welfare became a political issue. In the 1962 New Year message delivered by General Park, he made the first-ever announcement of the necessity of social welfare in modern Korean history: We will make our best efforts to improve the quality of ordinary people’s living and establish the welfare society by the introduction of a social security system based on social assistance and social insurance programmes. (Editing Board for History of the Korean Military Revolution, 1963: 391) Following Park’s remarks, the military government established the Social Security Investigation Committee (SSIC) as an advisory agency within the Ministry of Health and Social Affairs (MOHSA) by Cabinet Decree No. 469.6 It is acknowledged that the SSIC played a vital role in producing the foundation of a social security system in Korea (Son, 1981; H. J. Kwon, 1995). In July 1962, the SSIC was asked to prepare a drafts of welfare programmes that could cover all of the Korean

Export-led industrialisation in the 1960s 63 population by January 1963. Thereafter a series of social welfare laws were passed by the military government: the Military Pension Law (1963), the Social Security Related Law (1963), the Industrial Accident Compensation Insurance Law (1963), and the Medical Insurance Law (1963).7 Despite a series of social welfare legislation in the early 1960s, only a few programmes were put into effect: the pension scheme for the military personnel in 1963, the Industrial Accident Compensation Insurance in 1964, pilot medical insurance programmes in 1965 and a social assistance programme in 1969 under the title of ‘Living Protection’. This brings up the question of why the military government enacted so many social laws in a short period without putting them into effect. The answers to this question highlight the main features of the development of the social security system in Korea. Social security as an instrument for political legitimacy In order to understand why the military government promulgated at the same time a series of social welfare laws in the early 1960s, we should pay attention to the political process at that time. Despite the success of the military coup, the military junta was suffering from lack of political legitimacy (S. J. Han, 1974). In the early stage of the military coup, the military junta was able to gain significant public support due to its promise of a series of social reforms and its initiation of the Economic Development Plan.8 Yet, the military junta increasingly lost its popularity due to the lack of visible economic performance, two years of poor harvets, insufficient social reforms, and Park’s reluctance to relinquish the military government.9 In the face of the presidential election in October 1963, in which Park himself planned to run as a candidate, the military junta needed to elevate its political legitimacy more than at any other time. The 1963 New Year message given by Park supported this argument. We must realise the establishment of a welfare state with the strong power of execution, which has ended in mere gesture. – We are going to introduce Medical Insurance and Industrial Accident Compensation Insurance Schemes. (1963) Following his announcement, the military government enacted three laws including the Industrial Accident Compensation Insurance Law, the Medical Insurance Law and the Social Security Related Law. Yet, as I mentioned, only a few programmes were implemented. I will next consider three programmes implemented in the 1960s – the pension for public employees and military personnel (1963), the Industrial Accident Compensation Insurance Programme (1964), and the Pilot Medical Insurance Programme (1965) – in order to examine the characteristics of the welfare system. After the pension scheme had been first put into effect for public employees including military persons in 1960, the military government introduced a separate pension scheme for military personnel in 1963. Both pension schemes, which are

64 Export-led industrialisation in the 1960s still in effect, had similar benefit structures that included a retirement pension, a survivor’s pension, recuperation benefit, and a disability pension (Civil Service Pension Law (CSPL), 1960; Military Personnel Pension Law (MPPL), 1963). The military pension fund was initially financed by contributions paid by the insured at 3.5 per cent of their monthly salary and by the government contribution of 2.3 per cent of the insured’s monthly salary.10 As for the amount of retirement pension, the programmes were to provide annual pensions equivalent to 50 per cent of the final year’s salary for those who had been in service for 20 years regardless of their age. Thus, it seems that the pension schemes for public employees and military personnel were planned to provide a preferential treatment for those in society whose support was crucial to the survival of the political regime. The Industrial Accident Compensation Insurance (IACI), introduced in 1964, was the first significant social security programme in Korea. It is generally recognised that in the developmental history of Western welfare states, industrial accident compensation was introduced earlier than any other welfare programmes, since for the employers it makes their financial situation more secure and predictable in the face of industrial accidents (Rimlinger, 1971: ch. 4). The first implementation of the Industrial Accident Compensation scheme in Korea as a social security programme could be understood as a case of this general trend. When the IACI was first introduced, the programme covered only workers working in mining and manufacturing firms with more than 500 employees. Thereafter the programme was gradually extended to cover firms employing more than 200 employees in 1965 and more than 50 in 1969. The IACI was funded entirely out of contributions from employers, with the government paying for a portion of the administration costs. The benefits would cover medical expenses in full if the period of treatment exceeded three days (Industrial Accident Compensation Insurance Law (IACIL), 1997: Article 40). The programme would also provide for 70 per cent of the insured’s wages during the recuperation period (IACIL, 1997: Article 41). In a case of compensation for total or partial disability, a lump-sum payment or disability pension would be given depending on the extent of the disability and wage level (IACIL, 997: Article 42). The programme would also provide a lump-sum payment equal to 1,300 days’ wages to the family of covered workers who died as a result of industrial accidents (IACIL, 1997: Article 43). However, in a strict sense, the Industrial Accident Compensation Programme is not a social insurance scheme given that workers and employers do not share the responsibility for contributions. It is rather a state-administrated insurance for employers who are liable for the compensation of industrial accidents. It is more closely related to a paternalistic responsibility of employers rather than to the social rights of the workers to compensation (H. K. Lee, 1992: 155). Finally, we will consider the Pilot Medical Insurance Programme introduced in 1965. The first draft of the Medical Insurance Law prepared by the SSIC was designed to adapt the compulsory coverage principle so that the programme should cover workplaces with more than 500 employees. However, during the final deliberation process in the SCNR, the compulsory principle was ruled out and a voluntary affiliation principle was chosen instead (Son, 1981: ch. 3). Consequently,

Export-led industrialisation in the 1960s 65 Table 4.10 Pilot medical insurance schemes

No. of workplaces No. of the insured

1965

1967

1969

1971

1973

1975

1977

1 340

2 1,301

3 22,386

3 17,000

5 32,581

11 68,417

12 63,455

Source: C. Choi, 1991: 120.

the Medical Insurance Programme (MIP) lost its function of a compulsory social security system. It was in 1977 that the MIP became compulsory. In the mean time, the MIP was implemented in a few workplaces as pilot programmes. Yet, the number of the insured covered by pilot schemes was always negligible as Table 4.10 shows. Furthermore, since it was based on voluntary affiliation, there was the problem of adverse selection. The participants in the pilot workplaces tended to be from so-called risk-prone groups with higher demands for medical services. Thus all pilot programmes suffered from over-demand for services, resulting in a drought of funds. This in turn caused low-risk employees to drop out of the pilot schemes, pushing premiums even higher. Consequently, these pilot programmes proved to be a failure. It is worth noting that the form and content of the MIP enacted in 1963 became the main pillars of the Korean health care system, which has developed on the basis of the Bismarckian social insurance model. After 1964 when Park became president and his regime went through a relatively stable political situation thanks to a dramatic economic growth led by EOI, the political interest in social welfare was gradually faded out not only in theory but also in practice. The issues of social welfare raised in a series of New Year messages by President Park reflected the changing concern of the government: We shall improve the quality of medical service by the restructuring of the medical system. We shall also relieve the needy and feeble, such as the elderly, the disabled, and mental or physical handicap persons together with the poor. (1964) We shall establish social security by the growth of employment and we shall implement the measures which help the unemployed and needy seek a living for themselves. (1965) Special measures will be worked out to maintain public health of the people. First, rigid control will be imposed on pharmaceutical companies to guarantee their products, so that public confidence in domestic medicine may be restored. An X-ray machine will be installed at all public health centres of the country. (1966)

66 Export-led industrialisation in the 1960s We shall assist the needy for their livelihoods and carry out job-creation projects for them. Employers have to extend the welfare facilities for their employees and to strengthen the co-operation between employer and employee. (1969) In these quotations we can see a transition in the priority of social welfare from a universalistic programme to a selective and paternalistic one. It can also be seen that the responsibility of the state for social welfare was transferred to the enterprise sector together with putting emphasis on job creation. All these facts suggest that social legislation in the early 1960s after the coup was a result of the state’s efforts to raise its political legitimacy. This experience of the 1960s might provide a good example of the Bonapartist approach to social policy. The Bonapartist approach regards social policy in a politically functional sense as a means used by social elites to preserve status quo, side-stepping the threat of major reform by granting modest concessions to increasingly important but still largely disenfranchised classes (Baldwin 1990: 39). Gough (2000: 8–9) distinguishes three aspects of this approach. First, social policy can play an important role in nation building in post-colonial states. Second, there is the need to secure the loyalty of the elite and of key state personnel. Third, there is the role of social policies in legitimising undemocratic regimes, noted in the development of nineteenth-century European social policy. The last two aspects were clearly evident in the development of the social security system in 1960s Korea. Analysis of social expenditure Three-dimensional analysis, I propose here, will be useful to understand the inputs of social policy. The first dimension is the composition of government social expenditure, which will highlight the state’s priorities. The second dimension is the division of social security expenditure into social insurance, social assistance and social welfare. Finally, the third dimension is revenues for social security programmes that include contributions and government expenditure. Table 4.11 illustrates how the share of social expenditure in total government spending and the composition of social expenditure changed in the 1960s. The share of social expenditure always remained less than one-third of total governmental expenditure, though it slightly increased towards the end of the 1960s. The spending on education always accounted for more than one half of total social expenditure with a peak of 66.3 per cent in 1966. Yet this high figure does not necessarily imply that the Park regime in the 1960s put a great deal of emphasis on education. Rather it reflected the underdevelopment of other social areas, which accounted for less than 10 per cent of total government spending. Let us move on to the second dimension regarding the analysis of social expenditure, namely social security spending. The first notable thing in Table 4.12 is that the share of social assistance, which represented patriots and veterans affairs (introduced according to three laws: the Law for Military Relief and Compensation (1961), the Law for Disaster Relief (1962), and the Law for Special Care of Persons

Export-led industrialisation in the 1960s 67 Table 4.11 Social expenditure in the 1960s (%) Year

Ratio to total expenditure = 100

Education

Health

Social security

Community servicesa

Housing

Others

1964 1965 1966 1967 1968 1969 1970

26.8 26.4 26.9 27.9 30.0 31.1 31.6

59.9 61.9 66.3 62.9 54.2 50.0 57.6

5.9 3.6 3.9 2.9 3.0 1.4 3.6

19.8 17.4 16.3 15.6 16.6 14.0 9.2

10.4 12.9 8.9 14.6 23.1 31.5 27.5

3.9 1.6 1.3 1.1 1.3 1.2 1.1

— 2.4 2.8 2.3 1.2 1.6 0.8

Note: (a) Community services include roads and waterway construction, fire protection, water supply, and sanitation. Source: EPB, 1970: 122–9.

Table 4.12 Social security spending in the 1960s Year

Social Social Social welfare Total 100 million Ratio of Per capita social insurance % assistance % services % won =100 GDP % expenditure (won)

1962 1963 1964 1965 1966 1967 1968 1969 1970

16.2 17.0 20.8 21.5 25.0 30.6 29.7 36.1 52.1

81.1 78.0 73.6 73.8 70.7 65.3 66.0 60.8 45.0

2.7 5.0 5.6 4.6 4.3 4.0 4.2 3.1 2.9

37 53 53 64 92 124 215 254 281

1.1 1.1 0.7 0.8 0.9 1.0 1.3 1.2 1.0

140 193 188 224 313 411 697 805 870

Sources: EPB, Summary of Financial Statistics, various years; Ministry of Home Affairs, Local Government Finance, various years; MOL, Yearbook of Industrial Accident Compensation Insurance Programme, various years; NSO, Main Economic Indicators in Korea, various years; Agency for Patriots and Veterans Affairs, Yearbook of Patriots and Veterans Affairs, various years; National Pension Corporation, National Pension Statistical Yearbook, various years; Public Employees’ Pension Corporation, Public Employees’ Pension Statistics, various years; Private Teachers’ Pension Corporation, Private Teachers’ Pension Statistical Yearbook, various years; Medical Insurance Association, Medical Insurance Statistical Yearbook, various years; Medical Insurance Corporation, Medical Insurance Statistical Yearbook, various years. In No and Kim, 1995: Table III.1, 4, 5, 6.

Who Rendered Meritorious Services to the Nation (1962)), was very high, though it significantly declined at the end of the 1960s. With the implementation of the Industrial Accident Compensation Insurance and pension schemes for governmental employees and military personnel, the expenditure of social insurance programmes went up from 16.2 per cent in 1962 to 52.1 per cent in 1970. Thus, the high share of social assistance did illustrate the underdevelopment of the social security system. As we can see in Table 4.12, Korea spent around 1 per cent of GDP on social security programmes in the 1960s, which was extremely low, when compared with

68 Export-led industrialisation in the 1960s 10.2 per cent for the UK in 1960 and 4.1 per cent for Japan (OECD, 1994: Table 1a). If we look at the annual amounts attained by each individual citizen in 1971, it was just 1,014 current won, the equivalent of less than US$3. This figure proves that the role of the state in the provision of social welfare was indeed negligible during the 1960s. Let us turn to the third dimension of the analysis, which is concerned with the proportion of contributions and tax-financing in the total revenue of the social security system. At a first glance of Table 4.13, the government seemed to take a dominant role in social security revenue in comparison with quasi-governmental organisations. More than two-thirds of total revenue for the social security system was financed by the government during the 1960s. Nevertheless, given that the level of total social security revenue remained extremely low, around 1 per cent of GDP during the 1960s, the state hardly played an active role in social welfare provision. As a result of the low level of social security spending, individual wellbeing had to be satisfied in the market, which resulted in unevenness and inequality with regard to citizens’ welfare. In the terms of Esping-Andersen (1990), the degree of decommodification was extremely low. Table 4.13 Revenue of the social security system in the 1960s Year Tax-financing Quasi-government contribution(%) financing (%)

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

82.9 84.6 79.6 77.9 77.6 74.6 78.9 74.7 57.6 62.7

Subtotal

Employers The insured

12.7 13.8 15.6 15.6 16.8 17.6 15.2 20.5 29.6 30.8

0 0 1.5 2.6 4.7 6.3 6.7 6.9 8.0 7.7

12.7 13.8 14.0 13.0 12.1 11.3 9.5 13.6 21.6 23.1

Others Total 100 million Ratio of (%) won = 100 GDP (%)

2.1 3.0 6.2 6.5 6.5 7.7 6.3 4.7 12.7 6.6

47 65 64 77 107 142 223 273 371 426

1.3 1.3 0.9 1.0 1.1 1.1 1.4 1.3 1.3 1.3

Sources: See Table 4.12.

As a result of little implementation of social welfare laws and the extremely low level of social security expenditure, the social welfare system in the 1960s remained a minimal welfare system.

Policy linkages between economic and social policies In order to highlight policy linkages in the 1960s, I will deal with the question of how the requirements of export promotion were reflected in the form and content of social policy. Economic bureaucrats, who could veto social policy, were dominating all policy-making processes so that social policy was by and large subordinated

Export-led industrialisation in the 1960s 69 to the requirements of economic development. This section attempts to examine the policy linkages between economic policy and social policy during the 1960s, with a special reference to social security policy, labour policy and education and training policy. Social security and trickle-down effect Regarding lack of implementation of social security policy in the 1960s, we should look at the policy linkages where the economic policy characterised by EOI constrained the development of social security policy. As we discussed earlier, the Park government, which had a close relationship with businesses but not the working classes, was putting policy priority on economic growth. Thus, the development of social security policy was always subject to the requirements of economic development. This policy linkage was reflected clearly in the social security laws and in the words of President Park in a conference held in May 1962: After we achieve the overall growth of our national economy we will be able to perform the functions of a modern welfare state. With the establishment of a social security system, we will be able to provide all the people in this country with decent lives as human beings. (C. H. Park, 1970b: 224–5) It is clear that social welfare was regarded as a secondary matter. This understanding was also shown in Park’s memo, numbered 12,531, delivered on 28 July 1962 to the cabinet to request the preparation of drafts concerning social security programmes. This memo included important directions that should guide the development of the Korean welfare system. First, the social security system in Korea should be incorporated into the economic development plans. Second, the social security system in Korea should be established on the basis of a social insurance model (Editing Board for History of the Korean Military Revolution, 1963: 391–408). These directions were also reflected in social security laws. The Social Security Related Law (SSRL) enacted in 1963 included defining characteristics of the Korean social security system together with articles concerning the composition and activities of the SSIC. It was prescribed in Article 2 that ‘social security is defined as benefits provided through social insurance systems and public assistance’. This provision became a cornerstone of the Korean social security system. A social insurance model can alleviate the financial burdens and responsibility of the state as it is based on the nexus between contributions and the right to benefits (Castles, 1997: 26). Thus, programmes based on a social insurance model impose minimal burdens on the state. Interestingly enough, the SSRL prescribed that the state should not weaken the people’s spirit of self-reliance by social security benefits (SSRL, 1963: Article 3, Clause 2). This clause illustrated that the state was concerned that welfare dependency may be caused by social security programmes. In addition, it was prescribed that the social security programmes should be gradually developed and

70 Export-led industrialisation in the 1960s in no way undermine the more highly prioritised economic development (SSRL, 1963: Article 3, Clause 3). If we look at the policy-making process in the 1960s, there is more evidence to suggest that the primacy of economic development greatly constrained the introduction of social welfare programmes. First, the concern of labour costs rather than social rights dominated the process of policy-making with regard to social welfare programmes. When the SSIC reviewed social welfare programmes, it initially took into account two welfare programmes: an industrial accident programme and an unemployment programme. Yet, the unemployment programme was soon ruled out, as the SSIC could not make decisions about funding methods. Moreover, it believed that the unemployment programme would weaken the people’s spirit of self-reliance (MOL, 1981: 25–7). When the draft of the Medical Insurance Law adopting a compulsory system was revised drastically in the reading process of the SCNR so as to become a voluntary programme, this was also a result of economic consideration. That is, this decision was made under the consideration that the contributions paid by businesses would be harmful to economic development owing to creating additional costs to employers (SCNR, 1963; Son, 1981: 66–9). Second, trickle-down effects became a dominant policy idea in the making of social security policy. As the Park government actively implemented EOI with various policy instruments from the mid-1960s, economic development itself was regarded as social development, which was obviously a case of trickle-down effects. This was evident from the 1966 National Message of President Park: There are still a large number of people who ask, ‘what benefit did that remarkable progress bring to us?’ They are labourers, low-ranking government employees, farmers, fishermen and especially housewives. When the sun rises in the morning, it does not shine in every nook and corner of the world at the same time. It takes time. Only when the sun rises high up in the sky does it shine on the whole world with warm heat. In the same way, the remarkable economic accomplishment we have achieved last year cannot bring light to the whole of our society at the same time. If we accomplish more this year than last year, and if we repeat the same next year, then in the near future, the whole of our society will become bright enough. (C. H. Park, 1970a: 322) The government was simply relying on trickle-down economics to tackle social welfare. The idea that ‘the Economic Development Plan will accelerate social development’, which was espoused by President Park in the 1967 New Year message (C. H. Park, 1970a: 174), was indeed dominating the social security policy process. As a result, the issue of social welfare hardly entered into the policy agenda of the government. In summary, there was a clear policy linkage between economic policy and social security policy during the 1960s such that the development of social security programmes was significantly restrained by the requirements of economic development. It was strongly believed that economic growth would bring about

Export-led industrialisation in the 1960s 71 significant improvements of social well-being. It seems that the process of social policy making in the 1960s echoed ‘non-decision making’, as termed by Bachrah and Baratz (1963). Market-conforming labour policy Regardless of theoretical perspectives, it has been generally acknowledged that one of the most important factors that brought about Korean economic success was the comparative advantage enjoyed as a result of plentiful qualified labour forces at relatively low costs. The importance of EOI based on labour-intensive industries in the economic growth and employment during the 1960s can hardly be questioned. However, as EOI evolved workers increasingly found themselves being exploited for export promotion. It is clear that the labour policy of the 1960s was preoccupied by the requirement of low labour costs. This linkage between export promotion and labour costs can be found in President Park’s remark: If we produce high quality and cheap commodities, there is still much room for our products on the international markets. Therefore, we must make an effort to rationalise the operation of all enterprises, improve their management, and strengthen quality control for domestic products – all geared to the objective of lowering the production cost so as to export better and cheaper commodities in larger quantity. (C. H. Park, 1970a: 148) The existence of a huge pool of surplus labour in the rural sector, coupled with high unemployment levels, made it easy for employers to maintain low wages. As a result of these labour market conditions, the real wage decreased during the first half of the 1960s, as Figure 4.1 illustrates. Though the real wage rate steadily increased from 1963, it had been considerably lower than the productivity increase rate throughout the 1960s except 1966. The trend of wages was also a consequence of the wage-setting mechanism in the 1960s. As we mentioned earlier, labour unions hardly exerted any influence on wage formation. In a situation in which the state-controlled industrial unions and national unions had little power, the wage bargaining system was highly decentralised so that wages were decided at the enterprise level through annual bargaining, usually during the spring. Thus, the influence of the state on wage formation was relatively minor over the 1960s. In this respect, Song (1989) pointed out that low wages during the 1960s were primarily a function of market principles. State intervention in wage formation in the 1960s was thus mainly operated by a market-conforming policy. Nevertheless, it was by no means true that the state played little role in the wage formation process. It was clear that this wage mechanism was directly or indirectly affected by state intervention in labour affairs, including labour rights and industrial relations. In 1963 the military junta amended the labour laws and reinforced state intervention in labour–business relations. The important points in the new labour law were as follows: (1) a union had to be legally recognised; for this, a newly

72 Export-led industrialisation in the 1960s 30 25 20 15 Real wages 10

Productivity

% 5 0 –5

1962

1963

1964

1965

1966

1967

1968

1969

1970

–10

Figure 4.1 Growth rate of real wages and productivity in the 1960s Sources: EPB, Korean Statistical Yearbook, various years; ALO, 1972: 80.

organised union had to obtain ‘a certificate of report’; (2) a union would not be granted legal recognition if its purpose was to hamper the ordinary operation of a previously established union, that is, any second union was automatically disapproved; (3) the unions were to be restructured in the form of industrial unions organised along industrial lines and unified under a single national industrial union; (4) the unions should not participate in party politics; they were prohibited from collecting political funds from their members or using the funds for political purposes; (5) state intervention in the internal and operational matters of labour unions was expanded in scope (for example, administrative authorities were granted the right to convene extraordinary meetings or to audit union finances) (J. J. Choi, 1989: 84–5). There was little doubt that this amendment intended to bolster political authority by ensuring a weak, internally fragmented and politically inert labour movement. At the same time the revised laws enabled the state to intervene further in the internal and operational matters of labour unions in order to secure industrial peace for economic development. Yet, it is noteworthy that the state employed ‘appeasement policies’ in order to motivate the workers. These policies were aimed at both union officials and the rank-and-file workers (You, 1995a: 183). For instance, the introduction of the Industrial Accident Compensation Insurance Programme in 1964 can be understood as a measure to appease the rank-and-file workers. Consequently, trade unions lost their militancy in the 1960s and were not able to fight for their interests in the wage negotiation process. It is also important to note that, given the asymmetry of the power relations between capital and labour and of their relationship to the state, the outcome of these power dynamics was unfavourable to labour. The state’s indifference to working conditions was a predictable consequence of this state–society configuration. The weakness of labour’s negotiation power at the enterprise level resulted in poor working conditions together with little supervision by the state. EOI was

Export-led industrialisation in the 1960s 73 associated with a disproportionate expansion in jobs characterised by low skill and low wages. In particular, all those labour-intensive export-oriented industries that grew most rapidly during this period employed predominantly young, unmarried female production workers (Deyo, 1989). In short, the requirements for Korea’s economic development in the 1960s, which was driven by EOI based on low labour costs, were reflected in labour policy. With the amendment of the labour laws of 1963, the Park government established a foundation for active state intervention in labour affairs. Apart from restricting labour rights and therefore shifting the balance of power against labour, the influence of the state on wage formations was relatively minor during the 1960s. In a situation where Korea was enjoying comparative advantage due to low labour costs greatly attributable to the labour surplus and high unemployment rates, EOI initiative was not necessarily associated with state interventions in wage settings. Nevertheless, it should be noted that the state’s role in buttressing managerial power at the enterprise level significantly contributed to maintaining a low wage system. Therefore, though labour-intensive export-led growth itself provided rapid job creation and a sharp reduction of unemployment, it also led to a market-conforming wage policy and industrial relations that were particularly preferential for employers. Education for human resources: the second economy The basic features of the current Korean education system were originally formed under the US military government. As part of its state-building, the US military government used education, mandating three major changes: the education system should provide equal opportunity for all; it should be controlled at the local level; and it should strive to develop self-reliance and responsibility in students (McGinn et al., 1980: 12). In particular, primary education was to be compulsory and free to all students of applicable age to achieve equal opportunity. Many of the features created under the US military government, notably compulsory and free education, were adopted in the Constitution of the First Republic and the Education Law in 1949. Nevertheless, the ambition of free compulsory education in Korea was not realised until 1979.11 Students in primary school had to pay their tuition fees called ‘Yuksonghoebi’ (Parent–Teacher Association fee). Despite the charging of tuition fees, the enrolment rate in primary schools dramatically increased after the Korean War so that by the end of the 1960s it had reached nearly 100 per cent. The quantitative expansion in other school levels became more evident in the 1960s. Table 4.14 shows that school enrolments in all types of schools increased by more than 100 per cent between 1960 and 1970. Given this increase in school enrolments, one might expect that the Park government played a crucial role in educational expansion, for export-oriented industrialisation required a certain type of human resources. In order to find out the role of the government in human resources development, I will look at educational expenditures and then the changed policy directions in education and training policy during the 1960s.

74 Export-led industrialisation in the 1960s Table. 4.14 Increase in school enrolments in the 1960s (1955=100) Type of school

1960

1965

1970

Primary school Middle school Academic high school Vocational high school Higher education

127 111 116 64 125

168 158 180 145 176

195 277 223 231 241

Source: MOE, Statistical Yearbooks of Education, various years.

First, government expenditure for education remained at pretty much the same level during the 1960s. It was about 14 per cent of total government expenditure in the first half of the decade and then about 17 per cent during the second half, which was never over 3 per cent of GNP (KDI, 1995a: 28). As a result, state spending in total educational expenditure was very low, compared to the private burden. Indeed, the state paid only around 30 per cent of total education expenditure and thus the other 70 per cent were made up by students’ tuition fees. This figure suggests that the enrolment expansion was not largely attributable to state efforts. Nevertheless, it does not mean that the state goals with regard to education were not changed over the 1960s. Despite pretty much the same level of government spending on education, there was a notable change in the goals of education associated with the changes of economic strategies. In conjunction with the Second Economic Development Plan, human resources development was adopted as one of the main policy measures (EPB, 1966, in KDI, 1995a: 259). President Park’s New Year message of 1967 included emphasis on the role of education in economic development: I hope that our educators, mass communications, and cultural leaders will continuously serve as hidden forces for the maintenance and acceleration of the tempo of our economic growth and, at the same time, take charge of that social education called ‘the Second Economy’. (C. H. Park, 1970a: 138) As the metaphor of ‘the second economy’ shows, the role of the education system in Korea began to be re-established towards the appropriate provision of human capital for economic development. In particular, it is noteworthy that the government started to put more emphasis on vocational and technical education. This was confirmed in President Park’s statements in 1967: We have suffered tremendous losses through the past pattern of education, because of its adverse effects on our national economy, and because education largely relied on paper and chalk for formalised entrance examinations to higher institutions. In this connection I stress the indispensable importance of education for training in the productive capabilities vitally essential to industrial

Export-led industrialisation in the 1960s 75 modernisation and economic reconstruction. Now we have an opportunity to fully rationalise technical education, and to correct the unfair operation of schools by a supplementary build-up of technical facilities, reform of curricular and expansion of training facilities. (C. H. Park, 1970b: 232–3). Following his announcement, the Vocational Training Law was enacted in 1967. This law implies that for the first time the government started to take into account vocational training as a policy goal. Table 4.15 shows that during the period of the Second Economic Development Plan, nearly 100,000 people received vocational training under three different systems: public, in-plant and authorised institutions. Public vocational training was conducted by the central government or local governments, in-plant vocational programmes were run by the industries and approved vocational training programmes were carried out by general juridical bodies. Why did the state then begin vocational training? It could be argued that this new policy goal was a result of the changed economic development strategy. At the stage of industrialisation based on labour-intensive industries, those with a basic education and literacy might be regarded as critical to economic development. Yet, since the Second Economic Development Plan, when the state increasingly emphasised the necessity of the development of heavy and chemical industries, the state began to place more emphasis on vocational training together with the general recognition of the important role of education in economic development. Thus, the change in the goals of education and training policy during the 1960s can be understood as a result of the human resources requirements of economic development. Table 4.15 Vocational training achievements, 1967–71 Type

No. of people

Craftsman Public

In-Plant

Approved

36,317

48,225

14,321

Training instructor

Total

445

99,308

Source: MOL, 1999: ch. 7.

Conclusion With the restructuring of economic bureaucracy and a state-dominated alliance between the state and businesses, the government strongly intervened in the economy to facilitate economic development. In order to achieve EOI, the state strengthened its control over finance by the restructuring of financial institutions and actively intervening in the process of mobilisation and allocation of domestic as well as foreign capital. In addition, the state introduced various policy measures to support export-led growth. Korean economic development in the 1960s was a clear example of the developmental state in action.

76 Export-led industrialisation in the 1960s There was a series of legislation concerning social security in the early 1960s. However, only a few programmes (including the IACI and the occupational pension schemes for government employees and military personnel together with pilot medical insurance programmes, which could not be referred to as a social security system in a strict sense) came into effect in the 1960s. Social security expenditure was inevitably very low, remaining at around 1 per cent of GDP. Thus, Korea witnessed the establishment of a preferential welfare system to provide special treatment only for very limited groups whose support might be crucial for the survival of the regime. Regarding policy linkages between economic policy and social policy, it was obvious that the requirements of EOI were reflected in social measures. The state, which was preoccupied with economic development and had a close working relationship with businesses, was prone to neglect social affairs and systematically excluded them from the policy-making process. The requirement of low labour costs for EOI was strongly embedded in labour policy. The development of a social welfare programme was substituted by reliance on trickle-down economics to tackle social welfare. There was also a close relation between economic developmental strategies and the goals of education policy. Therefore, it was clear that social policy during the 1960s was greatly constrained by the requirements of EOI.

5

Social and economic policies during the heavy and chemical industrialisation of the 1970s

The World Development Report of 1981, published by the World Bank, revealed that between 1960 and 1979 Korea achieved the highest rate of growth in manufacturing production and exports among the 124 countries listed in the report. This outstanding performance was indeed attributed to the EOI during the 1960s and the heavy and chemical industrialisation (hereinafter HCI) during the 1970s. In particular, during the 1970s, the authoritarian Yushin (‘revitalisation’ in English) system and the HCI policy allowed the state to intervene in the economy more vigorously. Korea’s development experience of the 1970s clearly provides a typical example of a developmental state. Regarding social policy, however, the main concern of the state was in whether or not social policy would have a beneficial effect on economic development. The development of social policy was greatly subjected to the requirements of the HCI.

Policy legacies of the 1960s: take-off without social welfare There is no doubt that the EOI presented a crucial transition towards a take-off in the Korean economy. During the period of the First and Second Development Plans, national income increased by an average rate of 8.22 per cent in real terms. The unemployment rate significantly decreased from more than 8 per cent in the early 1960s to 4.5 per cent in 1970, allowing Korean people to move out of chronic long-term unemployment. Needless to say, this success was led by the dramatic growth of manufacturing industries during the 1960s. For example, the share of agriculture, forestry and fisheries in total employment declined from 59.7 per cent in 1962 to 45.9 per cent in 1971; their share in total GNP also decreased from 40.1 per cent to 29.1 per cent during the same period (EPB, 1972: 321–2). In particular, there was a remarkable change in the composition of export products from primary agricultural and natural resources (73 per cent in 1962) to manufactured products (86 per cent in 1971) (EPB, 1972: 324). Accordingly, Korea was substantially transformed from an agricultural society to an industrialised society. This economic development of the 1960s was clearly associated with the emergence of a developmental state in Korea. The state formed a state-dominated alliance with exporting businesses but against working classes so that it was able to discipline its local

78 Heavy and chemical industrialisation in the 1970s firms to a great extent. Thanks to the success of EOI, some of large export enterprises became sprawling chaebols, family-owned big conglomerates, towards the end of the 1960s. The EOI also made it possible to improve significantly the living conditions of the people by a large expansion of employment opportunities. Yet, it is worth noting that there was an increasing gap in income between rural and urban areas as a consequence of the industrialisation during the 1960s. The shares of both property income and wage income in total income increased by 33 and 40 per cent respectively during the second half of the 1960s, while the share of agricultural income dropped 32 per cent (Adelman and Robinson, 1978: 45–7). In addition, little implementation of a social security programme in the 1960s forced Korean people to get by without social welfare provision. The economic development was proceeding with little social welfare. The benefits of rapid industrialisation were thus substantially distributed among urban areas with an exclusion of rural areas, which brought about a massive immigration from rural to urban areas. According to a ‘two-sector developmental model’ proposed by some developmental economists like Ranis and Fei (1961), economic development consists of the re-allocation of surplus agricultural workers, whose contribution to output may have been zero or negligible, to industry, where they become productive members of the labour force (Ranis and Fei, 1961: 534). Yet, it is often difficult for developing countries to make this transition (Sethuraman, 1981). This is because there is a large immigration from the agricultural sector exceeding the employment capacity in the urban industrial sector, so that many of the incomers may fall into unemployment and remain in the urban informal sector. Korea was not an exception from this trend. According to Bae’s study (1982), the size of the urban informal sector significantly increased along with the industrialisation, from 15.5 per cent in 1960 to 23.3 per cent in 1970 (see Table 5.1). It is important to note that a low price policy for agricultural products in the 1960s made a significant contribution to the growth of the urban informal sector. That is, the provision of cheap food enabled workers to lower their living costs, and thus significantly contributed to maintaining low wages in the manufacturing sector Table 5.1 Distribution of the economically active population (%)

1960 1965 1970 1975 1981

No. of employed (000s)

Modern sector

Traditional sector Agricultural, forestry and fishing

Rural non-agricultural, forestry and fishing

Urban informal sector

7,028 8,206 9,745 11,830 14,048

7.1 10.1 15.3 16.7 24.7

65.9 58.6 50.4 45.9 34.2

11.5 11.4 11.0 9.8 9.0

15.5 19.9 23.3 27.7 32.1

Note: The Urban informal sector includes urban dwellers who are employed in workplaces employing less than 10 people, self-employed and family-employed. Source: Bae, 1982: 573.

Heavy and chemical industrialisation in the 1970s 79 (J. H. Yoon, 1984: 260). Consequently, the low price policy for agricultural products accelerated the massive immigration, which played the role of an abundant labour reservoir during the industrialisation, which enabled Korean exporting firms to have a competitive advantage due to low labour costs. At the same time, they created major urban problems, referred to as ‘the affairs of urban slums’. In particular, the urban housing problem was very serious. For example, in July 1971 there were as many as 170,000 illegal shacks in Seoul, accounting for roughly 30 per cent of total housing (Sohn, 1989: 35). On the other hand, workers were forced to sacrifice their well-being for the economic development in the 1960s. According to ILO statistical data on hours of work in manufacturing, in 1970 workers in Korea worked the longest time of 54 hours per week among the 52 countries listed in the report (ILO, 1972: Table 25).1 Korea also had one of the highest industrial accident rates. In 1970, the industrial accident rate was 4.72 per 1,000 people employed, which was extremely high in comparison with the UK, showing 0.45 (ILO, 1972: Table 26).2 Despite these poor labour conditions, workers hardly showed labour militancy throughout the 1960s. However, in late 1970, labour movements in Korea witnessed an astonishing, unforgettable incident.3 A young garment worker at a sweatshop in the Peace Market, Chon Tae-il, committed suicide by dousing himself with gasoline and setting fire to himself in the main street in Seoul in protest at the government’s labour policies and poor working conditions. He died with a book on the Labour Standards Law in his arms, shouting ‘Workers are not machines. We are also human beings. Observe the Labour Standards Law. Don’t make my death useless’ (Committee for the Construction of a Chon Tae-il Memorial Building, 1983). Though Korea had had a Labour Standard Law to regulate working conditions since 1953, none of the workplaces in the Peace Market complied with these rules. Moreover, the state did not monitor or punish those who violated these rules. Thus, the EOI in labourintensive industries was systematically associated with the exclusion of workers from economic returns.

The authoritarian developmental state and the state–business relationship In the early 1970s, the Park regime officially moved towards a more authoritarian regime by the Yushin Constitution and a series of Presidential Emergency Measures. Korea was obviously taking an opposite path from that proposed by modernisation theorists who argue that democracy should march alongside economic development. The following observation of Cole and Lyman’s on Korea’s developmental process in the 1960s would prove misleading. The process of economic and political development in Korea was made mutually reinforcing in the 1960s. Korea perhaps would provide clues by which other developing countries can escape some of the dilemmas of political and economic development. (Cole and Lyman, 1971: 9)

80 Heavy and chemical industrialisation in the 1970s In fact, Korea’s march towards economic development during the 1970s was led by an authoritarian regime. I will here deal with the following questions: Why and how did the Park regime change to an authoritarian regime in the early 1970s? What was the effect of the emergence of an authoritarian regime on the policymaking process? Restructuring politics towards an authoritarian state The emergence of the authoritarian state in Korea in the early 1970s has been a debatable matter with respect to the applicability of the bureaucratic-authoritarian theory developed by O’Donnell. According to O’Donnell, bureaucratic-authoritarian states have the following common characteristics: (a) higher governmental positions usually are occupied by persons who come to them after successful careers in complex and highly bureaucratised organisations – the armed forces, the public bureaucracy, and large private firms; (b) political exclusion, in that it aims at closing channels of political access to the popular sector and its allies so as to deactivate them politically, not only by means of repression but also through the imposition of vertical (corporatist) controls by the state on such organisations as labour unions; (c) economic exclusion, in that it reduces or postpones indefinitely the aspiration to economic participation of the popular sector; (d) depolitization, in the sense that it pretends to reduce social and political issues to ‘technical’ problems to be resolved by means of interactions among the higher echelons of the abovementioned organisations; and (e) it corresponds to a stage of important transformations in the mechanisms of capital accumulation of its society, changes that are, in turn, a part of the ‘deepening’ process of a peripheral and dependant capitalism characterised by extensive industrialisation. (O’Donnell, 1978: 6) The Korean bureaucratic-authoritarian regime, named the Yushin regime, had indeed some traits similar to these. Despite similarities, however, the emergence of the bureaucratic-authoritarian regime in Korea was different from those in Latin America. O’Donnell’s proposition that the bureaucratic-authoritarian state has an ‘elective affinity’ with a certain type of capitalism and its crises cannot be applicable to Korea. The emergence of the bureaucratic-authoritarian regime in Korea in the early 1970s was not a result of the crisis of EOI in the 1960s. In this sense, some scholars (Lim, 1985; S. J. Han, 1987; Cumings, 1988; Cotton, 1992) have argued that the rise of the authoritarian regime in Korea was not structurally determined, but contingent upon the outcome of conflict among key political actors. I agree with this perspective and thus I will look at the political situation in the early 1970s in order to understand the transition to bureaucratic authoritarianism in Korea. Despite the success of EOI, at the end of 1969 there was growing disenchantment with the Park regime. In particular, a national referendum in October 1969, which approved a constitutional amendment that removed the two-term limit on the

Heavy and chemical industrialisation in the 1970s 81 presidency and thus allowed President Park to run for office a third time, brought about growing opposition to the government. The 1971 presidential election following the constitutional amendment gave Park a marginal victory of 51.2 per cent against the opposition leader Kim Dae-jung’s 43.6 per cent (Dong-a ilbo, 1 May 1972). Yet, this narrow victory met a lot of criticism of large-scale governmental interventions and fraud in the election. The National Assembly elections in May 1971 proved a further setback to the government.4 Encouraged by these two elections, there was a massive eruption of social and political discontent in various forms of protest (Sohn, 1989). As the protests intensified, the Park regime declared ‘a Garrison Decree in Seoul’ in October 1971, which meant the beginning of a bureaucratic-authoritarian regime.5 It was extended to the whole nation with the Emergency Decree for National Security in December. The Park regime finally proclaimed the Martial Law on 17 October 1972, arguing that it was necessary owing to the irresponsibility of political parties, military threats from North Korea, and changes in the regional security setting following President Nixon’s opening to China (Dong-a ilbo, 18 October 1972). It is true that the world witnessed a considerable change in international relations in the early 1970s. The change of US diplomacy policy, which was triggered by the Nixon Doctrine, brought about a series of missions seeking détente: the US–China rapprochement, the admission of China to the UN as a full member of the Security Council, Nixon’s visit to China and Moscow with an agreement on the basic principle of peaceful coexistence, and the normalisation of diplomatic relations between Japan and China. The détente mood, however, was paradoxically regarded by the Park regime, which had been enjoying much visible and invisible benefit from the Cold War, as a threat to its security. It is well known through Kim Chungryum, the chief of the Presidential Secretariat 1969–79, that the concern of national security prompted Park to direct more resources into defence-related production, bringing about his obsession with HCI (C. R. Kim, 1994: 83–7). There is little doubt that national security was exploited to justify harsh politics by the Park regime. With the Martial Law, Park dissolved the National Assembly, banned all political activities of parties, closed the universities, and instituted a tight system of press censorship. The Emergency State Council took over all legislative functions and prepared a draft of the New Constitution called the Yushin Constitution. The draft was approved in a national referendum of November 1972. According to the New Yushin Constitution (Article 39, 47), Park was re-elected as the eighth president of the Fourth Republic on 23 December 1972 by the National Conference for Unification (hereinafter NCU), composed of delegates elected by popular vote who were not themselves affiliated to a political party. The only candidate, Park gained 99.9 per cent of the total votes. At last, the Fourth Republic, called the Yushin Republic, was launched with the promulgation of the Constitution on 27 December 1972. Consequently, the Park regime can be seen as assuming a more authoritarian mantle in the name of national security. The authoritarian Park regime faced considerable public resistance, mainly organised by college students, proposing an amendment of the Yushin Constitution. The regime’s reaction became harsher with a series of Presidential Emergency

82 Heavy and chemical industrialisation in the 1970s Measures, moving the regime in a more openly authoritarian direction (Sohn, 1989). Any kind of anti-government activity was prohibited. It was forbidden to fabricate, disseminate false facts or make a false presentation and to deny, oppose, distort or defame the Constitution. It was also prohibited to assert, petition or propagate its revision by means of assembly, demonstration, mass media, or publications. Those who violated these measures were liable to periods of imprisonment from one to ten years (Presidential Emergency Measure No. 9 for National Security and Public Order, 1975). These measures effectively blocked all challenges to the Yushin system by banning any form of criticism of the government. The experience of the 1970s in Korea strongly supports the view that the emergence of democracy is not a by-product of economic development. Rather, democratisation is an outcome of actions, not just of conditions. In addition, the rise of bureaucratic authoritarianism in Korea could be understood as the outcome of strategic choices made by the strong state rather than a part of deepening Korean capitalism. It is clear that the emergence of an authoritarian regime enormously affected the policy-making process. In particular, the Yushin Constitution concentrated power into the hands of the president. The president became constitutionally the national leader situated above the three branches of executive, legislative and judiciary. The provisions for presidential elections created the possibility of a president for life, as there was no restriction on the number of times he could run for office. The president was empowered to dissolve the National Assembly, to nominate one-third of the members of the National Assembly to the NCU, and to appoint and dismiss judges. He was to be accountable only in so far as he could be impeached by the Constitutional Committee – itself consisting of presidential appointees. The president was also empowered to make emergency measures with regard to the whole range of state affairs in the case of a national emergency or a threat to national security (Sohn, 1989: 49; S. J. Kim, 1991: ch. 4). The effect of this concentration of power in the hands of the president was to hamper significantly the separation of power among the three branches of government. Consequently, the president himself became the most powerful policy-maker within the state. Deepening of the developmental state and the symbiotic state–business alliance According to a celebrated work by Gerschenkron, it is argued that a lateness of industrialisation implies a larger role of the state in the developmental process: The more backward a country’s economy, the greater was the part played by special institutional factors designed to increase supply of capital to the nascent industries and, in addition, to provide them with less decentralised and better informed entrepreneurial guidance; the more backward the country, the more pronounced was the coercion and comprehensiveness of those factors. (Gerschenkron, 1976: 354)

Heavy and chemical industrialisation in the 1970s 83 As for Korea, the state that had played an active role in the developmental process during the 1960s was seeking to play an even larger role in the industrialisation process in the 1970s. The HCI Plan was initially prepared by a small group centred in the Chong Wa Dae created by President Park himself. It is well known that Park was very determined to develop heavy and chemical industries (C. R. Kim, 1994: 83–7). His role was unusual considering that formerly most economic development planning was prepared in the EPB rather than by the president himself. In the early 1970s, the HCI Plan was widely seen as premature for the Korean economy by many technocrats of the EPB as well as businesses (C. R. Kim, 1994). Thus, it is important to note that President Park’s leadership was crucial for the development of heavy and chemical industries in the 1970s. The announcement of the HCI Plan by President Park was followed by some changes in governmental organisation in order to implement the Plan effectively. First, a Heavy and Chemical Industry Promotion Committee was formed under the Office of the Prime Minister along with the HCI Plan. In September 1973, the Heavy and Chemical Industry Planning Council was established in the Committee, which later came under the direction of the Second Presidential Economic Secretary, Oh Won-chul. The Planning Council was an extremely powerful body. It took priority over the rest of the government, bypassing the EPB and giving orders directly to the Ministry of Finance (MOF), the banks, and the Ministry of Commerce and Industry. The allocation of capital was largely decided by the Planning Council and ultimately by the president himself, who exercised final approval over major projects. The council also decided where plants would be built, what their capacity would be, and which companies would build them (Clifford, 1994: 101–12; E. M. Kim, 1997: ch. 5). In addition, economic ministries underwent organisational reform to implement the HCI more effectively. Within the EPB, the Department for Foreign Capital Management and the Department for Promoting Investment were both formed in 1973. Similar departments within the MOF were also expanded to assist with attracting foreign capital. The Ministry of Trade and Industry also underwent considerable changes. The Department for Industrial Development and the Department for Management of Industrial Plants were expanded and promoted to higher status within the ministry. Many defence-related departments and heavy and chemical industries-related departments were created (E. M. Kim, 1997: 144). Consequently, the state was restructuring towards a further comprehensive and planned developmental state in order to pursue the single aim of the HCI. On the other hand, during the 1970s, many large enterprises were able to grow and become chaebols. Table 5.2 shows how the top four largest chaebols expended their size through conforming to the HCI Plan in the 1970s. They substantially acquired and founded many affiliated companies in the state-targeted heavy and chemical industries, with the exception of Samsung, which showed a relatively modest growth in the heavy and chemical industries. Yet, they also pursued horizontal diversification by expanding their business into other sectors. Thus, by the end of 1980, the sales of the top ten chaebols were 23.8 per cent of total manufacturing sales and absorbed 12.8 per cent of the total

84 Heavy and chemical industrialisation in the 1970s Table 5.2 Top four chaebols’ participation in the heavy and chemical industries Chaebol

Growth rate of the 1970s (%)

No. of affiliates 1974

Acquisitions in HC industries

1978

Hyundai

38.0

9

31

Samsung

18.4

24

33

Daewoo 53.7 Lucky-Goldstar 17.2

10 17

35 43

Automobile, machinery, iron & steel, shipbuilding, aluminium, oil-refining, heavy electrical, heavy machinery Machinery, electric switching system, petrochemicals Machinery, automobile, shipbuilding Petrochemicals, oil refining, electronics

Note: Growth rate based on the average annual growth rate in total assets. Source: Woo, 1991: 168.

workforce in manufacturing (J. E. Woo, 1991: 171). There is no doubt that such a rapid growth of chaebols during the 1970s was mainly caused by the preferential supports of the state, such as policy loans, tax incentives and protection measures. However, it is important to note that there was a change in the state–business relationship in the 1970s. The alliance was no longer between the state and general exporting large businesses, but more specifically between the state and a few chaebols chosen by the president involved in the drive for HCI. According to E. M. Kim (1997: ch. 5), there was growing interdependence and symbiosis between the state and businesses, notably a few of the chaebols, during the 1970s. This state–business configuration can be explained by ‘embedded state autonomy’, in Evans’s terms (1990): ‘autonomy’ of the state from social entanglements gives the state a capacity to direct social change, and social ‘embeddedness’ in turn, especially the links the state forges with businesses, enables the state to incorporate these powerful groups in the state’s economic project. At the same time, however, labour was systematically excluded from the policymaking process mainly through state repression in the 1970s. Table 5.3 indicates the union organisation rates and the number of industrial disputes during the Yushin regime. Though the organisation rates of trade unions rose steadily in the 1970s, the number of labour disputes was hardly considerable. This reflected the labour policy of the state in the 1970s in which union activities were legally allowed, but Table 5.3 Labour disputes and organisation rates in the 1970s

Union organisation rates (%) No. of labour disputes

1971

1975

1976

1977

1978

1979

19.7 —

23.0 133

23.3 110

24.3 96

24.0 102

23.6 105

Note: Data on industrial disputes is unreliable because the declaration of National Emergency for National Security in December 1971 banned all labour disputes so that there was no data available between 1971 and 1974. Source: MOL, Labour Statistical Yearbook, 1980, 1983.

