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Industrial Policy and Economic Development: Lessons from South Korea
My name is Huong Dang and I am a student in the Doctor of Philosophy program at GW’s Department of Economics. Thanks to the summer fellowship by GW Institute for Korean Studies, I have had the chance to spend this summer in South Korea (hereafter Korea) to conduct field research for my doctoral studies on industrial policy and economic development.
For this research project, I have been very fortunate to have the opportunity to stay on campus of Sogang University in Seoul, South Korea, where I have access to the resources at the university library and the Department of Economics. I would like to express my sincere gratitude to my advisor at GW, Professor Roberto Samaniego, and Professor Yoonsoo Lee at the Department of Economics at Sogang University, for their help with these arrangements for my stay in Korea.
During my time in Korea, I have managed to meet with, learn from and exchange ideas with a number of experts and professionals in the field of economics and development in Korea. I also visited the Bank of Korea Money Museum in Seoul and conducted library research to add to my literature review on the topic.
Additionally, I made a few trips to Sejong city to audit a seminar series on Korean Economic Development led by Professor Hee-Yhon Song for the MPP program at the KDI School of Public Policy. The research experience was amazing, and I have gained much better insights and understanding of the economic development experiences as well as the current challenges facing the Korean economy than I had expected. New revelations and perspectives have shed light on previous gaps in the literature on Korea’s economic development experience that I had been able to gather.
Specifically, Before I came here, I was focused on the set of policies that the Korean government exercised in the 1970s-1980s that targeted industrial development and were supposed to fuel the country’s phenomenal economic success the followed the period. These policies included export promotion and import restriction, promotion of heavy and chemical industries, promotion of high tech high value industries through the preferential treatment of big firms (the chaebols) e.g. tax rebates, lower interest rates etc.
During my time in Korea, I learned a few more things that I did not notice before. First of all, Korea had to deal with a lot of macroeconomic problems in the 1980s-1990s that resulted from that set of policies as well as the oil price shock in 1979. Overzealous promotion of heavy and chemical industries resulted in macroeconomic imbalances such as rapid growth of the money supply leading to inflation. Moreover, government interventions in the financial sector (credit rationing, preferential interest rates…) led to heavy burden of nonperforming loans and low financial deepening rate compared to other countries e.g. Japan and Taiwan.
As such, since the 1980s-1990s the Korean government has had to implement a series of trade and financial reforms along with the phasing out of industrial policy to remedy the situation. These policies include exchange rate depreciation, import liberalization, restrictive demand management i.e. restrictive monetary policy (zero-base budgeting system: everything starts from zero base) and tight fiscal policy, implementation of freer external capital flows, industrial restructuring (e.g. reducing number of firms in certain industries such as shipping industry…), privatization and managerial innovation, price stabilization for daily necessities etc.
With this set of stabilization policies, the Korean economy started to stabilize, a recession was avoided and policy credibility of government was improved.
However, there seemed to be certain negative side effects of Korea’s early set of industrial policy that have turned out to be quite problematic. The dominance of large conglomerate firms in both the economic and public policy climate of the country that arose as a result of this set of policies from the mid-1970s resulted in severe advantages for the development of the small and medium enterprise (SME) sector. Korea has become known to be so chaebol-dominated that this feature stands out as a contrast with other Asian tiger economies like Japan and Taiwan where SMEs have been consistently playing a much more important role.
Since the 1980s, the Korean government has implemented a series of efforts to support SMEs, however, there is little evidence whether these policies have been effective. There are some trends in the development process of SMEs in Korea as follows: growing share in employment in the 1950s, which steadily declined from the early 1960s to late 1970s, after which it started to rise again until 1990s. Since the mid-1990s the trend has stalled or even been reversed.
The reason why I mentioned this declining performance in SMEs is that this imbalance between the role and dominance of large chaebols and SMEs is supposed to be one of the factors responsible for the severe situation of youth unemployment in Korea. Through literature review and also informal discussions with people here, I have learned that the quality and competitiveness of SME jobs is a main issue for youth unemployment. Young people with good university education would prefer to find jobs with one of the big companies or with the government, which would promise them better pay and more job security.
Therefore, it seems to me there are things for currently developing countries to learn and unlearn from the lessons of Korea: industrial policy should target the sectors that are highly competitive in order to further promote competition and motivate firms to innovate. By creating monopolies in a wide range of sectors, the Korean government has subsequently limited the space for growth of the SME sector. Industrial policy, if exercised recklessly, can cause serious macroeconomic imbalances, hurt the banking sector and worsen employment situation. This is something I would like to go further into especially for Vietnam.