Government-Business Relationship - Essay Example

Government-Business Relationship: South Korea and New Zealand 2009 Since the 1950s, the state has played an important role in many countries in restoring the economy or in developing through industrialization. In particular, the government plays a crucial supporting role in promoting international trade relationships of businesses through policies that either encourage or discourage trade. While some governments have adopted import-substituting policies in order to protect domestic industries, others have followed liberal trade policies to boost exports and develop international competitiveness. The economy can be a bureaucracy dominated one to promote either individuals or corporatism or a business-dominated ones, also to promote individuals or corporate. In this paper, I will discuss the government-business relationships in South Korea and New Zealand, two countries that are crucially dependent on international trade but with very different government-business relationship, and the effect on the welfare of the people. At the end of the Japanese rule, the World War II and the Korean War over 1950-53, South Korea was left with a damaged industrial sector and a very weak economy as a result of which it had come to be dependent on American aid. However, South Korea had a strong industrial, entrepreneurial and technological base developed during the colonial era. Besides, South Korea had earlier engaged in significant land reforms and high educational standards that came to its aid in reconstruction and industrialization. Over the 1960s, South Korea, under the military rule of Park Chung Hee, “restoration of political order” and “promotion of economic growth” was taken up as the prime objectives (Kohli, 2004, p288). This was achieved through what Kohli (2004) called “cohesive collusion” between the government and businesses, often termed as the Korea Inc (p386). The aim was to develop the economy through export-promotion and outward-orientation of the economy and in particular industries like automobiles, electronics and textiles. Export-orientation was deemed essential as the domestic economy was small and the import-substitution possibilities in these industries were near complete. The business sector of the country was then dominated by family-owned large business houses, called chaebols, which have since then grown to be major global players in different sectors. The most successful of these chaebols were Hyundai, Daewoo, LG and Samsung. The state was transformed from a militarist, top-down, authoritative state to the cohesive-capitalist state. The apex of the state was controlled by a centralized structure composed of military associates of Park but in close association with the business leaders. While the state directed import substitution in heavy industries and carried the automobile and electronic industries beyond the assembly stage. On the other hand, export promotion in other industries where it had the advantage of low costs was also directed through favorable trade policies of the government (Amsden, 1992, p 198). The bureaucracy was expanded in the Japanese model with the export division being the most crucial one. The educated and professional bureaucracy was specially geared towards the economic aspects of administration. As American aid declines, the Park government worked towards normalizing relations with Japan so that it could develop trade relations in the region. Japanese businessmen who had historical relations with Korean businesses encouraged this move as they realized that they could benefit from the low labor costs and significant technological prowess of Korean businesses. Western businesses, too, saw similar benefits from developing trading relations with South Korea and increased investments in this small country during the 1960s and 1970s. Such international trade and investment relations were supported by government policies that reduced tariff rates and encouraged foreign investments through preferential treatment. In particular, the chaebols were rewarded with import licenses on the basis of achievement of export targets. Besides trade policies, the government also directed investment flows. Private banks were nationalized and bank credit was directed along government priorities. The financial sector was highly regulated, with the money and bond market restricted to a few instruments and discouragement of the auction market (Noland, 2005, p3). Although there was domestic political resentment to Park’s authoritarian rule, culminating in his fall in the democratic elections in 1971, the economic policies by the democratic ruler, Kim Dae Jung, who ruled till the 1990s, were in the same lines as that of Park’s. The nationalist political agenda, collusive government-business relations towards economic goals and an authoritative administration were the hallmarks of the 1970s. In the early part of Park’s rule, he imprisoned some businessmen on charges of corruption but released them when he realized that he needed them to retain power. Businesses were highly concentrated. By the end of the Park era, 10 chaebols accounted nearly two-third of the South Korea’s gross national product. Over 