Jong WonLeeEmeritusProfessorofEconomics

Sungkyunkwan University

I. IntroductionII. MajorCausesorOriginsofPolarizationIII. TraditionalEconomicDevelopment

StrategiesandTheirConsequences:CrisisandPolarization

IV. KeyPolarizationIndicatorsV. NewEconomicDevelopmentParadigm:

Macro‐EconomicPerspectivesVI. PolicyAgendaforSharedGrowth:Micro‐

EconomicandInstitutionalPerspectives

1. ShiftofParadigm(SuggestedinPresidentialAddressonIndependenceDay)1) 2009.8.15:GreenGrowth2) 2010.8.15:FairandJustSociety3) 2011.8.15:SharedGrowth

2. Reality:SluggishEconomyandAggravatedPolarization

3. PolicyObjective:MainConcernhasbeenhowtoStrengthenEconomicPotential,toImproveQualityofLife,andtoEstablishaFairSocietythroughSharedandSustainableGrowth

1. Long‐cherishedUnbalancedEconomicGrowthStrategy

2. Neo‐classicalDoctrine:UnboundedGlobalCompetitionintheWTOEra

3. ChallengesfromNewCompetitors(BRICs:Brazil,Russia,India,China)whileEnteringMaturedStageofEconomicDevelopment

4. 1997EastAsianCrisis5. 2008GlobalFinancialCrisis

1. EstablishmentoftheCMES(UniqueKoreanStyleDevelopmentalStateModel)

[Figure1]EconomicDevelopmentStrategyunderCMESysteminKorea

ConcentrationofCapitalOwnershipandManagementbyGovernment

CompleteControlofGovernmentoverFinancialInstitutions,ResourcesAllocations,

andWagesandPrices

Government‐ledEconomicDevelopmentStrategies:Export‐orientedIndustrialization:UnbalancedGrowth:GrowthFirst,DistributionLater

CentralizedManagementEconomicSystem

Theterminology,centralizedmanagementeconomicsystem(CMES),isemployedinthisbooktodescribecharacteristicsoftheKoreaneconomicdevelopmentprocess.Withthisterm,Itrytoemphasizetheroleofthegovernment(orpoliticalpowergroup)anditsbureaucratswhoplayedaleadingroleinestablishingeconomicdevelopmentplansandexecutingpolicyimplementation.Ialso,withthisterm,trytorefuteotherpopularapproachesincludingthedependencymodelapproachatthesametime.Marxistsemphasizedtheroleofownershipofproductionmeans,withwhichtheytriedtoexplainproductivity,productionrelationandconsequentinequality.However,ItrytoemphasizethefactthatmanagerialcontrolpowerofthegovernmentandbureaucratsplayedabiggerroleintheKoreaneconomythantheartificialorlegalownership.Ontheotherhand,Iintroducethisterminologyinordertoplaceemphasisonthe

factthatthefeudalisticbureaucratsystemstemmedfromtheKwa‐keo‐je stillexistsinthemindoftheKoreanpeople,eventhoughtheformalownershipofproductionmeansandfactorsweretransferredtoprivatesectors.Monopolisticpowerofabsolutemonarchyandnationalizationofalltheproductionmeanaregone.However,thepracticeofcentralizedmanagementhas,inKorea,beenatthecenterofthegovernment.

2. MajorStrategies

(1)EmploymentofUnbalancedGrowthStrategy

1)R.Nurkse vs.A.O.Hirschman2)Backward&ForwardLinkageEffect3)SocialOverheadCapital(Electricity,Coal,Railroads,Roads,Ports)andKeyIndustries(Fertilizer,Refinery,Cement,etc.)toeliminateviciouscircleofpovertyandtoestablishaself‐supportingeconomy

(2)EOI(Export‐orientedIndustrialization)Strategy1)NeglectofNon‐tradesectors2)NeglectofAgriculturalsectors

(3)BorrowingForeignCapitalforthePlannedInvestments

(4)Government‐ledEconomicPolicingStructureforEffectiveControlof EconomicPlanningandExecutingProcedures:CMES

3. SelectionofPrinciples

(1)EconomicPlanningvs.LaissezFaire(2)Unbalancedvs. BalancedGrowth(3)EOIvs. ISI(4)Protectivevs.FreeTrade(5)Growthvs. Stability(6)Efficiencyvs. Equity

Kuznets’U‐Hypothesis(seenextpage)

[Figure2]Kuznets’U‐Hypothesis

4. ‘HardState’(G.Mrdal):StrongGovernmentRole

(1)Government‐ledRegulatoryFinancingSystem

1)ReorganizationoftheCentralBankingSystem2)RearrangementofCommercialBankOwnership3)ReorganizationandExpansionofSpecializedBanks4)FoundationofLocalBanksandForeignBankBranchOffices

u

5)Non‐BankFinancialInstitutions

6)ForeignCapitalInducementⅰ)WarReparationFortheJapaneseRule

(600millionUSD)(usedmainlyforhighwaysandPOSCO)

ⅱ)J.F.K.

