Korea's Public-Private Alliance: A Case Study

1. KeyPartners in Public-Private Alliance: The Case of Korea YooSoo Hong Director Institute for Global Innovation Economy (IGIE) A Presentation at the Conference, “Public-Private Alliance for New Development Strategy Perspective”, Co-organized by OAS, GOES, andECLAC, San Salvador, El Salvador, January 10, 2011 1

2. Contents • Introduction and Historical Review • Institutions for Public Private Alliance • Investment and Production • Trade and Foreign Investment • Technology and International Competitiveness • Implications References 2

3. I. Introduction and Historical Review

4. Basic Facts on Korea Major Statistics Sea of Okhotsk • Land Area: 98,480sq km • National Capital: Seoul • GDP: $1,012.4 Billion(2010f) • GDP Growth Rate: 5.9%(2010f) • Population: 48.6 Million • Global leader in Semiconductors, Steel, Shipbuilding, Automobiles, Electronics, Telecommunications East Sea Pacific Ocean Yellow Sea Philippine Sea 4

5. From Ash to a G20 Country - Korea was one of the least developed countries in terms of industrial development in the early 1960s. It has been transformed into one of leading industrial countries in the world during the last 50 years. 1960s Present • GDP (2010f): US$1,012.4 billion (14th) • GDP per capita (2010f): $20,450 • Exports (2010f): $459,803 million (12th) • Industry: DRAM and CDMA cellular phone • Diplomacy: OECD, G20, etc. • GNP (1960): US $1.1 billion • GNP per capita (1960): $82 • Exports (1960): $33 million • Industry: Plywood and wigs • Diplomacy: No member in • major intern’l organizations • GNP(1960): US $1.1 billion • GNP per capita (1960): $82 • Exports(1960): $33 million • Industry: Plywood and wigs • Diplomacy: No member in major international organization 5 5

6. Transformation of the Korean Economy Per capita GDP ($) 18,480 18,000 15,000 16,460 10,307 10,000 6,742 5,000 Five year economic development plans Financial crisis 67 87 1945 1953 1962 1970 1980 1990 1997 2000 ’05 ’06 ’07 6

7. Changes in Employment Structure 1963 2007 Agriculture / Fisheries 7.4% Service Manufacturing 17.6% Service Manufacturing 75.0% Agriculture / Fisheries Source : National Statistical Office

8. Semi-conductors Mobile communications Digital home electronics E-commerce Bio products Fine parts Semi-conductors IT Automobile Shipbuilding Textile Petro-chemicals Home Electronics Semi-conductors Iron & Steel Automobile Shipbuilding Textile Home electronics Iron & Steel Overseas construction Food Plywood Wig 1960 1970 1980 1990 2000 Changes in Dominant Industries and Top Exports 8

9. Development Stages in the Korean Economy 1950s 1960s 1970s 1980s 1990s 2000s Aid,Labor intensiveproduction Imitation Simple tech. Import of oldplant/ machinery Heavy industry Assimilation Minorinnovations R&D New product development R&D intensiveincrease in scienceNew productinnovation Innovationfrontier Traditional Imitative Catch-up Innovative Catch-up Innovative Economy “Intensive Growth” Transition to Innovation-driven Economy Outward-looking Invesment-driven Economy“Extensive Growth” Agricultural Economy Factor-driven Economy “Extensive Growth” Outward-looking Stages of Development 9 9

10. Regimes and PPP

11. Stages of Catching-up Industrialization Internalizing parts and components Internalizing skills and technology Pre- industrialization Initial FDI absorption Internalizing innovation Creativity Technology absorption STAGE FOUR Full capability in innovation and product design as global leader Agglomeration (acceleration of FDI) STAGE THREE Management & technology mastered, can produce high quality goods Arrival of manufacturing FDI STAGE TWO Have supporting industries, but still under foreign guidance Japan, US, EU STAGE ONE Simple manufacturing under foreign guidance Korea, Taiwan STAGE ZERO Monoculture, subsistence agriculture, aid dependency Thailand, Malaysia Vietnam Border to Middle Income Economies Poor countries in Africa Source: Kenichi Ohno.2009

