Contemporary Politics

Vol. 15, No. 3, September 2009, 287 –304

The politics of market reforms: Korea’s path from Chaebol Republic

to market democracy and back
Thomas Kalinowski

Ewha Womans University, Korea

This paper studies the politics of market-oriented reforms in Korea since the 1997/98
financial crisis. It focuses on the capacity of the state to implement these reforms, and
challenges the view that successfully implemented market reforms follow a technocratic
‘best practice’ approach. On the contrary, this paper argues that reforms in Korea were
relatively successful because they were political projects that went beyond ownership
concepts of the IMF and World Bank. The temporary weakness of big business (chaebol)
and the formation of reform coalitions by the government created a balance of power
between societal interest groups that opened a political space for the government. The state
regained some of the autonomy it had lost during the ‘Chaebol Republic’ from 1987 to
1997 and was able to implement reforms in a temporary corporatist framework. However,
the chaebol adapted to the new situation and used the market-friendly reforms in their
favour. The re-emergence of the chaebol undermined state autonomy and with the
inauguration of the new President and former chaebol CEO Lee Myung Bak in 2008,
Korea is arguably entering the second Chaebol Republic.
Keywords: market reforms; financial crisis; IMF; political economy; Korea; chaebol

Introduction
Market-oriented reforms and structural adjustment are often seen as an inevitable or even
‘natural’ development amid economic globalization. International organizations such as the
IMF and the World Bank praise market opening and liberalization as ‘best practice’ solutions
that should be implemented through technocratic ‘good governance’ neglecting the role of
politics in economic reforms.
This paper analyses a relatively successful case of market reform implementation:1 South
Korea (henceforth Korea) since the 1997/98 financial crisis. The paper shows that this relatively
successful implementation of market-oriented reforms in Korea was not achieved through tech-
nocratic ‘good governance’, but because they were a political project of the Kim Dae Jung
(1998 – 2003) and Roh Moo Hyun (2005 – 08) administrations. The goal was to transform
Korea from a country dominated by big business conglomerates (chaebol) and authoritarian
politics (‘Chaebol Republic’) into a ‘democratic market economy’. The market reforms were
not the result of economic facts or the invisible hand of market forces but implemented
through a politically negotiated process that I call temporary corporatism. This process was
made possible by the window of opportunity opened by the crisis and corresponded with the


Thomas Kalinowski is an Assistant Professor at the Graduate School of International Studies at Ewha
Womans University in Seoul, Korea. He received his PhD in Political Science from Freie Universität
Berlin in 2004. He is interested in international political economy and international development.
Recent publication includes works on IMF structural adjustment, global governance of finance, Asian finan-
cial crisis, financial liberalization in Korea, democratization and market-oriented reforms, the role of the
state in development and civil society. Email: tkalinowski@ewha.ac.kr

ISSN 1356-9775 print/ISSN 1469-3631 online

# 2009 Taylor & Francis
DOI: 10.1080/13569770903118770
http://www.informaworld.com
288 Thomas Kalinowski

changing political economy in Korea at that time. The temporary weakness of the chaebol and
the rise of competing interest groups such as foreign investors, labour unions and civil society
organizations (CSOs) constituted a balance of power. This fragile balance created a political
space in which state institutions had a relative autonomy from direct influence or even state
capture by any single interest group. In some sense the Korean state temporarily regained
some of the autonomy it possessed during the prime time of the authoritarian developmental
state until the 1980s but that it lost during the first ‘Chaebol Republic’ (1987– 97). However,
this democratic autonomy was fragile and market reforms did not help to curb the power of
the chaebol but actually helped them to reconsolidation their power and gradually undermine
state autonomy. We can observe the decline of temporary corporatism and degeneration of
market-friendly into chaebol-friendly policies that are implemented in a more confrontational
approach. The loss of state autonomy had already started during the Roh administration when
the chaebol rehabilitated themselves by exporting Korea out of the crisis. In fact, the plan of
the IMF as well as the Kim and Roh administrations to limit the power of chaebol by strength-
ening market forces failed badly. The chaebol adapted to the new times and used the new market
freedom even to extend their power. The end of temporary corporatism and state autonomy was
marked with the election of the conservative and former chaebol CEO Lee Myung Bak and his
inauguration as President in 2008. The new Lee administration returned to chaebol-friendly
policies that focus government spending on supporting the chaebol and continue mostly those
kinds of market reforms that benefit the conglomerates.
This paper is organized as follows. The next section provides a short theoretical framework
and explains the general argument of this paper in more detail. The third section analyses the two
aspects of state capacity that facilitated the structural adjustment process for the case of Korea
during the Kim Dae Jung and Roh Moo Hyun administrations – the political capacity to build
reform coalition. The fourth section describes the collapse of temporary corporatism, the weak-
ening of state capacity and the emergence of the chaebol-friendly Lee Myung Bak adminis-
tration. The final section summarizes the findings of this paper.

The role of politics in market reforms

Reform policies conceived by technocrats, scholars and international organizations often
struggle with reality. The ‘implementation problem’ is particularly evident for international
organizations such as the IMF and the World Bank that recommend or even require certain
reforms as part of their conditional lending. International organizations are far away from the
situation ‘on the ground’ and their knowledge of the political economy of a particular country
is limited. This is at least one of the reasons why the overall performance of IMF and World
Bank assistance is rather disappointing (Easterly 2001, 2006).
As a reaction to criticism, particularly due to the mishandling of the 1997/98 Asian financial
crisis, the international finance institutions have overhauled the conditionality for their assist-
ance (IEO/IMF 2003). Before, the World Bank and IMF had been promoting ‘less state’ and
believed that markets would automatically fill the gap the state created in the process of
market-oriented reforms. They believed that market-oriented reforms would be particularly
beneficial for countries with low state capacity because economic liberalization would limit
state activities and adjust them to low state capacity (World Bank 1997). On the contrary, as
this paper will show, market reforms need a high degree of state capacity in order to build a
political consensus and an institutional framework to negotiate and implement them.
Since the Asian financial crisis, the IMF and World Bank have shifted from promoting ‘less
government’ to stressing ‘good governance’. They addressed the importance of good govern-
ance and ownership of reforms in ‘building institutions for markets’ (World Bank 2002)
 Contemporary Politics 289

