East Asian Culture and Capitalism

1. East Asian Culture and Capitalism Chapter 4

2. The Importance of Culture and Social Capital • “South Koreans valued thrift, investment, hard work, education, organization, and discipline… In short, cultures count.” Samuel P. Huntington • “..if we learn anything from the history of economic development, it is that culture makes almost all the difference” David Landes • “.. Culture is a form of social capital, and an important determinant of economic development” Gary S. Becker • “Social capital is an instantiated set of informal values or norms shared among members of a group that permits them to cooperate with one another.” Francis Fukuyama

3. Korean Homogeneity • Same racial stock • Same language • Identical pre-college education • Same national college entrance exam • Highly cohesive family system due to short distances

4. Importance of Christianity • Introduction of Western civilization • Enhancement of the social status of women (first educated at mission schools) • Rectification of the early marriage system • Popularization of the vernacular literature (due to the Bible) • Stimulation of individualism

5. The New Confucian Ethic • “Asian values served economic development well for nearly half a century. They are not likely to serve the region as well in the future. The challenge now is to complete the process of creating a strong modern economy built on a foundation of law.” • Dwight H. Perkins • The New Confucian Ethics is a combination of the traditional Confucian values and the Western Christian ethics • The importance of self-improvement (study groups etc) • Family values and filial piety • Harmonious relationship based on school, hometown or blood ties • Patriotism and loyalty to the country • Encourages individual freedom and strife for material success (compare to the traditional Korean neglect for the “low class” merchants and manufacturers)

6. The Importance of Free Market • “Korea gave us the greatest demonstration in the world—the same people, the same country, the same resources show what happens with the market system on the one hand and with communism on the other hand. You couldn’t have designed a better experiment to compare the two systems.” John K. Galbraith • Capitalism and communism are rules of the economic game devised to make everyone work as hard as possible to produce more and better goods and services • Those who contribute to the society must be properly rewarded, those who harm society must be appropriately punished • Free market system is the best way to achieve these objectives • However, lack of understanding of the free market system may lead to disasters (e.g. the 1997 financial crisis)

7. Communitarian Capitalism • “So I think a good economy is a mixture of group and individual. It’s not one; it’s not the other. A purely group economy would not, I think, be successful in the modern world. A purely individualistic economy would not be successful. In some areas, the group is important; in other areas, the individual.” Gary S. Becker • The American model • Economic dimension (shareholder sovereignty) • The Japanese model • Human dimension • The German model • Social dimension (social market economy) • Balancing the three dimensions in a corporation is crucial

8. Types of Free Market and Ownership of Capital • American model (individualistic capitalism) • Individuals or institutions that represent individual interests own most capital through national assets • Japanese model (communitarian capitalism) • Companies own most national assets • Over 60% of stocks are not traded • 25% of stocks owned by individuals • Korean model • Both corporations and individuals own portfolios of stocks • Government encourages individuals to own stocks

9. Korean Market System • Korean firms are not independent firms like those in the West, but are members of large business groups (BGs) • Communitarian ethos emphasizes spending time and income on clan rituals • Organizations of various types are based on three types of yeon (緣, or affinity): • 혈연 血 緣 (affinity by blood): among members of the same clan • 지연 地 緣 (affinity by region): among people from the same region • 學 緣 (affinity by school): among people from the same school • Danger of crony capitalism • Korea has given strong roles to both the Government and the market in the economy

10. Vertical versus Horizontal • Most organizations in Korea are communitarian but also hierarchical (vertical) while those in the West are individualistic (horizontal) • Korean versus Western values • Long versus short term relationships • Personal versus contractual • Informal versus formal • Non-materialistic versus materialistic • Hierarchical versus horizontal • These preferences are found in government, business and personal relationships

11. The Korean Family • Korean family is the basis upon which every other type of organization is modeled (business, government etc) • The features of Korean families: • Preponderance of multi-member households with very strong family ties • Family-based welfare dominates government social welfare • A network of family members manage many Korean firms, especially BGs • Members of parties and corporations treat each other as family • Family rituals are important both socially and economically • 國家 Country+Family is the term often used by Koreans to refer to their country

12. The Korean Firm • 인화 (人和) Man+Peace is a concept emphasized by many Korean firms, the harmonious interpersonal relations • Korean firms are communitarian in the sense that life-long employment is often the case (however, financial crisis of 1997 changed this) • Korean large industrial groups often feature strong interpersonal and business linkages • Firms belonging to the same BG often behave like family members • Firms in the same BG compete with each other in terms of growth and other performance indicators (recall the ‘socialist competition’ practices in the Communist states) • General Trading Companies (GTC) • Information gathering • Organization • Financial transactions • Trade facilitation • GTCs are hardly possible in non-communitarian states

13. The Korean Government • “Bureaucrats are not merely government functionaries, but leaders, intellectuals, and teachers. The rise and fall of dynasties in imperial China often depended on the quality of its scholar-officials; so do the fortunes of modern states, as many East Asian intellectuals observe.” Tu Wei-Ming • Important characteristics of the Korean government: • A lot of Korean government members have a strong academic background (remember Confucian emphasis on education) • Government officials believe they assume full responsibility for the well-being of the people making the government highly interventionist • Korean people tend to rely on the government for growth, stability, equity, education, quality of life, moral guidance and basic survival • Government-business relationship is highly hierarchical (compare to Japan and especially the US) • The market tends to be guided or managed by the government • Command market economy in the 1960s

14. Institutional Framework • “The differential performance of economies over time is fundamentally influenced by the way institutions evolve. Institutional change shapes the way societies evolve through time, and hence, is the key to understanding historical change.” Douglas C. North • The right institutional framework is key to achieving sustained economic growth • Right institutions need to be congruent with the indigenous culture • Important institutions in Korea: • Economic Planning Board (EPB) • Korea Development Institute (KDI) • Korea Institute for Science and Technology (KIST) • Korea Traders Association (KTA) • Korea Trade Promotion Corporation (KOTRA) • “Korea Incorporated”

15. Equity in Korea • Korean government sees ensuring a fair distribution of benefits from growth as one of its key objectives (remember homogeneity prevalent in Korea) • Equal sharing is crucial in families, companies and almost all kinds of organizations in Korea • Sustained economic growth requires equal allocation (e.g. Western Europe and the middle class) • Korean economic policy is both equity-oriented and growth-oriented