Heavy and chemical industrialisation in the 1970s 85 all collective bargaining and disputes were under the strong controls of the state. In addition, the FKTU and industrial unions gave up their potential political power to the state by expressing their support for the Yushin regime (FKTU, 1972: 73–7; 1973: 103). In summary, the experience of the political regime in Korea in the 1970s hardly supported Lipset’s observation that democracy is related to economic development (Lipset, 1959). A rapid economic growth in Korea did not indeed bring about democracy. Korea’s experience rather nicely fitted with the argument of Huntington and Nelson in their study of developing countries that ‘political participation must be held down, at least temporarily, in order to promote economic development’ (Huntington and Nelson, 1976: 23). During the 1970s, the Park regime sought to exclude the popular sector from the policy-making process by establishing an authoritarian regime. The state was able to attain social order by authoritarian measures, mobilise society without any serious objections, and thus lead society to realise the policy priority of the regime. On the other hand, the Park regime ferociously led economic development by strengthening the developmental state and forming a developmental symbiotic alliance with chaebols. Hence, the term authoritarian developmental state may well be the best description of the state in the 1970s.

HCI and state intervention: a model of the developmental state Given the rapid economic growth of the 1960s driven by the EOI strategy, one might expect to see the same outward-looking economic development in the 1970s. Yet, its orientation shifted in the 1970s. The emphasis on exports still remained, but the aim was towards economic self-sufficiency and industrial consolidation. There have been many studies providing overviews and more detailed discussions of this transformation in the economic developmental strategy (Michell, 1981; J. H. Kim, 1990; Stern et al., 1995). This section does not attempt to substitute for a detailed discussion of the political economy of the HCI. Instead, my main focus will be the policy instruments of the state for the HCI in order to examine the state’s role in the market. The HCI Plan was mainly implemented by the active intervention of the state in the process of financing and various supporting measures. Distorted financial system The HCI Plan, which brought a spurt of economic growth to Korea, got into an impressive stride along with the Declaration of Heavy and Chemical Industrialisation in January 1973 made by President Park. He disclosed an ambitious vision that the government should promote the heavy and chemical industries so that by 1980 Korea would be one of the leading developing countries, with a per capita GNP of US$1,000 and exports of US$10 billion. Six industries – iron and steel, petrochemicals, non-ferrous metal, machinery, shipbuilding, and electrical appliances and electronics – were officially selected, with a specific growth target for each (EPB, 1973, in KDI, 1995a: 301–2).

86 Heavy and chemical industrialisation in the 1970s When the HCI Plan was launched in 1973, the economic situation was hardly favourable for its implementation. The world experienced a severe economic recession due to the first-ever oil shock, which saw oil prices quadruple. However, the Korean response was to absorb oil price increases through devaluation and more borrowing abroad. Table 5.4 shows that since 1973, when the government started to launch the HCI vigorously, the amount of total foreign capital dramatically increased. In particular, commercial loans from the international financial market led the growth of foreign capital inflow during the second half of the 1970s. Yet, FDI was not considerable due to the tight controls of the government. During the 1970s, the government strongly regulated FDI by imposing limits in investment proportion as well as in allowed industries and businesses (Law for Foreign Capital Inducement, 1973). Nevertheless, this massive infusion of foreign debt was crucial for the completion of the big push. The financial system of the 1970s was not much different from that of the 1960s in that every bank in the nation was owned and controlled by the state, and thus they substantially loaned only to those favoured by the state. Nevertheless, it is important to note that during the 1970s the credit-based financial system was strongly favourable to specific industries. That is, in the 1960s all exporters, regardless of what they exported, had been eligible for preferential loans, whereas during the 1970s the main goal of the financial system was to allocate as much capital as possible to the heavy and chemical industries. The state thus set the financial prices at an extremely low level to subsidise the HCI. Figure 5.1 shows that real costs of general bank loans in the period 1973–9 were almost always negative, which was clearly different from the 1960s. Furthermore, the costs of both export loans and National Investment Fund (NIF) loans, which were called ‘policy loans’, were even lower than the subsidiary rate of general bank loans. They claimed over 40 per cent of total domestic credit during the same period. In particular, it is notable that the NIF was created in 1974 in order to efficiently mobilise and allocate the domestic capital needed for the HCI (NIF Law, 1974). Although it was neither as plentiful nor as cheap as export loans, more than 60 per cent of the total NIF was allocated to the heavy and chemical industries (MOF, 1982). Table 5.4 Inflow of foreign capital during HCI (%) Year

1972 1973 1974 1975 1976 1977 1978 1979

Total (US$ million)

Foreign aid

780.3 891.3 1,098.2 1,397.0 1,653.1 1,980.4 2,858.6 2,845.2

6.4 3.9 3.7 3.4 0.8 0.4 0.3 0.3

Foreign loan Public loan

Commercial loan

41.6 41.3 28.7 34.5 42.9 30.7 28.5 38.1

41.8 38.6 56.1 57.6 50.9 63.6 67.5 56.9

Source: EPB, Main Economic Indicators, various years.

Foreign direct investment 10.0 16.0 11.2 4.4 5.2 5.2 3.4 4.4

Heavy and chemical industrialisation in the 1970s 87 5 0 –5

1973

1974

1975

1976

1977

1978

1979

–10 %

–15 –20 –25 General bank

Export

NIF

Figure 5.1 Real interest rates on various loans in the 1970s Note: The figures of real interest rates are gained by the difference of nominal interest rates and GNP deflators. Source: BOK.

Due to a highly distorted and discretionary credit market, heavy and chemical industry absorbed more than 70 per cent of the total investment in manufacturing during the period 1977–9. It is clear that this distorted financial system enabled the government to lead businesses into new heavy and chemical sectors. Spending measures and tax incentives The state used spending measures as a powerful instrument for fulfilling HCI. Table 5.5 shows the magnitude of state investment and loans in domestic capital formation during the 1970s. The government allocated more money for state investment and loans in the 1970s. In particular during the second half of the 1970s, they accounted for an annual average of around 35 per cent of total government expenditure, with a peak of 43 per cent in 1979. This was a big increase considering that the amount Table 5.5 Magnitude of state investment and loans during HCI Year

1972 1973 1974 1975 1976 1977 1978 1979

Ratio to total government expenditure

Ratio to gross domestic capital formation Total (a)+(b)

State investment (a)

State loan (b)

32.1 28.5 33.3 37.9 36.0 33.9 35.3 43.0

40.2 26.0 30.3 38.7 38.0 37.3 29.7 32.2

36.2 21.8 24.5 31.6 31.3 29.7 22.6 25.8

4.0 4.2 5.8 7.1 6.7 7.6 7.1 6.4

Source: KDI, 1995b: 282.

88 Heavy and chemical industrialisation in the 1970s of state investment and loans was less than 30 per cent during the 1960s. The share of state investment and loans in gross domestic capital formation also increased from less than 30 per cent in the 1960s to around 38 per cent in the period 1975–7. It is obvious that this growth of state investments and loans reflected the efforts of the state to facilitate the big push. The government also used the tax system to support the development of the heavy and chemical industries. There occurred two kinds of incentive forms during the 1970s: trade-based incentives and tax incentives for specific industries. In the early 1970s, the Korean government began to scale down its export promotion schemes, and started to give higher priority to sectoral development, focusing on heavy and chemical industries. Regarding tax incentives for exports, the government still granted tariff exemption and tax cuts for firms who not only imported heavy and chemical facilities but also exported heavy chemical products (EPB, 1981: 107). At the same time, there was an important change in the tax system in order to encourage firms to invest in specific industries. In 1974, a major reform replaced all major tax incentives to exporting industries with a special tax treatment for key industries. Under the new system, eligible firms in the fourteen industries, mainly composed of heavy and chemical industries, could get either a tax holiday for five years, with 100 per cent tax exemption for the first three years and then 50 per cent exemption for the next two years, an 8 per cent investment tax credit for machinery and equipment (10 per cent for investments using domestic capital goods), or an additional 100 per cent special depreciation allowance (Trela and Whalley, 1990: 19). Consequently, during this phase of the HCI, fiscal measures including state investment and loans as well as tax incentives for the specific industries played a crucial role. In summary, the developmental experience of Korea in the 1970s, in particular since 1973 when the HCI was launched, was a model of the developmental state in action. In comparison with the 1960s, the state intervention became more comprehensive and planned. Specific target industries were chosen and given considerable preferential treatment by the state. This was very different from the role of the state in the 1960s when the state employed non-discretionary supporting measures to support all exporters. The policy measures for the HCI led to the state being referred to as ‘Korean Inc.’, just as the Japanese government was called ‘Japan Inc.’ The state was able to shape the market by its control of financial capital and enormous fiscal incentives.

Social welfare: a residual welfare system The active intervention of the state in the market is not necessarily accompanied by the state’s active role in social welfare. On the contrary, the preoccupation of the state with economic development is likely to bring about a systematic indifference to social welfare. The experience of the social security system in Korea supports this general proposition. In this section, I will look at the institutional change of the social security system in the 1970s and then examine social expenditures.

Heavy and chemical industrialisation in the 1970s 89 Legislation but indefinite postponement of the national pension scheme In January 1973, President Park announced an unexpected plan to introduce a national pension scheme for all retired workers at the New Year’s press conference of 1973: By the introduction of a national pension scheme from 1974, the government will provide a old-aged pension for retired persons, a disability pension for disabled persons and a survivor pension for the family of the insured. (Chosunilbo, 13 January 1973) Following his announcement, the National Welfare Pension Law (NWPL) was enacted on 7 November 1973 and was due to come into effect at the beginning of 1974. It was quite unusual in comparison with the experiences of the Western welfare states. In general, a national pension programme tends to be brought into operation after the introduction of other social security programmes and it takes a long time to develop full coverage (Mishra, 1981: ch. 6). Despite this exceptional legislation, however, the NWPL did not in fact come into effect until 1988. The first oil shock brought the Presidential Emergency Measure No.3 for the Stabilisation of National Life in January 1974, which put off the implementation of the NWPL for one year (EPB, 1974, in KDI, 1995a: 818), but the programme was again deferred for an indefinite period. The government tried to justify this postponement by pointing out that businesses were suffering from weak financial structure and the further pressure on production costs due to the recent oil shock. Nevertheless, the NWPL of 1973 established some fundamental institutional settings with respect to the national pension scheme in Korea. First of all, the NWPL adopted a social insurance model rather than a basic state pension, so that it would be difficult for the pension programme to contribute to the redistribution of wealth. A pension programme can systematically redistribute wealth from rich to poor by taking in income-related contributions but paying out a flat-rate pension (P. Johnson, 1998: 137). The NWPL of 1973, however, essentially limited its concern to providing income across the life-cycle of an individual. Second, the NWPL mainly adopted funding systems rather than ‘pay-as-you-go’ (PAYG). PAYG systems pay pensions out of the taxes (or contributions) collected in that year. In the absence of capital funding, these schemes typically imply substantial inter-generation transfers. On the other hand, funding systems are not redistributed either within or across generations. Individual retirement benefits are directly related to individual contributions. Thus, funding implies the existence of a dedicated account on which the individual can draw, while PAYG means the existence of an implicit contract between generations and between contributors and the state (Casey, 1998: 58). In this respect, the pension scheme in Korea focused more on individualistic protection rather than social protection. Third, regarding the sources of financing in the NWPL, the funds were to be financed by contributions equally paid by both employers and employees (Class I)

90 Heavy and chemical industrialisation in the 1970s or by the insured paying monthly fixed contributions of 900 won (Class II).6 Thus, the financial burden of the state was limited only to administration costs without any subsidies to the pension fund. Limited introduction of the national health system Although the Medical Insurance Law enacted in 1963 was revised to change from a voluntary scheme to a compulsory system in 1970, it was in 1977 that the Medical Insurance Programme (MIP) took effect for the first time as a social security programme in Korea. At the same time, the government initiated the Medical Assistance (MA) for the poor who were entitled to the Public Assistance Programme. These two programmes represented a decisive landmark in the history of the social security system in Korea. I will first briefly look at the situation of health care in Korea at that time, and then examine the state’s role in health care under this new changed situation. As already indicated in the last chapter, there were only around 64,000 people covered by twelve pilot medical insurance programmes by the end of 1976. Yet, all these pilot programmes proved to be failures due to their adopting the principle of voluntary affiliation. The general tax revenue of the government had never been allocated in medical services except for general health-related services, such as public sanitation and immunisation. These expenditures remained a negligible amount. In 1976, for instance, the central government spent 19 billion won on various health-related services, accounting for only 0.8 per cent of total governmental expenditure. As a result, only those who were able to pay for medical services could access them. Most of the medical institutions in Korea were operated by the private sector, representing 86.8 per cent of all health facilities in 1978 (Park and Yeon, 1981: 152). The bulk of health services were accordingly supplied through the market mechanism on a profit-making basis. These private medical systems inevitably caused an inequality in the distribution of health facilities. In fact, almost 87 per cent of physicians and 90 per cent of medical facilities were concentrated in urban areas, where medical services were sold almost exclusively to the middle and upper income classes who could afford to pay for them (C. K. Park, 1979, 39). As a result, the rural population was less served by medical facilities than the urban residents due to the scarcity of health facilities as well as their financial difficulties. Despite these situations, however, the introduction of the MIP was launched only with limited groups of people. According to the revised Medical Insurance Law of 1976, there were two types of medical insurance programmes: Type I was a compulsory MIP covering the employees together with their dependants working in large firms with 500 workers or more; Type II was a voluntary community-based MIP for all others, both employees working in smaller firms with less than 500 workers and the self-employed including farmers. However, since many small firms and individuals could not afford the Type II contributions, the medical insurance programme was started with just Type I. Thus, the coverage rate of the programme was just 14.5 per cent of total population in 1977 (see Table 5.6).

Heavy and chemical industrialisation in the 1970s 91 Table 5.6 Trend of medical care coverage (% of total population) Year

Medical Assistance

Medical Insurance

Total

1977 1979 1980 1981 1983 1988 1989

5.7 5.7 5.7 9.6 9.3 10.2 10.2

8.8 21.2 23.9 29.7 39.3 68.9 89.8

14.5 26.9 29.6 39.3 48.6 79.1 100.0

Source: Federation of Korean Medical Insurance Societies.

Then, the compulsory coverage requirement was lowered to include firms with at least 300 workers in July 1979. Also, on 1 January 1979, under the Medical Insurance Law for Government Employees and Private School Employees, governmental officials and private school teachers were covered by a compulsory MIP. On the other hand, the government initiated Medical Assistance as a social assistance programme. This programme was introduced with two different categories. The first category covered indigent people who did not have the means to pay for health care, and entitled them to government full-financed medical treatment including both out-patient and in-patient care. The second was lowincome groups who became entitled to receive out-patient medical care which was paid for completely by the government and in-patient care for which 30 per cent was defrayed by the government and the remaining 70 per cent was provided by no-interest long-term government loans (Park and Yeon, 1981: 158). By 1980, the number of people who benefited from Medical Assistance was over 2.1 million, or 5.7 per cent of the population. Consequently, as Table 5.6 shows, some 30 per cent of the population were covered by MIPs or Medical Assistance by 1980. This initial national health system in Korea had some important characteristics. First, the MIP was run under the co-operative system in which each medical society was financially independent from other societies. This organisational form brought forth problems, since many of the medical societies were too small to take proper advantage of the pooling of funds and the spreading of risks. As a response to this problem, the government tried to reduce the number of medical societies so that there were 114 societies in 1981, compared with 603 in 1979 (Park and Yeon, 1981: 156). Second, since the MIP was initially introduced with large firms employing 500 workers or more, more unequal use of health services was bound to ensue. Those who were not covered by the MIP would not only be more likely to have difficulty in paying for the health costs but would also be more vulnerable from the risk of disease. Moreover, they had to pay more money for the same medical service compared with those covered by the MIP, as there was a difference in medical service fees between the insured and the non-insured (Yoo, 1990: 29). Thus, despite the introduction of the MIP, more than 70 per cent of the population still had to

92 Heavy and chemical industrialisation in the 1970s pay for all of the costs of more expensive medical services. There was significant social exclusion in health care due to the partial introduction of the MIP. Finally, but most importantly, the state limited its role in health care to be a regulator rather than a provider. With the adoption of a social insurance model, the state minimised its financial burden. The employers and the insured together contributed to the medical insurance fund, whereas the state subsidised only the administrative costs. Though the state paid half of the contributions for the government employees as an employer, it provided only subsidies to support the administration costs for the medical insurance societies before the introduction of the medical programme for the self-employed in 1988. If the state contributions to the insurance fund for its employees were not considered, the share of the state’s burden in the total medical insurance resources would be just 0.7 per cent in 1982 (J. D. Kim, 1989: 319). However, the state came to play a growing role of regulator in the health care system, mainly through the standardisation and control of health service fees according to the introduction of the medical insurance programme. Analysis of social expenditure The analysis of social expenditure during the 1970s confirms the laggard social security system in Korea. Table 5.7 shows that more than two-thirds of total social expenditure was spent on education over the 1970s. The expenditure for social security accounted for around just 20 per cent of total social expenditure. This trend was not changed even after the introduction of the MIP in 1977, though it slightly went up with the implementation of the MIP for government officials in 1979. Other expenditures in health and housing were kept at an extremely low level throughout the 1970s. These figures suggest that in terms of social expenditure, the financial priority of the state was education. If we look at the composition of social security expenditure, it is clear that the social security system of Korea was residual. Figure 5.2 illustrates that in the 1970s the government spent around 60 per cent of total social security expenditure on social assistance, despite the implementation of the MIP. The amount spent Table 5.7 Composition of social expenditure in central government in the 1970s Year

Ratio to government expenditure (%)

1973 25.9 1974 22.5 1975 22.1 1977 25.0 1978 24.2 1979 24.2

Social expenditure (%) Subtotal (billion won) = 100 %

Education

Health

Social security & welfare

Housing & community amenities

Others

175.7 232.1 345.3 703.1 914.3 1,267.3

68.9 66.7 65.0 66.7 66.1 68.1

5.3 4.9 4.7 6.8 6.5 4.6

14.6 19.8 21.0 19.9 20.3 22.2

6.4 3.7 5.2 3.9 3.0 2.4

4.6 4.8 3.9 4.8 3.8 2.7

Source: IMF, Government Financial Statistic Yearbook, 1977 and 1986.

Heavy and chemical industrialisation in the 1970s 93 80 60 1972–76

% 40

1977–81 20 0 Social insurance

Social assistance

Social welfare services

Figure 5.2 Trend of social security spending in the 1970s

on social welfare services was very small. Accordingly, the focus of the social security system of the 1970s was in the relief programme for the poor. The residual role of the state in the social welfare system was also clearly reflected in the revenues for the social security programme. Table 5.8 illustrates that taxfinancing, which had supplied around 80 per cent of total revenue for the social security system in the 1960s, continuously decreased over the 1970s and thus by 1980 was 45.9 per cent. Conversely, the proportion of contribution-financing increased so as to account for nearly 40 per cent. This change took place mainly due to the implementation of the MIP in 1977. By 1980, the ratio of total revenue for social security system to GDP went up to 2.2 per cent. However, the central government financed only around 0.53 per cent of GDP. In summary, during the 1970s, Korea experienced the legislation of the NWPL as well as the implementation of the MIP. Korea might have been able to make one step forward towards the development of a social security system. However, the implementation of the NWPL was postponed for an indefinite period. The MIP was partially introduced only for workers in large firms and exempted most people. The Table 5.8 Trend of revenue for the social security system in the 1970s (%) Year

1972 1973 1974 1975 1976 1977 1978 1979 1980

Government tax-financing

Quasi-government contribution-financing Subtotal

Employers

The insured

60.9 56.9 64.8 65.2 58.4 52.5 44.8 48.3 45.9

31.8 33.2 26.6 26.2 32.3 36.6 40.5 38.0 39.7

9.2 10.9 9.8 11.0 13.1 15.4 18.6 17.3 16.2

22.6 22.3 16.7 15.1 19.2 21.2 21.9 20.7 23.5

Others

Ratio of GDP

7.0 9.7 8.4 8.6 9.3 10.8 14.6 13.6 14.4

1.2 1.0 1.1 1.3 1.2 1.3 1.4 1.9 2.2

Note: The contribution of the government to social insurance programmes is included in government tax-financing. Government tax-financing includes central and local government. Sources: See Table 4.12.

94 Heavy and chemical industrialisation in the 1970s government hardly increased its financial commitment to the social security system. Therefore, social welfare in Korea was a residual system.

Policy linkages between economic and social policies The authoritarian Park regime’s obsession with industrial consolidation brought about a predominance of economic development in the policy-making process. It can be thus expected that the requirements of economic development were clearly reflected in the making of social policy. I will here examine the policy linkages between economic and social policies during the 1970s, with special reference to social security policy, labour policy, and education and training policy. Social security through growth Regarding the development of a social security system in the 1970s, I will raise the following questions: Why did the state intend to introduce the national pension in 1973 and then defer its implementation indefinitely? Why did the state introduce the medical insurance programme in 1977? National welfare pension: a measure of capital mobilisation? Before the legislation of the pension law, Korea had occupational pension schemes only for government officials including military personnel. By 1973 the number of those covered by these pension schemes reached around 441,000 people, roughly 4 per cent of the total employed population. Despite the lack of governmental measures for the elderly, caring for the elderly in Korea had never presented serious problems given the national tradition that the elderly should be looked after by their children, especially by a family’s oldest son, which reflects the Confucian ethic. Furthermore, the demographic structure of society had not considerably changed to challenge this situation. The proportion of the population over 65 was just 3.3 per cent in 1973, which was low compared to 5.2 per cent in 1911 in the UK when the national old-age pension was introduced there under the National Insurance Act (Fraser, 1973: 161). In addition, in Korea there had been the severance allowance system for workers who were retired or fired, according to the Labour Standard Law enacted in 1953, which played a similar role to the pension programme in terms of providing a lump sum of money at retirement. Therefore, it would not be an exaggeration to say that the government had little responsibility for caring for elderly people at that time. Nevertheless, the forthcoming pension programme was announced at the 1973 New Year press conference by President Park. The policy-making process of the pension programme sheds light on why the state actively tried to introduce the pension scheme. The initiation of the pension programme was raised not only by the MOHSA, which was responsible for social affairs, but also by the EPB, which was mainly responsible for economic affairs. Given that the EPB normally took veto points against social welfare, this was exceptional. Yet, according to the drafts of the

Heavy and chemical industrialisation in the 1970s 95 Table 5.9 Comparison of the drafts for the pension programme

Coverage Contribution rates Fund managing

The MOHSA’s draft

The EPB’s draft

Workplaces with more than 500 employees Variant rates from 2% Fund system Funds should be allocated for the social security

All population Fixed rate of 10% Fund system Funds should be allocated in National Investment Fund for investment in heavy and chemical industries

Source: J. K. Son, 1981: 83.

pension programme, there were notable differences between these bodies with respects to its coverage, contribution rates and fund management (see Table 5.9). The draft of the EPB covered all of the population from the beginning and its contribution rate was fixed at 10 per cent of income, regardless of the income level of the insured. It is not difficult to speculate that the EPB’s draft was designed to mobilise as much savings as possible for domestic capital. It is known that the Korea Development Institute (KDI), a research institute under the EPB, invited a US economist, Paul Fisher, to present his policy recommendations concerning the pension programme during the process of preparing its draft. He recommended a pension programme that would entail little financial burden for the government, but would make a great contribution in the mobilisation of domestic capital (C. K. Park, 1975; Son, 1981: 81). According to a working paper of the KDI in 1972, if the pension programme was introduced in 1974 and would collect contributions of 5 per cent of the monthly wage, the government could mobilise additional savings amounting to 0.74 per cent of GNP (Nam, 1972: 25–6). Nam Duck-woo, the Minister of Finance at that time, also alluded in retrospect to this motive: I created the NIF (National Investment Fund) to finance petrochemical industries. – We pooled funds from various sources of a public nature. Government employees’ pension fund, other similar funds plus some contributions from the commercial banks. I knew very well that tapping resources by mandate is against the rules of the market economy, but I had to do it, because President Park wouldn’t give it up. (Clifford, 1994: 106) Therefore, the main intention of introducing the pension scheme can be said to reflect the necessity of mobilising domestic capital in order to propel the HCI. The EPB took a leading role during the process of making the final draft, in order that the draft mainly reflected the concerns of the EPB. In order to increase the potentiality of savings, the draft adopted not only a funding system but also a 20year contribution period. The contribution rates were decided at levels of 3 per cent for employees and 4 per cent for employers of the monthly wage.

96 Heavy and chemical industrialisation in the 1970s After announcing the draft, there was some criticism from businesses and considerable suspicion among the public over the intention of the pension programme, but these could only find limited expression under the authoritarian state.7 On 7 November 1973, the NWPL was enacted. However it was soon followed by the deferment of the pension scheme for a year and then followed by the indefinite delay. Though the unexpected economic difficulties caused by the oil shock of 1973 critically affected the government decision to put off the pension programme, the businesses’ interest surrounding the pension programme was also an important factor that explains the reason of this postponement (EPB, 1974, in KDI 1995a: 318). As for businesses, the introduction of the pension programme simply meant an additional factor to increase production costs. The Federation of Korean Industries (FKI), a business interest organisation, continued to be concerned about the additional financial burden resulting from the introduction of the pension (MOHSA, 1974). Yet, the protests of business were not necessarily powerful enough to make the state defer the pension programme. Rather, the state could not avoid the necessity of maintaining business confidence in the economy, in particular at a time of economic difficulties. The Medical Insurance Programme The success of EOI made it possible to improve significantly the living standards of the people by a large expansion of employment opportunities. However, economic and social inequality became evident along with economic development. Table 5.10 shows that income inequality in Korea slightly declined during the second half of the 1960s, and then increased in the 1970s. The Gini index went up noticeably from 0.332 in 1970 to 0.381 in 1976. As to the main cause of such a growing income inequality, Koo maintained that the reduction of unemployment reached more or less its maximum level and consequently the de-marginalisation effect of EOI began to disappear (Koo, 1984; 1985: 139). Yet, it is also necessary to note that the indifference of the state to social welfare contributed to the exacerbation of social inequality. Under the authoritarian regime, this growing social inequality did not lead to any social and political unrest that might threaten the Park regime. Yet, there was a growing concern among policy-makers, including those in the EPB, that the potentiality of the economic development might be threatened by growing economic and social inequality. In this situation, the state changed the direction of Table 5.10 Distribution of household income, 1965–76 Income group

1965

1970

1976

Bottom 40% Top 20% Gini Coefficient

19.34 41.81 0.344

19.63 41.62 0.332

16.85 45.34 0.381

Source: Choo and Kim, 1978.

Heavy and chemical industrialisation in the 1970s 97 social security policy. There is some concrete evidence to support this. Kim Chungryum, chief of the President Secretariat, describes the changes in President Park’s policy as follows: President Park took account the correction of some economic and social inequality associated with the rapid economic growth which, he believed, would be necessary for the continuous economic development. Thus, he took the directions that the state should incorporate social development into the Fourth Economic Development Plan starting in 1977. In particular, he ordered that the medical security measures should be implemented under any circumstances. – President Park asked the new Minister of the MOHSA, Shin Hyun-hwak, to develop a national health system suitable for the country’s circumstances. (C. R. Kim, 1994: 308–9) The change of policy was reflected in the Fourth Five-Year Economic Development Plan (1977–82). The objective of social development was for the first time incorporated in the Plan to promote the long-term potentiality for economic growth (EPB, 1976: 85–6). In the Plan, the government made the following objectives clear: Though Korea accomplished the industrialisation and rapid economic growth through implementing three Economic Development Plans, there was a considerable lack of social equity and qualitative development. To solve these problems, the government put the priorities of the Development Plan on growth, equity and efficiency. (EPB, 1976, in KDI, 1995a: 339) Thus, the Plan was hereafter officially entitled the ‘Five-Year Economic and Social Development Plan’. This change was soon highlighted by the implementation of the MIP and the Medical Assistance. The MIP, which had been a pilot project in the form of a voluntary system for thirteen years, was back on the policy agenda in 1976. The MOHSA prepared a draft of the revised medical insurance law, referring to the Japanese medical insurance system as a model (Son, 1981: ch. 4; Joo, 1999). The MOHSA in particular persuaded the economic ministries to support the MIP by placing emphasis on the principle of minimising the financial burden of the state (M. S. Son, 1989: 50–68).8 Finally, the MIP came into effect in July 1977, together with the Medical Assistance implemented six month earlier. Businesses supported the introduction of the MIP. The FKI, representing big businesses, notably chaebols, showed some concern at first by expressing that it would be misguided to pursue redistribution at the expense of economic growth (FKI, 1977: 95). Yet, the FKI soon made the decision to support the MIP in return for favours offered to employers (J. K. Son, 1981, ch. 4; H. J. Kwon, 1995: ch. 2; Joo, 1999). The businesses received tax-deductions amounting to the same as each business’s contribution to the MIP. At the same time, before the MIP was launched, many large corporations had given subsidies to medical services for their employees

98 Heavy and chemical industrialisation in the 1970s and dependants. This amount reached nearly 50 per cent of the total medical costs that the employees paid (D. Y. Kim, 1982: 99). Thus, the additional cost, as a result of the introduction of the MIP, was not heavy to businesses. The FKI tried to persuade some big companies to accept the MIP by pointing out that the MIP would not only contribute to maintaining working capacity, but would also decrease longterm labour costs by reducing the movements of labour forces (FKI, 1982). Consequently, for businesses, the MIP should be understood as compatible with their economic interests. Nevertheless, the development of the social welfare system was limited by the requirment that it should not hamper working incentives. ‘Avoiding welfare dependency’ was still a dominant policy concern. President Park strongly endorsed this throughout the 1970s: Korea cannot afford to blindly ape the income or welfare policy of other advanced countries. Should we extend welfare in disregard of reality, it would only dampen the enthusiasm of some hard-working people. Should welfare policy, in opposition to its goal, encourage indolence and a psychology of dependence among some people, it would have harmed not only development, but also welfare. No matter to what degree civilisation develops, a society of idlers will never materialise. Even if it did, it would be a highly undesirable phenomenon. (C. H. Park, 1979: 102) The MIP was implemented with this in mind. The financial burden of the state was minimised and the application of the MIP was decided according to the capability to pay the contributions rather than the extent of social needs. The implementation of the MIP shows that social security programmes could be introduced under the consideration of their potentiality to contribute to economic development. Nevertheless, the developmental state, which was putting a great deal of priority on economic development, was prone to minimise the financial burden of the state and to introduce the programme incrementally. Repressive labour policy: political exclusion and economic mobilisation The state was continually seeking to combine high economic growth with low wages during the 1970s. Yet, the experience of the 1970s was different from that of the 1960s in that the low labour costs of the 1960s were driven largely by market logic, while during the 1970s they were led mainly by the state labour policy. The state actively sought political exclusion as well as economic mobilisation of labour in the 1970s. The former was related to the state policy concerning trade union activities, while the latter was sought by low wage policy. The trade unions in Korea had been deprived of their political power by the amendment of the labour laws of 1963. In the 1970s, they experienced more serious state controls. Workers in Korea witnessed an extraordinary labour-related law

Heavy and chemical industrialisation in the 1970s 99 entitled the Provisional Exceptional Law Concerning Labour Unions and the Settlement of Labour Disputes in Foreign Invested Firms (hereinafter, the PELFIF) on the first day of the 1970s. The main objective of the PELFIF was to provide an exceptional privilege for foreign invested firms by the setting up of separate settlement procedures, including compulsory arbitration and limits on the freedom to strike (EPB, 1970, in KDI, 1995a: 273). The PELFIF also made it more difficult for a union to be legally qualified by requiring new unions to be recognised by the Agency of Labour Affairs (hereinafter ALA), a government ministry (PELFIF, 1970: Articles 4, 5, 6). The reason why the state promulgated such an exceptional law can be explained by its concern with economic development. Considering the shortage of natural resources and the small size of the domestic market in Korea, cheap and effectively controlled but relatively well-educated workers might be the only attractive factor to foreign capital. Thus, it was thought by the state that trade union activities should not jeopardise the inducement of foreign direct investments (EPB, 1970, in KDI, 1995a: 273). For instance, two highly visible disputes with the foreign-invested electronic firms in 1968 were enough of a threat for the state to enact a special law for foreign investors (FKTU, 1979: 776–8). Thus, labour policy was led not only by the necessity for the political control of workers but also by the economic consideration of them as a labour force. The PELFIF shows that the needs of economic development were strongly reflected in labour policy. After the early 1970s, the state’s control over labour affairs became harsher so that labour rights, such as association, collective bargaining and collective action, were significantly restricted. Following the declaration of a State Emergency in December 1971, the Park regime promulgated the Law Concerning Special Measures for National Security (hereinafter, the LSMNS). Regarding labour affairs, the LSMNS substantially restricted the rights of collective bargaining and collective action: 1) In a state of emergency, both employers and trade unions should ask the pertinent authority to intercede for all disputes and the rights of collective bargaining and collective action should be exercised according to the arbitration of the pertinent authority. 2) The President can take a special measure that restricts the right of collective action for the employees working in the following working places which could jeopardise state security and state mobilisation; a) public officials working in the state and local authorities, b) employees working in public enterprises, c) employees involved in public affairs, d) employees working in working places that could have crucial effects on the national economy. (LSMNS, 1971: Article 9) According to the LSMNS, whose scope of application was unspecified, the ALA was empowered to intervene in all collective bargaining processes and to mediate all labour disputes. This law was effective until December 1981, when the LSMNS was abrogated. Consequently, it is true that for the 1970s all labour affairs were under the control of the state.

100 Heavy and chemical industrialisation in the 1970s The revision of the labour-related laws in 1973 was no more than a restatement of the LSMNS. There was considerable change in the Labour Dispute Adjustment Law (LDAL). The right of collective disputes was seriously restricted by expanding the scope of public enterprise, which was legally prohibited from involvement in any kind of collective action (LDAL, 1973: Article 4). In addition, by the revision of the Labour Union Law (LUL), the activities of trade unions were considerably restricted. The previous clause that had allowed a nationwide organisation in industrial sectors was lifted and thus trade unions had to be organised only at factory level (LUL, 1973: Article 33). Furthermore, the role of trade unions at factory level was also weakened due to the strengthening of Labour–Management Councils at each factory in the name of promoting industrial productivity and industrial peace (EPB, 1973, in KDI, 1995a: 304–5). Although the rights to organise a trade union remained intact under the Yushin system, freedom of organisation was also considerably restricted by the arbitrary administration of the ALA as well as the intervention of state security-related organisations, such as the KCIA (Korea Central Intelligence Agency) and the police. This was a clear example of authoritarianism, since their intervention in labour affairs was justified in the name of national security by laws outside the framework of the labour laws, such as the Law Regarding Assembly and Demonstration, the LSMNS, and the National Security and Anti-Communist Law. With all of these measures, the state was able to realise the political exclusion of workers over the 1970s. On the other hand, the Park regime was seeking to realise the economic mobilisation of labour by keeping relatively low wages in the 1970s. It was maintained by the government that ‘the low level of wages is necessary in order to increase exports in labour-intensive industries, the inducement of foreign capital and capital accumulation for the firms’ (EPB, 1968: 98). That is, the main objective of the wage policy was to maintain a low wage level in order for domestic firms to have a competitive advantage in world trade markets. As a result, the government proposed ‘a productivity-related wage system’ so that the wage growth rate should be decided within the growth rate of labour productivity (EPB, 1974). At the same time, however, the Park regime was in an ad hoc way showing its favour to workers receiving an extremely low level of wages. The Presidential Emergency Decree No. 3 for Stabilisation of National Life promulgated in January 1974 included some measures to improve the life of low-income households. Income taxes were eliminated for low-income workers who had formerly paid monthly income tax of less than 50,000 won. The measure also included a new regulation for preferential payment of workers’ wages in cases of bankruptcy and punishment of unfair employer’s practices (EPB, 1974, in KDI, 1995a: 318). In addition, the state issued an administrative guideline to terminate extremely low wages of less than 10,000 won monthly from 1975.9 Given the general direction of the government towards low labour costs, these measures were unusual. Yet, considering the legitimacy problem of the Yushin system, which was substantially created from the vigorous controls of the Park regime over all labour affairs, these measures can be understood as conciliatory attempts to pacify potential sources of political resistance.

Heavy and chemical industrialisation in the 1970s 101 25 20 15 %

10 5 0 1971

1972

1973

1974

1975

Labour productivity

1976

1977

1978

1979

Real wages

Figure 5.3 Trend of wages in the 1970s Source: MOL, Yearbook of Labour Statistics, 1980.

Surprisingly, real wages in the 1970s positively soared. Figure 5.3 shows that wage levels dramatically increased, accounting for an annual average growth rate of 9.8 per cent in real wages. In particular, during the second half of the 1970s wage growth soared to an annual average growth rate of 13.4 per cent in real wages, which exceeded the productivity growth level of 11.2 per cent. This growth was caused mainly by market equilibrium in the labour market. In the second half of the 1970s the labour market in Korea experienced a structural change from a state of labour surplus to one of limited supply (FKI, 1990: 885). It was caused mainly by ever increasing labour demands due to the progression of the HCI and a considerable shortage of skilled labour forces corresponding to a boom of overseas construction projects in the Middle East conducted by Korean companies.10 Thus, there began to be an acute shortage of skilled labour from the mid-1970s, which caused real wages to soar. However, these high growth rates do not imply that manufacturing workers in Korea were pulled out of the state of low wages during the 1970s. In fact, they received an extremely low level of wage compared with workers in Japan and the USA, which were Korea’s main trade partners. In 1978, the level of wages in manufacturing in Korea was less than one-fifth that of Japan and the USA (ILO, 1980; IMF, 1979). Clearly, during the 1970s Korea’s exporting firms were continually enjoying a competitive advantage because of its extremely low level of wages. In summary, labour policy in the 1970s was significantly tied to the needs of economic development. The authoritarian developmental state was systematically seeking to maintain a competitive advantage due to low labour costs through political exclusion and economic mobilisation of labour. In a situation where most collective bargaining was under the control of the authoritarian state and collective action was effectively restricted, the bargaining power of trade unions was seriously weakened. As a result, wages tended to be decided in favour of business.

102 Heavy and chemical industrialisation in the 1970s Education and training: human capital and economic development According to a World Bank report on East Asian countries’ economic development, the governments in this region, with regard to education, have a common feature in focusing educational spending on the lower grades to meet industrial demands (World Bank, 1993: 199–200). That is to say, they first put their priority on providing compulsory primary education and then increase the availability of secondary education. It has been maintained that by focusing spending on primary and secondary education and leaving demands for tertiary education to be met largely by a self-financed private system, the governments served large segments of the population that otherwise would have lacked access to education. It is said that Korea’s economic growth was possible only because workers with technical skills existed in abundance. This observation seems to be borne out by the dramatic increase in school enrolments in the 1970s. Table 5.11 shows that during the 1970s, secondary education including middle and high school experienced a dramatic increase in enrolment. By 1980, the enrolment rates in middle school reached 96 per cent. The enrolment rates in high school also rose to 66 per cent by 1980. This great expansion of enrolment at secondary schools clearly contributed to economic development by providing well-educated workers in abundance. However, any interpretation that ascribes this educational expansion to the education policy of the state is misleading. Table 5.12 shows that government expenditure covered only a small portion of the total investment in education, with a heavier reliance placed on the investment of the private sector, namely on parents. In 1977 the proportion of governmental expenditure was about one-third of total educational expenditure, which was similar to that of 1969. As a result, the extent of private spending on education was striking. Table 5.12 illustrates that in 1977 private expenditure was approximately two-thirds of the total expenditure on education. This high level of private expenditure in Korea shows the willingness of large numbers of Korean families to pay substantial sums for education in spite of their relatively modest income. Thus, it can be said that much of that growth was not a result of state policy but of a strong social demand for education. Nevertheless, this in no way means that the state took little part in the expansion of education. There was a change in the direction of education policy in the 1970s, which greatly reflected the change of industrial strategies. During the period of implementing the EOI in the 1960s, which was based on labour-intensive light Table 5.11 School enrolment rates in the 1970s (%) Year

Primary school

Middle school

High school

Higher education

1970 1975 1980

102.8 106.1 103.1

54.1 72.6 96.0

29.3 41.8 66.2

9.0 9.7 17.0

Source: KEDI, 1996.

Heavy and chemical industrialisation in the 1970s 103 Table 5.12 Sources of educational expenditure in various years 1968 In-school expenditure 51.3 (public cost of education) Government 28.4 Private school foundations 3.3 Parents 19.6 Out-of-school expenditure 48.7 (private cost of education) Total (% of GNP) 100.0 (9.2)

1969

1977

1982

57.0

66.5

61.8

33.0 3.1 20.9 43.0

35.8 0.8 29.9 33.5

30.2 2.6 29.0 38.2

100.0 (9.0)

100.0 (7.1)

100.2 (10.9)

Source: Y. T. Kim, 1985: 202.

industries, the labour needs of industry were compatible with the existing labour force, which already had access to universal primary education (McGinn et al., 1980 ch. 3; Middleton et al., 1994: Box 5.5). The skills required in workers were easily learned given basic literacy. Yet, with the shift of economic developmental strategy to the HCI in the mid-1970s, the demand for skilled workers continuously increased so that the government began to emphasise technical and vocational training. The government indeed made special efforts to induce a substantial number of students to enrol in technical education (S. M. Hong, 1983: 216–20). In 1973 the government established mechanist high schools to train precision-machinery workers, and by 1981 there were some 21,900 precision-machinery workers who had graduated from these schools. In particular, responding to the soaring demand for skilled construction workers abroad, in 1976 the government designated eleven technical high schools in which some 2,000 workers were produced annually. The government also established specialised technical high schools in order to meet the needs for a steady supply of highly skilled workers in areas including railroads, electronics, chemical engineering, and construction. Hence, the reform of technical education in the 1970s emphasised the matching of technical training courses to specific manpower needs in heavy and chemical industries. The government also introduced a mandatory training scheme for enterprises with 500 or more employees through the Special Law for Vocational Training in 1974. The law forced firms to provide six-month in-plant training for the skilled workers of their own plants, otherwise they had to pay a fine determined by the ALA (Y. B. Kim, 1987: 199; MOL, 1999: ch. 7). Table 5.13 shows that during the period of the Third and Fourth Plans, more than 800,000 workers received vocational training, which was far more than the 10,000 under the Second Plan (1967–71). Yet it should be noted that the share of public vocational training in the total achievement was only a quarter. Again, the state was more likely to play the role of a regulator than a provider. In summary, with a shift of economic development strategy to the HCI, the developmental state placed more emphasis on vocational education in order to meet the changing labour demands of heavy and chemical industries. As the economic developmental strategies changed, education and training policy changed to ensure that the requisite skills were in place. Yet, in a situation where there was

104 Heavy and chemical industrialisation in the 1970s Table 5.13 Vocational training achievements in the 1970s (persons) Manpower

The Third Plan (1972–76)

The Fourth Plan (1977–81)

Craftsman Public In-plant Approved Training Instructor Total

312,736 81,294 177,350 54,092 1,397 314,133

459,739 120,117 337,388 38,234 5,408 501,147

Source: MOL, 1999.

a huge social demand for education as well as a strong willingness to pay for education costs, the state was able to achieve this educational expansion with a modest investment in education.

