3. Deep Learning, from Shallow to Long Short-Term Memory Recurrent Neural
4.3. Database and Experimental Framework
developm ent through its cunning use o f state-created rents as an in
strument for industrial development. O f course, such a result was only possible because the Korean state was a-strong state which could discipline firms whenever necessary.24 W hat was the basis for such state power?
It has often been suggested that the Korean state could become strong because the country’s historical developm ent left a social struc
ture with no powerful social classes to contest state pow er (Hamilton.
1983; Lim, 1985; Evans. 1987; Amsden, 1989: Chapter 2). The landed class was eliminated through land reform around the time of the Ko
rean War, and the incipient (largely socialist) political organisations o f the working class and the farmers were also crushed during the war and the subsequent domination of Cold War politics. Moreover, it is argued that the country’s long history o f Confucian tradition pro
duced a society where the state comm ands the moral high ground and draws in the best talents (e.g.. Luedde-Neurath, 1985).25 The long tradition o f centralisation in Korean history seems to have been an
other factor serving to legitimatise the power possessed by the central bureaucracy.26
24 The power o f the Korean state has frequently been underrated, especially by some neoclassical economists (e.g.. Balassa, 1988), on the ground that the ‘size’ o f the Korean state (defined in terms o f public sector expenditure) is relatively small (but see Sachs (1987) for some evidence to the contrary). However, what matters for the effectiveness or otherwise o f state intervention is not where the boundary o f the state as a legal entity lies, but how far it can exercise its influence. Public sector expenditure as usually defined is a very poor measure o f this.
23 However, Confucianism in itself is not necessarily beneficial to economic devel
opment. Its contempt for commercial and industrial pursuits (the merchant and the craftsman occupied the two lowest castes in the traditional Confucian social hierarchy) could have acted as an obstacle to industrialisation. Actually, Confu
cianism, often hailed currently as the reason for the Korean success, was often blamed for the relatively poor Korean econom ic performance in the 1950s.
26 Korea has traditionally been even more centralised than other Confucian coun
tries. The Japanese feudal system was fairly decentralised until the Meiji Resto
ration, and the Chinese system, due to the sheer size o f the country, had a strong tendency to dissolve into a decentralised one except in the prime time o f a dy
nasty.
9 6 The East Asian Development Experience: The Miracle, the Crisisandthe Future
We think that these historical factors are extremely important, and perhaps what differentiate Korea most from, say, India or Latin America (on India, see Datta-Chaudhuri. 1990: on Latin America, see Fishlow, 1990, and Shapiro and Taylor, 1990). The weakness of social classes was certainly important in deciding the balance of power between the state and society in Korea. The Confucian belief in the state as a legitimate social institution (if not necessarily in particular governments and individual political leaders), often lacking in other developing countries, also seems to have been an important factor in making state intervention effective in Korea.
However, we think that such historical factors are. in themselves, not enough to bring about a strong state. For example, if social classes had been weak since the end o f the Korean War, why was the Korean state so weak and incompetent in the 1950s? For another example, if Confucianism is conducive to a strong and competent state, why was the Kuomintang government before 1949 so weak and incompetent?
Although a full discussion of the subject is beyond the scope of this chapter, we would argue that the strong state should be understood as an outcome o f the conscious actions taken by the military regime of General Park Chung Hee, which fundamentally shaped the political economy o f the country' for decades to come. The strong Korean state was, as we shall soon see, as much, if not more, an outcome of calculated political moves and institutional innovations as o f the his
torical conditions and culture.
The political ideas o f the top political decision-makers of the military regime were fundamentally shaped in the shadow of the Japa
nese variety o f corporatism.27 In terms o f their economics, the early Korean top political decision-m akers were no fans o f the free market.
27 Park was a fierce nationalist strongly influenced by corporatist and communist ideas. His education in the Japanese military academy in Manchuria, which he joined after a brief career as a school teacher, left him deeply influenced by the Japanese variety o f corporatism, as is testified by his naming the ‘October Resto
ration’ in 1972. his own mid-career political coup to guarantee him self a lifetime presidency, after the Meiji Restoration. He was also strongly influenced by com munism, which was a torch-bearer o f the Korean nationalist movement under Japanese colonial rule. His brother was an influential local communist leader, and he him self was sentenced to death (but earned an amnesty by publicly de
nouncing communism) as one o f the leaders o f a communist mutiny within the Korean army in 1949. His close political aides shared similar ideas.
