Manual The Political Economy of the Korean Industrialisation

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A superb book. Governing the Market demystifies East Asia's miracle without making it seem any less remarkable. It assaults idle prejudice on every side of the debate about markets and the role of government. It is long overdue, and deserves to be widely read. Robert Wade. Subject Areas. Bruce Cumings is my husband, friend, colleague, discussant, and sounding board; without his love and jokes good and bad , this book would not have been possible. Yet we have little understanding of how this strong, ubiquitous state has come about, and of what it does to stimulate the economy.

Unraveling the riddle of the Korean state would enlighten us not only about the political economy of rapid industrialization, but about the nature of the state in general. This study seeks to contribute to the literature on the theory of the state through an examination of finance and development in Korea. I propose that the political logic of the financial structure in Korea offers us the best explanation of the origin and development of this state.

A stable monetary framework is not something that the market can provide by itself, and even Milton Friedman emphasized state supervision of the money supply as an essential prerequisite for a market economy. Depending on types and degrees of monetary control, the state is in a position to decide how national resources are mobilized and allocated: who gets what, when, and how. At the core of state power, therefore, is its channeling of the flow of money. As such, money is not merely a medium of exchange but also a political tool. But this is not well recognized in the literature.

With the eclipse of functional behaviorism as the dominant mode of analysis in political science, scholars of diverse perspectives have sought to explain one or another of these three facets of strong states. Huntington focused on an organizational accumulation of power through institution-building, Skocpol reinterpreted the strong states that emerge with modern revolutions as a function of state-building by revolutionary elites, and Krasner and Stepan have defined a strong state as one that is insulated from outside pressure groups, and capable of reordering society.

Fiscal policies are seen as the nexus between state and economy, and between the state and the restructuring of society. In the Marxist literature, too, the instrumental conception of the state has given way to a theory of "relative autonomy," sharing many of the same arguments about what makes for a formidable state. It is little wonder then that people like Loriaux and Zysman who both study France have produced studies on state and finance. If not that, then it is the theory of the more or less dependent Latin American state.

This produces a curious regional bias, and a hiatus between the two bodies of theory, giving us theories of the European or the Latin American state at distinctly different levels of development. NormanL and a specifically American perspective that wants to uncover pluralism everywhere.

His preferred method for unlocking the secret of Japanese neomercantilism is an institutional analysis, combined with a genealogy of prominent bureaucratic careers. The Korean literature is even less rich, yet Korea partakes of the same problems. But, the rate and the pattern of Korea's economic growth, not to mention geographic and cultural proximity, also make Japan a useful referent.

So, study of Korea must inevitably partake of the discourses within the two regions-East Asia and Latin America-and do so in such a way that it is in but not of the mainstream debate: a stranger often observes strange things, things hitherto unnoticed. Second, Korea's promontory position in the cold war requires an analyst to mesh domestic with international politics. Yet, the neorealist conception of the state as an international actor does not account for the domestic accretion of state power, and state theory in comparative politics treats security matters in passing, almost as an afterthought.

We obviously need a dialectical conjoining of comparative and international politics, something this study seeks to do. We must first define what we mean by the state. Yet the world system literature informs us that states in the periphery, no matter how strong at home, are ipso facto "weak states.

We agree with the state-centric definition, in part: the state is the rational-legal, administrative agency of coercion. But we also posit the state as poised between the world system and the domestic system. The central hypothesis of this study is that an examination of the state and the financial structure can explain different developmental outcomes, in particular the comparative developmental success of South Korea.

This could never be understood without grasping the political logic of the Korean financial structure.

Spotlight the Future Economic Situation of Korean Society - Seung Il Jeong - TEDxKoreaUniversity

The Korean model of the state will become more apparent when we look at the categories of financial mobilization and allocation, and their social consequences. By mobilization, I mean the gathering together of foreign and domestic resources by the state, thus enhancing its capacity. By allocation, I mean the modalities by which the state directs these resources in terms of its own goals. By social consequences, I refer to the state's capacity to restructure society, and to resist or be insulated from domestic social forces.

