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Catch-up and Crisis in Korea

Wontack Hong

Whilst the process of catch-up in Korea – led by export-oriented growth – has been rapid and, in a sense, very successful, it has also been subject to turbulence, not least in a crisis of near bankruptcy that has dramatically revealed its Achilles heel. Informed by the 1997 crisis, Wontack Hong writes a new history of the Korean economy; one that seeks to understand export-oriented catch-up in newly industrialized countries (NICs) whilst offering a realistic appraisal and forewarning of the pitfalls which could signal self-destruction.
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Chapter 9: The Political Economy of the Korean Model

Wontack Hong


1. INTRODUCTION The object of this chapter is to examine the political economy of the Korean model, summarizing the relevant parts of previous chapters, and then consider its prospects in light of the 1997 crisis. Section 2 reviews the institutional arrangement that had bred the seeds of eventual catastrophe, Section 3 examines the financial crisis in Korea that invited the IMF intervention on November 23, 1997, Section 4 examines the metaphor of rulers as robbers, Section 5 describes the aspect of predatory pseudo-democracy in Korea and the last section gives concluding remarks on economic and political prospects of the Korean model. 2. THE SEEDS OF EVENTUAL CATASTROPHE The major policy measures that were adopted by the Korean government in pursuing the export-oriented growth strategy were subsidized credit rationing, preferential tax treatments, selective import restrictions, socialization of business risk, and vigorous administrative support. In due course, the politicians and bureaucrats came to wield great influence upon the fate of individual firms and entrepreneurs. Under the late President Park’s regime (1961–79), any entrepreneur could automatically attain access to short-term bank credits at subsidized interest rates by undertaking export-related activities. Firms engaged in export activities could also receive favorable treatment, though less automatic, in the allocation of low-cost long-term domestic and foreign loans (which received government repayment guarantees). Also the other subsidy measures such as preferential tax treatments were more or less streamlined in proportion to export performance. Consequently, the efficiency of credit rationing and other subsidy measures was maintained...

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