7)DomesticSavingsInducementⅰ)InterestRateRealizationPolicy(1965;1979)ⅱ)CurrencyReform

8)ReinforcementofPolicyLoansandCreditControl:Freeze ofCurbLoansandRescueofInsolventEnterprises

[Figure3]CharacteristicsofFinancialPolicyinKorea

FinancialManagement

MonetaryControl

FinancialManagement

MaintenanceofGrowthOrientedMoneySupply

NeglectofStability

FundRaising

FundAllocation

FailureofInterestRatePolicy

RetardationofNewFinancialCommodity

Development

NeglectofInvestmentEfficiency

ExcessivePolicyFinancing

(2)ExportPromotionPolicy

[Table1]ComprehensiveExportPromotionPolicy

Means MajorContents

PromotionofExportIndustry

• Constructionofindustrialcomplexes• Specializationofexportindustry• Selectionofandsupportforexport‐goodsproducingcompanies

• Securityofrawmaterialsforexport• Exportrecordslinkingimport‐licensing• Importpromotionofproductionforexportindustry,andfinancingitsneededcapital

FinancialSupport

• Export subsidy• Increasedexportfinancing• Lowerinterestratesforexportfinancing• Maturityextensionofexportfinancing

[Table1]ComprehensiveExportPromotionPolicy‐ continued

Means MajorContents

TaxIncentives

• Special allowanceofdepreciationperiodforexportindustry’sfacilities

• Tariffexemptionandcommoditytaxcutforrawmaterialsofexportindustry

• Substantialreductionofcorporatetaxandincometaxthatarerelatedtoforeignexchangeearnings

• Reductionofcorporatetaxthatisrelatedtoproductionofexportgoodsanditswarmaterials

• Reductionofdomestictaxonexportsanditsintermediateinputs

• Reductionoftariffandindirecttaxfordomesticsuppliersofintermediategoodsforexport

• Allowanceofwearingoutofimportedwarmaterials• Allowanceofaccelerateddepreciationoffixedassetsofmajorexportindustry

Means MajorContents

AdministrativeSupport

• Reformofforeignexchangeandinternationaltradesystemssuchassimplification oftradeadministrationandestablishmentofbanksthatspecializeinforeignexchangedealings

• EstablishmentofKoreaTradeAssociation(KTA)andKOTRAtostrengthenmarketingandinformationgatheringforexports

• Specialfinancialbenefitoflong‐termloanstothosewhoaccomplishedyearlyexporttargets

• Monthlyexportmeetings,inwhichPresidentwasalsopresent,topromoteexportsandtoeliminateexportbottlenecks

• Establishmentofexportpromotionfund• Expansionofdeferred‐paymentexports• Strengtheningofexportinspection• Discountofrailroadfreightfareforminingproducts

[Table1]ComprehensiveExportPromotionPolicy‐ continued

(3)ChangeofLeadingSectorsforEOI

ImportSubstitutionLightIndustryHCIR&D

(4)Development&WaningofCMES(1980s&1990s)

(1)GovernmentRoletoSolveViciousCircleofPovertyandtoEliminateSupplyBottlenecks

(2)UnbalancedGrowthApproach:GovernmentEconomicPolicyPrincipleand6Five‐yearEconomicDevelopmentPlans

(3)Rationale:SupportoftheStrongDevelopmentalStateModel1)ChalmersJohnson(1994)2)RobertWade(1990)3)Amsden (1988)4)WorldBank(1993):TheAsianMiracle

(4)Limitation(Seethenextpage<Box>)

5. RationaleandLimitationoftheStatistModel:FactorsforSuccessandFailureoftheKoreanEconomy

FactorsforSuccessandFailureoftheKoreanEconomy

[Figure4]RootCauseoftheCrisis

[Figure5]IMFRecommendations

[Table2]FourMajorEconomicReformPolicies

[Figure6] RatiosofLight andHeavy&ChemicalIndustry

59.4%50.3%

41.9%36.3%

29.0%23.4% 21.2%

15.6% 12.7%

40.6%49.7%

58.1%63.7%

71.0%76.6% 78.8%

84.4% 87.3%

1970 1975 1980 1985 1990 1995 2000 2005 2010

LightIndustry Heavy&ChemicalIndustry

[Figure7]RatiosofExportandDomesticSectors

13.2%

26.3%31.2% 32.0% 27.6% 28.5%

38.6% 39.3%

52.3%

86.8%

73.7%68.8% 68.0% 72.4% 71.5%

61.4% 60.7%

47.7%

1970 1975 1980 1985 1990 1995 2000 2005 2010

Export Domestic

2007 2008 2009 2010 2011 2012

Totalworkers(A)

