ABSTRACT
It is now well known that rapid economic development in Korea was guided by the government that strongly intervened into the economy from the early 1960s (Amsden, 1989). Opposite to neoclassical arguments, the role of the state was crucial in Korea’s growth, represented by selective promotion of industry, credit allocation programs, various measures for trade protection, and capital controls. The key to this successful intervention was a specific institutional structure of the government, called the developmental state, that had a characteristic of embedded autonomy and high capacity (Evans, 1995). The state in Korea had relatively strong autonomy because no powerful economic interest groups existed, in contrast with Latin American captured states. Another important feature was a close government-business relationship with cooperation and discipline. This mitigated information problems and limited unproductive rentseeking. Furthermore, the Korean government had highly capable officials due to the long history of the bureaucracy system and efforts for internal reform. It was strongly development-oriented, different from other developing governments that attempted to maximize their own revenues. The Korean government established a state-led financial system on the basis of this institutional structure, in which the government allocated financial resources to priority industries and firms in line with industrial policy. The major industrial policy purpose was export promotion in the 1960s and the development of heavy and chemical industries in the 1970s. In the process of industrialization, domestic business groups, called “chaebol” had been strongly supported by the government, with preferential credit, tax break and trade protection. The most important tool the government made use of was providing them with preferential bank loans, which were owned and controlled by the government itself. The share of policy credit in all loans of deposit money banks was higher than 60 percent from 1960 to 1991. It is crucial to understand that the government support for businesses was wedded with effective discipline over their practices. The government provided preferential credit in return for export performance of firms, thereby creating contingent rents and minimizing rent-seeking. Hence, the development model of Korea was a unique combination of the market and state mechanism. The specific character of the state and the government-business relationship in Korea made this peculiar system function effectively. This system resulted in high and productive investment in the private sector, and thus economic growth for some 30 years.
