Description
Economic inequality (also described as the gap between rich and poor, income inequality, wealth disparity, or wealth and income differences) is the difference between individuals or populations in the distribution of their assets, wealth, or income.
ABSTRACT
Title of Thesis: INCOME INEQUALITY AND THE CAPACITY OF THE
STATE IN SOUTH KOREA, 1965-2004
Chang Won Lee, Master of Arts, 2006
Directed By: Professor Roberto Patricio Korzeniewicz
Department of Sociology
This paper focuses on the relationship between income inequality and state
capacity in South Korea. Korea achieved rapid economic growth accompanied by
equity from the 1960s to the mid 1990s. However, after the 1997 IMF financial crisis,
income inequality in Korea increased dramatically. This change in income inequality
is closely related to increases in unemployment and underemployment. I argue that
such failures in the labor market are attributed to the rapid decline of the state’s
capacity after financial liberalization in 1993. During the developmental era, the state
had been able to form institutions for low income inequality, due to its relative
autonomy from business owners. After the financial liberalization no such
autonomous capacity to build employment-protective institutions existed, as these
reforms increased the influence of domestic and international capital. Further, the
weakening of the state’s capacity also reflects changes in the relationship of the
Korean economy to the world system.
INCOME INEQUALITY AND THE CAPACITY OF THE STATE
IN SOUTH KOREA, 1965-2004
by
Chang Won Lee
Thesis submitted to the Faculty of the Graduate School of the
University of Maryland, College Park, in partial fulfillment
of the requirements for the degree of
Master of Arts
2006
Advisory Committee:
Professor Roberto Patricio Korzeniewicz, Chair
Professor John Iceland
Professor Dae Young Kim
© Copyright by
Chang Won Lee
2006
ii
Dedication
To my parents, Sang Jin Lee and Young Ja Choi
iii
Acknowledgements
I would like to thank my committee members, John Iceland and Dae Young
Kim, for their valuable comments and ideas throughout this project. I extend my
warm appreciation to my colleagues, in particular, my cohorts Guillermo Cantor,
Shyam KC, Nazneen Kane, and Kyle Nelson. Their help out of simple friendship
made me enjoy life in graduate school in America. I am also thankful to my friends
Kim Ricker and Tom Ricker, and my colleague, Kim Nguyen, for their editorial help.
My special appreciation goes to my committee chair, Patricio Korzeniewicz. He
inspired me with new zeal to study inequality and gave me many insights on how to
do this. My debts to him are huge.
Most of all, I want to thank my wife, Yun Jeong Yu, whose unfailing love,
pride, and support enabled me to survive this project. I cannot thank enough to my
father, Sang Jin Lee, and my mother, Young Ja Choi for their bottomless love and
devotion to their son. I dedicate this thesis to them.
iv
Table of Contents
Dedication..................................................................................................................... ii
Acknowledgements...................................................................................................... iii
Table of Contents......................................................................................................... iv
List of Tables ................................................................................................................ v
List of Figures .............................................................................................................. vi
Chapter 1: Introduction................................................................................................. 1
Chapter 2: Theoretical Discussion................................................................................ 6
2.1. Economic Growth and Income Inequality......................................................... 6
2.2. Relational View on Creative Destruction of Institutions................................... 8
2.3. Bringing the Capacity of the State Back In ..................................................... 10
2.4. Literature on Income Inequality in Korea........................................................ 14
Chapter 3: The Developmental Era: “Growth with Equity” and the Strong State,
1961-1992 ................................................................................................................... 16
3.1. U-Curvilinear Pattern of Income Inequality in the 1960s and the First Half of
1970s....................................................................................................................... 16
3.2. “Growth with Equity” and the Developmental State, the Late 1970s - 1992.. 17
3.2.1. Developing the Rural Sector..................................................................... 18
3.2.2. The State’s Intervention in the Labor Market........................................... 19
3.2.3. The State’s Control in the Financial Market............................................. 24
3.3. The Sources of the Strong Power of the State ................................................. 27
3.3.1. Internal Factors: Land Reform and the Elimination of the Ruling Elite
Class.................................................................................................................... 27
3.3.2. External sources: Japan, the Vietnam War and the United States ............ 28
3.4. Linking the Strong State with Inequality in the Developmental Era............... 30
Chapter 4: The 1997 IMF Financial Crisis: Economic Liberalization and Increasing
Income Inequality, 1993-2004.................................................................................... 34
4.1. The Impact of the 1997 IMF Crisis on Income Inequality and the Labor Market
................................................................................................................................. 34
4.1.1. Uneven Impacts ........................................................................................ 34
4.1.2. Increasing Rates of Unemployment and Underemployment .................... 35
4.1.3. Job Security at Risk .................................................................................. 36
4.2. The Causes of the Crisis: Financial Liberalization and Too Little Regulation of
the State................................................................................................................... 37
4.3. The Decline of the State’s Capacity................................................................. 41
4.3.1. External Factors: the Changed Context of the World Economy............... 41
4.3.2. Internal Factors: Growing Power of Chaebol and Neo- liberalization of
Technocrats ......................................................................................................... 43
4.4. The Impact of the Institutional Transformation on the Labor Market and
Inequality ................................................................................................................ 45
Chapter 5: Conclusion................................................................................................. 50
v
List of Tables
1. Composition of Employed Persons by Industry, 1960-2000 56
2. Premium to Education Among Male Wage Labor 56
3. Employment Changes by Gender and Education 56
4. Employment Changes by Industry and Occupation 57
5. Changes in Employment Structure 57
6. Hourly Wages by Employment Type, 2000 57
7. Major Financial Liberalization Measures in Korea During the 1990s 58
8. Korea’s Foreign Debt Profile, 1960-1997 59
vi
List of Figures
1. Income Distribution in Korea, 1965-2004 60
2. The Growth Rate of GDP in Korea, 1971-2004 60
3. Per Capita Gross National Income (GNI) in Korea, 1981-2004 61
4. Unemployment Rate in Korea, 1970-2005 61
1
Chapter 1: Introduction
Simon Kuznets’s classic article, “Economic Growth and Income Inequality”
in The American Economic Review in 1955, marked a new epoch in studying the
relationship between economic growth and income inequality. He hypothesized that
income inequality rises in the earlier phase of economic growth, but then starts to fall
after reaching the peak. This relationship was described as an inverted “U.” Since the
publication of Kuznets’s groundbreaking analysis, social scientists have paid
considerable attention to income inequality trends within countries, and the “Kuznets
curve” was treated like an “iron law” for two decades after it first appeared (Moran
2005).
The trend of income inequality in the era of development from the early 1960s
to the early 1990s
1
in South Korea (hereafter, Korea) appears to follow Kuznets’s
classic pattern, except for a brief decline during the earlier phase between 1965 and
1969 – income inequality increased after 1970, but then declined after a peak in 1976.
Korea’s low-income inequality, accompanied by high rate of economic growth from
the mid 1970s to the mid 1990s, has attracted attention, getting named “the East
Asian Miracle.”(World Bank 1993). Unlike the Kuznets’s hypothesis, however, the
decline was not the final trend in income inequality. In the aftermath of the 1997
1
I define the development era as the time when the developmental state leads the economy with its
plans for development. In 1961, the Economic Planning Board, a key organization in the state-led
development economy, was institutionalized by Park Chung Hee military government. One year after,
implementing the First Five-Year Economic Development Plan, the Economic Planning Board had
lasted the five-year plans to the Sixth Economic Development Plan in 1991. The development era
ended as Kim Young Sam administration that started in 1993 dissolved the Economic Planning Board.
Thus, I name the period when the Economic Planning Board played a key role (1961-1992) the
development era of Korea.
2
International Monetary Fund (IMF) financial crisis, income inequality in Korea rose
sharply. As of 2004, the Gini index reached 0.344 (See Figure 1). This was almost at
the same level of the early 1980s. One may interpret the rise of income inequality as
another transient phase during the aftermath of the 1997 IMF financial crisis, and
expect that income inequality would revert to its previous level as the Korean
economy recovers from the shock of the 1997 IMF financial crisis. However, eight
years after the 1997 IMF financial crisis, inequality has remained above the pre-1997
levels, even though the Korean economy had recovered (See Table 2 for the growth
rate of GDP and Table 3 for per capita GNI). According to estimates from the Korean
National Statistical Office (KNSO), the Gini coefficient of the nationwide households
was 0.295 in 1996, but increased to 0.352 in 2000, and remained high until 2004
when the Gini coefficient was 0.344 (See Figure 1).
2
There is no sign that income
inequality will return to its previous level. Instead, increasing income inequality had
become the hottest issue in politics and society. In early 2006 many newspapers
started to deal with the polarization of income distribution as an important serial
story. The Roh Moo-Hyun government also announced the removal of deteriorating
income inequality as the first priority of their public policy. In February 2006, the
Korean government decided to invest 800 billion Won (equivalent to $ 8 billon)
donated by Lee Gun-Hee, the head of Samsung group, to solve social polarization.
2
Gini coefficients in table 2 are more or less underestimated compared with those in table 1. For
example, Gini coefficient of 2000 in table 2 is reported as 0.317, while that in table 1 0.352. It seems to
originate in the difference of data employed by the two tables. Table 1 uses data for gross income of
“households in all areas within country,” but data in table 2 are for those of all cities (73 cities).
However, regardless data difference, the trends of income inequality between two data are similar.
Table 2 shows clearly that increased income inequality continues for 7 years from 1997 IMF financial
crisis as well.
3
Why did inequality increase after 1997? Conventional wisdom assumes that
there is a tradeoff between economic growth and equality. Accordingly, one may
argue that the increase in income inequality has been an inevitable consequence of
economic growth during the same period. However, during the later years of Korea’s
developmental era, a different pattern emerged; income inequality decreased even
when the economy had rapid growth. Some scholars argue that the increase in income
inequality since 1997 is the result of the uneven impact the crisis had on different
sectors of the economy. For example, Haggard (2000), Henderson (1999), and Kim
(2004) argue that lower income workers, the unemployed and the underemployed (the
majority of whom were less-educated and female) were more seriously hurt by the
financial crisis than higher income ones. Given that in the two years before 1997 the
Korean economy achieved an unemployment rate of about two percent, it seems
certain that the increase in unemployment after 1997 among lower income workers
affected detrimentally the distribution of income. In that case, a following question
should be; why did the rates of the unemployed and irregular workers rise so
dramatically after 1997?
There are few studies that attempt to explain the structural mechanism that led
to such instability in the Korean labor market. Instead, many simply suggest that
instability was the result of the IMF’s neoliberal labor market polity by adopted by
the Korean state. In that case, though, why did the Korean state apply a neoliberal
policy that was detrimental to job security? Why was the government of Korea able to
resist pressures for liberalization of the labor market prior to 1997? If income
inequality depends largely on the labor market performance, then these questions
4
should be examined in order to fully explain the increase in income inequality since
1997. This paper focuses on the characteristics of institutional reform undertaken in
Korea during the 1990s in order to explain the evolution of income inequality.
Institutional configurations are worthy of notice because they influence the setting of
priorities for public policy as well as the strategy of actors within the institutional
arrangement for achieving those priorities. For example, in a “pure” capitalist
institutional arrangement, activities seeking profit can be justified and supported as
the first priority. Income inequality issues may be more likely to be treated as a
second priority or the inevitable by-product of capitalist economic growth. In such
context, institutions in a capitalist society tend to favor profit-making, namely,
capitalist groups. Through institutions, the state is more likely to sacrifice equality for
the capital’s profit. That is, in a capitalist arrangement, the institutional capacity of
capital (i.e., making institutions favoring capital) becomes strong, while that of a state
and labor class weakens. Conversely, such an arrangement in power relationships also
affects the formation of institutions.
Since the early 1990s, the Korean state fully liberalized the financial market,
which weakened the capacity of the state and strengthened that of both domestic and
foreign capitalist groups. Such changes in the institutional configuration gave rise to
inequality in Korea by making the Korean labor markets flexible. This paper
examines why and how Korea has been institutionally changed since 1993, and how
such institutional changes have affected income inequality. Considering that it was
the state that played a considerable role in Korea’s “growth with equity”
development, I pay a particular attention to institutional change with respect to the
5
state’s capacity. In the following section, I discuss theories that guide us in
understanding the causes of income inequality with a focus on how institutional
configurations and their changes are related to income inequality.
6
Chapter 2: Theoretical Discussion
2.1. Economic Growth and Income Inequality
The relationship between economic growth and inequality has been hotly
debated among social scientists. Neoclassical economics assumes a tradeoff between
rising growth and falling inequality; inequality is more likely to enhance growth (See
Birdsall’s (2000:9) summary). In this view, we are more likely to see rapid growth if
income is concentrated in the hands of the rich who are more likely to save than the
poor because a high level of savings and resulting investment is a prerequisite for
rapid growth. Also, inequality provides an incentive for individual economic
activities such as productive risk-taking and innovation that ultimately ensures higher
output and increasing productivity. The result is higher average income and rates of
growth. The neoclassical view tends to be negative concerning intervention by a state
such as tax-financed transfers because such interventions undermine individual
responsibility and the work ethic. As neoclassical arguments are based on assumption
such as: “economic problems should be solved by economic ways” and “the less
political interference the better economy,” they are less likely to consider
political/institutional dimensions in their explanations.
Kuznets (1955) raised a different view than the “tradeoff” thesis. He
characterized the pattern of inequality in the process of economic growth this way:
“Widening in the early phases of economic growth when the transition from the pre-
industrial to the industrial civilization was most rapid; becoming stabilized for a
while; and then narrowing in the later” (Kuznets 1955:18). Growing inequality in the
earlier period of economic growth occurred because of a demographic shift from rural
7
to urban areas. Kuznets draws his income inequality pattern from two assumptions.
First, the average per capita income of a rural population is usually lower than that of
an urban population. Thus, the migration from the agricultural to the industrial sector
contributes to economic growth by increasing per capital income. The second
assumption is that income inequality for a rural population is somewhat lower than
for an urban population. Thus it can be inferred that the more urban a population, the
greater the inequality. With these assumptions, Kuzents argues that the compositional
change by such migrations tends to increase income inequality in the early stage of
industrialization.
However, income inequality declines after a peak. As an equalizing
mechanism, Kuznets noticed the institutional effect of urbanization. Kuznets argued,
The major offset to the widening of income inequality associated with the shift
from agriculture and the countryside to industry and the city must have been a rise
in the income share of the lower groups within the nonagricultural sector of the
population … Once the early turbulent phases of industrialization and urbanization
had passed, a variety of forces converged to bolster the economic position of the
lower-income groups within the urban (Kuznets 1955:17, emphasis by the author).
That is, increase and convergence of lower-income work force to urban areas
brought about the growing political power of that group, thereby leading to a variety
of protective legislation to counteract the worst effects of rapid industrialization and
urbanization. This was accomplished through the institutional and political changes
inherent in the “dynamism of a growing and free economic society”(Kuznets 1955:9).
8
In sum, Kuznets believes there is an equalizing force in “modern” system (vis-à-vis a
“traditional” society) in both economic and political areas.
From the 1970 to the middle of the 1990s, the inequality trend in Korea
appears to follow the U-curve. The Gini coefficient peaked in 1976 (0.391), stayed
for a few years, then declined from the early 1980s. The mechanism that lowered the
gap in Korea was, however, quite different from Kuznets’s hypothesis. It was the
state that led the modernization of Korea and rapid economic growth. In this process,
the state controlled strongly the working class as well as the capitalist class. The
urban working group had been considerably weak in bargaining power until 1988
(Haggard and Moon 1990; Haggard 2000; Lie 1998). Moreover, Kuznets’s theory
cannot account for the rise of income inequality after 1997; in his theory, the
inequality should have decreased in the latter 1990s when Korean society was already
democratized and labor was unionized as well. This implies that other factors that
Kuznets was missing may have influenced income inequality in Korea
2.2. Relational View on Creative Destruction of Institutions
An alternative theory on the relationship between economic growth and
income inequality has recently been published by Korzeniewicz and Moran (2005).
Critiquing single transition from traditional to modern array in Kuznets,
Korzeniewicz and Moran (2005) insist that institutions need to be understood as
incessantly changing and therefore a transition of distributional array has no an
ending point, but it is ever changing. Such their view on institution came out of
Schumpeter’s perspective on capitalism. Schumpeter understood the mechanism of
9
capitalism as a process of incessant “creative destruction.” Thus, capitalism should be
conceived of entailing continuous transformation, instead of a single transition from
one state of equilibrium to another (Korzeniewcz and Moran 2005:297-298). That is,
decreasing income inequality in the latter phase in the Kuznets’s curve cannot be
expected to remain constant.
The other notable point of Korzeniewicz and Moran’s theory is that the
dynamic and evolutionary mechanism of the “creative destruction” is not limited to a
national boundary. The process of creative destruction, destroying old systems and
creating new institutions for profit, occurs both within and beyond a national
boundary. Thus, institutional arrangements are embedded in “international relations”
as well as relations among domestic groups.
nstitutions should be understood as relational mechanisms of regulation,
operating within countries while simultaneously shaping interactions and flows
between nations. In this sense, the same institutional mechanisms through which
inequality historically has been reduced within nations often have accentuated
the exclusion from wealthy markets of populations from poorer countries
(Korzeniewicz and Moran, forthcoming: 20, emphasis in original)
The ‘great U-turn’ in wealthy countries, according to Korzeniewicz and
Moran (2005), shows clearly such relational aspects of capitalistic growth. The
United States, for example, has gone through economic restructuring by neoliberal
globalization that removed regulations for a cross-border capital. The globalization of
capital placed the U.S. economy in the position of high-tech industry, while
consolidating the international labor division. As a result, many manufacturing or
labor-intensive industries moved out to the Third World countries for cheap labor,
10
while high-tech industries requiring high education have been concentrated in the
United States. Such deindustrialization in the United States caused the polarization of
jobs in the U.S. labor market. This resulted in greater wage differentials between the
skilled and unskilled (Galbraith 2001; Ong, Bonacich, and Cheng 1997), which has
been referred to as the “hourglass economy.” Moreover, such relational view on
institution reveals its importance in restricting some groups’ entry to markets. For
example, Olson (1982:163) recognizes, in the particular case of South Africa, that
“[t]he denial of various skilled and semi-skilled jobs to Africans not only raised the
wages of the European (and sometimes Coloureds and Asian) workers, but it also
crowed more labor into the areas that remained open to Africans, making the wages
there lower than they would otherwise be.”(recited in Korzeniewicz and Moran,
forthcoming: 20).
Such institutional approaches may shed light on understanding Korea’s U-turn
after 1997 as it has done so for the United States. We can find considerable changes
in the international context surrounding the Korean economy since the early 1990s. I
will address in more detail how external situations have been changed and have
affected internal institutional configurations in Korea.
2.3. Bringing the Capacity of the State Back In
It seems certain that the world economy shapes institutional arrangements
within countries. However, not all countries with comparable levels of development
have their institutional configurations impacted in the same way. For example, both
Korea and Argentina have been placed in the semi-periphery of the world system as
11
newly industrialized countries (NICs). Both countries, however, have responded in
different ways to the influences from the world economy. They have established
different institutions (e.g. import-substitutive vs. export-oriented strategy) for their
development. In some ways, their different choices of developmental strategy came
from different institutional arrangements between the two countries. In Korea, the
state had strong and autonomous power to control other groups during the period of
modernization. The traditional elite class, yangban, and the labor class had almost no
political power. As the state controlled local capital’s access to financial resource,
capital was controlled and integrated entirely to the state’s developmental plans.
Likewise, multinational corporations and international finance were screened and
regulated by the state. There was, as a consequence, a lack of competing social
pressures at the level of institutional political action (Kim 1997; Lie 1998). By
contrast, in Argentina, the state had no ability to achieve an institutional and
organizational coherence to mobilize efficiently all groups to accomplish the state’s
own goals like Korea. As a result, social and political conflicts prevented the adoption
of an effective development strategy after the early 1950s (Korzeniewicz and
Korzeniewicz 1992). To understand fluctuating trends in income inequality one must
examine what institutions are established and how the formation of these institutions
(and their impacts on economy) is shaped by power relations among economic actors.
Thus, this study focuses on changing power relations among main actors in
Korea. It emphasizes changes in the state’s capacity to shape and control the ways in
which these actors interact with one another. How should we define the capacity of
the state and how should we measure it? Chang (2000:10-11) underlines that there is
12
no universal measure of the capacity of the state; its definition depends on local
context.
The point that we are trying to illustrate … is that how we measure state
intervention matters, because the particular measures that we use embody a
particular vision of the role of the state which may not be universally
applicable, because the institutional assumptions behind that vision may not
hold in contexts other than the one from which that vision emerged. Unless we
recognize that different measures of state intervention are based on different
theories of the role of the state, which embody different assumptions about the
institutions and political economy of state intervention, our empirical
investigation of the role of the state will be constrained by the limitations of
the theoretical perspective that lies behind the “measures” of intervention that
we use (Chang 2000:11).
The degree of state power has often been measured as the proportion of total
government budget to GDP and the share of the public enterprise sector in GDP (or
total investment). Yet, how “big” the state is does not necessary correspond to its
“strength” or capacity. A state with small budget may still actively intervene in the
economy and control other economic actors. Korea is an example. Korea has had a
strong regulatory capacity in the era of industrialization, but its budget was not large
when measured against GDP. Part of the reason is that the state did not actively
execute policies for social welfare via its budget. Rather, private companies took
responsibility for providing welfare through programs such as tuition assistance for
worker’s children and low-interest-loans for purchasing a house. However, the
Korean state had the power to control capital’s (in particular chaebols) access to
resources. Therefore, while the Korean government’s budget was small but it still
13
had the power to intervene (Chang 2000:11).
In this context, the definition of state power by Rueschemeyer and Evans
(1985) is notable. They argued that the power of a state consists of “autonomy” and
“capacity.” State autonomy is defined as the relative autonomy of state officials from
dominant economic classes and social groups (Rueschemeyer and Evans 1985:46-50).
