Comment on “Chaeboland Industrial Policy in Korea”

Abstract

In the early 1960s, in a seminal book, Alexander Gerschenkron (1962) addressed the question of how backward countries grew fast. The essential point he stressed was the role of institutional and organizational innovations for developing countries to enjoy the potential “economies of backwardness.” Gerschenkron derived his hypothesis primarily from the experiences of Germany and Russia in the nineteenth and the early twentieth centuries. That is, the universal bank and state enterprises were the key institutional innovations for the rapid growth of the German economy and the Russian economy, respectively. Living in the twenty-first century, we have richer historical records and data on the growth of backward countries than Gerschenkron had, so it is worthwhile for us to reconsider the paths and institutional bases of the growth of backward countries. Lim (2012) makes a great contribution in this respect. By comparing the experience of Korea with that of Japan, we can have some new insights on the answers to Gerschenkron's classic question. First, I would like to make a general comparison between the experience of Japan and Korea. Lim stresses that the government and the chaebol played the dominant roles in Korea's post-war economic development. According to Lim, while the Korean government promoted heavy and chemical industries by various industrial policy measures including low interest rate loans and constructing clusters in the 1970s, it relied on a selected group of state-owned enterprises and chaebol. Comparing this process with the Japanese experience since the late nineteenth century, I find that Korea seems to compress the experience of Japan. Whereas zaibatsu, the Japanese chaebol, played a substantial role in Japan's pre-war economic development, as mentioned in Lim's paper, the role of industrial policy was not so large then. Indeed, the zaibatsu basically had autonomy from the government. The situation changed drastically during World War II. In order to mobilize resources for the war, the Japanese government heavily intervened in the economy and restricted the autonomy of private firms including zaibatsu. Substituting for the capital market, banks came to play a dominant role in corporate finance under this government control. Then, just after the war, the US occupation authorities came to Japan to dissolve the zaibatsu. That is, in the 1940s, the major player of the pre-war economy, zaibatsu, disappeared on the one hand, and new players, the government and banks, became powerful on the other hand (Okazaki & Okuno-Fujiwara, 1999). In this sense, the zaibatsu and the government played dominant roles successively in Japan's economic development. In contrast, they simultaneously collaborated in Korea, as described in Lim (2012). I suspect that the preceding experience of Japan enabled Korea to take this compressed path. I would like to ask whether or not Korea learned from Japan's experience in this respect. My second comment is specific to the chaebol. An important observation concerning the history of the zaibatsu in Japan is that their primary role changed over time. In the late nineteenth century, each zaibatsu was somewhat monolithic, and the management policies of the businesses were coordinated by the top management. Indeed, this feature enabled zaibatsu to internalize externalities. For example, Mitsui simultaneously ran a trading business and a financial business to enjoy the complementarities of these businesses. Also, Mitsubishi diversified its business from marine shipping to shipbuilding. This strategy was useful when the markets were underdeveloped and a big push to develop related industries simultaneously was necessary, but its merit declined as markets developed. Indeed, the zaibatsu changed their organizational structure and function from the early twentieth century. Namely, the zaibatsu established holding companies to make their businesses independent firms. Then, the major role of the holding companies was not coordinating businesses, but rather governing the subsidiary firms and allocating funds to them (Okazaki, 1999, 2001). I wonder whether or not the Korean chaebol experienced a similar transition.