FS H 93-205
Beyond State and Market The Role of the State
in Korean Industrial Development - The Case of Machine Tools -
S. Ran Kim
Berlin, October 1993 ISSN 0724-5084
Wissenschaftszentrum Berlin für Sozialforschung (WZB) Reichpietschufer 50,10785 Berlin
Telefon (030) 25 491-0
L IST OF ABBREVIATIONS
CAD Computer-aided Design
CAM Computer-aided Manufacturing
C h a e b o l Korean Conglomerates
CNC Computer Numerical Control
FMS Flexible Manufacturing System
HCI-Drive Heavy, Chemical Industry Drive
MVA Manufacturing Value Added
KIET Korea Institute for Economics and Technology
KIMM Korea Institute of Machinery and Metals
KIST Korean Institute of Science and Technology
KOMMA Korea Machine Tool Manufacture's Association
M ill Ministry of International Trade and Industry, Japan
MTI Ministry of Trade and Industry, Korea
NCMTs Numerical Controlled Machine Tools
NC Numerical Control
NICs Newly Industrializing Countries
R & D Research and Development
VER Voluntary Export Restraint
This study aims to systematically analyse the real role of the Korean state in industrial development, by focusing on the distinct ways and dynamics of state intervention, i.e., state's interaction with the market.
It contains a specific industry study and explores the "strategically" and "institutionally" distinct ways in which the Korean state has exerted influence on the industrial development process. The focus will be on a specific industrial sector, in order to study how the Korean industrial policy has been developed and implemented and also how it has influenced competition and corporate decisions. For this purpose, one of the most important branches of the capital goods sector, i.e., machine tools is chosen. The research findings fiom the machine tool industry show that the Korean state took an activist role during the process of transformation in the 1970s, but the real source of the Korean machine tool development has neither been a "leading" state policy, nor a simply "following" one, as is asserted in the state or market regulation theses. It has been rather
"the routinized politics of reciprocal subsidy", i.e., the tacit alliance and constant negotiations and bargaining arrangements between the Korean state and large firms.
Marktregulierung oder Staatsregulierung? Welches ist der wahre Motor der koreanischen Entwicklung? Die vorliegende Studie greift die kontroverse Debatte über den koreanischen Industrialisierungsprozeß auf und versucht die wirkliche Rolle des Staates in der technologischen und industriellen Entwicklung Koreas besser zu verstehen sowie Reichweite und Grenzen staatlicher Einflußnahme aufzuzeigen.
So wird zunächst die Aussagekraft der beiden vorherrschenden Thesen von Markt- und Staatsregulierung, welche die komplexen, interaktiven Prozesse der koreanischen Industrialisierung lediglich "monokausal" erklären, kritisch geprüft. Die kritische Diskussion macht so dann deutlich, daß zur Überwindung der simplen Polarisierung von Markt und Staat vor allem eine alternative analytische Sichtweise des Faktors "Staat" erforderlich ist. Es werden daher die jüngsten Ansätze des Neuen Institutionalismus und dessen konzeptionelle Differenzierung des Staates ("Akteur" und
"struktureller Einfluß") herangezogen. Den Kern dieser Untersuchung bildet die Fallstudie der koreanischen Werkzeugmaschinenbau-Industrie. Sie bewegt sich im konzeptionellen Rahmen des
"institutioneilen approach". Sie ist historisch-institutionell angelegt und untersucht eingehend den Zusammenhang zwischen staatlicher Intervention bzw. Nicht-Intervention und der industriellen Performanz des koreanischen Werkzeugmaschinenbaus in den verschiedenen Entwicklungsphasen.
Entgegen den Erwartungen der Markt- und Staatsregulierungstheoretiker führt diese Fallstudie zu dem Ergebnis, daß die Quelle der koreanischen industriellen Entwicklung weder eine "effektive"
Industriepolitik des koreanischen Staates noch der reine Marktmechanismus ist. Vielmehr wird der koreanische Industrialisierungsprozeß durch die Dynamik der "politics of reciprocal subsidy"
zwischen Staat und Großbetrieben getragen, welche tief in der politischen Ökonomie Koreas verwurzelt ist und die Stärken und Schwächen des koreanischen Entwicklungspfades bestimmt.
Auch bezüglich der Rolle des Staates verweisen die Befunde kaum auf die angebliche Effizienz des
"guiding-state". Der koreanische Staat intervenierte zwar massiv in der Werkzeugmaschinenbau- Industrie, aber seine Rolle bzw. Effizienz beschränkten sich im wesentlichen auf die Risikoübemahme bei neuen Investitionen in der Anfangsphase der Industrie. Die im Zuge der verschiedenen Entwicklungsphase entstandenen politisch-institutionellen Strukturen sind für die Weiterentwicklung dieser Industrie ungeeignet und hinderlich; ihre fehlende Flexibilität wird zum Problem der industriellen Performanz, da sie zum Defizit an innovativer Orientierung und eigenständiger, auf Forschung basierender Weiterentwicklung der Branche führt.