State capacity refers to the existence of a state apparatus that facilitates the
implementation of state policies (Rueschemeyer and Evans 1985:50-53). When
possessing these two components, a state can effectively implement its policies. By
this definition, the Korean state had strong power in the developmental era. The
Korean state had autonomy in the sense that its interest was nation-building through
economic growth, and it pursued this goal without interference from other groups
(Amsden 1989; Evans 1995). The state had strong capacity as well in that it had
organizations that enabled effective execution of economic development plans with
discipline and punishment (Amsden 1989). The autonomy and the capacity of the
state is embodied in relations of control. Controlling other actors requires such
autonomy and capacity.
In this study, the power of the state is defined as its controlling or regulatory
capacity. The ability to control requires not only executive power of state apparatus
but its autonomy. Were it not for state autonomy, active regulation of state apparatus
would be more likely to reflect other groups’ interests. In this case we might more
accurately say the state is controlled by those groups that benefit from its actions.
Therefore, state regulatory capacity is defined as a function of state autonomy. Hence,
14
I pay special attention to the controlling interests that create institutions and shape
their effects on inequality.
2.4. Literature on Income Inequality in Korea
Literature on income inequality in Korea agrees in general that income
inequality declined during the developmental period (particularly since the late
1970s)
3
(Choi 2003; Choo 1993; Fields and Yoo 2001; Kim and Topel 1995). The
literature consistently points to educational expansion as a key factor or mechanism in
the falling income inequality of that period (e.g. Birdsall, Ross and Sabot 1997; Fields
and Yoo 2000). According to Birdsall, Ross and Sabot (1997)’s research, from 1976
to 1985, as Korea experienced a rapid expansion of education, the wage premium for
education declined by 22 percent during that period. Fields and Yoo (2000) also
found that education accounted for the largest part (33 percent) of the reduction in the
earning gap between 1986 and 1993. The literature suggests encouraging education
widely is the key to reducing income inequality. However, this explanation breaks
down when looking at the more recent period. Education has been expanding, but the
wage premium for education has increased since the mid 1990s. Why has the effect of
education on income inequality changed? None of the previous studies provide
factors accounting consistently for the rise and fall of income inequality across time
3
In Korea, “official” estimation on income distribution began in 1980 by Korean National Statistics
Office (KNSO). The “official data” consist of the City Household Income and Expenditure Survey
(CHIES) and the Farm Household Economy Survey (FHES). These two survey sampling frames do not
include all households in Korea. The CHIES excludes non-farm households in rural areas and single-
person households, which are also excluded in the FHES. Besides, in the CHIES there are data only on
the size distribution of income of worker households but not those of urban self-employed and
employer households. In addition, the CHIES set a household income ceiling and excluded high-
income households above the ceiling from the survey (Ahn 1997:29). Thus, Ahn (1997) points out that
official estimation is more likely to underestimate gaps in income distribution.
15
in Korea. This implies that educational expansion is not a fundamental factor for
declining inequality in the developmental era. Rather, it can be understood as a
consequence of certain deeper foundational factors.
What is (are) the fundamental factor(s) on which income inequality depends?
What is the mechanism? The above theoretical discussion shows that Kuznets (1955)
and Korzeniewicz and Moran (2005) address the effect of institutional arrangements
on income inequality, although they have different views regarding what institutions
and how they affect income inequality. Also, many political economists point to the
central role of the state in directing the modernization of the Korean economy
(Amsden 1989; Chang 2000; Evans 1995; Kim 1997; Lie 1998; Wade 1990). Those
theories and historical studies provide valuable insights to explain fluctuation of
income inequality in Korea. Adopting their ideas, this study will focus on two points:
the autonomy and capacity of the state in shaping and managing other groups for
pursuing its own goals and the context of the world economy that affects institutional
arrangements surrounding the state’s capacity. Then it will study how such changes in
institutional configurations are related to income inequality.
16
Chapter 3: The Developmental Era: “Growth with Equity” and
the Strong State, 1961-1992
3.1. U-Curvilinear Pattern of Income Inequality in the 1960s and the First
Half of 1970s
Income inequality in Korea declined during the initial period of
industrialization in the second half of the 1960s, increased during the 1970s, and then
decreased in the 1980s and during the first half of 1990s (see Figure 1).
Unfortunately, there are few studies that explain this fluctuation of income inequality
over time. One explanation from literature of the modern Korean history, is that the
decline of income inequality during 1960s was due mainly to extensive land reform.
Land reform in Korea was initiated after the National Assembly of Korea passed a
land redistribution law in 1949 (Lie 1998:9). Land reform was effective in solving
rural poverty. It eliminated large landholdings by allowing for widespread ownership
of land. As a result, in 1944 the richest 3 percent of farming households owned 64
percent of all the farmland; by 1956, the top 6 percent owned only 18 percent (Lie
1998:12). Such redistribution of land ownership was closely tied to the decline of
income inequality because 1960s Korea was an agricultural country where 72 percent
of total Korean population was a farmer (Lie 1998:111).
After 1970, income inequality rose until 1976. This period coincided with
mass migration from rural to urban areas. Korea in the 1960s and 1970s experienced
one of the most accelerated rural out-migrations in world history (Koo 1991; Lie
1998). Mass migration to urban sector was motivated by the state exploitation in rural
areas. The government purchased rice about 15 percent below the market price in the
1960s. The state employed this dual-price to lower grain prices in order to feed the
17
expanding urban working class while also inducing the migration necessary for the
state’s industrialization plan. This process may have increased the income gap
between the rural and the urban sector. Another related reason for increasing income
inequality during the early 1970s was the compositional changes of the rapid mass
migration that was emphasized by Kuznets. Table 1 illustrates the transformation in
the composition of persons employed by industry between 1960 and 2000. The
proportion of workers in the primary sector – agricultural, forestry, and fishery
industries – declined drastically, while that of the other industrial groups increased
remarkably. In the 1960s, employees of the primary sector constituted 79.5 percent of
the total economically active population, but this figure was reduced to 8.7 percent by
2000 (Hong 2003:40). Choo (1982) indicates that such urbanization and the
emergence of high-income groups in the urban sector accounts for a large part of the
widening income inequality in the 1970s.
3.2. “Growth with Equity” and the Developmental State, the Late 1970s -
1992
From the late 1970s until the 1997 IMF financial crisis, income inequality in
Korea declined gradually. What reduced income inequality during that period?
Because it was the developmental state that established institutions and drove rapid
industrialization in Korea during this time, we must address the state’s role in our
explanation. The Five-Year Economic Development Plans by the Economic Planning
Board (EPB) were the primary feature of the state-driven economic development. In
particular, the Third Five-Year Economic Development Plan in 1972 led to a
18
significant period of economic growth of the 1970s. The three main goals of the plan
were “the dynamic development of the rural economy, a dramatic and sustained
increase in exports, and the establishment of heavy and chemical industries.”(ROK
1971:2, recited from Lie 1998:79). Those clear developmental goals of the state gave
birth to institutional effects that contributed to the decline of income inequality after
1976.
3.2.1. Developing the Rural Sector
As mentioned above, in the 1960s, the necessity of cheap grain resulted in the
deterioration of the condition of the rural population. It threatened the legitimacy of
Park’s military regime in the countryside. Therefore the state began to emphasize
rural development in the Third Five-Year Economic Development Plan. It quadrupled
the budget of the previous Plan in the rural sector, and constructed dams and power
plants. It raised the government price of main staples, particularly rice (Lie
1998:109).
The Saemal undong (New Community, or Village, Movement) was a key
project among the state’s various efforts to develop the countryside. It began in 1970
by distributing surplus cement to the rural areas. In an initial stage, the Park
administration focused on improving rural living environments. The three goals of the
state-led Saemal undong were agricultural mechanization, the spread of high
yielding rice strains, and village beautification (Lie 1998:110). In order to maximize
its limited resources, the government gave priority to villages with excellent
movement records. The program opened the Saemal Leaders Training Institute to
19
improve the qualifications and capabilities of the trainees, and established a special
bureau that organized and assisted the movement and coordinated related projects. To
increase income for the rural population, the state encouraged industrialization in the
countryside and created off-farm employment that gave rural peoples double income
from joint workplaces
4
(NCSUM 2001).
The state-led rural revitalization movement made it possible to increase
productivity and per capita incomes in rural sectors much faster than any other
countries (Lie 1998:110). Thus, the gap of income between rural and urban areas
closed.
3.2.2. The State’s Intervention in the Labor Market
Control over labor class: the regulation of wage and the protection of the labor
market
The second developmental goal of the Third Five-Year Development Plan was
a “dramatic and sustained increase in exports.” Competitive power in export
depended on the quality and (or) the price of exported goods. During the 1970s,
however, quality competition had been considered infeasible because of the lack of
technology and a foreign-technology-dependent economic structure. Therefore, the
only way Korea could compete with other exporting countries was to lower the prices
for exports. To gain an advantage in an export price, the cost of production was
lowered. Since there were not abundant raw materials in Korea, the easiest way to
reduce the cost of production was to lower the cost of the labor force. The state tried
4
See the section of “what is Saemaul Undong?” at the website of the National Council of Saemaul
Undong Movement in Korea (NCSUM) (www.saemaul.com/english/whatissaemaul)
20
to maintain cheap labor with an understanding that rising wages for labor would be
detrimental to exports as well as economic stability (Koo 2001; Ogle 1990; Lie 1998).
During the 1970s, the state regulated indirectly the rise of wages by
preventing labor union organizing. The 1972 Special Law Concerning National
Defense and Security prohibited strikes for workers. The labor movement was often
identified as a communist movement in the public statements made by the state. It
was thus easy to justify repression against unions. Furthermore, the new Labor
Dispute Law in 1980 prohibited any third-party intervention in labor disputes. It was
originally designed to block intervention by non-labor groups such as church or
student activists, but it also prohibited the Federation of Korean Trade Union (FKTU)
and industrial unions to take part in labor disputes. By restricting third-party
intervention, the state monopolized the mediation process in negotiations between
capital and labor. The state’s approval was required for initiating collective
bargaining by the law in 1980. That is, labor unions were prohibited not only from
striking, but even from negotiating independently (Haggard and Moon 1990:223-
225).
However, in return partly for its repressive labor policy, the state protected job
security. The Labor Standards Act, for example, regulated the permissible types,
durations, and conditions for termination of labor contracts rather than leaving such
contracts between employers and employee. Under the act, employers could dismiss
regular employees only with “just cause.” However, in practice, dismissal was rarely
implemented because the definitions of “just cause” were highly restrictive (Yang and
Moon 2005:77). As a result, Korea was one of highest ranked countries among
21
OECD members regarding the strictness of employment protection (Yang and Moon
2005:78).
The state’s repression of collective actions by workers accompanied with
protective labor regulations, contributed to low inequality; the regulation of the rise of
wages provided the condition in which employers could hire more workers; the
protective law contributed to the increase in the number of regular industrial workers
by prohibiting free dismissal from employers.
The expansion of basic education
Ample labor was requisite to the export-oriented strategy relying on cheap
labor. Besides, the change in the state’s industrial strategy from light industry to
heavy and chemical industry (HCI) in 1972 required educated laborers who could
deal with complex machines. The state therefore emphasized the value of human
capital and education in order to meet the need. The state implanted the idea that all
we can rely on is only human resource (capital) in a country with no natural
resources. Mass education was, on the other hand, a by-product of land reform in
1950s. Land reform destroyed yangban, the land-based ruling elite class. At the same
time, land reform decreased the value of land as a tool for accumulating wealth and
power as well. Instead, the value of education increased as an alternative strategy to
upward mobility. The state’s push, combined with the effects of land reform, resulted
in a rapid increase in the Korean education level.
However, we cannot assume that the expansion of education always
contributes to a decline in inequality. As a matter of fact, education can either
22
increase or reduce income inequality. It has two effects together: a composition effect
and a compression one. The composition effect refers to the impact of education on
increasing income (mostly, wage) inequality. It occurs when the more-educated group
moves into higher-paying jobs. By contrast, the compression effect means that
expansion of education decreases income inequality. This happens when the scarcity
rents by education are eroded as the supply of the educated workers increases
(Birdsall, Ross, and Sabot 1997: 104).
Whether income inequality rises or falls depends on which effect is bigger.
According to Birdsall, Ross, and Sabot’s (1997) study, in Korea, the compression
effect turned out to be the dominant one. The educational composition of the Korean
labor force changed noticeably from 1976 to 1985: The proportion of high school and
post-secondary graduates in the wage labor force rose sharply and the proportion of
workers with elementary school or less was reduced to only 8 percent. Along with the
compositional change of education, the wage premium of highly-educated workers
was reduced. In 1976 Korean workers with high school education earned 47 percent
more than primary school graduates; by 1986 that premium had declined to 30
percent. Similarly, the premium earned by workers with higher education declined
from 97 to 66 percent.
In contrast, in Brazil, the composition effect dominated. For example, the
wage premium earned by workers leaving a university was 159 percent in 1976 and
151 percent in 1985 (see Table 2). The net effect of educational expansion in Brazil
over the decade was to increase the log variance of wages by roughly 4 percent, in
marked contrast to the 22 percent decline that resulted from educational expansion in
23
Korea (Birdsall, Ross, and Sabot 1997: 105-106). According to Birdsall, Ross, and
Sabot (1997:106), the composition effect appeared in Brazil because the absolute
increment of well-educated workers was too small to offset the premium of the highly
educated. Applying this logic to Korea, we infer that the compression effect in Korea
was due to the large-and-rapid educational expansion as the ample supply of the
educated labor force removed the premium.
However, educational expansion alone is not sufficient to reduce income
inequality, given that the wage premium by education in Korea began to rise since
1990s despite continuous expansion of education for all segments of the population.
In addition to educational expansion, abundant jobs thanks to rapid industrial growth
contributed to the low wage gap. Meanwhile, the growth of the capital-intensive
heavy and chemical industries (HCI) should have served to increase the wage
premium by educational achievement. Nevertheless it had been kept low due to the
state’s control of the labor market that prevented the rapid increase of the wage of the
highly educated. In sum, the state created the demand for labor (i.e. plenty of jobs) by
pursuing manufacture-based industrialization policy, which led to rapid economic
growth. It also produced an ample labor supply by expanding education and
restraining the rise of wages, which resulted in low income inequality. That is, the
state’s strong intervention in the labor market played a key role by increasing both the
labor supply and demand for labor in accomplishing the “growth and equity” during
the industrialization period.
24
3.2.3. The State’s Control in the Financial Market
It is certain that the success of rapid transition to an industrial country in
Korea contributed significantly to low income inequality through providing plenty of
job opportunities. How did Korea achieve such success in the labor market
performance while other regions (e.g. Latin American countries) failed? Different
consequences in developmental outcomes, according to Evans (1987), come from the
difference in the configuration of a triple alliance between states, local capital, and
multinational capital. Namely the outcomes depend on whose and what interests are
accomplished among three actors’ interests. In Latin America, for example, the states
were a critical actor, but the interests of private capital predominated (Evans 1987).
Transnational corporations also influenced no less than the state and local capital on
policies by using the interests of local private capital successfully to oppose or at least
to reshape policies that they found threatening (Evans 1987; Korzeniewicz and
Korzeniewicz 1992). The Korean state, in contrast, controlled both local and
multinational capital (Lim 1985; Lie 1998; Evans 1987; Kim 1997; Korzeniewicz and
Korzeniewicz 1992). In fact, capital groups have an attribute to pursue their own
profit. Schumpeter’s creative destruction describes that they change incessantly their
objectives to invest and institutions for their new profit sources (Korzeniewicz and
Moran 2005). Therefore, capitalist groups are often uncooperative in the state’s
developmental plan when particularly their new strategy does not fit the state’s plan.
In this case, a state should regulate such a capital’s diverse and uncooperative
investment in order to achieve coherently the state’s blueprint for industrial
development. The Korean state controlled successfully capital groups – not only
25
domestic but transnational capitalist groups, while the states in Latin America failed
to organize resolutely capitalist groups’ interest according to the state’s own plan.
How could the Korean state control both domestic and international capital?
The part of the power source was found in the fact that the Park regime was relatively
autonomous from particularistic economic interests (Cumings 1987: 73). The interest
of Park Chung Hee was not to protect particular interest groups. His aim was nation-
building itself. He stressed the imperative of national autonomy and ruled over the
country with jaju (self-reliance) philosophy. He said, “Succinctly speaking, jaju
means we should be the master of our own house (Lie 1998:82).” The state’s interest
in building a self-reliant industrial structure did not allow a direct investment by
foreign capital and multinational corporations. In the case that foreign capital can
invest directly in the local economy without any regulation, it is less likely that the
state can pursue its own goals because it is more difficult to regulate or induce foreign
capitalist groups to invest in the state’s selective industries than to pressure local
capital.
Despite such concern, however, the state had to rely on foreign capital in
industrializing the economy according to its plan, because of the lack of crucial
resources such as money, technology, and organization skill. For preventing
interruption by foreign capital in the developmental plan, the Korean state intervened
deeply in all transactions with foreign capitals (Lie 1998: 81). In particular, it
regulated multinational corporations and foreign capital. Domestic industrial capital
(particularly chaebols) could not autonomously gain access to foreign capital. They
26
relied on government-controlled credit institutions (Kim 1997; Lee 1997). In short,
“the state became the fundamental source of capital and credit,” states Lie (1998:82).
As one of the efficient ways for controlling the cheabol’s access to the foreign
capital, the state relied on foreign loans, rather than direct foreign investment. Some
research shows that the direct foreign investment is more likely to increase economic
inequality within countries (e.g. Bornschier, Chase-Dunn, and Rubinson 1978). The
difference in the effects of the direct foreign investment and the foreign loans on
inequality becomes clear by comparing Latin American and East Asian countries.
Many countries in Latin America relied on the direct foreign investment. Prior to the
emergence of an authoritarian state, these societies had been already penetrated by
direct foreign investment. It made it difficult for the state to control and manage
industrial sectors, thereby making it hard to pursue consistently its own development
strategies. By contrast, in Korea, the authoritarian regime controlled financial
resources by accepting foreign loans instead of direct foreign investment. It was
possible because the state was already in command by the time foreign investors
began to take a real interest. As a result, the state was able to pursue consistently its
own goals and strategies, and at the same time, could autonomously determine from
the beginning what role transnational capital would play in the industrialization. The
state’s great power vis-à-vis the local capital also made the state a much more
attractive partner for multinational capital. Local capitalists who wanted foreign loans
needed government approval and repayment guarantees. Thus reliance on loan capital
contributed to expanding the state’s capacity in Korea rather than undercutting itself.
27
3.3. The Sources of the Strong Power of the State
3.3.1. Internal Factors: Land Reform and the Elimination of the Ruling
Elite Class
It is impossible for the state to implement strong regulations without
autonomy and strong capacity. What were sources of the autonomous power of the
Korean state? How was the state able to play such roles? Evans (1995) argues that the
ranges of roles that states can pursue are defined by structures. In other words,
developmental outcomes depend on whether these states’ roles fit the surrounding
social context and how well they are executed by political elites. In terms of social
context, land reform was a key social structure to provide the state with strong
capacity. Land reform removed existing ruling class (yangban), by destroying their
power base, land. It allowed the Korean state to have autonomous power to promote
industrialization and control over other competing groups who might hinder it.
Historical evidence shows that the agrarian elites tended to impede industrialization
because they have no incentive to invest economic surplus in manufacturing. They
are more likely to reproduce the status quo by preserving their source of privilege. In
this way, eliminating the landowner class contributed to industrialization (Lie 1998:
13-14). On the other hand, the continuance of landlords’ power often resisted
industrialization in some developing countries. The Philippines illustrates this case; in
1950, the beginning of the postcolonial era, the Filipino government did not accept
land reform recommended by the U.S. government. Without land reform, landholders
were able to hold their power as well as land. As a result, the strong landlord class
impeded the industrialization of the country by strongly influencing the choice of
28
export-oriented agriculture as a nation’s developmental strategy (Lie 1998:14). In
Argentina, likewise, landowners played a key role in the formation of the modern
economy after the 1860s. They challenged state policies promoting industrialization,
and as a result, hindered the growth of manufacturing (Korzeniewicz and
Korzeniewicz 1992: 84). The Korean state, however, was able to avoid such conflicts
in establishing developmental strategies as the ruling class was destroyed by land
reform. It empowered the state to plan developmental policies independently and
control various factors as well as foreign and domestic groups.
3.3.2. External sources: Japan, the Vietnam War and the United States
The formation and transformation of institutions within countries are affected
not only by internal sources but also by the external environment to which a country
is related (Korzeniewicz and Moran 2005). Rapid development in Korea was possible
thanks largely to the geopolitical conditions favoring Korea’s industrialization.
Notable are the transformation of the Japanese economic structure and the Vietnam
War. First, by the late 1960s, the move of Japan to higher value-added industries
provided Korea with the chance of industrialization through Japan’s old industries.
Despite the prevalence of anti-Japanese sentiments, for reasons of economy, Korea
made a normalization treaty with Japan in 1965 (Lie 1998:59). At that time, Japan
was well on its way to becoming an economic superpower; it had not only the capital
but the technological know-how as well. Reestablishing a diplomatic and economic
relationship with Japan incorporated the Korean economy into a Japanese economic
zone. In production, the development of Korean enterprises relied largely on Japanese
29
technology and the diffusion of Japanese skills. In particular, as Japanese
corporations turned to less-polluting and higher value-added production, Korean
companies were easily handed down the technology and machinery of low-
technology, pollution-production, and labor-intensive industries that Japanese
corporations had abandoned (Lie 1998:60). Korea had little competition for taking
over Japanese old industries and markets. In Latin American countries, the state did
not have as active efforts for industrialization as the Korean state. They were content
to promote agriculture and to export raw materials (Lie 1998:69). In Asia, only
Taiwan had capital, technology and industrializing efforts to develop those industries.
Other Asian countries had cheap labor, but their capability was insufficient to take on
the industries. The move of the footwear industry is an illustrative example. As
Japanese labor costs increase, Nike and other shoe manufacturers began to move to
Korea (Korzeniewicz 1994). Korea’s cost-effective mass production capability
(Gereffi and Korzeniewicz 1990:59), by combining high levels of technology and
skill and low labor cost, attracted shoe factories. Although the labor costs in Thailand
and other Southeast Asian countries were as low as that in Korea, but the technology
and skill to produce shoes were not as developed as those of Korea (Lie 1998:87).