while the normative goal of creating market-oriented economies and an investor-friendly frame-
work remained. The ownership and good governance concepts are improvements over the
simplistic technocratic notion that supposedly ‘apolitical’ market-oriented reforms would
work everywhere regardless of the economic, political and cultural environment. Despite this
progress, economists inside and outside the international finance institutions have tried very
little to understand how good governance and ownership of market reforms can actually be
achieved. They are trapped in an idealist understanding of politics in which governments are
free to choose between ‘good’ and ‘bad’ policy options. For them, ownership merely depends
on the commitment of the government to make the right choices and implement the policies rec-
ommended by the IMF and World Bank instead of following the pressure from domestic vested
interests.2 Policy choices, however, are always embedded in the concrete historical context and
reflect interests according to the power balance within a society. This is not only but particularly
true for democratic governments, because in democratic countries reforms cannot be success-
fully implemented without the support of the population. ‘The technocratic style of reform is
counterproductive. If reforms are to proceed under democracy, they must enjoy the continued
support of a majority . . . No reform, regardless how well planned and how rapid they may be
can short-circuit this requirement’ (Pereira et al. 1993, p. 183).
It is often argued that authoritarian governments are more successful in implementing
reforms and achieving development in general, because they can neglect interest groups and
have no need for complicated consultations with the civil society. Although this notion is
widespread, there are only a few scholarly works that support it (Huntington 1968, Kohli
1986). The Korean developmental state was successful in achieving economic development
not because it was authoritarian and not even primarily because it was autonomous, but
because state autonomy was embedded in close networks between state and big business
(Evans 1995, Kim 1997). On the other hand, a growing number of studies suggest that democ-
racies are more successful in adapting to economic challenges because they involve diverse
interests in the political process of reforms (Maravall 1994, Wrage 1997, Haggard 2000,
Evans 2004, Kalinowski 2007). Following up on this discussion, autonomy can also be
created through the democratic competition in which different interests balance each other
and prevent dominance by a single interest group. This balance of power creates a political
space for the government in which universal rules can be framed that have a greater chance
of serving the universal good than otherwise.
At this point, a look at (neo-)corporatist forms of capitalism can help us to understand how
the state and organized interests in the society interact to implement reforms. Ironically, market
reforms that are, in theory, the results of economic facts and the ‘invisible hand of markets’ are in
practice often facilitated by a corporatist state that provides a framework of negotiated reforms.
Thus, the transformation into a US-style market economy that is seen as a role model for other
countries by the IMF and many others seems to depend on institutions that are more associated
with corporatist states in Japan and Europe.3 Katzenstein has illustrated this ‘neo-corporatism’
for the cases of small economies in Europe that successfully governed their world market inte-
gration through a corporatist framework (Katzenstein 1984, 1985). In a corporatist state, differ-
ent interest groups and particularly those of labour and business should be relatively balanced
and highly concentrated in national organizations that negotiate all reforms with the government.
The power of the interest groups is generally acknowledged by all sides and direct confrontations
such as strikes are only the last resort to remind the negotiating partner of one’s own strength.
Classical corporatist countries that come closest to this idealtyp are Austria, Sweden, Germany
and Japan. Korea has usually not been included in the list of corporatist countries and indeed it
seems to be daring to do so if we consider the weakness of labour unions and the dominance of
the large business conglomerates (the chaebol). Given the close cooperation between the
290 Thomas Kalinowski

developmental state and the chaebol, Korea has some similarities with the old-style Japanese
‘corporatism without labor’ (Pempel and Tsunekawa 1979).
Indeed, in this paper, Korea is not labelled a corporatist state, but there has been a period of
temporary corporatism, in the decade following the 1997/98 financial crisis. Within this period,
there has been a kind of balance of power within the interest groups due to the temporary weak-
ness of the chaebol as an effect of the financial crisis and the rise of competing interest groups
such as foreign investors, labour unions and civil society organization. This temporary corpor-
atism was undermined by the re-emergence of the chaebol during the economic recovery and
ended with the return to power by the conservative party in 2008.
This paper follows an explicit non-technocratic, political economic approach and shows that
it can plausibly explain the relative successful implementation of IMF structural adjustment and
market reforms in Korea. They were implemented more successfully, not because of an able
technocratic government that ‘owned’ the reforms, but because the reforms were a political
project. The government was able to seize the opportunity presented by the 1997/98 financial
crisis and built reform coalition in a political economic environment that was ripe for market-
oriented reforms. The balancing of power between the important interest groups – big business,
labour unions, CSOs and financial investors – opened a political space for the government to
implement market reforms. The government negotiated the reforms and designed them in a
way that all interest groups had something to gain and were thus willing to give up some of
their vested interests. Although the goal of the reforms was a US-style market economy, the
institutions that have managed these changes are products of the Korean political economy.

From Chaebol Republic to ‘market democracy’

The politics of market reforms, democratic state autonomy and temporary corporatism
The market-oriented reforms since the 1997/98 crisis were negotiated with the IMF under an
IMF reform programme, but they were essentially reforms that had been worked out by the
Korean government before. Crisis and IMF pressure merely provided the window of opportunity
to implement the reforms that were previously met by opposition from the big business conglom-
erates (chaebol) and labour unions (Koo 2000).
The goals of the market reform under President Kim Dae Jung and President Roh Moo Hyun
were the ‘dual transition’ (Kim and Sin 2004) from a still mostly authoritarian political system to a
democracy and from a monopolistic economic system dominated by the chaebol to a market
economy. In President Kim’s words, the task was to create a ‘democratic market economy’
(Kim 1996, Diamond and Kim 2000, p. 45). Priorities of the reforms were financial market
opening and liberalization, as well as improvements in the rights of financial investors (Chang
et al. 2003, Kwon 2004). This second wave of liberalization distinguished itself from the first
wave of financial liberalization during the Chaebol Republic until 1997 because it was not tailored
to suit the expansion of the chaebol but, on the contrary, was intended to curb the power of the
chaebol (Kalinowski and Cho 2009). With the help of foreign investors and CSOs, the big business
conglomerates were forced to follow the rules of financial markets. They had to become more
transparent, concentrate on their core business, reduce their debts, loosen ties between subsidiaries
of the same chaebol and, in short, switch from an expansion-oriented to a profit-oriented strategy
(Haggard et al. 2003, Jeong 2004). In order to facilitate this transformation and to compensate
big business for the loss of their unchallenged power, the government liberalized labour
markets and made layoffs easier (Cho and Keum 2004, Kim and Park 2006). Financial investors,
particularly foreign investors, were the clear beneficiaries of the reforms, while the chaebol were
forced to give up their reckless expansion strategy and labour faced massive layoffs. However,
chaebol and labour had some incentives to agree to the reforms and give up some of their
 Contemporary Politics 291

