Market opening and joining the OECD
The import liberalization in Korea gathered speed in the mid-1980s, as the country chalked up its first current account surplus in 1986 and in the following year. The government began to phase in quantitative restriction reduction imposed on imports against the background of intensifying trade conflicts with major trading partners.
Capital market opening lagged behind trade liberalization, as the government feared that it might suddenly lose control over the domestic money supply and the real exchange fluctuations. In January 1992, the stock market was opened to foreign investors and they could now invest in listed firms up to a certain limit. The overall opening of the financial market did not begin until the mid-90s, as part of the government’s effort to meet the criteria to join the OECD and to accelerate the globalization of the Korean economy.
Korea joined the OECD in 1996 and this boosted Korea’s profile overseas substantially, since its membership was also an important recognition of the exceptional economic, social and political progress Korea had made in previous decades, rising from the ashes of war to become a world economic power and full-fledged democracy. Korea’s accession to the exclusive club was also widely seen as an important milestone in the globalization of the organization. Korea today still remains the only Asian country to have joined the OECD since Japan in 1964.
Promoting competition and the role of the chaebol
As explained in the previous issues of this series, wide-ranging intervention by the government in the market continued until the early 1990s and in many cases the entry and exit of business entities had not been necessarily determined by market forces. However, the Korean economy grew in terms of size and breadth rather steadily with competition in the domestic market getting ever fiercer. That the number of firms in Korea more than quadrupled between 1975 and 1995 demonstrates the trend.
In 1981, the government set up an agency whose primary purpose was to oversee competition policies. The Fair Trade Commission pursued various policies to promote competition in consultation with the private sector and other relevant ministries. The concept of free and fair competition was something unfamiliar to entrepreneurs and consumers alike at the time, as the economic scene had been dominated by government regulations and promotion of certain strategic industries.
While competition policy was struggling to take root, regulations on the chaebol (family-owned business conglomerates) multiplied. The government undertook a lot of measures designed to stop economic concentration in the few conglomerates representing a disproportionately high portion of the GDP. The enforcement of these policies have not been effectively enforced, as anticipated by many, and have not resulted in stopping the sprawling influence of the chaebol. The Chaebol benefitted from low interest rates and they were more likely to be saved by the government when they found themselves in financial dire straits. It would not be difficult to understand why this happened when you see those too-big–to-fail investment banks on Wall Street receive implicit subsidies by the government.
A discussion on the role of the chaebol in Korea’s economic development and their oligopolistic market positions always invites fierce debates. It defies simplistic judgment. Many people believe that the failure to contain the sprawling power of the chaebol has not produced an overall efficient economic system. However, some economists argue that chaebol-bashing is not the solution. They say that even though the large companies have ample room for improving their management style, they deserve credit for having substantially contributed to the rapid economic development of Korea, bordering on miraculous transformations.
It would be fair to say that the chaebol has served as the locomotive of the Korean economy over the past few decades and yet, they find themselves under heavy pressure to promote transparency in terms of economic transactions and management practices they undertake.
Rapid growth of government spending
Once the fiscal balance was restored to a stable position in 1987, the government responded to the growing demand for more public services by increasing its spending, particularly on welfare, infrastructure and education spending, which in turn laid the groundwork to promote further economic development. As a result, general government spending rose from 18 percent of GDP in 1987 to 30 percent in 2009.
(This series of contribution is based upon the contents of the recently published book “The Korean Economy: six decades of growth and development,” as compiled by The Committee for the Sixty-Year History of the Korean Economy and “Korea from Rags to Riches,” compiled by the Korean Institute of Public Administration.)