Second, the Vietnam War also served significantly to promote Korea’s rapid
industrialization. The demand generated by the Vietnam War provided a crucial niche
for Korean light industrialization and export in the late 1960s. The U.S. war economy
generated demand for Korean light industrial goods, such as plywood, shoes, and
textiles. While exports to the United States accounted for 30 percent of the total in
1964, the figure increased to 37 percent in 1966 and 52 percent in 1968 (Lie
30
1998:64). Moreover, with involvement in the Vietnam War, the Park regime received
political and economical support from the U. S. government. The U.S. military
continued to be stationed in Korea and doubled aid after Korea sent its troops to
Vietnam. Park Chung Hee and many Korean officials were aware of economic
opportunities from wars in other regions, noticing the resurgence of the Japanese
economy in the early 1950s through the Korean War. A Korean told Newsweek
(February 7, 1966:37), “In the Korean War, the Japanese made the money while we
Koreans did the fighting… Now it is Korea’s turn.” (Lie 1998:63).
Along with the Vietnam War effect, the geopolitical environment served to
support Korea’s export-led development. During the Cold War, the U.S. recognized
Korea as a place of strategic importance. The U.S. expected Korea’s success to serve
as proof of the superiority of capitalism. Therefore, the U.S. supported Korea’s
export-led development not only as a material supplier but also as the biggest market
for Korea’s export. Furthermore, the U.S. did not pressure Korea to open up domestic
markets, and remove protective labor market policies. The Japanese industrial
transformation, the Vietnam War, and the U.S.’s support integrated the Korean
economy into the expanding U.S. and Japanese economic spheres, providing
favorable environment for the Korean state’s export-oriented developmental strategy.
This resulted in strengthening the capacity of the developmental state as it led
successfully the transformation of the Korean economy into the export-led economy.
3.4. Linking the Strong State with Inequality in the Developmental Era
31
Korea showed the “growth with equity” pattern during the developmental era.
This was possible through the control of a strong developmental state over capital and
labor. Land reform served as the social condition to allow the state to have such
power by removing the land-based ruling (or capital) class who were more likely to
resist the innovative industrialization of the state. In addition, in the tense situation of
the confrontation with North Korea, the strict anti-Communist policy of the Park
Chung Hee military government justified the state’s strong control by using the
metaphor of nationalism. Based on such social conditions, to begin with, the Korean
state controlled banks; it nationalized commercial banks and fully subordinated their
lending decisions to developmental strategy (Shin and Chang 2003:13). The state
designated strategic industries and selected companies or business groups to
undertake the task of building these new industries and provide them with subsidies
and protections. Besides, the state did not allow free access of local companies to
foreign capital. Although Korea heavily imported foreign capitals and technologies,
the state limited the influx of foreign direct investment (FDI). It was proved that the
share of FDI to gross fixed capital formation in Korea remained the lowest among the
East Asian NICs with just over 1 percent during 1970-90, while Korea’s reliance on
foreign debt was the highest among them (Shin and Chang 2003:12). It meant, on the
other hand, that the Korean state prevented free investment of foreign capital in the
Korean economy.
With its autonomous power, the Korean state undertook economically
independent nation-building. Since 1961, the Park military regime established
national plans for economic growth, and powerfully carried it out to make up for its
32
lack of legitimacy. As a principal developmental strategy, the state chose an export-
oriented policy. Given the weak competitive power of the local enterprises in the
initial stage, the state protected the domestic economy from foreign capital and
competition with foreign goods; increased the productivity by expanding education
widely; and guaranteed the continuing high profit rate of local capital by regulating
the rapid increase of wages through prohibiting workers from unionizing. By way of
compensating for such repression, the state employed the protective labor market
policy that prohibited dismissal without “just cause.” It consolidated job security. The
export-oriented policy contributed to produce abundant jobs to absorb most of rising
urban workers in manufacturing industries. This condition affected the compression
effect of education that lowered a wage premium for education. In addition, as a by-
product of the state’s labor policy, the Korean labor market of that time was not
segmented by firm size in terms of wage level. Workers in the same kind of
occupation or industry earned similar wage levels. Besides, wage gaps by occupation
and industry were relatively low. This mechanism explains the low income inequality
during the high growth period in Korea.
Meanwhile, we need to consider the situation of the world economy during
that time. During the Cold War, for geopolitical reasons, the United States supported
the growth of the Korean economy by serving as a market for Korea’s exports as well
as by tacitly approving Korea’s protective trade policy. Japan’s ascendance provided
a niche for Korea. Korea was handed over not only technology but markets for export
from Japan. Korea did not face severe competition with other developing countries in
occupying the industries abandoned by Japan. The Vietnam War served to promote
33
dramatically Korea’s exports. Low competition in export also played a significant
role in Korea’s rapid growth.
Given Korea’s concentration on heavy and chemical industries in the 1970s
and information technology in the 1980s, Korea’s rival in export would have been
developed countries. But the rich countries were struggling with rising labor costs.
There were, besides, few developing countries that participated fully in the world
export market with the advantage of lower labor cost.
In sum, the rapid growth in exports expanded significantly the demand for
labor, and the state met the increasing demand by producing ample labor supply
through educational expansion and urbanization. In addition, the state removed job
insecurity with job-protective labor laws. Those mechanisms resulted in superior
labor market performance (Cortázar, Lustig, and Sabot 1998:193-199), which was a
key factor in lowering income inequality in the developmental era.
34
Chapter 4: The 1997 IMF Financial Crisis: Economic
Liberalization and Increasing Income Inequality, 1993-2004
4.1. The Impact of the 1997 IMF Crisis on Income Inequality and the
Labor Market
4.1.1. Uneven Impacts
Most studies on the social impact of the Korean financial crisis agree that the
country’s income distribution deteriorated after the 1997 IMF financial crisis. Korea’s
Gini coefficient was relatively lower than that in most other developing countries
until 1997, but the Gini coefficient of nationwide households soared to 0.352 in 2000
and remained high at 0.344 in 2004 (See Figure 1). Consistently, the relative income
shares of decile income groups appeared to be more unequal. Cheong’s (2001) study
finds that the income shares of the lower four groups have decreased to a greater
extent after rather than before the IMF financial crisis, while the income share of the
richest group has increased. The income shares of the middle-income groups from the
fourth to the seventh deciles significantly declined both in absolute and relative terms
compared to the rich (the top two deciles) – from 0.97 before the crisis to 0.77 in the
first quarter of 1999. The income share of the middle groups relative to the poorest
two declies increased by over 10 percent after the crisis (Cheong 2001:45). The study
by Haggard (2000) supports these uneven consequences of the crisis. According to
Haggard, the fall in income in Korea was most serious for the poorest 20 percent (-
23.7 percent vs. -2.5 for the top 10 percent) (Haggard 2000:197). He insists,
The crisis affected precisely those emergent, transitional, weakly organized
‘starving classes’ to which growth-with-equity model had historically granted
35
social mobility, pushing them back, at least temporarily, into the urban
informal sector or the countryside.(Haggard 2000:198)
4.1.2. Increasing Rates of Unemployment and Underemployment
Rising inequality after the Korean financial crisis was closely associated with
rapid increases in unemployment and underemployment. Unemployment was most
conspicuous (see Figure 2). Normally below three percent in the early 1990s, the
unemployment rate climbed to 6.8 percent in 1998. This is a record high for Korea.
Moreover, unemployment was unevenly distributed. Women, the uneducated, and
workers in manufacturing or construction industries were more likely to be dismissed
or less likely to secure a job (See Table 3 and Table 4). The rate, furthermore, does
not include hundreds of thousands of unemployed people who had given up on
finding jobs. One estimate in 2001 showed that as many as 490,000 individuals had
given up on looking for works (Kim 2004). Leading to this figure is the fact that the
labor force participation rate declined from 62 percent in 1996 to 60 percent in 2000
(Jang 2003:55). If that number were included, the unemployment rate in Korea would
have risen by at least 2 percent (Kim 2004:223).
As of 2005, the unemployment rate has gradually decreased to 3.7 percent, but
the figure is still higher than its pre-crisis level (See Figure 4). The decline in the
unemployment rate was possible by the sharply increasing employment of temporary
and daily jobs, not by the increase in regular jobs. The official unemployment rate
does not include millions of day laborers whose jobs often require their services for
less than a month. Table 5 shows that the proportion of non-standard or irregular
workers exceeded that of regular workers in early 1999. This proportion of non-
36
standard workers in the total labor force is the highest among the member countries of
the Organization for Economic Cooperation and Development (OECD). Moreover,
non-standard workers received less pay than regular workers for doing the same type
of works. To illustrate, in 2000, irregular workers, including temporary and daily-hire
workers, received less than half of the hourly wages of regular workers (8,225 Won
for regular workers vs. 4,031 Won for non-irregular workers; see Table 6). Kim’s
(2004:224) study also shows that non-standard workers received only 52.9 percent of
what regular workers earned for doing the same task in the end of 2002.
4.1.3. Job Security at Risk
The rising unemployment and underemployment rates are, if anything,
consequences of the increasing “flexibility” of the Korean labor market. Since the
early 1990s, Korea started to make the labor market flexible in the sense that it had
the highest ratios of temporary workers in the workforce among the OECD countries
(Shin and Chang 2003:56). The financial crisis dramatically accelerated the speed and
expanded the extent of its flexibility. Following an agreement with the IMF, the
Korean National Assembly passed a bill that legalized layoffs and the right to use
“dispatch labor” to substitute workers during union strikes. It also allowed the
extension of daily work-times and prohibited wild-cat strikes. The Korean unions had
strongly resisted this practice before 1997, but the financial crisis compelled the labor
class to settle the removal of job-protection institutions. With the excuse that “the
flexible labor market is necessary for the nation’s economy to get out of the crisis and
further survive in severe global competition,” the state urged labor to accept the
37
changes of labor market policy. Meanwhile, the flexible labor market in Korea is
mainly attributed to the liberalization policy of the state, since the early 1990s and the
1997 financial crisis (Kim 2004; Shin and Chang 2003). Given that the rising
flexibility of the labor market that produced high unemployment and
underemployment rates is most detrimental in income distribution in the post-1997
Korea, the analysis on the causes of flexible labor – the liberalization of the Korean
economy and the 1997 IMF financial crisis – can shed light on understanding the
increasing income inequality in the post-1997 Korea.
4.2. The Causes of the Crisis: Financial Liberalization and Too Little
Regulation of the State
The IMF financial crisis in 1997 occurred due to the sudden withdrawal of
capital by foreign investors who were threatened by the financial crisis in Thailand in
July 1997 (Chang, Palma, and Whittaker 2001). Internally, Korea had no significant
slump in the economy until the crisis. Macroeconomic indicators had been “normal”-
exports were on the rise; the current balance of payment was improving; prices had
been stable, and the GNP growth rate was projected to be around 6 percent (Kim
2004: 221). Nevertheless, why did the 1997 IMF financial crisis occur in Korea?
The immediate cause of the Korean financial crisis was the rapidly increasing
vulnerability of the economy to foreign capital. This was a consequence of financial
liberalization. In the developmental era, Korean lending decisions were ultimately
made by the state, not by the financial institutions. However, from the early 1990s,
the Korean government started relaxing its control over the financial sector
38
significantly and, under the Kim Young Sam government, which came to power in
1993, the liberalization process was greatly accelerated. Financial liberalization
allowed foreign capital access to the domestic financial market. At the same time, it
permitted the local capitals to raise finance on foreign markets. Table 7 charts the
evolution of this process in detail.
As a part of the financial liberalization, the state licensed nine new merchant
banks in 1994 and 15 more in July 1996, in addition to the six existing ones before
the 1993 liberalization (Wade 2000:154). Since then, borrowing by financial
institutions and private corporations dramatically increased, which resulted in the
rapid build-up of foreign debt in some years before the crisis. Especially alarming
was the rapid increase in short-term debt. During the period between 1993 and 1996,
short-term debt held by financial institutions increased from $11.4 billion to $39.0
billion, while the increase for private enterprises was from $7.8 billion to $22.0
billion (You and Lee 2001:11). Throughout 1997, the short-term foreign debt reached
to roughly 65 percent of total debt (Wade 2000:154). The rapid increase of short-term
borrowing was due to its much lower transaction costs than those for long-term
borrowing. Adding to the short-term debt, the total foreign debt at the end of 1997
stood at an astonishingly high level of $120.8 billion, which is almost four times the
total foreign debt at the end of 1990, $31.7 billion (See Table 8).
This demonstrates the Korean economy’s deep reliance on foreign capital that
can be freely withdrawn. The dependence made the Korean economy vulnerable to
world financial movements. The fact that the financial crisis in Korea was the
subsequent consequence of the South East Asian crises in July 1997 reflected that the
39
crisis was related to the global movement of finance. The confidence in all Asian
economies was shaken by the “domino” effect created by the South East Asian crisis.
The Korean financial institutions that invested in the region lost at least $2 billion
between July (the beginning of the Thai crisis) and November (the beginning of the
Korean crisis) (Shin and Chang 2003:38-39). Some Japanese banks that heavily
invested in the region withdrew loans from Korean debtors in order to improve their
balance sheets. The situation caused growing distrust of the Korean economy among
foreign investors, and thereby a serious current account deficit and high-profile
corporate bankruptcies. This shows how vulnerable the local economy became to
global capital since the financial liberalization in 1993.
At a more fundamental level, accounting for the causes of the IMF financial
crisis can be largely divided into two perspectives: neoliberal vs. statist perspectives
(Hart-Landsberg and Burkett 2001), or “too much state intervention” vs. “too little
regulation”(Weiss 1999). The former groups view the crisis as a demonstration of the
folly of state intervention in the economy. Despite having praised Korea “miracle
Asia” for its free-market policies,
5
neoliberals (e.g. Krugman 1998) quickly blamed
the crisis on “crony capitalism,” what Wade (2000) calls a “gestalt shift.” Neoliberal
economists, including those in the IMF, argue that the IMF financial crisis in Korea
occurred due to misguided and corrupt investment and lending decisions produced by
state industrial policies (Hart-Landsberg and Burkett 2001:403). This brought down
5
Neoliberal economists viewed that the success of the East Asian countries was possible due to the
“magic of the market.” For example, Balassa and Williamson (1987) argued, “South Korea and other
newly industrializing countries (NICs) in East Asia had outperformed the Latin American NICs and
India because the scope of administrative controls was much more limited in the four East Asian NICs
than in Latin America and, even more, India. … Capital markets were freer in the East Asian NICs
than in Latin America and India.”(Balassa and Williamson 1987:14-15, recited from Hart-Landsberg
and Burkett (2001:405)).
40
the Korean economy by distorting market processes. Neoliberal economists argue that
if states had not intervened, there would be fewer distortions blocking efficient
resource allocation (Weiss 1999:320). The solutions they suggest for the recovery of
the Korean economy are the following: the abandonment of the state-led industrial
policies; corporate downsizing including the dissolution of chaebol; more rigorous
and open accounting practices; and a greater role for foreign capital in shaping and
disciplining economic activity (Hart-Landsberg and Burkett 2001:404).
By contrast, the latter, statist (e.g. Stiglitz 2003), groups argue that the state’s
underregulation rather than overregulation helped to create the1997 financial crisis.
They underscore the success of past governments’ industrial policies based on their
developmental plans. According to this view, the main causes of the crisis were the
opening of the capital account and the laxity of regulatory control over capital flows.
Their solution for economic recovery is, therefore, the reregulation of the financial
system and the reimposition of an industrial policy (Hart-Landsberg and Burkett
2001:404). In the statist view, if the state were a stronger regulator, preventing
dangerous inflows, there would have been no crisis (Weiss 1999: 320).
Both perspectives have shortcomings. Neoliberal economists do not explain
why the crisis occurred after the economic liberalization. If it is true that the
intervention of the state in the economy with its industrial policy was a causal
problem, why did not such a crisis happen at the time of the strong intervention by the
state? Statists have a far better grasp of the Korea experience than did neoliberals. But
their work is also not free from criticism. Statists do not account in detail for why the
41
state, that was once strong, lost its capacity to control over capital. Is the weakness of
the state an endogenous consequence? Otherwise is it from external factors? Or both?
4.3. The Decline of the State’s Capacity
The failure of neoliberal groups to account for the Korean case (i.e., the rapid
growth under the strong intervention of the state in the economy and the economic
crisis after the liberalization) arises from their neglect in considering the roles of the
state in the economy. The state may distort the market as neoliberalists assume, but at
the same time, can play a significant role in the growth of the economy as shown in
the Korean case. Statists have provided us with critical insights into the role of the
state in economic development, but they do not investigate how the balance of power
between the state vis-à-vis other actors in society may change as a result of economic
development (Kim 1997:14). This section examines why the Korean state lost its
power vis-à-vis capital groups during the period of liberalization.
4.3.1. External Factors: the Changed Context of the World Economy
The decline of the state’s capacity has both external and internal factors.
Externally, the changing situations of the world-market economy play a role in the
loss of controlling power of the Korean state. The late 1990s provided a different
world-economy circumstance to Korea than before. The rising global competition for
exports led to a rapid decline in export earnings. Notable here is the emergence of
Southeast Asian countries and China as competitor nations for exports. Their low
42
labor costs have more advantage in price competition than Korea. This resulted in a
serious trade balance deficit. This trade deficit threatened the Korean economy. Faced
with declining profits, chaebols moved production overseas not only for low-labor
cost, but for expanding export market. The now-defunct Daewoo Group’s popular
slogan, “Sae-gye-gyong-young,”(global management) is a typical example of the
chaebol’s strategy – global expansion of production and market. The investment by
the Daewoo Group was not limited to Asia; it spread out to European countries such
as Poland and Uzbekistan. As a result, by the mid-1990s, Korea became one of the
largest foreign investors in a number of developing and transition economies (Shin
and Chang 2003:77-78). Such an attempt to capture new market opportunities needs
abundant capital. Thus, Chaebols demanded the liberalization of the financial market
for easier access to cheaper foreign money. The state fully opened the financial
market, as the Korean state had changed its attitude to chaebols from control to
support with the belief that “the competitive power of chaebols reflects the very
competitive power of the nation.”
On the other hand, there was pressure to remove market-protection policies
from the United States and other advanced countries. From the late 1980s,
recognizing Korea as a now-developed country, industrial nations started claiming
that Korea should become more ‘responsible’ by abandoning all those ‘unfair’
protections in all the markets including the financial market (Shin and Chang
2003:70). Especially, in the view of OECD countries of which the Kim Young Sam
government wanted to be a member, a mature and developed economy was governed
by market forces and the desirable type of a state was a relatively disengaged,
43
economically liberal state (Henderson, Hulme, Phillips, and Kim 2002:17). Thus, The
Kim government opened up various markets including the financial market for being
a member of OECD.
4.3.2. Internal Factors: Growing Power of Chaebol and Neo-
liberalization of Technocrats
Internally, the decline of the state’s power is a result of economic
development itself. Rapid economic growth in Korea transformed the state-centered
institutional configuration; it accompanied the growing power of chaebols. The
chaebols that had grown in the protection of the state came to have confidence that
they could now stand on their own, as they have succeeded in the exclusive domains
of the most advanced economies such as memory chips and automobiles. The
protection by the state became unnecessary for chaebols. By the mid 1990s, the
chaebols aggressively demanded the withdrawal of the state from economic
management (Shin and Chang 2003:69). In its report in 1997, for instance, the
Federation of Korean Industries (FKI), the club of the chaebols, called for a radical
scale-down of the state including the abolition of all government ministries except for
Defense and Foreign Affairs and demanded the consequent reduction of government
bureaucracy by 90 percent (Shin and Chang 2003:69).
The decay of the developmental state is also closely associated with the
increasing conversion of the intellectual elite, especially bureaucratic elite, to neo-
liberalism. As Korea connected closely with the United States in politics and the
economy, the number of elite bureaucrats and academics who had a masters or
44
doctoral degree in economics from the United States increased. Increasing Korea’s
trade with America and the other Western countries amplified the value of American
academic degrees and work experiences in the United States. As a consequence, the
so-called ATKEs (American-trained Korean economists) (Amsden 1991) increasingly
dominated not only an academic world but also a bureaucratic field in Korea. The
majority of technocrats were the ATKEs. Because of their study in the U.S., the
ATKEs easily accepted neoliberalism in economics and actively pursued neoliberal
economic policy.
6
In other words, the technocrats increasingly believed the virtues of
the free market and saw developmentalism as a ‘backward’ and ‘mistaken’ ideology
(Shin and Chang 2003:68). The Economic Planning Board (EPB) increasingly
consisted of neoliberal ATKEs. The EPB, the symbol of developmentalism, had
become the home of neoliberalism in the Korean state. Like FKI, technocrats in the
EPB also suggested a retrenchment of the state and especially the abolishment of their
own ministry. They viewed planning as no longer feasible due to the increasing
complexity of the economy (Shin and Chang 2003:68).
Furthermore, the developmental strategy encouraging education produced a
well-educated middle class that pursued democracy and possessed antipathy for the
authoritarian military government and thereby contributed to the formation of civil
society. The suppression of labor, combined with the rapid growth of manufacturing
industries, moreover, brought strong unions.
6
Babb’s (2003) study of Mexico shows the same tendency. The increasing moves of capital and goods
between Mexico and the United States enhanced demand for technocrats who knew the U.S. economy
well. The new American-trained Mexican technocrats disseminated neoliberal ideology in Mexico
where nationalistic economics had dominated and retrenched the role of the Mexican state in economic
development.
45
These changes considerably weakened the capacity of the state. The state-led
industrial policy started to be dismantled since the early 1990s. The hallmark of the
end of developmentalism in Korea was the termination of five-year economic
development plan along with the abolishment of the Economic Planning Board in
1993. This demise of the developmental state brought about the mismanagement of
the financial market that led the 1997 IMF crisis due to incapacity of the state to
control capital’s reckless access to financial resources (Shin and Chang 2003:70).