Conclusion The developmental experience of Korea in the 1970s, in particular since 1973 when the HCI Plan was being launched, should be a model of the developmental state. Compared to the active role of the state in the economy, however, the developmental state in Korea played only a small role in social welfare. The welfare system was a residual system. The national pension programme was put off for an indefinite period in spite of the legislation of 1973. The MIP was partially introduced only for workers working in large firms. The state hardly increased its financial burden for social welfare. Thus, during the 1970s, economic development was carried out with a minimal degree of social welfare. The developmental state tried to exploit the social security system for implementing the HCI Plan, as we saw in the policy process of the NWPL. The introduction of the MIP also shows that social security programmes can be introduced with a view to their potentiality to contribute to economic development. Nevertheless, the developmental state, which put a great deal of priority on economic development and was concerned about the possibility of welfare dependency, was keen to minimise the financial burden of the state and to introduce the programme incrementally. Regarding labour policy, the authoritarian developmental state systematically sought to maintain competitive advantage due to low labour costs through political exclusion and economic mobilisation of labour. Yet, it should be noted that the repressive labour controls of the state were exercised together with some appeasing measures to low waged workers. With a shift of economic developmental strategy to the HCI, the developmental state placed more emphasis on technical and vocational education in order to respond to the changing labour demands of heavy and chemical industries. Thus, the state played an important role in fostering the HCI by enhancing the level of skills among the labour force required in heavy and chemical industries. Consequently, there is no doubt that the predominance of economic development driven by the HCI in the policy-making process significantly influenced the form and content of social policy in the 1970s.

6

Stabilisation, liberalisation and social policies: 1980–1992

The era of the authoritarian Yushin regime ended with the assassination of President Park by his henchman, the chief of the KCIA in October 1979 (Clifford, 1994: ch.10). After a short period of political turmoil, the Korean people experienced another authoritarian state, the Chun regime, for seven years. At the end of this term, the Chun regime faced massive civil protests for democracy, and thereafter Korea witnessed unprecedented democratic transition along with the emergence of the Rho government in 1988. These two governments employed quite different economic policies from those of the Park regime; these new policies were characterised by stabilisation and liberalisation measures. In this chapter, I will examine the changes in economic and social policy under the Chun and Rho governments, together with the policy linkages between them.

Policy legacies of the 1970s The big push driven by the HCI Plan resulted in an industrial consolidation in the Korean economy. By 1981, the share of heavy and chemical industries in the total value-added amounts of manufacturing rose to 54.1 per cent from 41.8 per cent in 1970. The export growth of heavy and chemical industries was more striking, showing a rise of their proportion in manufacturing products from 17 per cent in 1970 to 47 per cent in 1981 (KDI, 1982: 39). The driving force for the development of the Korean economy was transformed from labour-intensive light industries to heavy and chemical industries over the 1970s. As the 1970s came to the end, however, Korea experienced the most serious economic situation since 1962 when the Economic Development Plan was launched. Between 1979 and 1981, GNP growth rates, which had been almost an annual average of 10 per cent between 1962 and 1978, dropped to just over 3 per cent, with the first negative growth since the end of the Korean War (–6.2 per cent in 1980). At the same time, soaring oil import bills and interest payments brought about a rapid accumulation of foreign debts, raising the debt/GNP ratio from 28.5 per cent in 1978 to 53.5 per cent in 1982. The current account deficit also increased fourfold between 1978 and 1981, from US$1.1 billion to US$4.4 billion (EPB, 1982: 57). It is widely agreed that this economic recession was greatly affected by the world economic malaise at the end of the 1970s associated with the second oil crisis.

106 Stabilisation and liberalisation: 1980–1992 However, a more fundamental reason for this crisis was associated with the way heavy and chemical industries were developed during the 1970s. That is to say, the process of capital allocations in which the state actively mobilised domestic and foreign capital and allocated it in a preferential form called ‘policy loans’ to large firms in heavy and chemical industries contained the seeds of its own destruction. It can thus be said that the economic crisis at the end of the 1970s was the result of state interventions in the HCI period. First of all, the Korean economy became more vulnerable to the world economy, as many of the heavy industries were financed mainly by foreign loans. Consequently, the Korean economy became more likely to be affected by the economic recession of the world economy. For instance, heavy machine building and shipbuilding industries had great difficulties in the face of the world economic recession: in 1978 the operation rate in the shipbuilding industry was just 28 per cent and in the heavy machinery industry 62 per cent (KDI, 1995a: 362). At the same time, the financial structures of chaebols became increasingly fragile due to their heavy debts. In 1980, the ratio of debts to equity in the 50 largest chaebol groups was estimated at 524 per cent (Hangukilbo, 24 February, 1985). The Korean economy became more vulnerable in spite of the very success of industrial consolidation. Second, the big push resulted in an over-capacity problem in the heavy and chemical industries, as the government provided firms with a great deal of preferential treatment. This included heavily subsidised credit, fiscal incentives, protection and restrictions on competing foreign investment, and monopoly or oligopoly market positions. Thus, for investors the most secure business was in heavy and chemical industries. Between 1977 and 1979, around 80 per cent of the total investment in manufacturing went into heavy and chemical industries, especially towards the end of the 1970s (J. H. Kim, 1990: 20). The enterprises began to learn that the size of the firm matters for successful business in Korea. Third, the big push caused growing industrial concentration in the Korean economy, together with the growth of chaebols. For instance, the 50 largest chaebol groups, which had accounted for 32 per cent of GDP in 1973, grew dramatically throughout the 1970s so that by 1980 they had expanded to produce 49 per cent of GDP (Haggard and Moon, 1990: 218). There is little doubt that chaebols became so prominent in the Korean economy that they could not easily be dealt with even by the strong state. Finally, the big push also created some social problems, such as a growing concentration of wealth and a widening income gap between rural and urban areas. The ratio of relative poverty, which is measured by the percentage of households with incomes below one-third of the average level of household income, slightly increased from 12.4 per cent in 1976 to 13.3 per cent in 1980 (Suh, 1985). In addition, the ratio of farm household income to city wage earner’s income in current and constant prices deteriorated during the HCI period, from 87.5 per cent and 98.6 per cent respectively in 1973 to 84.7 per cent and 74.7 per cent respectively in 1979 (Choo, 1982: 4). Furthermore, the indifference of the state to the provision of social welfare during the 1970s significantly contributed to the deterioration of income distribution.

Stabilisation and liberalisation: 1980–1992 107 In summary, during the period of the HCI, the state and businesses, notably chaebols, were rolled into ‘Korea Inc.’, forming a symbiotic relationship. The role of the state as a director in the industrialisation process became more evident and the chaebols played the main role in implementing the HCI in return for a great deal of preferential treatment from the state. As a result of these unique development features, the chaebols became more powerful groups not only in the economy but also in politics.

Democratic transition and the growth of chaebols During the 1980s, Korea experienced a continuing transformation of the political system characterised by a change from authoritarianism to democracy. At the same time, the economic growth in the 1980s, especially during the second half of the 1980s, was associated with the significant growth of chaebols, which created a new state–business relationship. I will next examine the path from authoritarianism to democracy in Korea and then discuss the evolving relations between the state and the chaebols. From authoritarianism to democracy According to the ‘Transitions’ project led by O’Donnell and Schmitter, it is maintained that although international factors, directly and indirectly, may condition and affect the course of transition from authoritarian rule, the major participants and the dominant influences in every case have been national (Lowenthal, 1989: ix). In other words, such transitions are conditioned and shaped by concrete historical circumstances. In this sense, the transition of Korea from authoritarian rule should have unique features. The following discussion about the transition from authoritarianism in the 1980s intends to show what the main factors were in the breakdown of the authoritarian regime and what the result of it was. Not surprisingly, the first few months after President Park’s assassination were a time of euphoria in Korean society, with the expectation of democracy; this period was called ‘the Spring of Seoul in 1980’. Choi Kyu-hah, the prime minister who had become acting president after the assassination of President Park, was elected as the new president on 6 December 1979. Yet, the Choi government’s inability to manage socio-political and economic crises soon invited another military coup led by General Chun Doo-hwan on 17 May 1980.1 He imposed martial law on the whole nation, under which all political activities were banned. All universities were closed and occupied by the military and all media were severely censored. Futhermore, the country witnessed a tragic massacre at Kwangju in South Cholla Province just after the announcement of this martial law.2 Chun’s violent path to power left a bloody stain on his regime. Just like his predecessor, Park Chung-hee, Chun established the Special Committee for National Security (SCNS) on 31 May, paving the road to power, and finally became president in September 1980 under a new Constitution. The Chun regime did little to change the authoritarian rule of the Park regime. There were a number of political and institutional similarities between them: a

108 Stabilisation and liberalisation: 1980–1992 powerful executive, a weak legislature and a president willing to suppress all opposition in order to achieve his political and economic goals (Haggard and Collins, 1994: 81). If anything, the authoritarian rule over society became harsher under the Chun regime. For instance, plain-clothes police posing as students frequented college and university campuses to spy on student activities and immediately thwart any kind of demonstration until the end of 1983. More student activists were arrested, sentenced to jail terms, and expelled from colleges and universities during the seven years under the Chun regime, when compared to the previous eighteen years under the Park regime. Social movements, including labour movements, were also strongly repressed so that they were no threat to the authoritarian Chun government. However, the general election of February 1985 marked a crucial point for the public to express their opposition to the government. Although the ruling Democratic Justice Party (DJP) retained its control of the National Assembly with only 35.3 per cent of the popular vote, this result demonstrated the people’s evaluation of the Chun government (Koh, 1985: 888). In particular, corruption surrounding President Chun became intolerable for the people: his wife’s relatives had systematically enriched themselves; his brothers were looting state organisations and extorting money from private businessmen (Clifford, 1994: ch. 14). After the general election, the main opposition party, the New Korean Democratic Party (NKDP), which was led by an alliance of the two Kims, that is Kim Young-sam and Kim Dae-jung who both later became presidents, launched a campaign for the revision of the Constitution, mainly incorporating direct election to the presidency. This campaign was accelerated by the active student movements in 1987. Chun’s response to the movements was harsh and ferocious, bringing about the deaths of several students.3 June 1987 witnessed a big explosion of the largest and most prolonged civil protests in Korean modern history. Finally, on 29 June 1987, the Chairman of DJP, Rho Tae-woo, another ex-general, who had conspired with Chun in 1979 and was earmarked as a presidential candidate by Chun, made a surprise concession, accepting all the demands of the opposition groups, which was called the ‘6.29 Declaration’. It included not only direct presidential elections but also measures to release political prisoners, to restore Kim Dae-jung’s civil rights and to remove restriction of the press. Rho tried to distance himself from Chun by announcing that if Chun refused to support his proposals he would resign as a presidential candidate. There was no option for Chun, who was maintaining his legitimacy mainly by emphasising a peaceful transfer of power by a single-term presidency; he was forced to adopt Rho’s proposals (Cotton, 1989: 253). From the ‘6.29 Declaration’, Korea started to experience political liberalisation. In particular, labour movements seized this turning point. Just after 29 June 1987, as if labour had been waiting for the right moment, massive labour strikes immediately broke out on an unprecedented scale; more than three thousand disputes erupted during the period between July and August involving more than one million workers all over the country. White-collar union mobilisation also occurred among employees of banks and other financial institutions, followed by

Stabilisation and liberalisation: 1980–1992 109 more aggressive unionisation struggles among workers employed in intellectual occupations – journalists, school teachers, and researchers employed in governmentsponsored research institutions (Koo, 1991). The disputes ushered in a tremendous growth of new trade unions; the number of unions nearly tripled from 2,658 in 1986 to 7,846 in 1989 (see Table 6.1). Union membership also increased by about one million during the same period and thus the unionisation rate reached 23.4 per cent, its highest ever level, in 1989. Furthermore, a new trend of democratic trade unions outside the government-sanctioned labour organisation, the FKTU, emerged. In January 1990, the leaders of democratic labour movements organised a national-level labour organisation, the National Council of Trade Unions (hereafter NCTU), proclaiming a democratic labour movement in direct challenge to the FKTU. These changes certainly plunged the old system of authoritarian capital–labour relations into an open crisis, which meant the end of forced industrial peace imposed by repression and state controls. Following the ‘6.29 Declaration’, in December 1987 there was the first direct presidential election in seventeen years, which Rho won by gaining 35.9 per cent of the popular vote. This victory owed much to regionalism as well as fragmentation of the opposition party (S. J. Han, 1988; Cotton, 1989). The general election of April 1988 largely reproduced the results of the presidential elections due to the fragmentation of the opposition parties. Yet, it presented a National Assembly dominated by the opposition parties for the first time in Korean politics. It was a clear institutional change, which would play the role of a new veto point in the government policy-making process. In January 1990, however, an unexpected merger between the ruling party and two moderate opposition parties took place, creating a grand ruling party, the Democratic Liberal Party (DLP).4 It was mentioned by President Rho that ‘the present four-party system has been found to be incapable of effectively meeting domestic and international challenges confronting the nation or of furthering the Table 6.1 Labour disputes in the 1980s Year

No. of unionised labour (000s)

No. of unions

Unionisation (%)

No. of labour disputes

No. of labour involved (000s)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

966.7 984.1 1,009.8 1,011.0 1,004.3 1,035.8 1,267.4 1,707.4 1,932.4 1,886.8 1,803.4 1,734.5

2,141 2,194 2,238 2,365 2,534 2,658 4,086 6,142 7,861 7,676 7,656 7,527

19.6 19.1 18.1 16.8 15.7 15.5 17.3 22.0 23.4 21.7 19.8 18.5

186 88 98 114 265 276 3,749 1,827 1,616 322 234 235

34.6 9.0 11.1 16.4 28.7 46.9 1,262.2 293.4 409.1 135.9 175.0 105.3

Source: KLI, Labour Trend Analysis, 3/4, 1993.

110 Stabilisation and liberalisation: 1980–1992 goal of shaping a bright future for the country’ (Rho, 1990: 172). Due to a grand coalition, Rho could overcome a weak political structure characterised by the opposition-dominating National Assembly and pave the road for stable governing. The negative effect of this merger on the democratisation was obvious, as we will see. Although there was not a change in political power from a ruling party to an opposition party, Korean politics experienced a significant increase in social pressure on the government, which has been described as ‘the maturity of civil society in Korea’. Now the state could no longer disregard the growing social pressures. Towards the chaebols’ republic? The chaebols, which had rapidly expanded their sizes under the HCI Plan during the 1970s, were already dominant economic forces in the Korean economy in the early 1980s. Their voices became louder and louder in the policy-making process and thus state dominance was no longer sustained. At the same time, the seemingly limitless concentration of economic power in the hand of chaebols was increasingly criticised by the public. ‘The chaebol’s Republic’ might well capture the reality of the growth of chaebols. I will here try to find some evidence for the growth of chaebols in the 1980s and discuss the practical foundations of their increasing power. The first proof for the growth of chaebol power can be found in the very early stage of the Chun regime. The Chun government in its early term tried to make adjustments in the heavy and chemical industries in order to solve the problems of over-capacity and excessive competition. Yet, the government met serious objections from some chaebols, which we will discuss in the next section, as the adjustment plan itself inevitably created winners and losers among the chaebols (Rhee, 1991: ch. 10). Thus, the adjustment plan failed to be implemented, suggesting that the chaebols were now so prominent in the Korean economy that they were able to challenge state decisions. The chaebols increasingly became an important voice in demanding the reduction of state intervention in the economy. The 1981 annual report of the FKI officially claimed the necessity of the establishment of a civilian-led economy: We must quickly establish a civilian-led economic management and control system which will enable us to benefit from the rules of the market economy most efficiently. We must actively seek and adopt the opinions and expertise coming from various corners of our society, and in particular from the business leaders. (FKI, 1981: 79) The chaebols did not need a state-led economy any more. Yet, this did not mean that the chaebols became independent from the government. Rather, the government still retained the power of controlling the financial system so that credit control could be used at any time as a measure of disciplining business, as can be seen from the collapse of the Kukje business group, the seventh biggest chaebol group, in 1985 (Clifford, 1994: ch. 16).

Stabilisation and liberalisation: 1980–1992 111 The voice of chaebols was getting louder and more open under the Rho government. At the 1988 New Year press conference, the FKI’s new president, Ku Cha Kyong, who was the chair of the Lucky Gold Star chaebol group, declared that a free market with minimal state intervention was the only way in which Korea could become a developed country. He claimed that ‘the private sector will no longer agree with every state policy. We will voice our objections loudly and clearly when we do not agree with the policies’ (K. M. Kim, 1988). The direct participation of business in politics would be the most prominent indicator of the growing power of chaebols in Korea. Chung Joo-yong, the patriarch of Hyundai business group and Korea’s most influential businessman, established a new political party aimed at the establishment of a liberal economy in the face of the 1992 general election. He firmly accused the government of diminishing the competitiveness of Korean firms through its regulations and interventions in the economy. His party won 25 per cent of the National Assembly seats, making a public plea for ending state interventionism. He even ran himself as a presidential candidate of his party in the 1992 election. That was obviously a symbolic event showing the changed state–business relations. How did the chaebols voice their objections loudly in the 1980s contrary to the 1970s? It is clear that their dramatic growth enabled them to do so. Table 6.2 shows that the four largest chaebols continued to expand during the 1980s, recording an annual average growth rate of some 20 per cent. In particular, the favourable international market in the second half of the 1980s significantly contributed to the expansion of chaebols. Given the fact that by 1987 the share of sales from the five largest chaebol groups comprised 75.2 per cent of manufacturing GDP (E. M. Kim, 1997: 183), it is no exaggeration to say that the Korean economy became more dependent on the chaebols. Table 6.2 also illustrates that one of the most striking features surrounding the growth of chaebols in the 1980s was that the financial service sector substantially led the remarkable growth. More than one-third of total assets were in financial service sectors in the case of the four largest chaebol groups. This distribution of total assets reflected the features of the Korean financial system where the state prohibited the chaebols from having ownership of a bank. Thus, non-bank financial institutions

Table 6.2 Basic indicators in the four largest chaebol groups, 1981–8 Chaebol

Daewoo Samsung Hyundai Lucky Gold Star

No. of firms 1981

1988

21 22 24 20

33 41 33 54

Annual growth rate %

Distribution of total assets % Light

Heavy

Services (financial)

18.8 25.0 15.3 21.3

0.3 9.7 0.9 0.2

37.5 33.6 43.0 52.1

62.3 (38.7) 56.7 (44.9) 56.0 (24.8) 47.7 (36.1)

Notes: Rank order based on total assets in 1988. Distribution of total assets are for 1988. Source: Bankers Trust Securities Research 1989, in E. M. Kim, 1997: 186–7.

112 Stabilisation and liberalisation: 1980–1992 Table 6.3 Distribution of sources of funds raised by the corporate sector (%)

Internal funds Equity Debt security Borrowing from banks Borrowing from non-banks Government loans Foreign borrowings Trade credits

1975–9

1980

1985

1989

26.6 13.4 5.4 18.4 10.5 1.3 11.8 12.6

18.3 8.9 9.8 17.0 12.4 2.2 13.6 17.8

39.8 7.8 10.5 21.3 12.5 0.1 0.4 7.5

27.1 19.2 22.3 11.4 16.0 –0.1 –0.4 4.4

Source: BOK, National Accounts, 1990.

were not only very lucrative businesses but also critical for the chaebols in their efforts to become less dependent on the domestic banks and the state. In fact, non-banking institutions enabled the chaebols to be more flexible with cash flow problems. Table 6.3 shows that in 1989, non-bank financial institutions were expanded to make a bigger contribution to the funds raised by the corporate sector rather than the banks. In particular, in 1989 around 70 per cent of the funds raised by the corporate sector were allocated by internal funds, equity and securities. Only 11.4 per cent of total funds raised was appropriated from banks. As a result, the chaebols did not need to rely solely on state support for their growth and could therefore raise their voice against the state. They actively demanded policy changes and even defied the state policies. That implies that the state now had to gain the consent and co-operation of chaebols in order to implement its policies. Statedominated relations with businesses no longer existed. In short, the political development from authoritarianism to democracy in Korea was generally driven by increased social demands for political participation and the willingness of the political elite to respond to them. In other words, the democratic transition in Korea seemed to occur not as a by-product of modernisation but a result of the strategic behaviour of political actors embedded in concrete historical situations. Thus, it might be said that political development was a continuing process reflecting the relationships between the state and society. This change of the political system had an influence on state policies. In addition, the dramatic growth of chaebols’ power in the economy and politics significantly limited the state’s discretionary power to propel its own economic policy. These institutional changes removed certain policy options that had been used in the past, either by limiting the government’s discretionary power, or simply by raising their political costs. In fact, the state was no longer insulated from wider social forces.

Economic stabilisation and liberalisation In the face of economic crisis at the end of the 1970s, the EPB finally announced measures for economic stabilisation on 17 April 1979, which represented a fundamental break from the style of economic management of the last two decades.

Stabilisation and liberalisation: 1980–1992 113 Stabilising prices, restraining the budget, reorganising heavy and chemical industries, reforming financial institutions, and protecting the poor were scheduled to be pursued, which went in general in an opposite direction to state-led expansion policies (EPB, 1979, in KDI, 1995a: 358–66). However, the political turmoil that was accelerated by the assassination of President Park forced stabilisation measures to be held off. Stabilisation policy was again revived by Chun’s strong push for anti-inflation. He firmly proposed a purification of society (Saheijonghwha) by eliminating ‘three negative social malaises’: corruption, lack of civic-mindedness, and inflation (Clifford, 1994: 164–7). Chun’s views were clearly reflected in the Fifth Five-Year Plan (1982–6) in which stabilisation and structural adjustment were adopted as the main objectives of economic policy (EPB, 1981, in KDI, 1995a: 406–9). Structural adjustment was sought in heavy and chemical industries as well as liberalisation. Yet, the timing and contents of stabilisation and structural adjustment were conditioned by the institutional configuration that we discussed in the last section. I will next look at the evolution of stabilisation and structural adjustment in order to highlight the changing role of the state in the economy. Economic stabilisation Despite Chun’s personal commitment to stabilisation, the new government was not able to resume strong stabilisation measures until 1983 due to severe recession and unemployment. The expansionary stance still led fiscal and monetary policy. The new government also started a gradual reduction in interest rates, from 24.5 per cent in January 1980 to 10.0 per cent in June 1982 (EPB, 1980, 1982, in KDI, 1995a: 371, 426). However, this expansionary stance was soon replaced by a stabilisation stance along with President Chun’s announcement over the squeeze on the budget of 1984: The new year’s budget will be in the black for the first time in the nation’s fiscal history because expenditures in the general account will be frozen at this year’s level and the present tax rate structure left unchanged. This reflects the government’s intention that public finance takes the lead in establishing stability, a top priority in economic policy. The government has also made an epochal improvement in finances as a whole, encompassing not only the general account but also the special accounts and various funds. (Policy Statement, 24 October 1983, in Chun, 1984: 39) The Chun government thereafter actively pursued economic stabilisation mainly by implementing three measures: tightening the government budget, limiting monetary growth, and restraining wage increases (EPB, 1983: 355–69: Haggard and Collins, 1994). First of all, the government introduced a so-called ‘zero-base budget system’ for the tight control of the government budget. Table 6.4 shows that the squeeze on the budget substantially succeeded in a reduction of the government deficit.

114 Stabilisation and liberalisation: 1980–1992 Table 6.4 The size of government budget and the fiscal balance (% of GNP) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Size 28.7 27.6 26.4 25.3 25.4 24.8 23.3 23.5 23.6 26.2 28.9 36.7 Balance –4.6 –4.4 –1.6 –1.4 –1.0 –0.1 0.2 1.3 –0.0 –0.9 –1.9 –0.7 Note: The size of government budget includes central government and local governments. Source: MOF, Korean Fiscal Statistics, various years.

Table 6.5 M2 annual growth rate 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 M2

25.0 27.0 15.2 7.7

15.6 18.4 19.1 21.5 19.8 17.2 21.9 14.9

Source: BOK.

The rate of the government deficit as a percentage of GNP dropped down from 4.6 per cent in 1981 to 0.1 per cent in 1986, and for the first time Korea claimed a surplus budget in 1987. This success was largely attributed to cutting the budgets for the general administrative sector, mainly by squeezing wages of public officials, as well as for the economic development sector (EPB, 1984: 88–93). Additional cuts were substantially made in special accounts, noticeably in the Grain Management Fund, which had provided subsidies for farmers since 1969 by running a dual price system (Braverman et al., 1983). Consequently, the government budget as a share of GNP gradually declined, from 28.7 per cent in 1981 to 23.3 per cent in 1987 and then remained at around 23 per cent until 1989. Second, monetary policy, in particular credit, became an important component of stabilisation. Table 6.5 shows that the broad monetary growth rate (M2) declined from 27 per cent in 1982 to 15.2 per cent in 1983, but dramatically dropped to 7.7 per cent in 1984. In reducing credit growth, from 1982 the government abolished all preferential lending rates for policy loans, such as export loans, the Machinery Industry Promotion Fund (MIPF) and the National Investment Fund (NIF). Thus, the interest rates on all bank loans unified at around 10 per cent in June 1982, though the preferential access to credit for special groups of borrowers continued (EPB, 1983: 43). Despite the reduction of interest rates for bank loans, historic levels of low inflation were accomplished after 1982 mainly by maintaining the positive loan interest rates in real terms. The government’s tight monetary policy inevitably met with a lot of criticism from businesses. For instance, FKI began a campaign to reverse this policy in late 1983 by arguing that tight monetary policy would depress investment and thus limit the economic recovery (FKI, 1983). Given the size of chaebols and their role in the Korean economy, it was impossible for the government to ignore their financial difficulties (Haggard and Collins, 1994: 91–2; Haggard and Moon, 1990: 228–9). After the bankruptcy of Kukje group, the seventh largest chaebol in 1985, the tight financial policy was lifted in order to increase investment (EPB, 1985, in KDI, 1995a: 449).

Stabilisation and liberalisation: 1980–1992 115 As a result, M2 dramatically increased to 15.6 per cent in 1985 and then remained at around 19 per cent for most of this period. Nevertheless, it is undeniable that the government sought economic stabilisation by tight monetary policy during 1983–4. Third, the government used wage policy as a component of economic stabilisation. A remarkable wage growth from 1976 to 1979, running far ahead of productivity growth rates, was criticised as being a main source of the country’s soaring inflation. The Chun government thus played a more active role in the wagesetting process by imposing guidelines on wage increases and reforming industrial relations in order to restrict wage growth. Yet, this government’s efforts to restrict wage increases did not always work. As Table 6.6 shows, in 1982 and 1985 the growth rates of real wages were higher than the growth rate of productivity. Nevertheless, the commitment of the Chun government to wage restraints as a component of stabilisation was unquestionable. After all, the price stabilisation was largely successful in the Chun government. Table 6.6 illustrates that the GDP deflator dramatically declined from 17.3 per cent in 1981 to 6.8 per cent in 1982 and then stayed near 5 per cent annually until 1988. Yet, it once again went up to two figures from 1989, which implies that, despite President Rho’s strong priority on price stabilisation (Rho, 1990: 188), the Rho government failed to implement stabilisation measures. This fact raises an interesting question of why the Chun government succeeded in economic stabilisation but the Rho government did not. As many observers pointed out (Haggard and Moon, 1990; Haggard and Collins, 1994), this resulted from institutional differences. That is, the Rho government had a lack of policy options due to increased social pressures brought about by democratisation. Significant wage increases, which were prompted by labour union movements and averaged 11 per cent in real terms between 1988 and 1991, caused tremendous inflationary pressures. The process of political democratisation also presented social demands for the increase of welfarerelated expenditure. The stabilisation measures proved to be a failure under the Rho government. Economic liberalisation In conjunction with economic stabilisation, the Chun and Rho governments undertook several policy measures towards economic liberalisation. It is a wellknown story that the liberal economic technocrats close to President Chun strongly Table 6.6 Annual growth rates in real wages, productivity and GNP deflator 1981 1982 1983 Wages –0.8 Productivity 2.8 GNP deflator 17.3

8.7 2.0 6.8

7.6 9.0 5.6

1984 1985 1986

1987 1988 1989 1990 1991 1992

6.4 7.7 5.4

7.1 7.9 6.9

6.8 0.1 4.7

5.5 7.7 4.8

8.3 8.1 5.3

15.4 10.2 2.2 6.0 10.0 10.2

Notes: Wages is average growth rate of real wage in whole industries. Productivity is average growth rate of productivity in whole industries. Sources: MOL; BOK, National Accounts, various years.

8.2 9.0 5.2 2.1 10.2 6.1

116 Stabilisation and liberalisation: 1980–1992 criticised the big push of the state in the 1970s, arguing for a free and competitive economy through implementing liberalisation measures (Michell, 1981; Lee, 1991: 257–62; Clifford, 1994; 177–85). The liberalisation measures, which by and large were concerned with financial and import liberalisation, meant a departure from the previous developmental strategy of Korea during the last two decades characterised by a state-led economy. I will here look at the evolving process of economic liberalisation during the Chun and Rho governments. Financial liberalisation is in general related to the opening of financial markets and deregulation of financial systems. Under the Chun government, liberalisation over capital flows, including inward and the outward capital, hardly occurred. There was a measure to expand the permitted area for foreign direct investment in 1984, although the government nominated a few non-permitted areas (EPB, 1984, in KDI, 1995a: 439). This negative attitude in general remained intact during the Rho government. Yet, in the face of growing international pressures, in particular from the USA for the opening of more financial markets, the Rho government inevitably began to lower the tight controls of the state on capital flows from the late 1980s (EPB, 1988, in KDI, 1995a: 511). From July 1992, the government first allowed foreigners to buy and sell directly on Korea’s stock exchange, but subject to a ceiling on the amount of foreign ownership in any particular industry or firm (EPB, 1991, in KDI, 1995a: 597–9). Yet, liberalisation in the other financial sectors, including FDI, was due to take place according to a long-term plan (EPB, March 1992, in KDI, 1995a: 626–9). Thus, the process of financial liberalisation under the Rho government was halting and partial. It is noteworthy that the financial liberalisation proceeded by the deregulation of the financial system. The first deregulation measure under the Chun government was implemented with the privatisation of commercial banks from 1981, in which the government had owned a majority of stock (EPB, 1984: 129–31). However, this privatisation did not represent a banking system. Ceilings were still imposed on the shares of commercial banks (a single shareholder might hold less than 10 per cent) as well as on the loans available to the specific chaebols (EPB, 1985, in KDI, 1995a: 445). Management of banks also continued to be under the state’s control through retaining its right to appoint bank directors. Furthermore, the government still set financial prices, decided policy loans and influenced who should receive credit allocation. Thus, although Korea’s commercial banks became privatised, they were still under the control of the state. This obviously reflected the reluctance of the Chun government to give up its control of a financial system that might be the most powerful instrument for the predominant position of the state. A significant increase in real interests and a drying up of foreign credit during the first half of the 1980s increased the need for liberalisation. In particular, the chaebols increasingly wanted the liberalisation of the financial system so that they could get greater control over capital and investment (Amsden and Euh, 1993: 380). In December 1988, the MOF was no longer empowered to set a ceiling on interest rates or to earmark subsidised credit for special borrowers. Yet, the MOF still prevented interest rates from rising too high and still had influence over the appointment of bank directors. Moreover, the MOF intervened in loan allocation on the grounds

Stabilisation and liberalisation: 1980–1992 117 that the government had to lead the industrial adjustment by providing preferential access to bank loans for special borrowers. It is thus important to note that despite some financial deregulation, the Rho government still retained a great deal of influence on the allocation of resources, which significantly constrained the progress of financial liberalisation. The Chun and Rho governments both proceeded with import liberalisation, which had begun after 1984. The government took a major step to remove the protection measures in 1989 that had been one of the main pillars buttressing the Korean developmental state. The government began to shift large numbers of items from the import restriction list to the automatic approval list. Thus, the latter, which had included 68.6 per cent of imported goods in 1980, expanded to cover 97.3 per cent in 1991, with the exception of some agricultural products (EPB, 1991: 343). In April 1991, responding to the pressure of the US government, the Korean government announced a further liberalisation of 133 agricultural products, or 47 per cent of the total number of 283 products, whose import was still restricted (EPB, 1991, in KDI, 1995a: 579–80). The tariff structure, although less important as a protection measure than quantitative restrictions, was also reformed from a sectoral and specific tariff system to a functional and general system, experiencing general reductions in tariff levels and changes aimed at producing greater uniformity of tariff levels (EPB, 1984: 1936–9). Thus, in 1982 the average level of tariffs stood at 23.7 per cent, but by 1991 tariffs decreased to 11.4 per cent (S. Cho, 1994: 157). Change of industrial policy The very success of economic stabilisation and liberalisation measures affected industrial policy, as they significantly limited the policy instruments for the government to implement sectoral or specific industrial policy. Indeed, the 1980s witnessed a change in the industrial policy that had substantially explained the Korean economic success. During the Chun government, reform of industrial policy was one of the main policy agendas. The new industrial policy was pursued by industrial adjustment, mainly in heavy and chemical industries. For the structural adjustment, substantial modifications were made to the tax system. The tax incentives were changed such that they were no longer designed to support a specific sector. In 1983, the special tax treatments for specific industries, notably in heavy and chemical industries, were terminated with the exception of machinery and electronics industries. Yet, the tax credit rate in these two industries was reduced to 5 per cent from 10 per cent (EPB, 1983: 52). This effort of the government to reform industrial policy was clearly reflected in the Industrial Development Law (IDL), enacted in 1986, which substituted seven special laws to support so-called ‘strategic heavy and chemical industries’. The IDL by and large emphasised the functional rather than sectoral approach to industrial policy, that is to say, the primary role of the state in industrial development should be limited to technology development and industrial adjustments (G. Kim, 1991). Yet, this law still left enough room for selective industrial policy for industrial adjustment. After the late 1980s, the will to conduct selective industrial policy started

118 Stabilisation and liberalisation: 1980–1992 to decline with the rise of neo-liberal ideology and the growing power of chaebols, which wanted to be free of government regulations. Thus, the intervention of the state in the market was in general transformed from sectoral and industry-specific support to functional and horizontal support (Shin, 1996: ch. 1). In short, economic stabilisation and structural adjustment measures, in particular liberalisation, critically weakened the role of the state as a facilitator or director in the process of industrialisation. In other words, the developmental state in Korea was significantly being eroded. These policy shifts were largely the result of certain structural forces. First, the chaebols became more and more independent, as they no longer needed to depend solely on the state in terms of financing. Second, there were various, increasing pressures by the advanced countries, in particular by the USA, for Korea to facilitate liberalisation in its markets. Third, the democratic transition under the Rho government, which was led by the development of civil society including the growth of labour movements, significantly constrained the government in its choice of policy options for economic development.

Social security: towards a regulator For the first half of the 1980s, social welfare was not part of the main policy agenda. Despite the rhetoric of the ‘construction of a welfare state’ instead of ‘economic development’, the Chun government did not make any significant changes in the social security system except for the incremental expansion of the coverage of the MIP for industrial workers. However, the social security system in Korea experienced a dramatic change after 1988. The MIP finally became a universal scheme in July 1989. The National Pension Programme (NPP) was also put into effect from 1989. In this section, I will first explore the evolution of the social security system in Korea during the Chun and Rho governments, focusing on these two social security programmes. I will then examine the change of social expenditure. Establishment of a universal health service system With several measures to expand the coverage of the MIP,5 by 1987 the MIP covered 50.3 per cent of the population (MOHSA, 1988: Table 101). It was in July 1989 under the Rho government that the MIP finally became a universal scheme when the MIP was launched for the self-employed in urban areas.6 Thus, Korean people came to be covered by either the MIP or Medical Assistance. We will next look at the features of these programmes in terms of organisation, financing and benefits structures, which will give us a clearer picture of the state’s role in health service systems in Korea. First, there were three different types of MIP running in Korea: Type I MIP was for industrial employees, called ‘Enterprise MIP’; Type II was for the self-employed in rural or urban areas, called ‘Regional MIP’; and Type III was for civil servants and private school teachers. Within Type I and II schemes, many insurance societies were established according to individual firms or a group of enterprises and regional

Stabilisation and liberalisation: 1980–1992 119 administrative units (there were 420 societies in 1992). They were all members of the National Federation of Medical Insurance (now Medical Insurance Association). However, each insurance society was financially independent, having different rates of contributions and benefits. On the other hand, Type III was run separately under the charge of the Korea Medical Insurance Corporation. These two quasigovernmental organisations have been responsible for running the MIP, and the state played the role of a regulator rather than a provider. Second, the sources for financing the MIP as a whole consisted of contributions and state subsidies, but their proportions in each programme have been quite different. Table 6.7 illustrates that for Enterprise MIP: premiums were paid equally by both employer and employee. The rate of contribution was different between insurance societies, between 2 and 8 per cent of the basic monthly wage (Medical Insurance Law, 1997: Article 50, 51 and 52). For the Regional MIP, the scheme levied a fixed amount of premiums per household according to their cash income, assets and number of dependants. It is noteworthy that the government subsidised the premiums to the Regional MIP, which accounts for 50 per cent of the total cost including administration costs. This financing method highlights the role of the state in the provision of health services. Generally speaking, as for different health insurance systems under a social insurance model, more subsidies from the state are better in contributing to vertical redistribution. Although it is not easy to compare accurately the financing methods among countries that adopt a social insurance model, I compare Korean MIP with the Taiwanese national health system in Table 6.7 in order to understand the financing method of Korea in a comparative context. This comparison is interesting in that both countries established a universal health service system at the end of the 1980s on a similar basis, namely a health insurance system and a health assistance programme. Table 6.7 shows that the Taiwanese government provided more subsidies for the national health system than Korea. It implies that the Korean Table 6.7 Financing methods of medical systems in Korea and Taiwan in 1996 (%) Korea

Type I Employees Employers Type II Farmers, fishermen Self-employed Type III Government employees Private school teachers

Taiwan

Gov’t

Er

Ee or In

Gov’t

Er

0 0

50 100

50 0

10 0

60 100

30 0

50 50

— —

50 50

70 0

— —

30 100

50 20

— 30

50 50

60 30

— 30

40 40

Note: Gov’t: government; Er: employers; Ee: employees; In: the insured. Sources: Jacobs, 1998: 61; MOHW, 1996b.

Ee or In

120 Stabilisation and liberalisation: 1980–1992 Table 6.8 Share in co-payments of the medical insurance programmes

1977 1979 1980 1986

In case of outpatient care

In case of inpatient care

40% (the insured) 50% (the dependants) 30% 30–50% according to institutions 30–55% according to institutions in cases of total medical fees being more than 10,000 won; in other cases, fixed amounts

30% (the insured) 40% (the dependants) 20% 20% 20 %

Source: MOHSA, White Paper, 1980, 1987.

health insurance system is less likely to satisfy the objective of vertical redistribution in spite of having the same kind of institution as Taiwan. Third, the MIPs in Korea adopted a co-payment scheme. What is striking in Table 6.8 is that the patient should pay a very high proportion of the medical service fees. As for outpatient care, the co-payment rate dramatically increased from 30 per cent in 1979 to 50 per cent in 1980, and in 1986 it was raised once again raised to 55 per cent. The high rate of the patient’s co-payments in Korea was evident when compared with Taiwan. In Taiwan, co-payments apply to most patients and treatments, but they account for 6 per cent of health facilities’ revenue (Jacobs, 1998: 131). Thus, despite the universal health service system in Korea, the high rate of co-payments proved to be a considerable barrier for the health services. There was also a problem of high co-payments in Medical Assistance (MA), which has been a social assistance programme in Korea since 1977. Table 6.9 shows that, though beneficiaries of the MA do not pay premiums, they have to pay their share of the co-payments for medical services, except for Type I accounting for 24.1 per cent of the total beneficiaries. In the case of in-patient services, they should pay 20 per cent of the medical services fees, just as the patient in the MIP should do. In addition, until the MA’s fee schedule matched the MIP’s fee schedule in 1990, it was common for them to be unkindly treated by the medical institutions, as there were differences in the service fees between patients covered by the MA and patients covered by the MIP. For example, in 1989 this difference accounted for 10 per cent (MOHSA, 1996). As a result, patients from low-income groups, though they were exempted from paying premiums, had difficulty in accessing medical services. Consequently, despite there being a universal national health system since 1989, Korean people have had to pay nearly one half of their total medical expenses directly out of their own pockets. Table 6.10 shows that among the five selected countries, Korean people paid the highest private cost for health services. Korea was higher than Japan and Germany, which both adopted social insurance models, not to mention Sweden and the UK, which both provide national health services financed by general taxation. Needless to say, such a high private burden in Korea

Stabilisation and liberalisation: 1980–1992 121 Table 6.9 Medical Assistance system in 1992 Category

Type I

Type II

Type III

Eligibility requirements

– Income less than 80,000 won per person per month under the scheme of in-house protection for handicapped people – Inmates of social welfare institutions – Persons who suffer as a result of national disasters – Patriots and human cultural properties Free

Those who qualify for livelihood protection assistance with income less than 100,000 won per person per month

Medically indigent with income less than 120,000 won per person per month

– Outpatient services: free – Inpatient services: 20% in a case of less than 100,000 won and otherwise available with government loan

– Outpatient services: 44% – Inpatient services: 20%

24.1

63.4

12.5

Cost-sharing

Proportion Total =100%

Notes: In 1994, Medical Assistance was divided into Type I and Type II but, in the case of Type II, cost sharing was basically intact so that the co-payment of Type II for outpatient services was 1,500 won and inpatients 20%. The exchange rate of won to US$ in 1992 was 780 won. Source: MOHSA, White Paper, 1992.

Table 6.10 Health expenditure of selected countries in 1990

% of GDP Per capita (US$) Public (%) Private (%)

Sweden

UK

Japan

Germany

Korea

8.79 2,520 89.3 10.7

6.11 1,039 84.9 15.1

6.45 1,538 74.5 25.5

8.73 1,511 72.7 27.3

6.61 365 41.1 58.9

Source: NSO, 1995.

reflected not only the high co-payment rates of the patient but also the low level of state subsidies in the MIP. Despite its small financial contribution to the MIP, however, the state strengthened its role of regulator with respect to the health system. Medical service providers

122 Stabilisation and liberalisation: 1980–1992 claimed medical fees from the insurance associations (NFMI and KMIC) according to the fee schedule decided by the MOHSA, which set a fixed fee for each item of service and medicine (Medical Insurance Law, 1997: Articles 29, 35). Introduction of the National Pension Programme After a lapse of fifteen years from the legislation of the National Welfare Pension Law (NWPL) in 1973, the National Pension Programme (NPP) finally came into effect. Yet, the NPP took effect only with employees of firms with ten or more workers at first. This condition was reduced to cover those in firms with five or more in 1992. From that time, the self-employed including farmers and fishermen were allowed to join the NPP on a voluntary basis. Nevertheless, by 1992 the number of those covered by the NPP or occupation-based pension schemes for civil servants and private school teachers was only 33 per cent of the economically active population aged over 15 years (KIHASA, 1996a: 314). Despite the introduction of the NPP, the majority of people were still excluded from pension schemes. The main features of the NPP had already been decided in the NWPL of 1973, as we discussed in the last chapter: adopting a social insurance model without the basic state pension; a funding system; and no subsidies from the state for the pension fund. Indeed, the government established the National Pension Corporation as a quasi-governmental organisation to run the NPP independently in terms of finance. The contributions were charged equally to employer and employee at a fixed rate, 1.5 per cent of the monthly wage of the insured until 1992. This rate was due to rise to 6 per cent over the next five years from the beginning of 1993: 2 per cent from the employee, 2 per cent from the employer and the rest from the severance reserve fund built up by companies. The financial burden of the state was limited to the administration costs. Regarding benefits, there have been three kinds of benefits under the NPP: oldage pension, invalidity pension and survivor pension. The full old-age pension will be paid only to the insured who have made contributions for more than 20 years and reach 60 years old (NPPL, 1995: Article 56). Thus, the full old-age pension will start from 2008.7 The amount of pension received consists of two parts: a basic amount and an additional amount. The basic amount is decided according to the average monthly wages of all insured persons, which aimed at income redistribution, and the average amount of the monthly standard wages of insured individuals, which aimed at income proportional distribution. Thus, the National Pension Scheme can be said to combine the earnings-related system with the re-distributive benefits schedule. Monthly Pension Formula = 0.2 (A + 0.75 B) * (1 + 0.05N) Note: A is the average monthly wage of all insured in the NPP during the last year; B is the average monthly wage over the contribution period of the pensioner; N is the number of contribution years – 20.

Stabilisation and liberalisation: 1980–1992 123 According to this formula, the NPP was designed to provide a pension amounting to 70 per cent income replacement for the retired person paying contributions for 40 years. This rate was very generous, given a pension age of 60 years old as well as a contribution rate of 3 per cent of monthly wage. Thus the NPP faced the possibility of long-term financial difficulties due to its inappropriate institutional design. Analysis of social expenditure The development of the social security system under the Chun and Rho governments was clearly reflected in social expenditure. Table 6.11 shows the trend of social expenditure. The most notable change in its composition was an increase in social security but a decline in education. Between 1983 and 1992, the share of education in social expenditure was significantly reduced from 70.7 per cent to 54.8 per cent, whereas the share of social security rose from 17.8 per cent to 34.4 per cent. These figures imply that, though education still remained a dominant area in social policy, the governments, especially the Rho government, increasingly put more emphasis on social security. Yet, the proportion of social expenditure in the total government expenditure remained pretty much the same, at around 30 per cent. The trend of social security spending also reflected a change in the welfare system. Table 6.12 illustrates that between 1981 and 1992 the share of social assistance in total social security spending declined from 28.7 per cent to 17.8 per cent, while social insurance increased from 64.7 to 71.5 per cent. The social welfare service was also raised to account for around 10 per cent in the early 1990s. Social security expenditure as a ratio to GDP was also expanded to account for 3.4 per cent of GDP in 1992. Yet, the government spent only 1.18 per cent of GDP on the social security system. This low level of government expenditure implies that the Table 6.11 Trend of social expenditure, 1983–92 Year

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Ratio to Social expenditure (%) governmental Education expenditure (%) Subtotal (billion won) = 100

Health Social security & welfare

Housing & Others community amenities

28.9 27.9 27.6 27.9 28.9 30.4 31.2 32.5 29.6 29.1

5.6 5.1 5.2 5.4 8.1 7.3 6.5 6.0 6.8 3.6

2.5 3.8 3.7 3.1 2.8 3.6 5.0 4.6 6.1 5.2

3,093 3,319 3.686 4,182 4,897 5,918 7,409 9,426 10,565 11,870

70.7 68.0 66.7 64.7 63.5 62.5 59.5 59.9 53.1 54.8

17.8 19.6 20.4 22.7 22.3 24.4 26.7 27.7 32.0 34.4

Source: IMF, Government Financial Statistic Yearbook, 1986 and 1995.