The Political Economyof Industrial Policyin Korea 9 7
although they had to pay constant lip service to the ‘free enterprise econom y’, given the critical importance o f US support for the politi
cal survival o f the regim e.28 In addition, w hatever little economic knowledge the early Korean economic bureaucracy had was not neo
classical economics but the economic theories o f Friedrich List, Jo
seph Schumpeter, and especially Karl Marx, which dom inated Japa
nese academia and policy-making circles in the first half o f the 20th century (see M orris-Suzuki, 1989). The major themes o f Korean eco
nomic policy-making, for example, the concern with ‘social w aste’
from ‘excessive com petition’, the emphasis on scale economies (and large firms), the obsession with capital accumulation (reflected in the anti-consumption bias), and the desire to develop heavy and chemi
cal industries, make more sense when we understand the intellectual background o f the economic bureaucracy. Given such a background, it is more than natural that the political-economic agenda o f the Park regime was summarised as ‘guided capitalism ’ (Gyodo Jabon-Jui), where the state plays a guardian role.
As soon as it came to power, the Park regime moved swiftly to prepare some institutional ground for its political-economic agenda.
One o f its first moves was to nationalise all the banks, and therefore to gain control over the financial flows in the economy. Subsequently, new state-owned banks (e.g.. the Korean Exchange Bank, the Bank for M edium and Small Firms, the Ex-Im Bank) were set up over a period o f time, resulting in full state control over investment loans.2'’
At the same time, the Park regime imprisoned many prominent busi
nessmen on the charge o f having accumulated wealth through ‘illicit’
means (e.g., using political connections) and later released them in return for their promises to ‘serve the nation through enterprise', which b a sic a lly m e a n t b u ild in g new p la n ts in s ta te -d e sig n a te d in d u strie s (the so-called ‘Illicit Wealth Accumulation" episode; see Jones and Sakong, 1980: pp. 69-70, 281-2). With these two major political blows, the
28 With the growing acceptance o f ‘private initiative', later policy documents (espe
cially the 5th and the 6th FYP documents) emphasised the government’s commit
ment to the ‘private-led econom y1, but this testifies to the persisting dominance o f the state (if the economy was already ‘private-led’, no comments o f this sort would have been necessary).
29 Short-term working capital, given credit rationing, was mainly provided either by small non-bank financial institutions or by the curb market.
9 8 The Eas t Asian Development Experienc e: The Miracle, the Crisisandthe Future
business community suddenly became, morally, criminals on parole on condition that they ‘served the nation through enterprise’, and, economically, a paper tiger with little power to make investment de
cisions - the ultimate capitalist prerogative.
Another im portant institutional innovation made by the Park regime was the centralisation o f economic policy-making power in the hands o f the super-ministry headed by the deputy prime minister, namely, the Econom ic Planning Board (EPB) (see W hang. 1991: pp.
86-7). The integration o f both planning and budgeting authorities within the EPB eliminated the conflict o f interests, if at the cost of concentration o f power within the governm ent (which may be ob
jected to on other grounds), between the planning and industrial min
istries (which are usually more interested in long-term investments) and the finance ministry (which is usually more interested in short
term stability). Elimination o f such conflict made the implementa
tion o f industrial policy in Korea more effective than in other ‘indus
trial policy states' like Japan and France where such conflict has been a problem (see Johnson (1982) for Japan: see Hall (1987) for France).
Even the much-vaunted cultural and ideological homogeneity o f the Korean society was not purely a historical bounty which the nation accidentally stumbled on. The Park regime mobilised the na
tion with the ideology o f ‘Renaissance o f the N ation' through the building o f Ja r ip Gyongje (independent economy). Workers were described by the state-controlled media and state-issued school text
books as ‘industrial soldiers' fighting a patriotic war against poverty (although the labour movement was brutally suppressed) and busi
nessmen were given medals for their achievement o f export targets as if they were generals who won m ajor battles. Farmers were mobilised into semi-compulsory (unpaid) labour for rural infrastructural devel
opment a la M ao Tse Tung, through the ‘Semaul (New Village) M ove
m ent' (Michell, 1982: pp. 205-8). Although not all such ideological mobilisations were successful (for example, the Semaul M ovement was much resented) and some may criticise them as ‘m ilitarising’ the society (e.g., Halliday, 1980), it is undeniable that they were impor
tant in promoting the society’s ideological homogeneity.