4.4. The Impact of the Institutional Transformation on the Labor Market
and Inequality
One may view the rising inequality after 1997 as a passing phenomenon
caused by the shock of the crisis. That is, one might expect that income distribution
would return to prior levels sooner or later as the impact of the shock disappeared and
there was an economic recovery. This is not the case, however. Despite the fact that
the Korean state completely repaid its IMF loan in 1999, and the Korean economy
recovered within a few years of 1997, inequality has remained much higher than
before 1997, with a Gini coefficient above 3.0.
Why did inequality not fall to its previous level? To answer this question, one
must address the structural changes keeping inequality high. The process of
liberalizing the Korean economy and the IMF financial crisis itself transformed the
institutional configurations in Korea. For example, economic liberalization and the
financial crisis increased the institutional capacity of foreign capital, by rapidly
denationalizing domestic capital (Hart-Landsberg and Burkett 2001: 414-416). First,
46
the Korean auto industry was handed over to foreign capital. The Daewoo Motor
Company, Korea’s second largest car company, was acquired by General Motors
(GM). The Renault Company of France bought Samsung Motors. Denationalization
occurred in large scale in other manufacturing sectors as well. Sweden’s Volvo
purchased Samsung’s construction equipment operation in 1998, and Philips
Electronics acquired a 50 percent stake in LG-LCD in 1999.
7
As the Korean economy has been increasingly denationalized, labor has faced
a crisis in its job security. This is evident in efforts to force unions to accept mass
layoffs by foreign managers. For example, in November 2000 as a condition for
providing fresh loans necessary for the company’s survival, Daewoo Motor’s
creditors demanded that “the carmaker’s union accepted a plan to cut wages and
layoff as many as 3,500 workers, or one-third of its domestic work force.”
8
The union
did not accept this suggestion, and thereby the creditors refused loans. This result
damaged the union. As Hart-Landberg and Burkett (2001:421) observed, “the
government, domestic creditors, and the international business press all blamed
Daewoo workers for their unwillingness to shoulder their rightful share of the costs of
a painful but unavoidable restructuring.” This case illustrates the increasing power of
foreign capital on the Korean labor market. Given the large number of layoffs and
that those whose wages were reduced by foreign managers were largely uneducated
and unskilled workers, it can be inferred that the denationalization of the Korean
7
The above-mentioned cases of denationalization are cited from Hart-Landsberg and Burkett
(2001:415-416).
8
Samuel Len, “Automaker on the Brink of Failure,” New York Times, November 7, 2000, recited from
Hart-Landsberg and Burkett (2001:46)
47
economy was more likely to affect income distribution negatively by decreasing job
security in the new “flexible labor market.”
On the other hand, rising pressures from global competition gave chaebols
strength, while weakened the capacity of the state. Shin and Chang (2003:78) argue,
“Globalization gave chaebols an important advantage by opening up new, ‘emerging’
markets, entry into which carried high risk and therefore was suited more to the
chaebols with greater risk-bearing capability than to single-product firms.” Another
scholar also agrees the rising power of chaebols since 1990s. According to You and
Lee, “The winding down of industrial policy was also mishandled because of
chaebol’s influence on the government”(You and Lee 2000:89; emphasis added).
That is, they said the chaebol’s power over the state is one of the main causes of the
crisis. For example, chaebols’ power over the state can be seen in the Samsung
Automobile case. The Kim Young Sam government allowed Samsung to enter the
auto industry, reversing its earlier decision that prohibited its entry. In the view of the
state, Korea already had sufficient production of cars for domestic and the world
markets. The state might think that it would be more important to support existing
auto companies such as the Hyundai motor company to increase car exports to the
world market. Besides, building a new car company requires high levels of
capitalization, which often means a high reliance on foreign capital. That is, the state
viewed Samsung’s entry into the car industry as an inefficient project accompanying
high risk. Despite the negative view, however, the state approved Samsung’s
expansion to the car industry agreeing to the biggest cheabol’s demand. The deal
48
resulted in exacerbating over-capacity in the economy (Hart-Landsberg and Burkett
2001; You and Lee 2000).
The flexibility of the labor market has a similar story. The Kim Dae-Jung
government that started from 1998 accepted the chaebol’s demand to remove a rigid
protection policy in the labor market. The pro-chaebol policy, like the easy layoffs
and the use of “dispatch” labor, directly and indirectly affected the level of income
inequality. Directly, and most decisively regarding inequality, it brought about
unprecedented unemployment and underemployment and dramatically increased non-
regular workers, through the “flexible” labor market institution, as mentioned above.
Indirectly, it contributed to the changes in the effects of education. As examined in
the previous section and as most scholars agree, educational expansion substantially
contributed to a reduction of inequality in Korea (Kim and Topel 1995; Lee and Kim
1997; Birdsall, Ross and Sabot 1997). However, in the 1990s, the equalizing impact
(i.e., compression effect) of mass education no longer seemed to apply. Rather, the
composition effect became more notable. In particular, college premiums started
rising in the early 1990s, despite the steady increase of the ratio of college graduates
among the labor force from 6.7 percent in 1980 to 12.5 percent in 1988, 17.5 percent
in 1993, and up to 23.4 percent in 1998. You and Lee (2001:15) state, “Although the
rate of expansion of college education has remained as high since the early 1990s, it
has not led to an improvement of educational wage differential.” The rise of the
college premium is associated with an increasing demand for highly educated labor.
There are some indications that the demand for the highly educated has increased
since 1992. During the period from 1992 to 1996, the increase in employment in
49
finance, insurance, real estate, and business services amounted to 30.2 percent of the
total employment increase during the same period. This compares to only 18.4
percent during the period from 1988 to 1992 (You and Lee 2001:15).
What changed the compression effect of education to the composition effect?
First, the change was due to the structural change in Korean industry. Many
manufacturing industries have been going overseas for cheaper labor, while many
finance-related industries have grown significantly due to financial liberalization. In
the past, the period of the state’s control of financial resources, domestic capital,
especially chaebol, did not need to establish financial companies because they were
not able to attract foreign capital without the state’s approval. However, once
chaebols were able to freely borrow foreign money after the liberalization of finance,
individual firms also needed to restructure in order to attract and manage foreign
capital. It increased the financial industry in Korea. As the financial sector became
increasingly important, the wage gap between the financial sector and the non-
financial sector became larger. The expansion of the financial industry increased the
premium of a college education that was required to enter that industry. As a result,
after the liberalization, the impact of higher education has been to increase income
inequality.
50
Chapter 5: Conclusion
Between 1960 and 1990, the Korean economy grew rapidly, retaining relative
equity in income. Through both internal and external factors, the autonomous power
of the state played a key role in achieving this “growth with equity.” Internally, land
reform contributed considerably to the state’s strong capacity. The Korean state was
free from undue pressure from the ruling class as land reform removed the basis of
the traditional elite’s power. In addition, the Cold War context allowed the Korean
state to avoid external coercion from core countries. In the 1960s and 1970s, Korea
was considered as a bulwark against international communism in East Asia. This
geopolitical situation led the United States and Japan to support the Korean economy
through economic aid and transfers of technology. Confrontations with North Korea
strengthened the controlling power of the authoritarian military government over
society. Such internal and external circumstances strengthened the Korean state’s
relative autonomy, and allowed the government to achieve both growth and relative
equality.
In the liberalization era since 1990, Korea experienced dramatic institutional
changes. The capacity of the state to regulate, especially, chaebols and foreign capital
weakened. Before the liberalization, the state was able to control access to financial
resources for domestic capital and regulate international investment in order to pursue
specific developmental goals. However, by allowing financial liberalization, the state
gradually lost its leverage in directing development. Instead, the influential power of
chaebols and foreign capital, including IMF to intervene in industrial policy-making,
51
became larger. This is particularly evident in reforms for “labor market flexibility.”
Chaebols argued that strict labor market institutions distorted the market and lessened
their efficiency. For the same reason, foreign-capital investors and IMF also urged the
flexible labor market as a condition for their investment.
The changes in institutional configurations were due largely to the changing
relation of the Korean economy to the world economy. Emerging rival exporting
countries drastically reduced Korea’s earnings from exports. The United States and
Japan started adopting an “economic” containment policy toward Korea as the Cold
War ended and the Korean economy continued to grow rapidly. Neoliberal ideology
as a “global standard” also served as a pressure on opening the Korean market. Such
external conditions were not the only cause of the weakening power of the state. The
internal transformations of the institutions intrinsic in the process of Korean
economic growth such as the growing power of chaebols and pressure for
democratization tended to reduce the capacity of the state, interplaying with the
external context.
The liberalization of financial markets was a product of the changed power
relationships between the state and both domestic and foreign capital. Financial
liberalization strengthened both local and foreign capital, by allowing easier access to
loans and/or direct investment by foreign capital. One result of this liberalization was
an increase in the foreign debt grew to an unsustainable level. And this situation
resulted in the 1997 IMF financial crisis. As a way of restoration, Korea handed over
many industries to foreign investors. Mass layoffs were allowed and many jobs were
52
lost as a condition for selling companies. Unions were forced to accept the easy-
layoffs policy by the state as well as chaebols and foreign capital.
Such flexibility of the labor market (as a product of the transformed power
relationships) including such deregulation for layoffs and “casualization of labor”
resulted in the sharp rise of the unemployment and underemployment rates, which
were the very causes affecting the largest part of the rise of inequality after the
financial crisis (Haggard 2000; Kim 2004; Yang and Moon 2005). Moreover, the
flexible labor market, combined with the decline of manufacturing jobs by shifting
production abroad, eroded the equalizing factors that existed during the “growth with
equity” era. Increased job insecurity – increased unemployment and
underemployment – removed the compression effect of education, and instead
strengthened the composition effect that widened income inequality. Democratization
and unionization made the state’s low-wage policy unattainable, and as a result,
widened wage gaps between large companies with unions and the small-and-medium-
sized firms without unions (Keum 2004). Moreover, the increasing competition in the
world economy and geopolitical changes – particularly the turn of the United States
and Japan from economic aid and supports to checks – no longer supported Korea’s
export strategy. These factors from the inside and the outside Korea contributed to the
rise of income inequality since 1997.
This study on income inequality in Korea argues that Kuznets’s hypothesis
must be revisited. First, Kuznets did not pay attention to the state’s role.
Modernization theorists, including Kuznets, were more likely to think that
intervention by a state was unnecessary for lowering inequality. However, in Korea’s
53
situation showed the opposite was true. Relatively low inequality in Korea during the
developmental era was, in fact, due largely to the state’s capacity to regulate domestic
and foreign capital. The state contributed to the “growth with equity” development
model, by creating an institutional environment that promoted an accumulation of
individual and collective human skills in production. After 1993, however, the state
lost its regulating power by removing EPB that had established developmental plan
and by opening fully the financial market. As a consequence, Korea faced a financial
crisis. This crisis deteriorated income distribution in Korea. While Kuznets made
little account of the role of a state, the Korean case emphasizes the importance of the
state’s capacity by showing how the loss of the state’s capacity affects the labor
market and income inequality. The neoliberal perspective – that a state’s intervention
is always problematic – is therefore disproved by this case. Second, Kuznets
overlooked the relations of a local economy to the world economy. There was
mounting competition and increasing pressure of the world economy behind the
changes of institutional configurations in Korea. It lowered the capacity of the state
and by the same token reinforced that of capital. Therefore, explanations of income
inequality should include the relations of a local economy to the world economy, as
well as the regulatory capacity of the state. The causes and dynamic patterns of
income inequality in Korea demonstrate the importance of such changes in the
institutional configuration as factors affecting inequality.
As an initial effort to link income inequality and state’s capacity, this study
has limitations as much as it serves as a stepping-stone for future research. First, this
study does not pay attention to civil society. In Korea, since 1990s, the power of civil
54
society has increased considerably. Perhaps civil society, instead of the state, may be
able to restrain chaebol’s activities that increase income inequality. Civil society’s
active participation might affect institutional configurations and institutions
themselves, thereby playing a role in lowering (or raising) income inequality. Second,
this study does not include the case of self-employment. Given its increasing
proportion, self-employment should be examined in future studies about income
inequality. Third, a comparative study is necessary for generalizing the conclusion of
this study. Is the relationship between income inequality and the capacity of the state
a “unique” case of Korea or a common pattern to be generalized? We can compare
the Korean case with countries that have gone through similar financial crises but had
different political context, for example, Mexico. Also, comparative study can provide
knowledge about how significant the rise of income inequality was after the IMF
financial crisis is. If income inequality in other countries increased more than that in
Korea after their financial crises, we can ask how the Korean government was able to
restrain the rise of income inequality, even though it did increase some after the IMF
financial crisis. Last, it is not clear what caused the decline of the state’s capacity.
Was the loss of the state’s capacity based on the failure of the policy choices by the
local state? Or, is it an inevitable process of neoliberal globalization? In terms of this
question, Malaysia may serve as a good case to be compared with Korea. Rejecting
IMF’s neoliberal reform policies, the Malaysian government has not given up on its
regulation of the financial market. How could the Malaysian state resist such external
pressures? How did maintaining the state’s regulatory power affect income inequality
in Malaysia?
55
Understood as an opening to the analysis of the relationships between state’s
capacity and income inequality, this paper has begun to unravel some parts of the
institutional arrangements related to changes in income inequality in Korea. This
comparative study across time in Korea indicates that income inequality depends
much on how the state and capital respond and reorganize the local institutions in the
face of increased competition in the world-economy due to neoliberal globalization.
This paper, at the same time, holds the argument that the state should have capacity to
regulate the economy ensure more equitable income distribution.
56
Table 1. Composition of Employed Persons by Industry, 1960-2000 (%)
Industry 1960 1970 1980 1990 2000
Agricultural, forestry &
fishery
Mining & manufacturing
SOC* & others
79.5
5.4
15.1
50.4
14.3
35.3
34.0
22.5
43.5
17.9
27.6
54.5
8.7
20.6
70.7
Source: Korean National Statistical Office, Social Indicators in Korea in Hong (2003:41)
* SOC (social overhead capital)
Table 2. Premium to Education Among Male Wage Labor
Brazil Korea
1976 1985 1976 1985
Premium to
primary schooling
0.488
(55.68)
0.449
(67.23)
0.176
(19.66)
0.092
(7.54)
Premium to
secondary schooling
0.958
(85.70)
0.886
(110.53)
0.473
(48.19)
0.296
(23.40)
Premium to
tertiary schooling
1.593
(100.22)
1.508
(127.40)
0.969
(71.48)
0.655
(42.06)
Source: Birdsall, Ross and Sabot (1997:107)
Table 3. Employment Changes by Gender and Education (thousand, %)
April 1996 April 1997 April 1998 96/97 (%) 97/98 (%)
Total 20,743 21,219 20,127 476 (2.3) -1,092 (-5.1)
Gender
Men
12,349
12,446
11,976
97 (0.8)
-470 (-3.8)
Women 8,395 8,773 8,151 378 (4.5) -622 (-7.1)
Education
Less HS degree 7,637 7,715 6,870 78 (1.2) -845 (-11.1)
HS degree 9,009 9,163 8,582 154 (1.6) -581 (-6.2)
College degree 4,098 4,341 4,675 243 (6.4) 334 (7.2)
Source: Korean National Statistical Office, The Economically Active Population Survey
57
Table 4. Employment Change by Industry and Occupation
April 1997/ April 1998 (% Change)
Industry
Agriculture / Fishery
216 (8.8)
Manufacturing -619 (-13.7)
Construction -392 (-19.3)
Utility/Trans./FIRE 11 (0.6)
Retail/Wholesale -234 (-4.0)
Services -66 (-1.5)
Occupation
Prof./Administration 15 (0.0)
Clerical -117 (-4.5)
Sales/ Service -103 (-2.1)
Operatives/Laborer -1,072 (-13.9)
Farmers/ Fishers 186 (7.9)
Source: Korean National Statistical Office, The Economically Active Population Survey
Table 5. Changes in Employment Structure (%)
1991 1994 1997 1999.3 2000 2001 2002 2003.3
Day
Laborers
15.7
14.3
14.1
17.4
17.6
16.2
17.2
14.9
Temporary
Workers*
28.7
27.8
31.6
33.2
34.5
34.6
34.5
34.7
Full-time
workers
55.5
57.9
54.3
49.4
47.9
49.2
48.4
50.4
Source: Korean National Statistical Office in Kim (2004:25)
Note: * Those employed from one month to less than a year
Table 6. Hourly Wages by Employment Type, 2000 (in won/hour)
Fixed-term contracts Contracts of an indefinite
period
Duration of
employment
contract
Less than
one year
One year or
longer
One year or
longer
Less than one
year
Average
Average 3,894 7,632 6,364 3,520 6,061
Regular -- 7,632 8,234 3,840 8,225
Temporary 4,165 -- 4,307 3,352 4,251
Daily-hire 3,766 -- 3,941 3,586 3,811
Source: Korean National Statistical Office (2000) in Yang and Moon (2005:84)
58
Table 7. Major Financial Liberalization Measures in Korea During the 1990s
1) Interest rates deregulation (on four states: 1991 to July 1997)
- By 1997, all lending and borrowing rates, except the demand deposit rates, were liberalized
2) More managerial autonomy to the banks and lower entry barriers to financial activities
- Freedom for banks to increase capital, to establish branches, and to determine dividends payments
(1994)
- Enlargement of business scopes for financial institutions (1993)
: continuous expansion of the securities business of deposit money
: freedom for banks and life insurance companies to sell government and public bonds over-the-
counter (1995)
: permission for the securities companies to handle foreign exchange business (1995)
- Abolition of the limits on the maximum maturities in loans and deposits of banks (1996)
3) Foreign exchange liberalization
- Adoption of the Market-Average Foreign Exchange Rate System (1990)
- Easing of the requirement for documentation providing the deal (i.e., non-financial) demand in
foreign exchange transactions (1991)
- Setting up of foreign currency call markets
- Revision of the Foreign Exchange Management Act (1991)
: changing the basis for regulation from a positive system to a negative system
- Introduction of ‘free won’ accounts for non-residents (1993)
- Allowance of partial Won settlements for the export or import of visible items (1993)
- Foreign Exchange Reform Plan (1994)
: a detailed schedule for the reform of the foreign exchange market structure
- A very significant relaxation of the Foreign Exchange Concentration System (1995)
4) Capital market opening
- Foreign investors are allowed to invest directly in Korea stock markets with ownership ceilings
(1992)
- Foreigners are allowed to purchase government and public bonds issued at international interest
rates (1994), equity-linked bonds issued by small-and-medium-sized firms (1994), non-
guaranteed long term bonds issued by small-and-medium-sized firms (Jan. 1997), and non-
guaranteed convertible bonds issued by large companies (Jan. 1997)
- Residents are allowed to invest in overseas securities via beneficiary certificates (1993)
- Abolition of the ceiling on the domestic institutional investors’ overseas portfolio investment
(1995)
- Foreign commercial loans are allowed without government approval as far as they meet the
guideline established in May 1995
- Private companies engaged in major infrastructure projects are allowed to borrow overseas to pay
for domestic construction cost (Jan. 1997)
- Liberalization of borrowings related to foreign direct investments related (Jan. 1997)
5) Policy loans & credit control
- A planned termination of all policy loans by 1997 is announced (1993)
: a step-wise reduction in policy loans to specific sectors (e.g., export industries and small and
medium-sized firms)
- Simplifying and slimming down of the controls on the share of bank’s loans to major
conglomerates in its total loans
Source: Ministry of Finance and Economy in You and Lee (2000:30)
59
Table 8. Korea’s Foreign Debt Profile, 1960-1997
Year Total debt
(millions of
dollars)
Share of short-
term debt (%)
Foreign debt to
GNP (%)
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
83
83
89
157
177
206
392
645
1,199
1,800
2,245
2,922
3,587
4,257
5,933
8,443
10,350
12,649
14,823
20,287
27,170
32,433
37,083
40,378
43,053
46,762
44,510
35,563
31,150
29,368
31,700
39,135
42,819
43,870
56,850
78,439
104,695
120,800
1.2
n.a
n.a
14.0
5.6
1.5
1.8
10.2
7.4
10.8
16.6
16.4
17.8
16.5
20.9
28.5
28.9
29.4
21.3
26.9
34.5
31.5
33.5
30.0
26.5
23.0
20.8
26.1
31.4
36.8
45.3
44.0
n.a.
43.7
n.a.
n.a.
58.3
n.a.
3.9
3.9
3.8
5.8
6.1
6.9
10.7
15.1
22.9
27.2
28.1
31.2
33.9
31.5
32.0
40.5
36.7
33.8
28.5
32.5
44.4
49.0
52.0
50.8
49.5
52.1
42.3
27.6
18.0
13.9
13.3
13.9
n.a.
12.7
14.2
16.1
20.2
25.5
Sources: Economic Planning Board and the Bank of Korea in Shin and Chang (2003:40)
60
Figure 1. Income Distribution in Korea, 1965-2004
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
G
i
n
i
I
n
d
e
x
nationwide
cities only
Sources of ‘Nationwide’: World Bank table by Deininger (1965-1988); Korean National Statistical
Office (1996-2004)
Note: The unit is the nationwide households; the income reported is gross income
Source of ‘Cities only’: Cities only: Korean National Statistical Office, Annual Report on the
Household Income and Expenditure Survey
Note: Data are for salary & wage earner’s households in all cities (73 cities)
Figure 2. The Growth Rate of GDP in Korea, 1971-2004
-10.0
-5.0
0.0
5.0
10.0
15.0
1971 1976 1981 1986 1991 1996 2001
T
h
e
G
r
o
w
t
h
R
a
t
e
o
f
G
D
P
Source: The Bank of Korea, Quarterly National Accounts
61
Figure 3. Per Capita Gross National Income (GNI) in Korea, 1981-2004
? 000
4 000
6 000
8 000
10 000
1? 000
14 000
16 000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 ?001 ?003 ?005
P
e
r
c
a
p
i
t
a
G
N
I
(
$
)
Source: The Bank of Korea, Quarterly National Accounts
Figure 4. Unemployment Rate in Korea, 1970-2005
0
1
2
3
4
5
6
7
8
1970 1975 1980 1985 1990 1995 2000 2005
P
e
r
c
e
n
t
o
f
P
o
p
u
l
a
t
i
o
n
Source: Korean National Statistical Office, The Economically Active Population Survey
62
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doc_794480084.pdf
Economic inequality (also described as the gap between rich and poor, income inequality, wealth disparity, or wealth and income differences) is the difference between individuals or populations in the distribution of their assets, wealth, or income.
