American Economic Association

Development Lessons from Asia: The Role of Government in South Korea and Taiwan
Author(s): Yung Chul Park
Source: The American Economic Review, Vol. 80, No. 2, Papers and Proceedings of the
Hundred and Second Annual Meeting of the American Economic Association (May, 1990), pp.
118-121
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2006554
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 Development Lessons from Asia:
The Role of Government in South Korea and Taiwan
By YUNG CHUL PARK*
South Korea and Taiwan share common
structuralcharacteristicsand export-ledin-
dustrialization.Several studies have docu-
mented an active role of government,be-
yond correcting market failures (H. Pack
and W. E. Westphal, 1986; Paul Kuznets,
1988). But the role of governmentdiffers.
The Taiwangovernmenthas been supportive
ratherthan interventionist,whereasthe Ko-
rean governmenthas been collaborativeand
even coercive in relationswith the private
sector.
Government in both countries helped
launch and sustain the export-ledstrategy,
taking into considerationthe initial condi-
tions in industrial organizationand struc-
ture, capital markets and trade. Although
the strategycontributedto export develop-
ment, once put in place, the respectivegov-
ernmentshave been unwillingand unableto
adjust their role to changingcircumstances.
This rigidityaccountsfor the inefficiencyof
governmentin Korea in the 1970s and in
Taiwanin the 1980s.
I. Contrasts
Since the importsubstitutionin the 1950s,
the Korean governmenthas intervenedin
the allocation of resourcescreatingan en-
trenched policy bureaucracythat controls
the means for plan implementation.The in-
stitutional setup provides domestic market
protection, implementsindustrialtargeting,
and issues permitsof entry in many indus-
tries and foreign loan guarantees."Korea,
Inc." is a more apt descriptionof govern-
ment-businessrelationsin KoreathanJapan
(Kuznets).
The Taiwan governmentuses a medium-
term economic plan that sets macroeco-
*Professor of economics, Korean University, Seoul,
Korea.
118
nomic targetsand formulatessectoralinvest-
ment plans. Unlike Korea, however, these
plans are indicative.The plannershave had
little authorityand limited access to policy
instrumentssuch as credit allocation.There
is no institutionalnetworklinking the eco-
nomic bureaucracywith the private sector.
Interaction has been characterizedby mu-
tual adjustment rather than collaboration.
The Taiwan governmenthas in generalcon-
fined its role to providingsocial and physical
infrastructureand otherpublic goods. It has
balanced public needs with a desire to en-
courageprivateenterprisein its intervention.
II. LeadingRole in Korea
In the 1960s, Korea had to cope with a
formidable array of structuraland institu-
tional problems.The low rate of savingsand
chronic current account deficits requireda
continuousinflowof foreignlendingunavail-
able without governmentguarantees.It was
believed that the financialsystem could not
direct resourcesto export-orientedindustries
and that there was a shortageof entrepre-
neurs and managersto undertakethe devel-
opment of export-orientedindustries. The
industrialist class that had been nurtured
during the import substitutionperiod had
little knowledge of foreign marketsand in-
ternationalmarketing,and hencewas unpre-
pared to take high risksin sellingabroad.
In many cases efficiencyrequiredadoption
of increasingreturnstechnologies.This con-
flicted with Korea's limited availabilityof
resources,and forcedthe governmentto sup-
port a few, selected large producersin the
targetedindustries.In the absenceof a mar-
ket mechanism, they assumed the task of
selecting the winners. The banking system
was used to channel domestic and foreign
savingsto these largefirmsand as a de facto
partner, and the governmentwas drawn to
participatein their businessdecisions.Dur-
VOL.80 NO. 2 LESSONS FOR DEVELOPMENT FROM THE EXPERIENCE IN ASIA
ing the 1960s, these large firmsbecame suc-
cessful exporters,and with the growthof the
economy also developed into industrial
groupsdominatingthe manufacturing sector.
Korea's export-orientedindustries could
have sustainedrapidgrowthwithoutgovern-
ment intervention,though not without gov-
ernment supportin the 1970s. However,in-
stead of deregulatingthe controlledsectors,
Korean policymakers tightened their grip
over manufacturingindustriesand financial
intermediaries.The confidencethey gained
from the success in the 1960s encourageda
big, unsuccessful import substitution for
capital and technology-intensive productsin
the 1970s.