15,731 15,993 16,076 16,617 17,065 17,421

Regular 9,958 10,356 10,702 11,119 11,294 11,612

Non‐regular(B) 5,773 5,638 5,374 5,498 5,771 5,809

Ratio(B/A) 0.367 0.353 0.334 0.331 0.338 0.333

[Table4]NumberofEmployed:RegularandNon‐regularWorkers

0

2,000

4,000

6,000

8,000

10,000

12,000

2007 2008 2009 2010 2011 2012

9,95810,356 10,702

11,119 11,294 11,612

5,773 5,638 5,374 5,498 5,771 5,809

Regularworkers

Non‐regularworkers

[Figure8]NumberofEmployedRegularandNon‐regularWorkers

2007 2008 2009 2010 2011 2012

Totalworkers 172.4 181.1 185.4 194.6 202.6 211.3

Regular(A) 198.5 210.4 216.7 228.9 236.8 245.5

Non‐regular(B) 127.3 127.2 123.2 125.3 135.6 143.2

Ratio(B/A) 0.64 0.60 0.57 0.55 0.57 0.58

[Table5]AverageMonthlyWagesofRegularandNon‐regularWorkers

0

50

100

150

200

250

2007 2008 2009 2010 2011 2012

198.5210.4 216.7

228.9236.8

245.5

127.3 127.2 123.2 125.3135.6

143.2

Regularworkers

Non‐regularworkers

[Figure10]AverageMonthlyWagesofRegularandNon‐regularWorkers

IncomeClassandIndex

1996 2000 2006 2008

Market

Disposable

Nominal

Market

Disposable

Nominal

Market

Disposable

Nominal

Market

Disposable

Nominal

IncomeClass(%)

Low 11.76 11.25 11.19 17.39 15.74 15.48 21.23 17.94 17.40 22.20 18.97 18.48

Middle 68.00 68.45 68.73 58.86 61.88 61.13 53.63 58.48 58.54 50.94 56.42 56.45

High 20.24 20.30 20.08 23.75 22.38 23.39 25.14 23.59 24.06 26.86 24.61 25.06

Source: Korea Bureau of Statistics.

[Table6]MiddleClassSizeinPercent

[Figure11]MiddleClassRatio

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

7.1 6.8 6.5 7.5 7.3 7.7 8.2 8.2 10.9 11.4 9.2 10.1 10.0 10.6 11.4 11.9 11.9 12.6 12.5 13.1 12.5 12.4

75.4 76.2 76.3 75.7 75.8 75.3 74.5 74.1 69.6 68.9 71.7 70.4 70.3 71.8 70.0 69.2 68.3 67.0 66.3 66.9 67.5 67.7

17.5 16.9 17.1 16.8 16.9 16.9 17.2 17.8 19.5 19.6 19.0 19.5 19.8 17.6 18.6 18.9 19.8 20.4 21.2 20.0 20.0 19.9

MiddleclassIncome:morethan150%

MiddleclassIncome:lessthan50%~150%

RelativePovertyRates(MiddleclassIncome:lessthan50%)

[Figure12]Gini CoefficientandRelativePovertyRatio

Source:KoreaBureauofStatistics

Gini CoefficientandRelativePovertyRatio

0.230

0.250

0.270

0.290

0.310

0.330

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

7

8

9

10

11

12

13

14

15

지니계수

상대빈곤율

Gini Coefficient

RelativePoverty

[Figure13]Bi‐PolarizationIndex(ERindex,Windex)

0.0165

0.0170

0.0175

0.0180

0.0185

0.0190

0.0195

0.0200

0.0205

0.0210

0.0215

0.2300

0.2400

0.2500

0.2600

0.2700

0.2800

0.2900

0.3000

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Bi‐PolarizationIndex(ERindex,Windex)

Windex ERindex

ERw

1. CantheNeo‐ClassicalRemedybeanAppropriateAlternative

(1)MarketPrinciplesareEmphasized

(2)Chowdhury andIslam(2001):WashingtonConsensusandNeo‐ClassicalDoctrineCannotbeaRemedyforLDC’s

(3)Hutson andKearney(2001) WarningagainstIncreasingDegreeofFragilityoftheInternationalFinancialMarket.

ForcesofIMFandU.S.TreasuryDept.