ABSTRACT
Title of Thesis: INCOME INEQUALITY AND THE CAPACITY OF THE
STATE IN SOUTH KOREA, 1965-2004
Chang Won Lee, Master of Arts, 2006
Directed By: Professor Roberto Patricio Korzeniewicz
Department of Sociology
This paper focuses on the relationship between income inequality and state
capacity in South Korea. Korea achieved rapid economic growth accompanied by
equity from the 1960s to the mid 1990s. However, after the 1997 IMF financial crisis,
income inequality in Korea increased dramatically. This change in income inequality
is closely related to increases in unemployment and underemployment. I argue that
such failures in the labor market are attributed to the rapid decline of the state’s
capacity after financial liberalization in 1993. During the developmental era, the state
had been able to form institutions for low income inequality, due to its relative
autonomy from business owners. After the financial liberalization no such
autonomous capacity to build employment-protective institutions existed, as these
reforms increased the influence of domestic and international capital. Further, the
weakening of the state’s capacity also reflects changes in the relationship of the
Korean economy to the world system.
INCOME INEQUALITY AND THE CAPACITY OF THE STATE
IN SOUTH KOREA, 1965-2004
by
Chang Won Lee
Thesis submitted to the Faculty of the Graduate School of the
University of Maryland, College Park, in partial fulfillment
of the requirements for the degree of
Master of Arts
2006
Advisory Committee:
Professor Roberto Patricio Korzeniewicz, Chair
Professor John Iceland
Professor Dae Young Kim
© Copyright by
Chang Won Lee
2006
ii
Dedication
To my parents, Sang Jin Lee and Young Ja Choi
iii
Acknowledgements
I would like to thank my committee members, John Iceland and Dae Young
Kim, for their valuable comments and ideas throughout this project. I extend my
warm appreciation to my colleagues, in particular, my cohorts Guillermo Cantor,
Shyam KC, Nazneen Kane, and Kyle Nelson. Their help out of simple friendship
made me enjoy life in graduate school in America. I am also thankful to my friends
Kim Ricker and Tom Ricker, and my colleague, Kim Nguyen, for their editorial help.
My special appreciation goes to my committee chair, Patricio Korzeniewicz. He
inspired me with new zeal to study inequality and gave me many insights on how to
do this. My debts to him are huge.
Most of all, I want to thank my wife, Yun Jeong Yu, whose unfailing love,
pride, and support enabled me to survive this project. I cannot thank enough to my
father, Sang Jin Lee, and my mother, Young Ja Choi for their bottomless love and
devotion to their son. I dedicate this thesis to them.
iv
Table of Contents
Dedication..................................................................................................................... ii
Acknowledgements...................................................................................................... iii
Table of Contents......................................................................................................... iv
List of Tables ................................................................................................................ v
List of Figures .............................................................................................................. vi
Chapter 1: Introduction................................................................................................. 1
Chapter 2: Theoretical Discussion................................................................................ 6
2.1. Economic Growth and Income Inequality......................................................... 6
2.2. Relational View on Creative Destruction of Institutions................................... 8
2.3. Bringing the Capacity of the State Back In ..................................................... 10
2.4. Literature on Income Inequality in Korea........................................................ 14
Chapter 3: The Developmental Era: “Growth with Equity” and the Strong State,
1961-1992 ................................................................................................................... 16
3.1. U-Curvilinear Pattern of Income Inequality in the 1960s and the First Half of
1970s....................................................................................................................... 16
3.2. “Growth with Equity” and the Developmental State, the Late 1970s - 1992.. 17
3.2.1. Developing the Rural Sector..................................................................... 18
3.2.2. The State’s Intervention in the Labor Market........................................... 19
3.2.3. The State’s Control in the Financial Market............................................. 24
3.3. The Sources of the Strong Power of the State ................................................. 27
3.3.1. Internal Factors: Land Reform and the Elimination of the Ruling Elite
Class.................................................................................................................... 27
3.3.2. External sources: Japan, the Vietnam War and the United States ............ 28
3.4. Linking the Strong State with Inequality in the Developmental Era............... 30
Chapter 4: The 1997 IMF Financial Crisis: Economic Liberalization and Increasing
Income Inequality, 1993-2004.................................................................................... 34
4.1. The Impact of the 1997 IMF Crisis on Income Inequality and the Labor Market
................................................................................................................................. 34
4.1.1. Uneven Impacts ........................................................................................ 34
4.1.2. Increasing Rates of Unemployment and Underemployment .................... 35
4.1.3. Job Security at Risk .................................................................................. 36
4.2. The Causes of the Crisis: Financial Liberalization and Too Little Regulation of
the State................................................................................................................... 37
4.3. The Decline of the State’s Capacity................................................................. 41
4.3.1. External Factors: the Changed Context of the World Economy............... 41
4.3.2. Internal Factors: Growing Power of Chaebol and Neo- liberalization of
Technocrats ......................................................................................................... 43
4.4. The Impact of the Institutional Transformation on the Labor Market and
Inequality ................................................................................................................ 45
Chapter 5: Conclusion................................................................................................. 50
v
List of Tables
1. Composition of Employed Persons by Industry, 1960-2000 56
2. Premium to Education Among Male Wage Labor 56
3. Employment Changes by Gender and Education 56
4. Employment Changes by Industry and Occupation 57
5. Changes in Employment Structure 57
6. Hourly Wages by Employment Type, 2000 57
7. Major Financial Liberalization Measures in Korea During the 1990s 58
8. Korea’s Foreign Debt Profile, 1960-1997 59
vi
List of Figures
1. Income Distribution in Korea, 1965-2004 60
2. The Growth Rate of GDP in Korea, 1971-2004 60
3. Per Capita Gross National Income (GNI) in Korea, 1981-2004 61
4. Unemployment Rate in Korea, 1970-2005 61
1
Chapter 1: Introduction
Simon Kuznets’s classic article, “Economic Growth and Income Inequality”
in The American Economic Review in 1955, marked a new epoch in studying the
relationship between economic growth and income inequality. He hypothesized that
income inequality rises in the earlier phase of economic growth, but then starts to fall
after reaching the peak. This relationship was described as an inverted “U.” Since the
publication of Kuznets’s groundbreaking analysis, social scientists have paid
considerable attention to income inequality trends within countries, and the “Kuznets
curve” was treated like an “iron law” for two decades after it first appeared (Moran
2005).
The trend of income inequality in the era of development from the early 1960s
to the early 1990s
1
in South Korea (hereafter, Korea) appears to follow Kuznets’s
classic pattern, except for a brief decline during the earlier phase between 1965 and
1969 – income inequality increased after 1970, but then declined after a peak in 1976.
Korea’s low-income inequality, accompanied by high rate of economic growth from
the mid 1970s to the mid 1990s, has attracted attention, getting named “the East
Asian Miracle.”(World Bank 1993). Unlike the Kuznets’s hypothesis, however, the
decline was not the final trend in income inequality. In the aftermath of the 1997
1
I define the development era as the time when the developmental state leads the economy with its
plans for development. In 1961, the Economic Planning Board, a key organization in the state-led
development economy, was institutionalized by Park Chung Hee military government. One year after,
implementing the First Five-Year Economic Development Plan, the Economic Planning Board had
lasted the five-year plans to the Sixth Economic Development Plan in 1991. The development era
ended as Kim Young Sam administration that started in 1993 dissolved the Economic Planning Board.
Thus, I name the period when the Economic Planning Board played a key role (1961-1992) the
development era of Korea.
2
International Monetary Fund (IMF) financial crisis, income inequality in Korea rose
sharply. As of 2004, the Gini index reached 0.344 (See Figure 1). This was almost at
the same level of the early 1980s. One may interpret the rise of income inequality as
another transient phase during the aftermath of the 1997 IMF financial crisis, and
expect that income inequality would revert to its previous level as the Korean
economy recovers from the shock of the 1997 IMF financial crisis. However, eight
years after the 1997 IMF financial crisis, inequality has remained above the pre-1997
levels, even though the Korean economy had recovered (See Table 2 for the growth
rate of GDP and Table 3 for per capita GNI). According to estimates from the Korean
National Statistical Office (KNSO), the Gini coefficient of the nationwide households
was 0.295 in 1996, but increased to 0.352 in 2000, and remained high until 2004
when the Gini coefficient was 0.344 (See Figure 1).
2
There is no sign that income
inequality will return to its previous level. Instead, increasing income inequality had
become the hottest issue in politics and society. In early 2006 many newspapers
started to deal with the polarization of income distribution as an important serial
story. The Roh Moo-Hyun government also announced the removal of deteriorating
income inequality as the first priority of their public policy. In February 2006, the
Korean government decided to invest 800 billion Won (equivalent to $ 8 billon)
donated by Lee Gun-Hee, the head of Samsung group, to solve social polarization.
2
Gini coefficients in table 2 are more or less underestimated compared with those in table 1. For
example, Gini coefficient of 2000 in table 2 is reported as 0.317, while that in table 1 0.352. It seems to
originate in the difference of data employed by the two tables. Table 1 uses data for gross income of
“households in all areas within country,” but data in table 2 are for those of all cities (73 cities).
However, regardless data difference, the trends of income inequality between two data are similar.
Table 2 shows clearly that increased income inequality continues for 7 years from 1997 IMF financial
crisis as well.
3
Why did inequality increase after 1997? Conventional wisdom assumes that
there is a tradeoff between economic growth and equality. Accordingly, one may
argue that the increase in income inequality has been an inevitable consequence of
economic growth during the same period. However, during the later years of Korea’s
developmental era, a different pattern emerged; income inequality decreased even
when the economy had rapid growth. Some scholars argue that the increase in income
inequality since 1997 is the result of the uneven impact the crisis had on different
sectors of the economy. For example, Haggard (2000), Henderson (1999), and Kim
(2004) argue that lower income workers, the unemployed and the underemployed (the
majority of whom were less-educated and female) were more seriously hurt by the
financial crisis than higher income ones. Given that in the two years before 1997 the
Korean economy achieved an unemployment rate of about two percent, it seems
certain that the increase in unemployment after 1997 among lower income workers
affected detrimentally the distribution of income. In that case, a following question
should be; why did the rates of the unemployed and irregular workers rise so
dramatically after 1997?
There are few studies that attempt to explain the structural mechanism that led
to such instability in the Korean labor market. Instead, many simply suggest that
instability was the result of the IMF’s neoliberal labor market polity by adopted by
the Korean state. In that case, though, why did the Korean state apply a neoliberal
policy that was detrimental to job security? Why was the government of Korea able to
resist pressures for liberalization of the labor market prior to 1997? If income
inequality depends largely on the labor market performance, then these questions
4
should be examined in order to fully explain the increase in income inequality since
1997. This paper focuses on the characteristics of institutional reform undertaken in
Korea during the 1990s in order to explain the evolution of income inequality.
Institutional configurations are worthy of notice because they influence the setting of
priorities for public policy as well as the strategy of actors within the institutional
arrangement for achieving those priorities. For example, in a “pure” capitalist
institutional arrangement, activities seeking profit can be justified and supported as
the first priority. Income inequality issues may be more likely to be treated as a
second priority or the inevitable by-product of capitalist economic growth. In such
context, institutions in a capitalist society tend to favor profit-making, namely,
capitalist groups. Through institutions, the state is more likely to sacrifice equality for
the capital’s profit. That is, in a capitalist arrangement, the institutional capacity of
capital (i.e., making institutions favoring capital) becomes strong, while that of a state
and labor class weakens. Conversely, such an arrangement in power relationships also
affects the formation of institutions.
Since the early 1990s, the Korean state fully liberalized the financial market,
which weakened the capacity of the state and strengthened that of both domestic and
foreign capitalist groups. Such changes in the institutional configuration gave rise to
inequality in Korea by making the Korean labor markets flexible. This paper
examines why and how Korea has been institutionally changed since 1993, and how
such institutional changes have affected income inequality. Considering that it was
the state that played a considerable role in Korea’s “growth with equity”
development, I pay a particular attention to institutional change with respect to the
5
state’s capacity. In the following section, I discuss theories that guide us in
understanding the causes of income inequality with a focus on how institutional
configurations and their changes are related to income inequality.
6
Chapter 2: Theoretical Discussion
2.1. Economic Growth and Income Inequality
The relationship between economic growth and inequality has been hotly
debated among social scientists. Neoclassical economics assumes a tradeoff between
rising growth and falling inequality; inequality is more likely to enhance growth (See
Birdsall’s (2000:9) summary). In this view, we are more likely to see rapid growth if
income is concentrated in the hands of the rich who are more likely to save than the
poor because a high level of savings and resulting investment is a prerequisite for
rapid growth. Also, inequality provides an incentive for individual economic
activities such as productive risk-taking and innovation that ultimately ensures higher
output and increasing productivity. The result is higher average income and rates of
growth. The neoclassical view tends to be negative concerning intervention by a state
such as tax-financed transfers because such interventions undermine individual
responsibility and the work ethic. As neoclassical arguments are based on assumption
such as: “economic problems should be solved by economic ways” and “the less
political interference the better economy,” they are less likely to consider
political/institutional dimensions in their explanations.
Kuznets (1955) raised a different view than the “tradeoff” thesis. He
characterized the pattern of inequality in the process of economic growth this way:
“Widening in the early phases of economic growth when the transition from the pre-
industrial to the industrial civilization was most rapid; becoming stabilized for a
while; and then narrowing in the later” (Kuznets 1955:18). Growing inequality in the
earlier period of economic growth occurred because of a demographic shift from rural
7
to urban areas. Kuznets draws his income inequality pattern from two assumptions.
First, the average per capita income of a rural population is usually lower than that of
an urban population. Thus, the migration from the agricultural to the industrial sector
contributes to economic growth by increasing per capital income. The second
assumption is that income inequality for a rural population is somewhat lower than
for an urban population. Thus it can be inferred that the more urban a population, the
greater the inequality. With these assumptions, Kuzents argues that the compositional
change by such migrations tends to increase income inequality in the early stage of
industrialization.
However, income inequality declines after a peak. As an equalizing
mechanism, Kuznets noticed the institutional effect of urbanization. Kuznets argued,
The major offset to the widening of income inequality associated with the shift
from agriculture and the countryside to industry and the city must have been a rise
in the income share of the lower groups within the nonagricultural sector of the
population … Once the early turbulent phases of industrialization and urbanization
had passed, a variety of forces converged to bolster the economic position of the
lower-income groups within the urban (Kuznets 1955:17, emphasis by the author).
That is, increase and convergence of lower-income work force to urban areas
brought about the growing political power of that group, thereby leading to a variety
of protective legislation to counteract the worst effects of rapid industrialization and
urbanization. This was accomplished through the institutional and political changes
inherent in the “dynamism of a growing and free economic society”(Kuznets 1955:9).
8
In sum, Kuznets believes there is an equalizing force in “modern” system (vis-à-vis a
“traditional” society) in both economic and political areas.
From the 1970 to the middle of the 1990s, the inequality trend in Korea
appears to follow the U-curve. The Gini coefficient peaked in 1976 (0.391), stayed
for a few years, then declined from the early 1980s. The mechanism that lowered the
gap in Korea was, however, quite different from Kuznets’s hypothesis. It was the
state that led the modernization of Korea and rapid economic growth. In this process,
the state controlled strongly the working class as well as the capitalist class. The
urban working group had been considerably weak in bargaining power until 1988
(Haggard and Moon 1990; Haggard 2000; Lie 1998). Moreover, Kuznets’s theory
cannot account for the rise of income inequality after 1997; in his theory, the
inequality should have decreased in the latter 1990s when Korean society was already
democratized and labor was unionized as well. This implies that other factors that
Kuznets was missing may have influenced income inequality in Korea
2.2. Relational View on Creative Destruction of Institutions
An alternative theory on the relationship between economic growth and
income inequality has recently been published by Korzeniewicz and Moran (2005).
Critiquing single transition from traditional to modern array in Kuznets,
Korzeniewicz and Moran (2005) insist that institutions need to be understood as
incessantly changing and therefore a transition of distributional array has no an
ending point, but it is ever changing. Such their view on institution came out of
Schumpeter’s perspective on capitalism. Schumpeter understood the mechanism of
9
capitalism as a process of incessant “creative destruction.” Thus, capitalism should be
conceived of entailing continuous transformation, instead of a single transition from
one state of equilibrium to another (Korzeniewcz and Moran 2005:297-298). That is,
decreasing income inequality in the latter phase in the Kuznets’s curve cannot be
expected to remain constant.
The other notable point of Korzeniewicz and Moran’s theory is that the
dynamic and evolutionary mechanism of the “creative destruction” is not limited to a
national boundary. The process of creative destruction, destroying old systems and
creating new institutions for profit, occurs both within and beyond a national
boundary. Thus, institutional arrangements are embedded in “international relations”
as well as relations among domestic groups.
nstitutions should be understood as relational mechanisms of regulation,
operating within countries while simultaneously shaping interactions and flows
between nations. In this sense, the same institutional mechanisms through which
inequality historically has been reduced within nations often have accentuated
the exclusion from wealthy markets of populations from poorer countries
(Korzeniewicz and Moran, forthcoming: 20, emphasis in original)
The ‘great U-turn’ in wealthy countries, according to Korzeniewicz and
Moran (2005), shows clearly such relational aspects of capitalistic growth. The
United States, for example, has gone through economic restructuring by neoliberal
globalization that removed regulations for a cross-border capital. The globalization of
capital placed the U.S. economy in the position of high-tech industry, while
consolidating the international labor division. As a result, many manufacturing or
labor-intensive industries moved out to the Third World countries for cheap labor,
10
while high-tech industries requiring high education have been concentrated in the
United States. Such deindustrialization in the United States caused the polarization of
jobs in the U.S. labor market. This resulted in greater wage differentials between the
skilled and unskilled (Galbraith 2001; Ong, Bonacich, and Cheng 1997), which has
been referred to as the “hourglass economy.” Moreover, such relational view on
institution reveals its importance in restricting some groups’ entry to markets. For
example, Olson (1982:163) recognizes, in the particular case of South Africa, that
“[t]he denial of various skilled and semi-skilled jobs to Africans not only raised the
wages of the European (and sometimes Coloureds and Asian) workers, but it also
crowed more labor into the areas that remained open to Africans, making the wages
there lower than they would otherwise be.”(recited in Korzeniewicz and Moran,
forthcoming: 20).
Such institutional approaches may shed light on understanding Korea’s U-turn
after 1997 as it has done so for the United States. We can find considerable changes
in the international context surrounding the Korean economy since the early 1990s. I
will address in more detail how external situations have been changed and have
affected internal institutional configurations in Korea.
2.3. Bringing the Capacity of the State Back In
It seems certain that the world economy shapes institutional arrangements
within countries. However, not all countries with comparable levels of development
have their institutional configurations impacted in the same way. For example, both
Korea and Argentina have been placed in the semi-periphery of the world system as
11
newly industrialized countries (NICs). Both countries, however, have responded in
different ways to the influences from the world economy. They have established
different institutions (e.g. import-substitutive vs. export-oriented strategy) for their
development. In some ways, their different choices of developmental strategy came
from different institutional arrangements between the two countries. In Korea, the
state had strong and autonomous power to control other groups during the period of
modernization. The traditional elite class, yangban, and the labor class had almost no
political power. As the state controlled local capital’s access to financial resource,
capital was controlled and integrated entirely to the state’s developmental plans.
Likewise, multinational corporations and international finance were screened and
regulated by the state. There was, as a consequence, a lack of competing social
pressures at the level of institutional political action (Kim 1997; Lie 1998). By
contrast, in Argentina, the state had no ability to achieve an institutional and
organizational coherence to mobilize efficiently all groups to accomplish the state’s
own goals like Korea. As a result, social and political conflicts prevented the adoption
of an effective development strategy after the early 1950s (Korzeniewicz and
Korzeniewicz 1992). To understand fluctuating trends in income inequality one must
examine what institutions are established and how the formation of these institutions
(and their impacts on economy) is shaped by power relations among economic actors.
Thus, this study focuses on changing power relations among main actors in
Korea. It emphasizes changes in the state’s capacity to shape and control the ways in
which these actors interact with one another. How should we define the capacity of
the state and how should we measure it? Chang (2000:10-11) underlines that there is
12
no universal measure of the capacity of the state; its definition depends on local
context.
The point that we are trying to illustrate … is that how we measure state
intervention matters, because the particular measures that we use embody a
particular vision of the role of the state which may not be universally
applicable, because the institutional assumptions behind that vision may not
hold in contexts other than the one from which that vision emerged. Unless we
recognize that different measures of state intervention are based on different
theories of the role of the state, which embody different assumptions about the
institutions and political economy of state intervention, our empirical
investigation of the role of the state will be constrained by the limitations of
the theoretical perspective that lies behind the “measures” of intervention that
we use (Chang 2000:11).
The degree of state power has often been measured as the proportion of total
government budget to GDP and the share of the public enterprise sector in GDP (or
total investment). Yet, how “big” the state is does not necessary correspond to its
“strength” or capacity. A state with small budget may still actively intervene in the
economy and control other economic actors. Korea is an example. Korea has had a
strong regulatory capacity in the era of industrialization, but its budget was not large
when measured against GDP. Part of the reason is that the state did not actively
execute policies for social welfare via its budget. Rather, private companies took
responsibility for providing welfare through programs such as tuition assistance for
worker’s children and low-interest-loans for purchasing a house. However, the
Korean state had the power to control capital’s (in particular chaebols) access to
resources. Therefore, while the Korean government’s budget was small but it still
13
had the power to intervene (Chang 2000:11).
In this context, the definition of state power by Rueschemeyer and Evans
(1985) is notable. They argued that the power of a state consists of “autonomy” and
“capacity.” State autonomy is defined as the relative autonomy of state officials from
dominant economic classes and social groups (Rueschemeyer and Evans 1985:46-50).
