Roots of the Economic Crisis in Post-Democratization Korea

By Jennifer Du and Leslie Evans

South Korea is still smarting from the economic free fall of 1997-98. Countless employees were laid off. Businesses failed. Savings were wiped out. There was a massive growth of homelessness. Job security seemed an ancient relic, and Koreans grew increasingly pessimistic about their government. Yet this came about after decades of huge economic growth, a major reform in the 1960s, and even a democratic movement that was embraced by South Korea's authoritarian government in 1987 and was supported enthusiastically by the country's citizens. Professor Woo Jin Yang of Hanshin University, Osan city, Kyonggi province, South Korea, spoke at UCLA May 10 and attempted to answer the questions why Korea was so unprepared and what can be learned from such mistakes? His talk was sponsored by the Center for Korean Studies.

Professor Yang pointed out that in the decade before the crash the country had entered a relatively democratic phase and that there was broad agreement in all classes of society to undertake economic reforms that would strengthen a market economy. The crash came not in a period of deep social antagonism but in one of broad agreement on goals if not on methods.

The Korean economy became vulnerable to the disastrous 1997-98 Asian crisis, he said, because the major currents in the country's political life operated within outmoded and unexamined theoretical frameworks, all arising from variations on radical nationalism. Professor Yang spoke Friday, May 10, at UCLA's Royce Hall on the decade leading up to the crisis in what he called "post-democratization" Korea.

Professor Yang concentrated his talk on the ten years from the inauguration of democratic reforms by President Chun Doo Hwan and his successor Roh Tae Woo in 1987, to the begining of the disaster in 1997. The introduction of political democracy after years of military rule was a concession to "the student movement, labor movement, and other resistances that fought together against the Chun regime," he said. But economic reforms lagged far behind the political ones.

Nationalist Traditions Take Center Stage after Democratization

Democratization, he said, provided a more open forum for ideas, but the principal store of ideas that were then aired were variations on nationalist ideology. Koreans have long been a very nationalist people. They have struggled for hundreds of years for their independence from China and Japan. In fact nationalism was what brought the country into modernity in the first place, as Yang called nationalism “the convoy of modernity, a channel of the western civilization.” For a short time after the Korean War, most Korean nationalists identified with the United States and saw emulation of the U.S. as the way to achieve the nationalist goals of “democracy and material affluence.” Yang emphasized that after the war, Koreans viewed the United States “as an ideal model to emulate,” and “hoped to make their country such a westernized, democratic, and affluent nation.”

By the 1970s, however, currents arose within the nationalist movement that saw the opening of South Korea to the West as a violation of the long tradition of seeking to keep outsiders away. Radical, antigovernment nationalists began to emerge. They called for an “authentic national economy” that did not rely on foreign capital, aid, or investments. These nationalists wanted a national Korean economy that was fully self-sufficient. In Yang's view the problem with national self-isolation was that “there was not enough capital accumulated in the then-Korea to invest.” The government was aware of this problem, but the radical nationalists were not. Hence, any action that the government took to reform and strengthen the economy faced stiff opposition from radical nationalists who viewed such action as steps away from their “authentic national economy.”

South Korea as a State Capitalist System

In Professor Yang's view, Korea's economy in the 1980s and 1990s should be characterized as "state capitalist" rather than a true market economy. Here he was drawing on ideas developed by British theorist Tony Cliff to analyze the former Soviet state, which Yang said resembled 1980s South Korea in many economic respects. The government in the decade before the crash was working to divest itself of control over the banking system and basic industries, and to break the chaebol, Korea's giant cartels, into smaller units. It had entered the 1980s with government ownership of not only the state bank but also of the commercial banks, which had been confiscated from the chaebol. During the 1980s the commercial banks were finally privatized, but they were also saddled with enormous debts from loans the government had insisted they make to the chaebol and this prevented any true banking independence until after the IMF intervention to resolve the crisis of 1997-98.

A Weak "Strong State"

"Actually," Professor Yang said, "the economic reforms imposed by the IMF were, in most part, similar to the government's efforts to reform the economy before the crisis." The problem had been the government's extreme weakness, its inability to impose its own policy on the country. On one hand, the chaebol refused to submit to government reorganization and demanded instead complete deregulation. On the other had stood a leftist nationalist movement that essentially rejected all realistic reforms--until it capitulated to the government and became, in Professor Yang's opinion, a passive adjunct of weak "conservative political parties."

Contributing to the powerlessness of the nominal strong state was the tremendous scale and speed of economic growth. "Now, because of continuous growth, and expecially the growth of the chaebol, the scale of the economy grew beyond state control. State intervention could hardly penetrate the economy any longer."

In Yang's view the real key issues that needed to be addressed were the "deepening conflicts of capital-labor relations, the aftermath of rapid economic development like environmental disaster, and challenges from outside like globalization." But as the government bureaucrats became more and more helpless and the chaebol were mesmerized by the prospect of unlimited growth in the old pattern, the viable popular opposition became fixated on various nationalist panaceas. Most of these aimed at cutting Korea off from the outside world. Under their slogan of an "authentic national economy" the left of the 1970s and 1980s called for an economy that "was not to rely on foreign capital, resources, raw materials, and market." The chaebol were denounced as compradors and the strategy of export-led production characterized as a sellout to Western imperialism.

The Problem of Autarky as a Plan

This rejectionist current began in the 1980s to constitute itself as a revolutionary opposition to the status quo. It then split into two wings in what was known as the "controversy on the social formation of Korea." One wing looked to North Korea with its Juche strategy of isolated self-development for its views, the other to the Soviet Union. For both, however, the main issue seemed to be "the problem of the dependency of the economy. This means that they were still obsessed with the problematic of self-reliant national economy, the nationalist agenda."

But the government and the chaebol were also nationalists. In this context, with many shared beliefs and a weak grasp by all of the actual problems facing the economy, the left was ultimately overwhelmed by the enormous success of the Korean economic machine. Substantially the main currents of the left lost faith in their autarkic vision and collapsed in the 1990s. "Their criticism," Professor Yang said, "focused only on the problem of dependency, ignoring the real problems rising from the changing character of Korean society."

It was a bad thing for Korean society, he felt, that its populist sector became derailed with sterile nationalist formulas and then lost its self-confidence. "That the criticism of government policies vanished meant that there were no countervailing forces on the issues of carrying out the reform policies, on the issues of the way post-democratization Korea should go forward. Korean society was left open to the impending danger of the crisis." Only a few "diehard groups of dissidents" remained outside of the dominant conservative political parties and government after 1990.

Yang suggested that various factors had propelled the coalescence of the previously divergent nationalist strains into a conservative coalition in Korean politics. In addition to the long period of prosperity the most important was the collapse of the Soviet Union, which dealt a blow to leftists who saw an autarkic planned economy as a viable alternative to industrial capitalism.

The problem with the new coalition was that it was based on the old programs of the conservative nationalist parties and short-circuited the normal process of the more radical younger generation coming to power with a fresh eye and new ideas.

Differences within the Government

There were differences within the post-1990 governments. Advocates of big business demanded a radical form of complete deregulation. Others, mainly scholars, opposed “such a conspicuously firm-oriented” approach and promoted the view that the realization of a true market economy would only work if it was gradual.

"The problematic of nationalism held stubbornly in the mind of the people kept them from considering actual problems of the economy," Yang concluded. Instead the active forces of the country drifted along with the economic successes of the 1990s and ignored "the need to rationalize the chaebol, the need to reform the state and official sector, the need to heal the chasm [between workers and employers] that resulted from rapid modernization."