3.3 3.3 4.0 4.0 3.3 2.2 2.2 1.7 2.0 2.0

124 Stabilisation and liberalisation: 1980–1992 Table 6.12 Trend of social security spending, 1981–92 Year

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Social security programme Social insurance

Social assistance

Welfare service

64.7 67.3 67.6 72.1 74.4 73.5 71.5 72.5 72.6 73.0 66.8 71.5

28.7 26.9 25.2 21.9 20.1 20.2 22.7 22.7 21.8 19.8 19.7 17.8

6.6 5.8 7.2 6.1 5.4 6.3 5.7 4.8 5.7 7.3 13.5 10.8

Ratio of SS to GDP

Ratio of gov’t SS to GDP

1.6 2.0 2.1 2.0 2.1 2.0 2.0 2.3 2.6 3.1 3.2 3.4

0.69 0.78 0.78 0.74 0.73 0.73 0.77 0.93 1.01 1.08 1.16 1.18

Sources: See Table 4.12.

Table 6.13 Trend of revenue for the social security system, 1981–92 (%) Year

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Government financing

Quasi-government contribution-financing Subtotal

Employers

The insured

45.2 44.8 42.1 40.2 38.3 38.8 39.6 37.4 36.3 37.1 40.5 37.5

40.8 41.8 44.0 48.0 48.6 48.2 47.8 51.6 52.1 51.1 46.8 48.6

16.3 16.9 16.3 18.6 20.3 20.8 21.3 22.5 22.1 20.8 19.0 20.9

24.5 24.8 27.7 29.5 28.6 27.4 26.5 29.1 29.9 30.2 27.8 27.7

Others

Ratio to GDP

13.9 13.3 13.6 11.7 13.1 12.9 12.5 10.9 11.4 11.7 12.6 13.9

2.3 2.6 2.9 2.6 2.6 2.7 2.7 3.4 3.8 4.1 4.6 4.8

Sources: See Table 4.12.

introduction of the social security system in Korea was not associated with the expansion of the state’s role as a provider. By adopting a social insurance model, the state came to introduce a social security system with a limited financial burden. Table 6.13 shows how the system in Korea was financed. The amount of social security revenue as a ratio to GDP more than doubled from 2.3 per cent in 1981 to 4.8 per cent in 1992. Interestingly, however, the share of government financing in the total social security revenue gradually decreased between 1981 and 1992 in spite of the expansion of the social security

Stabilisation and liberalisation: 1980–1992 125 system. In 1992, the government financed 37.5 per cent of revenue, whereas contribution-financing reached 48.6 per cent. This trend proves the government was keen to develop the social security system on the basis of the beneficiary-burdening principle. In summary, during the Chun regime, the only improvement of the social security system was the expansion of the coverage in the MIP for enterprise workers. However, under the Rho government in 1989 the Korean social security system made a big step forward towards an institutionalised welfare system by realising a universal national health system and introducing the pension programme. Yet, the state played the role of a regulator rather than a provider.

Policy linkages between economic and social policies There was a considerable transformation not only in economic policy but also in social policy throughout the 1980s. The economic stabilisation and liberalisation measures significantly undermined the role of the developmental state in the economy. This change in economic policy had an influence on the development of social policy. In this section, I will discuss social security policy, labour policy, and education and training policy in order to examine the policy linkages between economic policy and social policy during the Chun and Rho governments. Stabilisation and social welfare With the very success of stabilisation and economic recovery under the Chun government, income distribution significantly improved so that in 1988 the Gini coefficient declined to record 0.34 from 0.38 in 1980 (Choo, 1985). S. Kwon (1993) pointed out how stabilisation measures in the Chun government contributed to the amelioration of income distribution. According to him, price stability was not only to have its most beneficial effect on urban wage earners who experienced a steady rise in real incomes due to low inflation rates. It also reduced some of the income distribution gaps by limiting the opportunities for windfall profits in real estates and other speculative ventures (S. Kwon, 1993: 151). However, it should be noted that this improvement in income distribution was not ascribed to the efforts of the state to increase income redistribution. As we have discussed earlier, stabilisation measures tended to impose costs on specific groups, notably wage workers. Moreover, the stringent management of the government budget, which was adopted as a strategy of stabilisation, systematically limited the development of social welfare. In order to prove the incompatible relationship between stabilisation and social welfare under the Chun government, I will next look at policy outputs in the social security system. I will then discuss the policy process of extending the MIPs to the self-employed, including farmers and fishermen, and the administration structure. First, the trend of social security expenditure clearly reflected the incompatible relation between stabilisation and social security policy. For instance, during the period between 1982 and 1987, there was no difference in the ratio of social security

126 Stabilisation and liberalisation: 1980–1992 expenditure to GDP, which accounted for around 2.0 per cent. The burden of the central government was always less than 0.8 per cent of GDP (see Table 6.12). It is no exaggeration to say that during the first half of the 1980s the government, which was systematically pursuing economic stabilisation, made little effort to expand social welfare. Second, there was a significant reduction in the provision of fiscal welfare for farmers in order to cut down the fiscal deficits. The Korean government had run a two-tier price system for rice and barley through the Grain Management Fund (GMF) since 1969, which involved high purchase prices from farmers and low selling prices to urban consumers (Braverman et al., 1983; Y. S. Ha, 1992: 232–5). The result of running this special fund was a rapid increase in the budget deficit. For instance, during the period 1972–9, the GMF deficit reached about 3.1 per cent of total government expenditure or roughly a quarter of the total fiscal deficit (Braverman et al., 1983: 87). It is undeniable that the GMF, which arguably was functionally equivalent to social security policy, substantially contributed to the well-being of farmers during the 1970s when the government provided little social welfare. The GMF, however, dramatically decreased during the first half of the 1980s when the government actively pursued tight budget controls for stabilisation. Table 6.14 shows that the difference between purchasing and selling prices of grain dramatically declined in the first half of the 1980s. In particular, in 1982 sale price was higher than purchase price, which implies that the government was substantially involved in doing business rather than subsidising farmers with respect to running grain management. Third, the policy process surrounding the MIP also illustrates the effect of stabilisation on social security policy. As the government initiated the Regional MIP in pilot programmes in three rural areas in 1981, there were ongoing debates over an alternative structure of the MIP, with two arguments emerging: one supporting the existing co-operative system and the other arguing for the establishment of a new integrated system among insurance societies in which all financing and administration would be run under a new organisation (Yoon, 1984; Y. C. Park, 1985; Cha, 1986). The latter was first raised by one faction in the MOHSA (MOHSA, 1982a, 1982b). According to them, small-scale insurance societies established on the basis of individual firms caused financial instability and differences in benefits and contribution rates among insurance societies, not to mention inefficient management of resources. On the other hand, the integrated system among insurance societies was said to solve the problem of financial instability, to enable the MIP to contribute to Table 6.14 Dual price system for rice in the 1980s (10 won/second class 80 kg) Prices

80

81

82

Buying (A) Selling (B) A–B/A %

3,660 3,200 –12.5

4,575 4,400 –3.8

5,216 5,597 5,328 5,228 2.1 –6.6

Source: KDI, 1995a: 499.

83

84

85

86

87

88

5,597 5,200 –7.1

5,765 5,426 –5.8

6,053 4,900 –19.0

6,416 5,512 –14.0

7,314 4,961 –32.1

Stabilisation and liberalisation: 1980–1992 127 redistribution, and to improve efficiency by realising economies of scale. In addition, the integrated system was said to make it much easier to introduce the Regional MIP. There was a general agreement among social security professionals at that time that the integrated system would be better in realising the principle of social security (Yoon, 1984: 40). In particular, given that the pilot regional programmes were all suffering from financial deficit – for instance in 1983 the ratio of deficit to the collected contributions reached nearly 60 per cent (MOHSA, 1988: 219) – the integrated system appeared to be necessary for the extension of the MIP. When the integrated system was due to be enacted by the Special Committee for Health and Social Affairs in the National Assembly, it was turned down by President Chun (Y. C. Park, 1985: 71–2; Yoon, 1984: 65–73), probably because it would raise the state’s responsibility for MIP and expand its financial burden. The policy objective of stabilisation became a barrier to the reforms of the MIP. It can thus be said that the Chun government’s attitude towards social welfare was not much different from that of the previous government. Under the Chun government, especially in the first half of the 1980s, social security policy was still greatly subject to the needs of economic policy and was thus greatly limited. Towards the end of the regime, however, the social security programme was raised as a response of the state to increasing social pressures, especially increasing labour militancy. The government announced ‘Measures for Improving National Welfare’ in September 1986, in which the MIP was scheduled to extend to rural residents from 1988 and to self-employed in urban areas from 1989. The NPP was also planned to take effect in 1988 (KDI, 1995a: 465). There is no doubt that the democratic transition ensured that these reforms took effect without any delay. As we have discussed earlier, the social security system in Korea, especially during the early period of the Rho government, began to make a significant stride towards an institutional welfare system. This was reflected in the Sixth Economic and Social Development Plan, which had been set in 1986, and was re-established by the Rho government with three objectives: liberalisation, stabilisation and welfare (EPB, 1988: 380–9). In particular, it is noteworthy that with the introduction of the Regional MIP for farmers and fishermen, the government for the first time began to provide subsidies amounting to 35 per cent of total costs needed for the programme. This amount was soon raised to 50 per cent in the face of farmers’ protests regarding the introduction of the Regional MIP (MOHSA, 1988). Why did the state introduce the subsidies for the Regional MIP for farmers and fishermen in 1988? It is true that the increasing pressures from farmers just after the introduction of the Regional MIP in January 1988 forced the government to raise the amount of subsidies. Indeed, there were many occasions where payment of premiums was refused, in protest at the level of government subsidies (Y. M. Kim 1989; R. H. Kim, 1989). Yet, it is misleading to say that the state simply responded to the farmers’ protests regarding the MIP. Rather, the introduction of these subsidies was a response to farmers’ difficulties during the 1980s. In particular, the great reduction of the deficit in the GMF resulted in financial difficulties among farmers. For instance, during the first half of the 1980s, the average amount of debt among

128 Stabilisation and liberalisation: 1980–1992 farming households increased more than fourfold (Y. T. Cho, 1991: 376). Under these circumstances, the government announced special measures for the farming and fishing villages beginning in 1986, focusing on industrialisation and income increase in rural areas (EPB, 1986, in KDI, 1995a: 455–7). One measure aimed to reduce debts in farming and fishing households, providing special loans at a preferential interest rate, 14.5 per cent, to replace private loans with a high interest rate of 24.5 per cent (EPB, 1987, in KDI, 1995a: 472–3). This interest rate was subsequently cut down to 10 per cent and the repayment period extended (EPB, December 1987, in KDI, 1995a: 484). Hence the government had already actively begun to employ a series of special measures for farmers who were among the most adversely affected by stabilisation. Thus, the provision of subsidies with respect to the regional MIP can be understood as a result of the state’s response to deteriorating living conditions of farmers rather than a direct consequence of farmers’ protests. Transition from repressive labour policy to responsive labour policy The requirements of economic stabilisation during the Chun government greatly affected labour policy. As we have discussed already, one of the key elements of stabilisation was a strong wage restraint. An average annual growth rate of nearly 17 per cent in real wages during the second half of the 1970s was blamed for bringing about soaring inflation as well as declining competitiveness. In order to achieve a constraint in wage increases, the Chun regime reorganised wage settlement procedures and tried to weaken the power of trade unions. Shortly after Chun came to power through a coup, leaders of trade unions became a prime target of the government’s purification campaign in the name of the eradication of social malaise. The union movements were gutted that year, with almost 200 union officials purged and more than a dozen sent to the brutal ‘reeducation camps’ (Clifford, 1994: 196–8). The organisational power of labour, which was suppressed by negative economic growth in 1980, was further undermined by the authoritarian controls of the Chun government. The Chun regime kept most of the control measures regarding labour affairs in the Yushin Constitution intact. Furthermore, by the revision of the labour-related laws at the end of 1980, the Chun regime tried to reorganise trade union movements such that their potential political power was greatly restricted. The revised Trade Union Law (TUL) intended to limit the freedom of labour to organise unions by imposing the conditions that trade unions should gain the consent of 30 workers per workshop, or the consent of 20 per cent of total workshop members (TUL, 1980: Article 13). The law also gave the government the power to refuse the establishment of certain trade unions (TUL, 1980: Article 3). The revised law also transformed the overall union structure from industrial-level to individual firm-level unionism. The revised Labour Dispute Law did more damage to labour’s power. The law prohibited any third-party intervention in labour disputes. The provision was originally designed to prevent so called ‘impure elements’ (in Korean uijang) motivated by leftist ideologies, such as church or student activists, from participation

Stabilisation and liberalisation: 1980–1992 129 in labour affairs (Vogel and Lindauer, 1998); it also blocked intervention by the FKTU or any other political forces in labour disputes. Consequently, the government was able to intervene exclusively in the mediation process regarding labour disputes. In addition, in order to encourage co-operation between employees and employers, the Labour–Management Co-operative Council Law was enacted. The law mandated the establishment of a Labour–Management Co-operative Council in individual enterprises either with 100 employees or more or with trade unions. These councils consisted of less than ten delegates representing both labour and management, and were encouraged to deal with most of the matters occurring between labour and management except for the functions of trade unions (MOL, 1983: 13). Although the law did not legally confer wage-negotiation functions on the councils, they gradually took over wage-related issues, replacing trade unions. In a FKTU survey of 1984 some 30 per cent of union leaders replied that wage negotiations were carried out through the Labour–Management Co-operative Council (FKTU, 1984). It can hardly be denied that the councils disturbed the wage-bargaining system at the enterprise level, jeopardising the role of trade unions. As a result of these repressive labour controls, trade union movements in the first half of the 1980s experienced a great deal of retrenchment. As we saw in Table 6.1, the unionisation rate declined to 15.5 per cent in 1986 from 20.1 per cent in 1980. The number of labour disputes dropped to only double figures in 1982 and 1983. There is no doubt that the new system of industrial relations under the Chun government significantly undermined labour’s power. In addition, the state substantially maintained wage repression. Figure 6.1 shows that during the first half of the 1980s, the growth rate of real wages was lower than that of the customer price index. However, the very success of the wage restraints also bore the seeds of labour unrest. There were continuing attempts in many workplaces to let managementsupported trade unions step down and to establish ‘real trade unions’, called

200 150 100 50 0

75

77

78

79

80

81

82

83

84

85

86

Year Real wages

Figure 6.1 Trend of wages in the 1980s

Customer price index

87

88

89

90

130 Stabilisation and liberalisation: 1980–1992 ‘democratic trade union movements’ (KDI, 1995b: 538–9). This new trend in union movements easily developed into anti-government movements, as they were arguing a revision of the labour laws that would allow labour to establish multiple trade unions within individual working places. In particular, the general election of 1985 provided more room for democratic trade union movements to express their demands, such as the revision of labour laws and the introduction of a wage system guaranteeing workers decent lives (Joo, 1999: 400). Indeed, the number of labour disputes more than doubled to 265 in 1985 and 276 in 1986, compared to those during the time between 1982 and 1984 (see Table 6.1). Under these circumstances, the government announced the introduction of a minimum wage system as part of its ‘Measures for Improving National Welfare’ in September 1986, which also included plans to extend the MIP and to introduce the NPP (EPB, 1986, in KDI, 1995a: 464–5). The minimum wage system was enacted in December 1986, and was due to cover workers in firms with ten employees or more from 1988. The minimum wage was to be determined according to industries under the considerations of workers’ costs of living, wages of related or similar workers and labour productivity. In 1988, the level of the minimum wage was below 30 per cent of the average monthly earnings of a regular employee in all manufacturing industries, providing the minimum wage for 4.2 per cent of them (EPB, 1988: 156). Yet, this figure did not capture the reality of low wages in Korea, as the minimum wage system was applied only to workplaces with ten employees or more. Given the fact that 96.5 per cent of the total workers in agricultural and fish industries were working in firms with less than ten employees and 72.9 per cent in service industries (MOL, 1986), the extent of the lower wage was more serious. Despite the limited introduction of the minimum wage system, however, it is undeniable that the scheme was a notable change in tackling the low wage problem. However, it does not mean that the authoritarian controls of the Chun regime over labour affairs were in question. Rather, the introduction of the minimum wage system might be understood as a conciliatory measure in response to increasing labour militancy after the mid-1980s (Health and Social Research Committee, 1989; Joo, 1999). With the arrival of democratic transition, the authoritarian labour controls, which had been prevalent in the Park and Chun regimes, were dramatically eroded. The sudden massive labour outburst brought about the amendment of the labourrelated laws in November 1987. The revised laws allowed workers to set up trade unions more freely and state engagements in labour disputes were largely repealed to encourage more autonomous labour relations at enterprise level (KDI, 1995a: 481). Three limitations on trade union activities remained, however: the ban on multiple trade unions, political activities of trade unions and intervention of a third party. Under the Rho government, industrial relations began to change: From a broad perspective, labour unrest is an indication that the economy is advancing. Because of economic advancement, human resources are growing scarce. To employ workers under such circumstances, you have to pay better

Stabilisation and liberalisation: 1980–1992 131 wages, don’t you? In a sense, this is the price of economic development. Employers should more readily share profits with the workers. (Rho Tae-woo, Press Conference, 21 April 1988, Rho, 1990: 101) The proper wage level now seemed to be regarded not as incompatible with economic development but as a necessary condition for it. It was an obvious change in policy. That is, the idea that low labour costs were necessary for maintaining the competitiveness of Korean firms in the world market began to be undermined. As a result, there was a big increase in real wages during the period between 1988 and 1990, as Figure 5.2 shows. Real wages rose 8.4 per cent in 1988, 15.4 per cent in 1989 and 10.2 per cent in 1990, which all greatly exceeded the growth rates of productivity. However, the Rho government did not seriously undertake the reform of labour affairs. Rather, the response of the Rho government to the labour demands was just a partial concession to ease political instability. For instance, when further revisions of the labour-related laws were attempted by the National Assembly in early 1989 to allow the government officials labour rights, political activity of trade unions, and third party intervention, President Rho vetoed the revised bill passed by the National Assembly. This was a good indication of the limited democratic intentions of the Rho government. The working class did not have enough power to exercise great political pressure on the government. Working-class power resources could be expected to be greatest where the labour movement was well integrated and had strong support from wageearners (Korpi, 1983: 39). Yet, the sudden massive labour uprising in 1987 was an unorganised eruption (Song, 1994: 125). Indeed, the mood towards a new industrial relationship did not last long. A retreat from this came with ‘the grand conservative coalition of three parties’ in January 1990, which allowed the Rho government to enjoy a dominant position in the parliamentary system. The government increasingly took a harder line against union activities and resumed some of the anti-labour practices. This was clear in President Rho’s address to a New Year press conference in 1990: Our workers should hold back their impatient urge to resolve everything all at once out of an immediate sense of frustration, and should strive to make the cake larger first so that their shares can also be larger and their cherished goals can thus be achieved one by one. If workers continue to persist in their excessive demands in disregard of the actual profitability and competitiveness of business, they will wind up losing everything. The government will resolutely deal with illegal practices and violence regardless of whether they are perpetrated by labour or by management. (Rho, 1990: 115) The strict application of the labour-related laws together with the Law for National Security over democratic trade union movements resulted in a considerable reduction of the trade unions’ leaderships. In 1992 the number of labour disputes

132 Stabilisation and liberalisation: 1980–1992 drastically decreased back to pre-1987 levels. The unionisation rate also fell down to 18.5 per cent in 1992 from 23.4 per cent in 1989. The government also actively imposed wage guidelines recommending less than 10 per cent wage increase rates from 1990, seeking to establish a new social compact that would dampen wage demands. Furthermore, in 1992 the official guideline was reduced to 5 per cent increase. For firms that did not comply with the guideline, the government imposed a disadvantage in credit allocation, while for firms that complied, preferential treatment in credit allocation and tax allowance were to be given (EPB, 1992, in KDI, 1995a: 635–6). The rate of increase in the minimum wage was also considerably lowered since 1990. Thus, the minimum wage was paid to just over 1 per cent of the labour force in 1993. The responsive labour policy brought about by the sudden resurrection of the labour movement seemed to have been turned back. Education and training policy During the 1980s, the government intervened in the market in a different way characterised in general by transforming from sectoral and industry-specific support to functional and horizontal support. This change in policy direction was also reflected in education and training policy. The policy concern with human capital development, which during the 1970s focused on the training of skilled workers to meet the requirement of the HCI, was replaced by the training of workers with scientific and advanced technological knowledge. This was well expressed in the policy statement made by President Chun: Policy emphasis will be placed on the promotion of scientific and technological education in support of the development of a highly industrial society and on training in good citizenship . . . the government has been actively coping with international competition by boldly attempting to develop top technology, introducing increasingly more advanced technologies and seeking an organic interrelationship between research and development and industrial production. (Policy Statement on submitting the 1984 Budget to the National Assembly, 24 October 1983, in Chun, 1984: 43) The government sought to support science and engineering colleges and to rearrange the vocational and training education system. In particular, it set longterm objectives concerning the training of experts in advanced technology, planning to train some 150,000 researchers by 2001, with 10 per cent of them being brought up especially to reach international level (EPB, 1987: 271). Partly as a result of these policies, the enrolment rate in higher education significantly changed. Table 6.15 shows that by 1990 it had reached 38.1 per cent, more than double the 1980 rate of 16 per cent. The high school enrolment rate also increased from 63.3 per cent in 1980 to 87.6 per cent in 1990. Yet, the number of vocational high schools was reduced from 197 in 1980 to 104 in 1990 (KEDI, 1994: Table 3.5). This reduction substantially contributed to a severe manpower shortage after the mid-1980s, especially in small

Stabilisation and liberalisation: 1980–1992 133 Table 6.15 Enrolment rates by school level (%) Year

Elementary school

Middle school

High school

Higher education

1980 1985 1990 1995

102.9 100.4 101.4 98.7

95.0 100.0 97.8 100.6

63.3 79.5 87.6 89.9

16.0 35.6 38.1 54.6

Source: KEDI, 1996.

or medium-sized manufacturing firms. In addition, the labour market situation also encouraged the shortage in skilled labour. The substantial wage difference between high school graduates and university graduates made potential members of the labour force avoid vocational and technical training. In 1985, the ratio of wages of high school graduates to four-year college or university graduates was 100 to 227 (NSO, 1995: 73). The tendency among young people to avoid ‘3D’ (dirty, dangerous, difficult) jobs also made the shortage of skilled labour worse by encouraging the flow of the labour force from the manufacturing sector to the service sector (MOL, 1993: 144). This trend was reflected in vocational training in the 1980s. Compared to the number of people who received vocational training in the Fourth Five-Year Plan (1977–81), around 500,000, the training achievements greatly decreased in the periods of the Fifth and Sixth Plan, as Table 6.16 illustrates. Indeed, both the Chun and Rho governments tried to establish private vocational training systems (MOL, 1991: 545). The government intended to concentrate its efforts on training in high precision areas, which would be difficult for private firms to provide (EPB, 1986: 412–14). In order to undertake this plan, private enterprises with more than 150 employees were asked either to train their employees or to pay a levy to the government. Yet, this incentive failed: the proportion of firms opting to pay the training levy steadily increased from 33 per cent, when the system was introduced in 1974, to 80 per cent by 1992. In addition, the total government expenditure on vocational training was about 170 billion won, only 0.1 per cent of Table 6.16 Vocational training achievements in the 1980s (persons) Manpower

The Fifth Plan (1982–6)

The Fourth Plan (1987–91)

Craftsman Public In-plant Approved Technical master Training Instructor Total

276,187 121,044 114,773 40,370 1,556 1,686 279,429

367,616 113,802 163,230 90,584 2,148 691 370,455

Source: MOL, 1999.

134 Stabilisation and liberalisation: 1980–1992 Table 6.17 Ratio of education budget to GNP and government budget

Ed/GNP Ed/GE

1982

1983

1984

1985

1986

1987

1988

1989

1990

4.0 20.6

3.7 20.9

3.5 20.4

3.5 20.3

3.3 20.1

3.4 20.1

2.9 20.7

2.9 21.1

3.0 22.3

Note: Ed: Ministry of Education budget; GE: government budget. Source: KEDI, 1994: Table 4.1.

GDP in 1992 (OECD, 1994: 85). Thus, the vocational training system was neither a private-oriented system nor a state-centred system. On the other hand, the state made little effort to increase its investment in education during the 1980s in spite of its emphasis on human capital development. Though the Chun government introduced ‘education tax’ as a temporary earmarked tax for five years in order to enlarge education facilities, the government education budget remained at pretty much the same level (EPB, 1983: 91). Table 6.17 shows that the education budget as a ratio to GNP was around 3.5 per cent during the Chun government, with the exception of 1982, and it was reduced to around 3 per cent in the Rho government. This rate was similar to that of the 1970s. Education’s share of the total government budget also stayed at around 20 per cent. It is wrong to say that the governments in Korea were trying to develop human resources with a serious financial commitment to education investments.

Conclusion Many points in the development of the social security programme in Korea during the 1980s echo Piven and Cloward’s arguments concerning the expansion of the relief programme in the USA during the Great Depression. Whether expressed in the streets or at the polls, the disaffection of any large segment of voters can wreak havoc with electoral majorities. Political incumbents try to use the power and resources of government to intervene in the institutional arrangements that breed dissension or to develop public programmes intended to recapture the allegiance of disaffected blocs. During periods of electoral upset, in other words, political leaders proffer concessions to win the allegiance of disaffected voting blocs. (Piven and Cloward, 1971: 40–1) There is little doubt that the democratic transition associated with the development of civil society, in particular a growth of working-class power, greatly pushed the government to develop the social security programme in Korea. However, this view fails to explain why the Chun government did not develop social policy during the 1980s and then began to raise social policy issues in 1986. We have argued that social policy during the first half of the 1980s was greatly affected by the requirements

Stabilisation and liberalisation: 1980–1992 135 of economic policy, that is stabilisation measures, so that its development was significantly limited. In order to minimise the inflationary impact of wage growth, the state was not only trying to destroy the power of labour but also to exclude labour from wagesettlement procedures. Social security programmes were substantially limited by the necessity of fiscal restraint. Yet, the success of stabilisation was mainly ascribed to the sacrifice of certain social classes, notably farmers. In other words, stabilisation measures resulted in economic difficulties among farmers that the state had to respond to. Regarding education and training policy, we have found that the changed role of the state in the economy characterised by the transformation from sectoral intervention to functional intervention was also reflected in the policy objectives in education and training areas. The government increasingly focused on science and technological education and highly skilled workers’ training. Therefore, it is clear that social policy was significantly constrained by economic policy, though the content and form of social policy were affected by the extent of political power resources.

7

Social and economic policies under globalisation: 1993–1997

Globalisation has been one of the main policy agendas of the Korean government since the end of the 1980s, when the advanced countries, notably the USA, started to put great pressure on Korea to adopt a further liberalisation of her economy. However, it was in the Kim Young-sam government that globalisation became a predominant factor in all public policies. This chapter will explore the impact of globalisation on economic and social policies in Korea.

Globalisation, policy network and public policies This section examines how changing policy ideas in the Kim government influenced the formation of public policies. However, ideas are obviously not the only determinant of policies. Their impact on public policy depends on their interaction with a number of other factors, such as institutions. In this regard, this section also looks at the evolving relationships among the state, business and labour. From Sinhanguk (New Korea) to segyehwa (globalisation) There was a clear change in policy ideas in the Kim government, which can be expressed by the transition from Sinhanguk (in English, New Korea) to segyehwa (in English, globalisation). Why did this change occur and what was its effect on state policies. In his inaugural speech to the nation in February 1993, President Kim Young-sam, who boasted that he was the first civilian president since 1961, asked people to pledge their support for the government campaign of creating ‘a New Korea’. He admitted that ‘the current economic difficulties had come not just from a short-run cyclical deterioration but also from more fundamental problems, the socalled Korean Disease. In order to overcome Korean Disease and create a New Korea, institutional corruption, political rent-seeking, concentration of economic power and the loss of work motivation should be all eliminated’ (Chosunilbo, February 1993).1 Following this pledge, the government implemented several reform measures, which had never been seen in former governments. In pursuit of more transparent politics, President Kim vowed that he would not accept any funds from business while in office. He also required all cabinet members and Assembly members of his party, the New Korea Party (NKP), to disclose their

Globalisation: 1993–1997 137 personal assets publicly. Following the disclosures of personal assets, there was a broad sweeping purge. More than 3,000 officials stepped down or were forced out of their jobs, including eleven Assembly members, three ministers, five deputyministers, and the mayor of Seoul (Clifford, 1994: 332). President Kim was also determined to assert the principle of civilian supremacy in the political system, which had been dominated by former military elite since 1961. For this, he broke up the Hanahoe (meaning in English, one association), an informal society of senior officers who formed the core of the preceding Chun and Rho administrations, claiming that the military and security establishments no longer possessed even the power of veto in Korean politics (Cotton, 1995: 3). In conjunction with these political reforms, President Kim surprisingly announced ‘the implementation of the RealName System in Financial Transactions’ in August 1993, which required all accounts to bear the real name of the holder. Before August 1993, it was legal to have deposit accounts and securities under assumed names (EPB, 1993, in KDI, 1995a: 671–4). Thus, one could borrow a real name or use false names to avoid higher taxes. It was widely acknowledged among Korean people that lenders and dealers in the informal money markets, speculators in real estates, and those engaging in dubious activities were the majority of anonymous holders of financial assets. It was also said that financial transactions under assumed names were hotbeds of political corruption (EBP, 1994: 132–49). Thanks to these reform measures, President Kim reaped immense public support in his early days. A series of Korea barometer surveys conducted by Shin and Rose (1998) showed how public support changed during the Kim government. Figure 7.1 illustrates that the Kim government during the first year enjoyed great support from the general public. At the end of 1993, 64 per cent of the respondents expressed their satisfaction with the extent of the general democracy in Korea. In particular, 71 per cent of the respondents were satisfied with the Kim government. There was no doubt that such a high level of political support can be largely attributed to the series

80 70

71

60

64 56

50

57 54

% 40

Satisfaction with government 36

30

Satisfaction with democracy

20 13

10 0 1993

1994

1996

1997

Figure 7.1 Trends in democratic support during the Kim Young-sam government Source: D. C. Shin, 1998. Note: This empirical data was from four parallel surveys conducted in Korea during the Kim Young-sam government (1993–7).

138 Globalisation: 1993–1997 of reforms that were implemented in the early days of the Kim government under the watchword of creating New Korea. However, there appeared to be a dilemma in the process of reform in that more substantial reform was needed to target the group that played a crucial role both in the former governments as well as in the Kim government. For the Kim government, which was born of the ‘Grand Conservative Coalition of 1990’, it was not feasible to sweep out the old guard of the former governments. It was also worth noting that the reforms created mounting complaints from establishment groups in society. As a result, these measures accomplished only a halting and halfway reform. Indeed, the Real-Name Financial System still retained enough room to be abused due to allowing the use of borrowed names. The Kim government seemed to have great difficulties in carrying out the reforms thoroughly. Another great pressure on the government, which would lead to a change in its policy priorities, came from international forces. There was intensive bilateral and multilateral pressure to liberalise Korea’s domestic markets. In particular, after the late 1980s the USA began to put a great deal of pressure on the Korean government to adopt more liberalisation in capital and trade markets (K. Kim, 1997). Moreover, as the Uruguay Round came to an agreement at the end of 1993, not only all commercial goods but almost all non-commodity markets, including construction, telecommunication, sales and education, were forced to be liberalised. For Korea, there was no choice but to open its domestic markets. In this situation, President Kim declared Segyehwa just after returning from the Second Summit Forum of the Asian Pacific Economic Co-operation in Bogor, Indonesia, in November 1994. Thereafter, the earlier goal of creating Sinhanguk was completely replaced by Segyehwa. It provided the Kim government with a new political watchword. What then did ‘globalisation’ mean in Korea? There appears to be little doubt that Korea was one of the main beneficiaries of the expansion of the world trade regime, given the fact that by 1996 Korea had become the eleventh largest exporting country in the world. However, Korea never had an affinity for financial liberalisation, let alone the liberalisation of FDI. Table 7.1 shows that the magnitude of FDI in the Korean economy was far lower than in other competing Asian countries except Japan. In 1997 the amount of FDI in Korea was only 0.34 per cent of GDP and 0.9 per cent of gross domestic fixed capital formation. This figure demonstrates the negligible role of inflow FDI in the Korean economy. Korea’s overseas direct investment, that is outflow FDI, was in a similar position. In 1996 the ratio of outflow FDI to total investment was only 2.6 per cent. It was Table 7.1 FDI ratio of major Asian countries in 1997

Ratio to GDP Ratio to gross domestic fixed capital formation

Korea

Singapore

Taiwan

China

Japan

0.34 0.90

8.78 25.40

0.8 3.50

4.57 13.00

0.02 0.10

Source: IMF, International Financial Statistics Yearbook, 1998.

Globalisation: 1993–1997 139 far lower than the 14.0 per cent of Singapore, 6.6 per cent of Taiwan, and 19.1 per cent of Britain (Newsreview, 15 May 1999). Moreover, as we saw in the last chapter, the liberalisation of financial markets had never seriously taken place in spite of a series of liberalisation measures during the last government. Therefore, it might be said that the Korean economy was hardly global. In other words, the extent of the integration of the Korean economy into the world markets was relatively less than we might expect from the high integration of trade markets. Therefore, it can be said that globalisation in Korea was devised as a government strategy to adjust the Korean economy to a more integrated world economy. This is clear in a policy document entitled ‘Globalisation strategy of the Korean economy’ prepared by KDI, which played a crucial role in the policy-making process and honed the policy idea of globalisation. Along with the agreement of UR [Uruguay Round] and the launch of the World Trade Organisation (WTO), the world economy will be integrated into a borderless global economy. At the same time, the national economy will be dismantled and all firms will face limitless competition. In order to cope with these challenges, ‘globalisation’ in the economy as well as in all social areas will be inevitable. (KDI, 1994: 1–2) The idea of globalisation was not confined to the area of economic policy. Rather, ‘globalisation’ became a watchword for all state policies with a strong emphasis on competitiveness. An interview carried out by Moon with Lee Hong-koo, the former prime minister in the Kim government who initiated the globalisation campaign, clearly revealed the effect of globalisation on all state policies: Globalisation is something like a panacea. Globalisation has often been used as the powerful tool for persuasion in dealing with bureaucratic or political oppositions to government policies. Those who opposed globalisation policies were branded as parochial, collective egoists. Indeed, it has served as the foundation of social consensus. (Moon, 1999: 11) In this regard, Moon (1999: 12) argued that globalisation in Korea became a new, omnipotent ideological tool of governance. Since President Kim announced the globalisation policy, all government affairs were dealt with under the consideration of globalisation. It might be argued that there were some kinds of structural constraints at work here. According to pessimists of globalisation, the rhetoric of globalisation is a godsend for the Right or a watchword for bourgeois revolution. Yet, the impacts of globalisation as a strategy or policy idea on public policy will be contingent, depending on its interaction with other institutions. Thus, I will next discuss the evolving policy network in the Kim government.

140 Globalisation: 1993–1997 Change of policy network The concentration of economic power in the hands of the chaebols has been one of the main features of the Korean economy since the 1970s. The 1990s also witnessed a further increase in the chaebols’ economic power. Table 7.2 shows that by 1995 the 30 largest chaebols accounted for about two-fifths of the value-added in the mining and manufacturing sector, 44 per cent of the fixed assets and almost a fifth of the employment. In particular, the profiles of the top five were astonishing. In 1995 they occupied about a quarter of the mining and manufacturing sector in term of shipments, value added and fixed assets. Their growth coincided with diversification, which can be summed up the following advertisement of a chaebol: ‘which company can produce from chip to ship?’ Indeed, the 30 largest chaebols were expanded from an average of 16.8 companies in 1987 to 22 operating in almost 19 different industries in 1996. The five largest chaebols were even more diversified, with an average of more than 40 companies in almost 30 industries (OECD, 1998e: 93). The Kim government employed several policy measures to reduce the economic power of chaebols, as the former government did (OECD 1998e: 98–100; Moon, 1999: 18–26). First, the government controlled chaebols’ preferential access to financial resources by limiting the quantity of bank loans to chaebols. Second, it tried to regulate cross-investment, cross-subsidisation and cross-payment guarantees between two companies within a chaebol by revising the Monopoly Regulation and Fair Trade Act. Third, the government implemented a ‘specialisation’ policy to limit the diversification of chaebols by inducing them to concentrate on core businesses. The top 30 chaebols were required to nominate up to three of their affiliates as core industries and were encouraged to specialise in these industries by relaxing restrictions on bank lending and investment. Fourth, the government attempted to accelerate the dispersion of ownership of chaebols by promoting the development of capital markets and by using inheritance and gift taxes to prevent wealth from remaining in the families of the founders of chaebols. Despite all these measures, however, chaebols’ economic power hardly decreased, as shown in Table 7.2. This was partly because the chaebols generally ignored these Table 7.2 Share of chaebol groups in mining and manufacturing (%)

Top five Shipments Value added Fixed assets Employment Top thirty Shipments Value added Fixed assets Employment Source: OECD, 1998e: 91.

1991

1992

1993

1994

1995

23.4 22.0 27.7 10.8

23.8 21.7 25.5 10.8

23.0 20.0 24.9 10.4

24.6 24.0 25.6 11.1

n.a. n.a n.a. n.a

38.8 35.4 45.3 17.7

39.7 35.9 44.5 17.5

38.1 33.5 42.1 16.6

39.6 36.9 45.0 17.7

n.a. 40.2 44.0 18.0

Globalisation: 1993–1997 141 regulations and partly because the government did not make a serious effort to pursue them. The chaebols’ access to alternative financial sources, notably from nonbanking financial systems and overseas financing, limited the effectiveness of these financial measures. It should also be noted that globalisation and the related liberalisation of the financial system created new niches for the chaebols’ financial mobilisation. In 1995, the Kim government got rid of all bank credit system regulations, which accelerated the concentration of bank loans in the hands of chaebols even further (EPB, 1995, in KDI, 1995a: 713–14). By this point supervision over the chaebols’ investments had virtually disappeared. On the other hand, the emergence of the new civilian government was associated with extensive institutional reforms towards a procedural democratisation. These institutional changes facilitated an unprecedented expansion of civil society. Interest groups proliferated and became vocal. Several civic organisations such as Kyungsilryun (Coalition for Economic and Social Justice) and Gongchuhyup (Association for Expelling Pollution) emerged as powerful pressure groups. However, the most critical change regarding the development of civil society during the Kim government was the growing influence of labour on the government. The figures in Table 7.3 suggest that labour movements became weaker during the period of the Kim government. Indeed, both the number of organised workers and the organisation rate continuously declined. The organisation rate was steadily falling, and in 1997 it was 12.2 per cent. Table 7.3 also shows that labour disputes were decreasing, in particular compared with the period of the late 1980s. This reflected a growing stability in labour–management relations. However, it does not necessarily mean weakness in the organisational power of labour. The trade union movement in Korea experienced a crucial development in its leadership during the time of the Kim government. The groups representing democratic trade unions established another national-level labour organisation, a challenger to the Federation of Korean Trade Unions (FKTU), which had been the single government-authorised labour organisation across the nation since 1961. In November 1995 the Korean Confederation of Trade Unions (KCTU) was founded, representing 861 trade unions and 16 industrial unions. The KCTU covered a quarter of total organised labour, 418,000 members, accounting for only 5 per cent of total employees. However it had a more militant attitude than the FKTU. In Table 7.3 Labour statistics in the Kim Young-sam government

1993 1994 1995 1996 1997

No. of members (000s)

Organisation rates %

No. of disputes

1,667 1,659 1,615 1,599 1,484

15.6 14.5 13.8 13.3 12.2

144 121 88 85 78

Note: Organisation rate = number of members / number of total employees  100 Source: MOL, Labour White Paper, 1998 and 1999.

142 Globalisation: 1993–1997 particular, the KCTU made it clear in its manifesto that its main concern would not be confined to economic matters within enterprises but rather would be in campaigning for social reforms (KCTU, 1995: No. 1–4). The KCTU proposed not only the revision of the labour laws, but also various social reforms, such as reforms in social security systems, tax reforms, regulation of chaebols, housing, education and so on (KCTU, 1995: No. 5–6). The establishment of the KCTU became a landmark in that labour started to play a primary role in social reforms in Korea. The state was not allowed to enjoy an enforced corporatist relationship with the government-sponsored labour organisation, the FKTU. The shield insulating policy-making from labour interests was dismantled gradually. The policy-making process concerning the revision of the labour laws, which I will discuss later, supports this case. When the government established a Labour–Management Relation Reformation Committee on 9 May 1996 in order to prepare a draft of the labourrelated laws, it included representatives from the labour organisations, namely three from the FKTU and two from the KCTU, together with five representatives from the Korean Employers Federation (KEF), ten public leaders and ten academics. The inclusion of the KCTU, which was still an unauthorised illegal organisation, was obviously a response of the government to the changing leadership of the labour movement. Moreover, the general strike at the end of 1996 following the revision of the labour laws was a watershed in the growth of labour power in Korean politics. Workers recognised their power over business and the government as a result of general strikes. It was now impossible for the government to disregard workers’ interests in the policy-making process. As the KCTU pointed out in its report, it is true that the general strikes brought ‘the obtaining of citizenship in the labour movements’ (KCTU, 1997). Furthermore, the labour force proved its potential to play a leading role in social movements in Korea. In particular, with the KCTU becoming an authorised labour organisation from 1997 by the second revision of the labour laws, its influence on the labour movement greatly increased and it became a crucial actor in social movements. Consequently, the state in Korea became increasingly porous. The dominance of the state over society was no longer the case. Yet, there was no clean break in the previous symbiotic relationship between the state and business, let alone an institutionalisation of labour’s participation in the policy-making process. Rather, it is worth noting that the policy of globalisation was systematically favourable to employers. Despite the announcement of President Kim that he would not accept any political contributions from businesses during his governance, there was continuous political corruption connected with chaebols during the Kim government. Notably, during the final term of the Kim government, there was the Hanbo financial scandal involving political corruption, in which President Kim’s second son was involved. In a situation where formal and rational criteria for government intervention disappeared, the relationship between the state and business was prone to be partial to specific chaebols, which might easily lead to political corruption. ‘Crony capitalism’ was a suitable description of the state–business relationship under the Kim government.