State capacity refers to the existence of a state apparatus that facilitates the
implementation of state policies (Rueschemeyer and Evans 1985:50-53). When
possessing these two components, a state can effectively implement its policies. By
this definition, the Korean state had strong power in the developmental era. The
Korean state had autonomy in the sense that its interest was nation-building through
economic growth, and it pursued this goal without interference from other groups
(Amsden 1989; Evans 1995). The state had strong capacity as well in that it had
organizations that enabled effective execution of economic development plans with
discipline and punishment (Amsden 1989). The autonomy and the capacity of the
state is embodied in relations of control. Controlling other actors requires such
autonomy and capacity.
In this study, the power of the state is defined as its controlling or regulatory
capacity. The ability to control requires not only executive power of state apparatus
but its autonomy. Were it not for state autonomy, active regulation of state apparatus
would be more likely to reflect other groups’ interests. In this case we might more
accurately say the state is controlled by those groups that benefit from its actions.
Therefore, state regulatory capacity is defined as a function of state autonomy. Hence,
14
I pay special attention to the controlling interests that create institutions and shape
their effects on inequality.
2.4. Literature on Income Inequality in Korea
Literature on income inequality in Korea agrees in general that income
inequality declined during the developmental period (particularly since the late
1970s)
3
(Choi 2003; Choo 1993; Fields and Yoo 2001; Kim and Topel 1995). The
literature consistently points to educational expansion as a key factor or mechanism in
the falling income inequality of that period (e.g. Birdsall, Ross and Sabot 1997; Fields
and Yoo 2000). According to Birdsall, Ross and Sabot (1997)’s research, from 1976
to 1985, as Korea experienced a rapid expansion of education, the wage premium for
education declined by 22 percent during that period. Fields and Yoo (2000) also
found that education accounted for the largest part (33 percent) of the reduction in the
earning gap between 1986 and 1993. The literature suggests encouraging education
widely is the key to reducing income inequality. However, this explanation breaks
down when looking at the more recent period. Education has been expanding, but the
wage premium for education has increased since the mid 1990s. Why has the effect of
education on income inequality changed? None of the previous studies provide
factors accounting consistently for the rise and fall of income inequality across time
3
In Korea, “official” estimation on income distribution began in 1980 by Korean National Statistics
Office (KNSO). The “official data” consist of the City Household Income and Expenditure Survey
(CHIES) and the Farm Household Economy Survey (FHES). These two survey sampling frames do not
include all households in Korea. The CHIES excludes non-farm households in rural areas and single-
person households, which are also excluded in the FHES. Besides, in the CHIES there are data only on
the size distribution of income of worker households but not those of urban self-employed and
employer households. In addition, the CHIES set a household income ceiling and excluded high-
income households above the ceiling from the survey (Ahn 1997:29). Thus, Ahn (1997) points out that
official estimation is more likely to underestimate gaps in income distribution.
15
in Korea. This implies that educational expansion is not a fundamental factor for
declining inequality in the developmental era. Rather, it can be understood as a
consequence of certain deeper foundational factors.
What is (are) the fundamental factor(s) on which income inequality depends?
What is the mechanism? The above theoretical discussion shows that Kuznets (1955)
and Korzeniewicz and Moran (2005) address the effect of institutional arrangements
on income inequality, although they have different views regarding what institutions
and how they affect income inequality. Also, many political economists point to the
central role of the state in directing the modernization of the Korean economy
(Amsden 1989; Chang 2000; Evans 1995; Kim 1997; Lie 1998; Wade 1990). Those
theories and historical studies provide valuable insights to explain fluctuation of
income inequality in Korea. Adopting their ideas, this study will focus on two points:
the autonomy and capacity of the state in shaping and managing other groups for
pursuing its own goals and the context of the world economy that affects institutional
arrangements surrounding the state’s capacity. Then it will study how such changes in
institutional configurations are related to income inequality.
16
Chapter 3: The Developmental Era: “Growth with Equity” and
the Strong State, 1961-1992
3.1. U-Curvilinear Pattern of Income Inequality in the 1960s and the First
Half of 1970s
Income inequality in Korea declined during the initial period of
industrialization in the second half of the 1960s, increased during the 1970s, and then
decreased in the 1980s and during the first half of 1990s (see Figure 1).
Unfortunately, there are few studies that explain this fluctuation of income inequality
over time. One explanation from literature of the modern Korean history, is that the
decline of income inequality during 1960s was due mainly to extensive land reform.
Land reform in Korea was initiated after the National Assembly of Korea passed a
land redistribution law in 1949 (Lie 1998:9). Land reform was effective in solving
rural poverty. It eliminated large landholdings by allowing for widespread ownership
of land. As a result, in 1944 the richest 3 percent of farming households owned 64
percent of all the farmland; by 1956, the top 6 percent owned only 18 percent (Lie
1998:12). Such redistribution of land ownership was closely tied to the decline of
income inequality because 1960s Korea was an agricultural country where 72 percent
of total Korean population was a farmer (Lie 1998:111).
After 1970, income inequality rose until 1976. This period coincided with
mass migration from rural to urban areas. Korea in the 1960s and 1970s experienced
one of the most accelerated rural out-migrations in world history (Koo 1991; Lie
1998). Mass migration to urban sector was motivated by the state exploitation in rural
areas. The government purchased rice about 15 percent below the market price in the
1960s. The state employed this dual-price to lower grain prices in order to feed the
17
expanding urban working class while also inducing the migration necessary for the
state’s industrialization plan. This process may have increased the income gap
between the rural and the urban sector. Another related reason for increasing income
inequality during the early 1970s was the compositional changes of the rapid mass
migration that was emphasized by Kuznets. Table 1 illustrates the transformation in
the composition of persons employed by industry between 1960 and 2000. The
proportion of workers in the primary sector – agricultural, forestry, and fishery
industries – declined drastically, while that of the other industrial groups increased
remarkably. In the 1960s, employees of the primary sector constituted 79.5 percent of
the total economically active population, but this figure was reduced to 8.7 percent by
2000 (Hong 2003:40). Choo (1982) indicates that such urbanization and the
emergence of high-income groups in the urban sector accounts for a large part of the
widening income inequality in the 1970s.
3.2. “Growth with Equity” and the Developmental State, the Late 1970s -
1992
From the late 1970s until the 1997 IMF financial crisis, income inequality in
Korea declined gradually. What reduced income inequality during that period?
Because it was the developmental state that established institutions and drove rapid
industrialization in Korea during this time, we must address the state’s role in our
explanation. The Five-Year Economic Development Plans by the Economic Planning
Board (EPB) were the primary feature of the state-driven economic development. In
particular, the Third Five-Year Economic Development Plan in 1972 led to a
18
significant period of economic growth of the 1970s. The three main goals of the plan
were “the dynamic development of the rural economy, a dramatic and sustained
increase in exports, and the establishment of heavy and chemical industries.”(ROK
1971:2, recited from Lie 1998:79). Those clear developmental goals of the state gave
birth to institutional effects that contributed to the decline of income inequality after
1976.
3.2.1. Developing the Rural Sector
As mentioned above, in the 1960s, the necessity of cheap grain resulted in the
deterioration of the condition of the rural population. It threatened the legitimacy of
Park’s military regime in the countryside. Therefore the state began to emphasize
rural development in the Third Five-Year Economic Development Plan. It quadrupled
the budget of the previous Plan in the rural sector, and constructed dams and power
plants. It raised the government price of main staples, particularly rice (Lie
1998:109).
The Saemal undong (New Community, or Village, Movement) was a key
project among the state’s various efforts to develop the countryside. It began in 1970
by distributing surplus cement to the rural areas. In an initial stage, the Park
administration focused on improving rural living environments. The three goals of the
state-led Saemal undong were agricultural mechanization, the spread of high
yielding rice strains, and village beautification (Lie 1998:110). In order to maximize
its limited resources, the government gave priority to villages with excellent
movement records. The program opened the Saemal Leaders Training Institute to
19
improve the qualifications and capabilities of the trainees, and established a special
bureau that organized and assisted the movement and coordinated related projects. To
increase income for the rural population, the state encouraged industrialization in the
countryside and created off-farm employment that gave rural peoples double income
from joint workplaces
4
(NCSUM 2001).
The state-led rural revitalization movement made it possible to increase
productivity and per capita incomes in rural sectors much faster than any other
countries (Lie 1998:110). Thus, the gap of income between rural and urban areas
closed.
3.2.2. The State’s Intervention in the Labor Market
Control over labor class: the regulation of wage and the protection of the labor
market
The second developmental goal of the Third Five-Year Development Plan was
a “dramatic and sustained increase in exports.” Competitive power in export
depended on the quality and (or) the price of exported goods. During the 1970s,
however, quality competition had been considered infeasible because of the lack of
technology and a foreign-technology-dependent economic structure. Therefore, the
only way Korea could compete with other exporting countries was to lower the prices
for exports. To gain an advantage in an export price, the cost of production was
lowered. Since there were not abundant raw materials in Korea, the easiest way to
reduce the cost of production was to lower the cost of the labor force. The state tried
4
See the section of “what is Saemaul Undong?” at the website of the National Council of Saemaul
Undong Movement in Korea (NCSUM) (www.saemaul.com/english/whatissaemaul)
20
to maintain cheap labor with an understanding that rising wages for labor would be
detrimental to exports as well as economic stability (Koo 2001; Ogle 1990; Lie 1998).
During the 1970s, the state regulated indirectly the rise of wages by
preventing labor union organizing. The 1972 Special Law Concerning National
Defense and Security prohibited strikes for workers. The labor movement was often
identified as a communist movement in the public statements made by the state. It
was thus easy to justify repression against unions. Furthermore, the new Labor
Dispute Law in 1980 prohibited any third-party intervention in labor disputes. It was
originally designed to block intervention by non-labor groups such as church or
student activists, but it also prohibited the Federation of Korean Trade Union (FKTU)
and industrial unions to take part in labor disputes. By restricting third-party
intervention, the state monopolized the mediation process in negotiations between
capital and labor. The state’s approval was required for initiating collective
bargaining by the law in 1980. That is, labor unions were prohibited not only from
striking, but even from negotiating independently (Haggard and Moon 1990:223-
225).
However, in return partly for its repressive labor policy, the state protected job
security. The Labor Standards Act, for example, regulated the permissible types,
durations, and conditions for termination of labor contracts rather than leaving such
contracts between employers and employee. Under the act, employers could dismiss
regular employees only with “just cause.” However, in practice, dismissal was rarely
implemented because the definitions of “just cause” were highly restrictive (Yang and
Moon 2005:77). As a result, Korea was one of highest ranked countries among
21
OECD members regarding the strictness of employment protection (Yang and Moon
2005:78).
The state’s repression of collective actions by workers accompanied with
protective labor regulations, contributed to low inequality; the regulation of the rise of
wages provided the condition in which employers could hire more workers; the
protective law contributed to the increase in the number of regular industrial workers
by prohibiting free dismissal from employers.
The expansion of basic education
Ample labor was requisite to the export-oriented strategy relying on cheap
labor. Besides, the change in the state’s industrial strategy from light industry to
heavy and chemical industry (HCI) in 1972 required educated laborers who could
deal with complex machines. The state therefore emphasized the value of human
capital and education in order to meet the need. The state implanted the idea that all
we can rely on is only human resource (capital) in a country with no natural
resources. Mass education was, on the other hand, a by-product of land reform in
1950s. Land reform destroyed yangban, the land-based ruling elite class. At the same
time, land reform decreased the value of land as a tool for accumulating wealth and
power as well. Instead, the value of education increased as an alternative strategy to
upward mobility. The state’s push, combined with the effects of land reform, resulted
in a rapid increase in the Korean education level.
However, we cannot assume that the expansion of education always
contributes to a decline in inequality. As a matter of fact, education can either
22
increase or reduce income inequality. It has two effects together: a composition effect
and a compression one. The composition effect refers to the impact of education on
increasing income (mostly, wage) inequality. It occurs when the more-educated group
moves into higher-paying jobs. By contrast, the compression effect means that
expansion of education decreases income inequality. This happens when the scarcity
rents by education are eroded as the supply of the educated workers increases
(Birdsall, Ross, and Sabot 1997: 104).
Whether income inequality rises or falls depends on which effect is bigger.
According to Birdsall, Ross, and Sabot’s (1997) study, in Korea, the compression
effect turned out to be the dominant one. The educational composition of the Korean
labor force changed noticeably from 1976 to 1985: The proportion of high school and
post-secondary graduates in the wage labor force rose sharply and the proportion of
workers with elementary school or less was reduced to only 8 percent. Along with the
compositional change of education, the wage premium of highly-educated workers
was reduced. In 1976 Korean workers with high school education earned 47 percent
more than primary school graduates; by 1986 that premium had declined to 30
percent. Similarly, the premium earned by workers with higher education declined
from 97 to 66 percent.
In contrast, in Brazil, the composition effect dominated. For example, the
wage premium earned by workers leaving a university was 159 percent in 1976 and
151 percent in 1985 (see Table 2). The net effect of educational expansion in Brazil
over the decade was to increase the log variance of wages by roughly 4 percent, in
marked contrast to the 22 percent decline that resulted from educational expansion in
23
Korea (Birdsall, Ross, and Sabot 1997: 105-106). According to Birdsall, Ross, and
Sabot (1997:106), the composition effect appeared in Brazil because the absolute
increment of well-educated workers was too small to offset the premium of the highly
educated. Applying this logic to Korea, we infer that the compression effect in Korea
was due to the large-and-rapid educational expansion as the ample supply of the
educated labor force removed the premium.
However, educational expansion alone is not sufficient to reduce income
inequality, given that the wage premium by education in Korea began to rise since
1990s despite continuous expansion of education for all segments of the population.
In addition to educational expansion, abundant jobs thanks to rapid industrial growth
contributed to the low wage gap. Meanwhile, the growth of the capital-intensive
heavy and chemical industries (HCI) should have served to increase the wage
premium by educational achievement. Nevertheless it had been kept low due to the
state’s control of the labor market that prevented the rapid increase of the wage of the
highly educated. In sum, the state created the demand for labor (i.e. plenty of jobs) by
pursuing manufacture-based industrialization policy, which led to rapid economic
growth. It also produced an ample labor supply by expanding education and
restraining the rise of wages, which resulted in low income inequality. That is, the
state’s strong intervention in the labor market played a key role by increasing both the
labor supply and demand for labor in accomplishing the “growth and equity” during
the industrialization period.
24
3.2.3. The State’s Control in the Financial Market
It is certain that the success of rapid transition to an industrial country in
Korea contributed significantly to low income inequality through providing plenty of
job opportunities. How did Korea achieve such success in the labor market
performance while other regions (e.g. Latin American countries) failed? Different
consequences in developmental outcomes, according to Evans (1987), come from the
difference in the configuration of a triple alliance between states, local capital, and
multinational capital. Namely the outcomes depend on whose and what interests are
accomplished among three actors’ interests. In Latin America, for example, the states
were a critical actor, but the interests of private capital predominated (Evans 1987).
Transnational corporations also influenced no less than the state and local capital on
policies by using the interests of local private capital successfully to oppose or at least
to reshape policies that they found threatening (Evans 1987; Korzeniewicz and
Korzeniewicz 1992). The Korean state, in contrast, controlled both local and
multinational capital (Lim 1985; Lie 1998; Evans 1987; Kim 1997; Korzeniewicz and
Korzeniewicz 1992). In fact, capital groups have an attribute to pursue their own
profit. Schumpeter’s creative destruction describes that they change incessantly their
objectives to invest and institutions for their new profit sources (Korzeniewicz and
Moran 2005). Therefore, capitalist groups are often uncooperative in the state’s
developmental plan when particularly their new strategy does not fit the state’s plan.
In this case, a state should regulate such a capital’s diverse and uncooperative
investment in order to achieve coherently the state’s blueprint for industrial
development. The Korean state controlled successfully capital groups – not only
25
domestic but transnational capitalist groups, while the states in Latin America failed
to organize resolutely capitalist groups’ interest according to the state’s own plan.
How could the Korean state control both domestic and international capital?
The part of the power source was found in the fact that the Park regime was relatively
autonomous from particularistic economic interests (Cumings 1987: 73). The interest
of Park Chung Hee was not to protect particular interest groups. His aim was nation-
building itself. He stressed the imperative of national autonomy and ruled over the
country with jaju (self-reliance) philosophy. He said, “Succinctly speaking, jaju
means we should be the master of our own house (Lie 1998:82).” The state’s interest
in building a self-reliant industrial structure did not allow a direct investment by
foreign capital and multinational corporations. In the case that foreign capital can
invest directly in the local economy without any regulation, it is less likely that the
state can pursue its own goals because it is more difficult to regulate or induce foreign
capitalist groups to invest in the state’s selective industries than to pressure local
capital.
Despite such concern, however, the state had to rely on foreign capital in
industrializing the economy according to its plan, because of the lack of crucial
resources such as money, technology, and organization skill. For preventing
interruption by foreign capital in the developmental plan, the Korean state intervened
deeply in all transactions with foreign capitals (Lie 1998: 81). In particular, it
regulated multinational corporations and foreign capital. Domestic industrial capital
(particularly chaebols) could not autonomously gain access to foreign capital. They
26
relied on government-controlled credit institutions (Kim 1997; Lee 1997). In short,
“the state became the fundamental source of capital and credit,” states Lie (1998:82).
As one of the efficient ways for controlling the cheabol’s access to the foreign
capital, the state relied on foreign loans, rather than direct foreign investment. Some
research shows that the direct foreign investment is more likely to increase economic
inequality within countries (e.g. Bornschier, Chase-Dunn, and Rubinson 1978). The
difference in the effects of the direct foreign investment and the foreign loans on
inequality becomes clear by comparing Latin American and East Asian countries.
Many countries in Latin America relied on the direct foreign investment. Prior to the
emergence of an authoritarian state, these societies had been already penetrated by
direct foreign investment. It made it difficult for the state to control and manage
industrial sectors, thereby making it hard to pursue consistently its own development
strategies. By contrast, in Korea, the authoritarian regime controlled financial
resources by accepting foreign loans instead of direct foreign investment. It was
possible because the state was already in command by the time foreign investors
began to take a real interest. As a result, the state was able to pursue consistently its
own goals and strategies, and at the same time, could autonomously determine from
the beginning what role transnational capital would play in the industrialization. The
state’s great power vis-à-vis the local capital also made the state a much more
attractive partner for multinational capital. Local capitalists who wanted foreign loans
needed government approval and repayment guarantees. Thus reliance on loan capital
contributed to expanding the state’s capacity in Korea rather than undercutting itself.
27
3.3. The Sources of the Strong Power of the State
3.3.1. Internal Factors: Land Reform and the Elimination of the Ruling
Elite Class
It is impossible for the state to implement strong regulations without
autonomy and strong capacity. What were sources of the autonomous power of the
Korean state? How was the state able to play such roles? Evans (1995) argues that the
ranges of roles that states can pursue are defined by structures. In other words,
developmental outcomes depend on whether these states’ roles fit the surrounding
social context and how well they are executed by political elites. In terms of social
context, land reform was a key social structure to provide the state with strong
capacity. Land reform removed existing ruling class (yangban), by destroying their
power base, land. It allowed the Korean state to have autonomous power to promote
industrialization and control over other competing groups who might hinder it.
Historical evidence shows that the agrarian elites tended to impede industrialization
because they have no incentive to invest economic surplus in manufacturing. They
are more likely to reproduce the status quo by preserving their source of privilege. In
this way, eliminating the landowner class contributed to industrialization (Lie 1998:
13-14). On the other hand, the continuance of landlords’ power often resisted
industrialization in some developing countries. The Philippines illustrates this case; in
1950, the beginning of the postcolonial era, the Filipino government did not accept
land reform recommended by the U.S. government. Without land reform, landholders
were able to hold their power as well as land. As a result, the strong landlord class
impeded the industrialization of the country by strongly influencing the choice of
28
export-oriented agriculture as a nation’s developmental strategy (Lie 1998:14). In
Argentina, likewise, landowners played a key role in the formation of the modern
economy after the 1860s. They challenged state policies promoting industrialization,
and as a result, hindered the growth of manufacturing (Korzeniewicz and
Korzeniewicz 1992: 84). The Korean state, however, was able to avoid such conflicts
in establishing developmental strategies as the ruling class was destroyed by land
reform. It empowered the state to plan developmental policies independently and
control various factors as well as foreign and domestic groups.
3.3.2. External sources: Japan, the Vietnam War and the United States
The formation and transformation of institutions within countries are affected
not only by internal sources but also by the external environment to which a country
is related (Korzeniewicz and Moran 2005). Rapid development in Korea was possible
thanks largely to the geopolitical conditions favoring Korea’s industrialization.
Notable are the transformation of the Japanese economic structure and the Vietnam
War. First, by the late 1960s, the move of Japan to higher value-added industries
provided Korea with the chance of industrialization through Japan’s old industries.
Despite the prevalence of anti-Japanese sentiments, for reasons of economy, Korea
made a normalization treaty with Japan in 1965 (Lie 1998:59). At that time, Japan
was well on its way to becoming an economic superpower; it had not only the capital
but the technological know-how as well. Reestablishing a diplomatic and economic
relationship with Japan incorporated the Korean economy into a Japanese economic
zone. In production, the development of Korean enterprises relied largely on Japanese
29
technology and the diffusion of Japanese skills. In particular, as Japanese
corporations turned to less-polluting and higher value-added production, Korean
companies were easily handed down the technology and machinery of low-
technology, pollution-production, and labor-intensive industries that Japanese
corporations had abandoned (Lie 1998:60). Korea had little competition for taking
over Japanese old industries and markets. In Latin American countries, the state did
not have as active efforts for industrialization as the Korean state. They were content
to promote agriculture and to export raw materials (Lie 1998:69). In Asia, only
Taiwan had capital, technology and industrializing efforts to develop those industries.
Other Asian countries had cheap labor, but their capability was insufficient to take on
the industries. The move of the footwear industry is an illustrative example. As
Japanese labor costs increase, Nike and other shoe manufacturers began to move to
Korea (Korzeniewicz 1994). Korea’s cost-effective mass production capability
(Gereffi and Korzeniewicz 1990:59), by combining high levels of technology and
skill and low labor cost, attracted shoe factories. Although the labor costs in Thailand
and other Southeast Asian countries were as low as that in Korea, but the technology
and skill to produce shoes were not as developed as those of Korea (Lie 1998:87).