vested interests in return. The chaebol received easier access to foreign capital and could take
advantage of the flexible labour market. Labour unions were paid-off by promised political
recognition and an improved social security net (Koo 2000, Song 2003, Kim 2005).
In order to understand the politics of market-oriented reforms in Korea, it is important to
analyse the dynamic of the relative strength of interest groups in Korea in a historical perspec-
tive. The change of power relations between the main interest groups can explain the direction
and pace of development in Korea. Since the 1960s, the Korean political economy has been
shaped by three main actors: a strong state, big business conglomerates and organized labour.
During the military rule until 1987, the government ruled the country with the chaebol as
junior partners while organized labour was suppressed. The authoritarian state was relatively
autonomous from societal interests and at the same time embedded into the close state – business
relationship (Evans 1995). During the first phase of democratization from 1987 to 1997, the hier-
archy changed, chaebol influence increased and Korea was often dubbed the Chaebol Republic
(Kim 1997). The state lost much of its direct control over the economy and the Korean business
conglomerates emancipated themselves from the state. The increasing economic power, man-
agement and business planning skills, as well as their increasing investment in R&D, made
them more and more independent from government protection, support and guidance.4
During the Chaebol Republic, policies were mostly tailored to suit the interests of the
chaebol. The chaebol demanded the withdrawal of the government from economic intervention
and economic liberalization, particularly the liberalization of access to foreign capital (Lee et al.
2002). At the same time, foreign equity participation remained heavily restricted as the chaebol
continued to seek governmental protection from foreign investors. The withdrawal of the state
from the economic sphere along with the lack of proper regulations facilitated the accumulation
of massive foreign debts by the chaebol that led to the 1997/98 financial crisis (Chang et al.
1998, Jeong 2004).
In a simultaneous development, the rise of organized labour, facilitated and fuelled by
democratization since the 1980s, challenged the close state–chaebol partnership (see the following
subsection). Organized labour remained politically weak but was quite successful in achieving
wage increases and improved working conditions. Labour unions influenced politics only indirectly
from outside political institutions through protests and strikes, as they were not accepted as official
partners of the government until the Kim Dae Jung administration took office in 1998. However,
since the 1997/98 financial crisis, labour unions, CSOs and foreign investors have emerged as
new interest groups to balance the dominant power of the chaebol. This challenge opened up a
political space for the government to implement reforms to weaken the power of the chaebol,
implement market reforms and strengthen the social security net.
The market reforms in Korea did not materialize through the ‘invisible hand’ of the market but
through a political process that was the result of a balance of power between the main interest
groups within the society. This balance gave the state back some of the autonomy it lost
during the Chaebol Republic. Different from the authoritarian autonomy of the developmental
state, this was now a democratic autonomy created by the competition of interests that prevent
the state capture by one dominant group. The democratic autonomy allowed the government
to pursue a neo-corporatist strategy to implement the market reforms. Big business was forced
to accept compromises while foreign investors, labour unions and civil society organizations
gained influence. However, the weakness of big business was only temporary and the balance
of powers had already started to erode during the tenure of President Roh. Thus, in the decade
following the 1997/98 financial crisis, during the tenure of President Kim and President Roh,
Korea could thus be characterized as a ‘temporary neo-corporatist state’. In order to understand
the evolving of democratic autonomy and the mechanisms of corporatist reform implementation
it is necessary to look at the relative strength of the important interest groups in Korean society.
292 Thomas Kalinowski

Temporary weakness of chaebol and the rise of labour unions

The most important factors in the changing political economy that allowed corporate-style
reforms are the temporary weakness of the chaebol, the consolidation of the labour unions
and the rise of two new powerful interest groups – civil society organizations and international
investors. Although the number of chaebol decreased and they are less integrated, they remain
powerful actors and the biggest conglomerates even gained power in absolute terms. The relative
weakening of the chaebol was the result of the rise of competing interest groups and was
particularly accentuated during and directly after the 1997/98 financial crisis. Many large
chaebol, such as Hanbo, Kia and Daewoo, went bankrupt and others were preoccupied with
survival. At the same time, public opinion went against the chaebol because their reckless
debt-financed expansion was rightly seen as one of the causes for the crisis. A grand coalition
of the IMF, Korean government, Korean CSOs and labour unions, as well as the majority of
the Korean public, saw the dismantling or at least the reform of the chaebol as pivotal for the
economic recovery. The chaebol were accused of reckless lending, octopus-like expansion,
low profitability, corruption, missing accountability and transparency that led to high debt
levels and bankruptcies. In particular, the collusion between government and business that
allowed over-risky business behaviour was seen by most scholars and the general public alike
as one of the major problems (Hayo 2005).
Organized labour, on the other hand, has gained political influence in Korea since 1997,
albeit coming from a very low level. Compared with labour unions in most other countries,
Korean labour unions have been relatively successful in protecting and even strengthening
their organizations amid the globalization of the economy and the increasing importance of
the service sector (Kim and Kim 2003, Lee and Lim 2006). It is often stated that labour union-
ization is lower today than in the 1980s, but the unionization rate alone is not a good indicator for
labour union influence. Indeed, union membership has decreased steadily from the end of the
1980s until 1997, but this was mostly due to the loss in the employer-friendly unions that
existed during the military regime. Since the deep crisis in 1997/98 when many unionized
workers lost their jobs, the number of union members has actually increased from 1.48
million in 1997 to 1.56 million in 2006 (KOILAF 2008). At the same time independent
labour unions emerged as a new power. The shift from government- and employer-friendly
unions organized in the Federation of Korean Trade Unions (FKTU) to the more progressive
Korean Confederation of Trade Unions (KCTU), which was legalized in 1999, added to the
vitality of the labour movement. Labour unions are also beginning to transform from a
company-level union system to industrial unions, a development that will probably curb the
egoism of company-level unions and lead to a more politicized and politically powerful
labour movement. The foundation of the Democratic Labour Party (DLP) in 2000 was
another major step in increasing the political power of labour unions (Lee and Lim 2006).
The DLP entered parliament for the first time in 2004, gaining 13% of the votes and nine
seats. The success of the Korean labour union movement is remarkable. It is probably the
only labour movement in the industrialized world that has actually gained influence amid econ-
omic liberalization and globalization in the last two decades. Despite all the remaining weak-
nesses, it has become a political force that cannot be neglected by any government in Korea.
With President Kim Dae Jung’s election, the increased power of labour unions found its
political expression in the form of their official inclusion in the Tripartite Commission (TPC)
in 1998, and the legalization of the independent labour union umbrella organization in 1999
(KCTU). President Kim Dae Jung, who came from the democratization movement, was able
to co-opt labour unions in a way that would have been inconceivable if his opponent – the con-
servative Lee Hoi Chang – had won the elections. Despite their militant rhetoric and actions, the
 Contemporary Politics 293

