Opinion Leaders' Digest 99-02
Date: Jan 15, 1999
Author : In Young Kim, Professor, Hallym University

Beyond The Economic Myth

In the last one year, the process of overcoming the economic crisis was led by the government. That the government came to a fore and coped with economic problems is not a new phenomenon in Korea. It is taken for granted in Korea that the government intervenes in economic activities. And many people believe that the economic growth in Korea was led by the intervention and initiative of the government.

However, there are suspicious political intents and myths in this state-led economic growth hypothesis. They are the intents to maintain the authoritarian political system and the myths that the economic problems can be resolved by the government initiative. We were pleasantly surprised on December 19, 1997 when president elect Kim Dae Jung said in his first speech that he would "develop democracy and (market) economy at the same time." Pleasantly surprised because we expect that he would take a policy different from that of the previous authoritarian governments which advocated state-led development.

The Myths That Do Not Disappear

Poor performance of financial market, protraction of the KIA Motors Company incident, inordinate defense of foreign exchange rate - these generally agreed-upon direct causes of the financial crisis are the typical examples of untimely government policy and policy failure. Surely, excessive borrowing practice of big companies was one of the reasons that made the financial market fall and the radical labor movements were also a cause of rigid labor market. However, economic agents, like the big companies or labor organizations, are not the major agent responsible for the economic crisis. The major responsibility for the economic crisis we are experiencing lies ultimately in the failure of the government-led economic development paradigm. The primary problem was that the interventionist government which presented itself as the leader and insurer against the market failed to perform.

Even after the IMF rescue package revealed the government failure, the government did come to the fore. The government activities were based on the myth that the government was the only agent which could deal with the urgent economic crisis and the government offered a rationale based on the reality that markets in Korea were incomplete. As a result, ironically, the government failure which brought about the rescue finance was put into the rear and only workers and big companies became the object of restructuring. The sharing of burdens agreed upon by the Labor-Management-Government Committee was turned into the painful restructuring of Labor and Management while the government and political groups did not budge. The government claimed that it also restructured its organizations. Yet, there were fundamental difference in the intensity of restructuring between the government organizations and the private sector. What is a more serious structural problem is that the restructuring of the interventionist sector which caused the government failure did not take place.

Though it is commonly said that the economic growth in Korea was led by the government, we find, on a closer look, that there are many areas where the corporate-led or business initiative played an important role. What this observation implies is that the role of the government is the protector or umpire of the market, rather than the leader of the market and it is to construct the autonomous economic system so that the market is able to maintain its dynamics. Nevertheless, if the myth of government-led development is sustained, it will result in the construction of heteronomous economic system, rather than the construction of autonomous economic system.

What the Government Initiative Can Achieve

Following the policies initiated by the government, we may resolve the issue of excessive, duplicative investments and convert the inordinately expanded business groups into specialized business groups as desired by the government. However, this may produce the perils of monopolistic system in major industries. It is consistently pointed out that the government may bring about another sort of poorly managed companies while it tries to resolve the issue of poorly managed companies through restructuring. Have we already forgotten that the ambiguous government policies have been the cause of the current economic crisis?

Another problem with the government initiated restructuring is that it blocks the companies or the market from developing their own capability to restructure. In the "government-business agreement" announced on December 7, 1998, we find that companies try to implement restructuring they need, relying on the government power, instead of companies restructuring on their own. In fact, up to now, big companies have found it difficult to dispose of its own subsidiary in the normal times. With the introduction of lay-off, companies were going to restructure on its own. Yet, government-initiated restructuring led the companies to use the authority of the government in persuading its subsidiaries and, thus, the government created the paternalistic protective shield under which the companies do not have to work out their own problems. This is not different from the experiences under the authoritarian government when the government tried to control the companies by making the companies rely on it. If the government is satisfied with the dependent companies, there is no future for the Korean companies in the era of cutthroat competition.

One more fundamental issue we would like to point out is that in the process of government initiated restructuring, the roles of companies and entrepreneurs are being underestimated. Big companies made clear that they would reduce the mutual payment guarantee and mutual investments among the member companies of the same business group, reform the accounting system and implement, with sincerity, the independent director and external audit system in order to enhance the transparency and responsibility of management. However, if such reforms are implemented under the across-the-board government guidelines, there will be no room for the creative solution by the companies and entrepreneurship.

Once Schumpeter declared that the entrepreneurship is the determining force of economic change (growth). According to Schumpeter, the entrepreneurs are those who look after inventions. Or, in a more general term, they are those who produce new goods, or try unexplored possibility of technology to produce exiting goods in a novel way, supply new raw materials or create market for new products, and reform or revolutionize the production mode by a new method of organizing industries. Schumpeter emphasized that successful growth of capitalism is closely related to the creative entrepreneurs. Schumpeter put an emphasis that in the uncertain managerial environments of Korea facing crisis, we can not overcome the economic crisis without those entrepreneurs who develop new goods, create new markets, explore and exploit new resources, invent new technology and drive industrialization, and create new institutions.

A final point is that the logic of the citizen movement organizations has too strong influence in the era of government-led restructuring. The citizen movement organizations which seem to believe that they should lead the process of overcoming the economic crisis behind the government and propose core policy alternatives are crossing the boundary. Proper functions of the citizen movement organizations are to criticize and check the excessive activities of the government. They are not the major agent of public policy and nor of economic production. We should not underestimate the roles of the citizen movement organizations to supervise the government and market, nor should we overestimate them. When they lack information, have ideological bias, or pursue their organizational interests, they can not represent the public interest. In addition, they do not have responsibility for misjudgment and mistakes.

Desirable Roles of the Government

The argument that the government should come forward because the market is unstable and companies do not have the will to restructure themselves is not tenable. The original import of the argument that the government intervenes to make the unstable market perfect is that the government should take a role of umpire to protect the market and cure the market failure. That is, it does not say that the government stay out of the market, but, it says that the government deregulates the restrictions and interference in the economic activities and implement the rule of game in a fair manner. The government should not pursue aggressive policy and stick to it. It is said that the proper role of the government is to shape the market structure so as to facilitate the exit of poorly managed companies from the market.

The Korean economy seems to recover remarkably well. It is very fortunate. Yet, the economic recovery should not become the basis for the government-led strategy. We need to keep in mind that though the last government enjoyed the economic boom at the beginning, it did not throw off the myth of the government-led strategy, failed to reform the "high cost - low efficiency" political and economic structure and, as a result, we came to face the economic crisis, represented by the IMF rescue finance package.

(The view expressed here is the author's personal view. It is not the official view of the CFE.)