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South Korea & Taiwan.

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Darren Webster posted on Tue, Feb 7 2012 8:27 AM


Hey there.

I am turning to the wonderful minds here at the Mises forum, since I'm finding it hard to find source material or applied economic theorists to this subject. South Korea and Taiwan.

I had heard Friedman discuss this subject with someone in an episode of "free to choose" once, but I never gave it much consideration after. However, my house-mate was reading a book about the IMF which herelded the economies of South Korea especially, but also of Taiwan as "success" stories of Government intervention in domestic markets to create, at least, conditions for prosperity. 

Searching information on this issue somewhat further I came accross a paper entitled;
 "Critically asses the suggestion that the high level of economic growth enjoyed by the target economies prior to 1997 constitutes support for the arguments of those economists who maintain that government intervention in economies should be kept to a minimum."

In it, I found a few interesting quotes;

 -   "
Unlike the government of Hong Kong, the government of South Korea has always played an active role in all parts of the economy of this country “The Korean government has been the most interventionist among the East Asian NIEs" / Chowdhury & Islam (1997) p167.  

-  The Korean miracle is not a triumph of laissez fair but a pragmatic non-ideological mixture of market and non-market forces. When the market works fine; when it doesn’t the government shows no hesitation in intervention. Jones & Skongs (1980) p3 cited White (1988) p73

- Korean has had one of the “free world’s” most tightly supervised economies with government intervention in almost every major investment by private sector. Smith (1979) p17 cited White (1988) p74

Almost all of financial institutions in South Korea are controlled by the government; Control over financial institutions has been a key element of estate intervention in Korea. Throughout 1960s and 1970s, the ministry of finance firmly directed the banking industry in Korea. White(1988)p75

Korea has the lowest share of wholly owned subsidiaries in entire sample. Koo (1982) p38 cited White (1988) p85.


Despite all this, South Korea enjoys a position as a G12 nation and enjoys relative prosperity.

I can admit to you, I am a devout Misesian, but this is obviously an important issue to be clued up on if I am to be able to provide an adequate defence of lassez-faire. It seems as if to simply suggest "Government created the prosperity" is about 1/4 or 1/2 of the story, but, honestly, I know little about the development of this economy compared to that of Hong Kong. 

I suppose the question is: 
Are people correct in assuming that it was largely Government intervention in the South Korean domestic market that led to it's prosperity?

Please share all information, source material, literature, anything you can to further shed light on this issue. 

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Answered (Verified) Kakugo replied on Tue, Feb 7 2012 10:04 AM
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As you may know, the Korean business model is deeply tied to the so called chaebol, or family controlled conglomerates. Some of them are household names like Hyundai, Daewoo, Hankook or Kumho.

While these powerful families always had very close ties with the government, what really kicked them in high gear was the regime of Park Chung Hee (1961-1979). Park worked closely with the familes to come to a special government-chaebol agreement. The chaebol were reorganized along the lines of the old Japanese zaibatsu (or their modern day descendants, the keiretsu) but with a crucial difference. While the zaibatsu had at their core a huge bank (Sumitomo, Mitsubishi etc) which acted as the main source of capital, the chaebol relinquished all banking operations to the State. Under Park all Korean banks were nationalized. This allowed to channel scarce capital into the chaebol to achieve two main objectives: industrialization and economic growth through export. The chaebol grew so large not because they were particularly efficient, but because they could borrow vast sums at extremely low interest rates. Of course these loans were financed both by witholding capitals from other entities (mid-sized enterprises, for example) and by inflating the currency, something which was also beneficial to keep Korean exports palatable. The chaebol also had a host of special privileges thanks to the close ties with the Park regime: for example during the Vietnam War Korea had the monopoly to supply the ARVN (South Vietnamese army) with uniforms, helmets and many of other items. Park had negotiated these conditions with the Americans in return for sending tens of thousands of troops to Indochina.

The problem is after the Park regime fell, the successive Korean governments proved less amenable to keep on sudsidizing the chaebol at the expense of the rest of the country. Japan was also applying pressure (both through the US and directly) to redress the issue. The 1999 crisis which swept the so called Asian Tigers proved devastating for the chaebol system. As interest rates rose and profits fell, a full quarter of them proved unable to earn enough money to service their own debt. Ever since the 1999 South Korea has started to drift away from the Park-era chaebol system. Successive governments have recognized the need for developing an alternative to the chaebol system, in the form of mid-sized enterprises (ie Appeal Telecom) which are seen as much less hazardous than a few gigantic conglomerates and to contribute more to the economy as a whole.

One of the best books on the subject is Economic Crisis and Corporate Restructuring in Korea: Reforming the Chaebol, edited by Stephan Haggard. You may also want to check out The Evolution of Large Corporations in Korea by Sung-Hee Jwa which provides useful insights to the system.

Together we go unsung... together we go down with our people
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Answered (Verified) Marko replied on Tue, Feb 7 2012 11:20 AM
Verified by Darren Webster

- “The Korean government has been the most interventionist among the East Asian NIEs" / Chowdhury & Islam (1997) p167.

It has also been the least successful of all the "East Asian NIEs". (Tied with Taiwan.)

- Korean has had one of the “free world’s” most tightly supervised economies with government intervention in almost every major investment by private sector. Smith (1979) p17 cited White (1988) p74

Which would go a long way toward explaining how come it was until mid 1970s significantly lagging behind that of North Korea.

That "South Korean economic miracle" refers to the period from 1960s to 1990s is heavy handed revisionism. In the 1960s when the country was lagging behind North Korea nobody was talking about any "miracle". Instead there was anxiety the South would fall further and further behind.

The country experienced its best years after 1980 — which is to say after it was no longer ruled by the hyper-interventionist Park. Naturally there was growth before this period also, but so was there in the North yet few would hold it up as an example of superiority of central planning.

Really South Korea is not in the same category as Hong Kong or Singapore. Its story is more like that of China, an unfree economy becoming relatively free-er. It is both less free and less prosperous than Japan.
So actually there is near perfect correlation between economic freedom and prosperity in the China-ROK/Taiwan-Japan-Singapore/Hong Kong part of the world.

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