Industrial concentrationand government
involvement created its own problems. By
1977, the 30 largestgroupsaccountedfor 25
percent of employmentand 34 percent of
shipment of manufacturing(Kyu-uck Lee,
1986, p. 239). Concentrationof economic
power in the hands of a few conglomerates
was necessaryfor efficiency,but highly un-
desirablefor distributiveequity.This dilem-
ma created pressure for (and justified the
governmentcontrolof) the industrialgroups.
The pricing and supply behavior of these
groups had to be regulatedbecause their
market position was protected by closed
trade and a closed financialregime.
Governmentsupportfor industrialgroups
created moral hazardproblems.By the early
1970s, they were highly leveragedwith loan
guaranteesthroughthe banks owned by the
government. The governmenthad literally
become a partnerresponsiblefor their fail-
ure as well as success.This bailout certainty
induced excessiverisk taking.
The coordinationand moralhazardprob-
lems were most serious during the 1970s
when the governmentattemptedto develop
simultaneously a number of heavy and
chemical industries. The developmentwas
deemed necessaryto take advantageof com-
plementarityon the demand side, and for-
ward and backwardlinkages among these
industries.The industrialgroupslost no time
in making massive investments,not to be
locked out of potentiallylucrativemarkets.
The resultof this competitivebiddingwas an
excessiveinvestmentand duplication.
119
Exceptfor petro chemicalsand nonferrous
metals, most industrieswere developed as
future export industries.In order to export
with the benefits of scale economies and
minimumefficientsize, the groupswere en-
couragedto build large plants from the be-
ginning. But because of marketing,quality,
and technology problems, export earnings
were low and losses heavy.The complemen-
tarity as well as forwardand backwardlink-
ages made the situation much worse. This
setbackmotivatedeconomicliberalizationat
the end of the 1970s. Yet, after almost a
decade of trade and financialliberalization
in the 1980s, Korea's policy regime is still
based on development mercantilism.The
governmenthas not been able to extricate
itself from its relations with the industrial
groups.
III. SupportiveRole in Taiwan
The indirectrole of governmentin Taiwan
was predicated on a high rate of savings,
chronic trade surpluses,conservativestance
of fiscal and monetarypolicy, an egalitarian
development philosophy,and an industrial
organizationcharacterizedby a large num-
ber of small and medium-sizedfirmsin man-
ufacturing.As a result,Taiwaneseplanners
have been largely deprived of two instru-
ments of industrialpolicy-the controlover
credit and budgetaryallocationfor develop-
ment purposes.
The political leadershipwas also deter-
mined to prevent the concentrationof re-
sourcesin privatehands,as it believedthat a
small group of powerfulbusinessmenwho
controlleda large shareof privateresources
and the financial system had caused its
downfall on the mainland.This determina-
tion was manifest in the proliferationof
public enterprisesthat accountedfor an av-
erage 50 percent of manufacturingvalue-
added during the 1950s. Even in the export
promotionstrategyled primarilyby the pri-
vate sector, this egalitarian tradition re-
maineda balancingforce.
In Taiwan, a large numberof small and
medium-sizedfirms produce and export a
large share of Taiwan'smanufacturedprod-
ucts. Inw1986, for example, more than 98
120 AEA PAPERS AND PROCEEDINGS
percent of Taiwan's firms had fewer than
300 employees,and 48 percentof these em-
ployed 5 or less workers.Smalland medium-
sized firms produced about 30 percent of
manufacturingvalue-added,and exported
most of this to foreignmarkets(TylerBiggs,
1988). Taiwan embarkedon export promo-
tion of labor intensivemanufacturesjust as
Korea had, but chose differentproduction
technologies.Taiwan'splannersdid not se-
lect increasingreturntechnologiesas the Ko-
rean plannersdid, becausethey could draw
on a largepool of experiencedentrepreneurs.