Mobilization of Financial Resources and State Power In regard to mobilization, an essential point is that no consideration of the relative autonomy of the Korean state can proceed without mention of its position as a security state in the global system. But at the same time, this is not so different from the pattern of nineteenth century continental industrialization, in the context of British hegemony. The big difference in the Korean case is the role of outside guarantors like the United States and Japan who, so intent on preventing South Korea from being another domino, opened a realm of opportunity for Korean action this is true from the first days of the Rhee regime, however weak it was at the time.

The main point is that this security environment showers benefits on the guaranteed state in the form of bilateral aid or multilateral loans, and enhances Korean maneuverability-such as, for example, justifying in security terms the adding on of heavy industrial capacity i? Security concerns can thus be utilized to mobilize resources for development. Sources of funding have important political implications.

Industrialization in Sub-Saharan Africa and import substitution policy

Here, in both cases, the effect was to augment state power. In Latin America, by contrast, the source of funding was usually multinational corporations; foreign capital possessed its own investment and market goals and bypassed the state, thus emerging as a formidable domestic force which hamstrung the state; in Korea, the opposite occurred, thereby building state power and reducing foreign goal direction. The point is not that this sort of external financing foreign aid and multilateral loans is free from foreign interference.

Quite the contrary. Taiwan and Korea in the s and the early s were penetrated states, often approximating the situation in Central America. The aid missions of the United States would often keep the largest branch offices in these nations, closely monitoring their use of funds. Taiwan's tum toward market liberalization in the late s, and Korea's in the mids, cannot be understood apart from the pressure of USAID, which used aid as a bargaining chip.

The answer is that the penetration was not one way but both ways, because of the cold war milieu. The promontory strategic positions of the ROK and ROC, poised on the geopolitical fault lines, gave the two states remarkable leverage on the big ally; thus, for example, they were able to influence the Congress through lobbying activities here, the China Lobby was particularly successful; Korea notorious in its failure, with "Koreagate". It is little wonder then that theories on the power of the "small allies" would often use Taiwan and Korea as the model.

In a nation with a dearth of accumulated capital, business has had to rely on credits from banks that were controlled and, until recently, owned by the state.

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A glance at the annual reports of firms listed in the Seoul Stock Exchange catches an entry called "voluntary contribution" to the government. Corruption can have a detrimental effect on state building if the yield from corruption exceeds the rate of return on investment, thus aborting economic growth. In the Korean instance, the effect of corruption a concrete manifestation of the state-business coalition was on the side of augmenting the power base of the state. State mobilization of credits on preferential terms drove down bank interest rates, which had a dire effect on household savings, causing them to flee mostly into an unregulated financial market, called the "curb.

The state and business were the beneficiaries, and the casualities were the citizens who had stayed away from the banks. This type of decree-and many to follow-is most symbolic of the economic policies of an authoritarian state with the financial structure we are describing. The rationale for such industrial strategy was primarily political and security-oriented, an economic nationalism that coincided with the perception of the decline of the United States as an hegemonic power: the Nixon Doctrine, the first major troop withdrawal, the fall of Vietnam.

President Carter's threat to withdraw the remaining ground troops from Korea, his human rights salvos, and "Koreagate" further provided the impetus and context in which Korea began to push for heavy industrialization associated with the goal of national self-sufficiency. Yet, it often happens that considerations of efficiency loom large only in the minds of economists; efficiency, as Susan Strange argues, rarely, if ever, commands priority in the national economic policies of any nation.

Such was the case historically in European continental and Japanese "late" industrialization. The argument here is that the credit-based financial structure made possible such industrial sectoral upward mobility. In such a structure, according to John Zysman, firms rely on bank credit-to the extent that the banks are the main suppliers-for raising finance beyond retained earnings.

Nor are the Korean banks "pawnshops" with high collateral requirements as in the Taiwan case. When compared with Brazil or Mexico in the s, where the debt-equity ratio of firms averaged around percent to percent, Korea showed a rate of percent to percent and Taiwan, percent to percent in the same time period. On top of this basic financial structure, the Korean state has erected a complex incentive structure to further facilitate sectoral mobility.

The best example perhaps would be policy loans; at the end of , there were some types of policy loans among the total of types of bank loans. Banks were allowed no voice over the allocative decisions, and had to passively accomodate the loans irrespective of their portfolio strategies. But the Korean financial system is also intrinsically unstable.