labour unions have in fact become a partner of the government in the decade since the crisis (Koo
2000, Park 2007). The government’s goal to restructure and liberalize the economy helped to
transform the organizational strength of the unions into political influence because the govern-
ment needed a negotiating partner to implement its reforms without meeting fierce resistance.
The TPC was an attempt to implement neo-liberal reforms with the help of a corporatist fra-
mework. The framework remained unstable and the more militant KCTU left and rejoined the
commission a couple of times. The national labour union umbrella organizations constantly
struggled with their own militant and apolitical company-level member unions over agreements
reached in the TPC. Most scholars are sceptical about the achievements of the TPC because the
decisions were too employer-friendly (Kim and Kim 2003) or because more radical labour
unions undermined the TPC (Baccaro and Lim 2006). The TPC was indeed a double-edged
sword for the labour unions. It provided labour unions with opportunities to consolidate their
political power at the cost of compromises in many decisions of the TPC.
In the first months of the crisis, the corporatist framework was very stable because any opposi-
tion against government policies could be easily criticized as unpatriotic. However, it soon became
clear to employees and their labour unions that they would clearly shoulder the main burden of
restructuring. Consequently, labour unions claimed that the TPC principles of fair burden
sharing were violated and labour conflicts started to increase already after May 1998. Labour con-
flicts have remained at a high level ever since (KOILAF 2008, MOLAB 2009a). Labour struggles
are generally inevitable due to the fundamentally opposed interests of employers and employees.
The question is whether the struggles are carried out in an antagonistic fight or whether there is
an institutional framework in which the information about power relations can be used to formulate
a compromise without the permanent necessity to protest and strike. In Korea, such corporatist insti-
tutions are much weaker than in classical corporatist countries but they were able to prevent labour
struggles from reaching a level that would sabotage government policies and in this case market
reforms. The integration of labour unions into the formal political system is slow and they
remain politically too weak to formulate their own political agenda. There is also a huge split
within the labour movement between the more politically oriented umbrella organizations and
the DLP on the one side and the wage-oriented apolitical company-level unions on the other side.
The biggest contribution of strengthened labour unions was that they forced the government
to put improvements of the social security net on the agenda. Without the relatively powerful
unions, the government would have seen less urgency to improve social security (Koo 2000,
Song 2003, Kim 2005). When the Korean government negotiated with the IMF during the
Asian financial crisis, it could also use the threat from strong labour unions as leverage to
include the strengthening of the social security net in the structural adjustment programme.
Until then, structural adjustment had always been associated with lowering government spend-
ing and cutting social expenditure. In Korea, for the first time, structural adjustment went hand-
in-hand with the expansion of government expenditure for social security (Shin 2000). In
countries where labour unions and social movements remain weak, structural adjustment con-
tinues to unfold its social and political destruction. In Indonesia, for example, cuts in subsidies
for cooking fuel and rice led to riots that left many dead and created a social and political crisis
that toppled the Suharto dictatorship in 1998.

The rise of new interest groups: financial investors and CSOs

As we have indicated above, financial liberalization was a strategy of the government and the
IMF to restructure the Korean economy in a ‘market friendly’ way. Here again, not market
forces and economic facts alone, but the rise of new interest groups facilitated the implemen-
tation process. Besides the changing power relationship of existing interest groups such as
294 Thomas Kalinowski

chaebol and labour unions, two new major stakeholders emerged that were major supporters of
market reforms, particularly in the financial markets. These new actors are international financial
investors that seek profits in Korea and CSOs that have a political agenda to challenge the
monopolistic power of the chaebol.
To a great degree, the Kim Dae Jung administration followed its own agenda with financial
market liberalization when it established financial investors as a new interest group (Kalinowski
and Cho 2009). The Korean government departed from the original agreement with the IMF,
liberalizing and opening financial markets much faster and more radically than the IMF had
required. The goal of the government was to restructure the huge domestic conglomerates
and curb the power of the owner families with the help of financial investors. Foreign investors
were a natural ally of the government because the owner family-centred chaebol structure limits
their investment opportunities, impedes their ownership rights and prevents the rise of a pro-
fessional management. High diversification of the chaebol also reduces returns of profitable
companies, because profitable subsidiaries are forced to subsidize less profitable subsidiaries
of the same chaebol.
More surprisingly, the government was supported in its market reforms by a vibrant CSO
scene that reached radical anti-chaebol groups and minority shareholder CSOs, which both
opposed the chaebol structure, but for different reasons (Choi and Cho 2003, Kim 2001, Lee
2001, Kalinowski 2008a). Anti-chaebol groups opposed the chaebol’s economic dominance
of the Korean economy, which remains a major obstacle for further economic development
and democratization. The minority shareholders, on the other hand, challenged management
and controlling shareholders in order to increase the returns on their investment. Even today,
the chaebol families control their conglomerates with a small share of the stocks by utilizing
cross-stockholding between affiliates and informal networks. Foreign investors were a natural
ally in the anti-chaebol struggle, because in the old system they were hindered from exercising
the ownership rights associated with their investment. The result was a very broad coalition of
interests that demanded the reform of the chaebol. The anti-chaebol CSOs were extremely
important because they voiced a radical criticism of the chaebol that influenced public
opinion and provided public support for chaebol reform. The new stakeholders, CSOs and
foreign financial investors opened a political space for the government to pursue the long-
planned chaebol reforms that had no chance to be implemented before the crisis due to heavy
resistance from the chaebol.
The indirect support from CSOs for market reforms was also important, as they provided
grassroots support for the Kim Dae Jung and Roh Moo Hyun governments that ensured two
market-friendly governments and kept the chaebol-friendly Grand National Party (GNP) from
power for 10 years (1998– 2008). The Kim and Roh administrations, for the first time, system-
atically supported and integrated civil society groups into the established political institution.
During Kim Dae Jung’s term, civil society organizations mushroomed and Roh Moo Hyun
made ‘participatory government’ the theme of his tenure. Roh’s election campaign was not
based mainly on a party structure, but on civil society organizations and support networks orga-
nized over the internet (Lee 2005, Chang 2005). When the conservative party tried to impeach
President Roh by utilizing its majority in the parliament in 2004, civil society organizations
mobilized mass protests that helped him to keep his job.5 He included many CSO activists in
his government and numerous commissions in which civil society activists and experts testified
on a wide range of policy issues. The Tripartite Commission was probably the most prominent of
these commissions, but there were altogether more than 400 commissions that worked on a great
variety of issues during the Roh Moo Hyun administration alone.
CSOs did not just pressure for reforms and participate in the drafting process of laws, they
also took advantage of new regulations. New legal frameworks alone do not change much if they
 Contemporary Politics 295