Globalisation: 1993–1997 143

Globalisation and economic policy A trend towards the demise of the developmental state in Korea, started during the Rho government, was facilitated further in the Kim government. In particular, the policy idea of globalisation made a niche for this transformation. The Kim government was preoccupied with the need for competitiveness of domestic firms under the watchword of globalisation. This policy change inevitably brought about a change in the state’s role in the economy. The experience of the Kim government clearly shows that the state has played an important role in the process of globalisation. This is opposite to the role promoted by enthusiasts of globalisation like Ohmae (1995), who pay little attention to the domestic, institutional and political factors in explaining globalisation. According to the policy proposal of the Kim government, the globalisation policy had three objectives: to strengthen competitiveness; to facilitate economic development and advanced economy; and to raise the national position in international society (KDI, 1994: 3). In order to implement these objectives, the government pursued a series of deregulation and liberalisation measures, which obviously led to a strengthening of the market-based economic system. I will next discuss two policy measures in order to elucidate the role of the state in economic affairs under the Kim government. Deregulation towards a market-based system Economic growth in 1992 was the lowest level in a decade, with an annual growth rate of 4.7 per cent. Having inherited a relatively unhealthy economy, the Kim government announced a ‘100-Days New Economic Reform Package’ to revitalise the economy in March 1993. The plan contained typical tools for economic expansion, including monetary and fiscal measures. In order to stimulate economic activity, monetary supply was expanded to keep market interest rates low enough to boost investment activities. Public investment programmes were started earlier than originally planned. In particular, a wide range of deregulation measures was implemented in order to encourage business activity (EPB, 1994: 110–15). In addition, the Kim government initiated a campaign of ‘pain sharing’ among economic actors, which was said to be necessary for recovering economic potentiality. A wage freeze was imposed on public sectors. Private companies were also encouraged to follow the wage-freeze guidelines. Farmers were asked to restrain their demands for raising prices of agricultural products (EPB, 1994: 115–16). Thus, the focus of the plan was in creating better circumstances for businesses, mainly depending on the reduction of factor costs, such as labour costs and regulation costs. In terms of strategies for competitiveness, therefore, the government put more emphasis on factor costs, and paid relatively little heed to the enhancement of productivity driven by high skill levels and advanced technology. The 100-Days New Economic Reform Package was followed in June by a lengthy statement on economic reform called the ‘Five-Year Plan for the New Economy’ (EPB, June 1993, in KDI, 1995a: 667–70). In this statement, the government

144 Globalisation: 1993–1997 embraced the need for reforms in the economic system, focusing on fiscal, financial and regulations systems. It was maintained that one good way to achieve competitiveness would be to get rid of all regulations and customs that restricted business activities. ‘The Special Law for Deregulation Concerning Business Activities’ was enacted as the first reform measure under the Kim government, aiming at the establishment of a small government (EPB, June 1993, in KDI, 1995a: 662). Indeed, according to Han, who was a director of the EPB at that time, the Kim government believed that: The primary energy for the new take-off of the economy should come from maximising private initiative and creativity. As much as possible, government interventions in the market will be removed and consequently private initiatives should prevail. (S. T. Han, 1993: 10) Over two and a half years, the government abolished or changed around 1,400 individual regulatory measures out of 1,800 measures that were targeted. They were all driven by the consideration that deregulation would cut down regulation costs, and thus contribute to competitiveness (MOFE, 1996: 150–4). The deregulation was facilitated even further when the Globalisation Policy Commission was established in 1995. The main objective of the economic reforms was to establish a market-based economic system: The objective of the industrial policy should be changed from protecting or supporting for the specific industries or firms to enhancing economic efficiency by the operation of the competitive market system. In particular, the variety of the state regulations should be abolished and thus, the efficient allocation of the resources can be attained by the price mechanism in the markets. Under the market-led economic system, the appropriate role of the government in the market should be limited to the establishment of the rules needed for fair and competitive economic activities so that the market itself will produce the optimal result for all of the people. (KDI, 1994: 32) There is no doubt that the deregulatory efforts represented something of a breakthrough in the history of Korean economic development. As we discussed earlier, economic development in Korea had been systematically associated with the strategic intervention of the government, notably sector-specific and even firmspecific industrial policies. However, under the Kim government, sectoral industrial policy was basically eroded. Instead, indirect and functional policies, such as research and development in science and technology and human resource development, were being emphasised. For instance, investment in research and development increased from 1.2 per cent of GDP in 1984 to 2.7 per cent in 1996, the third highest among OECD countries (OECD, 1998d: 153). At the same time, the planning ministry, EPB, was merged with the Ministry of Finance (MOF), forming the

Globalisation: 1993–1997 145 Ministry of Finance and Economy (MOFE) in December 1994, which symbolised the demise of ‘planning’ in Korea. However, it should also be noted that the abandonment of sectoral or selective industrial policy brought about lack of investment co-ordination, which in general led to overcapacity. In this respect, Chang (1998: 1559) has argued that the dismantling of selective industrial policy in the Kim government resulted in falling export prices, falling profitability due to low capacity utilisation, and the accumulation of non-performing loans in a number of leading industries, including semiconductors, automobiles, petrochemicals and shipbuilding. Liberalisation in the financial system and trade As discussed in the previous chapter, despite certain liberalisation during the 1980s, the financial system remained a tightly monitored one until the early 1990s. The government had continually used interest rate controls and quantitative credit targets. However, the effectiveness of this government-controlled financial system was increasingly in question within Korea. The local banks were greatly handicapped in conducting their operations competitively, compared with the foreign banks not subjected to interest rate ceilings and the non-bank financial institutions (NBFIs), which were generally less strictly regulated in terms of interest rates (Dalla and Khatkhate, 1994: 18). That is, a repressed financial system was accused of being not only redundant but also harmful to the efficient allocation of resources. In addition, big business, namely chaebol groups, continued to ask the government to remove the financial controls on the credit system. Moreover, most importantly, the advanced countries, in particular the USA, were putting pressure on Korea to liberalise its financial sector (K. Kim, 1997). Being the tenth largest economy in the world, Korea had no other option but to make its financial system compatible with that of its trading partners. Finally, Korea moved decisively in the direction of a conventional type of financial liberalisation in 1993, when the Kim government announced a plan of financial reforms spread over a period of five years ending in 1997 (BOK, 1994). There were four major areas of reform: liberalisation of all interest rates; reform of policy loans; autonomous management of financial institutions; and liberalisation of capital accounts (BOK, 1994). First, the reform plan included a gradual liberalisation of all interest rates, including commercial loans, deposits, short-term corporate bonds, government bonds and bank debenture. All lending rates of banks and NBFIs were completely liberalised by the end of 1993, except for the so-called policy loans, which accounted for around 25.3 per cent of total bank loans in 1993 (MOFE, 1996: 171). Deposit rates were liberalised gradually by 1997, beginning with interest rates on long-term deposits to be followed by deregulation of interest rates on short-term deposits. Second, in order to develop an efficient financial system, the reform plan was to freeze ceilings on policy loans and to conduct a step-wise reduction in ceilings, leading to a termination of all policy loans by 1997. In addition, preferential interest rates for certain sectors were to be removed. The policy loans as a share of total loans

146 Globalisation: 1993–1997 continually declined during the Kim government. However, allocations of financial resources to small and medium-sized firms were ensured by regulations (MOFE, 1996: 171). Commercial banks were obliged to allocate 45 per cent of their annual increased loan amount to them. Third, the reform plan intended to increase the autonomous scope of operations of financial institutions. Yet, the commercial banks continued to have obligations to act in accordance with government controls. For instance, the state prohibited shareholders from owning more than 4 per cent of a bank’s equity, which meant that the bank’s management was accountable to nobody except the government (OECD, 1998e: 57). Nevertheless, it is worth noting that in relation to foreign borrowing, an area that had been traditionally the most tightly controlled by the government, liberalisation was considerable, and now there was virtually no restriction. The situation of merchant banks, which are wholesale financial institutions engaging in underwriting primary capital market issues, leasing and short-term unsecured lending, can illustrate this (OECD, 1998e: ch. II). In 1990, there were only six merchant banks in Korea, but after laws were revised to allow existing investment finance companies to be converted to a merchant bank, there were thirty merchant banks by the end of 1996. Many of them belonged to chaebols, as they were subjected to less control on interest rates and were not obliged to engage in policy loans. Thus, they became main lenders in the issuing and discounting of bonds, mostly relying heavily on foreign currency funding. They also took imprudent risks, investing in foreign securities with borrowed short-term funds, thus leaving the Korean economy vulnerable to the speculative currency attack and liquidity crisis that beset Southeast Asia (Bosworth, 1998: 42). Finally, in parallel with the deregulation of the domestic market, the plan also involved progressive liberalisation of capital flows and foreign exchange controls. The exchange rate was to be market-determined and freely floating by 1997. FDI in both inflow and outflow directions as well as outflows of portfolio investment were to be gradually liberalised so that by 1997 the rate of opening of foreign investments was due to increase to 93.6 per cent from 83 per cent in June 1993 (EPB, June 1993, in KDI, 1995a: 664). Yet, by the end of 1997 the ceiling on foreign shareholdings in individual companies and the limits on foreign investments in certain areas still remained. Thus, the proportion of FDI inflows to GDP was only 0.34 per cent in 1997, which was far lower than in other OECD countries. Consequently, a peculiar mix of partial liberalisation and continued rigidities led by the state still characterised the financial system. Nevertheless, the financial liberalisation under the Kim government brought important changes in state interventions in the economy. It is widely acknowledged that during the economic development process, the government, financial sector and large industrial firms shared a common responsibility in the allocation of credit, which was referred to as ‘government-led internal organisation’ (C. H. Lee 1992; Cho and Hellmann, 1993). However, now this internal organisation had to be dismantled by financial liberalisation. At the same time, the liberalisation of the capital markets increased the vulnerability of the Korean financial system to international capital. Deregulation during the Kim government was not co-ordinated with a concerted attempt of the

Globalisation: 1993–1997 147 government to upgrade supervision. As a consequence, the financial system in Korea became more vulnerable to the movement of foreign financial capital. Thus, a lack of prudence concerning deregulation in Korea has often been mentioned as one of the main reasons for the Korean financial crisis at the end of 1997. To sum up, a variety of deregulation measures under the Kim government led to a significant change in the way in which the government intervened in the market. Financial liberalisation also brought about a significant weakness in the ability of the state to control the financial system. Despite these measures, the Korean government never became the minimalist state envisaged by the enthusiasts of globalisation. The globalisation policy accelerated a transformation towards a market-based economic system in Korea, but it was still a partial deregulation led by the regulated state.

A Korean welfare model? The Kim government announced a plan concerning the social security system called ‘A Korean welfare model’, which was included in Five-Year Plan for the New Economy. In the Plan, three specific goals were established as follows (MOHSA, 1993). The first goal was to secure a national minimum standard of living by raising the living allowance for those incapable of work and expanding the base of selfreliance in a Public Assistance Programme (PAP). The second was to enhance the specialisation in the social welfare services by encouraging private participation in welfare provision and establishing a community-centred service system on the base of a strengthened family role. The third was to develop social insurance programmes by extending their coverage and stabilising their finance. With these three goals, the Kim government took a very cautious approach to the social security system. Despite the first objective of strengthening the social safety net, the number of beneficiaries of the PAP decreased by more than 25 per cent during the period between 1992 and 1996. The proportion of beneficiaries in the population declined from 5 per cent in 1992 to 3.3 per cent in 1996. As for social insurance programmes, the Kim government introduced the Employment Insurance Programme and extended the National Pension Programme to farmers and fishermen in 1995. In this section, we shall examine the main characteristics of these two new social security programmes to highlight whether or not there was a change in the role of the state in welfare provision. Then, we shall look at the changes in social expenditure under the Kim government. These discussions will lead us to answer the following questions: What are the basic features of the Korean welfare model? Is it really unique enough to be called the ‘Korean welfare model’? Let us start with the introduction of the Employment Insurance Programme. Introduction of the Employment Insurance Programme The Employment Insurance Programme (EIP) took effect in July 1995. With the introduction of the EIP, Korea came to have all of the four main social insurance programmes which are present in the Western welfare states adopting the social

148 Globalisation: 1993–1997 insurance model. The provision of unemployment benefits distinguishes Korea from the other NICs in East Asia, namely Taiwan, Singapore and Hong Kong. It is acknowledged that unemployment benefit schemes are more likely to be cautiously introduced than other social insurance programmes. This is certainly due to the fact that the provision of unemployment benefit may have an effect on the labour market situation. Some studies have pointed out that an increase in the level of unemployment benefit leads to an increase in the duration of unemployment. Others have argued that unemployment benefit has no influence on unemployment (Atkinson, 1987). Thus, the possible influence of the level and duration of unemployment benefits on unemployment has been controversial. Yet, there is no doubt that unemployment benefit is essential for the protection of individual workers from risks in the market. In this regard, Esping-Andersen has used unemployment schemes as a main indicator to calculate his de-commodification index (EspingAndersen, 1990: ch. 2). Thus, the introduction of the EIP was a landmark in the development of the social security system in Korea. However, the EIP was hardly sufficient enough to provide a reasonable protection for workers due to its institutional settings. In order to prove that, an examination of the EIP in comparison with other countries will follow. Interestingly enough, first, the unemployment scheme in Korea has been implemented as one of the three programmes in the EIP. The EIP has three components (Employment Insurance Law (EIL), 1996: Article 4). The first is the Job Security Scheme (JSS) to prevent unemployment, facilitate job adjustment and increase job opportunities (EIL, 1996: Article 15). The second is the Job Ability Development Scheme (JADS) to encourage vocational training in the private sector and enable workers to develop and improve their job skills (EIL, 1996: Article 21). The third is the Unemployment Insurance Scheme (UIS) to alleviate hardships resulting from the loss of wage income (EIL, 1996: Article 28). Compared with Western welfare states, where the unemployment benefit system and the active labour market programme were separately introduced, Korea introduced the two programmes simultaneously. Second, the EIP was implemented incrementally in that the UIS was mandatory for private firms with 30 or more employees, whereas the JSS and JADS began with workplaces with 70 or more employees (Enforcement Ordinance for EIL, 1996: Article 2). At the end of 1995, the number of those covered by the EIP was only 32.6 per cent of total employees (KLI, 1996a: 3). The government undertook to finance only the administration costs. Contributions of employers and employees vary across the programmes. For the UIS, the contribution rate was 0.6 per cent of total wages, which was equally paid by employers and employees. Yet, the contributions for the JSS and JADS were made only by employers, at between 0.3 and 0.7 per cent of total wages according to the size of firms (Enforcement Ordinance for EIL, 1996: Article 69). It is interesting that, in comparison with contribution rates in other countries, these contributions were not only relatively low, but also suggest a different emphasis. For example, in Japan, the contribution rate for the UIS has been 1.1 per cent of total wages equally paid by employers and employees since 1993. The contribution rate for the other schemes has been 0.35 per cent paid only

Globalisation: 1993–1997 149 by employers (Keum, 1997: 132). Thus it seems that the EIP in Korea was designed to put more emphasis on active employment measures than on passive measures, namely unemployment benefits. Third, the UIS in Korea was designed to have a tight benefit system, relatively strict in its conditions of entitlement compared to the other countries. Table 7.4 shows that in most countries, eligibility for unemployment benefit was determined by an individual’s employment record. UIS entitlement in Korea required a relatively long period of minimum employment and more than one year’s contributions. Table 7.4 also shows waiting periods at the beginning of an unemployment spell. It is acknowledged that a minimum waiting period for all claimants helps reduce the cost of administrating benefit, and also may discourage the use of unemployment benefits (OECD, 1991). The minimum waiting period was relatively longer in Korea. In particular, any unemployed person who has voluntarily quit his/her previous job cannot be eligible for unemployment benefit. Fourth, unemployment benefit in Korea was hardly generous. As Table 7.4 illustrates, the level of unemployment benefit was 50 per cent of the previous earnings. However, the maximum duration of benefit was only eight weeks regardless of age and/or employment record (EIL, 1996: Article 36, 42). Moreover, it was unrelated to family circumstances, such as number of dependants. Thus, not only the level but also the length of unemployment benefit in Korean was hardly sufficient to alleviate hardship for the unemployed person. Finally, the UIS in Korea was not connected to the social assistance programme. In most countries, unemployment benefits follow both the insurance and the assistance principles. Workers with a good employment record, upon becoming unemployed, receive an insurance benefit for a limited period, and if unemployment continues assistance benefits at a lower level are paid to workers who have no other means of support (OECD, 1991: ch. 7). However, in Korea, the unemployed with the ability to work cannot receive any living allowance when the maximum period of unemployment benefit is exhausted. Those who are officially called ‘poor’ are Table 7.4 Unemployment benefit systems in selected countries Country

UK Sweden Japan Korea

Qualifying conditions Minimum employment record

Minimum waiting period

Waiting period for voluntarily unemployed

1 year 5 months 6 months 1 year

3 days None 7 days 14 days

1–26 weeks None 1–3 months Complete disqualification

Maximum benefit duration

Gross replacement ratio (%)

52 weeks 60 weeks 30 weeks 8 weeks

16 90 48 50

Note: Korea (1995) and the other countries (1989). The table refers to the system for a prime-age worker aged 40 who lost a job and then experienced a long spell of unemployment. Source: OECD, 1991: ch. 7.

150 Globalisation: 1993–1997 Table 7.5 Employment Insurance Fund in 1996 (million won)

Revenue (a) Expenditure (b) (b)/(a) %

Job security

Job training

Unemployment

Total

160,144 12,508 7.8

182,184 9,950 5.5

483,464 13,972 2.9

825,792 36,430 4.4

Source: MOL.

eligible only for limited medical assistance and educational assistance for their children without living allowance. Thus, despite the provision of unemployment benefit, Korea had only a limited social safety net for the unemployed. During the first year of the programme, the EIP performed poorly. Table 7.5 shows that both JSS and JADS were not used adequately by employers, let alone the UIS. The ratio of expenditure to revenue for the EIP was only 4.4 per cent in 1996. Though this small usage of programmes reflected the fact that the EIP was still an embryonic system, it also resulted from the lack of government initiatives and publicity. According to a Korean Labour Institute (KLI) survey of 450 workplaces covered by the EIP, there appeared to be relatively little acknowledgement of the EIP (KLI, 1996b). The survey shows that some 18.4 per cent of people in charge of the EIP in each workplace did not know which programmes in the EIP were available to them. This survey also reported that 12 per cent of the respondents never received any information packs about the EIP published by the government (KLI, 1996b: ch. 2). These figures suggest that the EIP was badly conducted and promoted. There is little doubt that the introduction of the EIP was a landmark in the development of the social security system in Korea. However, the UIP was designed to have relatively tight entitlement conditions and meagre unemployment benefits. The government was able to introduce the EIP without any financial burden, putting more emphasis on the active labour market programmes. Expansion of compulsory coverage in the National Pension Programme As we discussed in the previous chapter, the National Pension Programme in Korea was initially introduced as a compulsory scheme for private firms with ten or more employees. In 1992 the compulsory coverage was expanded to cover workplaces with five or more. Although the self-employed, including farmers and fishermen, as well as employees working in workplaces with four or less were allowed to affiliate voluntarily to the NPP, this was extremely rare because of the conditions imposed regarding minimum income needed for affiliation. In July 1995 the compulsory coverage was extended further to cover the selfemployed living in rural areas, including farmers and fishermen. This fast growth in coverage was exceptional amongst countries adopting a co-operative pension scheme in which insurance societies organised on the basis of job categories are

Globalisation: 1993–1997 151 running pension programmes. For example, simply comparing the time the pension programme took to cover farmers and fishermen, it took 68 years in Germany, 24 years in Austria and 20 years in Japan, whereas for Korea it took only 7 years (KSWA, 1996: 53). We shall examine the features of the NPP for farmers and fishermen (hereafter the NPPFF) in order to highlight the changed role of the state in the welfare provision. First, the NPPFF was implemented as an integrated programme in the NPP. The NPPFF was aimed at providing income maintenance for farmers and fishermen in old age, and paid little attention to structural adjustment in the agricultural or fishing industries. It was rather different from other countries adopting co-operative pension systems, such as Germany and Japan where the pension programmes for farmers have also functioned to facilitate agricultural adjustment by providing special pensions (KSWA, 1996: 56). Thus, there was no possibility for the NPPFF to be used as a measure to support industrial adjustment in the agricultural sector. Second, the NPPFF had different rules concerning affiliation. The NPPFF compulsorily covered those aged from 18 to 59 living in rural areas (‘Gun’ in terms of the Korean administration tier), and farmers and fishermen who live in urban areas (‘Si’ in terms of the Korean administration tier) (National Pension Law (NPL), 1995: Article 10). This rule reflected the sometimes unclear distinction between the self-employed and farmers or fishermen. In addition, given the relatively advanced age of many farmers and fishermen, those aged from 60 to 64 were exceptionally allowed to affiliate to the pension programme. They could receive ‘the special oldage pension’, provided that they satisfy the contribution period of five years (NPL, 1995: Appendix, Article 6). Third, farmers and fishermen were entitled to the same benefits as other insured, but a different rule concerning contributions was applied to them. The contribution rate paid by farmers and fishermen was 3 per cent of standard monthly earnings (NPL, 1995: Article 75), only half of the contribution rate applied to the rest of the insured. This rate was planned to increase 3 per cent every five years until it reached 9 per cent. The earnings of farmers and fishermen were calculated by deducting farming costs from total income. As a result, the average amount of earning among farmers and fishermen was 31.9 per cent of their average real income (NSO, 1996). Some 31 per cent of them belonged to the lowest earnings class. Table 7.6 shows that the average earning factors of farmers and fishermen was 64 per cent of Table 7.6 Comparison of the National Pension Programmes, 1995 (won) Class

Average monthly earnings Contribution rates Average amount of contributions Source: NPC, 1995: 22.

Self-employed living in rural areas

Employed

Average

Farmers & fishermen

Self-employed

565,135 3% 16,954

574,510 3% 17,235

535,590 3% 16,068

900,024 6% 54,000

152 Globalisation: 1993–1997 employees. It also illustrates that the average amount of contributions paid by farmers and fishermen was only about 30 per cent of that paid by employees. Finally, although there was no governmental subsidy for employees, the government started to provide financial support for farmers and fishermen in the form of one-third of the contributions paid by the insured belonging to the lowest earnings class (NPL, 1995: Appendix, Article 5). This subsidy amounted to 2,200 won monthly in 1995 and will be provided until 2004. There is no doubt that this subsidy will contribute to vertical income redistribution in society. This system is also expected to create income redistribution from employees to farmers and fishermen. It is yet to be seen whether this will increase social solidarity or promote interest conflicts between the employed and the self-employed. At the same time, it should be noted that this extension brought about growing concern about the possibility of a financial crisis in the pension fund due to its improper institutional design promising too generous a pension with a relatively low level of contributions. Table 7.7 shows that the pension programme in Korea was simply too generous to maintain financial stability. The contribution rate in Korea was relatively very low, although it was designed to provide a high amount of pension, amounting to 70 per cent income replacement. A pension age of 60 years was also said to be a cause of future financial crisis in the pension programmes. Table 7.7 Comparison of pension programmes in selected countries

Contribution rates (% of wage) Income replacement rates Pension age (male)

Korea

Japan

Germany

6.0 70 60

17.35 70 65

18.6 70 65

Notes: 1. All figures are for 1996. 2. Income replacement rates refer to the level of the pension benefits for the insured who pay 40 years contributions. 3. In Korea, contribution rates refer to the rates paid by employed persons. Source: MOHW, internal data, 1997.

The extension of the NPP to farmers and fishermen was associated with a significant change in the role of the state in welfare provision. The provision of subsidies for all farmers and fishermen should improve the extent of income redistribution. Yet, except for the subsidies to the NPP, little financial effort was made by the Kim government to increase social welfare in general. Analysis of social expenditure This section provides an analysis of social expenditure in Korea during the Kim government in comparison with other countries. Table 7.8 illustrates some features of this. First, throughout the Kim government, the share of social expenditure in the total governmental spending remained at pretty much the same level of around

Globalisation: 1993–1997 153 Table 7.8 Trend of social expenditure during the Kim Young-sam government Year

1993 1994 1995 1996 1997

Ratio to government expenditure

34.2 34.2 34.3 34.8 35.8

Social Expenditure Subtotal (billion won) = 100%

Education

Health

Social security & welfare

Housing & Others community amenities

15,414 18,421 21,351 25,261 30,829

62.6 59.6 59.7 57.0 54.6

2.8 2.0 1.9 2.0 1.9

29.2 31.2 28.9 30.5 34.0

3.6 5.5 7.4 8.2 7.1

1.5 1.6 1.9 2.1 2.4

Source: IMF, Government Financial Statistic Yearbook, 1998.

34 per cent. Though this figure was higher than that of the previous government, for example 29.1 per cent in 1992, the Kim government did not make a serious effort to allocate more expenditure to social affairs. This level was still low in comparison with the UK, 52.3 per cent in 1995, and Japan, 58.3 per cent in 1993 (IMF, 1997). Second, education expenditure was still dominant enough to account for around 60 per cent of the total social expenditure, though this proportion significantly decreased to 54.6 per cent in 1997. Compared with other countries, this proportion was exceptionally high. As for the UK in 1995, the expenditure of education only explained 9.5 per cent of total social expenditure, and in Japan in 1993, it was 10.3 per cent. In these two countries, unlike Korea, the expenditure on social security and welfare was the largest in total social expenditure, 59.5 per cent in the UK and 63 per cent in Japan respectively (IMF, 1997). These figures suggest that the priority of the Korean government in social affairs was in education, namely developing human resources. Third, the level of social security expenditure by the government was still low compared to other countries. Table 7.9 shows that among the selected five countries, Korea spent the lowest proportion of social security expenditure out of total government expenditure. In 1995 Korea spent only 9.8 per cent, while in Sweden it was 49.5 percent. Table 7.9 also demonstrates the magnitude of the social security Table 7.9 Comparison of social security expenditure (%)

Korea Japan UK US Sweden

Ratio of social security & welfare in government expenditure a

Ratio of social security expenditure in GDP b

9.8 36.7 31.1 29.1 49.5

5.18 12.44 22.84 15.55 37.07

Notes: a All data are for 1995 but Japan for 1993, following the IMF’s standard. b All data are for 1992 but Korea for 1996, following the OECD’s standard. Sources: IMF, 1997; OECD, 1996a.

154 Globalisation: 1993–1997 system in Korea. Korea spent 5.18 per cent of GDP on social security programmes in 1996. This was obviously a considerable growth, comparing to 2 per cent in 1986. However, Korea still spent an extremely low level of expenditure on social security systems compared to other OECD countries. Compared to Sweden, Korea spent almost seven times less on social security programmes as a percentage of GDP. The above aggregate data can tell us little about individual social security programmes. In order to resolve this limitation, I intend to divide the aggregate data into thirteen programmes according to the OECD’s classification of social security systems. It is very difficult and even problematic to match accurately the social security programmes in Korea with the OECD classification. This is partly because the social security system in Korea has not matured yet and partly because Korea has not introduced some programmes. Thus, I will just refer to a government report concerning a classification of the social security system in Korea rather than classify it myself. Table 7.10 shows that in Korea, the three largest benefits in order of size among the social security programmes were health, unemployment and old age cash benefits. Despite the burden of high medical costs paid by patients in Korea, the public spending on health was the highest one due to the premature state of other social security programmes. As a matter of fact, the most advanced and matured social security programme in Korea was the MIP. The second largest expenditure in Korea was unemployment benefit, accounting for 27.1 per cent, while in the UK unemployment benefit was the eighth largest of the thirteen programmes. Despite such a high proportion of unemployment expenditure in Korea, however, it is important to note that most of the unemployment expenditure in Korea was explained by the compulsory severance allowance, which was predicated upon the Labour Standard Law enacted in 1953. In the law, all employers had to pay departing employees a severance allowance (one month’s remuneration for one Table 7.10 Social security expenditure according to programmes Social security programmes

UK (1992)

Korea (1996)

1. Old age cash benefit 2. Disability cash benefit 3. Occupational injury and disease 4. Sickness benefits 5. Services for elderly and disabled people 6. Survivors benefit 7. Family cash benefit 8. Family services 9. Active labour market programmes 10. Unemployment benefit 11. Health 12. Housing benefit 13. Other contingencies Ratio of the total to GDP (%)

25.5 8.3 0.3 0.9 2.3 5.7 7.9 2.1 2.5 5.4 25.3 6.7 6.8 22.84 (100)

21.7 2.0 5.0 — 0.9 3.3 0.1 1.6 1.7 27.1 33.8 — 2.8 5.18 (100)

Sources: S. K. Hong, 1998; OECD, 1996a.

Globalisation: 1993–1997 155 year’s service), which functioned as a lump-sum pension for retiring elderly employees or as unemployment compensation for an unemployed person who had been laid off. To sum up, despite the rhetoric of a New Korean Welfare Model under the Kim government, there was nothing unique in the social security system. The social assistance programme shrank with respect to the number of recipients. The government introduced the EIP, but only supported a little of the administration costs of it. The UIS had relatively tight entitlement conditions and meagre unemployment benefits. The features of the UIS suggest that the main concern of the government in its introduction of the EIP was not income security for workers but active labour market measures. On the other hand, the extension of the NPP to farmers and fishermen was accompanied by the exceptional measure that the government provided subsidies for all farmers and fishermen in order to relieve the financial burden of their paying contributions. This was expected to contribute to income redistribution. Nevertheless, the government was constantly reluctant to increase social security expenditure.

Policy linkages between economic and social policies: towards a business-friendly social policy? With economic liberalisation, the Korean economy has been increasingly integrated into the world market. At the same time, the Kim government was increasingly requested to play the role of a competitive state in economic affairs in order to create competitiveness. This new policy direction should be reflected in the social policy formation so as to require the redesign of social policy. In order to highlight policy linkages between economic policy and social policy in the Kim government, this section deals with changes in three policy areas: social security system, labour policy and education and training system. Social security policy: contingent effects of globalisation This section discusses social security reforms in the Kim government in order to highlight the impact of globalisation on the social security system. This discussion suggests that the impact of globalisation on the social security system should be contingent according to the programmes. Expansion of social security in an era of globalisation The extension of the NPP to farmers and fishermen was initially planned in the Seventh Five-Year Economic and Social Development Plan prepared in 1992, in which the government had set up three major strategies: strengthening competitiveness, enhancing social equity and creating a balanced development (EPB, 1992, in KDI, 1995a: 629). However, it came into effect in July 1995 as we have seen in the last section. We here explore reasons why the Kim government extended the NPP to farmers and fishermen. Though it may be undeniable that

156 Globalisation: 1993–1997 electoral leaders expand social programmes as a way of facilitating the political integration of disaffected voting blocs (Piven and Cloward, 1972: 40), the extension of the NPP can be largely attributed to the change of family structure associated with industrialisation as well as the result of globalisation. In particular, I am going to argue here that a more crucial impetus to extend the NPP to farmers and fishermen came from the Uruguay Round, which was agreed at the end of 1993. Just like in other industrialised countries, industrialisation and urbanisation in Korea brought about an increasing number of elderly households composed of an elderly couple or a single elderly person. Table 7.11 shows that by 1990 the proportion of elderly households reached 25.5 per cent nationwide, although more than 70 per cent were made up of more than two generations. In particular, in rural areas the elderly households accounted for 34.5 per cent of total households, which was nearly twice that in urban areas. This figure reflected the fact that industrialisation in Korea has accompanied the inflow of population from rural areas to urban areas. There was also a significant change in social attitudes among the elderly people regarding co-habiting with their children. According to a government survey, the elderly have increasingly preferred to live separately from their children. In 1984 only 11.5 per cent of the elderly wanted to live independently from their children, whereas in 1994 the ratio increased to 46.4 per cent (KIHASA, 1996b: 118). Therefore, it was increasingly difficult to devolve responsibility for the care of the elderly to the family. Arguably, however, a more important factor in facilitating the extension of the NPP to farmers and fishermen came from the agreement of Korea on the Uruguay Round at the end of 1993. A report published by the government confirmed this: As the agreement of the Uruguay Round has negatively affected economic situations in rural households together with the emergence of ageing society, the government has tried to introduce the pension programme for farmers and fishermen in order to secure their income maintenance in old age. (MOHSA, 1994b)

Table 7.11 Types of elderly households, 1990

One generation Couple Single Two generation Three generation Four generation Others Note: Elderly – aged 60 or more. Source: NSO, 1993.

Nationwide

Urban areas (Si)

Rural areas (Gun)

25.5 17.2 8.3 29.3 41.5 1.6 2.0

18.1 11.8 6.3 30.8 47.5 1.5 2.1

34.5 23.7 10.8 27.5 34.3 1.8 1.9

Globalisation: 1993–1997 157 In 1991, Korea had already removed constraints on 97.3 per cent of imported goods with the exception of some agricultural products (EPB, 1991: 343). Under the new trade regime of the World Trade Organisation (WTO), Korea could no longer establish any trade barriers to imports. This had a serious impact on Korea’s agricultural industries, which were largely composed of rice-raising, small-sized farms and thus likely to be uncompetitive in an open market. In order to respond to these threats, the Kim government announced ‘A Plan for Development of Agricultural and Fishing Industries’ in 1994 (EPB, November 1994, in KDI, 1995a: 706–11). This Plan chose three objectives: strengthening of competitiveness in agricultural industries, improving living conditions, and enhancing social welfare in rural areas. In addition, the Kim government introduced ‘A New Special Tax for Agricultural and Fishing Villages’ as a temporary earmarked tax for the next ten years, which would be allocated to the above three projects (EPB, July 1995, in KDI, 1995a: 698). The government planned to collect 1.5 trillion won over ten years and to allocate 12.1 per cent of this to enhancing social welfare for farmers and fishermen. Moreover, the government started to provide subsidies for all farmers and fishermen who were covered by the NPP from 1995 in order to relieve their burden of contributions, which was funded from this earmarked tax. Although the amount of subsidy was not sufficient, there was no doubt that it contributed to strengthening the role of the state as a provider in welfare provision. As we have seen, therefore, whereas the extension of the NPP to farmers and fishermen seems to be a positive impact of globalisation on the social security system, the impetus behind the measure was globalisation’s negative influence on the life of farmers and fishermen through trade liberalisation. The NPP should therefore been seen as a way to compensate losers in the process of globalisation. Negative effects of globalisation on social security Given the priority of competitiveness in policy decisions, along with the declaration of the globalisation policy at the end of 1994, it is not surprising to see that the Kim government remained very cautious in expanding the social security system. In terms of social security policy, President Kim announced ‘the globalisation of life quality’ as an aim in March 1995, which meant the raising of the country’s life quality up to global standards of excellence (MOFE, 1996: 361). This was another beneficial image of globalisation. However, in a situation where the objective of competitiveness was dominating all policy matters, the global standard of excellence in the country’s life quality proved to be just a political slogan. Negative effects of globalisation can be found in the reforms of the social security system. In May 1995, the National Welfare Planning Board (NWPB) was established to prepare a special plan to pursue the ‘Korean welfare model’. After having several public hearings, the NWPB finally announced a special plan called ‘The Vision of National Welfare in the 21st century’ in February 1996 (MOHW, 1996a: 3). In the plan, the NWPB set ‘establishing a harmonised welfare state’ as the goal of national welfare and proposed four strategies to achieve this goal. The first was the attainment of a balance between economic development and social welfare. The

158 Globalisation: 1993–1997 second was the integration of traditional Korean customs with the positive elements of welfare systems in advanced countries. The third was the establishment of a productive and preventive welfare system. The last was the involvement of both public and private sectors in welfare provision (NWPB, 1995). In order to pursue these strategies, the following measures were chosen: establishing a social safety net through the social insurance system; securing a national minimum standard of living by public assistance programmes; realising welfare pluralism; strengthening the traditional family welfare function; enhancing efficiency in the social welfare system (NWPB, 1995; MOHW, 1996a: 3–8). There were many similarities between the plan announced by the NWPB and the ‘Korean welfare model’ that was proposed in the early period of the Kim government. They all put a greater emphasis on non-state welfare providers, namely families, voluntary organisations and private provision. Seo Sang-mok, the minister of the MOHW at that time, made sure that the direction of the Korean welfare model would be a ‘welfare society’: ‘As we have developed not only active private participation in the welfare provision but also traditional family values, we can realise “a welfare society” that we want to establish’ (KIHASA, 1995). Of course, this new direction did not mean the inevitable decay of the welfare system. Nevertheless, it should be noted that the Korean social security system proposed by the NWPB pursued a welfare society rather than a welfare state. A social security system with a minimal social safety net, welfare pluralism, in particular stressing the family welfare function and efficiency in the social welfare system, all suggest that the government paid much attention to keeping costs down in the provision of state welfare. The revision of the Employment Insurance Law (EIL) in December 1996 was another case elucidating the negative impact of globalisation on the social security system in Korea. The Kim government intended not only to facilitate the JSS and the JADS, but also to tighten the unemployment benefit system. In particular, the reforms of the UIS, which took place only five months after the UIS was launched, are interesting enough to draw our attention. The unemployment benefit system, which had been already designed to be strict to claimants, became much tougher by revising the entitlement conditions (EIL, 1996: Article 31). The unemployment benefit called ‘basic allowance’ was replaced by ‘jobseeker’s allowance’ (JSA). In order to be qualified for JSA, an unemployed person must be actively seeking employment, not to mention that he or she must satisfy the minimum contribution period of twelve months during the reference period of eighteen months. In order to satisfy the rules on actively seeking employment, the unemployed person must take responsible steps to find a job, including signing on fortnightly. The reform of the UIS was comparable to the UK’s reforms in unemployment benefits in October 1996. In the UK, ‘jobseeker’s allowance’ replaced ‘unemployment benefit’ and ‘income support’ for people who are out of work. Thus, for those who have paid sufficient contributions, JSA will be paid without a means test but only for six months. After that, it will only be paid if the unemployed pass a means test (Child Poverty Action Group, 1997: 46). In Korea, however, JSA will be paid only for two months. For those who are unemployed but able to work after the two months of benefit period, they cannot be eligible for Public Assistance even if they

Globalisation: 1993–1997 159 could pass a means test. Consequently, the UIS, which had already been designed to be strict to the unemployed, became much tougher on claimants. There was also a revision with respect to the waiting period (EIL, 1996: Article 40). In the old law, the waiting period for two weeks had started from the date when the unemployed person reported himself/herself to the Job Security Office. Thus, the unemployed person may receive benefit after two weeks from the date of informing the Office of their unemployed status. In the revised law, however, the waiting period of two weeks would be counted from the date when the Office officially acknowledged the unemployed status, providing that the unemployed are actively seeking employment. This revision was obviously aimed at discouraging the unemployed from claiming unemployment benefit. Finally, the pension programme was another area that the Kim government tried to reform. The NPP, which was extended to farmers and fishermen in 1995, had received mounting criticism with respect to its long-term financial stability (Moon, 1995; Kwon, 1999). As we have mentioned, because of inadequate institutional design, which promises generous benefits and at the same time requires only a small amount in contributions, the reform of the NPP was inevitable. The government established the National Pension Reforming Board (NPRB) in May 1997 and announced a proposal for the reform of the NPP in December 1997, at the end of the Kim administration. Although this proposal was significantly changed during the next government, it was interesting enough to show the direction of social security reforms under the Kim government. The NPRB proposed a transformation of the NPP from the existing integrated system, in which the pension was a combination of fixed and earnings-related components, to a two-tier system, in which a basic pension and an earnings-related pension are treated separately (NPRB, 1997). As we can see in Formula I below, the existing NPP had been designed to have a redistribution effect owing to Factor A, while, because of Factor B, the higher the earning is over a working life, the larger the pension that will be given. Thus, the value of the coefficient, that is 0.2 and 0.75, was a controversial issue, as it will decide the characteristics of pension as well as the amount of it. Formula I Monthly pension = 0.2 (A + 0.75 B) × (1 + 0.05n) Formula II Basic pension = 0.16 A × N/40 Earnings-related pension = 0.24 B × N/40 Note: A is the average monthly wage of all insured in the NPP during the last year; B is the average monthly wage over the contribution period of the pensioner; n is the number of contribution years – 20; and N is the number of paying contributions.

160 Globalisation: 1993–1997 Formula II aimed to reduce the amount of basic pension by lowering the coefficient value, and to raise the proportion of earnings-related pension. According to this new formula, the income replacement rate of pensions was designed to decrease dramatically. The existing income replacement rate of 70 per cent, which is the amount of the pension for the insured who are in the mean income strata and pay 40 years of contributions, was planned to drop to 40 per cent (NPRB, 1997). This reform was perhaps inevitable, given the inadequate pension design that was predicted to cause financial difficulty in the future. However, it is worth noting that the new proposal of the NPP will have less effect on income redistribution. The proposal tended to reflect a more market-conforming approach to pensions. The Kim government also introduced the personal pension scheme as a measure of private welfare provision from 1995 in order to compensate the NPP (EPB, January 1994, in KDI, 1995a: 686). The private personal pension scheme was also expected to play an important role in raising the saving rate and thus to contribute to the capital market and national economy (Ra and Moon, 1995). In order to attract people to the personal pension scheme, the insured were granted taxdeductions amounting to 720,000 won a year. The private pension will be exempted from income tax (Law for Tax Deduction and Tax Exemption, Article 80:2). The Kim government tried to reform the social security system under the slogan ‘the Korean welfare model’. These reforms in general tended towards welfare pluralism, emphasising the role of non-state providers in welfare provision, especially the family. The government was expected to play the role of a regulator rather than a provider, exerting greater control over the running of the social security system in order to enhance efficiency. All reforms in the social security system in the Kim government were greatly affected by the imperative of competitiveness under the watchword of globalisation. The effects of globalisation on the social security programmes, however, were not homogeneous. According to Rieger (1995), trade liberalisation had a negative effect on the life of particular groups, and social security programmes were extended as a way to compensate losers in the process of globalisation. It might be argued that the extension of the NPP to farmers and fishermen was such a case. However, other reforms, including the revision of the EIL, the introduction of the private pension scheme, and the reform proposal of the NPP, all suggest that the Kim government was increasingly taking into account the imperative of competitiveness in the formation of social security policy. Labour policy: towards a more flexible labour market It is widely recognised that labour market flexibility is imperative for maintaining or creating competitiveness. Indeed, with a growing economic integration in the world markets, labour regulations have been increasingly blamed for deteriorating competitiveness. In this context, labour policy would be dominated by the need for competitiveness more than ever. In order to examine the applicability of this general trend in Korea, I intend to discuss changes in labour policy in the Kim government.

Globalisation: 1993–1997 161 Creating competitiveness by reducing wage growth rates A dramatic increase in real wages in Korea since the end of 1980s had been accused of being one of the main constraints in maintaining the competitiveness of domestic firms in the world markets. As Table 7.12 shows, Korea experienced a dramatic increase in real wages during the period 1989–94, compared to other countries that were possibly Korea’s main competitors in trade markets. In Japan and the USA, there was little change in real wages. Interestingly, Taiwan also experienced a significant growth in real wages. However, since 1991 the hourly labour cost in manufacturing industries in Korea began to exceed that of Taiwan, and thereafter the gap between them increased (KLI, 1997: 123). As a consequence, Korean firms, which had heavily depended on Japan and the USA in export markets, enjoying comparative advantage mainly due to considerably lower labour costs, were increasingly having difficulty in maintaining their competitiveness. Table 7.12 Trend of real wages in manufacturing industries (1990 = 100)

1989 1991 1992 1993 1994

Korea

Taiwan

Japan

90.4 (18.3) 106.9 (6.9) 116.4 (8.9) 123.2 (5.8) 133.9 (8.7)

91.9 107.1 113.0 117.3 120.1

98.6 101.2 100.8 99.1 100.4

(9.6) (7.1) (5.5) (3.8) (2.4)

USA (3.4) (1.2) (–0.4) (–1.6) (1.3)

102.5 98.8 99.0 99.5 101.2

(–2.2) (–1.2) (0.2) (0.5) (1.7)

Note: ( ) growth rate compared to previous year. Source: KLI, 1997: 114.