Second, the Vietnam War also served significantly to promote Korea’s rapid
industrialization. The demand generated by the Vietnam War provided a crucial niche
for Korean light industrialization and export in the late 1960s. The U.S. war economy
generated demand for Korean light industrial goods, such as plywood, shoes, and
textiles. While exports to the United States accounted for 30 percent of the total in
1964, the figure increased to 37 percent in 1966 and 52 percent in 1968 (Lie
30
1998:64). Moreover, with involvement in the Vietnam War, the Park regime received
political and economical support from the U. S. government. The U.S. military
continued to be stationed in Korea and doubled aid after Korea sent its troops to
Vietnam. Park Chung Hee and many Korean officials were aware of economic
opportunities from wars in other regions, noticing the resurgence of the Japanese
economy in the early 1950s through the Korean War. A Korean told Newsweek
(February 7, 1966:37), “In the Korean War, the Japanese made the money while we
Koreans did the fighting… Now it is Korea’s turn.” (Lie 1998:63).
Along with the Vietnam War effect, the geopolitical environment served to
support Korea’s export-led development. During the Cold War, the U.S. recognized
Korea as a place of strategic importance. The U.S. expected Korea’s success to serve
as proof of the superiority of capitalism. Therefore, the U.S. supported Korea’s
export-led development not only as a material supplier but also as the biggest market
for Korea’s export. Furthermore, the U.S. did not pressure Korea to open up domestic
markets, and remove protective labor market policies. The Japanese industrial
transformation, the Vietnam War, and the U.S.’s support integrated the Korean
economy into the expanding U.S. and Japanese economic spheres, providing
favorable environment for the Korean state’s export-oriented developmental strategy.
This resulted in strengthening the capacity of the developmental state as it led
successfully the transformation of the Korean economy into the export-led economy.
3.4. Linking the Strong State with Inequality in the Developmental Era
31
Korea showed the “growth with equity” pattern during the developmental era.
This was possible through the control of a strong developmental state over capital and
labor. Land reform served as the social condition to allow the state to have such
power by removing the land-based ruling (or capital) class who were more likely to
resist the innovative industrialization of the state. In addition, in the tense situation of
the confrontation with North Korea, the strict anti-Communist policy of the Park
Chung Hee military government justified the state’s strong control by using the
metaphor of nationalism. Based on such social conditions, to begin with, the Korean
state controlled banks; it nationalized commercial banks and fully subordinated their
lending decisions to developmental strategy (Shin and Chang 2003:13). The state
designated strategic industries and selected companies or business groups to
undertake the task of building these new industries and provide them with subsidies
and protections. Besides, the state did not allow free access of local companies to
foreign capital. Although Korea heavily imported foreign capitals and technologies,
the state limited the influx of foreign direct investment (FDI). It was proved that the
share of FDI to gross fixed capital formation in Korea remained the lowest among the
East Asian NICs with just over 1 percent during 1970-90, while Korea’s reliance on
foreign debt was the highest among them (Shin and Chang 2003:12). It meant, on the
other hand, that the Korean state prevented free investment of foreign capital in the
Korean economy.
With its autonomous power, the Korean state undertook economically
independent nation-building. Since 1961, the Park military regime established
national plans for economic growth, and powerfully carried it out to make up for its
32
lack of legitimacy. As a principal developmental strategy, the state chose an export-
oriented policy. Given the weak competitive power of the local enterprises in the
initial stage, the state protected the domestic economy from foreign capital and
competition with foreign goods; increased the productivity by expanding education
widely; and guaranteed the continuing high profit rate of local capital by regulating
the rapid increase of wages through prohibiting workers from unionizing. By way of
compensating for such repression, the state employed the protective labor market
policy that prohibited dismissal without “just cause.” It consolidated job security. The
export-oriented policy contributed to produce abundant jobs to absorb most of rising
urban workers in manufacturing industries. This condition affected the compression
effect of education that lowered a wage premium for education. In addition, as a by-
product of the state’s labor policy, the Korean labor market of that time was not
segmented by firm size in terms of wage level. Workers in the same kind of
occupation or industry earned similar wage levels. Besides, wage gaps by occupation
and industry were relatively low. This mechanism explains the low income inequality
during the high growth period in Korea.
Meanwhile, we need to consider the situation of the world economy during
that time. During the Cold War, for geopolitical reasons, the United States supported
the growth of the Korean economy by serving as a market for Korea’s exports as well
as by tacitly approving Korea’s protective trade policy. Japan’s ascendance provided
a niche for Korea. Korea was handed over not only technology but markets for export
from Japan. Korea did not face severe competition with other developing countries in
occupying the industries abandoned by Japan. The Vietnam War served to promote
33
dramatically Korea’s exports. Low competition in export also played a significant
role in Korea’s rapid growth.
Given Korea’s concentration on heavy and chemical industries in the 1970s
and information technology in the 1980s, Korea’s rival in export would have been
developed countries. But the rich countries were struggling with rising labor costs.
There were, besides, few developing countries that participated fully in the world
export market with the advantage of lower labor cost.
In sum, the rapid growth in exports expanded significantly the demand for
labor, and the state met the increasing demand by producing ample labor supply
through educational expansion and urbanization. In addition, the state removed job
insecurity with job-protective labor laws. Those mechanisms resulted in superior
labor market performance (Cortázar, Lustig, and Sabot 1998:193-199), which was a
key factor in lowering income inequality in the developmental era.
34
Chapter 4: The 1997 IMF Financial Crisis: Economic
Liberalization and Increasing Income Inequality, 1993-2004
4.1. The Impact of the 1997 IMF Crisis on Income Inequality and the
Labor Market
4.1.1. Uneven Impacts
Most studies on the social impact of the Korean financial crisis agree that the
country’s income distribution deteriorated after the 1997 IMF financial crisis. Korea’s
Gini coefficient was relatively lower than that in most other developing countries
until 1997, but the Gini coefficient of nationwide households soared to 0.352 in 2000
and remained high at 0.344 in 2004 (See Figure 1). Consistently, the relative income
shares of decile income groups appeared to be more unequal. Cheong’s (2001) study
finds that the income shares of the lower four groups have decreased to a greater
extent after rather than before the IMF financial crisis, while the income share of the
richest group has increased. The income shares of the middle-income groups from the
fourth to the seventh deciles significantly declined both in absolute and relative terms
compared to the rich (the top two deciles) – from 0.97 before the crisis to 0.77 in the
first quarter of 1999. The income share of the middle groups relative to the poorest
two declies increased by over 10 percent after the crisis (Cheong 2001:45). The study
by Haggard (2000) supports these uneven consequences of the crisis. According to
Haggard, the fall in income in Korea was most serious for the poorest 20 percent (-
23.7 percent vs. -2.5 for the top 10 percent) (Haggard 2000:197). He insists,
The crisis affected precisely those emergent, transitional, weakly organized
‘starving classes’ to which growth-with-equity model had historically granted
35
social mobility, pushing them back, at least temporarily, into the urban
informal sector or the countryside.(Haggard 2000:198)
4.1.2. Increasing Rates of Unemployment and Underemployment
Rising inequality after the Korean financial crisis was closely associated with
rapid increases in unemployment and underemployment. Unemployment was most
conspicuous (see Figure 2). Normally below three percent in the early 1990s, the
unemployment rate climbed to 6.8 percent in 1998. This is a record high for Korea.
Moreover, unemployment was unevenly distributed. Women, the uneducated, and
workers in manufacturing or construction industries were more likely to be dismissed
or less likely to secure a job (See Table 3 and Table 4). The rate, furthermore, does
not include hundreds of thousands of unemployed people who had given up on
finding jobs. One estimate in 2001 showed that as many as 490,000 individuals had
given up on looking for works (Kim 2004). Leading to this figure is the fact that the
labor force participation rate declined from 62 percent in 1996 to 60 percent in 2000
(Jang 2003:55). If that number were included, the unemployment rate in Korea would
have risen by at least 2 percent (Kim 2004:223).
As of 2005, the unemployment rate has gradually decreased to 3.7 percent, but
the figure is still higher than its pre-crisis level (See Figure 4). The decline in the
unemployment rate was possible by the sharply increasing employment of temporary
and daily jobs, not by the increase in regular jobs. The official unemployment rate
does not include millions of day laborers whose jobs often require their services for
less than a month. Table 5 shows that the proportion of non-standard or irregular
workers exceeded that of regular workers in early 1999. This proportion of non-
36
standard workers in the total labor force is the highest among the member countries of
the Organization for Economic Cooperation and Development (OECD). Moreover,
non-standard workers received less pay than regular workers for doing the same type
of works. To illustrate, in 2000, irregular workers, including temporary and daily-hire
workers, received less than half of the hourly wages of regular workers (8,225 Won
for regular workers vs. 4,031 Won for non-irregular workers; see Table 6). Kim’s
(2004:224) study also shows that non-standard workers received only 52.9 percent of
what regular workers earned for doing the same task in the end of 2002.
4.1.3. Job Security at Risk
The rising unemployment and underemployment rates are, if anything,
consequences of the increasing “flexibility” of the Korean labor market. Since the
early 1990s, Korea started to make the labor market flexible in the sense that it had
the highest ratios of temporary workers in the workforce among the OECD countries
(Shin and Chang 2003:56). The financial crisis dramatically accelerated the speed and
expanded the extent of its flexibility. Following an agreement with the IMF, the
Korean National Assembly passed a bill that legalized layoffs and the right to use
“dispatch labor” to substitute workers during union strikes. It also allowed the
extension of daily work-times and prohibited wild-cat strikes. The Korean unions had
strongly resisted this practice before 1997, but the financial crisis compelled the labor
class to settle the removal of job-protection institutions. With the excuse that “the
flexible labor market is necessary for the nation’s economy to get out of the crisis and
further survive in severe global competition,” the state urged labor to accept the
37
changes of labor market policy. Meanwhile, the flexible labor market in Korea is
mainly attributed to the liberalization policy of the state, since the early 1990s and the
1997 financial crisis (Kim 2004; Shin and Chang 2003). Given that the rising
flexibility of the labor market that produced high unemployment and
underemployment rates is most detrimental in income distribution in the post-1997
Korea, the analysis on the causes of flexible labor – the liberalization of the Korean
economy and the 1997 IMF financial crisis – can shed light on understanding the
increasing income inequality in the post-1997 Korea.
4.2. The Causes of the Crisis: Financial Liberalization and Too Little
Regulation of the State
The IMF financial crisis in 1997 occurred due to the sudden withdrawal of
capital by foreign investors who were threatened by the financial crisis in Thailand in
July 1997 (Chang, Palma, and Whittaker 2001). Internally, Korea had no significant
slump in the economy until the crisis. Macroeconomic indicators had been “normal”-
exports were on the rise; the current balance of payment was improving; prices had
been stable, and the GNP growth rate was projected to be around 6 percent (Kim
2004: 221). Nevertheless, why did the 1997 IMF financial crisis occur in Korea?
The immediate cause of the Korean financial crisis was the rapidly increasing
vulnerability of the economy to foreign capital. This was a consequence of financial
liberalization. In the developmental era, Korean lending decisions were ultimately
made by the state, not by the financial institutions. However, from the early 1990s,
the Korean government started relaxing its control over the financial sector
38
significantly and, under the Kim Young Sam government, which came to power in
1993, the liberalization process was greatly accelerated. Financial liberalization
allowed foreign capital access to the domestic financial market. At the same time, it
permitted the local capitals to raise finance on foreign markets. Table 7 charts the
evolution of this process in detail.
As a part of the financial liberalization, the state licensed nine new merchant
banks in 1994 and 15 more in July 1996, in addition to the six existing ones before
the 1993 liberalization (Wade 2000:154). Since then, borrowing by financial
institutions and private corporations dramatically increased, which resulted in the
rapid build-up of foreign debt in some years before the crisis. Especially alarming
was the rapid increase in short-term debt. During the period between 1993 and 1996,
short-term debt held by financial institutions increased from $11.4 billion to $39.0
billion, while the increase for private enterprises was from $7.8 billion to $22.0
billion (You and Lee 2001:11). Throughout 1997, the short-term foreign debt reached
to roughly 65 percent of total debt (Wade 2000:154). The rapid increase of short-term
borrowing was due to its much lower transaction costs than those for long-term
borrowing. Adding to the short-term debt, the total foreign debt at the end of 1997
stood at an astonishingly high level of $120.8 billion, which is almost four times the
total foreign debt at the end of 1990, $31.7 billion (See Table 8).
This demonstrates the Korean economy’s deep reliance on foreign capital that
can be freely withdrawn. The dependence made the Korean economy vulnerable to
world financial movements. The fact that the financial crisis in Korea was the
subsequent consequence of the South East Asian crises in July 1997 reflected that the
39
crisis was related to the global movement of finance. The confidence in all Asian
economies was shaken by the “domino” effect created by the South East Asian crisis.
The Korean financial institutions that invested in the region lost at least $2 billion
between July (the beginning of the Thai crisis) and November (the beginning of the
Korean crisis) (Shin and Chang 2003:38-39). Some Japanese banks that heavily
invested in the region withdrew loans from Korean debtors in order to improve their
balance sheets. The situation caused growing distrust of the Korean economy among
foreign investors, and thereby a serious current account deficit and high-profile
corporate bankruptcies. This shows how vulnerable the local economy became to
global capital since the financial liberalization in 1993.
At a more fundamental level, accounting for the causes of the IMF financial
crisis can be largely divided into two perspectives: neoliberal vs. statist perspectives
(Hart-Landsberg and Burkett 2001), or “too much state intervention” vs. “too little
regulation”(Weiss 1999). The former groups view the crisis as a demonstration of the
folly of state intervention in the economy. Despite having praised Korea “miracle
Asia” for its free-market policies,
5
neoliberals (e.g. Krugman 1998) quickly blamed
the crisis on “crony capitalism,” what Wade (2000) calls a “gestalt shift.” Neoliberal
economists, including those in the IMF, argue that the IMF financial crisis in Korea
occurred due to misguided and corrupt investment and lending decisions produced by
state industrial policies (Hart-Landsberg and Burkett 2001:403). This brought down
5
Neoliberal economists viewed that the success of the East Asian countries was possible due to the
“magic of the market.” For example, Balassa and Williamson (1987) argued, “South Korea and other
newly industrializing countries (NICs) in East Asia had outperformed the Latin American NICs and
India because the scope of administrative controls was much more limited in the four East Asian NICs
than in Latin America and, even more, India. … Capital markets were freer in the East Asian NICs
than in Latin America and India.”(Balassa and Williamson 1987:14-15, recited from Hart-Landsberg
and Burkett (2001:405)).
40
the Korean economy by distorting market processes. Neoliberal economists argue that
if states had not intervened, there would be fewer distortions blocking efficient
resource allocation (Weiss 1999:320). The solutions they suggest for the recovery of
the Korean economy are the following: the abandonment of the state-led industrial
policies; corporate downsizing including the dissolution of chaebol; more rigorous
and open accounting practices; and a greater role for foreign capital in shaping and
disciplining economic activity (Hart-Landsberg and Burkett 2001:404).
By contrast, the latter, statist (e.g. Stiglitz 2003), groups argue that the state’s
underregulation rather than overregulation helped to create the1997 financial crisis.
They underscore the success of past governments’ industrial policies based on their
developmental plans. According to this view, the main causes of the crisis were the
opening of the capital account and the laxity of regulatory control over capital flows.
Their solution for economic recovery is, therefore, the reregulation of the financial
system and the reimposition of an industrial policy (Hart-Landsberg and Burkett
2001:404). In the statist view, if the state were a stronger regulator, preventing
dangerous inflows, there would have been no crisis (Weiss 1999: 320).
Both perspectives have shortcomings. Neoliberal economists do not explain
why the crisis occurred after the economic liberalization. If it is true that the
intervention of the state in the economy with its industrial policy was a causal
problem, why did not such a crisis happen at the time of the strong intervention by the
state? Statists have a far better grasp of the Korea experience than did neoliberals. But
their work is also not free from criticism. Statists do not account in detail for why the
41
state, that was once strong, lost its capacity to control over capital. Is the weakness of
the state an endogenous consequence? Otherwise is it from external factors? Or both?
4.3. The Decline of the State’s Capacity
The failure of neoliberal groups to account for the Korean case (i.e., the rapid
growth under the strong intervention of the state in the economy and the economic
crisis after the liberalization) arises from their neglect in considering the roles of the
state in the economy. The state may distort the market as neoliberalists assume, but at
the same time, can play a significant role in the growth of the economy as shown in
the Korean case. Statists have provided us with critical insights into the role of the
state in economic development, but they do not investigate how the balance of power
between the state vis-à-vis other actors in society may change as a result of economic
development (Kim 1997:14). This section examines why the Korean state lost its
power vis-à-vis capital groups during the period of liberalization.
4.3.1. External Factors: the Changed Context of the World Economy
The decline of the state’s capacity has both external and internal factors.
Externally, the changing situations of the world-market economy play a role in the
loss of controlling power of the Korean state. The late 1990s provided a different
world-economy circumstance to Korea than before. The rising global competition for
exports led to a rapid decline in export earnings. Notable here is the emergence of
Southeast Asian countries and China as competitor nations for exports. Their low
42
labor costs have more advantage in price competition than Korea. This resulted in a
serious trade balance deficit. This trade deficit threatened the Korean economy. Faced
with declining profits, chaebols moved production overseas not only for low-labor
cost, but for expanding export market. The now-defunct Daewoo Group’s popular
slogan, “Sae-gye-gyong-young,”(global management) is a typical example of the
chaebol’s strategy – global expansion of production and market. The investment by
the Daewoo Group was not limited to Asia; it spread out to European countries such
as Poland and Uzbekistan. As a result, by the mid-1990s, Korea became one of the
largest foreign investors in a number of developing and transition economies (Shin
and Chang 2003:77-78). Such an attempt to capture new market opportunities needs
abundant capital. Thus, Chaebols demanded the liberalization of the financial market
for easier access to cheaper foreign money. The state fully opened the financial
market, as the Korean state had changed its attitude to chaebols from control to
support with the belief that “the competitive power of chaebols reflects the very
competitive power of the nation.”
On the other hand, there was pressure to remove market-protection policies
from the United States and other advanced countries. From the late 1980s,
recognizing Korea as a now-developed country, industrial nations started claiming
that Korea should become more ‘responsible’ by abandoning all those ‘unfair’
protections in all the markets including the financial market (Shin and Chang
2003:70). Especially, in the view of OECD countries of which the Kim Young Sam
government wanted to be a member, a mature and developed economy was governed
by market forces and the desirable type of a state was a relatively disengaged,
43
economically liberal state (Henderson, Hulme, Phillips, and Kim 2002:17). Thus, The
Kim government opened up various markets including the financial market for being
a member of OECD.
4.3.2. Internal Factors: Growing Power of Chaebol and Neo-
liberalization of Technocrats
Internally, the decline of the state’s power is a result of economic
development itself. Rapid economic growth in Korea transformed the state-centered
institutional configuration; it accompanied the growing power of chaebols. The
chaebols that had grown in the protection of the state came to have confidence that
they could now stand on their own, as they have succeeded in the exclusive domains
of the most advanced economies such as memory chips and automobiles. The
protection by the state became unnecessary for chaebols. By the mid 1990s, the
chaebols aggressively demanded the withdrawal of the state from economic
management (Shin and Chang 2003:69). In its report in 1997, for instance, the
Federation of Korean Industries (FKI), the club of the chaebols, called for a radical
scale-down of the state including the abolition of all government ministries except for
Defense and Foreign Affairs and demanded the consequent reduction of government
bureaucracy by 90 percent (Shin and Chang 2003:69).
The decay of the developmental state is also closely associated with the
increasing conversion of the intellectual elite, especially bureaucratic elite, to neo-
liberalism. As Korea connected closely with the United States in politics and the
economy, the number of elite bureaucrats and academics who had a masters or
44
doctoral degree in economics from the United States increased. Increasing Korea’s
trade with America and the other Western countries amplified the value of American
academic degrees and work experiences in the United States. As a consequence, the
so-called ATKEs (American-trained Korean economists) (Amsden 1991) increasingly
dominated not only an academic world but also a bureaucratic field in Korea. The
majority of technocrats were the ATKEs. Because of their study in the U.S., the
ATKEs easily accepted neoliberalism in economics and actively pursued neoliberal
economic policy.
6
In other words, the technocrats increasingly believed the virtues of
the free market and saw developmentalism as a ‘backward’ and ‘mistaken’ ideology
(Shin and Chang 2003:68). The Economic Planning Board (EPB) increasingly
consisted of neoliberal ATKEs. The EPB, the symbol of developmentalism, had
become the home of neoliberalism in the Korean state. Like FKI, technocrats in the
EPB also suggested a retrenchment of the state and especially the abolishment of their
own ministry. They viewed planning as no longer feasible due to the increasing
complexity of the economy (Shin and Chang 2003:68).
Furthermore, the developmental strategy encouraging education produced a
well-educated middle class that pursued democracy and possessed antipathy for the
authoritarian military government and thereby contributed to the formation of civil
society. The suppression of labor, combined with the rapid growth of manufacturing
industries, moreover, brought strong unions.
6
Babb’s (2003) study of Mexico shows the same tendency. The increasing moves of capital and goods
between Mexico and the United States enhanced demand for technocrats who knew the U.S. economy
well. The new American-trained Mexican technocrats disseminated neoliberal ideology in Mexico
where nationalistic economics had dominated and retrenched the role of the Mexican state in economic
development.
45
These changes considerably weakened the capacity of the state. The state-led
industrial policy started to be dismantled since the early 1990s. The hallmark of the
end of developmentalism in Korea was the termination of five-year economic
development plan along with the abolishment of the Economic Planning Board in
1993. This demise of the developmental state brought about the mismanagement of
the financial market that led the 1997 IMF crisis due to incapacity of the state to
control capital’s reckless access to financial resources (Shin and Chang 2003:70).