1962 and 1974, output per business grew ninefold while the number of businesses grew only by 40 percent (Kohli, 2004, p 423). Bureaucrats and businessmen often shared cultural and educational backgrounds and policies were influenced by the strong bureaucracy-business personal networks. The rapid industrialization during the 1960s and 1970s was possible not just due to the government-business relations during this period but due to the presence of a strong social and technological base that was created during the colonial period. During the period of rapid industrialization, there was a significant shift from rural to urban employment and an increase in the number of women in the labor force. Despite the high employment, the wage rates were low and hours of work long. Wage inequality was still lower in international standards because of labor abundance in the country (Noland, 2005, p 5). There was a dualistic structure of employment in South Korea, with wages in chaebol higher than in smaller firms. The military rule discouraged independent labor unions. Although the chaebols are considered to be the main agents of the economic miracle of the 1960s and 1970s South Korea, the small and medium enterprises played a significant role. Even as the government’s attention was mostly focused on providing incentives to the chaebols, the SMEs were the main players in industries like textiles and electronics (Regnier, 1992). By the 1980s, the speed of industrialization through export-promotion reached roadblocks primarily because of the development of monopoly powers of large businesses – directly the result of the “cohesive collusion” over the previous two decades. By then, South Korea had reached the technological frontiers and the catching-up possibilities became saturated. The prevalence of a number of stakeholders in the bureaucracy, business and their financiers meant that there were clash of interests at every quarter that became more and more problematic to handle. Besides, high amounts of corruption in the bureaucracy needed a power shift from the bureaucracy to the private sector. Some analysts have even called the Korean bureaucracy as a “hostage state” where the small set of business and political elite rule South Korea during 1961 to 1979 (Kang, 2002, p 178). By the 1990s, South Korean economy entered a declining phase. The 1997 Asian financial crisis eroded much of the remaining financial and technological prowess of South Korea (Noland, 2005, p 4). The financial sector was liberalized in order to attract foreign capital. However, this too was directed by the state and “power games” resulted between the state, big business and foreign investors (Kalinowski and Cho, 2009, p 67). The state turned from a player to a referee in the economic scenario of South Korea. Despite liberalization reforms, the cultural acclimatization to state intervention had become pervasive. Even in 2004, the perception of the “inefficient bureaucracy” and “political instability” as the major hindrances to doing business in South Korea reflected the attitude of dependence on the state (Noland, 2005, p 5). While South Korea restored the damaged economy after the World War II through rapid industrialization based on international trade, the New Zealand economy, which had for long been dependent on international trade, particularly with the United Kingdom, declined into a stagnation phase as it faced barriers to an increasingly competitive global trade. New Zealand, in the 1950s, was primarily an agricultural country, exporting meat, dairy products and wool. At the time, New Zealand was considered as one of the wealthy welfare states in which agriculture was subsidized, industries protected and social security provided to the weaker sections of the population. However, by the mid 1980s, the concept of the welfare state began to falter worldwide and the structure was seen to be “inefficient, uneconomic, unresponsive and unaccountable” (Jagmohan, p 59). The solution to the malady was seen in privatization and liberalization that would allow global competition to make producers more competitive in the domestic as well as export markets. New Zealand has always had a higher share of agricultural merchandise than any other of OECD country (OECD, 2005, p 33). However, after the end of the World War II, its main trading partner, the United Kingdom, faced an economic downturn. Besides, the shift towards local procurement in the UK affected New Zealand exports all the more. In the 1960s, declining pastoral profitability led to diversification of both agricultural production as well as trade destinations. There was a greater focus on horticultural products, like kiwis, and less on meat. Land was diversified into plantations and forestry. Tourism became a greater foreign exchange earner than exports of agricultural products. Manufactured products were diversified, with dairy products extending to a variety of cheeses. Export of meat to the Middle East meant that halal products had to be increased. However, even in the 1970s, the domestic economy remained regulated. Foreign exchange dealings had to be done through government banks. Transport was regulated meaning that transport costs were high and