Embedded Video: The Financial Times' Simon Mundy reports on South Korean attitudes toward the nation's conglomerates
"Do you believe that the government should serve as a neutral guardian of the rule of law, or that it should it favor one special interest group at the expense of everyone else?
To this question, the average "Citizen on the Street" would likely respond that governments ought to refrain from playing favorites, as any distinctly favorable or unfavorable treatment toward a particular group is, in a word, unfair. When pressed for an opinion on specific policies, however, our Citizen is likely to favor policies that are distinctly favorable toward his particular group. If he's a businessman, for example, he might tell you that, sure, free trade is great, but that his industry is "unique" and clearly in need of protection. If he's a university professor upset by government bailouts to a certain well-connected conglomerate, he might lament the rampant cronyism of the age while insisting that, obviously, government subsidies to universities are essential to the nation's wellbeing. We humans, it seems, have an innate tendency to see ourselves, and the groups to which we belong, as special and therefore deserving of special treatment.
"Because people tend to view policies from their own vantage points," writes Randall Holcombe, "they tend to see policies that benefit them as policies that are also in the public interest."
This is pertinent because, on 19 December, Koreans will go to the polls and vote for their next president. The election will pit nominal conservative Park Geun-hye against the Democratic United Party's Moon Jae-in. It is the presence of Park, however - as the daughter of former dictator Park Chung-hee - that makes this election as much a referendum on the nation's past as it is a choice about the future.
Park Chung-hee, who headed Korea during the years of its explosive economic growth (1961-1979), is considered by a majority of the Korean public to have been the most effective president in the nation's history, but he is also the most divisive. Park's fans attribute to him the unprecedented gains in prosperity achieved during his time in office, while his detractors argue that Park, even as he singlehandedly produced a higher GDP, brooked no dissent and had few qualms about imprisoning, torturing, and even murdering those who challenged his vision for Korea's future.
Both views of Park give him too much credit for the economic growth of the period. To be sure, if Koreans were destined to play the Dictator Lottery, they lucked out by getting Park instead of, say, Mobutu or the Kims of North Korea, as Park was at least willing to change course when a policy was clearly courting ruin. Yet, as Benjamin Powell points out, while Korea’s industrialization was government-led, its development (that is, the quality-of-life improvements we should care about) was not. Instead, that economic development came as the result of individual knowledge responding to market incentives, and to the extent that the Park government allowed this knowledge to follow these incentives, prosperity grew. The more the government intervened and tilted the playing field toward one group instead of others, the more the economy floundered.
Government, of course, produces no wealth of its own and, as a result, cannot give something to one group without first taking it from someone else. In modern-day Korea, therefore, many citizens feel that the nation's family-owned conglomerates (chaebol) have exploited their close ties to the state and thus see the success of these firms as illegitimate. Such indignation is not without merit: these ties were cemented in the 1970s as the government ratcheted up its economic interventions, during which time the state greatly favored large industries at the expense of small businesses.
In a piece that should be required reading for anyone with an opinion on Park Chung-hee (see “references” below), Young Back Choi points to the many sacrifices that were foisted upon the Korean people by the Park government during the 1960s and 1970s. These included, among other offenses, forcing Korean citizens to buy long-term bonds that quickly became worthless even as the state handed out interest-free loans to favored businessmen; forcing Koreans to "pay exorbitant prices for shoddy products in protected consumer goods markets dominated by government-sanctioned monopolies and oligopolies"; and, as mentioned, brutally suppressing anyone who dared to protest this unfairness.
As such, this year's presidential race has included much talk about "economic democracy," an idea which includes government restrictions on the ability of chaebol to sell particular items in certain places; subsidies to uncompetitive business models, mostly among small and medium-sized businesses; and increased welfare spending. The widespread, albeit mistaken, belief is that the Korean government orchestrated the nation’s rise by favoring certain groups. Why, then, can it not now simply direct its magical largesse toward different groups? And if the chaebol can be punished for their sins – either real or imagined – in the process, so much the better.
Unfortunately, while the proposals which make up economic democracy certainly appeal to the human appetite for vengeance, such sentiments have seldom been the basis for sound public policy. Indeed, the policies packaged as economic democracy merely double down on the political-economic model that so angers Koreans, that is, one in which the state accords privileges to one group at the expense of another. Ultimately, neither the repressive industrial policy of years past nor “economic democracy” of the sort promised by current presidential hopefuls best serves Korea, as both tie economic success to a group’s ability to capture the political system.
Instead, as Holcombe writes, the goal should be a government that “is neutral toward everyone and supports neither business nor workers.” Korean voters should demand that the government strip away the last remaining privileges of industrial policy (subsidies, trade barriers, etc.) and force large firms to compete on their merits. In the interest of consistency, however, voters must also resist the urge to demand that new privileges be created and directed toward their own particular group.
References (and recommended reading):
Young Back Choi. "Industrial Policy as the Engine of Economic Growth in South Korea: Myth and Reality." The Collapse of Development Planning. Ed. Peter J. Boettke. New York: New York UP, 1994. 231-55.
Randall G.Holcombe. "South Korea's Economic Future: Industrial Policy, or Economic Democracy?" Journal of Economic Behavior & Organization (2011).
Benjamin Powell. "State Development Planning: Did It Create an East Asian Miracle?" The Review of Austrian Economics 18.3-4 (2005): 305-23.
Jungho Yoo. "The Myth About Korea's Rapid Growth." Institutional Economics and National Competitiveness. Ed. Young Back Choi. New York: Routledge, 2012. 154-66.