The dominanceof smallandmedium-sized
firms continues in Taiwan's major export
industries.For example,in the footwearin-
dustry, firms with 300 or less workersac-
counted for almost 60 percent of value-
added in Taiwan, whereasthe same share
was about 7 percentin Koreain 1976 (Brian
Levy, 1987).With this structure,directinter-
ventionKorean-stylewas impossible.A more
efficient way of supportingthese small ex-
porterswas to provideuniformincentiveson
the basis of exportperformance.
The strategy of relying on small and
medium-sizedfirms obviously raises prob-
lems related to the loss of scale economies,
marketingand collection,and dissemination
of informationon foreignconsumers'prefer-
ences and technologicaldevelopments.But
in Taiwan they were overcomeby the pres-
ence of a large numberof traderscoming
from the mainland(see Levy).These traders
subdivided large orders among small pro-
ducers and still do. They gave Taiwanese
manufacturersaccess to ordersof small vol-
ume that Korean manufacturerscould not
accept. They have also successfullysought
out specializedproductsfor which demand
is relatively small, and many technology-
intensive activities to which small firmsare
well adapted (Levy and Wen-Jeng Kuo,
1987).Perhapsthis lackof successwas fortu-
nate in that it avoidedthe large-scaleineffi-
ciency associatedwith the Koreandevelop-
ment effortin heavyindustry.
Unlike Korea, Taiwan'sefforts at import
substitution of capital and intermediate
goods in the 1970s were frustrated. En-
trepreneurswere unable and unwilling to
make large capital investmentswith a long
MA Y 1990
gestationperiod.Neitherdid the government
have an industrialpolicy regimecapableof
planning and implementingan import sub-
stitution program as ambitious as Korea's
scheme. In orderto bypass these difficulties,
the governmententrustedpublic enterprises
with developing the automotiveindustryin
the 1970s, but the attemptdid not succeed
(Yun-Han Chu, 1989).
Since the early 1980s, the Taiwangovern-
ment has widenedthe scope and accelerated
the pace of tradeand financialliberalization.
However, economic liberalizationhas not
mitigatedthe imbalancebetweenthe traded
and nontraded goods sectors. The traded
goods sector is still too large,the nontraded
goods sector too small. An expansion of
domesticdemand,in particularin the public
sector, is now needed. Yet, the industrial
policy regime that preventedthe promotion
of a large-scaleimport substitutionplan in
the 1970s has made it equally difficult to
channel more resourcesinto the nontraded
goods sector. The housing and social and
physicalinfrastructure sectorsremaingrossly
underdeveloped.The supportiverole of gov-
ernmenthas becomea causeof misallocation
of resources.
IV. AnyLessons?
One conclusion is that there is no ideal
model for the role of government.The suc-
cess or failure of export-led development
strategydoes not seem to correlatewith pol-
icy activism. In both Korea and Taiwan,
initial conditions, structural, and institu-
tional characteristicshave been moreimpor-
tant than the strategyitself, or development
ideologiesin shapingthe role of government.
Institutional and structural characteristics
explain why Korean planners have always
sought to adopt increasingreturntechnolo-
gies whereas Taiwanesepolicymakershave
not. Technologydifferencesin turn brought
about differencesin the role of government
between the two countries.
Another lesson is that once government
assumes a certain role in the development
process, it tends to persist with the same
role, often failing to adjust to changes in
economic environment. This inflexibility
VOL. 80 NO. 2 LESSONS FOR DEVELOPMENT FROM THE EXPERIENCE IN ASIA
could be a cause of governmentfailureas it
was in the case of Koreain the 1970s and in
the 1980s in Taiwan.
Finally, have governmentscontributedto
rapidgrowthand industrialization in the two
countriesthroughintervention?It is difficult
to believe that the privatesectoralone could
have launchedand sustainedthe exportdrive
without the direct governmentintervention
in Korea in the 1960s. Nor would it have
been more efficient if the Taiwan govern-
ment had assumed a more interventionist
role during the same period. But since the
mid-1970s, efficiency of governmentinter-
vention in the two economieshas been de-
batable at best. Judgingfrom the recordof
rapid growth with stability, however, any
losses related to governmentintervention
must have had theiroffsets.
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