Korean Politics (POLI 133J) , April 12 Political Economy of Development

1. Korean Politics (POLI 133J), April 12Political Economy of Development • What were the sources of the economic "take-off"? • Why was government intervention in Korea effective unlike in many other developing countries? • Was authoritarian rule necessary for economic development in Korea?

2. What were the sources of the economic "take-off" of the 1960s? Y= α f(K, L) Paul Krugman: Communist growth (1950s) and East Asian growth: driven by inputs (K, L), not efficiency. Orthodox economists: efficiency gain from free trade (comparative advantage) New institutionalist economics: heavy government intervention, export-led growth by getting prices wrong (industrial policy; developmental state) Dani Rodrik: investment-led growth (K), government role in alleviating coordination failure; favorable initial conditions (human capital, low inequality) Bruce Cumings: human capital

3. “Predatory Rhee” vs. “Developmental Park” • Overall consensus of the literature

4. Rhee (1948-60) vs. Park (1961-79) • Import substitution industrialization under Rhee vs. export-oriented industrialization under Park • “GDP growth 3.9%, industrial growth 11.2%” under Rhee • Transition to export-led growth (Haggard): • Why?: Declining US aid commitment (search for new sources of foreign exchange), initial failure of Park’s inward-looking, expansionary strategy • State-led: Executive dominance, Economic Planning Board, New policy instruments (nationalization of commercial banks, allocation of low-interest loans to exporters)

6. Investment and export • Investment = savings (private, government, foreign) • Real interest rate: not high, often negative • Anti-consumption campaign • Foreign savings: US aid, normalization with Japan, Vietnam War, Middle East construction boom • Selection of strategic industries, provision of under-priced credit, and socialization of investment risk (guarantee of bail out)

7. Why was government intervention effective in Korea? • Government intervention (eg. rationing of under-priced credit) creates inefficiency. r S D Q QD QS

8. Why was government intervention effective in Korea? • Government intervention (eg. rationing of under-priced credit) creates incentives for corruption and moral hazard: -illegal political contributions -risky investment (too big to fail) -a cause of financial crisis in 1997

9. Why was government intervention effective in Korea? • Evans (1995): embedded autonomy -meritocratic, professional bureaucracy • Rodrik(1995, 91-93): equality, lack of landed elites or powerful interests  no capture

10. Growth= 6.22 -0.38 GDPpc +2.66 enrollment – 5.22 land gini -3.47 income gini + ε

11. Real GDP per capita of South Korea, Taiwan, and the Philippines, 1953-2004 (in 2000 constant dollars) Source: Penn World Table 6.2.

12. Trends of land gini Sources: Ban, Moon, and Perkins (1980), Taylor and Jodice (1983), and Frankema (2006) Note: When there are multiple estimates, both the lower and the higher estimates are included.

13. Trends of income gini Source: World Income Inequality Database

14. The Trends of Secondary & Tertiary Enrollment, from 1945 to 1960 • Sources: McGinn et al (1980), 150-51: UNESCO, World Survey of Education, 1955-1971.

15. Land reform in S. Korea • August 1945: Liberation; Separation of North and South • October 1945: American Military Government, rent reduction (1/3) • 1946: Radical land reform in the North • 1948: AMG redistributed 240,000 hectares of former Japanese land. • August 1948: Establishment of ROK, followed by DPRK in September • March 1950: Land Reform Act, signed into law. • 1950-52: Government purchased and redistributed 330,000 hectares of farmland, before and during the war. • Retention limit: 3 hectares • Buying and selling prices: 1.5 times the annual yield • Voluntary sales of over 500,000 hectares, between 1948 and 1950. • 52 percent of total cultivated land transferred ownership.

16. Changes after the reform • Before the reform: The richest 2.7 percent of rural households owned two thirds of all the cultivated lands, while 58 percent owned no land at all. • By 1956, however, the top 6 percent owned only 18 percent of the cultivated lands. • Tenancy dropped from 49 percent to 7 percent of all farming households, and the area of cultivated land under tenancy fell from 65 percent to 18 percent.

17. Role of external threat and competition • Land reform: North Korean threat • Security threat from NK • Economic performance competition with NK • From import substitution to export promotion: Competition in global markets

18. Trends of GNP per capita of Two Koreas Source: The Research Institute for National Unification (1993)

19. Reversal of fortunes?Irony of history? • South America vs. North America • USSR-model socialism vs. welfare capitalism & social democracy • South Korea vs. North Korea • South Korea & Taiwan vs. the Philippines

20. Two critical questions • Was authoritarian rule necessary for economic growth? • Role of chaebol: positive & negative

21. What about post-Park? • Post-Park and post-democratic transition: < Average annual growth rate >

22. Przeworski et al. (2000): Impact of democracy on development Normative concern: Is democracy a luxury? Amartya Sen: The preeminence of political freedoms and democracy; instrumental role (no famine in democracies) Empirical concern: • 1950s (Romania), 1970s (Brazil), 1980s (Singapore, S. Korea, Taiwan), 1990s (China): The tigers have tended to be dictatorships, but are dictatorships necessarily tigers?

23. Przeworski et al.’s empirical findings • Political regimes have no impact on the growth of total income. • Yet per capita income grows faster in democracies, because of lower rates of population growth. • People live longer under democracy. • Dictatorships are labor-extensive and labor-exploitative. They pay more for capital. • Democracies pay higher wages, and labor share of income is higher.