12. II. Institutions for Public Private Alliance

13. Institutional Mechanisms of PPA • PPA Device • High level organization with continuity in political leadership, political resolve and commitment at top of state apparatus • Permanent working groups at the bureaucratic level, feeding into the policy-making process at the higher levels of government-business interactions • Consultative/deliberative councils with functional authority over certain policy areas • Measurable objectives and targets, clear deadlines • Selective benefits and rewards • Substantial contribution by each participant (Adapted from OECD)

14. Nature of PPA Actors • Government and bureaucrats • Autonomy of the state and political elites / private interests and a vision for economic development. • Proximity with the private sector. • Embedded autonomy or connectedness without capture • An organized private sector and strong business associations • Representativeness • Analytical capabilities and ability to feed the process of policy-making • Capacity of sectoral private regulation and decision enforcement • Willingness to engage in PPA • Benefits expected (Adapted from OECD)

15. Formal PPA Campaigns &Elections Lobbying Bribing Personal Networks Formal and Informal PPA • Government – Business Interactions Political Elites & Government Bureaucracy Business Sector Source: Adapted from OECD

16.  Development Strategy and Apparatus -When Korea started its development strategy, the only productive factor at the disposal of the economy was human resources, lacked natural resources, industrial facilities, sufficient land, foreign reserves and business experiences. - Through heavy and aggressive investments in education, training and borrowing foreign capital, Korea could overcome all the barriers, although the development process has not been so smooth. Human resource was the key factor for the entire period. -The Korean success also benefited from effective institutions. The Korean bureaucracy consisted of high quality technocrats with strong motivation.

17.  Development Institutions - There are two kinds of public-private alliance, i.e. the hierarchical relationship and the horizontal relationship, largely corresponding to the stage of authoritarian regime and the democratic regime. - The basic guideline for national strategies and policies is usually prepared by bureaucrats but the formulation requires the input of experts from the public sector and the private sector as well. - The relatively stable political system enabled elite bureaucrats to react appropriately to policy environments with rapid decision making and implementation.

18.  Top Leadership Qualifications - Dynamism of leadership with strong political will, economic knowledge, effective use of technocrats and advisory committees - Direction of strategic goal and creation of focal point in policy making - Direct and commit some organizations for taking lead and responsibility - Ensuring implementation - Public Private Alliance for effective cooperation with businesses

19. Technocrats - Work directly under the top leader to realize the national vision. - Create core policies including overall industrial plan. - Guide and coordinate ministries for implementing policies. - Invite businesses, academics, foreign experts and supporters for cooperation. - Emphasize economic rationality, counter-balance against interest groups and rent seekers.

20.  Ministries - EDB is the ministry above ministries of planning and coordination - Ministry of Commerce and Industry • Later known as the Ministry of Trade and Industry, or MTI - Ministry of Finance • Nationalization of the banks • Centralization of the financial system - Day-to-day contact with businessmen who wanted approval for projects

21. Quality of Bureaucracy in Select Developing Countries Source: UNDP. 2010. “State Capacity for Development” (pdf.Google)

22.  Chaebol System • A conglomerate of many companies and they hold shares in each other • Concentration of national economy • Does not have own financial institution • Spreads across industries • Has centralized structure and control • Tends to be family-based

23. Korean and Japanese Conglomerates

24. Authoritarian PPA - Centralized political system: Power concentrated in small elite - Strong and coherent state - Effective policy implementation - Government officials autonomous (shielded from pressures), competent, professional (corruption minimized) - Officials executed policies as leadership intended - Close relationship to business community: Frequent consultation - Coercive power: Huge armies, massive security apparatus, repression of dissent

25. Democratic PPA - Strong, autonomous states make, implement policies favoring broad categories of population - Capable, coherent state bureaucracies - Encompassing business and labor federations - Parties appeal to broad groups of voters through policies that aim to promote growth with equity - Broad-based labor and business federations - Incentives leaders have to build broad or narrow coalitions of support

26. Two Kinds of PPA Models in Korea Hierarchical/Authoritarian PPA (Phase I) Government Government-sponsored research institutes SMEs Large firms Universities Experts Horizontal/Democratic PPA (Phase II) Government-sponsored research institute Large firms Government SMEs Universities NGOs

27.  Two Different Phases • In the earlier stage (Phase-I), a strong government leadership may be of necessity. In this period, mobilization of resources for rapid economic growth is the essence of the national development strategy. • In the later stage (Phase-II) when the economy becomes more diversified and complicated, the role of the market mechanism and effective public-private alliance gain the importance. • Although effective public-private alliance has been shown in the process of plan or strategy formulation at the national level to a certain extent, the Korean case shows that the country has not always achieved a desirable public-private alliance for implementation of strategies under some regimes.