are not enforced and if nobody claims the rights associated with them. For example, the govern-
ment changed the Securities Act and improved minority shareholder rights by lowering the
requirements for shareholders to review accounting books (from 3 to 0.1%), propose the dismis-
sal of directors or internal auditors (from 1 to 0.5%), and to bring a derivate suit (from 1 to
0.05%). The requirements for large corporations with a capital of more than 100 billion won
were set even lower (Rho 2007). Korean minority shareholder CSOs played an important role
to make these new rules effective, while foreign institutional investors – that also invested
heavily in Korea – showed little interest in taking on the chaebol management in potentially
long legal battles (Kalinowski 2008a, p. 353). Understandably, foreign investors’ primary
focus was not on improving long-term returns by helping to restructure the chaebol. In the
case of conflicts with the management they rather preferred safe, short-term profits by accepting
offers from the management to buy back their stocks. As long as returns were good, foreign
investors turned a blind eye to non-transparent corporate governance and did not exercise super-
vision and control of management in an efficient way. Some of the most popular companies
among foreign investors, such as Samsung Electronics, continue to remain strongly under the
control of their founder’s families.
Korean CSOs that represented minority shareholders, such as the People’s Solidarity for
Participatory Democracy (PSPD), were not in the business for returns, but for the idealism of
changing Korean corporate governance and structure. They often only owned 10 stocks of a
company and the material gains from their action were negligible. Their impact came not
from large investment but from their political determination and the utilization of lawsuits. In
1998, the first derivate suit in Korean history was won by PSPD against Korea First Bank
(KFB) for irregularities in credits to Hanbo, an overleveraged chaebol that went bankrupt in
early 1997. Many more activities followed (Rho 2007, PSPD 2008). In sum, the results of the
minority shareholder movement are mixed. On one hand, the strategy to reform corporate
governance with the help of financial investors and shareholder rights was not successful.
They have not been able to weaken the power of the chaebol in general, and the dominance
of the owner families remains largely intact. In the cases where conglomerates were weakened,
as with the former largest chaebol Hyundai that split into three independent groups, the
dynamism of reforms derived mainly from a family feud and not from shareholder pressure.
On the other hand, the chaebol structurally adapted to pressure from new regulations, CSOs
and profit-seeking investors. The chaebol followed the principles of shareholder value, but they
did so without surrendering family control of conglomerates to the shareholders and the financial
markets. The chaebol have become more profit-oriented, with a great willingness to share profits
with shareholders, as proved by the increase in dividend payments, which reached 10.8 trillion
won in 2006 – up from 2.2 trillion won in 2001 (Korea Listed Companies Association 2007).
The chaebol also reduced diversification and loosened ties between the affiliates. For
example, the chaebol reduced their total number of affiliates from 819 in 1997 to 544 in 2000
and limited diversification within the conglomerates (Choe 2007, p. 235). Most chaebol,
except Samsung, have transformed from deeply interwoven conglomerates into holding compa-
nies. They have grown in size and profits but streamlined their operations and limited their
business fields. A good example of this process of capital concentration is the car industry.
From the five independent domestic car-makers that existed in Korea in 1997, only one –
Hyundai – survived crisis and restructuring, commanding a domestic market share of nearly
80% (Chosun Ilbo 2008).
This section has explored the change of the political economy in Korea and the reform and
strengthening of corporatist arrangements. The government facilitated this reform by greatly
expanding the role of government spending and redistribution. Particularly the government refi-
nanced the banking system and strengthened the social security net (Kalinowski 2008b). If the
296 Thomas Kalinowski

changes in the political economy provided the machinery for reforms, government spending pro-
vided the grease to make the machinery work and overcome blockades.
It is still too early for a final judgment on the market reforms. It is possible that Korea will
transform from a family-dominated corporate structure to a professional management structure,
although this will only happen with the help of government action, CSO activism, and chaebol
family feuds – not because of mere market forces. However, the newly elected President Lee
Myung Bak who came to office in February 2008, as a former chaebol CEO, is an unlikely
candidate to advance chaebol reforms.

