ABSTRACT
Developing countries typically face three interrelated policy challenges: investment, conflict management, and engagement with the outside world. They must formulate effective strategies to accumulate both physical and human capital, cope with social conflicts, and maximize the benefits of ‘openness’ while containing the risks (Rodrik 1999). In the early 1960s, the Republic of Korea (South Korea) addressed these developmental challenges by combining state-led financial resource allocation with export market orientation. The government nationalized banks and assumed a dominant role in financial resource allocation, providing selective guarantees on private-sector foreign borrowing. The government in effect formed a risk partnership with large private firms. Replacing the import substitution bias of the 1950s with outward orientation, the government, for the most part, used the performance of firms in competitive export markets as a selection criterion. As for conflict management, successive authoritarian regimes used both the carrot of improving living standards and the stick of ruthless suppression – before Korea was democratized in the late 1980s.