Three reasons may be traced, two of which arise directly out of the incentive system of the financial structure, and one of which is due to the structural condition of Korea's open economy. But, then, bankruptcy was a perennial threat since highly leveraged firms were vulnerable to declines in current earnings to below the levels required by debt repayment, a fixed cost, compared to payments on equity, a share of profits. Banks often ended up carrying a huge amount of "nonperforming" loans, and if these are incurred by mammoth firms, known as the chaebol in Korea, the state often has no choice but to bail them out through loans from the Bank of Korea, in turn fueling inflation.

Third World Industrialization: 'Global Fordism' or a New Model?

While the state is chary of the expansion mania of firms, once credit is allocated, it is difficult to track down the actual use of the funds since various bookkeeping devices can hide it. The third point is that since Korea has a small domestic market and thus relies excessively on export more so than, say, Japan , Korean firms are tested in the fires of international competition and are more vulnerable to external shocks. The former is indirect taxation on the populace, and the latter, direct.

But, the state does so in ways that favor the capitalist class. Social Consequences: The State, Finance, and Rise of Big Business In referring to the state in Korea, scholars use various adjectives ranging from interventionary, discretionary or-wrongly, since it confuses Korea with Japan-guiding. Lately, entries such as the state as the "senior partner" or "Korea Inc. This did not occur, for reasons that need not concern us here.

The Korean state has met comparatively little resistance in transforming the industrial structure of the nation because domestic resistance has been feeble. Not only that, what powerful group exists today in Korea, mostly the chaebol, had to be built by the state. Under Japanese colonialism, domestic capital was given neither the time nor space to develop; this was more true of Korea than Taiwan. Thus, in the two Asian countries, but especially in Korea, powerful agrarian export interests did not emerge to play havoc with the state's industrialization attempt, in contrast to Latin America, nor did a protected domestic sector militate against the attempt to turn the economic structure toward export of manufactured goods.

This has both opened more space for state autonomy, and made transition from one industrial phase to another more fluid. But perhaps the most important consequence of this historical development has been the modal type of capitalist firm in Korea: the chaebol. In reality, they are creations-productions and not reproductions-of the state and the Korean financial structure. Most of the chaebol existed as firms by the immediate postwar period, but they were small enterprises milling rice or repairing automobiles. Daewoo did not even appear until the late s. The others did not grow into anything big until the s; thus, the conglomerates are a very recent phenomenon.

Our argument about the Korean financial system, financial policies, and the role of the state would lead us to predict precisely such an outcome. Interest rate subsidies, preferential lending, and other such devices have been the energy fueling the growth of these firms. We will see that the agenda of the s has introduced some alterations in our picture. In this detailed analysis, we pursue historical contours through chapter four, not because of concern for a descriptive rendering of facts and dates, but because-without a developmental perspective on how things got the way they are-one misses the whole point about the context in which a strong state came about, and misses the specific developmental model available to Korea, that is, the colonial configuration of the s.

The past two decades of "development" in Korea cannot be abstracted from the earlier decades of this century without distorting our understanding, much as a photograph sliced from a film would excise the film's meaning and perspective. Chapter 2 is a retrospective on colonial industrialization. The third chapter deals with the period of import-substitution industrialization of the s. This is easily the most maligned era of Korean economic history. But, this was an important decade for understanding how the ROK, using U.

Rhee knew better than did the Americans the weakness or absence of backing for his regime in the class structure of the s. Politically, it bolstered the power base of the dominant party. But, the Japan connection was also double-edged: a turn to "debt-led growth," and the beginning of accumulating short-term commercial credits. It was often said that Guillermo O'Donnell's argument did not fit the Korean context, since Korea never had a real populist phase-lSI did not bring about a populist coalition,. But, in Korea, the critical link with regime change is not with the domestic sector, but with the outside world: a simultaneous crisis in the security structure that gave the ROK its strong bargaining position in the first place meaning the Nixon opening to China , and a crisis of foreign debt repayment, threatening national bankruptcy.

Heavy industrialization the Big Push under the BA regime is the topic of the fifth chapter. The rest of the chapter discusses the process of industrialization, with particular focus on five basic industries. We find that the Big Push of the s resembles, both in the ambience and substance of industrialization, "late" development in Japan and continental Europe rather than "late-late" development in Latin America.