2. TheAdvancedStateModel:ANewAlternative

[Figure14]RolesofGovernmentforEconomicDemocracy

3. EconomicDevelopmentParadigms

[Table7]DevelopmentalStateandAdvancedStateModel

1. MajorSourcesofPolarization

(1)InvoluntaryIntroductionofCapitalismthroughColonization=>WeakBasisforMarketEconomy

(2)ExtremeExploitationbytheJapaneseRule,DevastatingDestructionbytheKoreanWar

=>ViciousCircleofPoverty=>WeakBasisforIndustrialization

Leading‐sectorOrientedUnbalancedGrowthStrategy(i.e.,EOI) Government‐ledEconomicDevelopmentPlan

2. Consequences

(1)DualitybetweenModernandTraditionalSectorsIndustrialandAgriculturalSectorsExportandNon‐exportSectorsLargeandS&MEnterprisesH&CandLightIndustries

(2)DeteriorationofIncomeDistribution

Polarization

3. OtherSourcesofPolarization

(1)Astheeconomyapproachesmaturedstagesofeconomicdevelopment,andasthetechnologicalinnovationisaccelerating,discrepancyinadaptivecapabilitybetweenIndividualsandbusinessfirmsgrowswider.

(2)AsthecompetitionbecomesunboundedlyferventundertheWTOscheme,continuousseparationbetweenwinnersandlosersiscreatedinthegameofsurvivalofthefittest.

4. BehavioralCharacteristicsofPolarization

(1)Largevs.S&MCorporations SharpIncreaseofSubsidiariesofthe10LargestBusinessGroups:237betweenApril,2009andJune,2011.

IntrusionorEncroachmentofCoreBusinessesforS&MEnterprisesbytheBigCorporations(esp.sincetheCoreS&MBusinessRegulationswereliftedin2006)

SecuringorLuringTechniciansfromS&MIndustriesbytheBigCorporations(45.5%ofthenewlyemployedtechniciansbythebigcorporationscamefromtheS&Mindustries)

UnfairTradingPrevailsbyForcingOralContract,UnitDeliveryPriceCut,andTechnologyExtortion.

(2)LargeCorporationsvs.Consumers

EntryBarrier=>Monopolisticprice PriceCollusion=>MonopolisticProfit Quality,PriceandAfter‐serviceDifferentialsbetweenExportandDomesticDeliveries

InsufficientandImplicitDocumentationorInstructions

(3)1997EastAsianForeignExchangeCrisisand2008GlobalFinancialCrisisAggravatethePolarization

(4)Consequences:

AggravationofPolarization

AccelerationofPolarizationduetoWeakTrickle‐downEffect,andDeepeningofDuality

GloomyFutureProspectsduetoWeakenedGrowthPotential,LowEmploymentRate,HighPercentageofNon‐RegularWorkers,DecreasingConsumption,etc.

5. WhatNeedstobeDone:

(1)byBigCorporations

DownsizingorReductionofExcessivelyHighCEOWages ContractionofNon‐RegularWorkers’Size CreationofMoreJobs RestraintofUnfairTradingPracticestowardS&MEnterprises

DeterrenceofPriceCollusionandMonopolyProfits ImprovementofAfter‐servicesorRepairDefects CoordinationofConsumerProtection ExtensiveSupportforthePoor

(2)S&MEnterprises

ProtectTechnologyandTechnicians EradicationofUnfairTradingPractices SettlementoftheS&MFirmSuitableCoreBusiness Nuture(orFoster)theAbilitytoPropagatethroughAdoptionofParticipatoryModelsintermsofOwnership,Management,andPaymentbytheResultSystem(PerformanceBasedPaymentSystem)

UtilizationofProducerAssociations(e.g.,NationalFederationofFisheries,NationalFederationofLivestock,NationalAgriculturalCooperation)

(3)Consumer

UtilizationofConsumerAssociations StrengtheningofConsumerProtectionMovement

(4)Government

SupportforS&MindustriesandConsumers’CountermeasuresagainstBigCorporations’UnfairTradingPractices

FosteringS&MBusCorporations ReconsiderationofChaebol Policies(Forexample,RegulationsPertainingtoTotalEquityInvestmentwhichwasfirstintroducedin1987,andabolishedin2009,mayneedreintroduction)

6. EssentialIssuesforSharedGrowth

EstablishmentofOrderinFairTradingPractices ProtectionofS&MCoreBusiness FosteringS&MIndustry’sAbilitytoPropagate EstablishmentofAdministrativeSupportSystemfor

SharedGrowth PromotionofSocio‐EconomicCommunitythrough

IntroductionofCooperativeEconomicModels,andFosteringofProducers’&Consumers’AssociationsandEncouragingSocialEnterprises.

Thankyouverymuchforyourcarefulattention!