The return of the Chaebol Republic

The election of President Lee Myung Bak in 2007 and his inauguration in February 2008 was an
important turning point for Korea. It marked the end of 10 years of economically and politically
liberal rule under President Kim Dae Jung and President Roh Moo Hyun that implemented the
market reforms described in the previous sections. It brought back to power the conservative
party that basically ruled Korea since the independence from Japanese colonial rule in 1945 until
the Asian Financial Crisis of 1997. As a member of the conservative party (GNP) and former
CEO at Hyundai, he personifies the return of the chaebol–conservative party complex and the
emergence of the second Chaebol Republic. Lee was elected because he could profit from dissatis-
faction with the outcome of market reforms in Korea. He branded himself as the ‘economy presi-
dent’, and promised to bring CEO-style management to the Korean government and revive the
economy. He went as far as calling the time of ‘liberal rule’ the ‘lost decade’. Even though
average growth rate from 1999 to 2007 was 5.7% (Asian Development Bank 2009), he succeeded
in persuading Korean voters that growth was sluggish. He made the ‘747’ promise to increase
growth to 7%, achieve a per capita income of US$40,000 and make Korea the seventh largest
economy. Although the criticism of sluggish growth seemed unjustified and the promises comple-
tely overblown, many voters were vulnerable to populist promises due to the increase of social
insecurity. While average growth had been high since the recovery from the 1997/98 crisis,
large parts of the population did not profit from the recovery as social inequality increased quite
dramatically.6 Market-friendly reforms revived growth but also severed the link between growth
and increasing prosperity for all parts of the population. The social split since 1997 ended the
era of ‘growth with equity’ that was praised by the World Bank in its seminal study on the ‘East
Asian Miracle’ (World Bank 1993). Increasing social inequality had the double effect of creating
insecurity for both the socially disadvantaged and the well-off. The socially disadvantaged were
constantly reminded by the well-off that they were left behind and the well-off were constantly
reminded by the underprivileged that their social status remained precarious. The resulting social
insecurity made many Korean susceptible to populist promises of new economic miracles, and
the historical experience of overcoming social problems in Korea through high growth rates has
created a predisposition for growth-oriented solutions that triumph over economic facts.
The focus on growth facilitated further the re-emergence of the chaebol because they were
the only ones viewed as capable of producing it, but the re-emergence of the chaebol from the
ashes of the Asian Financial Crisis began earlier. Already during the Roh Moo hyun presidency,
the chaebol had regained some of their lost standing due to their ability to earn the foreign cur-
rency that was needed to repay foreign debt and recover from the financial crisis. Suddenly the
chaebol were again the saviours of the national economy. Many of the chaebol leaders, including
the chairmen of the two largest chaebol, Lee Kun-hee of Samsung and Chung Mong-koo of
Hyundai Motors, were convicted for tax evasion and embezzlement, respectively, but they
were spared prison terms by judges who argued that they were ‘too important to the nation’s
economy to go to jail’ (Choe 2008).
 Contemporary Politics 297

The attempt to implement US-style market capitalism failed to achieve its goal to curb the
vested interest of big business and eventually even strengthened the chaebol after they adapted to
the new environment. First, shareholder capitalism forced the chaebol to streamline their oper-
ation and become more profitable. Second, foreign financial investors who were initially greeted
as a balancing power against the chaebol fell out of favour. They were now accused of making
inappropriately high profits through speculation, shady deals and circumventing taxes.7 Even
though their activities were probably legal, they left Koreans with the impression that the
new post-crisis global financial crony capitalism was not necessarily better than their old
pre-crisis chaebol crony capitalism.
While the chaebol regained strength, their ‘natural enemies’ lost momentum. The weakness
of the progressive forces allowed the re-emergence of the conservative party/chaebol coalition
to turn into a sweep of political power by winning the Presidency in 2007 and the majority in
parliament in 2008. The parties that supported President Kim and President Roh were divided
and exhausted by 10 years of ruling.8 They have lost most of their support base within the
labour unions and the civil society organizations due to their inability to curb social injustices
and their single-minded focus on market-friendly projects such as the Trade and Investment
Agreement, most notably the one with the United States. The lowest voter turn-out in Korean
history of 63% (down from 71% in 2002) in the presidential elections and 46% (down from
61% in 2004) in national assembly elections signals a disillusionment of many Koreans with
party politics (All election results from NEC 2009).
Organized labour also lost influence due to their inability to appeal to the general public by
developing a comprehensive alternative political concept with solutions that attract a growing
number of citizens. In order to continue a neo-corporatist balance of power the progressive
camp would need a powerful unified national federation of labour unions with a powerful
labour party as its political arm, similar to the setting in the traditional corporatist countries.
The opposite happened; labour party and union umbrella groups failed to rein in company-level
labour unions that maintain their apolitical focus on the militant struggle for wage increases. In
the 2008 parliamentary elections, the DLP share of the popular vote dropped from 13 to 5.7%.
This was partly due to a split in the party as the minority culturally liberal ‘people’s democracy
faction’ left the DLP, which is dominated by the majority nationalist faction and founded the
New Progressive Party (NPP). The NPP won only 2.9% of the votes and failed to secure a
single seat in the 2008; however, it won a seat in a by-election in Ulsan in April 2009.
The changing power constellation diminished the necessity of the chaebol to accept compro-
mises and the willingness of the government to use corporatist solutions to implement reforms.
On the contrary, the Lee administration applied a confrontation course against labour unions and
CSOs that reacted with massive protests. Consequently, the number of working days lost due to
industrial disputes increased 82% in the first 9 months of 2008 compared with the same period
in the year earlier (MOLAB 2009b). From May to July 2008 Korea experienced almost daily
mass protests against the lifting of import restrictions on US beef that were pushed through
by President Lee despite concerns about food safety by many citizens (Kim and Kim 2009).
The shift from market-friendly reforms implemented through corporatist channels to a
business-friendly strategy implemented in an authoritarian manner can be observed in many pol-
icies. The Lee Myung administration changed considerably the direction of reforms from the
attempt of using market forces to challenge the chaebol-dominated system to a chaebol-friendly
strategy aimed at strengthening the chaebol. Instead of viewing the chaebol as too big for the
Korean market and too powerful for the deepening of democracy, the new government views
the chaebol as too small to compete on a global level. Policies thus shifted from curbing the
power of the chaebol to improve competition to nurturing the power of the chaebol in order to
improve national competitiveness. At first sight, these policies might seem to indicate a revival
298 Thomas Kalinowski