In his inaugural speech, President Kim proposed ‘pain sharing’ as a watchword with respect to labour policy, putting off the revision of the labour laws, which had been promised in his election campaign (Chosunilbo, 28 February 1993). The Kim government asked workers to make a concession in wages to employers in the name of pain sharing. In response to this initiative, on 1 April 1993 there was an agreement on wage growth for the first time between the FKTU, which was the only government-authorised labour organisation, and the KEF, which was a leading organisation of employers. They announced that the growth rate of nominal wages for 1993 should be set at between 4.5 and 8.7 per cent. This was a lower level than those of the previous few years. Despite this social pact, however, average nominal wages in manufacturing industries increased by 10.2 per cent in 1993. In a situation where the FKTU did not have sufficient measures or resources to control umbrella unions, the wage agreement between two establishment organisations had to be ‘an ultra-elitist agreement’ without a consensus among workers (Song, 1994: ch. 7). Revision of the labour-related laws: towards a flexible labour market Despite President Kim’s promise to revise the labour laws during his election campaign, this did not occur until the final year of his term. It was in April 1996, when

162 Globalisation: 1993–1997 President Kim announced the ‘Plan for a New Labour–Management Relation’, that the revision of the labour laws came onto the policy agenda. In the Plan, he emphasised the necessity of reforms in labour–management relations, arguing that all existing institutions and customs with respect to labour affairs must be changed for the Korean economy to survive in an era of globalisation characterised by limitless competition (Presidential Secretary Office, 1996). Indeed, employers in Korea had been persistently asking for the amendment of the labour laws to allow greater labour flexibility, freedom to ‘hire and fire’, and the use of non-standard work contracts, such as temporary, part-time, fixed-term and contracting out (Bae et al., 1997: 155). On the other hand, workers had also been arguing for the revision of the labour laws, asking the government to guarantee more autonomous trade union movements (KCTU, 1995). In particular, three prohibitions concerning trade union activities, namely multiple unions, political activity of unions and third-party intervention, were consistently criticised as a great barrier to autonomous union activities. Thus, with respect to the labour laws, the major concern of business was labour flexibility, whereas workers put more emphasis on labour standards. The revision of the labour laws had to be a delicate process to satisfy two seemingly contradictory needs at the same time. Korea witnessed the first ever general strike regarding the revision of the labour laws in early 1997. So how did the process of revising the labour laws proceed? THE FIRST REVISION OF THE LABOUR-RELATED LAWS

The government set up the Labour–Management Relations Reformation Committee (LMRRC) on 9 May 1996 in order to draw an agreement between business and labour on a draft labour law revision. Despite extensive efforts to draw an agreement, however, there was a wide gap between labour and business positions on the following issues (No, 1996: 13–19; W. D. Lee, 1997). The first was concerned with collective labour–management relations: multiple trade unions, third-party intervention, political activities of trade unions, the no-work and no-payment principle, remuneration for full-time union staffs by companies, replacement of strikers, and union formation for teachers and public officials. The second was related to labour flexibility: employee layoffs, flexible work systems and leave systems. The LMRRC inevitably failed to reach an agreement concerning the above issues and announced the breakdown of its talks, which meant the failure of a corporatist trial in the policymaking process. Subsequently, the government alone prepared a draft of the revision and transferred it to the National Assembly for its passage on 19 December. The opposition parties opposed deliberating on a draft and proposed to postpone the Assembly session until the next year. However, the ruling New Korea Party (NKP) secretly called in its affiliated lawmakers to the National Assembly at 6 o’clock in the morning on the day after Christmas. They then unanimously passed the draft proposed by the government within seven minutes, excluding the opposition lawmakers who held a sit-in in the parliament building for days to block physically

Globalisation: 1993–1997 163 the passage of the bills. The new labour laws included several important features, which brought a new direction of labour policy. First, the new labour laws amended three long-lasting, controversial articles regarding trade union activities, that is, the three prohibitions on multiple unions, third-party intervention and political activities of unions. The revised laws would contribute to enhancing the basic labour rights of workers with respect to collective activity. Yet, regarding multiple unions, the law stipulated that in order to avoid unnecessary confusion multiple trade unions at the enterprise level would be allowed from 2002, while at the industry and association level they would be introduced in three years (Trade Union and Labour Relation Adjustment Law (TULRAL), 1997: Appendix, 6). That was an unexpected decision, as both business and labour had already agreed the immediate introduction of multiple unions at industry and association level in the LMRRC. This thus provided the KCTU with grounds to initiate general strikes in support of its very existence. Second, the new labour laws included new clauses regarding the collective action of trade unions: no-work no-pay, replacement of strikers and remuneration to fulltime union officers by companies. It was stipulated in the laws that employers must be prohibited from paying wages during strikes, which meant the realisation of the ‘no-work no-pay’ principle that had been one of the most controversial issues between labour and business. At the same time, employees should be banned from starting strikes just to receive wages unpaid during strikes (TULRAL, 1997: Article 44). In the laws, employers were allowed to replace strikers with non-union members or non-striking union members within the same company. Moreover, in the case of firms that adopt the union-shop system or do not have replaceable workers, employers may replace strikers with temporary workers out of the same company (TULRAL, 1997: Article 43). In addition, from 2002 employers would be banned from paying wages to full-time union staff (TULRAL, 1997: Article 24, 81). It will become almost impossible for small and medium-scaled firms to form trade unions, as the prohibition of payment to full-time staff would entail financial problems for trade unions and serve as a critical hindrance to the creation of unions. As a result of these new clauses, workers will have more difficulty in exercising their rights concerning their collective activity. Third, and most importantly, the new labour laws included new clauses to enhance labour market flexibility: layoffs upon business dissolution, flexible working hour systems and leave systems. According to the new laws, employers gained the legal right to dismiss employees. Previously, companies could not discharge employees without just cause. The new laws allowed layoffs for reasons of financial deterioration, structural adjustment, technical innovation, and mergers and acquisitions, though employers must consult with union or workers’ representatives before layoffs are made (Labour Standard Law (LSL), 1997: Article 27). It is true that a version of lifetime employment in Korea was already eroding with the introduction of early retirement practices in private companies, but this fresh clause would inevitably fuel concerns about job security among workers. The new labour laws introduced two different types of flexible work system: ‘hours’ and ‘time’. When a written agreement is made between labour and

164 Globalisation: 1993–1997 management, working hours shall be extended up to 56 hours per week without overtime pay on a monthly basis (LSL, 1997: Article 42). When unions and employers agree, working time now can be freely arranged according to workers’ own choice, provided that the maximum daily working time does not exceed twelve hours (LSL, 1997: Article 46). With the introduction of a flexible work system, employers will save labour costs, whereas employees will be paid less. That is because payment for overtime work, which had been made at a higher remuneration rate, will decrease. Another additional amendment to reduce labour costs was made in the paid leave system. Under the old paid leave system, there had been annual leave (10 days per year), seniority leave (one day per year of service), monthly leave (12 days per year), menstruation leave (12 days per year for females), maternity leave (60 days for females) and 17 recognised government holidays. Employers had been complaining that this leave system was very expensive and hindered competitiveness, especially considering that unused leave must be compensated at a higher remuneration rate than normal working hours. In response to these complaints, the new laws introduced a limit, which restricts the maximum number of paid leave days a year to 31 days (LSL, 1997: Article 48). After all, although the new labour laws included some revisions to modernise collective labour–management relations, the priority of the revision was deregulation of the labour market and strengthening of labour flexibility. Lee Hong-koo, the NKP chairman at that time, expressed his regret at the way the reforms had been passed in the Assembly. However he emphasised that: as the opposition lawmakers had almost detained House Speaker Kim Soo-han, there was no other way we could bypass the blockade of the opposition. NKP could not help taking the regrettable action because of the pressing needs of the competitiveness in the economy. (Korea Times, 27 December 1996) The need for strengthening competitiveness was indeed the main driving force behind the revision. The new labour laws were indeed favourable to businesses, placing more emphasis on enhancing labour market flexibility than on improving the quality of working life. Businesses had a hard time to mask their delight over the new labour law.2 The revision of the laws, however, triggered the first ever general strike in Korea. GENERAL STRIKES AND THE SECOND REVISION OF THE LABOUR LAWS

The revision of the labour laws drew a lot of criticism not only from labour groups in Korea but also from abroad. The KCTU, an illegal umbrella organisation, immediately ordered its 320 member unions to go on general strike. The KCTU chairman, Kwon Young-gil, claimed that ‘the passage of the amendments should be null and void, because the NKP ignored all legislative rules in the process’ (Korea Herald, 27 December 1996). The FKTU, the only legal umbrella union, also went

Globalisation: 1993–1997 165 out of its way to issue a general strike call in solidarity with its rival, the KCTU. The FKTU ordered a 24-hour general strike by 1.2 million members in 5,500 affiliated workplaces, arguing that ‘the new labour laws demand the sacrifice of workers’ blood and tears in exchange for better business interests’ (Korea Times, 29 December 1996). It was the first general strike ordered by the FKTU since its inception. Many civic groups also condemned the Kim government and its party, demanding the annulment of the revisions (Korea Times, 27 December 1996). The Kim government also faced growing external pressure from international labour bodies. Four delegations from international labour groups, including the International Confederation of Free Trade Unions and the Trade Union Advisory Committee for the OECD, attended protest rallies and news conferences with Korean union leaders. They pledged international support for the Korean efforts to repeal the new labour bills. It was said that they would intensify a world-wide campaign in protest at Korea’s unpopular labour laws (Korea Herald, 13 January 1997). In addition, several member states of the OECD, including the USA, Austria and Norway, expressed their regret over Korea’s controversial revisions to its labourrelated laws ahead of a special session of an OECD committee on Korean labour affairs (Korea Herald, 11, 17, 21 January 1997). Indeed, the OECD’s Economic, Labour and Social Affairs Committee was held on 22 January to make a report concerning the revisions of the Korean labour laws in line with OECD standards. The early response of the Kim government to general strikes was strict. President Kim, in his New Year press conference on 7 January, called for more restraints on trade unions, emphasising a tight application of the law (Korea Herald, 8 January 1997). However, this tough stance had to be relaxed in the face of escalating labour protests, which led the Kim government to lose public support.3 Under mounting pressures at home and abroad, on 21 January President Kim backed down on the new labour laws and allowed the National Assembly to revise the laws again through negotiations between the governing party and opposition parties. The most controversial issues during the negotiations were the following issues: postponing multiple unions, no-work no-pay, replacement of strikers, remuneration for fulltime union staff, layoffs and a flexible work system. Finally, the new labour law, which had caused the first ever general strike in Korean modern history, came to be revised again in early March. Nevertheless, the second revised labour laws retained most of the clauses in the first revision. Regarding the collective activity of trade unions, the only change was made in the provision of multiple unions at industry or national level. The KCTU thus became a legally recognised organisation for workers, pitting itself against the FKTU. However, other provisions were basically intact in spite of some relaxation. Moreover, with respect to the clause for labour flexibility, that is layoffs and the flexible work system, nothing was changed but putting off the implementation of layoffs for two years. Consequently, despite the second revision, the new labour laws would greatly favour businesses. There is no doubt that the revised labour laws made it easier for employers to lay off workers and to increase working hours, which are obviously pro-business measures. These all were driven by the need for competitiveness, which was the major objective in globalisation policy.

166 Globalisation: 1993–1997 Human resources development It is widely accepted that with increased economic integration in the world markets, greater emphasis in most countries will be placed on human capital investment, such as public education and training programmes. In particular, in the face of rapid change in production technologies, most states tend to emphasise the necessity for vocational training and retraining to provide business with a well-skilled labour force, which will be crucial to facilitate competitiveness. There appears to be no doubt that national prosperity becomes ever more dependent upon the skills and competitiveness of nations (OECD, 1998a). Given this trend, one would expect that the Kim government should put greater emphasis on human capital development. This section starts by examining the reforms in the education and training system under the Kim government. After the end of the 1980s the Korean economy started to suffer an imbalance between labour supply and demand. Manufacturing factories, in particular small and medium-sized companies in labour-intensive industries, were experiencing a severe shortage of skilled labour (MOL, 1996: 169). In a response to this problem, the Kim government announced a ‘New Human Resource Policy’ which was included in the Five-Year New Economy Plan. It was maintained that the establishment of a flexible labour market as well as training of a flexible labour force, such as multiple-skilled workers, would be essential for creating competitiveness (KLI, 1993). In order to achieve this goal, two strategies were chosen: reforming the vocational training system and developing labour market flexibility. First, the Kim government sought to diversify the vocational training system in order to cope with the severe shortage of skilled labour. New vocational training institutions, such as technical colleges, in-plant vocational colleges and universities were to be founded by industrial firms to train skilled workers. Thus, the jurisdiction of vocational and technical education was shared by two government agencies: the Ministry of Education (MOE) was responsible for vocational high schools, vocational junior colleges, polytechnics (open industrial university) and engineering colleges; the Ministry of Labour (MOL) was responsible for for vocational training institutes, technical colleges and industry-initiated programmes. In addition, the government introduced a new system of vocational high schools, the ‘2+1 system’, under which students were to study at school for two years and practise in industries for one year (MOL, 1999: ch. 7). The Kim government also made sure that enterprises would play the main role in vocational training, while the government would intervene only in the training of those who were more likely to be vulnerable to market failures, such as the female workforce, young people with poor education, elderly people and disabled people. Table 7.13 shows that there were some 1.1 million people who received vocational training during the five years of the Kim government. This figure was far more than the total number of people, 650,000, trained during the period 1982–91. In particular, multiple-skilled workers have been trained in the technical colleges since 1994. By 1997, nineteen technical colleges were founded and the number of multipleskilled workers significantly increased throughout the Kim government (MOL,

Globalisation: 1993–1997 167 Table 7.13 Number of vocational trainees during the KimYoung-sam government

Craftsmen Public In-plant Authorised Multiple-skilled workers Technical masters Instructors Total = 1,106,234

1993

1994

1995

1996

1997

184,034 26,206 122,151 35,677 — 352 4,022 188,408

213,005 31,617 152,030 29,304 961 286 3,987 218,239

217,660 30,508 160,413 26,739 3,004 417 2,854 223,935

214,259 36,644 151,303 26,313 4,733 480 2,622 222,094

245,044 49,257 173,686 22,101 5,843 579 2,092 253,558

Source: MOL, 1999.

1999: ch. 7). Table 7.13 also demonstrates that around 70 per cent of all trainees were produced in private enterprises.4 Thus, most of vocational training in Korea was carried out by private enterprises, according to their needs to adapt to the changes in production skills and technologies. Second, the government pursued the flexible labour market. As we discussed earlier, the government introduced the Employment Insurance Programme in 1995, which put more emphasis on active labour market programmes rather than unemployment benefits. In the first year of 1996, around 106,000 people, accounting for only 4.6 per cent of all of the insured, received financial support for vocational training under the Job Ability Development Scheme (JADS). This number has subsequently been rapidly increased. Another important aspect of education policy in the Kim government was the establishment of the Presidential Commission on Education Reform (PCER) in February 1994 in order to prepare an educational reform plan. The PCER announced a series of proposals entitled ‘Educational Policy Tasks for Establishing the New Education System’. In the first proposal of May 1995, which was called ‘Education reform: proposals for the establishment of a new system of education for an age of globalisation and information’, the PCER presented a focus of education reform in Korea for the twenty-first century: The needs for the education reforms stem from economic globalisation and the electronic revolution. A world that was once felt to be immensely vast is turning into a neighbourly community. The advent of a society based on knowledge and information is a structural change that heralds the advent of a new civilisation. Faced with these challenges, Koreans must have a strategy for survival if they are not to be condemned to fall behind the rest of the world in history. (PCER, 1996: 2) It is true that the main emphasis in the education reforms was put on the development of human resources with knowledge and information needed in the era of globalisation. The reform proposal also included several measures concerning

168 Globalisation: 1993–1997 the vocational and technical education system. The focus of vocational and technical education was now shifted from the high school to higher education, including vocational junior colleges and universities. This reform was a response to the perceived necessity to prepare for the growing sophistication of production technology. In addition, the Manpower Development Fund was to be set up by the year 2000, facilitating vocational training for employees in small-sized firms, selfemployed people, and deprived groups. Indeed, one of the most astonishing features of the development of the Korean education system during the 1990s was a dramatic increase in the enrolment rate of higher education. Over the period between 1990 and 1995, the number of students in junior vocational colleges increased by 76 per cent and at university level by 14 per cent. By 1995 the enrolment rate reached 54.6 per cent. Table 7.14 shows that some 86 per cent of the younger generation aged 25–34 completed upper secondary level education, which was much higher than an average level of OECD countries. Educational attainment, which has been often regarded as an indicator of government efforts in education, should be treated carefully. Despite the rapid expansion of higher education, the size of public educational budget as a percentage of both the total government budget and the GNP remained stable. For instance, in 1993 the education budget, which had accounted for 3.7 per cent of GNP and 20.9 per cent of the government budget in 1983, was still 3.6 per cent and 22.9 per cent respectively. The government in Korea was still paying less for education than other countries, as we can see in Table 7.14. As a result, there was a significant increase in the number of private schools as well as in the amount of private educational expenditure. The share of the private sector in education in Korea has Table 7.14 Educational spending and attainment in selected countries in 1994

Denmark Sweden France Germany Italy UK Korea OECD average

Spending on formal education % to GDP

% with upper secondary education or higher

Public and privatea

Public only b

Aged 25–34

Aged 45–54

8.4 9.0 6.7 6.0 4.8 n/a 6.2 6.3

6.6 6.6 5.6 4.5 4.7 4.9 3.7 5.2

69 88 86 89 49 86 86 71

61 69 62 84 28 72 39 55

Notes: a Total expenditure from public, private and international sources for education (including payments for student living costs and educational materials). b Total public expenditure for educational institutions (excluding public subsidies for student living costs). n/a = not available. Source: OECD, 1998a: Annex Table A2.2 and A3.1.

Globalisation: 1993–1997 169 been very high. In the case of kindergartens, the enrolment rate in the private sector was 77.8 per cent of the total in 1994. The share of private colleges and universities at tertiary level reached 81.9 per cent of the total enrolment as of 1995 (OECD, 1998e: 28). The comparison of public and private spending on formal education gives a much clearer idea about the overall effort of the government in education. Table 7.14 shows that on average OECD countries spent 6.3 per cent of GDP on running formal education systems, of which four-fifths was direct public expenditure. The figure demonstrates that most of the expenditure on education across OECD countries was allocated by public sources. However, Korea was an exception. Though Korea spent 6.2 per cent of GDP on formal education, equivalent to the average in OECD countries, the proportion of public expenditure, 3.7 per cent, was far lower compared to that of other OECD countries. In particular, the share of expenditure for higher education was always less than 8 per cent of the government’s expenditure on education. It was far lower than an average of around 20 per cent among the industrialised countries (UNDP, 1998). Moreover, a large sum of money was spent on private informal education in Korea, such as private tutoring. According to a governmen report, as of 1994 private tutoring and other out-of-school supplementary education alone took up 2.7 per cent of the GNP at primary and secondary levels (OECD, 1998e: 43). It made up about 50 per cent of the average monthly expenditure for education paid per household, which was 10 per cent higher than the total amount of tuition fees for formal education (NSO, 1996). Consequently, parents bore a greater burden for education than public sources. In short, it is clear that the Kim government put more emphasis on vocational training. In particular, priority was given to the training of multiple-skilled workers in order to respond actively to evolving technologies. The focus of education reform was the development of human resources with the knowledge and information needed for creating competitiveness in an era of globalisation.

Conclusion During the Kim government, globalisation became a dominant policy idea in all of the state policies, which provided a significant momentum for businesses to retain their prevalence in society. Economic policy, which was driven by the imperative of globalisation, accelerated a transformation toward a market-based economic system by implementing a variety of deregulation and financial liberalisation measures. Despite these measures, the Korean government never became a minimalist one. The government continued to play the role of a participant in the market to encourage business activity and help domestic firms maintain competitiveness in the world market. In particular, the government largely adopted a strategy of competitiveness depending on production costs mainly driven by lowering labour costs and deregulation. This strategy significantly affected social policy. The state’s role in the provision of social welfare as a regulator was intact. The extension of the NPP to farmers and fishermen and the introduction of the EIP took

170 Globalisation: 1993–1997 place during the Kim government. However, the government continually played the role of a regulator rather than a provider in welfare provision. In particular, welfare reforms in the Kim government seemed to be towards more limited income security programmes. They included tightening conditions of access to unemployment benefit, putting more emphasis on active labour market measures, introducing a private pension scheme, adopting a market-conforming approach in pensions, and cutbacks in pensions. At the same time, the government increasingly emphasised the responsibility of the family and the role of the private sector in welfare provision. Competitiveness also increasingly became the main objective of labour policy. The Kim government in the early years actively encouraged workers to make a concession to business with respect to wages. Labour flexibility and deregulation of labour protections were sought by the revision of the labour-related laws. The new direction in labour affairs was to strengthen labour flexibility and lower labour costs. Regarding education and training policy, the Kim government did make a considerable change by putting more emphasis on the vocational education system. Consequently, there was a strong linkage between economic policy and social policy during the Kim government. With globalisation policy, the government increasingly became a competitive state to create and/or maintain competitiveness for domestic firms and thus social policy was increasingly required to conform to the needs of competitiveness. There seems to be little doubt that one reason for this ongoing shift was the imperative of international competitiveness within the dynamics of increased economic integration. In this regard, we have argued that social policy in the Kim government was transformed towards ‘a businessfriendly’ one.

8

Financial crisis, economic policy and social policy: 1998–present

The devaluation of the Thai baht in July 1997 was followed by financial instability in Indonesia, Malaysia, the Philippines, Taiwan, Hong Kong and Korea, which had all been praised as ‘an East Asian miracle’ by the World Bank in 1993 (World Bank, 1993). These financial crises led to the IMF’s bailouts to Thailand, Indonesia and Korea. Indeed, nobody expected the IMF bailout to Korea since it was the world’s eleventh largest economy and at the end of 1996 became the first OECD member country among the Asian countries except Japan. Not surprisingly, the IMF policy packages to Korea continue to push radical liberalisation in trade, finance and investment. The Korean economy has been fully integrated into the world markets in the wake of the financial crisis. In other words, the extent of globalisation has become ever deeper and wider. In this situation, one might expect that the social security system in Korea should be retrenched or at best keep the status quo. In particular, the IMF recommended that policy should focus on the social safety net rather than social rights for individual citizens. On the contrary, however, the government in Korea has pursued an expansion of the social security system as well as the establishment of the social safety net after the economic crisis. The social security system in Korea has been increasingly changing into a comprehensive and institutionalised system such as is present in Western welfare states. It is fascinating that Korea is following the opposite direction from the avenue suggested by the logic of globalisation regarding social welfare, while the Korean economy has been increasingly integrated into the world markets. This chapter deals with the following questions. What are the main causes of the financial crisis in Korea? Has the Korean development model been dissolved under the IMF? Why and how has the social security system in Korea been expanded in the wake of the economic crisis? In the first part of this chapter I will discuss the main causes of the financial crisis. I will next investigate how the role of the state in the economy has changed after the financial crisis. In the third part I will look at the transition process from an economic crisis to a social crisis. Then, in the fourth part I will explore the changes in the social security system in the wake of the financial crisis. Finally, I will discuss the driving forces that are changing the social security system in Korea.

172 Financial crisis: 1998–present

Crony capitalism versus the punishment of international capital The sudden and unexpected collapse of the Korean economy has been the subject of intense debate. This has probed the root causes of the financial crisis and possible solutions, as well as bringing into question the Korean economic success that had attracted epithets of ‘exemplary’, ‘amazing’, ‘miraculous’ and ‘spectacular’. Despite the large number of studies concerning the economic crisis in Korea, however, there has been no general agreement on either the causes or the solutions to the financial crisis. Arguments on the causes of the financial crisis range from those who maintain that the heart of the crisis lay in ‘crony capitalism’ in the Korean model of industrialisation to those who place the blame on the role of ‘the Wall Street/ Treasury/IMF Complex’. The former argument advocates that the financial crisis was caused mostly by purely domestic malaise in the Korean economy, with symptoms such as lack of transparency of financial institutions and a government– business relationship permeated with corruption. On the other hand, the latter argues that the crisis was generated mainly by the intrinsic and volatile nature of the global financial system. Understandably, the first argument was in general supported by the international establishments such as the IMF, the World Bank and the OECD, while the second was argued by some respected academics (Khor, 1998; Wade and Veneroso, 1998; Bello, 1999). However, I will argue that the financial crisis of Korea was due to a combination of policy failures and the punishments of international capital. This section starts by dealing with Korea’s economic situations prior to the crisis. It is interesting that there were few signs of impending crisis in the Korean economy prior to the financial crisis. Korea’s problem, unlike the other affected Asian countries, did not stem from an overvalued exchange rate and an excessive current account deficit (Feldstein, 1998: 24). Indeed the real economy was performing well in 1997. Korea was still an economy to envy prior to the financial crisis. Despite the seemingly healthy economy, however, the financial situations of most chaebols were getting worse, reflecting a relatively high ratio of debt service (OECD, 1998e). Since the beginning of 1997 an unprecedented number of highly leveraged chaebols moved into bankruptcy. Corporate bankruptcies in turn spilled over into a sharp increase in non-performing loans to 32 trillion won, 7 per cent of GDP, by September, which was about double the growth in comparison with the end of 1996 (IMF standby agreement, 1997). Consequently, many of the banks, especially merchant banks which had been newly licensed by the Kim Young-sam government in the name of financial liberalisation and borrowed heavily abroad to finance the investment projects of chaebols, found it extremely difficult to make repayment to foreign lenders. Hence, Korea started to get into trouble in mid-1997. These developments led to the successive downgrading of Korean financial institutions by international credit-rating agencies and a sharp tightening in the availability of external finance. In particular, following the downgrading of Korea’s sovereign risk status by Standard and Poor’s, new external financing virtually dried up and substantial difficulties were being experienced in rolling over the large

Financial crisis: 1998–present 173 amount of short-term debt. In turn, the Korean currency, the won, depreciated by about 20 per cent to the US dollar by the end of November and the stock market index fell by near 30 per cent to a ten-year low. As a consequence, the burden of debt servicing dramatically rose in terms of the Korean currency, while foreign lenders were trying in every way to call in their loans and not make new ones. Finally, gross official reserves declined sharply to the level that foreign lenders began to worry about the risks of default. In this situation Korea had to seek the IMF’s bailout. The IMF argued in its standby agreements with Korea that the origin of the crisis lay in the state’s intervention in the markets: In the process of development, the limitations of Korea’s system of detailed government intervention at the micro-level have become increasingly apparent. In particular, the legacy of government intervention has left an inefficient financial sector and a highly leveraged corporate sector that lack effective market discipline. The present difficulties in the financial sector stem from a lack of market orientation in financial institutions combined with lax prudential supervision. (IMF, 3 December 1997) Though the applicability of the IMF’s points in the whole developmental process in the Korean economy since the 1960s is problematic, there is a general agreement that weaknesses in the financial sectors and corporate governance, especially during the previous Kim government, fed the crisis in Korea. As we have discussed in the last chapter, under the Kim Young-sam government, financial liberalisation was greatly accelerated. In particular the Kim government significantly reduced its control over foreign borrowing so that the amount of foreign debt was dramatically increased from $44 billion in 1993 to $120 billion in October 1997. Of this, 66 per cent was accounted for by loans to the banking sector while 28 per cent went to the non-bank private sector and 6 per cent to the public sector (Chosunilbo, 8 January 1998). What was even worse was that the share of short-term debt in total debt rose from 43.7 per cent in 1993 to an astonishing 58.3 per cent at the end of 1996. This growth clearly reflected the liberalisation measures carried out by the Kim government in which it was no longer required to provide detailed information and obtain permission from the government for short-term debts. A high ratio of shortterm debt should be more dangerous in a situation where many firms move into bankruptcy and as a result non-performing loans in the financial sector dramatically increase. The Korean case illustrated this danger. Thus, there is no doubt that the wrong management of the banks and financial institutions in the previous Kim government in the name of financial liberalisation should be blamed for generating the crisis. In addition, as pointed out in the IMF agreements, poor corporate governance also contributed to the 1997 crisis in the form of inaccurate company financial information, no credible exit threat, insufficient financial institution monitoring and few legal rights and forms of protection for minority shareholders (Joh, 1999). It is

174 Financial crisis: 1998–present also true that government intervention significantly contributed to poor governance. Korean governments directly and indirectly controlled banks and gave low-interest loans to preferred large firms in heavy industry throughout the 1970s. When these firms could not repay their debts the government froze their debts and provided bailout loans in 1972 and 1979–88. Given the government financial incentives and guarantees, firms borrowed heavily and expanded beyond profit maximisation levels, resulting in high debt/equity levels. By 1997, Korea’s top 30 chaebols were leveraged to the extent of debt exceeding shareholders’ equity by nearly fourfold (actual value, 3.87), much higher than in other countries such as Taiwan (0.85), Japan (2.0) and the USA (1.6) (Mathews, 1998: 750).1 It is therefore true that the financial crisis in Korea was greatly attributable to domestic problems, notably wrong government policies and poor corporate governance. However, this is not the whole story. Putting the blame for the financial crisis solely on government intervention, as the IMF did, is problematic. In a strict sense it was the financial liberalisation without the careful supervision of the government rather than the governmental intervention in the financial systems that drove the Korean economy into the crisis. In this sense, Chang et al. (1998) argued that it was the dismantling of financial regulation rather than the perpetuation of the traditional financial regime that generated the financial crisis in Korea. In addition, there is a contending perspective over the high debt/equity ratio which argues that high corporate debt itself does not necessarily lead to crisis. Wade and Veneroso have argued that the international establishments, including the IMF, tend to disregard the unique financial rationale in the East Asian developmental model where high household savings and high corporate debt yield powerful advantages in terms of national development based on government–bank–firm collaboration (Wade and Veneroso, 1998: 15–16). For instance, during the period of high economic growth between 1955 and 1973, the debt/equity ratio of Japanese manufacturing corporations was 320 per cent, which was at an equivalent level to the Korean figure of 338 per cent between 1973 and 1996. The Japanese debt/ equity ratio peaked at around 500 per cent in the mid-1970s (Chang et al., 1998: 744). This comparison suggests that high debt/equity ratio itself may not cause economic crisis, but instead panic in the international financial markets can greatly affect the situation of the national economy. Thus, we should also pay our attention to the financial markets in order to understand the causes of the crisis properly. Unsurprisingly, the IMF has avoided blaming the financial markets or currency speculation and the behaviour of huge institutional investors with respect to the causes of the financial crisis. However, there is another view of how the crisis emerged and spread in the affected countries. This view puts the blame on the global financial market. It is maintained that, while not denying that corruption may have been an accessory to the collapse, a far greater role was played by the unregulated flow of global capital. With the financial deregulation and liberalisation across the world there has been the rapid shifting of large blocks of short-term capital across borders in search of quick and high returns to the tune of US$2 trillion a day. Only 1 or 2 per cent of this is accounted for by foreign exchange transactions related to trade and foreign direct investments. The remainder is for speculation or

Financial crisis: 1998–present 175 short-term investment that can move very quickly when the speculator’s or investor’s perceptions change. For instance, in Asian developing countries in 1996 US$94 billion entered and in the first half of 1997 US$70 billion poured in. With the onset of the crisis US$102 billion went out in the second half of 1997 (Khor, 1998). In this context Bello has argued that the Asian crisis was essentially a product of the globalisation of financial markets (Bello, 1998: 135). These explanations do not show the whole picture, but the role of the international financial market should be included in understanding the causes of the financial crisis. It is true that there was an overreaction of the international financial market and, as a result, an over-devaluation of Korean won. It can also be said that the policy failures of the Kim government played their part. Therefore, the financial crisis of Korea can be said to have resulted from a combination of policy failures and the punishments of international capital.

The demise of the Korean development model IMF standby agreements There were three agendas in the IMF agreements signed with Korea on 3 and 24 December 1997: domestic austerity programmes, further liberalisation, and reforms in corporate governance. There have been continuous debates over the first two issues. We will here critically examine the IMF’s prescriptions for the Korean economy. First, the IMF policy packages included an austerity macro-economic policy, which is the typical IMF policy prescription. In order to squeeze the domestic economy, the IMF called for not only a tight monetary policy with higher interest rates but also an austerity fiscal policy with cuts in the government budget and higher taxes. The IMF argued that these measures were necessary to restore and sustain calm in the markets and contain the inflationary impact of the recent won depreciation (IMF, 3 and 24 December 1997). However, as the Korean economy was getting more depressed and thus the unemployment rate soared during the first half of 1998, the IMF macro-economic policy proved to be a wrong prescription. There have been mounting criticisms, which argue that the IMF should have advised the affected countries including Korea to activate their economies through inflation and increased government spending. According to Feldstein, since Korea’s financial crisis was clearly a case of temporary illiquidity rather than fundamental insolvency, there was no need for the traditional IMF policy of reduced government spending, higher taxes, and tight credit. Something needed to be done to stop the loss of foreign exchange and to maintain bank lending to the country and its healthy businesses (Feldstein, 1998: 25). Indeed, the austerity package generated large social costs, notably soaring unemployment. In July 1998, the IMF finally decided to shift the focus of macro-economic policies towards boosting the economy and supporting an early recovery of domestic demand. On the fiscal side, the budget deficit, which had at first aimed at a balanced or black-ink budget, was allowed to 4 per cent of GDP. The reduction of value

176 Financial crisis: 1998–present added tax was recommended in order to boost economic activity. As for monetary policy, tight policy with high interest rates was given up and the monetary programme was designed to provide adequate scope for accommodating a further gradual reduction in interest rates (IMF, 24 July 1998). In such a situation where the domestic economy was falling further into recession and consumer and investor confidence was at a low ebb, the IMF had to learn that its typical policy prescription did not work. Second, as Mathews (1998) has pointed out, the IMF packages included a conspicuous American agenda to open up the Korean economy to foreign investment. The IMF called for a comprehensive restructuring and reform of the financial system on the grounds that the crisis was generated by the inefficient financial system (IMF, 3 December 1997). The IMF’s programme included the following: closure of non-viable financial institutions; restructuring of undercapitalised institutions; close supervision of financial institutions; increased transparency; eliminating all government-directed lending; and giving up measures to bailout individual corporations, including subsidised credit and tax privileges (IMF, 3 December 1997). However, the IMF’s policy package was not confined to the management of domestic financial institutions and went further towards a substantial financial liberalisation. The IMF has forced the Korean government to open the financial system wider to enable international capital to move freely, emphasising the increase in competition and efficiency through capital account liberalisation. All restrictions on inflow and outflow of capital, including those restricting mergers and acquisitions of domestic financial institutions by foreign financial institutions, foreign ownership of listed Korean shares, foreign access to domestic money markets, corporate bond markets and foreign direct investment are to be removed. In addition, domestic companies are allowed to have even more freedom than ever before in borrowing on international capital markets on their own account without government intervention, though it was their uncoordinated borrowing that set up the crisis in the first place. The IMF also asked the Korean government to undertake further trade liberalisation, in line with WTO guidelines (IMF, 3 and 24 December 1997; 24 July 1998). It is not difficult to see that the concessions made by the Korean government in the negotiation of the IMF programme have a clear correspondence with Washington’s bilateral economic policy towards Korea over the last decade. The role of the US Treasury Department in stiffening the IMF’s insistence on radical financial opening in Korea is documented. The Treasury made it clear that Korean financial opening was a condition of US contributions to the bailout. Bergsten, Director of the Institute for International Economics in the US, emphasised that ‘the crisis will accomplish enormously more for trade expansion and capital investments in Asia than decades of effort by US negotiators’ (Bergsten, 1998). In fact, as the undersecretary of the US Treasury Department, Larry Summers, has candidly admitted: ‘In some way the IMF has done more in these past months to liberalise these economies and open their markets to US goods and services than has been achieved in rounds of trade negotiations in the region’ (US Treasury Department, 23 February

Financial crisis: 1998–present 177 1998). What Wade and Veneroso (1998) call the ‘Wall Street/Treasury/IMF Complex’ seems to be helpful in understanding the characteristics of the IMF policy package. There has been increasing criticism of the IMF’s role in the Korean national economy, especially with respect to its enforcing liberalisation. Feldstein has argued that ‘a nation’s desperate need for short-term financial help does not give the IMF the moral right to substitute its technical judgements for the outcomes of the nation’s political process. The IMF should not use the opportunity to impose other economic changes that, however helpful they may be, are not necessary to deal with the balance-of-payments problem and are the proper responsibility of the country’s own political system’ (Feldstein, 1998: 27). Moreover, in practical terms, Wade and Venerosa have argued that, given the Asian high debt model, the long-term damage to Asian economies caused by the IMF’s prescriptions is likely to be even greater than the critics have recognised. This is because restrictions on the freedom of firms and banks to borrow abroad, and co-ordination of foreign borrowing by government, are a necessary part of these systems (Wade and Veneroso, 1998: 7). Korea’s outstanding performance combining persistently high growth, low inflation and low unemployment would suggest that the current structure of the Korean economy might be well suited to Korea’s stage of economic and political development. Even if the structural measures were necessary or desirable for Korea to develop towards an advanced market economy, it may be best to evolve more gradually and with fewer social costs. Third, the IMF agreements contained Korean-instigated reform measures, such as reforming the structures and operations of chaebols, which have been among of the most demanding political aims for a long time. In order to reform corporate governance and corporate structure, the chaebols were required to improve transparency of corporate balance sheets by adopting independent external audits, full disclosure and provision of consolidated statements (IMF, 3 and 24 December 1997; 24 July 1998). Given these measures, some Koreans regard the crisis as a blessing in disguise on the grounds that the government and the chaebols were forced to change the existing corporate governance that had been controversial for the last three decades and was blamed for generating the financial crisis in Korea. Towards a new Korean development model? The financial crisis in Korea coincided with the lead-up to a presidential election on 18 December, which brought the first change in political power from a governing party to an opposition party in Korea’s modern history. Under the extraordinary situation of the IMF’s bailout, the president-elect, Kim Dae-jung, had to embark on a global road show, selling the government’s commitment to the reform task. Korea had no alternative but to commit to the IMF standby agreements in order to receive the bailout. This is clearly documented in the IMF agreement: During the period of the proposed standby arrangement and thereafter, Korea will consult with the Managing Director of the Fund on the adoption of any

178 Financial crisis: 1998–present measures that may be appropriate, at the initiative of either the Korean authorities or the Managing Director, in accordance with the Fund’s policies on such consultations. (IMF, 3 December 1997) The new Kim Dae-jung government, which was launched at the end of February 1998, intensified its efforts in all structural reforms of the economy as well as adopting the austerity macro-economic policy. The government employed five major measures for banking restructuring: shutdown, mergers, foreign capital attraction, new stock issues and downsizing of the workforce. On 29 June 1998 the government shut down five ailing commercial banks, followed by restructuring of the banking sector which was carried out with an injection of huge amounts of the taxpayers’ money. By the end of March 1999, 43.5 trillion won had been injected into banks to support the restructuring process, which accounted for around 10 per cent of 1998 GNP. The number of banks shrank from 26 in 1997 to 16 in June 1999, which was accompanied by a 33.6 per cent layoff of employees in the banking sector (Newsreview, 3 July 1999). In particular, opening up the financial sector has resulted in a take-over of domestic financial institutions by foreign institutions. Foreign banks may not lend to highly indebted local companies and may not participate in the kind of alliances between government, banks and companies that had been maintained for a highdebt/equity financial structure. The Korean developmental model, characterised by high household savings, high corporate debt/equity ratios, bank–firm–state collaboration, industrial strategy, and investment incentives conditional on international competitiveness (Wade, 1998: 695–6), has to be dismantled. State controls over financial flows are unlikely to be reintroduced but the vacuum created at the centre by the excess deregulation of the mid-1990s has been filled by the new financial supervisory structures. At the same time, the capital account has been dramatically liberalised. The barriers to capital inflows have been largely dismantled. The traditionally hostile attitude towards foreign direct investment has been reversed. This reversal was spearheaded in President Kim Dae-jung’s inaugural speech in which he stated: ‘Inducement of foreign capital is the most effective way to pay back our foreign debts, strengthen the competitiveness of businesses and raise the transparency of the economy’ (Kim, 26 February 1998). All restrictions on foreign access to the shortterm capital market were lifted as of 1 January 1998. Restrictions on long-term capital flow were also liberalised throughout 1998. With the reform of the financial sector, Korea is now substantially entering a new era of monetary management led by the markets. On the other hand, the IMF intervention and the election of Kim Dae-jung as the president have facilitated the change in chaebols’ governance. Kim forced chaebols to reform their business practices drastically by securing the agreement of the country’s top five business leaders to a binding five-point plan in January 1998: (1) producing a consolidated financial system in order to increase transparency of corporate management, (2) ending the practice of guaranteeing loans among

Financial crisis: 1998–present 179 group subsidiaries, (3) establishing a healthy financial structure, (4) concentrating on core businesses and promoting partnerships with small and medium enterprises, (5) raising accountability assumed by majority shareholders and mangers (Korea Herald, 14 January 1998). Although the full implementation of these five measures has yet to be seen, they have not only enhanced the managerial transparency of the chaebols but also implied a significant breakaway from previous state–business relations. In short, the structural reforms that were imposed by the IMF and faithfully intensified by the new government have resulted in the demise of the Korean developmental state. The main features of the former Korean model lay in its power to co-ordinate investment partly through the operation of a pilot agency such as the EPB and partly through state controls over financial flows, but both have now disappeared. Nevertheless, the government in Korea has no intention of replacing its former highly interventionist development model with an Anglo-American style non-interventionist economy. While the new Korean model after the crisis will have at its centre an economy that is much more open and transparent, it will be closely supervised and regulated, and the sources of corruption and excessive risk-taking will be much reduced.

From an economic crisis to a social crisis The negative impact of the financial crisis on the real economy became apparent throughout 1998. As Table 8.1 illustrates, GDP dropped 5.8 per cent year-on-year, reflecting an 8.2 per cent fall in domestic consumption expenditure and sluggish exports in the wake of the financial crisis. All industries showed negative annual growth and gross fixed capital formation also plunged 21.1 per cent in 1998. Consequently, per capita gross national income (GNI), which mirrors real purchasing power, also fell from $10,307 in 1997 to $6,823 in 1998. Such a deterioration of the real economy has had a great deal of negative impact on individual well-being. Nominal wages have fallen dramatically in the wake of the financial crisis so that 1998 witnessed a decrease in nominal wages for the first time since the 1960s. The sharp rise in import prices due to the depreciation of the won boosted consumer price inflation to 7.5 per cent during 1998. Consequently, real wages dropped by around 10 per cent at the end of 1998 compared to a year earlier. The average real annual income of the urban working-class household was thus reduced by 6.6 per cent in 1998, compared to that of the previous year (NSO, 1999a). This decline in real wages, especially when combined with soaring unemployment, became a source of increasing economic hardship. Figure 8.1 shows that unemployment rates increased dramatically after the financial crisis of 1997, transforming from a situation of near full employment to a level that threatens social stability. Before the financial crisis, unemployment rates in Korea were around 2.5 per cent, but they soared to 8.7 per cent in February 1999. The number of jobless was listed at 1.8 million at that time. In particular, the unemployed who lost their jobs within the previous year exceeded 90 per cent of the total. In a country like Korea that since industrialisation had never suffered

180 Financial crisis: 1998–present Table 8.1 Major economic indicators, 1995–8 (at 1995 constant prices), year-to-year change (%) 1995 1996 1997

1998 Yearly

1/4

2/4

3/4

4/4

Exchange rate (won against $) 774.7 844.2 1,415.2* 1,207.8 1,378.8 1,385.2 1,376.2 1207.8 Call interest rates 12.4 12.4 16.3 15.0 23.7 18.7 10.2 7.1 Gross domestic product (GDP) 8.9 6.3 5.0 –5.8 –3.6 –7.2 –7.1 –5.3 Final consumption expenditure 8.2 7.2 3.2 –8.2 –8.4 –9.7 –8.9 –5.8 (Private) 9.6 7.1 3.5 –9.6 –9.9 –11.2 –10.4 –6.9 (Government) 0.8 8.2 1.5 –0.1 1.3 –0.7 –0.6 –0.4 Gross fixed capital formation 11.9 7.3 –2.2 –21.2 –20.6 –23.7 –22.2 –17.9 Exports of goods and services 24.6 11.2 21.4 13.3 25.7 13.2 8.0 8.8 Imports of goods and services 22.4 14.2 3.2 –22.0 –27.2 –25.5 –25.9 –9.0 Gross national income (GNI) 8.1 4.8 2.1 –7.9 –6.8 –9.7 –8.6 –6.6 Note: * refers to the last quarter of 1997. Source: NSO, 1999b.

from high unemployment, this might itself have been enough to bring about social and political instability. It is worth noting that this negative social impact has not been uniform across social groups. Table 8.2 shows that there have been some changes with respect to the composition of the unemployed since the financial crisis of 1997. First, if we look at the educational achievement of the unemployed, there has been a considerable increase in the proportion of the unemployed with a relatively poor education. Table 8.2 shows that the number of the unemployed who graduated only from middle or primary schools increased by more than double in the wake of the crisis. Second, the proportion of heads of household among the unemployed rose from 34.5 per cent in 1997 to 43.6 per cent in 1998, more than doubling in number from the year before. This causes hardship for dependants too. There have been a number of suicides called ‘IMF suicides’ by Koreans, which refer to male breadwinners who are laid off and take their own lives and those of their dependants, presumably out of a belief that no one will be left to care for them (Korea Herald, 25 April 1998). 10 8 7.9

6 % 4 2

6.5

6.9

Mar. 1998

May 1998

8.7 7.2

6.5

4.5 2.6

0 Nov. 1997

Jan. 1998

Dec. 1998

Feb. 1999

Apr. 1999

Figure 8.1 Trend of unemployment rates after the financial crisis

May 1999

Financial crisis: 1998–present 181 Table 8.2 Characteristics of the unemployed (%)

Educational attainment Middle school High school Technical college University Relation with householder Householder Spouse Other Age structure 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 50–59 60 or more Previous Job Full-time employment Temporary workers Daily workers Employers Self-employed Family-employed workers

1997 Jan.–Apr.

1998 Jan.–Apr.

Growth rate*

23.0 54.8 9.5 12.6

27.6 52.5 7.8 12.1

115.0 71.8 46.7 71.9

34.5 15.8 49.7

43.6 16.0 40.4

126.8 80.8 45.9

8.1 26.4 21.1 11.0 10.8 8.6 4.6 3.9 3.0 2.7

7.1 19.5 19.1 11.3 12.5 10.0 7.9 5.6 3.9 3.1

58.8 32.7 62.4 83.3 109.2 109.9 214.1 153.6 133.2 107.9

26.0 39.5 16.3 7.1 10.1 0.9

22.3 36.1 26.8 5.4 7.9 1.4

125.5 139.8 330.2 98.2 105.1 366.7

Note: * Growth rate = (number in 98) – (number in 97) / (number in 97) x 100 Source: NSO, 1998.

Third, middle-aged people have an increased risk of becoming unemployed. Table 8.2 illustrates that there has been more than a doubling in the number of the unemployed among all middle-aged groups. In particular, those aged from 45 to 49 have expanded more than threefold. These figures suggest that the people in this group are the main targets of structural adjustment in the labour market in the name of improving labour flexibility. Finally, there has been a big increase in unemployment across all kinds of jobs. However, unstable wage earners, such as temporary workers or daily workers, have become the majority of the unemployed, accounting for 36.1 per cent and 26.8 per cent of the total unemployed respectively. In particular, the number of those whose previous job was a daily worker has dramatically increased by 4.3 times. All these figures suggest that the social impact of the financial crisis has been different across social groups. Temporary or daily workers who are middle-aged with a relatively poor educational attainment are the worst affected. Furthermore,

182 Financial crisis: 1998–present given that they were not eligible for unemployment benefit as well as living allowance as a form of social assistance benefits, the situation of the unemployed and their families has been further aggravated.

The paradox of Korea: towards an institutional welfare system Prior to the 1997 financial crisis, Korea had implemented nearly all of the social security programmes, with the exception of family allowance. Nevertheless, some of them were simply underdeveloped or premature so that they did not play an important role in protecting against risks in the market, while others were designed to provide a relatively small amount of benefits. Thus, the severity of the social impact of the economic crisis was worsened by the underdevelopment of social protection. The new government, however, has been giving priority to the strengthening of systems of social protection. There appears to be a clear recognition that the design and implementation of structural adjustment programmes should be accompanied by social protection. The government measures have included not only establishing a social safety net but also reforming the social security system. Establishment of the social safety net The new government has been keen to strengthen the social safety net by reforming the Unemployment Insurance Scheme and the Public Assistance Programme as well as implementing public works, job training and special loan programmes for the unemployed (MOL, 1998b). As of January 1998, the coverage of the Unemployment Insurance Programme was expanded to workplaces with ten or more employees. In March, it was further expanded to workplaces with five or more employees and finally covered all workplaces including temporary or part-time workers in October 1998 with an exclusion of daily workers. The entitlement conditions of unemployment benefit have been relaxed. The requirement of twelve months contributions was replaced by six months in March. The unemployment benefit was made more generous. The minimum duration of unemployment benefit was extended from 30 days to 60 days in March. In order to cope with soaring unemployment more effectively, in July ‘the special extended unemployment benefit’ was introduced to give benefits for an extra 60 days if the unemployment rates remain at 6 per cent or more. The duration of benefits was again extended from 60 to 210 days from October, although these differ according to working periods and ages of the unemployed.2 The amount of benefits rose to 50 per cent of the previous wage, being decided between the minimum level of 70 per cent of the minimum wage and the maximum level of daily wage of 35,000 won. The contribution rates of the UIS also went up to 1.0 per cent of monthly wage from 1999 from 0.6 per cent (MOL, 1998a). It can thus be said that unemployment benefits have been largely changed towards a more generous and comprehensive scheme. Nevertheless, it hardly means that the level and the length of unemployment benefit in Korea is sufficient to alleviate hardship for the unemployed.