In chapter 6, we turn to the state mechanism for the Big Push through a nuts-and-bolts analysis of the financial structure and its policies in the s. We examine interest rate policies, types of "policy loans," the plight of the banking system, policies of credit allocation, etc. We also discuss the impact of financial policies on class structure. The result demonstrates overwhelming favoritism toward the large manufacturers, that is, the chaebol, and the heavy industries. It will show how the rapid growth of the chaebol were related to their rapid move into sectors favored by the state, for which concessional loans were available.

The last chapter assesses the political and economic impact of American policy, which finally led to regime change in Korea. The liberalization crawled at a snail's pace throughout the decade, as state and business confronted the central problem of power in the Republic of Korea. A spurt of massive industrialization occurred during the last half of the Japanese imperium, yet many assume, a priori, that the beginning of economic development in Korea should be traced to the Liberation, or even more commonly, to the inauguration of a growth-oriented regime in the early s.

One reason for this anachronism is that very little dispassionate work exists in either Korean or English on industrialization during the colonial era, and virtually none on the role of state and finance during the period. Thus, the entire colonial period takes on an aberrational quality in the literature, and the era of national independence marks the proper beginning of an economic development sui generis.

It is wrong, however, to go from there to assert no historical continuity at all; in fact, it would be truly amazing if the strong industrial push of the s left no mark in post South Korea. The first discernible pattern, it will be argued, is one of national industrialization determined to a significant degree by an East Asian regional economic integration, led by Japan. Whether understood in terms of a regional division of labor, or dovetailing with the product cycle as Bruce Cumings has argued, the Korean industrial structure has historically exhibited a high degree of articulation with that in Japan.

The second pattern is the state's role in the comprehensive and semicoercive channeling of capital to target industries. Regional Integration and Underdevelopment: From as early as the s, the Japanese interest in Korea sprang from regional security concerns, broadly conceived. In some ways, Japanese policy exhibited a pattern parallel to the one that Albert 0. The Japanese case also was a function of capital shortage; unlike other colonizers searching for investment opportunities for excess capital, Japan had little capital to export to its colony. In the absence of an urban economy, the immediate effect of the first policy was the classic manorial reaction as occurred east of the Elbe: an intensified seignorial repression, with a strong dose of violence from above pumped into social relations, primarily and inevitably in the new form of the "absolutist state" 11 the Government-General, here.

The power of local landlords had to be firmly grounded to discipline peasants and prevent the type of peasant mobilization that occurred in Korea at the end of the nineteenth century. What the loose, decaying agarian state of Yi could not provide for the landlords, political control over the restless peasantry, was now provided by a colonial state possessing considerable repressive capacity-through establishment of a nationwide gendarme the kempeitai and the military.

Peasants were stripped of the motley benefits guaranteed them by feudal arrangements, and the propertied farmers often found their land confiscated in a flurry of land registration which they hardly understood, let alone agreed with. This change came but slowly to Korea, however. Return on investments in land therefore remained more lucrative than alternative uses of capital. But this should not surprise us, given the colonizer's desire to substitute Korean rice for upwards of twenty percent of Japanese production.

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In contrast to Japan, where rice hauling was done largely by the farmers themselves, a division of labor was established in Korea to speed the massive handling and channeling of rice into Japan. This process, with benefits shared by merchants and mill owners, is said by one economic historian to be the first example of dualism in the Korean economic structure: household production of the bulk of nonagricultural products, in parallel with the production of rice as an export commodity through the modern facilities of these mills.

The colonial state was not only unaccountable to social groups in Korea merely a matter of defining a colonial state. In this way, it was said that "about 46 percent of the foreign capital imported by the Industrial Bank of Japan during , that is, 46 percent of Y Thus, in contrast to Japan proper, where financing policies-say, between the Sino-Japanese War and the Hara era-reflected political struggles of the time between the clan-genro and the bourgeoisie, often manifested in the Diet, financing of, as well as in, the colony would take on an apolitical character.

Once the economic raison d'etre of the colony was established, the rest was a mere matter of administration. With the enormous political and military power of imperial Japan stiff-arming the Yi court, Megata created almost overnight the entire modern fiscal and financial system in Korea a system that in some ways persists to this day. He built institutions of state finance, first by separating the finances of the court and the government, and then by creating a budget office, a tax agency, and later, a whole panopoly of state-sponsored special banks as well as the central bank.