4.4. The Impact of the Institutional Transformation on the Labor Market
and Inequality
One may view the rising inequality after 1997 as a passing phenomenon
caused by the shock of the crisis. That is, one might expect that income distribution
would return to prior levels sooner or later as the impact of the shock disappeared and
there was an economic recovery. This is not the case, however. Despite the fact that
the Korean state completely repaid its IMF loan in 1999, and the Korean economy
recovered within a few years of 1997, inequality has remained much higher than
before 1997, with a Gini coefficient above 3.0.
Why did inequality not fall to its previous level? To answer this question, one
must address the structural changes keeping inequality high. The process of
liberalizing the Korean economy and the IMF financial crisis itself transformed the
institutional configurations in Korea. For example, economic liberalization and the
financial crisis increased the institutional capacity of foreign capital, by rapidly
denationalizing domestic capital (Hart-Landsberg and Burkett 2001: 414-416). First,
46
the Korean auto industry was handed over to foreign capital. The Daewoo Motor
Company, Korea’s second largest car company, was acquired by General Motors
(GM). The Renault Company of France bought Samsung Motors. Denationalization
occurred in large scale in other manufacturing sectors as well. Sweden’s Volvo
purchased Samsung’s construction equipment operation in 1998, and Philips
Electronics acquired a 50 percent stake in LG-LCD in 1999.
7
As the Korean economy has been increasingly denationalized, labor has faced
a crisis in its job security. This is evident in efforts to force unions to accept mass
layoffs by foreign managers. For example, in November 2000 as a condition for
providing fresh loans necessary for the company’s survival, Daewoo Motor’s
creditors demanded that “the carmaker’s union accepted a plan to cut wages and
layoff as many as 3,500 workers, or one-third of its domestic work force.”
8
The union
did not accept this suggestion, and thereby the creditors refused loans. This result
damaged the union. As Hart-Landberg and Burkett (2001:421) observed, “the
government, domestic creditors, and the international business press all blamed
Daewoo workers for their unwillingness to shoulder their rightful share of the costs of
a painful but unavoidable restructuring.” This case illustrates the increasing power of
foreign capital on the Korean labor market. Given the large number of layoffs and
that those whose wages were reduced by foreign managers were largely uneducated
and unskilled workers, it can be inferred that the denationalization of the Korean
7
The above-mentioned cases of denationalization are cited from Hart-Landsberg and Burkett
(2001:415-416).
8
Samuel Len, “Automaker on the Brink of Failure,” New York Times, November 7, 2000, recited from
Hart-Landsberg and Burkett (2001:46)
47
economy was more likely to affect income distribution negatively by decreasing job
security in the new “flexible labor market.”
On the other hand, rising pressures from global competition gave chaebols
strength, while weakened the capacity of the state. Shin and Chang (2003:78) argue,
“Globalization gave chaebols an important advantage by opening up new, ‘emerging’
markets, entry into which carried high risk and therefore was suited more to the
chaebols with greater risk-bearing capability than to single-product firms.” Another
scholar also agrees the rising power of chaebols since 1990s. According to You and
Lee, “The winding down of industrial policy was also mishandled because of
chaebol’s influence on the government”(You and Lee 2000:89; emphasis added).
That is, they said the chaebol’s power over the state is one of the main causes of the
crisis. For example, chaebols’ power over the state can be seen in the Samsung
Automobile case. The Kim Young Sam government allowed Samsung to enter the
auto industry, reversing its earlier decision that prohibited its entry. In the view of the
state, Korea already had sufficient production of cars for domestic and the world
markets. The state might think that it would be more important to support existing
auto companies such as the Hyundai motor company to increase car exports to the
world market. Besides, building a new car company requires high levels of
capitalization, which often means a high reliance on foreign capital. That is, the state
viewed Samsung’s entry into the car industry as an inefficient project accompanying
high risk. Despite the negative view, however, the state approved Samsung’s
expansion to the car industry agreeing to the biggest cheabol’s demand. The deal
48
resulted in exacerbating over-capacity in the economy (Hart-Landsberg and Burkett
2001; You and Lee 2000).
The flexibility of the labor market has a similar story. The Kim Dae-Jung
government that started from 1998 accepted the chaebol’s demand to remove a rigid
protection policy in the labor market. The pro-chaebol policy, like the easy layoffs
and the use of “dispatch” labor, directly and indirectly affected the level of income
inequality. Directly, and most decisively regarding inequality, it brought about
unprecedented unemployment and underemployment and dramatically increased non-
regular workers, through the “flexible” labor market institution, as mentioned above.
Indirectly, it contributed to the changes in the effects of education. As examined in
the previous section and as most scholars agree, educational expansion substantially
contributed to a reduction of inequality in Korea (Kim and Topel 1995; Lee and Kim
1997; Birdsall, Ross and Sabot 1997). However, in the 1990s, the equalizing impact
(i.e., compression effect) of mass education no longer seemed to apply. Rather, the
composition effect became more notable. In particular, college premiums started
rising in the early 1990s, despite the steady increase of the ratio of college graduates
among the labor force from 6.7 percent in 1980 to 12.5 percent in 1988, 17.5 percent
in 1993, and up to 23.4 percent in 1998. You and Lee (2001:15) state, “Although the
rate of expansion of college education has remained as high since the early 1990s, it
has not led to an improvement of educational wage differential.” The rise of the
college premium is associated with an increasing demand for highly educated labor.
There are some indications that the demand for the highly educated has increased
since 1992. During the period from 1992 to 1996, the increase in employment in
49
finance, insurance, real estate, and business services amounted to 30.2 percent of the
total employment increase during the same period. This compares to only 18.4
percent during the period from 1988 to 1992 (You and Lee 2001:15).
What changed the compression effect of education to the composition effect?
First, the change was due to the structural change in Korean industry. Many
manufacturing industries have been going overseas for cheaper labor, while many
finance-related industries have grown significantly due to financial liberalization. In
the past, the period of the state’s control of financial resources, domestic capital,
especially chaebol, did not need to establish financial companies because they were
not able to attract foreign capital without the state’s approval. However, once
chaebols were able to freely borrow foreign money after the liberalization of finance,
individual firms also needed to restructure in order to attract and manage foreign
capital. It increased the financial industry in Korea. As the financial sector became
increasingly important, the wage gap between the financial sector and the non-
financial sector became larger. The expansion of the financial industry increased the
premium of a college education that was required to enter that industry. As a result,
after the liberalization, the impact of higher education has been to increase income
inequality.
50
Chapter 5: Conclusion
Between 1960 and 1990, the Korean economy grew rapidly, retaining relative
equity in income. Through both internal and external factors, the autonomous power
of the state played a key role in achieving this “growth with equity.” Internally, land
reform contributed considerably to the state’s strong capacity. The Korean state was
free from undue pressure from the ruling class as land reform removed the basis of
the traditional elite’s power. In addition, the Cold War context allowed the Korean
state to avoid external coercion from core countries. In the 1960s and 1970s, Korea
was considered as a bulwark against international communism in East Asia. This
geopolitical situation led the United States and Japan to support the Korean economy
through economic aid and transfers of technology. Confrontations with North Korea
strengthened the controlling power of the authoritarian military government over
society. Such internal and external circumstances strengthened the Korean state’s
relative autonomy, and allowed the government to achieve both growth and relative
equality.
In the liberalization era since 1990, Korea experienced dramatic institutional
changes. The capacity of the state to regulate, especially, chaebols and foreign capital
weakened. Before the liberalization, the state was able to control access to financial
resources for domestic capital and regulate international investment in order to pursue
specific developmental goals. However, by allowing financial liberalization, the state
gradually lost its leverage in directing development. Instead, the influential power of
chaebols and foreign capital, including IMF to intervene in industrial policy-making,
51
became larger. This is particularly evident in reforms for “labor market flexibility.”
Chaebols argued that strict labor market institutions distorted the market and lessened
their efficiency. For the same reason, foreign-capital investors and IMF also urged the
flexible labor market as a condition for their investment.
The changes in institutional configurations were due largely to the changing
relation of the Korean economy to the world economy. Emerging rival exporting
countries drastically reduced Korea’s earnings from exports. The United States and
Japan started adopting an “economic” containment policy toward Korea as the Cold
War ended and the Korean economy continued to grow rapidly. Neoliberal ideology
as a “global standard” also served as a pressure on opening the Korean market. Such
external conditions were not the only cause of the weakening power of the state. The
internal transformations of the institutions intrinsic in the process of Korean
economic growth such as the growing power of chaebols and pressure for
democratization tended to reduce the capacity of the state, interplaying with the
external context.
The liberalization of financial markets was a product of the changed power
relationships between the state and both domestic and foreign capital. Financial
liberalization strengthened both local and foreign capital, by allowing easier access to
loans and/or direct investment by foreign capital. One result of this liberalization was
an increase in the foreign debt grew to an unsustainable level. And this situation
resulted in the 1997 IMF financial crisis. As a way of restoration, Korea handed over
many industries to foreign investors. Mass layoffs were allowed and many jobs were
52
lost as a condition for selling companies. Unions were forced to accept the easy-
layoffs policy by the state as well as chaebols and foreign capital.
Such flexibility of the labor market (as a product of the transformed power
relationships) including such deregulation for layoffs and “casualization of labor”
resulted in the sharp rise of the unemployment and underemployment rates, which
were the very causes affecting the largest part of the rise of inequality after the
financial crisis (Haggard 2000; Kim 2004; Yang and Moon 2005). Moreover, the
flexible labor market, combined with the decline of manufacturing jobs by shifting
production abroad, eroded the equalizing factors that existed during the “growth with
equity” era. Increased job insecurity – increased unemployment and
underemployment – removed the compression effect of education, and instead
strengthened the composition effect that widened income inequality. Democratization
and unionization made the state’s low-wage policy unattainable, and as a result,
widened wage gaps between large companies with unions and the small-and-medium-
sized firms without unions (Keum 2004). Moreover, the increasing competition in the
world economy and geopolitical changes – particularly the turn of the United States
and Japan from economic aid and supports to checks – no longer supported Korea’s
export strategy. These factors from the inside and the outside Korea contributed to the
rise of income inequality since 1997.
This study on income inequality in Korea argues that Kuznets’s hypothesis
must be revisited. First, Kuznets did not pay attention to the state’s role.
Modernization theorists, including Kuznets, were more likely to think that
intervention by a state was unnecessary for lowering inequality. However, in Korea’s
53
situation showed the opposite was true. Relatively low inequality in Korea during the
developmental era was, in fact, due largely to the state’s capacity to regulate domestic
and foreign capital. The state contributed to the “growth with equity” development
model, by creating an institutional environment that promoted an accumulation of
individual and collective human skills in production. After 1993, however, the state
lost its regulating power by removing EPB that had established developmental plan
and by opening fully the financial market. As a consequence, Korea faced a financial
crisis. This crisis deteriorated income distribution in Korea. While Kuznets made
little account of the role of a state, the Korean case emphasizes the importance of the
state’s capacity by showing how the loss of the state’s capacity affects the labor
market and income inequality. The neoliberal perspective – that a state’s intervention
is always problematic – is therefore disproved by this case. Second, Kuznets
overlooked the relations of a local economy to the world economy. There was
mounting competition and increasing pressure of the world economy behind the
changes of institutional configurations in Korea. It lowered the capacity of the state
and by the same token reinforced that of capital. Therefore, explanations of income
inequality should include the relations of a local economy to the world economy, as
well as the regulatory capacity of the state. The causes and dynamic patterns of
income inequality in Korea demonstrate the importance of such changes in the
institutional configuration as factors affecting inequality.
As an initial effort to link income inequality and state’s capacity, this study
has limitations as much as it serves as a stepping-stone for future research. First, this
study does not pay attention to civil society. In Korea, since 1990s, the power of civil
54
society has increased considerably. Perhaps civil society, instead of the state, may be
able to restrain chaebol’s activities that increase income inequality. Civil society’s
active participation might affect institutional configurations and institutions
themselves, thereby playing a role in lowering (or raising) income inequality. Second,
this study does not include the case of self-employment. Given its increasing
proportion, self-employment should be examined in future studies about income
inequality. Third, a comparative study is necessary for generalizing the conclusion of
this study. Is the relationship between income inequality and the capacity of the state
a “unique” case of Korea or a common pattern to be generalized? We can compare
the Korean case with countries that have gone through similar financial crises but had
different political context, for example, Mexico. Also, comparative study can provide
knowledge about how significant the rise of income inequality was after the IMF
financial crisis is. If income inequality in other countries increased more than that in
Korea after their financial crises, we can ask how the Korean government was able to
restrain the rise of income inequality, even though it did increase some after the IMF
financial crisis. Last, it is not clear what caused the decline of the state’s capacity.
Was the loss of the state’s capacity based on the failure of the policy choices by the
local state? Or, is it an inevitable process of neoliberal globalization? In terms of this
question, Malaysia may serve as a good case to be compared with Korea. Rejecting
IMF’s neoliberal reform policies, the Malaysian government has not given up on its
regulation of the financial market. How could the Malaysian state resist such external
pressures? How did maintaining the state’s regulatory power affect income inequality
in Malaysia?
55
Understood as an opening to the analysis of the relationships between state’s
capacity and income inequality, this paper has begun to unravel some parts of the
institutional arrangements related to changes in income inequality in Korea. This
comparative study across time in Korea indicates that income inequality depends
much on how the state and capital respond and reorganize the local institutions in the
face of increased competition in the world-economy due to neoliberal globalization.
This paper, at the same time, holds the argument that the state should have capacity to
regulate the economy ensure more equitable income distribution.
56
Table 1. Composition of Employed Persons by Industry, 1960-2000 (%)
Industry 1960 1970 1980 1990 2000
Agricultural, forestry &
fishery
Mining & manufacturing
SOC* & others
79.5
5.4
15.1
50.4
14.3
35.3
34.0
22.5
43.5
17.9
27.6
54.5
8.7
20.6
70.7
Source: Korean National Statistical Office, Social Indicators in Korea in Hong (2003:41)
* SOC (social overhead capital)
Table 2. Premium to Education Among Male Wage Labor
Brazil Korea
1976 1985 1976 1985
Premium to
primary schooling
0.488
(55.68)
0.449
(67.23)
0.176
(19.66)
0.092
(7.54)
Premium to
secondary schooling
0.958
(85.70)
0.886
(110.53)
0.473
(48.19)
0.296
(23.40)
Premium to
tertiary schooling
1.593
(100.22)
1.508
(127.40)
0.969
(71.48)
0.655
(42.06)
Source: Birdsall, Ross and Sabot (1997:107)
Table 3. Employment Changes by Gender and Education (thousand, %)
April 1996 April 1997 April 1998 96/97 (%) 97/98 (%)
Total 20,743 21,219 20,127 476 (2.3) -1,092 (-5.1)
Gender
Men
12,349
12,446
11,976
97 (0.8)
-470 (-3.8)
Women 8,395 8,773 8,151 378 (4.5) -622 (-7.1)
Education
Less HS degree 7,637 7,715 6,870 78 (1.2) -845 (-11.1)
HS degree 9,009 9,163 8,582 154 (1.6) -581 (-6.2)
College degree 4,098 4,341 4,675 243 (6.4) 334 (7.2)
Source: Korean National Statistical Office, The Economically Active Population Survey
57
Table 4. Employment Change by Industry and Occupation
April 1997/ April 1998 (% Change)
Industry
Agriculture / Fishery
216 (8.8)
Manufacturing -619 (-13.7)
Construction -392 (-19.3)
Utility/Trans./FIRE 11 (0.6)
Retail/Wholesale -234 (-4.0)
Services -66 (-1.5)
Occupation
Prof./Administration 15 (0.0)
Clerical -117 (-4.5)
Sales/ Service -103 (-2.1)
Operatives/Laborer -1,072 (-13.9)
Farmers/ Fishers 186 (7.9)
Source: Korean National Statistical Office, The Economically Active Population Survey
Table 5. Changes in Employment Structure (%)
1991 1994 1997 1999.3 2000 2001 2002 2003.3
Day
Laborers
15.7
14.3
14.1
17.4
17.6
16.2
17.2
14.9
Temporary
Workers*
28.7
27.8
31.6
33.2
34.5
34.6
34.5
34.7
Full-time
workers
55.5
57.9
54.3
49.4
47.9
49.2
48.4
50.4
Source: Korean National Statistical Office in Kim (2004:25)
Note: * Those employed from one month to less than a year
Table 6. Hourly Wages by Employment Type, 2000 (in won/hour)
Fixed-term contracts Contracts of an indefinite
period
Duration of
employment
contract
Less than
one year
One year or
longer
One year or
longer
Less than one
year
Average
Average 3,894 7,632 6,364 3,520 6,061
Regular -- 7,632 8,234 3,840 8,225
Temporary 4,165 -- 4,307 3,352 4,251
Daily-hire 3,766 -- 3,941 3,586 3,811
Source: Korean National Statistical Office (2000) in Yang and Moon (2005:84)
58
Table 7. Major Financial Liberalization Measures in Korea During the 1990s
1) Interest rates deregulation (on four states: 1991 to July 1997)
- By 1997, all lending and borrowing rates, except the demand deposit rates, were liberalized
2) More managerial autonomy to the banks and lower entry barriers to financial activities
- Freedom for banks to increase capital, to establish branches, and to determine dividends payments
(1994)
- Enlargement of business scopes for financial institutions (1993)
: continuous expansion of the securities business of deposit money
: freedom for banks and life insurance companies to sell government and public bonds over-the-
counter (1995)
: permission for the securities companies to handle foreign exchange business (1995)
- Abolition of the limits on the maximum maturities in loans and deposits of banks (1996)
3) Foreign exchange liberalization
- Adoption of the Market-Average Foreign Exchange Rate System (1990)
- Easing of the requirement for documentation providing the deal (i.e., non-financial) demand in
foreign exchange transactions (1991)
- Setting up of foreign currency call markets
- Revision of the Foreign Exchange Management Act (1991)
: changing the basis for regulation from a positive system to a negative system
- Introduction of ‘free won’ accounts for non-residents (1993)
- Allowance of partial Won settlements for the export or import of visible items (1993)
- Foreign Exchange Reform Plan (1994)
: a detailed schedule for the reform of the foreign exchange market structure
- A very significant relaxation of the Foreign Exchange Concentration System (1995)
4) Capital market opening
- Foreign investors are allowed to invest directly in Korea stock markets with ownership ceilings
(1992)
- Foreigners are allowed to purchase government and public bonds issued at international interest
rates (1994), equity-linked bonds issued by small-and-medium-sized firms (1994), non-
guaranteed long term bonds issued by small-and-medium-sized firms (Jan. 1997), and non-
guaranteed convertible bonds issued by large companies (Jan. 1997)
- Residents are allowed to invest in overseas securities via beneficiary certificates (1993)
- Abolition of the ceiling on the domestic institutional investors’ overseas portfolio investment
(1995)
- Foreign commercial loans are allowed without government approval as far as they meet the
guideline established in May 1995
- Private companies engaged in major infrastructure projects are allowed to borrow overseas to pay
for domestic construction cost (Jan. 1997)
- Liberalization of borrowings related to foreign direct investments related (Jan. 1997)
5) Policy loans & credit control
- A planned termination of all policy loans by 1997 is announced (1993)
: a step-wise reduction in policy loans to specific sectors (e.g., export industries and small and
medium-sized firms)
- Simplifying and slimming down of the controls on the share of bank’s loans to major
conglomerates in its total loans
Source: Ministry of Finance and Economy in You and Lee (2000:30)
59
Table 8. Korea’s Foreign Debt Profile, 1960-1997
Year Total debt
(millions of
dollars)
Share of short-
term debt (%)
Foreign debt to
GNP (%)
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
83
83
89
157
177
206
392
645
1,199
1,800
2,245
2,922
3,587
4,257
5,933
8,443
10,350
12,649
14,823
20,287
27,170
32,433
37,083
40,378
43,053
46,762
44,510
35,563
31,150
29,368
31,700
39,135
42,819
43,870
56,850
78,439
104,695
120,800
1.2
n.a
n.a
14.0
5.6
1.5
1.8
10.2
7.4
10.8
16.6
16.4
17.8
16.5
20.9
28.5
28.9
29.4
21.3
26.9
34.5
31.5
33.5
30.0
26.5
23.0
20.8
26.1
31.4
36.8
45.3
44.0
n.a.
43.7
n.a.
n.a.
58.3
n.a.
3.9
3.9
3.8
5.8
6.1
6.9
10.7
15.1
22.9
27.2
28.1
31.2
33.9
31.5
32.0
40.5
36.7
33.8
28.5
32.5
44.4
49.0
52.0
50.8
49.5
52.1
42.3
27.6
18.0
13.9
13.3
13.9
n.a.
12.7
14.2
16.1
20.2
25.5
Sources: Economic Planning Board and the Bank of Korea in Shin and Chang (2003:40)
60
Figure 1. Income Distribution in Korea, 1965-2004
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
G
i
n
i
I
n
d
e
x
nationwide
cities only
Sources of ‘Nationwide’: World Bank table by Deininger (1965-1988); Korean National Statistical
Office (1996-2004)
Note: The unit is the nationwide households; the income reported is gross income
Source of ‘Cities only’: Cities only: Korean National Statistical Office, Annual Report on the
Household Income and Expenditure Survey
Note: Data are for salary & wage earner’s households in all cities (73 cities)
Figure 2. The Growth Rate of GDP in Korea, 1971-2004
-10.0
-5.0
0.0
5.0
10.0
15.0
1971 1976 1981 1986 1991 1996 2001
T
h
e
G
r
o
w
t
h
R
a
t
e
o
f
G
D
P
Source: The Bank of Korea, Quarterly National Accounts
61
Figure 3. Per Capita Gross National Income (GNI) in Korea, 1981-2004
? 000
4 000
6 000
8 000
10 000
1? 000
14 000
16 000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 ?001 ?003 ?005
P
e
r
c
a
p
i
t
a
G
N
I
(
$
)
Source: The Bank of Korea, Quarterly National Accounts
Figure 4. Unemployment Rate in Korea, 1970-2005
0
1
2
3
4
5
6
7
8
1970 1975 1980 1985 1990 1995 2000 2005
P
e
r
c
e
n
t
o
f
P
o
p
u
l
a
t
i
o
n
Source: Korean National Statistical Office, The Economically Active Population Survey
62
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