Visible Success and Invisible Failure in Post-Crisis Economic Reform in Korea: Interplay of the Global Standards, Agents and Local Specificity*

Article excerpt

Post-crisis reform was one of the most comprehensive and decisive reform that was implemented in Korea. This paper develops a model of reform dynamics. This paper subsequently uses this model to discuss the following arguments. First, while reform tends to achieve some nominal success in terms of making new laws and several quantifiable targets, it has not been able to achieve much success in really changing institutional conventions, habit and beliefs, such as enhancing transparency in the management or trust in labor relations. Second, it had mixed results as a result of the reform process involved tension between global standard and local specificity. Third, one source of the implementation difficulty in reform has to do with the institutional complementarities, and we need to take a proper sequence in reforms. One possible logical sequence seems to be moving from banking reform, corporate governance, labor relations, and finally to business restructuring. The paper concludes by tossing up a question of whether the Korean response (the reform blueprint) was right.

Key Words: Post-Crisis Economic Reform, Korea, Global Standards, Local Specificity, Institutional Complementarities.

INTRODUCTION

Once famous for its rapid economic growth and tagged as an East Asian miracle, Korea was subject to the shame of being one of the crisis-struck economies. However, the Korean economy also showed one of the quickest and strongest turn-round since 1999. While some attribute this recovery to the reform achievement, others still challenge this view and observe that not-much has been changed actually.

We consider Korea as a very unique country which has experienced, within a very short period of time, "everything" from miracle to crisis, and a stunning turn-around. As such, the Korean case raises two important issues. The first issue is how to link the old success regime to the recent crisis. In other words, the financial crisis of 1997 has again brought to surface the old debate on the role of market vs. state in economic development. On one side is the market-based view that finds state intervention in financial markets (i.e., over-regulation by government and/or crony capitalism) as a culprit for the crisis (Summers, 1998). On the other side is the statist view that blames the crisis on the reckless deregulation of financial markets inspired by neo-liberalism (Chang, 1998; Crotty and Lee, 2001).

While this first question has been sufficiently addressed by the literature, another issue that needs to be resolved is the need to interpret the post-crisis reform and the subsequent quick recovery. Some studies on this subject do not dig into the broad questions of whether the Korean growth regime has really changed, whether institutional reform can be done so quickly and thoroughly, and whether recovery is really due to the reform (C. Lee et al., 2007; Coe and Kim, 2002; Hooley and Yoo, 2002).

Examining how Korea's economic systems have been reformed offers an exemplary case study of the process and outcome of the reform intended to introduce global standards but conditioned by a country's political economy and initial conditions. This study will examine the role that various interest groups (agents) played in the reform and how initial conditions constrained its process and the performance of the system that has emerged from that process. Specifically, the study will examine the role played by chaebols, bureaucrats, external pressures, and the prevailing ideas on reform and liberalization espoused in academia. Thereby, the analysis will reveal the motivating reasons for reform initiatives and will identify the factors responsible for the success and failure parts of the reforms in Korea. For instance, we will discuss how the influence of chaebols and the strategic behavior of bureaucrats affected and/or manipulated the choice of reform blueprint as well as its implementations. This is borne out of the prediction of the thesis of economic entrenchment proposed in Morck, Wolfenzon, and Yeung (2004). …