Korea’s meandering path to market economy

Seventy years has been more than enough for South Korea to pull itself up from postwar wrecks to become the world’s 13th-largest economy.

Since its liberation from Japanese colonial rule in 1945, the country’s gross domestic product surged by over 30,000 times and its per capita income by over 400 times -- a record which, to this day, stands unrivaled in the world’s economic history.

This striking growth, dubbed “The Miracle on the Han,” is attributed to a number of reasons, including the competitive market system.

But to the surprise of many, a free market economy in the true sense of the term only started to take shape in recent decades.

State interference

“South Korea was fated to prefer a planned economy (to market economy) from the very start,” said Jang Ha-sung, professor of business administration at Korea University.

The country’s industrialization got on track in the 1960s under the hard-line lead of the Park Chung-hee administration.

Having seized power in a coup, the military government neither believed in the efficiency of a free market, nor properly understood how it worked, according to the professor.

The government had the ultimate power to single out winners in the market by offering special benefits to chosen individuals or groups -- which laid down the foundation of chaebol, or family-ruled conglomerates.

Some even claimed that Korea’s economic structure in the early post-liberation years could not be referred to as a market economy.

“When establishing the five-year economic development plan back in 1962, the government claimed to advocate free market economics but did not have a true understanding of the concept of market,” said Jin Nyum, former deputy prime minister who served in 2001-2002.

“Before even discussing the plausibility of a market economy, the government had to create a market in the first place.”

This government-led initiative lasted for decades until it gave way to the private sector, but opinions vary as to when the phase-out took place -- some refer to the early 1980s when market liberalization policies started to show up, others pinpoint the mid-1990s when the first civilian government took office.

“The transition from planned economy to market economy took place in 1995, under President Kim Young-sam,” professor Jang claimed.

“Back in the 1980, the so-called market liberalization plans were only pretexts to justify and prolong the market monopoly of chaebol.”

Chaebol’s key role

When former President Roh Moo-hyun said back in 2005 that “power has now been transferred to the market,” he was referring to the excessive leverage held by conglomerates.

The presence of chaebol has always been a double-edged sword for Korea -- steering the nation’s economic growth and supporting the free market economy, but also hindering start-ups and deepening inequality.

According to the World Economic Forum’s annual report in 2013, Korea was ranked 19th in national competitiveness but 99th in market domination balance, indicating a market monopoly by the country’s wealthy.

At the root of Korean chaebol history was former President Park Chung-hee who, during his 18 years of hard-line rule, cast favors and power to companies as a means to boost the economy as fast as possible

“The economic development in the 1960-1970s was based on a special government-private partnership,” said Kang Kyong-shik, former deputy prime minister.

“The government would do everything from making investment plans, gathering resources, and even taking the responsibility for failure, so companies only had to take the credit for success, as well as the resulting profits.”

This was how conglomerate Hyundai came to build the nation’s first-ever shipyard in 1974 -- founder Chung Ju-yung wavered but President Park pushed the entrepreneur ahead by promising full government responsibility if the plan resulted in losses.

But such strong conglomerate-friendly measures also created a winner-takes-all business culture, blocking new players from entering the market.

“The business ecosystem, which enables small enterprises to grow into medium-sized companies and eventually into conglomerates, is no longer working in Korea,” said professor Jang.

Park Sang-in, professor at Seoul National University’s graduate school of public administration, even claimed that the chaebol system should fade out gradually as it no longer fits the country’s economic reality.

Such skepticism has been amplified by the recent series of conglomerate issues such as the disputed merger of Samsung’s two pillar affiliates and the ongoing succession battle among Lotte Group’s heirs.

1997 Asian financial crisis

This government-led, chaebol-centered economic frame struck a rock in 1997 when the Asian financial crisis broke out. According to a recent survey conducted by the Federation of the Korean Industries, 50 percent of the respondents still referred to it as the single greatest crisis in the nation’s economy since industrialization.

The International Monetary Fund, when granting its loan at the time, had pointed out that Korea’s bureaucratic financial system and exclusive market structure were key triggers of the crisis.

Some, however, adopted a different view and pointed out that it was the crisis that reignited government interference.

“In the 1990s, Korea was just gearing up for a free market economy and the government was gradually pulling out of the system,” said professor Jang.

“But the 1997 financial crisis forced the government back in the game, before the market could evolve to the next step.”

In either view, the hardship stimulated debate on how much the government should interfere in the market for the sake of the economy.

Deregulation, a remaining task for Korea’s economy

Over the last three administrations, the Korean government’s stance toward free market economics has fluctuated.

The liberal Roh Moo-hyun administration focused on reducing economic polarization, by imposing regulations, if necessary. The conservative Lee Myung-bak administration started off with a pro-conglomerate economic policy but later added a number of regulations to prevent excessive market monopoly. The current Park Geun-hye government, citing the need for deregulation, has introduced a series of easing measures including five key interest rate cuts.

As a country that is heavily reliant on exports and foreign investment, deregulation is considered a key measure to activate the economy but concerns also persist on the elevating amount of household debts.

According to the Bank of Korea, the nation’s total household debt balance stood at 601 trillion won ($513 billion) as of the end of July.

By Bae Hyun-jung (tellme@heraldcorp.com)