The resulting financial system was one of rare sophistication, overly so for a nation as unmodern and impoverished as Korea. As can be seen from table 2. It was not until Manchuria became another Japanese lebensraum that the colonial banks could engage in activities congruent with their capacity and potential.

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And then it was the Korean financial system that provisioned capital throughout the newly acquired realm, mediating Japanese capital to Manchuria. NoTE: Figures in parentheses are percentage share. But the Bank of Chosen's biggest claim to fame or notoriety really rested with the nefarious Nishihara loan, payola to a military clique in Peking in order to consolidate Japanese influence in China after the twenty-one demands-which, when it defaulted, forced the Japanese government to pay off creditors to the tune of Y million.

Founded in with an initial capital of Y10 million, this omnibus company was to finance any activity it saw fit, to increase the production and export of food stuffs. In the process, it became, by hook or crook, the largest landlord in Korea. Reorganized in , the company then began to concentrate on mortgaging activities, extending loans to merchants, enterprises, banks, and trading posts in both Korea and Manchuria. Only in the period of the s was the ODC relatively idle in Korea.

This primary function, however, was not vigorously pursued until the s when it procured enormous funds in the Japanese money markets-Y million through industrial bonds by and Y1 billion by to finance the machine-building industry, munition plants, and other heavy industries. Unlike the Bank of Chosen, the IBC was clearly a bona fide institution for industrial financing, especially toward the last two decades of the Japanese imperium. Such remarkable upward mobility for colonial subjects was undoubtedly an artifact of wartime expediency, but even in peacetime, the number was never less than a third of the total bank personneP9 Men who went from the IBC to economic and financial decision-making positions in independent Korea are numerous and included men like Chang Pong-ho, Im Song-bon, Kwon Sok-sin, Chang Kyong-hwan, Kim Chin-hwan, Kim Po-yong, Kim Kyong-jin, An Yi-sang, and Yi Tok-yong, to name a few.

This is a fact embarrassingly obvious, and almost tautological given the colonial context, but worth repeating as a corrective to the prevailing academic thinking in which is permanently inscribed as the annus mirabilis, a turn to the world market. The key mechanism inhered in financial institutions remarkably developed for such an "underdeveloped" colony. The State, the Industrial Push, and the Zaibatsu: The s was a period of epochal change. Ironically, the global depression relieved the Korean landscape of its stagnant monocrop export economy, and thrust it fully into the Japanese industrial complex as an integral part.

Non-financial hurdles for human capital accumulation: Landown- ership in Korea under Japanese rule

The advantage of such a system was obvious: it protected the domestic economy from the ravages of international economy and global depression, allowed for fiscal expansion at home through easy money, and made possible the promotion of exports through devaluation. The fiscal portion of the closed door policy was Keynesian: farm village relief and military buildup-with the latter overtaking the former at the approach of the war.

Korea, as an entrepot between Manchuria and Japan and as a natural supplier of an abundant variety of mineral resources, cheap labor, and hydroelectricity, was one of the logical locations for the crash industrialization program: hence such slogans as "Chosen as a base of war supplies," and "Chosen as a base of penetration. Energy was also critically deployed. In terms of assets, the colonial administration and its associated agencies owned close to 20 percent of the total Japanese assets: Y Many young and venturesome zaibatsu, often blocked in the Japanese domestic market, responded to such enthusiasm and incentives, and came to establish their fortunes in Korea.

Factors in South Korea’s Economic Success

Most critical in the Japanese private sector's decision to invest in Korea, however, was the financial incentives created by the Japanese government and the latter's willingness to share the risk should the investment tum unprofitable. The situation changed by , with a rapid increase in corporate borrowing; this should have tightened the financial market, but the state intervened to lower the interest rate so as to make fund-raising easier even in the face of the deteriorating balance of payment.

The older and better established zaibatsu could depend on their own banks, insurance, and trust companies. But, for the shinko new , the most adventurous zaibatsu, the source of capital was the Industrial Bank of Japan IBJ and the government. Under the Bank Fund Utilization Order, the Ministry of Finance was able to arrogate the power to compel commercial and private banks to lend to specific companies in the target sector.