of the old developmental state, a view that is amplified by the frequent references made to the
economic successes of the past authoritarian developmental state and the widespread nostalgia
for the former military dictator President Park Chung Hee (1963 – 79). In one of his key recruit-
ments, Lee Myung Bak appointed Il Sakong, one of the architects of economic planning in the
1970s/80s, as his senior economic advisors. Other trends might support the interpretation of a
return of the developmental state, for example, the government has planned massive infrastruc-
ture projects and support for ‘green industries’.9 However, these policies should not be confused
with a return to developmental state policies for at least two reasons. First, the support for ‘green
growth’ cannot be compared with the industrial policies during the times of the developmental
state. The heavy and chemical industrialization (HCI) of the 1970s/80s, arguably the masterpiece
of the developmental state, was guided by the government’s 5-year-plans, financed by state-
controlled banks and implemented by a strong state that forced the chaebol into completely
new industries. The developmental state suppressed not just labour interests but also capital inter-
est by forcing the chaebol to reinvest profits into new and risky industries – often against their
will (Amsden 1989, Kim 1997). There is no doubt that government support for the chaebol is
returning, but despite the rhetoric the state autonomy and the growth-first policies of the old
developmental state will not return. The Lee government’s business-friendly policies do not
support infant industries but amount to government subsidy for sunset industries, such as an over-
sized construction sector dominated by the chaebol.10 An astonishing 81% of the 50 trillion won
fiscal stimulus package that was announced in April 2009 is designated for ‘green growth’ and is
planned to create 940,000 green jobs most of the investment will go into conventional construc-
tion and manufacturing in which the chaebol dominate. The largest share goes to the reconstruc-
tion of four rivers, which will include controversial dam projects; other big positions are the
expansion of electrified rail tracks, bike paths, green housing and the construction of fuel-efficient
cars (Watts 2009). In a separate plan the Korean government plans to spend 37 trillion won until
2022 to improve the carbon footprint of power generation; however, most of the funds will not go
to new infant industries such as solar and wind energy generation, but to the construction of 12
new nuclear power plants – another industry in which chaebol are already strong.11
Second, instead of ‘governing the market’ (Wade 2004) in order to facilitate economic goals
such as the old developmental state, the Lee Myung Bak administration government continued
and radicalized market-oriented reforms such as privatization and deregulation. The government
continues to delegate more decision-making power to the markets, particularly in those
‘markets’ that are dominated by the chaebol. For example, the government has weakened restric-
tions on the construction sector,12 reduced taxes on real estate ownerships and plans the priva-
tization of TV broadcasters and all remaining state-owned banks. Even though the government
claims that its policies are focused on high growth rates, it is actually supporting corporate profits
because it gives up all means to ensure that the corporate sector is using its profit to invest and
create jobs or to increase wages and thus consumption.
Instead of a revival of the developmental state, it rather seems Korea is reverting back to the
pre-crisis Chaebol Republic in which the government policies are tailored to the needs of the
chaebol to survive in an increasingly competitive world market. The current global financial
and economic crisis is facilitating this process. The power of the chaebol will be even bigger
when the government goes ahead with privatizing the three remaining state-owned banks,
Korea Development Bank, Woori Bank and the Industrial Bank of Korea. The chaebol already
control many of the non-bank financial institutes (NBFI), but until now the chaebol had not
been allowed to control banks. In May 2009, the parliament passed the new banking bill, which
raised the ceiling of bank ownership by non-financial institutions from 4 to 9% and allows indirect
control via private equity funds that are not subject to an investment ceiling (Jin 2009). Chaebol
control over the financial sector is dangerous because it was the control over the NBFI that allowed
 Contemporary Politics 299

the chaebol to pursue their reckless credit-financed expansion strategy that led to the 1997/98
financial crisis. Although chaebol finances look healthy now, the access to unlimited finances
from the deposits of Korea savers will create a temptation for chaebol that they will find hard
to resist. The temptation will be particularly large if we consider that many of the Korean
chaebol are under immense competitive pressure and know very well that they will have to
expand globally in order to compete with the global players from Japan, Europe and the United
States that have the advantage of much larger home markets. Korean chaebols, with the arguable
exemption of Samsung Electronics and possibly Hyundai Motors,13 still have the problem that
they are too big for Korea but too small for the world. When the chaebol use their access over
the savings of ordinary citizens and use the money to intensify their global expansion, the risks
for savers and the stability of the Korean banking system will be immense.
The increasing control of the chaebol over the media is another field of concern. The chaebol
already have a massive influence over the three large conservative newspapers (Chosun Ilbo,
Dong Ah Ilbo and Joong Ang Ilbo) through either indirect ownership or their dominance of
the advertising market. The Lee Myung Bak administration wants to privatize public TV broad-
casters and abolish the ban on cross-media ownership (Kim 2008), although the new media bills
are currently stalled in the parliament (Ser 2009). If the changes pass, which is likely given the
absolute majority of President Lee’s part in the parliament, it would give the main conservative
newspapers or even the chaebol directly the possibility of extending their influence on public
opinion. With control of banks and media, the big business conglomerates would reach a
power far beyond even the power they possessed during the first Chaebol Republic.
Forces that could balance the power of the chaebol are weakened but they are far from
defeated. Their weakness might be as temporary as the weakness of the chaebol during the
Asian financial crisis if they are able to learn from their mistakes and adjust to the new environ-
ment. The mass protest against the resumption of US beef imports in 2008 illustrated the poten-
tial challenges the government is facing to push through its pro-business agenda. However, the
protest also revealed the challenges for civil society groups that are strong in organizing broadly
based campaigns but weak in long-term organization. The highly emotionalized and depoliti-
cized protest culture in Korea is easily inflamed by real or perceived injustices, but is hard to
transform into a more steady and political engagement. This weakness is largely due to the
elitist and hierarchical structure and ideology of political and civil society organizations that
are dominated by professors, professionals and the ‘best qualified people’. Political and civil
society engagement in Korea is perceived as the activities of a ‘chosen elite’ in which the
masses are the infantry of the leadership, not the grass-roots out of which the movement
springs. Civil society is not a ‘school of democracy’ in which citizens can practise democratic
decision-making and action but a playground for leaders with political ambitions who sooner or
later fail to fulfil the unrealistic hopes put in them. The failure of such a leader-centred civil
society is exemplified by the tragic end of former President Roh Moo Hyun, who was a lifelong
leader in the democracy and human rights movement but disappointed many of his followers
during his presidency.14 The emancipation of civil society from charismatic leaders is the
immediate challenge and the chance amid the attacks of the government on civil society organ-
izations that will help them to unify and rally support. The democratization of civil society could
provide the grass-roots support for the biggest challenge Korea is facing, to rein in the chaebol
and put them in their place within a democratic society.