The Korean state has continued to occupy such economic and moral comm anding heights throughout the country’s developmental period. State control over credit, which has been the most effective
The Political Economyof Industrial Policyin Korea 9 9
m eans to control the private firms, given their high leverage (see above), continued, although some of the state-owned banks (the so- called ‘city b a n k s') were partially ‘p riv atised ’ in 1982. D espite privatisation, the independence o f these banks is alm ost nil, given their over-exposure to highly-borrowed firms and their consequent dependence on the central bank, which is under the full control o f the state.30 Indeed, following the ‘privatisation’, the share of ‘policy loans’
has actually increased, from 56.0% (1962-81) to 67.6% (1982-85), making it very difficult to argue that state control over the banking sector has loosened. In addition to their freedom to make loan deci
sions, the banks' freedom to set interest rates has also been severely limited. Despite the legal deregulation o f rates on loans and long
term deposits in December 1988. it was reported in 1991 that ‘[i]nterest rates are still strictly controlled by guidance from the Bank o f Korea and the M inistry o f Finance (FEER. 30 May 1991: p. 52).
In addition to its control over the domestic financial flows, the Korean state has m aintained tight foreign exchange controls. The buying and selling of foreign exchange has been tightly regulated, and up to a few years ago it was illegal (subject to prison sentence) to possess foreign exchange except for business purposes. The state’s control over foreign loans and foreign direct investment has been near
absolute. Although foreign borrowing and, to a lesser degree, foreign direct investment have not been discouraged, the state has had the final say in deciding whether a certain loan or foreign direct invest
ment would be permitted, and on what terms.
Albeit far less important than the control over financial resources, the state’s control over material resources through public enterprises should not be ignored. The Korean state has owned various strategic industries, including oil, coal (partly), gas, fertiliser, steel, and elec
tricity. The fact that such crucial intermediate inputs as oil, coal, gas, electricity, steel, and fertiliser (used as a means to control the farm
ers) are supplied by public enterprises is another im portant factor contributing to the power of the state.
-10 'The government [as o f 1988] appoints senior bank officials and major credit allocation decisions have traditionally been cleared with government authorities’
(FEER, 21 April 1988: p. 58).
1 0 0 The East Asian Development Experienc e: The Miracle, the Crisisandthe Future
O f course, the regular threat by the Korean state that it is going to use this power to discipline the non-performers (e.g., that it will restrict loans to firms which do not comply with a particular policy) does not always materialise, partly because large business firms have a strong influence on policy formation and implementation. Never
theless, such a threat is not an idle one and is often realised, as exem plified by the freezing o f bank credit (on 8 May 1991) to 14 subsid
iaries o f eight conglomerates that had not complied with state pres
sure to sell non-business land (EIU, 1991: p. 20). A still more dra
matic example is the Kukje group incident in 1985, when the state deliberately bankrupted the inefficiently run Kukje group, the then- seventh-largest conglom erate in the country, by ordering its major lending bank not to honour its cheques (for details, see FEER, 21 April 1988: pp. 58-60). Although it is believed that the decision to let Kukje go under was in part motivated by its lukewarm attitude in meeting the ruling party's financial demands, this is a good example o f how far the Korean state can go, if it chooses.
6. Conclusion
To begin with, the Korean experience shows that a developm ent strategy is a complex set o f interrelated policies rather than a simple matter of trade regime, as is often implied by debates between the proponents of 'outw ard-looking' and o f 'inw ard-looking' strategies.
Without doubt, trade strategy is a crucial ingredient o f a developm en
tal strategy, especially because, as we have seen in the Korean case, the fastest way to build up an advanced industrial base in a develop
ing country is to earn foreign exchange to import advanced technolo
gies and the machines which embody them. Nevertheless, the Ko
rean success was based on a conception of economic development which was far more encompassing than mere trade strategy. Devel
opment strategy is a multidimensional problem involving such wide- ranging areas as the establishm ent of long-term targets for growth and structural change, investments in productive facilities and infra
structure. the supply o f an adequate labour force with industrial com petence and discipline, and technological catching-up and develop
The Political Economyof Industrial Policyin Korea 1 0 1
ment. Development strategy should not be discussed in terms of the m isconceived dichotom y between export-led (or outward-looking) and import-substituting (or inward-looking) strategies.