28. -Under the Phase-I Model the relationship and interactions between the public (government) and the private (business sector) in Korea were characterized by a top-down (hierarchical) system where the government directed and guided major economic agents for the implementation of Five-Year Economic Plans, which were formulated by the government with the joint-work of government bureaucrats and civilian experts. - The horizontal interactions among major economic players were not developed and the authoritative government treated the private sector on the basis of the ‘divide and rule’ method. - This close relationship between the government and Chaebols in the Phase-I period of the 1970s, was not a public-private alliance in the true sense, but an imposed one by the authoritarian government.

29. -Under the Phase-II Model, the horizontal relationship between the major players is expected. However, the ideal cooperative horizontal relationship has not been fully developed yet. - Today the scale of the Koran economy and the diversity of the Korean industries do not make it easy to form such an ideal partnership. There is a big difference between Korea and Japan. Japan still maintains its world-famous ‘consensus-making’ practice between the government and the business sector. - The Korean economy, especially the trade sector, is still dominated by Chaebols and large enterprises. Although SMEs are gaining their importance and strengthening competitiveness, they are not the leaders but followers.

30. Government & Public Sector Committees & Affiliates President Prime Minister Committees & Affiliates Cabinet & economic Policy Coordination Council GSRIs (1) MOCIE MOFE MOST SMBA GSRIs (2) KOTRA KOTEF KITECH Major Players in the Korean Economy (2007) 30 30

31. FKI KCCI K-Biz KITA Chaebols & Large Firms Industry-Specific Associations GTCs Academia& Research Institutes NGOs (Continued) Private Sector SMEs 31 31

32. Conceptual Framework of PPA in Korea Government People F o r e i g n Ministries and Bureaucrats ----Interface/Interactions----- Industrial Associations, etc. M e d i a Profit Organizations / Enterprises Non-Profit Private Organizations

33. Government-Business Alliance under Park Administration • Direct presidential control over economic policies • EPB as super-ministry • Policy research institutes (KDI, etc.), providing analysis foreconomic policies • Govt.-business: very close andcooperative relations • Performance-based rewards and penalties President Economic Secretariats State Council Chaired by Deputy PM Five-year plan Economic Minister’s Council KDI, Etc. EPB Deputy PM Govt.-BusinessMeetings: - Export promotion - Economic briefs - HCI drive, etc. • Development planning • Public investment planning • Budget • Monitoring • Aid management Ministry MTI Ministry Source: Adapted from Kenichi Ohno. 2009.

34. III. Investment and Production

35. Economic growth Foreign Loans (Economic aids/ external debt) Reproduction Export promotion Manufacturing processing Private enterprises Financial tax support Capital good imports Government Raw material imports Foreign technology imports Technology Well-educated labor force development Source: KDI Working of the Outward-looking Development Strategy 35 35

36. Korean Economic Development Model in the 60s Capital financingthrough foreign loans Private enterpriseencouragement Authoritative government in the center of development motivated people Intervention Export Promotion High savings rate Technology catch-up Well-educatedwork force 36

37. Phase – I Model Government Financial regulation Suppressed labor movement Industrial Policy Finance Chaebols Labor Financial support Labor input Inflationary enforced savings Low wage National mobilization 37 37 Source: Lee, Jong Won. 2004.

38. The Role of the Government in the Phase-I Model Concentration of capital ownership and management by the government Strong control of the government over financial institutions, resources allocations, wages and prices Government-led economic development strategies : Export-oriented industrialization : Growth first, distribution later : Leadership in tech capability building Source: Lee, Jong Won. 2004. 38 38

39. Washington Consensus vs. Industrial Policy • Washington Consensus • Highly skeptical of ‘infant industry’ protection • Highly skeptical of government’s ability to successfully ‘target’ industries to support • Economic development is best left to international market forces following comparative advantage • Market forces will operate best in climate of private rights for business • Highly skeptical of bureaucratic discretion • Industrial Policy • Strong economic management and market intervention by the state • Maintain national economic autonomy • Move up ladder from light to heavy industry • Decrease reliance on foreign technology • National self-reliance • Build national wealth through exports