inefficient. Import license regime was also strict. The economy was riddle with interventions that made it inefficient (Easton, 2002, p 106). While the economy of New Zealand was dependent on agriculture, the majority of its population was urban and had a euro-centric consumer demand pattern. As a result, it had a growing import bill resulting in fiscal strain. Between 1977 and 1993, the share of agriculture in Gross Domestic Product fell from 9.8 percent to 5 percent, reflecting both a relative increase in other sectors as well as declining focus on agriculture (OECD, 2005, p 57). The oil shock of the 1970s further affected New Zealand’s exports forcing it to diversify its trading partners, with more focus on the Middle East. Till 1983, the New Zealand economy was seriously regulated and businesses spent quite a lot of time lobbying with the government for special favors in policies. In 1984, the government engaged in a structural adjustment and liberalization policy framework. Macroeconomic policies aimed at price stabilization as well as economic policies were engaged in. After a 20 percent devaluation of the currency, the government shifted from a fixed to a floating exchange rate regime, in order to provide more flexibility to exporters. At the microeconomic level, exporter and consumer subsidies were removed putting domestic producers open to foreign competition. As a result, the agriculture sector declined from 40 percent of GDP in 1975 to 32 percent in 1982, as services picked up. At the same time, import licenses and import quotas were removed and import tariffs greatly reduced. Incentives for agricultural produce and regulation of agricultural information and pricing was put in place to boost the sector as well (OECD, 2005, p 87). The rollback of the welfare state in New Zealand since the mid 1980s resulted in a widening of income gap between the rich and the poor (Gilbert, 2002, p 158). Along with privatization and liberalization, there were heavy cuts in social spending in health and education. Since the mid 1990s, the social spending in New Zealand fell lower than other OECD countries (Salonen, 2007). Thus, South Korea and New Zealand have had very different historical trajectories of development and government-business relations. While the South Korean economy achieved phenomenal industrialization, often termed the economic miracle, in the 1960s and 1970s through extensive government-big business collaboration that induced export-oriented industrialization, this left out a large section of the population from the benefits of growth. Big business grew at the cost of small and medium businesses and the social development that was the foundation on which the growth was based, was ignored in the process. This process reached its blockade as it led to monopolistic concentration in the economy and the possibilities of catching up growth reached its saturation point in the 1980s. The New Zealand economy, on the other hand, had developed as a welfare state on the basis of its rich agricultural production and exports. The state was restrictive in the 1950s to the mid 1980s, when the economy stagnated as it faced lower export markets. While attempting to diversify its production and trade, the government remained restrictive trying to provide social security through the welfare state. By the mid 1980s, however, it gave in to the pressures of global capital and opened up the economy to foreign competition through liberalization of the trade sector. Since then, as in most economies of the world, both South Korea and New Zealand has seen diminishing roles of the state, which plays the role of the referee to provide free hand to global businesses in the respective economies. Works Cited Amsden, Alice H, Asia’s Next Giant: South Korea and Late Industrialization, Oxford University Press, 1992 Easton, B H, The Commercialization of New Zealand, Auckland University Press, 2002 Gilbert, Neil, Transformation of the Welfare State, The Silent Surrender of Public responsibility, Oxford University Press, 2002 Jagmohan, Soul and Structure of Governance in India, Allied Publishers, 2005 Kalinowski, Thomas and Hyekung Cho, The Political Economy of Financial Liberalization in South Korea: State, Big Business, and Foreign Investors, Asian Survey, March/April 2009 Kang, David C, Crony Capitalism: Corruption and Development in South Korea and the Philippines, Cambridge University Press, 2002 Kohli, Atul, State-directed Development: Political Power and Industrialization in the Global Periphery, Cambridge University Press, 2004 Noland, Marcus, From Player to Referee? The State and the South Korean Economy, Institute for International Economics, September 27, 2005, http://www.iie.com/publications/papers/noland0905a.pdf Organization for Economic Cooperation and Development (OECD), Trade and Structural Adjustment: Embracing Globalization, OECD Publishing, 2005 Regnier, Philippe, Small business and industrialisation in South Korea, Asia Pacific Journal of Management, Vol 9 No 1, 1992 Salonen, Tapio, Welfare State changes in New Zealand: A View from Swedish perspective, 2007, http://web.auckland.ac.nz/uoa/fms/default/uoa/about/research/units/publicpolicygroup/docs/ArticleTapio.pdf Read More