In this manner, even short-term credit came under the control of the state. Now eligible were special drafts, issued by essential armament-producing corporations and accepted by the Industrial Bank of Japan, and second-grade debentures were also upgraded and made eligible as collateral. Thus, through to , the rise in bills discounted by the Bank of Japan recorded a whopping percent. In fact, of all factors of production, capital, in the financial sense, poses the least obstacle for the state in a security-related development rush. Time and time again, we see how warring states, especially if the war happened to be unpopular, resort to inflationary financing.

At any rate, Japan-unlike England or the United States, who relied on either taxation financing or bond ownership by the people-chose to balloon the financial structure to create resources for the war; it was far simpler and more productive to create an internal financing circuit, and it did yield, for a long while, the same results with much less trouble. In the process, not only banking activities but also private capital became concentrated.

According to E. The effect of this was clearly visible in Korea. The dominance of these groups was such that the ten largest zaibatsu, along with their affiliated firms, came to hold 35 percent of the total paid-up capital in Japan in In contrast to Nissan, which faced stiff competition in Manchuria from the subsidiaries of the Mantetsu, the Noguchi group emerged as the instrument of imperial policy and an "industrial ruler" of Korea.

By , the estimated assets of Noguchi Jun's empire in Korea was Y4. Nichitsu, with capital of Y Mitsubishi invested in railways, blast furnaces, chemicals, and machine tools, but its real strength was in mining. In terms of the production ratio, heavy industrial output, slightly more than a quarter of the light industrial output in , suddenly jumped to equal it by This remarkable change is illustrated in table 2. Some of the chemical factories, particularly those making fertilizer, were comparable to the best in the world, and larger in scale than those in Japan.

The textile industry also recorded significant growth. The number of spindles in Korea was 15, in but increased to , by Along with the hydroelectric and chemical complexes in Hungnam and Hamhung, textile factories in the Seoul-Inchon area became the main pull for industrial growth in By contrast, food production showed a precipitous decline: from 64 percent in to 24 percent by In trade, Korea became a net exporter of fertilizers, explosives, pulp, gold, hard oils, and other manufactured goods.

It was recognized at the outset of the Pacific War that the most fundamental limiting factor in the Japanese war economy would be its low level of iron and steel production capacity. The five-year plan was a resounding failure; its ambitious aim of building innumerable small-type blast furnaces never materialized to the level of professed goals. Nonetheless, Korea's importance as a supplier of iron ore became critical toward the end of the war, primarily because the cost of shipping was minimal and crossing the Japan strait was relatively safe.

This, however, was another failure in crash industrialization, just as with the steel industry: it absorbed materials and manpower excessively, and was thus more of a liability than an asset in the war. In magnesium production, Korea provided 50 percent of total output in the empire in , and coal production increased percent in Korea in This phenomenon of a ubiquitous state was not, of course, confined to Korea.

It occurred in Japan proper, and in Taiwan. Thus, the Korean state in the s, and perhaps the North Korean state as well is consanguineous with the earlier corporatist state in much the same way that, say, the corporatist state of Brazil in the s made an atavistic return in with the inauguration of the Castello Branco regime.

What makes such a return visitation possible still remains, on the theoretical level, moot: after all, nothing attests to the failure of comparative politics more than its resounding failure to understand causality in particular political regime formations. If, in fact, the political requisite for rapid industrialization and sovereign security favors the emergence of an authoritarian regime, that would explain, in part, the similarity between the colonial form of corporatism-cum-authoritarianism and the s version.

This wartime economy of vast scope and daunting augury for the future seemed terribly formidable, but it had a devastating effect on the development of that class which has carried all before it in the modern world, the entrepreneurial fraction. But the Japanese presence in Korea was much too overbearing for one to argue the case of successful entrepreneurial continuity.

Even in light manufacturing such as textiles and flour mills, the ratios were 80 percent and 81 percent, respectively. A ruthless state deployed Korean social classes in its own imperial interests, and saw no need to incubate Korean entrepreneurs. It is also possible that a bad seed can produce a good harvest. South Korea in the s could not see itself finding a usable past in the wartime industrialization of the s; indeed the very idea is anathema to Korean patriots. But sometimes history proceeds as a straightforward text, and at other times important forces appear-as it were-in the parentheses.