Financial crisis: 1998–present 183 The Public Assistance Programme has been considered as another crucial step in the establishment of the social safety net for the unemployed. The PAP, which had been introduced in 1969 under the name of ‘livelihood protection’, had been planned to guarantee a decent income for those who were officially classified as ‘poor’. Yet, the entitlement conditions of public assistance annually decided by the government were too strict and unrealistic. To be eligible claimants had to prove a loss of income-earning ability and an absence of private support from relatives. Both personal incomes and assets had to be lower than annually specified amounts by the government. Table 8.3 demonstrates that the level of monthly income for eligibility to public assistance remained at less than 16 per cent of the average monthly cash wage of an industrial worker. As a result, the PAP covered only 2.3 per cent of the total population by the end of 1997. These entitlement conditions thus meant that many Korean people who could not afford a decent standard of living were not able to access the PAP. Furthermore, the benefits structure of PAP meant it was unable to provide the social safety net even for beneficiaries. Claimants who satisfy the entitlement conditions are classified in two different groups: those who are unable to earn an income and others.3 They are entitled to different benefits: the first category are provided with a living allowance in the form of both cash and in-kind benefits, free health care and educational assistance for their children. However, the second group is only eligible for limited medical assistance and educational assistance without living allowances. Thus, at the end of 1997 the number of people receiving a living allowance was around 380,000, equivalent to only 0.8 per cent of the total population (MOHW, 1999a). It is hardly an exaggeration to say that, for most Korean people, there remained little by way of a social safety net. Not only was a large proportion of the poor not entitled to benefits, but also the unemployed with the ability to work did not receive any living allowance at all. The social assistance programme in Korea aimed to provide a minimum level of relief, with a very strict entitlement condition and providing living allowance only for those unable to work. The new government, however, reformed the eligibility criteria as well as the benefit systems in order to make the PAP play a role in the creation of the social safety net. First, a Temporary Protection Scheme was introduced to provide benefits for those who could not afford to maintain a decent standard of life due to unemployment or income decrease (MOHW, 1999a). The number of temporary recipients was extended to around 750,000 by early 1999. Thus, the ratio of total Table 8.3 Requirements for entitlement to public assistance (10,000 won)

Maximum income before entitlement (A) Monthly cash wage of industrial worker (B) (A) / (B) %

1988

1990

1992

1994

1995

4.4 45.8 9

4.8 66.7 7.2

10 89 11.2

17 111 15.3

20 129 15.5

Sources: MOHW, 1999b; MOL, Survey Report on Labour Costs of Enterprise, various years.

184 Financial crisis: 1998–present Table 8.4 Change of social assistance programme

Budget (10 billions) No. of recipients (10 thousands) Type I Type II Temporary Ratio of the population (%) Benefits Livelihood protection Medical assistance Child education assistance

1997

1998

1999

146 118 38 80 — 2.6

198 149 38 80 31 3.2

286 194 41 77 76 4.2

Type I

Type I

Type I, II

Type I, II, and Temporary

Type I, II, and Temporary Type I, II and Temporary

Source: MOHW, 1999b.

recipients of the PAP in the population increased to 4.2 per cent in 1999 from 2.6 per cent in 1997, as we can see in Table 8.4. Second, the means-tested conditions were relaxed by revising the requirement of the maximum assets from 29 million won to 44 million won. Finally, there was a change in the benefit structure. The living allowance, which was paid only to those unable to work, was provided for all others covered by the PAP, including temporary recipients for the winter term of six months. Thus, the budget for public assistance in 1999 increased by 45 per cent compared to that of 1998 (see Table 8.4). Although these changes have not guaranteed a decent standard of life for poor people yet, it is true that the PAP has been changed to strengthen the social safety net. Moreover, since October 2000, PAP has been replaced by the Basic Livelihood Protection Scheme. Under the new scheme, the government has provided living allowances for all of the people whose monthly income is less than the minimum living costs decided by the government. This means that all recipients of the Basic Living Protection Scheme can be entitled to a living allowance, which makes the government in Korea increasingly play the role of a provider in welfare provision. In other words, this new scheme has strengthened the nature of social rights. In August 2001, the Basic Livelihood Protection Scheme covered 1,510,000, 3.2 per cent of the population. There have also been complementary measures to establish the social safety net, such as job creation by the government, job training for the unemployed and the establishment of a loan programme (MOL, 1998b). These all are aimed at encouraging the unemployed into work. The job creation scheme is not new at all, although the government has actively organised more public works by the early implementation of SOC (social overhead capital) programmes. In particular, the public work programme has become a crucial income source for daily workers (accounting for about 350,000) as they are not entitled to unemployment benefits. Thus, a monthly average of 300,000 unemployed people have participated in public works since May 1998. At the same time, the government has actively

Financial crisis: 1998–present 185 pursued the job training programme as a pro-active measure, setting the target of training 320,000 unemployed persons. The training allowance, which amounts to 50,000–380,000 won monthly, has been paid to all participants in order to assist with their living expenses (MOL, 1998b). Finally, the preferential loan programme for the unemployed was introduced in April 1998. So, the unemployed are able to access living allowance loans, housing loans and business loans on the condition of repayment in 2–3 years with a 1–2 year grace period (MOL, 1998c). However, the loan programme has proved to be ineffective in strengthening the social safety net, as the unemployed have to satisfy the conditions of providing a guarantor and security to get the loans, which many fail to do. It is acknowledged that the social safety net provides the political and social stability required for the structural adjustment of the economy. The experience of Korea in the wake of the economic crisis has not been an exception to this general policy direction. However, it is worth noting that with the emphasis on the social safety net, the role of the government in welfare provision has changed to adopt a more redistributive welfare system. At the same time, the new government in Korea has been engaging in the reform of the social insurance systems. Expansion and restructuring of social insurance programmes In response to the economic crisis in Korea, social security reforms have not been limited to the establishment of the social safety net. Rather, they have been developing towards a more comprehensive welfare system. The Kim Dae-jung government has tried not only to redesign but also to expand them by the following measures: the integration of the medical insurance societies into a unified national health system; the extension of the National Pension Scheme to cover the selfemployed living in urban areas in April 1999; the extension of the Industrial Accident Compensation Insurance Scheme to all workplaces in July 2000. The integration of the medical insurance system has been regarded as one of the main reforms of the social security system in Korea. Although Korea accomplished the objective of a comprehensive national health system in 1989, the MIPs operating on the basis of separate insurance societies with a self-supported accounting system have inevitably caused some problems including inefficient management and little contribution to redistribution. That is, each medical insurance society has imposed different amounts of contributions on the insured and provided different kinds of benefits depending on their financial situation. Table 8.5 shows that the amount of contribution paid by the self-employed is 30 per cent more than that paid by the employed person. This medical system has contributed relatively little to social integration as the income redistribution and risk dispersion have taken place only within individual societies due to the adoption of a self-supported accounting system. The integration of the three types of medical insurance systems has come to pass with the new government. The first integration occurred in October 1998 with the incorporation of 227 regional insurance societies for the self-employed including farmers and fishermen

186 Financial crisis: 1998–present Table 8.5 Difference of contributions in the national health system in Korea

Medical insurance programmes For the employed For the self-employed For governmental officials and private school employees Medical assistance

Coverage Per household 10 thousands (%) contributions (won)

Per person contributions (won)

4,493 (97.0) 1,710 (38.1) 2,289 (50.9) 494 (11.0)

16,295 22,441 16,205

5,593 7,399 4,706

—

—

139 (3.0)

Note: All figures are for January 1998. Source: MOHW, 1998b.

with the Korea Medical Insurance Corporation that served government officials and private school employees. Soon after this partial integration, the National Health Insurance Act was revised so that the medical insurance system became an integrated national health system under the control of the National Health Insurance Corporation in July 2000. The integrated medical insurance programme will contribute to strengthening the social integration and the redistribution of wealth. Another important change has been made in the NPP, which is a social insurance programme based on a funded system. Though by 1997 the programme had accumulated funds of about 27 trillion won, which is around 6 per cent of GDP, there have been mounting criticisms with respect to its long-term financial stability, as we have seen (Moon, 1995; Kwon, 1998). According to Moon’s simulation, the pension fund will be continuously accumulating until 2008 when the full oldage pension starts being provided, although the pension expenditure will thereafter dramatically increase and finally the reserved fund will be drained in the 2030s (Moon, 1995: 41). This possibility of a financial crisis in the pension scheme is essentially ascribed to improper institutional design of the programme and the emergence of an ageing society. As Table 8.6 shows, the pension programme in Korea was simply too generous to maintain financial stability. The contribution rate in Korea was relatively very low, although it was designed to provide a high amount of pension, which amounted to 70 per cent income replacement. A pension age of 60 years was also said to be a cause of future financial crisis in the pension programmes. In addition, an increasingly ageing society in Korea has been said to be accelerating the draining of the pension fund. The average life expectancy for males and females in 1966 was 59.7 and 64.1 respectively, but thereafter dramatically increased to reach 68.1 and 75.4 in 1995 (UNDP, 1998). The population aged 65 and above in Korea was 5.9 per cent of total population in 1995, which was still lower than the average ratio of 12.2 per cent in OECD countries (UNDP, 1998). Nevertheless, it would not be long before Korea caught up with the OECD countries. According to a government report of population estimation, the proportion of the elderly aged 65 and above in Korea will reach 12.4 per cent in

Financial crisis: 1998–present 187 Table 8.6 Comparison of pension programmes in selected countries

Contribution rates (% of wage) Income replacement rates Pension age (male)

Korea

Japan

Germany

6.0 70 60

17.35 70 65

18.6 70 65

Notes: 1. All figures are for 1996. 2. Income replacement rates refer to the level of the pension benefits for the insured who pay 40 years contributions. Source: MOHW, 1997.

2010 (Chang et al., 1996). An ageing society will be one of the main characteristics of Korean society in the future. On the other hand the mismanagement of the reserve fund, in particular with respect to government borrowing from the fund, has been increasingly criticised. Since 1988, when the NPP was introduced, the government had borrowed more than 50 per cent of the total reserve fund by 1996 and by the end of 1998 this reached 75 per cent. The interest rates of all these governmental borrowings remained lower than those of financial institutions, which substantially accounted for differentials from 1.5 to 4 per cent. The criticism has often been made that governmental practice with respect to the pension fund is comparable to ‘stealing without a knife’, to use a Korean idiom (Chosunilbo, 16 January 1998). Therefore, the reforms of the new government in the pension programme have been initiated not only to redesign the pension programme but also to increase the transparency and efficiency of pension fund management (National Pension Law, 1999). The level of income replacement for a pensioner who makes 40 years contributions has been reduced from 70 per cent to 60 per cent. The pension age will be increased from 2013 by one year every five years. Contribution rates of employers and employees have risen to 4.5 per cent of the monthly wage. In order to ensure transparency and to increase returns with respect to managing the funds, reforms have been made so that the details of fund management have to be announced to the public and the government has to pay higher rates of interest than the financial institutions. In addition, the pension programme has been extended to cover the self-employed living in urban areas from April 1999. This proved to be the most important change in the pension programme, given the fact that it realised the objective of a comprehensive national pension system covering all of the economically active population over 18. On the other hand, in order that the pension can contribute to coping with soaring unemployment, some requirements have been relaxed. The minimum contributing period required to be eligible for the old-age pension was cut from 15 years to 10 years. ‘The early old-age pension’, which was given to the insured aged 55 and above making contributions for 20 years and more, has now been provided for the insured paying contributions for 10 years and more. Finally, the Industrial Accident Compensation Insurance Scheme has been extended to cover all workplaces from July 2000. In addition, the Labour Standard

188 Financial crisis: 1998–present Law has come into effect in small-sized workplaces with less than five employees from 1999 so that all workers now are protected by the Labour Standard Law. The minimum wage system, which took effect only in the workplaces with ten workers or more, has been also extended to all workplaces from November 2000. In short, the social security system in Korea, after the economic crisis, has been reformed towards a more redistributive and comprehensive system. Social security programmes have emerged as a crucial measure in the maintenance of social cohesion. They are acknowledged to be compatible with economic restructuring. This must be considered a breakthrough in the social security system in Korea. How and why did it occur? In other Asian countries severely hit by the financial crisis, such as Thailand and Indonesia (Tambunlertchai, 1998; Azis, 1998), the crisis was not accompanied by the development of a social security system. Korea is an exception in this respect.

Policy networks, public perceptions and social policy According to an OECD report on the Korean economy, Korea has been fully integrated into the world markets in the wake of the financial crisis of 1997 (OECD, 1998b). In particular, the traditionally hostile attitude towards FDI has been reversed by the enactment of the Foreign Investment Promotion Law in July 1998, as the advantages of FDI – improved management and technology and an increase in productive capacity – have finally been acknowledged. Thus, the legal system concerning FDI has been largely changed from a regulation and control system to a promotion and support-oriented one. Although the FDI ratio to gross domestic fixed capital formation in Korea was only 0.9 per cent in 1997 (IMF, 1998a) it has been rapidly expanding along with government efforts to induce FDI. Accordingly, one might expect that ‘social dumping’ would be more likely to occur in this situation in order to attract more foreign investment and to secure existing benefits for home-based firms, or at least the government in Korea would be expected to adopt a more ‘business-friendly’ social policy. However, as we have reviewed in the previous section, Korea’s experience in social security policy after the economic crisis is not consistent with this expectation. On the contrary, the social security system in Korea has increasingly emerged as a crucial measure to maintain social solidarity and has become a social right for the individual citizen. It is true that these changes have been partially affected by the IMF’s policy packages, which recommended the establishment of the social safety net in Korea. However, a more important role has been played by domestic institutional changes. I will argue here that the development of the social security system in the wake of the financial crisis in Korea can be mainly attributed to the change of policy networks and public perceptions with respect to social welfare.4 Emergence of a tripartite corporatism The first two IMF agreements signed with Korea in December 1997 did not contain any measures concerning the social safety net. However, the IMF agreements

Financial crisis: 1998–present 189 thereafter included measures to strengthen and expand the social safety net. In a letter of the IMF Intent on 2 May 1998, a widening of the coverage of unemployment insurance and increases in the minimum duration and level of benefits were chosen in order to establish the social safety net (IMF, 1998b). In a letter of 24 July 1998, the IMF allowed the Korean government to expand the budget by an extra 2.5 trillion won for the social safety net: an additional 1 trillion won in transfers to the unemployed, an extra 0.5 trillion won for public works and a further allocation of 1 trillion won for loans to the unemployed (IMF, 1998c). Thus, an amount of 10.4 trillion won, about 2.5 per cent of GDP, was allocated to the social safety net programmes during 1998. This is a great increase when compared to the 0.9 per cent of GDP spent by the central government on social security programmes in 1997. Yet, it should be noted that the overall direction of the IMF with regard to social welfare was to put an emphasis on securing the minimum standard of living rather than the development of a universal social security system. The IMF’s attitude to social welfare may not be much different from the policy recommendations of globalism enthusiasts, supporting a residual welfare state rather than an institutional welfare state, in Titmuss’s typology (1974). More attention must be paid to domestic institutional changes to comprehend the development of the social security system in Korea. Social security reforms of the government have been constrained by formal and informal institutions. First of all, it is worth noting that there has been a change in the policy networks in the policy-making process in the wake of the financial crisis. It is well known that industrial policies in Korea since the early 1960s brought a symbiosis or interdependency relationship between the state and businesses, which in turn constrained the policy options of the government (E. M. Kim, 1997). This policy network not only enabled Korea to develop its economy rapidly due to reducing transaction costs, but also presented several problems to the Korean economy. Moreover, this policy network dominated the social policy making process. As we have seen in the previous section, the social security system in Korea was developed with a view to economic necessities and even after the democratic transition in 1987 labour’s demands for social welfare were hardly important in the policy-making process prior to the financial crisis. The IMF intervention and agreement and subsequently the election of Kim Daejung as president on 18 December 1997 changed all that. The reforms of chaebols’ practices, which were intensified by the new government, not only encapsulated the essential reforms needed to enhance managerial transparency of the chaebols, but also implied a significant breakaway from previous state–business relations. In fact, the policy network of the new Kim government has been transformed from a symbiotic state–business relationship to a tripartite corporatism. In his inaugural speech, President Kim stated that ‘the Labour–Management–Government Committee will lay a foundation for overcoming the national crisis by reaching a grand compromise through dialogue’. Therefore, in order to produce ‘a people’s agreement’ on ways of overcoming the economic crisis, the new Kim government has urged both management and labour to participate in the tripartite committee. In March 1998, the tripartite committee, composed of representatives from selected organisations

190 Financial crisis: 1998–present for labour and management and the government, became a consultative body for the president. The committee was promoted to a permanent agency by a special law in May 1999, and can make legally binding decisions. The committee can deal with all matters, including labour, industrial and social policies, which may affect employment conditions (the No-Sa-Jung Committee Law, 1999). The government is obliged to implement faithfully the agreements made in the tripartite committee. This change is obviously a landmark. Of course there is no doubt that the IMF’s bailout of the Korean economy provided great momentum to create a new policy network. Yet, the emergence of the new government, which brought a democratic transition of power from the governing party to an opposition party for the first time in Korean history, was more important in establishing a new policy network. Although there is no significant difference between parties in Korea in terms of political ideology, the new government has sought participatory democracy as a way of overcoming the national crisis through running the tripartite committee. That is, as a sharp rise in unemployment has emerged as the most serious social problem, along with structural adjustments, the government has needed this new institutional setting to tackle the problem in a state of social agreement that will provide a foundation for political stability. On the other hand, it should also be mentioned that there has been mounting public criticism that it was the poor management of the chaebol leaders that was, to a great extent, responsible for the nation’s economic crisis (Korea Herald, 21 January 1998). With public opinion against chaebols, the government might have found it easier to break from the previous policy network. There are no guarantees, however, that the tripartite coalition will proceed smoothly. In particular, there have been real risks of large-scale labour unrest in response to layoffs, which were agreed in the tripartite committee in order to increase labour market flexibility. Labour representatives have continuously accused the government of implementing a restructuring reform of the economy at the expense of workers. According to Lee Kap-yong, head of the KCTU, it was argued that ‘the labour community has been completely excluded from the making of the restructuring plan, which contradicts the Kim Dae-jung administration’s muchtouted slogan of “participatory democracy”. The government must stop the present unilateral industrial restructuring which benefits only chaebols and multi-national capitals’ (Korea Herald, 16 December 1998). The businesses, notably chaebols, have also protested against the government, in order to give the government credibility with the labour force, working on pro-labour amendments. It is also maintained by the officials of the committee that ‘bureaucrats should give up their prejudice that the tripartite committee may wrestle their powers away from them’ (Korea Herald, 4 August 1998). Thus, the tripartite committee has been disrupted several times so far by both labour and management representatives, and is in a fragile state. Nevertheless, it is obvious that under the new policy network the interests of business will no longer be dominant in the policy-making process and thus the voice of the labour force is more likely to be heard. This should mark a landmark change in the policy-making process in Korea, which significantly restrains the policy

Financial crisis: 1998–present 191 options of the government. All social security reforms after the economic crisis, which include the integration of the Medical Insurance Programme, the reforms of the National Pension Programme and the Employment Insurance Programme, were indeed decided in the tripartite committee. In addition, the committee made an accord to integrate four social insurance programmes in Korea, namely, the Medical Insurance Programme, the National Pension Programme, the Employment Insurance Programme and the Industrial Accident Compensation Insurance Programme, into a unified social security system. Therefore, the new policy network characterised by a tripartite corporatism can be said to provide a foundation for the development of the social security system in Korea. Growing social demands for social welfare Regarding domestic institutional changes, it is important to note that public perceptions about appropriate forms of social protection will be reflected in the process of policy-making. In democratic politics the government can be expected to be sensitive to public preferences. Public values and attitudes can act as constraints on policy by ruling out some options. A policy option that is likely to offend the sense of justice of large numbers of citizen voters might well prove to be unfeasible (Bonoli, 1999). It is thus notable that the economic crisis of 1997 brought about a change in value orientations of Korean people regarding the provision of social welfare. In order to examine the changes of value orientation in the wake of the economic crisis of 1997, I am going to draw heavily on the surveys carried out by Shin and Rose in May 1997 and October 1998.5 According to their surveys, in 1997, before the financial crisis, more than half of the respondents supported the notion that individuals should be responsible for their own welfare. This may be a consequence of the way that the Korean social security system was financed. The financing methods may give the public in Korea the perception that contributions have to be made if social rights are to be acquired. That is, the social security system in Korea, with little financial commitment of the state, was significantly embedded in the social learning process of the public so that they did not see citizenship as entailing social rights in the way that T. H. Marshall conceived (Marshall, 1964). However, this attitude has changed dramatically since the economic crisis. Table 8.7 shows that some 83 per cent of the respondents answered that the state should be responsible for the welfare of the individual. This suggests that demands for social rights have been largely acknowledged among the public in Korea after the economic crisis of 1997. Needless to say, not only a historic level of unemployment but also the deterioration of income distribution has brought about growing demands for social welfare. In particular, the structure of income distribution is getting worse after the crisis. According to data from the World Bank (Show, 1999), the number of people living in poverty in urban sectors increased from 8.6 per cent in 1997 to 19.20 per cent in 1999. This increase clearly indicates that the crisis has engendered large social changes and sharp declines in middle-class standards of living.

192 Financial crisis: 1998–present Table 8.7 Attitudes to the state’s responsibility for individual welfare (%)

Individual responsible State responsible

May 1997

Oct. 1998

51 49

17 83

Note: These figures were obtained from the following options: Please choose the statement that comes closer to your view: individuals should be responsible for their own welfare; the state should be responsible for everyone’s economic security. Sources: Shin and Rose, 1997 and 1998.

Thus, the government needs to take into account changed public perceptions regarding social security.

Conclusion The changes in the social security system in Korea in the wake of the financial crisis are paradoxical from the perspective of globalisation enthusiasts. The social security reforms have proceeded as a crucial measure in coping with soaring unemployment as well as alleviating the insecurities associated with structural adjustments. These reforms have not been limited to the establishment of the social safety net. Rather, they have been developing towards a more redistributive and comprehensive welfare system. All these reforms have taken place at the same time as the Korean economy has been fully integrated into the world markets. Yet, these changes are compatible with the ideas of Rodrik, who argues that there is a highly significant correlation between openness and the growth of social protection (Rodrik, 1997, 1998). According to Rodrik, this correlation is mainly driven by exposure to external risk. However, I have argued that the ongoing development of the social security system after the financial crisis is mainly attributable to domestic institutional changes rather than external shocks to the Korean economy. That is, both new policy networks characterised by a tripartite corporatism and growing social demands for social welfare have led to the reforms of the social security system in Korea. In particular, the tripartite corporatism presents substantial economic and social benefits by producing a social compact over sharing the social costs of the crisis. At the same time the tripartite corporatism constrains the policy options of the government. This is the reason why Korea has gone beyond the establishment merely of a social safety net, as is normally adopted by the IMF as their policy recommendation with respect to social security policy.

9

Conclusions

This lengthy chronicle of state interventions in Korea suggests that there have been particular policy paths which the state has followed. State policies have indeed evolved in a path-dependent way, whereby the development and results of a policy process change the socio-economic circumstances in which that policy process will operate some time later. If this is the case, who then creates and sustains a particular path? This study has sought to answer this question by examining the changes of institutional settings in the political economy. We have found that the features of policy networks and policy ideas have constrained the choice of policy instruments not only by shaping the likelihood that a certain set of policy options is accepted but also by defining what problems exist. We have also discovered that economic and social policies are not determined in isolation from each other. The requirements of economic policy have influenced the form and content of social policy. Therefore, the roles of the state in economic and social affairs have changed over time. The findings of the preceding empirical chapters are summarised in Table 9.1. In this concluding chapter, I shall organise the discussion into three parts. In the first section, I shall recall the changes of policy networks and policy ideas, which have constrained the choice of policy instruments in the process of policy formation. In the second section, I shall recall the policy linkages between economic and social policies, which, I have argued, are necessary in order to understand the characteristics of social policy in Korea. In the last section, I shall recast the viability of the Korean welfare model in the future.

Policy networks, policy ideas and policy changes Several aspects of institutional settings can influence the choice of policy options in the process of policy-making. I have proposed that the characteristics of policy networks and policy ideas shape the policy instruments chosen by the government. Throughout the preceding empirical chapters, we have found that there was a substantial change in policy networks and policy ideas over the years, which had a major impact on the likelihood that a certain set of policy options would be accepted. We have also noted that these institutional configurations have generated distinctive policy paths by conditioning a range of policy options.

Expansionary policy

Export-oriented industrialisation

Developmental sate

Minimal and preferential welfare system

Industrial policy

State’s role in economy

Welfare system

Residual welfare system

Developmental state

Heavy and chemical industrialisation

Expansionary policy

Welfare dependency

Trickle-down

Macro-economic policy

Economic development

Economic development

Policy idea

Symbiotic state– business alliance

State-dominated alliance with business

1973–9

Policy network

1961–72

Table 9.1 Summary of findings

Growth of civil society

Transition from residual system to regulator welfare system

Developmental state in transition

Structural adjustment in heavy and chemical industries

Expansionary → Austerity → Expansionary

Liberalisation

Enterprise-centred regulator welfare system

Transition to an institutional welfare system

Regulated competitive state

Structural adjustment

Deregulation Competitive state

Liberalisation

Austerity → Expansionary

Social cohesion

Participation

Tripartite corporatism

1998–present

Liberalisation

Expansionary → Stabilisation

Competitiveness

Globalisation

Emerging civil society Stabilisation

Partial relation between the state and specific business

1993–97

Weakened state– business alliance

1980–92

Conclusions 195 During the developmental period of the Park Chung-hee regime (1961–79), the state in Korea had maintained a state-dominated alliance with business but against labour. The institutional basis of this lay in the reform of economic bureaucracy carried out after the coup of 1961, such as the creation of the EPB and the nationalisation of banks. This enhanced the power of economic bureaucrats, sometimes referred to as ‘technocrats’, by not only giving them supreme status within the bureaucracy but also expanding the range of policy instruments at their disposal so that the state was able to discipline its local firms to a great extent. In particular, during the 1970s the Park regime more actively sought to create a political exclusion of the popular sector from the policy-making process by establishing the Yushin authoritarian regime. The Yushin regime was able to attain social order through authoritarian rule, to mobilise society without any serious objections, and thus to lead society to realise the policy priority of the regime. The characteristics of this regime mainly account for the divergence in outcome between industrial policy in Korea and that in other developing countries. Given these institutional settings, it is hardly surprising to see that the Park regime adhered to the strategy of ‘growth first and distribution later’. A set of policy ideas, such as ‘trickle down’, ‘security through growth’ and ‘welfare dependency’, constituted the political discourse during the developmental period. These policy ideas greatly constrained the likelihood that a certain social policy would be developed. Indeed, the Park regime was reluctant to develop social welfare programmes, influenced by a set of these policy ideas. The Park regime was involved in virtually every sphere of economic activity, which was in large measure responsible for the remarkable economic success of Korea. After the success of turning to EOI in the 1960s, the state became a more comprehensive and planned developmental state, leading HCI. The specific target industries, namely heavy and chemical industries, were chosen and given a series of preferential treatments by the state: manipulating interest rates, providing preferential loans and tax incentives, offering protection to industry, subsidising new ventures, and informal political supports and so on. There is no doubt that the way the Park government chose to facilitate economic development was a typical model of the developmental state. The state in Korea was anything but laissez-faire, or a minimalist state. The very success of state intervention in the economy, however, provided the foundation for the increasing power of capital, which led to a change in policy networks. It is a great exaggeration to assert that the state in Korea was autonomous from its capitalist class enough to impose a new developmental strategy like EOI and HCI with little regard for how firms would react. Rather, during the developmental period the power of business, notably chaebol, significantly increased in terms of production and national wealth. The Koreans witnessed chaebols becoming more independent and stronger throughout the 1980s since they no longer needed to depend solely on the state for financing their businesses. The state found it increasingly difficult or even impossible to discipline chaebols. The symbiotic state– business alliance was gradually weakened over the 1980s.

196 Conclusions There was also a considerable change in policy ideas with respect to state intervention in the market among economic technocrats. When President Chun Doo-hwan turned to the new economic technocrats who endorsed pro-market ideas on the basis of neo-classical economics in 1980, they pushed hard for market reforms in Korea towards economic stabilisation and liberalisation. In particular, the policy idea of liberalisation became evident during the second half of the 1980s since the chaebols did not need a state-led economy any more. It was clear that this change constrained the policy options available to the government for intervention in the market. The democratic transition under the Rho Tae-woo government (1988–92), which was led by the development of civil society including the growth of labour movements, significantly restrained the government from providing preferential treatment to specific firms or industries. The democratic transition significantly limited the state’s discretionary power to propel its own economic policy. This institutional change eroded the developmental state in Korea, either by limiting the government’s discretionary power or by raising its political costs. Throughout the 1980s, thus, the focus of industrial policy was changed from a state-led industrial adjustment to a market-led industrial adjustment. As a consequence, the state-led economy in Korea was gradually diminished throughout the same period. The state in Korea became increasingly porous under the Kim Young-sam government (1993–97). This shift was driven by the rise of pro-market ideologies like globalisation and the consequent loss of legitimacy of governmental investment co-ordination. The demise of the planning ministry, the EPB, in December 1994 and the dismantling of selective industrial policy, which all took place under the watchword of globalisation, marked a crucial shift from the traditional Korean developmental model. The dominance of the state over society was no longer the case. However, it did not mean a break away from the previous symbiotic relationship between the state and business, let alone an institutionalisation of labour’s participation in the policy-making process. Rather, the relationship between the state and business became partial to specific chaebols, which was conducive to political corruption. It is also worth noting that the policy idea of globalisation, which became the political discourse in the Kim government, was systematically favourable to employers. Globalisation became a watchword for all state policies, with a strong emphasis on competitiveness, so that social policy was in general directed towards a business-friendly stance. Regarding this transition, it is necessary to note increasing pressures by the advanced countries for Korea to liberalise its market. During the 1990s, there were various multinational and bilateral attempts by the advanced countries, especially the USA, to pry open formerly closed markets in developing countries. Korea, with its newly acquired wealth and a wide array of interventionist policies, became an obvious target for such pressures. In response to these increasing pressures, the Kim Young-sam government went even further with a variety of deregulation measures and financial liberalisation. Despite these measures, however, the state in Korea never became a minimalist state envisaged by the enthusiasts of globalisation. The Kim government continued to play a crucial part in the market to encourage

Conclusions 197 business activities and to help domestic firms remain competitive in the world trade market. Rather, the state of Korea became a competitive one. A further change in policy network followed the financial crisis and the election of Kim Dae-jung as president. Under the Kim Dae-jung government since 1998 the policy network has been transformed from a partial relationship between the state and specific chaebols to a tripartite relationship. Though the new Labour– Management–Government Committee has been running in a fragile state, it is obvious that under this new institutional setting the interests of business will be no longer exclusively dominant in the policy-making process in Korea and thus the voice of labour is more likely to be heard. This should be a landmark change in the policy-making process in Korea, which significantly restrains the policy options of the government. This could contribute a more redistributive impetus to social policy formation. In the extraordinary situation since the IMF bailout of December 1997, however, the new Kim government has faithfully intensified the structural reforms imposed by the IMF so that the Korean economy has been fully integrated into the world market in terms of finance and investment. State controls over financial flows, which had been a main pillar of the Korean model, have disappeared. Under the new policy network it is infeasible for the government to employ any preferential treatment for specific enterprises. Nevertheless, the government in Korea has no intention of replacing its former highly interventionist development model with an Anglo-American-style non-interventionist economy. While the new Korean model after the crisis will have at its centre an economy that is much more open and transparent, it will be closely supervised and regulated. These findings clearly support the model I have proposed in the analytical framework, where state policies are regarded not only as outputs of the political process constrained by institutional settings but also as crucial inputs that reshape socio-economic conditions and institutional arrangements. State policies have not only provided both incentives and resources for social groups and state elites but have also had learning effects on individuals and social groups at the centre of the policy-making process. Industrial policy during the developmental period that substantially favoured targeted industries provided a crucial impetus to the growth of chaebols, which led to a change in policy networks. Chaebols also began to learn how they could lower production costs by following the government initiatives of developmental strategies. It is also worthwhile to note that the social security system in Korea, with little financial commitment from the state, was significantly embedded in the social learning process of the public so that they did not see citizenship as entailing social rights in the way that T. H. Marshall claimed. Thus, there are path-dependencies in the process of policy changes in Korea. This study also clearly shows that the approach of historical institutionalism, which emphasises the importance of specific institutional settings in policy formation, has a great deal of analytical power in understanding the development of social policy in Korea. By dealing with the features of policy networks and policy ideas in the policy-making process in Korea over time, I have tried to illustrate how the change of institutional settings over time has constrained and shaped the development of social policy in Korea. The shift in policy networks from

198 Conclusions state–business symbiosis to a tripartite corporatism has not only shaped the likelihood that a certain set of social policy options is accepted but also defined what problems exist. Thus, this study has illustrated that historical institutionalism would construct important analytical bridges between state-centred and society-centred approaches with respect to the policy-making process, by looking at the policy networks that structure relations between state and society. Moreover, an analysis of historical institutionalism would help us to avoid universalist and functionalist explanations regarding the development of welfare systems (such as modernisation or stages-of-development theories). In addition, by demonstrating the effects of institutional changes on the development of welfare systems, we can avoid the limited ahistorical and essentialist explanation that a ‘Confucian’ perspective presents. In effect, social policy in Korea has developed in circumstances distinct from its Western counterparts: it has developed within economic contexts characterised by state-led growth economies with sustained nearly full employment, in political contexts characterised by a conservative ‘oneparty’ democracy with relatively weak civil society and oppositions, and in social contexts characterised by rather authoritarian employment practices and gender inequality. Thus, historical institutionalism can help us to grasp the dynamic of welfare system development in Korea, which has been in large part a function of political and economic change.

Policy linkages: embedded social policy Different policy arenas have their own distinct characteristics (Lowi, 1964). Some policies are regulatory and others require huge public expenditure. In some cases, benefits and costs are concentrated on relatively narrow groups, and in others the direct effects of policy are much more broadly felt. Some policy arenas may be more exposed to international economic pressures than others. Taking into consideration real policy-making processes, however, we can discover that economic and social policies are not determined in isolation from each other. They are inextricably linked in the process of policy-making so that they have reciprocally affected the form and content of each other. I have thus argued that it is necessary to explore the policy linkages between economic and social policies in order to understand the development of social policy in Korea. Of course, the formation of social policy would not entirely depend on the requirements of economic strategy. For instance, there is no doubt that the introduction of a social security programme is a result of a political process where political incumbents try to use the power and resources of government in order to recapture the allegiance of disaffected blocs in society. As discussed in the last section, the symbiotic alliance between the state and business but against labour, which was a dominant policy network in the policy-making process, was prone to restrain social security programmes from becoming a policy agenda that the government should deal with. A set of policy ideas, such as ‘economic development’, ‘trickle down’, ‘welfare dependency’, ‘stabilisation’, ‘globalisation’ and so on, constituted the political discourses, and these too defined both what strategies were available but

Conclusions 199 also what problems existed. The institutional settings of the state, which included the supremacy of executive power, the dominance of economic bureaucrats in the administration, notably the EPB, and the weakness of the ministry responsible for social welfare, significantly constrained the development of the social welfare system. In particular, during the developmental period the EPB played a role of institutional veto points and thus often vetoed the introduction of social welfare programmes, especially when they would involve financial burdens on the state. However, it is also true that economic policy had a significant influence on the environment of social policy. We have found that the requirements of economic policy have significantly constrained the development of the social security system in Korea. The strategy of EOI had a great influence on the form and content of social security. This strategy was associated with lowering taxation and non-wage labour costs. It is hardly surprising that total government taxation in Korea as a share of GDP has been far lower than that of the other advanced countries. For instance, in 1996 Korea was the lowest in taxation among OECD countries except Mexico. The level of 23.2 per cent for Korea was far below the OECD average of 37.7 per cent (OECD, 1998d). There is little doubt that such a low level of government taxation has contributed to the lowering of labour costs. However, it should also be noted that the government has inevitably had relatively little room to engage in the redistribution of national resources. As a matter of fact, by the end of the 1970s the social security system in Korea was clearly minimal and residual. Despite much legislation, the implementation of most social security programmes was put off for many years. Rather, the developmental state tried to exploit the social security programme to mobilise capital needed for the investment in heavy and chemical industries, as we have seen in the legislation of the National Welfare Pension Law in 1973. The economic development in Korea during the Park regime proceeded with little provision of social welfare by the government, which was mainly attributable to the requirements of economic strategy sought by the developmental state. Economic stabilisation measures during the Chun government (1980–7), especially tightening the government budget and restraining wage increases, also significantly constrained the development of the welfare system. The success of stabilisation, however, was ironically associated with the sacrifice of specific groups, notably farmers, owing to the reduction of the deficits in the Grain Management Fund. Moreover, liberalisation in agricultural import markets made farmers’ lives even worse. In response to these policy results, the Chun government began to change the policy direction concerning social welfare at the end of Chun’s presidency, which was to recapture the allegiance of these disaffected blocs in society. The first turning point for the social security programme came with the democratic transition since July 1987. Throughout the periods of the Rho government (1988–92) and the Kim government (1993–7), most social security programmes came into effect, with the exception of family allowance. However, when the social security programmes were introduced most of them were designed to provide relatively modest social benefits financed by relatively lower contributions paid by employers and employees. The combination of ‘lower contribution and

200 Conclusions lower benefit’, which is the main feature of the social security system in Korea, was indeed attributable to the needs of lowering labour costs. With globalisation policy under the Kim Young-sam government, the imperative of competitiveness was predominant in the formation of social security policy. Yet it is worthwhile to note that the impacts of globalisation on social security were not homogeneous. Some programmes were extended as a way to compensate losers in the process of trade liberalisation, as we have seen in the case of extending the NPP to farmers and fishermen. However, other reforms – a greater emphasis of welfare pluralism under the slogan ‘Korean welfare model’, the revision of the unemployment scheme in 1996 which aimed at tightening unemployment benefits, and the reform proposal of the NPP in 1997 which reflected a more market-based approach to pensions – all suggest that globalisation policy had a significant influence on the social security programmes, requiring the redesigning of the Korean welfare system towards a business-friendly one. Regarding labour policy, it is clear that the strategy of economic development has constrained the form and content of labour policy. In order to keep the competitive advantage of domestic firms in the world trade market, the priority of labour policy was lowering labour costs during the period of the Park and Chun governments (1961–87). However, this does not necessarily mean that the governments were seeking to control wage growth rates by wage policy. Rather, the governments imposed wage guidelines for only five years during the same period (1977, 1979–81, 1983). Instead, they tried to depress wages by buttressing managerial power at the enterprise level combined with great control over union activities. In a situation where most collective bargaining was under the control of the authoritarian state and collective action was effectively restricted, the bargaining power of trade unions had to be seriously weakened. As a result, wages were decided in favour of business, mainly depending on the market equilibrium in the labour market. With the democratic transition since July 1987, which accompanied a growing labour power, however, labour policy has been generally transformed from a repressive policy to a responsive policy. The government found it politically difficult to keep low labour costs by the repression of union activities. It thus turned to announcing wage guidelines and reforming labour-market rigidities. In particular, during the Kim Young-sam government the globalisation policy fuelled a change of direction towards an increased labour flexibility. The revision of the labour laws was driven by the need of labour flexibility, which became the major objective of labour policy. Finally, we have also noted a close linkage between developmental strategy and education and training policy in order to ensure that the requisite skills were in place. The Park government played an important role in fostering the HCI by enhancing the level of skills among the labour force required in heavy and chemical industries. With the change of developmental strategy in the 1980s from sectoral intervention to functional intervention, the government increasingly put more emphasis on science and technological education and highly skilled workers’ training. Then, following the globalisation policy, the Kim Young-sam government stressed vocational training more than ever, especially training of multiple-skilled

Conclusions 201 workers, in order to respond actively to evolving technologies. This new direction certainly mirrored the imperative of competitiveness. Yet it should be noted that, in circumstances where there was a huge social demand for education as well as a strong willingness to pay for education costs, the state in Korea has played a smaller part in the expansion of education than many appear to believe. It can therefore be argued that there has been a strong linkage between economic policy and social policy in Korea. What is clear is that social policy has been embedded in and constrained by the requirements of economic policy. Yet the nature of policy linkages between them has been varied according to the areas of social policy and the strategies of economic development. This is why Korea had a pattern of social policy distinct from Western welfare states where, especially during the Golden Age of post-war expansion, Keynesian economic policy had been compatible with the extension of the welfare state. I shall further elaborate the dynamics of policy linkages and the concept of competitiveness. The logic of comparative advantage, which guided and governed the world trade regime, appears to have been substituted by competitive advantage nowadays. What is distinctive about competitive advantage is its emphasis on the role of the state in increasing competitiveness and its dynamic characteristic drawn from the idea that the productive factors of a nation are not fixed but changing. Thus, the most important issues raised in world trade markets should be how the state and firms can improve the quality of production, raise productivity and thus sustain competitiveness (Porter, 1990). Building on this discussion, Gough et al. (1991: 5–11) suggest a valuable distinction between two levels of competitiveness: (a) performance competitiveness, which refers to the ability of national enterprises to sell abroad in contested markets; and (b) structural or underlying competitiveness, which refers to the ability of nations to provide high and growing per capita incomes while being exposed to foreign competition. From their definition, competitiveness, which is directly connected with the relative share of national enterprise in world trade markets, can be achieved in two different ways: by minimising production costs and/or by improving product quality and technology. These elements can be regarded as main strategies for creating competitiveness as the ability of national enterprise to sell in the world market is decided by the price and/or quality of the particular product. As much of the literature suggests, production costs, ceteris paribus, are decided by the price of production factors which are inputs necessary to produce a product, such as labour, arable land, natural resources, capital and infrastructure. It is assumed that production costs will be influenced by labour costs, capital costs, regulatory costs, taxes and material costs. Accordingly, lowering labour costs and interest rates, deregulation and tax cuts for business will be pursued by firms in order to achieve competitiveness in production costs. States might be expected to intervene in these areas to achieve price competitiveness through creating a policy-induced competitive advantage. Alternatively currency devaluation, which reduces the price of exports and increases import prices, might also be considered to promote competitiveness (Shin, 2000a). However, the mix of production factors employed differs widely among industrial sectors from labour-intensive industry to knowledge-based industry. The value of

202 Conclusions particular factors can also be dramatically altered by the innovation of technology. For instance, Germany, Sweden and Switzerland, which have tended to produce relatively complex products depending on skilled and experienced employees, are unlikely to adopt a strategy for competitiveness based on production costs driven by lowering labour costs and deregulation. The UK, on the other hand, which has not been relatively successful in all these areas, may have to opt for cost reductions and deregulation (Scharpf, 1998; Soskice, 1999). Such differences may result in the need for alternative competitive strategies among the countries. Furthermore, the strategy of minimising costs is likely to bring about a sacrifice of labour welfare because it will involve a decrease in the real incomes of people. Price competitiveness is only one element of increased competitiveness. Competitiveness can or should be alternatively achieved by the superiority of productivity and product quality compared to that of firms in other countries. According to this strategy, it is generally emphasised that states have to focus on building up skilled labour forces and investment in research and development. It is true that in the longer term, the international competitiveness of a country is mainly determined by the innovative potentiality of its enterprises as well as the training of its labour force. However, in the short and medium term, the level and the evolution of labour costs also plays an essential role in creating competitiveness. In particular, the strategy of minimising labour costs for competitiveness in world trade markets is common across developing countries adopting export-oriented industrialisation. Our findings clearly illuminate that the policy linkages between economic and social policies in Korea were driven by the needs of performance competitiveness. That is, since the early 1960s the Korean government in fact chose the strategy of minimising labour costs to propel economic development with little regard for structural competitiveness. This in turn required social policy to be subordinated to economic policy. The evolution of social policy in Korea thus echoes Offe’s view on capital accumulation and its embeddedness in social policy. Yet our findings show that the policy linkage is a dynamic process, contingent upon the areas of social policy and the contents of economic policy. However, the notion of ‘embedded social policy’ still has much to offer with respect to the characteristics of social policy in Korea.

The welfare regime in Korea and its viability Let us now seek an answer to the following questions: what are the main features of the welfare system in Korea, and to what extent is there something distinct about the Korean welfare model? The answer is very straightforward from the findings of this study. As far as institutional forms are concerned, there is clearly nothing uniquely Korean in any social welfare programmes. The social welfare system in Korea is residual. Some of the programmes are simply underdeveloped or premature so that they do not yet play an important role in the protection against risks and insecurities in the market, and others are designed to provide a relatively small amount of benefits. Korea’s social assistance system is another example of residualism: strictly means-tested and highly targeted as well as stigmatising. These

Conclusions 203 features are hardly surprising when we recall that Korea emulated the Japanese welfare system, regarded as a hybrid case by Esping-Andersen (1998), in the process of establishing its own welfare system. Despite the similarity of this institutional form, however, Korea has developed a distinct welfare system from Western welfare states. The total amount of social security expenditure as a share of GDP is probably the simplest way to show the magnitude of social security in the macro-economy. Table 9.2 shows that the social security expenditure of Korea in 1996 was less than one-seventh that of Sweden in 1993. It also shows that mandatory private social benefits are more significant in Korea, indicating a greater reliance of government on the private sector to provide social benefits. Korean enterprises spent 1.40 per cent of GDP on mandatory private social benefits, which accounted for 26.5 per cent of total social security expenditure. This figure suggests that the state welfare systems in Korea have developed with relatively little state commitment while depending heavily on the private sector to provide social welfare. The state in Korea is a low spender on social welfare, but it has played the role of a regulator, not only by setting regulations which non-state sectors should observe but also by imposing greater control over the running of social security programmes. In this sense, I have proposed that the nature of the welfare system in Korea can be best grasped as ‘an enterprise-centred regulator welfare system’. Korea is ‘a welfare society’ rather than ‘a welfare state’. The results of this institutional setting are clearly a less redistributive and more fragmented welfare system without guaranteeing social rights to citizens. Therefore, levels of de-commodification are modest indeed. These features make the Korean welfare system clearly distinct from Western counterparts. This raises a further question: how have the Korean people coped with social risks in a situation where social security programmes are not only modest but also residual? Presumably, social risks in Korea are as widespread and severe as in Western welfare states, possibly more so. In this situation, there can be two possible alternatives: either that a huge number of social risks are not met, or that other sources of welfare are found in private social spending. Both turn out to be true in Table 9.2 Social security expenditure as a percentage of GDP

Total social security expenditures (a) Mandatory private social benefits (b) Private share (b)/(a) %

Korea

USA

UK

Germany Sweden

5.28 1.40 26.50

15.66 0.47 3.00

23.64 0.23 1.00

30.05 1.39 4.60

38.33 0.62 1.60

Notes: Korea (1996) and the other countries (1993). (a) These include public social expenditure and mandatory private social benefits. Voluntary private social benefits are not included. (b) Mandatory private social benefits are defined as those benefits which economic agents (often employers) are legally obliged to provide or are benefits derived from private insurance arrangements which economic agents are enforced to take up. Source: Adema and Einerhand, 1998: Table 4; KIHASA, 1998.