Conclusions
The Korean case allows some general conclusions for the politics of market reforms and offers
some lessons for policymakers and international organizations. First, market reforms in Korea
300 Thomas Kalinowski

were implemented relatively successfully, not by an able technocratic government, but through a
political process. The crisis of 1997/98 and IMF involvement in Korea just provided the window
of opportunity for market reforms. Successful market reforms must be embedded in the political
economy of the country and cannot simply be imposed from the outside. Nor can cases of market
reforms in one country be a role model for other countries, even if we consider market-oriented
reforms desirable, which is doubtful considering the social costs they created even in relatively
successful cases such as Korea.
Second, opportunities for reforms emerge when the power of vested interest groups such as,
in our case, big business conglomerates, is balanced by other societal groups, such as labour
unions, CSOs or foreign investors. A temporary balance of power can give some political
space and state autonomy to implement reforms that were previously stalled. It is thus necessary
for policymakers and international organizations to depart from their technocratic utopia and
bring politics back into economic reform processes. Policymakers and international institutions
can influence this balance of power, for example by pushing for labour laws more favourable to
labour unions or by supporting CSOs.
Third, market reforms need a capable state that is able not only to draft and administrate
reform policies, but also to build a social consensus and reform coalitions by building reform
coalitions and co-opting potential opponents. Thus, it is crucial, for example, for international
institutions such as the IMF and World Bank not to weaken the government by coercing it
into unrealistic reform commitments that alienate a large part of the population. On the contrary,
it is necessary to strengthen the state, increase state capacity and the political credibility of the
government in order to enable it to build broad reform coalitions. For international institutions
and governments alike, it is necessary to ensure broad participation and include civil society
organizations in the drafting and implementation of reforms.
Fourth, market reforms alone are an inadequate measure to curb permanently vested inter-
ested and the monopolistic power of big business. At least in the case of Korea, the strengthening
of financial investors and market forces has not been a good strategy to curb the monopolistic
power of big business, at least not in the long term. As soon as big business had adapted to
the more competitive market environment, market liberalization actually strengthened them.
The danger of state capture by big business groups might be particularly large if the state con-
tinues to delegate power to a market that is already dominated by monopolistic interests.
Fifth, in Korea, after 10 years of market-oriented reforms under a politically liberal president
the outlook is unclear. While macroeconomic indicators in Korea look relatively good, youth
unemployment, precarious working conditions and social inequality are major concerns. With
reconsolidated power, the reckless business practices of the chaebol that caused the crisis are
forgotten more and more as they profit from the fact that their export strength has helped the
country to overcome the crisis. They are now presenting themselves as the ‘saviour of the
economy’ and indeed most Koreans today believe that the economy will hardly be able to
work without the chaebol.
By voting overwhelmingly for the new President Lee Myung Bak in 2007, Koreans have
chosen a conservative who is the political expression of the re-emergence of big business.
He promises to reconcile market reforms and chaebol power – at the cost of labour, social
security and civil society organizations. To the degree the chaebol reconsolidate their power,
state autonomy and the need for corporatist compromises between government, chaebol and
labour vanish. This does not mean that market reforms will be abandoned, but they will be
implemented in a more chaebol-friendly and a more confrontational way. The resulting social
and political conflicts will make the repetition of a post-1997-style recovery impossible in the
current global financial crisis. If and how Korea will find its way out of the current crisis
remains to be seen.
 Contemporary Politics 301

Acknowledgement
This work was supported by the Ewha Womans University Research Grant of 2007.

Notes
1. I call the Korean case ‘relatively’ successful compared with other cases of IMF-prescribed market
reforms and structural adjustment in Southeast Asia, Latin America and Africa. A relatively successful
implementation of market reforms does not necessarily mean that their results can be called a success,
even though that clearly is the claim of the IMF and the Korean government. If we evaluate the reforms
as such as a success or a failure depends on the perspective and the criteria for success, an evaluation
that is beyond the scope of this paper.
2. The former IMF chief economist Simon Johnson just recently delivered an astonishing account of
technocratic idealism (or naivety) that is not uncommon among economists. In a very powerful
criticism of the US government and the IMF’s reaction to the current global financial crisis, he
argues US politics have been taken over by the financial oligarchy in a ‘quiet coup’. Instead of
implementing the ‘right policies’ that the IMF has prescribed to crisis countries in the past, the financial
oligarchy hijacked US politics and prevented the implementation of painful but necessary reforms
(Johnson 2009).
3. This is not surprising if we consider that the United States (and Britain) have been market economies
for a long time, whereas many European countries and Japan managed the transformation into a func-
tioning market much more recently.
4. For example, since the mid-1980s, the chaebol have founded their own research institutes that support
the management in making strategic decisions based on scientific research. The currently largest
research institutes, the Samsung Economic Institute and the LG Economic Research Institute, were
both founded in 1986.
5. He was reinstated by the constitutional court after the mobilization of the public through civil society
organizations helped his party to win the parliamentary elections.
6. The Gini coefficient increased from 0.268 in 1997 to 0.325 in 2008, which is one of the highest in the
developed world (Moon 2009b).
7. The most discussed examples are the activities of US private equity funds such as Lone Star, New-
bridge and Carlyle that bought Korean banks for fire-sale prices when the government privatized
banks and sold them for high profits without paying taxes a few years later (Fackler 2006).
8. The ruling party under Kim and Roh, the Millenium Democratic Party, split when the Uri Party was
founded in 2003. In 2008, both parties reunited under the name Democratic Party and now form the
main opposition party against the Lee administration.
9. Some authors argue that state capacity in Korea remained high and the developmental state has in fact
never vanished (Weiss 1999, Thurbon and Weiss 2006).
10. The value added to GDP of the Korean construction is 8.9%, substantially above the average of 5.6% in
the OECD as a whole. Within the OECD only Spain and Ireland have bigger construction sectors
(OECD 2009).
11. This plan will increase the share of nuclear power generation from 14.9 to 27.8% of the energy mix in
2030, while renewable energy is planned to grow to only 11% from 2.4% today (Ministry of Knowl-
edge Economy 2008, 2009a,b).
12. For example, environmental protection of the ‘green belt’ within the Seoul area has been weakened to
allow more areas to be designated for construction despite a slump in the demand for apartments (Moon
2009a). Even the previously almighty Korean military had to take a back seat when it conflicted with
the expansion of the chaebol. Concerns of the Korean Air Force about the construction of the new
‘Lotte World II’ in Seoul due to security threats for a nearby military airport had stalled the project
for 15 years. The concerned were overruled by the government and the permission to go ahead with
the construction was granted in April 2009 (Seo 2009).
13. Hyundai Motors combined with KIA control 80% of the Korean market and globally they are the fifth
largest car-maker, with a production of 4.2 million cars a year (2008) (Chosun Ilbo, 13 February 2009).
This is still far below the 5.5 million cars that are considered a threshold for mass-market car-makers to
survive independently (The Economist, 9 May 2009). Even Hyundai/Kia might thus be tempted to
expand through expensive overseas investments and acquisitions.
14. President Roh Moo Hyun committed suicide in May 2009 amid corruption investigations and
(unproven) allegations against him and his family.
302 Thomas Kalinowski

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