The Janus-faced legacy of Japanese imperialism was to make of the Korean suffering of the s a usable past for the s onward. Although this is by no means the whole story of the s, it is the part almost neglected in the literature. TABLE 2. The constant variables are a mode of industrialization connected to security needs and, more broadly, to the harsh requirements of industrialization in a world that the Western powers dominated; and a domestic social situation making the mobilization of capital difficult without heavy state intervention, and consequent state direction of funds.

Once these two structural constraints are enunciated, the regime type would oscillate within relatively narrow parameters. If mountain climbers are wont to say that they climb Mount Everest "because it is there," we may say that Koreans used a model of the s "because it was there," and why it was there flows from what we have just said. Perhaps the best proof for the point is that Rhee's preferred developmental scheme, import substitution, is itself, ipso facto, seen as a failure, a part of the problem.

Korea was a "client" state, led nevertheless by a recalcitrant, putative nationalist. Said to be an economic failure, the ROK was still an unaccountably expensive one, making unprecedented inroads on the U. Political scientists have an epithet for this type of a system, political decay another means to explain away the s ; 2 the economist's menu is full of reasons to dismiss the belabored economics of the Rhee period: wrong policy choices, the absence of native technology and technocracy, and the tried-and-true catchall for everything that does not fit, irrationality.

We will present here a tableau of a destitute nation that, using its geopolitical situation as both leverage and mortgage, managed to extract maximum "rents" from the global hegemon; of a leadership which parlayed a very short hand to operate a strong, and this time around, native state; and of an economic policy with method to its madness. What we do here is reverse the conventional images and discourses in the international relations discipline, and pursue, in Peter Gourevitch's terms, "the international sources of domestic politics,"6 the contradictions and strains in U.

We do not argue for sterling success, only for bringing to light the Korean agency and purpose that has long dwelt in the shadows of existing historiography. No other country in the world received such large sums in per capita terms, with the exception of Israel and South Vietnam. Table 3. Thus, American development agencies found Korea a nightmare, an albatross,15 a "rat-hole,"16 a bottomless pit; even in the middle of the s, some American academics despaired of the "dawn" of the day when Korea might become anything more than a permanent U.

Another way to evaluate U. Aid financed the major part of commodity imports, and the macroeconomic implication of this import flow was supposed to dampen inflationary pressure. Yet, we know ex post facto that the decade of the s was wracked by an inflationary spiral caused by enormous budget deficit, and notwithstanding American protests, arm-twisting and occasional stabilization programs enacted by aid agencies, inflation did not subside significantly. The aid program was, in this sense, a failure in bringing its intent into fruition; instead of containing what was repeatedly pointed out as the bete noir of Korean development-massive government spending-it ended up buying a tumescent state structure and a fitful program of import-substitution industrialization.

How, then, do we explain Rhee's remarkable ability to sabotage the sagacious efforts of development economists, a practice described in the old Spanish colonial adage as se acata pero nose cumple one obeys but one does not comply? We argue that Rhee found his space for maneuverability in the logical contradictions inherent in the U. Bauer's attack on India's Second Economic Plan and his-and ICA's-belief in the use of foreign aid to maximize the role of the private sector, especially small business, is a particularly good example of this tendency.

Rhee's tricks worked because, since the armistice in , many discussions on Korea during the National Security Council meetings were laced with handwringing about Rhee making a northward ho. Korea was a de facto Truman Doctrine country from early on, placed in tandem with Greece and Turkey. Congress and the Pentagon, however, never quite grasped such logic, being intent at best on relief programs for Korea rather than recovery aimed at development; at worst, they wanted to get out.

ECA budget requests for Korea in faced stiff opposition, and the first third of the appropriation in the form of aid bill H. Congress was curiously wrapped up with the remarkably big power of another small state, Taiwan, and put Korea behind Nationalist China in its hard-argued but shortsighted priorities. Even so, Acheson got the aid funds he wanted for Korea, by hook or by crook. Acheson had contempt for such thinking. He thought that global war was unlikely, and that a conjoining of power and plenty was the essence of turning a country away from communism.

In a directive to John Muccio,the U. Ambassador to Korea, Acheson specified that "military assistance must be viewed The first was the Korean Military Advisory Group, strong and deeply involved in containing the communist threat at the 38th parallel and in the mountainous interior. Another was the U. During the Occupation, he had been a gadfly for General Hodge, the head of the U. Seminars and Conferences. About Economic Research. Latest Remarks and Interviews.

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