204 Conclusions Korea. We have seen in this research that since the early 1960s Korea has not only experienced a dramatic economic growth but also enjoyed a state of near full employment. It is true that the remarkable economic growth, together with near full employment, allows Koreans to avoid a number of possible social risks. Moreover, non-state sectors, notably enterprise, family and commercial sectors, have played a major role in financing and providing social welfare services in an ideological context wherein self/mutual help through family or community is encouraged and dependence on the state greatly discouraged. Interestingly enough, however, Korea maintained a relatively equal income distribution, compared to Western counterparts. Let us take into account the structure of household income in Korea in comparison with that of the UK. Table 9.3 clearly illustrates that Korean income distribution is fairly equal. For instance, the Gini coefficient with regard to gross household income in Korea is 0.278, which is far lower than 0.386 for the UK. Table 9.3 shows that the lower inequality of income in Korea can mostly be attributed to the relatively equal distribution of earnings in the market. Public transfers in Korea are extremely low compared to those of the UK. Given the tradition of family piety in Korea, it is also not surprising that the private transfer in Korea as a share of gross household income is much higher than in the UK. It is true that Korea has achieved a relatively equitable income distribution, largely depending on market mechanism rather than public transfers via taxation. On the grounds of these figures, there has been growing interest from politicians in the welfare systems of East Asian countries for whom ‘low public spending but low income inequality’ and ‘high saving plus high economic growth’ are attractive. If politicians sell policies to buy more votes from voters, those in Western welfare states who suffer ‘higher taxation and increasing public deficits’ might consider the welfare systems of East Asian countries as an alternative. Until the crisis of December 1997 in Korea, in the words of Goodman and White (1999: 8), ‘positive Occidentalism and negative Orientalism’ had been displaced for many by ‘negative Occidentalism and positive Orientalism’. Can the welfare society then really work better than the welfare state? Is it really possible for the state to achieve a low degree of income Table 9.3 Comparison of household income structure Income sources

Household earnings Property income Market income Public transfer Enterprise transfers Private transfer Gross income

Korea (1996)

UK (1995)

% of gross income

Gini coefficient

% of gross income

Gini coefficient

89.9 5.1 95.0 0.8 — 4.2 100.0

0.307 0.908 0.304 0.987 — 0.927 0.278

70.6 5.0 75.5 16.2 7.7 0.6 100.0

0.563 0.888 0.547 0.563 0.896 0.951 0.386

Source: Luxembourg Income Study, 1995–6 in Jacobs, 2000; NSO, 1997.

Conclusions 205 inequality without committing higher public taxes and public transfers? In other words, can Western states manage to dismantle the welfare state, preferring instead the market strategy? According to Esping-Andersen (1999: 170), ‘we may live in a world of path dependencies where social creations, once cemented, are incomparably tougher than the city of Troy’. Given his remarks, the construction of a ‘welfare society’ in a Western welfare state would be politically infeasible and socially unacceptable. Moreover, it is necessary to note that the ‘Korean welfare society’ was viable only on the conditions that the country has enjoyed a high growth economy with nearly full employment and people who are out of work can expect to be supported by their family members. As Korea has witnessed soaring unemployment after the crisis of December 1997, it has become clearer that this system is not sufficient enough to cope with social risks. We need to turn to ‘market failure’ theory to see why. The market is able to provide well-being for those who are equipped to meet the requirements of the market, while the rest are left behind. This was evident after the financial crisis, when temporary or daily workers who are middle-aged with a relatively poor educational attainment were among the worst affected (Shin, 2000b). It should be noted that enterprise welfare systems are very unequal according to the size of firms. In 1996, the amount of enterprise welfare in firms employing 30–99 workers was less than half that in firms with more than 1,000 workers (MOL, 1997). In addition, trends towards a nuclearisation of family structure and changing social attitudes over family relations have also weakened the viability of the social security system in Korea. There is no doubt that the severity of the social impact of the economic crisis was worsened by the relative neglect of institutions for social protection during the decades of economic development. The new Kim Dae-jung government has now developed the social security system as a crucial measure in coping with the soaring unemployment associated with structural adjustments. The directions of reforms in the social security system have not been limited to the establishment of a social safety net. Rather, the social security system has been developing towards a more redistributive and comprehensive welfare system. Although the role of the state as a regulator in welfare provision based on social insurance schemes has remained untouched, its role as a provider has been gradually strengthening. The social security system is now in a process of transition to search for new, economically viable, politically feasible and socially acceptable repertories of social policy. The Korean welfare system may well increasingly adapt attributes of Western welfare systems. All these reforms have taken place at the same time as the Korean economy has been fully integrated into the world markets. This is paradoxical from the perspective of globalisation enthusiasts who argue that there should be a retrenchment in the social security system in an era of globalisation. The case of Korea shows that the impacts of globalisation on social security policy will not be necessarily harmful and rather this will be dependent on the structure of the domestic institutions. Indeed, politics do still matter in the development of a welfare state in an era of globalisation.

Epilogue: assessment of the existing social security system in Korea

During the first couple of years of the new millennium, the social security system in Korea has been developed towards a more comprehensive welfare system under the slogan of a ‘productivist welfare system’. In theory, the current social protection system will provide an adequate level of social security or social assistance to all employed and the poor. However, many workers and poor are still excluded from social welfare benefits due to several problems in the social security system. I am now going to assess the existing social security system in terms of its effectiveness and efficiency.

Coverage As we can see in Table E.1, all regular workers in Korea are in principle covered by four main social insurance programmes. However, temporary and daily workers who are not covered by the Employment Insurance System (EIS) are most vulnerable to economic threats. In fact, after the economic crisis, temporary or daily workers were the worst affected, given that they were not eligible for any unemployment benefits. Furthermore, the real coverage rates in the four main social insurance programmes show a very different picture from the principle shown in Table E.1. For example, the NPP was expanded to cover the self-employed in urban areas from April 1999, which meant that the NPP in Korea came to cover all of the economically active population over 18 years old. However more than 50 per cent of the people who should affiliate themselves to the NPP decline to pay contributions. In addition, though the government extended the coverage of the EIS and Industrial Accident Compensation Insurance System (IACIS) to all workers, there are many workers who are not covered by both programmes. Most of them are working in firms with less than five workers, and their employers are usually reluctant to pay for insurance premiums of both programmes owing to great concern about increasing labour costs. Health cover is an exception to this pattern, however. The National Health Insurance covers all Korean people except for the poor, who are covered by Medical Assistance. Consequently, the real coverage of most programmes is less than suggested by the legislation. Korea still has to make more effort to improve this situation.

Epilogue 207 Table E.1 Coverage of social insurance programmes according to employment status Employment status

National Pension

Health Insurance

Employment Insurance

Industrial Accident Compensation

Regular workers Temporary workers Daily workers Self-employed

Covered Covered Covered Covered

Covered Covered Covered Covered

Covered Partially covered Partially covered Not covered

Covered Partially covered Partially covered Not covered

Feasibility It is true that after the economic crisis the social security system in Korea has been reformed towards a more comprehensive system. However, owing to the insufficient preparation for such a rapid expansion of social security programmes, there are some problems in implementing the social security reforms. In particular, the integration of three types of medical insurance systems into a unified national system has resulted in a new social conflict between the employed and the selfemployed concerning the amount of contributions they pay. The National Pension Programme, which covers employees as well as the self-employed, has the same kind of problem as the National Health Insurance. This conflict is mainly due to the fact that the income of the self-employed in Korea is not sufficiently assessed in taxation. As a consequence, though the three types of health insurance systems are integrated, their financing is still separated. The financial integration was due to take place from 1 January 2002, but it was deferred for one and half years owing to the strong political objection of the main opposition party. Thus, at this moment, the integration achieved horizontal equity only among the self-employed and among employees, not across the entire population. With respect to the policy-making process of social security it is worth noting that, after the economic crisis, labour’s demand for social security is getting louder. In fact, in order to produce a people’s agreement on ways of overcoming the economic crisis, the Kim government urged both management and labour to participate in the tripartite Labour–Management–Government Committee. President-elect Roh Moo-Hyun, who was the governing party’s candidate in the December 2002 presidential election, has promised that this tripartite committee will continue to play an important role in the policy-making process of social security. The financial integration of Medical Insurance will take place according to the plan. Yet, the growing conflict between employees and the self-employed over contributions to the social insurance programmes would appear to be a difficult problem for the new government in implementing its social security reforms.

Financial sustainability There has been a great deal of doubt about the financial sustainability of some social insurance programmes. First of all, National Health Insurance has been suffering

208 Epilogue from financial collapse since 1997. Not only the unification of three health insurance systems but also the new health service division between doctor and pharmacist introduced in 2000 has been particularly blamed for this financial bankruptcy. Currently, overcoming this liquidation is the most urgent task with respect to running National Health Insurance. To tackle this problem, the government has announced several measures including the establishment of the earmarked tax in tobacco, the increase of governmental subsidies, and a raise in contribution rate. Yet, the last two measures will not be easy to implement. Another big concern about financial sustainability regards the National Pension Programme. The possibility of a financial crisis in the pension scheme is essentially ascribed to improper institutional design of the programme, promising too generous pensions with a relatively low level of contributions, and aggravated by the emergence of an ageing society. In 1998, the level of income replacement for a pensioner who makes 40 years contributions was reduced from 70 per cent to 60 per cent. The pension age of 60 years will be increased from 2013 by one year every five years to reach 65 years. Contribution rates of employers and employees rose to 4.5 per cent of the monthly wage. In the case of the self-employed, the contribution rate is annually increased by 1 per cent from 2000 to 2005, that is, from 3 per cent to 9 per cent. In addition, as the three separate occupational pension schemes for public officials, private school teachers and the military are more mature than the NPP, these schemes are rapidly approaching fiscal imbalance and are projected to run into deficit at some time during the next decade, despite the already high contributions.

Gender equality The welfare state in Western countries was generally built on the basis of a male breadwinner model. That is, women were expected to stay home and do unpaid work whereas men were expected to go out to paid employment. Given the Confucian tradition of Korea, the idea of a male breadwinner might influence the labour market as well as the social security system. It is true that female workers are not equally treated in the labour market. In the case of the new entrants to the labour market, young women have more difficulty in finding a job than young men. Furthermore, female workers are more likely to be employed in the informal sector. As for female workers working in the formal sector, their wages are far less than those of male workers. However, it is rare in the Korean social security laws that gender inequality is encouraged with respect to benefit or eligibility. The Employment Law for Gender Equality, legislated in 1987, guarantees a leave of absence for child rearing in firms that employ more than five workers. The total period of the leave of absence for child bearing and rearing may not exceed one year, as specified in the Labour Standard Law, Article 72. This period includes paid maternity leave and leave of absence for child rearing.

Epilogue 209

Costs of administration As mentioned earlier, the government established quasi-governmental organisations to run the social insurance programmes: the National Health Insurance Corporation for National Health Insurance; the National Pension Corporation for the National Pension Programme; the Korea Labour Welfare Corporation for Employment Insurance and Industrial Accident Compensation Insurance. The first two are under the control of the Ministry of Health and Welfare and the last one is controlled by the Ministry of Labour. The chief executive of each quasigovernmental organisation is appointed by the state. The Korean government has mainly provided subsidies for administration costs of each social insurance programme, though the government provides subsidies for the Regional Health Insurance Fund for the self-employed and for pension contributions paid by farmers and fishermen. However, the government has tried to cut administration costs. For example, the administration costs for the medical insurance programmes are 6.5 per cent of the total expenditures in 2000. They were recorded as 8.5 per cent in 1997. This decrease may be ascribed to the integration of medical insurance societies. Though the integration of four social insurance programmes into a unified social security system will greatly contribute to the cutting of administrative costs, its feasibility is very uncertain.

Targeting With respect to the issue of targeting, we shall first look at social assistance programme before examining social insurance programmes, particularly the Employment Insurance System (EIS). Social assistance programmes in Korea can be defined as formal safety nets targeted at the poor with the objective of raising living standards to an acceptable social minimum. Under the Basic Livelihood Protection Scheme, the government has provided living allowances for all of the people whose monthly income is less than the minimum living costs decided by the government. In August 2001, the Basic Livelihood Protection Scheme covered 1,510,000 people, 3.2 per cent of the population. However, there are still many households that miss out on the basic livelihood benefit due to strict eligibility conditions. With the expansion of EIS coverage, the number of employees and enterprises actually covered is increasing. The actual number of covered employees was 4.2 million on 31 December 1995 and 6.2 million on 28 February 2000. However, the number of insured employees was only 70.9 per cent of employees that should be entitled to the EIS by law, as Table E.2 shows. The EIS does not reach around 30 per cent of the target group. There are several reasons for this gap. First, although employers have a duty to register at the public employment office and pay EIS premiums for their employees, many employers of very small enterprises neglect to do this. Second, it is extremely difficult for the public employment offices to identify very small enterprises and their employees and collect insurance premiums from them because small businesses

210 Epilogue Table E.2 Coverage in number of workers (000s)

Paid workers Eligible workers Insured workers As a portion of insured workers to eligible workers (%)

July 1995

January 1998

July 1998

February 2000

12,824 4,280 4,204 98.2

12,500 5,190 4,309 83.0

12,603 8,342 5,876 70.4

12,819 8,700 6,172 70.9

Source: MOL.

open and close down constantly. Third, most daily and temporary workers are not effectively covered by the EIS even though they have to be covered by the system if their employment periods are one month or longer. Therefore, how the government can effectively identify very small enterprises and their employees and collect insurance premiums is a big issue in improving targeting of the EIS.

Accountability and transparency The government in Korea has to be responsible for the sound management of four social programmes. This means that the government should not only control the programmes but also be in charge of maintaining the fiscal stability of each programme. Thus, the government has monitored and supervised the management of the insurance fund on a regular basis and made the process of allocating money and benefits open and transparent to the public. For instance, in order to manage a sound Employment Insurance System, all of the contributions for the EIS are deposited into the Employment Insurance Fund (EIF), which is a special account in the Bank of Korea. The EIF has a separate account for each programme of the EIS and should have a sufficient reserve fund in order to pay unemployment benefits and implement active labour market programmes in the event of a serious economic downturn and high unemployment rate. As for the Pension Fund, the mismanagement of the reserve fund, in particular with respect to government borrowing from the fund, has been increasingly criticised. Since 1988, when the NPP was introduced, the government had borrowed more than 50 per cent of the total reserve fund by 1996 and by the end of 1998 this amount reached 75 per cent. The interest rates of all these governmental borrowings remained lower than those of financial institutions, which substantially accounted for differentials from 1.5 to 4 per cent. Therefore, the pension programme reforms of the new government in 1998 were initiated not only to redesign the pension programme but also to increase the transparency and efficiency of pension fund management. Details of fund management have to be announced to the public and the government has to pay higher rates of interest than the financial institutions.

Notes

Chapter 1 Introduction 1 The term ‘developmental state’ has developed from Chalmers Johnson’s (1982) ‘capitalist developmental state’, which was formed to explain the Japanese economic success. Following Johnson’s work, there have been many studies dealing with East Asian developmental experiences, especially Korea and Taiwan, supporting the developmental state paradigm: Deyo (1987) and Wade (1990) and Haggard (1990) provide detailed discussions of the developmental state with respect to the East Asian NICs. For Korea, see Amsden (1989), Woo (1991), Ha (1992) and Chang (1994). 2 For more detail, see Chapter 2. 3 Before that time, there were a lot of studies of welfare programmes. However, very little systematic work had been done in this area. Most of them stressed the necessity for the introduction of welfare programmes in Korea or just presented the characteristics of existing welfare programmes with little theoretical framework. 4 During the second half of the 1980s, the leading works dealing with welfare state development from the perspective of Marxism, such as The Political Economy of the Welfare State (Gough, 1979), The Fiscal Crisis of the State (O’Connor, 1973), and Contradictions of the Welfare State (Offe, 1984), were translated into Korean in the name of academic movements. They clearly provided major momentum for academics in social policy to break away from the previously dominant modernisation theory in Korea. 5 For more detail, see Chang (1994); Shin (1996). Chapter 3 A theoretical framework for analysing the process of policy formation and change 1 Under the same label of new institutionalism, we can find three different branches: rational choice institutionalism, organisational theory (social institutionalism) and historical institutionalism. 2 The concept of policy feedback was borrowed from Pierson (1993). Chapter 4 Social and economic policies during the export-led industrialisation of the 1960s 1 This calculation is based on the amount of GNP in 1953, US$1.45 billion (current). 2 That is, a militant and socialist union movement grouped together under the National Council of Korean Labour Unions (NCKL) was destroyed during the period of American Occupation and replaced by plant-level unions under the Korean Federation of Labour Unions (KFLU) (later the Federation of Korean Trade Unions (FKTU)).

212 Notes 3 In 1945 farm rents were reduced from 40–60 per cent to 33 per cent of output and in 1947 confiscated Japanese property was distributed. Between 1950 and 1953 land in excess of three hectares was distributed to former tenants. About 1.4 million acres (i.e. one quarter of total farmland) were allocated among some 1.6 million farmers (i.e. to 70 per cent of all farmers). Before the land reform, 19 per cent of farmers owned 90 per cent of all land and more than 50 per cent of farmers were landless tenants. Afterwards, 69 per cent of the farmers owned all the land on which they worked, 24 per cent were part-owners and only 7 per cent were tenants (KDI, 1995a: 111–15). 4 In exchange for the restoration of diplomatic relations with Japan, Korea was to receive from Japan US$300 million in grants, $200 million in government loans, and $300 million in commercial loans. The total was no small sum for a country whose entire exports in 1964 amounted to $200 million (EPB, 1965, in KDI, 1995a: 255). 5 Since 1964, 30 November has been commemorated as ‘Export Day’, a day when the highest-ranking exporters were awarded ‘industrial merit-medals’ of gold, silver and bronze rank. Special awards were also given to those exporting over US$100 million worth of goods. President Park personally presented these medals. 6 The SSIC was not initiated by the military junta. The initial proposal was made in the Second Republic in December 1960. The SSIC was divided into four sections: (a) a team for integration of the social security system; (b) a team for pension insurance; (c) a team for medical insurance; (d) a team for industrial accident compensation insurance. 7 In order to put the laws into effect, they need to be accompanied by an enforcement ordinance and regulations. The legislation itself does not necessarily result in the application of a law. 8 The favourable attitude of the public towards the military government can be found in the media at that time: Dong-a ilbo, 28 May 1961; Sasanggei, June 1961. 9 Park announced on 18 February 1963 that he was not going to participate in civilian government, which became invalid on 16 March 1963 by his decision to extend the military government by four more years. This decision was in turn declared invalid a month later by the announcement of general elections, including a presidential election. 10 As for the pension scheme for public employees, the rate of contribution paid by the insured was 2.3 per cent and this was matched by the government. These rates were raised several times thereafter and are currently (2003) 8.5 per cent of the monthly salary. 11 In 1974, Yuksonghoe fees amounted to 28 per cent of the public budget for compulsory education. Chapter 5 Social and economic policies during the heavy and chemical industrialisation of the 1970s 1 Regarding work hours in manufacturing industries, Korea recorded longer hours than most Latin American countries that adopted the ISI, let alone all of the industrialised countries. For example, Japan was 43.3, the UK 44.9, the USA 39.8 and Mexico 45.1 hours. 2 This gap would be much greater given equivalent statistics. Because Korean statistics were based on compensated accidents, but the UK’s data was based on reported accidents. 3 According to a recent survey which was conducted with people in their thirties by a daily newspaper, Hankyoreh, Chon Tae-il is ranked seventh among the 100 Koreans who have had the greatest impact on Korean modern history. He is regarded as a symbolic figure for the Korean labour movement, self-sacrifice, and resistance against the unjust (Hankyoreh, 1999). 4 Despite the financial and organisational weaknesses of the opposition New Democratic

Notes 213

5

6

7 8 9 10

Party, it managed to capture all but one seat in Seoul’s nineteen constituencies and forty-six of sixty-five seats in all urban areas. The ruling party’s legislative majority rested on large margins in the rural areas (sixty-seven to nineteen), and overwhelming victories in Park’s native Kyongsang province. The Garrison Decree, one step short of martial law, empowered the military to take charge of public order. Under the Garrison decree, the major universities in Seoul were occuped by troops, 1,889 students were arrested, 177 were expelled from universities, and 16,342 were reported to the military conscription authorities for induction (Sohn, 1989: 40). According to the Law, the pension programme was to be established with a two-part programme: Class I, a compulsory plan covering employees with earnings of at least 15,000 won working in firms with 30 employees or more; Class II, a voluntary plan covering all others, who were not covered by Class I. Criticism appeared in some daily newspapers: Dong-a ilbo, 22 September 1973 and Chosunilbo, 22 September 1973. The MIP was introduced with state expenditure of less than 9 billion won. In 1977, the total expenditure of the central government was 2,804 billion won. Thus 9 billion won amounted to around 0.3 per cent of total governmental expenditure. The exchange rate to US dollars was 484 won in 1975. Since the overseas construction work, in particular in the Middle East, was launched in 1973, it peaked in 1979 when the number of workers reached nearly 100,000, accounting for roughly 0.8 per cent of total employed population.

Chapter 6 Stabilisation, liberalisation and social policies: 1980–1992 1

2 3

4

5

6

On that day, Korea witnessed the most extraordinary cabinet meeting in the nation’s history, led by not the President but by General Chun Doo-hwan, the director of the KCIA and the head of the Defence Security Command who had already seized military power. In the cabinet meeting, he simply told cabinet members that they had to acquiesce in his decision to impose martial law and then dissolved the cabinet. It was obviously another coup that saw Korea’s hopes for democracy shattered. For more detail see Clifford (1994: ch. 11). For more detail, see Clifford (1994: 157–60). A student, Park Jong-chul, who was taken in by security agents, was killed during interrogation by torture. Brutal interrogations were common in Korea, and dissidents had long tried to rally public support against torture. There was another death of a student, Lee Han-yol, who was fatally injured by a tear-gas shell shot by the police. These incidents critically triggered a series of massive protests. Two opposition parties, the Reunification Democratic Party, led by Kim Young-sam who had boasted himself as a leader of anti-governmental movements for the last two decades, and the Democratic Republican Party led by Kim Jong-pil, were incorporated into the ruling party. The requirement of compulsory coverage was lowered to include those employed in firms with 100 workers or more in 1981 and 16 workers or more in 1983. In 1984 the provision concerning the definition of dependants was also revised for the MIP to cover parents-in-law. The government initiated ‘the Regional Medical Insurance Programme’ in the form of a pilot project in three rural areas in 1981 and three more additional areas in 1982. However, none of the pilot projects were ever successful, as the insured were unwilling to pay their premiums. So they all suffered financial deficits. For instance, in 1987, the collection rate of premiums was 87.3 per cent and the ratio of deficit reached 22 per cent (MOHSA, 1988: 228).

214 Notes 7

In a transitory period, people will be entitled to a reduced pension after fifteen years of contribution, equal to 72.5 to 92.5 per cent of the full pension. Similarly, employees will have the choice to continue to work between age 60 and 65 in order to get enough years of contribution, in which case they will get from 50 to 90 per cent of the full pension (it is called ‘extended pension’). Those who have already contributed for twenty years will be able to retire before the age of 60 and get the ‘early retirement pension’, which is 75 to 95 per cent of the full pension. Finally, people aged 45 to 60 at the introduction of the NPP who are unable to get fifteen years of contribution before retirement may get the ‘special pension’ if they contribute for at least five years, which is between 25 and 75 per cent of the full pension (NPPL, 1995: Article 57).

Chapter 7 Social and economic policies under globalisation: 1993–1997 1 2

3

4

The Korean economy appeared to be in a recession in the period 1992–3 when GNP grew by 4.7 per cent, compared to 9.1 per cent of the period 1991–2. In a statement, the Korea Chamber of Commerce and Industry maintained ‘the revision will form the turning point in labour–management relations and it will be no longer beneficial to continue debating the pros and cons of its content. It is time that labour and management work together with government to strengthen competitiveness.’ The Korea Federation of Small and Medium-sized Businesses also argued that ‘considering the state of the economy, the revision falls short of expectation, but the adoption of flexible labour management systems will certainly help improve productivity’. The Federation of Korean Industries, which is an organisation for chaebols, also said ‘business will be advised to not abuse the new system but rather contain it to the smallest possible scale and to work closely with workers to boost efficiency’. The Korea Employers Federation, another organisation for businesses, emphasised ‘the revision means that companies struggling to remain competitive have the legal means to cut costs to improve productivity’ (Korea Times, 27 December 1996). According to a survey conducted by the Hankyoreh newspaper, an overwhelming majority of the respondents, 75 per cent, said they supported the labour strikes against the new labour laws (17 January 1997). The Kim government in fact was facing its most serious political crisis. In 1997, the number of training centre was 96 public, 242 in-plant, and 139 authorised (MOL, 1999: ch. 7).

Chapter 8 Financial crisis, economic policy and social policy: 1998–present 1 2 3

4 5

In particular, all chaebols who entered into bankruptcy during 1997 had extremely high debt/equity ratios: Hanbo 22, Kia 5.2, Halla 20.6, Jinro 30.7, Haitai 6.6 and New Core 12.2 times. At present (2003), the duration of unemployment benefits, which is called ‘jobseeker’s allowance’, varies depending on the insured employment period and the age of the claimant, ranging between a minimum of 90 days and a maximum of 240 days. The first category covers the elderly aged over 65, children under 18, pregnant women, those unable to work due to physical and mental handicaps, households consisting only of women aged over 50 living together with the people listed above, and inmates in the social welfare facilities. The second group is the rest. Most of this section comes from Shin (2000b). The 1997 survey includes the responses of 1,117 Koreans interviewed in a nationwide sample survey, 20 May–3 June 1997. The 1998 survey offers empirical answers from a nationwide representative sample survey of 1,010 adults between 13 and 22 October 1998. Shin and Rose (1997 and 1998).

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234 Bibliography Park, Gyung-suk (1996) ‘Nongômin kukminyôngûmchedo’ [‘Implementation of the National Pension Programme for farmers and fishermen’], in Korea Welfare Association, Korea Social Welfare Yearbook, Seoul: Korea Welfare Association. Park, Hyun-chae (1978) National Economy, Seoul: Hangilsa. Presidential Commission on Education Reform (1996) ‘Searoun kyoukchedo rûl wihan kyoukgaehyôk’ [‘Education reform for new education system’], Seoul: Chông Wa Dae. Presidential Secretary Office (1996) ‘Nodongbôp kaechông’ [‘Revision of labour laws’], 25 April. Ra, D. and H. Moon (1995) ‘Kaeinyôngûm kwa chôngch’aek kwache’ [‘Private pension scheme and policy agenda’], in KDI, ed., Main Features of the Korean Economy and Policy Response in 1994, Seoul: KDI. Sakong, Il (1980) ‘Kyôngche sôngchang kwa kyôngcheryôkchipchung’ [‘Economic growth and concentration of economic power’], Korea Development Review, vol. 2, no. 1, pp. 2–13. Shin, Dong-myeon (1996) ‘Hanguk ûi sanôpchochông kwa kukga-giôpkwangye e kwanhan yôngu- bandoch’e, shinbal, chosônsanôp rûl chungsimûro’ [‘Industrial adjustment and state–business relations in South Korea: a comparative study of semiconductor, shipbuilding, and footwear industries’], Unpublished Ph.D. thesis, Yonsei University, Seoul. Social Security Research Council (1989) ‘Hanguk ûiryobohôm tonghap ûl wihan kwache’ [‘Countermeasure for the integrated system of National Medical Insurance programme in Korea’], Seoul: SSRC. Son, Joon-kyu (1981) ‘Hanguk ûi sahoebokchi chôngch’aek kyôlchôngkwachông e kwanhan ‘Hanguk ûi sahoebokchi chôngch’aek kyôlchôngkwachông e kwanhan yôngu’ [‘Social welfare policy-making in Korea: with special reference of administrative policy making’], unpublished Ph.D. thesis, Seoul National University. Son, Myung-sei (1989) ‘Hanguk ûiryobohômchôngch’aek kyôlchôngkwachông e kwanhan yôngyôlmangbunsôk’ [‘A network analysis of the policy making process in Korean medical insurance programme’], unpublished Ph.D. thesis, Yonsei University, Seoul. Song, Ho-keun (1994) Yôlrin sichang dathin chôngch’i [Open Market, Closed Society: Democratisation and Labour Regime in South Korea], Seoul: Nanam. Suh, Sang-mok (1985) ‘Bingon yuhyông’ [‘Patterns of poverty’], KDI Working Paper 7903, Seoul: KDI. SCNR (1963) ‘107 ch’a wiwonhoe hoeûirok’ [‘107th Committee Meeting Record’], Seoul: SCNR. Woo, G. D. (1990) ‘Kyôngchesôngchang kwa inryôk sahoegaebal kwache’ [‘Economic growth and targets for human resource and social development’], in FKI, Kyôngchechôngch aek sasipnonsa [The Forty-Year History of Economic Policy], Seoul: FKI. Yoo, Seung-heum (1990) Ûiryobohômron [Medical Insurance], Seoul: Soomunsa. Yoon, Hye-mi (1984) ‘Tonghap ûiryobohômron chôngch’aekgyôlchông kwachông e kwanhan yôngu’ [‘A study of the policy making process regarding the integrated health insurance system’], unpublished M.A. thesis, Seoul National University. Yoon, J. H. (1984) ‘Dosibigongsilbumun’ [‘Urban informal sector’], in Dea-geun Lee and Woon-young Chung, eds, Hangukchabonchoûiron [Korean Capitalism], Seoul: Kachi.

Government laws Kukminbokchiyôngûmbôp [The National Welfare Pension Law], 1973. Kulminyôngûmbôp [The National Pension Law], 1986, 1995, 1998, Ch’oechôimgûmbôp [The Minimum Wage Law], 1986, 1993.

Bibliography 235 Sanôpchaehaebosangbôp [The Law for Industrial Accident Compensation Insurance], 1963, 1994. Sahoebochang e kwanhan bôp [The Social Security Related Law], 1963. Nosachôngwiwonhoebôp [The No-Sa-Jung Committee Law], 1999. Ûiryobohômbôp [The Medical Insurance Law], 1963, 1970, 1976, 1986, 1994. Ûiryobohobôp [The Medical Aid Law], 1976, 1991, 1995. Saenghwalbohobôp [The Livelihood Protection Law], 1961, 1982, 1997. Goyongbohômbôp [The Employment Insurance Law], 1995, 1998. Oegukin tuchahoesa ûi nodongchohap kwa nodongchaengûichochông e kwanhan imsi tûkryebôp [The Provisional Exceptional Law Concerning Labour Unions and the Settlement of Labour Disputes in Foreign Invested Firms], 1970 Kukga anbo e kwanhan tûkbyôlchoch’lbôp [The Law Concerning Special Measures for the National Security], 1971. Kûnrogichunbôp [The Labour Standard Law], 1963, 1973, 1980, 1988, 1997 Nodongchohabbôp [The Labour Union Law], 1963, 1973, 1980, 1988. Nosawiwonhoebôp [The Labour–Management Committee Law], 1980. Nodongchaengûichochôngbôp [The Labour Dispute Adjustment Law], 1963, 1973, 1980, 1988. Nodongchohap kwa nodongkwangye e kwanhan bôp [The Trade Union and Labour Relation Law], 1997

Index

Agency of Labour Affairs (ALA) 99, 100 agriculture 78–9; subsidies 127–9 annual leave 164 April Revolution 51 Asian crisis 6 Association of Korean Businessmen 53 Bank of Korea (BOK) 57, 210 banking 116, 145; nationalisation of 57; see also Bank of Korea; World Bank basic allowance 158 Basic Livelihood Protection Scheme 184, 209 Beveridge, W. H. 17 Bismarckian social insurance system 25 Bonapartist approach to social policy 66 Bureau of Statistics 52 Bureau of Supply 52 Bureau of the Budget 52 bureaucratic–authoritarian theory 80 business-friendly welfare system 26–8 chaebols 33, 55, 195; in the 1970s 78, 83, 84, 85; 1980–1992 106, 110–12, 116, 118; 1993–1997 140–1; 1998–present 172, 174, 177, 178–9 Chang Myon 51 Choi Kyu-hah 107 Chon Tae-il 79 Chong Wa Dae 18, 61, 83 Chun Doo-hwan, General 6, 107, 108, 196 Chun government 105, 107–8, 110, 113, 123, 125, 127–30, 132–5; economic liberalisation 115–17 Chung Joo-yong 111 Citizens National Bank 57 Civil Service Pension Law (CSPL) 64 Civil War pension (USA) 45 collective action 99

collective bargaining 99 comparative institutional advantage 27 competitive state 18–20 Counterpart Fund 49 crony capitalism 142, 172–5 Declaration of Heavy and Chemical Industrialisation 85 de-industrialisation 11 Democratic Justice Party (DJP) 108 Democratic Liberal Party (DLP) 109 Department for Foreign Capital Management 83 Department for Management of Industrial Plants 83 Department for Promoting Investment 83 dependency theory 1 developmental state 17–18 East Asian developmental model 2 East Asian welfare model 2–3 economic bureaucracy, restructuring 52–3 Economic Development Plan, Five-Year 6, 60, 63, 105; Complementary Plan (1964) 58–9; for the New Economy 147; First 55–6, 58, 62, 77; Second 56, 74, 75, 77, 103; Third 103; Fourth 97, 103, 133; Fifth 113; Sixth 127; Seventh 155 economic liberalisation 115–17 Economic Planning Board (EPB) 18, 52, 53 economic stabilisation policy 112–15 education and training 8, 73–5; in the 1960s 73–5; in the 1970s 102–4; 1980–1992 132–4; 1993–1997 167–9 elderly households, types of 156 embedded autonomy 33 Emergency Decree for National Security 81 Employment Insurance Fund (EIF) 210 Employment Insurance Law (EIL) 158

Index 237 Employment Insurance Programme 147–50, 155, 167, 191 Employment Insurance System (EIS) 206, 209–10 Employment Law for Gender Equality 208 employment, FDI-related 13 exchange rates 61 export incentive subsidies (EPB) 58, 60, 94–6, 144, 195, 199 export-oriented industrialisation (EOI) 65, 75, 76, 80; exploitation of workers for export promotion 71; low skilled industries and 72–3; and state intervention 55–62; success of 78, 96 export promotion, policy instruments for 56–62; attracting more foreign capital 58–60; mobilising and allocating domestic capital 57–8; political leadership and 61–2; restructuring financial institutions 57; spending 60–1

GNP 56 Gongchuhyup 141 government failure 15 government-led internal organisation 146 Grain Management Fund (GMF) 114, 126, 199 Great Depression 16; relief programme during 134

Federation of Korean Industries (FKI) 53, 96, 97–8, 114 Federation of Korean Trade Unions (FKTU) 54, 85, 109, 129, 141–2, 161, 164–5 Fisher, Paul 95 fishing industry National Pension Programme 150–2, 155–6; subsidies 127–8; wages 130 floating exchange rate system 13 foreign direct investment (FDI) 14, 86; outflow stock 12, 13–14; ratio (1997) 138 Foreign Investment Promotion Law (1998) 188 Free Trade School 14

import-substitution industrialisation (ISI) 48–9, 51 income distribution 51 Industrial Accident Compensation Insurance (IACI) 6, 64, 67, 76, 206, 209 Industrial Accident Compensation Insurance Law (1963) 63, 64 Industrial Accident Compensation Insurance Programme (1964) 3, 63, 72, 185, 187–8, 191 industrial accident rate 79 Industrial Development Law (IDL) 117 industrial disputes: in the 1970s 84–5; (1980–1992) 108–9, 131–2; (1993–1997) 141, 164–5 industrial policy, definition 7 industrial relations policy 7–8 institutional welfare system 25–6 International Confederation of Free Trade Unions 165 International Monetary Fund (IMF) 1, 6, 171, 172, 173, 174, 188–90, 197; standby agreements 175–7

gender equality 208 Gerschenkron 82 Gini-coefficient 7 Gini index 96 global trade 12 globalisation 11, 19; characteristics of 12–14; economic policy and 143–7; deregulation towards a market-based system 143–5; liberalisation in the financial system and trade 145–7; negative effects on social security 157–60; policy network 136–42; public policies 136–42; social security policy, contingent effects 155–60 Globalisation Policy Commission 144

Hanbo financial scandal 142 HCI Plan 83, 85–8, 104 health service system 90–2, 118–22 Heavy and Chemical Industry Promotion Committee 83 historical (new) institutionalism 29, 37–40 housing 79 human resources development 166–9; 100-Days New Economic Reform package 143

Japan: contribution rate for unemployment insurance scheme 148; foreign capital imports from 59 Job Ability Development Scheme (JADS) 148, 150, 158, 167 Job Security Scheme 148, 150, 158 jobseeker’s allowance (JSA) 158

238 Index Keynes, John Maynard 16–17; General Theory of Employment, Interest, and Money, The 16 Keynesian state 16–17 Kim Chung-ryum 81, 97 Kim Dae-jung 6, 81, 108, 177–8, 197 Kim Jong-pil 53 Kim Soo-han 164 Kim Young-sam 6, 108, 136–9, 172, 196 Kim, E.M. 84 Korea Central Intelligence Agency (KCIA) 100 Korea Development Bank (KDB), Law for 57 Korea Development Institute (KDI) 95, 139 Korea Exchange Bank 57 Korea Housing Bank 57 Korea Inc. 88, 107 Korea Labour Welfare Corporation 209 Korea Medical Insurance Corporation (KMIC) 119, 122, 186 Korea–US Agreement on Aid (1948) 49 Korean Confederation of Trade Unions (KCTU) 141–2, 163, 164–5 Korean Employers Federation (KEF) 142, 161 Korean Trade Promotion Corporation (KOTRA) 61 Korean War 47, 50, 52 Korean welfare model 147–55, 157, 158, 160, 200 Ku Cha Kyong 111 Kukje business group, collapse of 110, 114 Kwangju, massacre at 107 Kwon Young-gil 164 Kyungsilryun 141 labour: in the 1960s 54; growth in 72–3 Labour Dispute Adjustment Law (LDAL) 100, 128 Labour–Management Co-operative Council Law 129 Labour–Management–Government Committee 197, 207 Labour–Management Relations Reformation Committee (LMRRC) 162, 163 labour movements 79; see also trade unions labour policy 200; in the 1960s 71–3; in the 1970s 98–101; (1980–1992) 128–32; (1993–1997) 160–5 Labour Standard Law 154, 187–8, 208 Labour Union Law (LUL) 100

laissez-faire, doctrine of 16 Law Concerning Special Measures for National Security (LSMNA) 99, 100 Law for Disaster Relief (1962) 66 Law for Foreign Capital Inducement 58 Law for Military Relief and Compensation (1961) 66 Law for Payment Guarantees of Foreign Loans 58 Law for Promotion of the Textile Industry (1967) 56 Law for Special Care of Persons Who Rendered Meritorious Services to the Nation (1962) 66–7 Law for the Development of the Electronics Industry (1969) 56 Law for the Development of the Mechanical Industry (1967) 56 Law for the Development of the Non-Metal Refining Industry (1971) 56 Law for the Development of the Petrochemical Industry (1970) 56 Law for the Development of the Ship Building Industry (1967) 56 Law for the Development of the Steel Industry (1970) 56 Law Regarding Assembly and Demonstration 100 Lee Hong-koo 164 Lipset 85 ‘Living Protection’ 63 Machinery Industry Promotion Fund (MIPF) 114 macro-economic policy, definition 7 Manpower Development Fund 168 market reconstruction perspective 14–15 Marshall, T.H. 21 Marx, Karl 31 Marxism 3 Medical Assistance (MA) 90, 91, 118, 120, 121 Medical Insurance Association 119 Medical Insurance Law: (1963) 63, 64, 70; (1976) 90 Medical Insurance Law for Government Employees and Private School Employees 91 Medical Insurance Programme (MIP) (1977) 3, 65, 90, 91–2, 96–8, 104, 118–21, 191; Enterprise 118, 119; financing 119; Regional 118, 119, 127; types 118–19

Index 239 Military Pension Law (1963) 63 Military Personnel Pension Law (MPPL) 64 Ministry of Commerce 83 Ministry of Education (MOE) 166 Ministry of Finance (MOF) 52, 57, 60, 83, 116, 144 Ministry of Finance and Economy (MOFE) 145 Ministry of Health and Social Affairs (MOHSA) 62, 94, 97 Ministry of International Trade and Technology (MITI) 18, 52 Ministry of Labour (MOL) 166 Ministry of Reconstruction 52 Ministry of Trade and Industry 83 Möller, Gustav 21 Monopoly Regulation and Fair Trade Act 140 multinational companies (MNCs) 19–20 Nam Duck-woo 95 National Agricultural Co-operatives Federation 57 National Assembly election (1971) 81 National Council of Trade Unions (NCTU) 108 National Federation of Fisheries Co-operatives 57 National Federation of Medical Insurance 119 National Health Insurance 207–9 National Health Insurance Act 186 National Health Insurance Corporation 186, 209 National Insurance Act (UK) 94 National Investment Fund (NIF) 86, 95, 114 National Pension Corporation 122, 209 National Pension Programme (NPP) 118, 122–3, 147, 150–2, 155–7, 159–60, 191, 200, 207, 208, 209 National Pension Reforming Board (NPRB) 159 National Security and Anti-Communist Law 100 National Welfare Pension Law (NWPL) 89, 93, 96, 104, 122, 199 National Welfare Planning Board (NWPB) 157–8 neo-classicalism 15 neo-liberalism 1 neo-Marxism 3, 29, 31–3

New Korea Party (NKP) 136, 162 New Korean Democratic Party (NKDP) 108 New Korean Welfare Model 155 New Right 24–5 NFMI 122 Nixon Doctrine 81 non-bank financial institutions (NBFIs) 145 non-decision making 71 OECD 13, 172; Economic, Labour and Social Affairs Committee 165; Trade Union Advisory Committee 165 Oh Won-chul 83 Oikonomic welfare states 2 oil crisis (1973) 13, 86, 96, 105 Park Chung-hee 53, 61–2, 65, 69, 70, 71, 74, 81, 83, 89, 94, 98; assassination 51, 105, 107, 113; regime 6, 33, 51, 52, 73 path-dependency of institutional change 39 pay-as-you-go pensions (PAYG) 89 pension scheme for public employees and military personnel (1963) 63–4 Pilot Medical Insurance Programme (1965) 63, 64 pluralism 29, 30–1 policy changes 193–8 policy feedback 8, 10, 39, 45–6 policy ideas 8, 10, 41–2, 193–8 policy learning arguments 46 policy linkages 8, 10, 43–5, 68–75, 198–202 policy loans 86, 106, 145, 146 policy network, concept of 8, 10, 41–2, 193–8 political economy approach 3, 4 political legitimacy 4 Presidential Commission on Education Reform (PCER) 167 presidential election (1971) 81 Presidential Emergency Measure No.3 for the Stabilisation of National Life 89 Provisional Exceptional Law concerning Labour Unions and the Settlement of Labour Disputes in Foreign Invested Firms (PELFIF) 99 Public Assistance Programme (PAP) 147, 182–4 public-choice theory 15 public goods state 15–16

240 Index ratio of relative poverty 106 rational choice institutionalism 35, 36–7 rational choice theory 29, 34–7 Real-Name Financial System 138 Regional Health Insurance Fund 209 rent-seeking activities 49 rent-seeking theory 15 residual welfare system 24–5 Rhee Syngman 47; government 48, 51, 52, 53 Rho Tae-woo government 6, 105, 108, 109–10, 111, 118, 123, 125, 127, 130–1, 134, 196; economic liberalisation 115–17

Special Law for Vocational training (1974) 103 state: autonomy 1–2; capacity 1; market intervention 14–20; role in welfare provision 21–2; structure 1; theories of policy making 29–40 state–business alliance 53–4, 79–85 state-centred approach 29, 33–4 statist approach 3, 4 strikes see industrial disputes structure-induced equilibrium 35 supply-side economics 15 Supreme Council for National Reconstruction (SCNR) 52, 64, 70

Samsung 83 Schumpeterian workfare state 28 segyehwa 136–9 self-adjusting market 16 Seo Sang-mok 158 service economy 11 Shin Hyun-hwak 97 shipbuilding industry 106 Sinhanguk 136–9 6.29 Declaration 108, 109 social assistance programme (1969) 3 social democratic model 25 social democratic welfare state 25–6 social dumping 27 social expenditure, analysis: in the 1960s 66–8; in the 1970s 92–4; (1983–1992) 123–5; (1993–1997) 152–5 social insurance model 25, 26 social insurance welfare system 25 social Keynesianism 17 social policy, definition 7 social safety net 182–5 social security: in the 1960s 62–6, 67, 68, 69–71; (1980–1992) 118–25, 134–5; (1993–1997) 157–60 Social Security Investigation Committee (SSIC) 62, 64, 69–70 social security policy, definition 7 Social Security Related Law (SSRL) (1963) 63, 69 social welfare: absence of 49–51; as etatist welfare system 62–8; legislation 63; stabilisation and 125–8 Special Accounts for Economic Development (1963) 60 Special Accounts for the Fiscal Capital (1962) 60 Special Committee for National Security (SCNS) 107

Taiwanese national health system 119–20 tariffs 117 taxation 22, 88, 199; education 134 telecommunications 13 trade ratios 13 Trade Union Law 128 trade unions 44, 45; in the 1960s 71–2; in the 1970s 84–5, 98–100; (1980–1992) 128–32; (1993–1997) 163 trans-national corporations (TNCs) 19 trickle-down effect 69–71 two-sector developmental model 78 unemployment 77, 179–82 unemployment benefit 148–50, 154, 158–9, 182 Unemployment Insurance Scheme (UIS) 148–9, 155, 182 UNICEF 49 Uruguay Round 138, 139, 156 US aid-led economy 47–9 USA welfare system, criticisms of 24–5 veto points 43, 52–5 vocational training: in the 1970s 75, 103–4; (1980–1992) 132–4; (1993–1997) 166–7 Vocational Training Law 75 wage 100–1; formation 71, 72, 73; minimum 130; repression 129–31 wage policy 115; definition 7 welfare states: change of 23–8; changing roles of the state 20–8 welfare systems, typologies of 23–4 Wolganchosun 53 working hours 163–4

Index 241 World Bank 1, 15, 172; World Development Report (1981) 77 World Trade Organisation (WTO) 139, 157

Yushin Constitution 79, 81–2, 128, 195; regime 77, 80, 84, 100 zero-base budget system 113