40. Industrial Policy Means • Chaebol System • Scale • Diversification • Know-how, experience, capability • Ease of government control • Finance • Government control of banks (borrowing) • Government control of access to capital markets (equity finance) • Foreign exchange controls to control inward and outward capital flows (ensures savings pool; limits foreign borrowing) • Foreign Investment controls (foreign equity investment severely limited)

41. Public-Private Alliance for Investment and Production President Examine & discuss basic policy & direction Economic Cabinet Meeting Presidential Secretariat Ministries EPB Others MTI Examine & discuss detailedmeasures & actions Federation ofKorea Industry (FKI) Bridge between governmentand business sector Information sharing, Specific action formulation, etc. Industrial associationsand supporting organization Textile, Food, Automobile, Iron & Steel, etc. Foreignmarket Domestic market Related institutions

42. Background and Characteristics of Chaebols • Background • Chaebols are on offspring of economic and industrial strategies under the CME (Centrally Managed Economic) system in the President Park’s era. • Chaebol is a business group of large companies which is owned and managed by family members or relatives in many inter-connected business areas. • Characteristics of Chaebols • The Chaebol system differs from US conglomerates, Japanese Keiretsu or German financial clique. • Chaebol system may be regarded as a private replica of the central government in Korea.

43.  Chaebol and the Korean Economy Chaebols are characterized by ambitious and aggressive entrepreneurship, paternalistic leadership and centralized planning and coordination. Chaebol had preferential financing for private investment. Often it was ended up with over-investment in some industries (electronics, automobile, steel) and large amount of debt (high leverage ratio). It was possible because the State was in control of banks, and Chaebol could access to financial resources whenever they needed. The economic growth was designed by the State by way of industrial policy (‘Five Year Economic Plan’ 1962-1991). As a result, Korea’s growth rate had been extraordinary (8% per year on average until the 1997 economic crisis). On the other hand, gains from growth accrued to Chaebols. Labor unions and social movements were severely repressed. 43

44. Phase – II Model Government Foreign Capital Coordination Investor-oriented governance Financial support Labor market Finance Chaebol Labor Flexibility Market expansion Economic liberalization and opening Source: Lee, Jong Won. 2004. 44 44

45. The Role of the Government in the Phase- II Model Reducing government intervention in the market and private sector Liberalizing the economy and coordinating Government-supported, innovation-oriented development strategies : Innovation-oriented industrialization : Improving business environment and infrastructure Source: Lee, Jong Won. 2004. 45 45

46. Transition in the 1980s • There was a substantial change in the government industrial and technological policy principles. As the government liberalized the industry and economy, the government refrained from direct influence of industries but used indirect support. • The Korean industrial structure itself was moving from labor-intensive to R&D-intensive one. • Firms were ready to respond to these circumstances due to already accumulated experiences and technological capabilities during the 1960s and 1970s. 46 46

47. IV. Trade and Foreign Investment

48. Export-Oriented Industrialization • Korea's industrial development has been achieved through export- • oriented strategies. • - During 1960s and 1970s, the period when Korea accomplished • the development of major industries, export growth outpaced GDP • growth Rapid Increase of Exports’ Share in GDP (%) 48

49. Public-Private Alliance for Trade President Examine & discuss basic policy & direction Economic Cabinet Meeting Presidential Secretariat Ministries MTI Others Examine & discuss detailedmeasures & actions Monthly Export Promotion Conference Bridge between governmentand business sector Information sharing, specific action formulation, etc. Federation ofKorea Industry (FKI) Chabols SMEs Foreignmarket Domestic market Related institutions

50. Monthly Export Promotion Conference Practical Forum for Trade Policy Presided by the President Established in December 1962. The most important administrative support mechanism for export promotion Attended by major government high-level officials (Ministers, etc.), leaders of public organizations, civilian experts, leading exporters (firms) and industrial associations Effects of the Conference Enhancing the general public’s awareness of the importance of export Problem shooting, especially directed by the President Sharing information and visions among participants Encouraging leading exporters and inducing cooperation of the private sector The conference made great contributions to the high export performance during the Phase-I period. 50