Secondly, the Korean experience shows the importance o f a long
term dynamic perspective in managing an industrial transition. The industrial transition in Korea was achieved not mainly through the attainment of short-term static efficiency ( ‘getting the prices right’), but mainly through the pursuit of long-term dynamic efficiency through the state’s constant creation o f rents (or M arxian/Schumpeterian prof
its). A constant upgrading of industrial structure based on the devel
opment o f local technological and managerial capabilities was seen by the Korean policy-makers as the surest way to achieve sustained growth and efficient structural change, and hence higher living stan
dards. The state’s control over technological transfers and foreign direct investments, and the state’s commitment to long-term lending through state-owned banks and various special investment funds have been vital in this respect. Many individual instances of intervention in Korea might have appeared inefficient and sometimes even mega
lomaniac from a short-term static point o f view (e.g., the establish
ment o f steel and shipbuilding industries), but when viewed from a long-term dynamic point of view, most, if not all, make sense.
Thirdly, the Korean experience suggests that a rethinking of the concept o f competition is necessary. Until recently, the obsession of Korean (and other, notably Japanese) policy-makers with ‘excessive com petition' and the resulting ‘social w aste’ had. unfortunately, been regarded as a sign of the stupidity of the bureaucrats who lack a good education in economics. However, as we have pointed out earlier (Subsection 4.1), such concerns are more than legitimate in a world with asset specificity, because, in such a world, competition is not a costless process. Ultimately, competition is a means to achieve effi
ciency. and not an end in itself. We value competition because it can produce more than what it costs, and not simply because it is cat
egorically good. And, if the technological and institutional condi
tions are such that there is going to be ‘excessive com petition’, sup
pressing competition may be efficient. The Korean experience comes as a serious challenge to the mainstream conception of competition, which is unable to explain why the Korean policy-makers could use
102 The East Asian Development Experience: The Miracle, the Crisisandthe Future
all those blatantly ‘anti-com petitive’ (in the neoclassical sense) poli
cies to generate some of the most rapid growth rates and structural change ever seen in human history.
Last but not least, the Korean experience may be ‘unique’ in the sense that it was supported by a set of idiosyncratic institutions, but this does not mean that it is irrelevant for other countries which share different histories.31 Practically all cases of successful industrialisation after the British one were based on conscious efforts to import and modify more advanced nations’ institutions. Korea, and its predeces
sor, Japan, are classic examples o f such ‘institutional learning'. Even when an institution is not transplantable, it is often possible to create some, at least partial, functional equivalent for it.32 And, if all else fails, there is still the possibility of institutional innovation through conscious design. For example, the famous Swedish ‘consensus’ be
tween labour and capital was constructed from the most contested industrial relations system in Europe o f the 1920s (Korpi, 1983: Chap
ter 3). M oreover, the construction o f a new and well-functioning in
stitution need not take a long time. The fam ous Japanese lifetime employment is basically a postwar creation (Johnson, 1982: Chapter 4). The French state, once regarded as one o f the most ‘archaic’ states in Europe, transformed itself into one o f the most ‘m odernising’ ones in the world soon after the Second World War (Cohen, 1977: Chapter 4). And, as we have tried to show. Korea is another example of how a well-functioning system can be constructed in a reasonably short period o f time through conscious collective actions.
31 For a rare attempt to consider the importance o f the idiosyncratic factors in the developm ental experience o f East A sian NICs in general (Korea, Taiwan, Singapore, and Hong Kong), see Nolan (1990).
33 For example, the Swedish system o f state-guaranteed employment and Japanese lifetime employment are radically different from each other in many respects, but as far as they create positive attitudes among workers towards the introduction o f more mechanised (and hence generally more productive) technology, they are functionally equivalent to each other. It is no coincidence that these two coun
tries are the most robotised econom ies in the world.
The Po litical Economyof Industrial Policyin Korea 1 0 3
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