List of Abbreviations... ... i In tr o d u c tio n ...1 l. Current Theoretical Controversy behind Korea's Development
Success... ...3 1. Market Regulation V ie w ... 4 2. State Regulation V ie w ...7 II. Beyond M arket and State: New-Institutionalism
as an Alternatiave Perspective on the " S ta te " ...15 m . The Political Economy o f Korean Industrial Development:
The Case o f Machine T o o l s ...20 1. Justification of Case Selection... 21 2. Machine Tools: Industrial Characteristics, Changes and
Policy Implications ... 22 2.1 Basic Industrial Characteristics of
the Machine Tool Industry... 22 2.2 Changing Technological and Economic Logic
in the Machine Tool In d u s try ...25 2.3 Implications for the Industrial Policymaking:
"Structural Steering"...29 3. Industrial Performance of Korean Machine Tools
in its Institutional Context... 33 3.1 Korean Machine Tools: Modest Performance Behind
Export-led Growth... 34 3.2 Problems of Weak Competitive Capacity... 42 3.3 Institutional Context of the Weak
Competitive Capacity...45
"Bringing the State I n " ...52
4.2 Postwar Machine Tool Industry and the Process of Building the State Structure (Before 1 9 7 3 ) ... .. . 55
4.3 Exercising State Strength: Machine Tool Industrial Policy during the Heavy and Chemical Industry Drive (1973-1979)... 59
4.3.1 State Intervention Strategy... 59
4.3.2 State Actions: "Pushing" Policy Instruments... 61
4.3.3 Corresponding Structural Effects of the State... 65
4.3.4 Consequences of the State Strength and Policy of "Making W in n ers"... 67
4.4 The Limitations of State Action After the Heavy and Chemical Industry Drive (Since 1979)... 72
4.4.1 The General Shift in State Strategy...72
4.4.2 State Actions and their Limitations towards Machine Tools... , ... 75
4.4.3 The Irony of State Strength as the C a u s e ...86
4.5 Resume and Evaluation of the Korean Industrial Policy for Machine T o o ls... 91
IV. Conclusion and Theoretical Im p lica tio n s...94
1. The Korean State's Capacity and New-Institutionalism... 94
2. Korean Machine Tool Development and State and Market Regulation T h e s e s ... ... 95
References 98
The industrial performance o f the late industrializing countries o f Asia like Japan and Korea has led to a fundamental rethinking o f the role o f states in relation to economies.
Now, the issue whether the state can help create comparative advantages, and state intervention can be structured in certain ways to speed up the industrial growth, have increasingly preoccupied both the policymakers and scholarly debates. After a lengthy dispute, the question is yet to be resolved satisfactorily.
Despite the increasingly controversial discussion over the role o f the state in Korean industrial development, there has been no systematic analysis o f the specific ways in which it really mattered. This is largely because o f the two paradigms which have been dominating the research on Korean industrial development, i.e., the neoclassical economics and new trade policy debates. They tend to explain the highly subtle and interactive process o f Korean industrial development only by using a single dominant factor like "state" or "market"; without specifying the complex mechanisms o f the state- market interactions.
Hence, this study aims to systematically analyse the real role o f the Korean state in industrial development, by focusing on the distinct ways and dynamics o f state intervention, i.e., state's interaction with the m arket
By rejecting the prevailing monocausal explanations by "state" or "market", I emphasize in chapter I that the ways in which the state influences a nation's industrial development should be examined more "contextually".
For this purpose, in chapter II, New-Institutionalism is suggested as an alternative analytical perspective on the state and its capacity. This allows us to analyse the
"historically" unique and "institutionally" circumscribed character o f state interventions in the economy.
Then in chapter HI, an attempt is made to bring together the New-Institutionalist perspective o f the state with those concepts, which emphasize the importance o f organizational efficiency and coordination o f economic activities for industrial performance (e.g., the "govemance"-discourse or the concepts o f "national system of innovation"). This chapter, which constitutes the main part o f this paper, contains a
specific study, i.e., the Korean machine tool industry. It explores the "strategically" and
"institutionally" distinct ways in which the Korean state has exerted influence on the industrial development process. Here, the main objective is to pursue a politico- economic understanding of Korean state interventions in the machine tool industry. It becomes necessary in order to throw light on some of the wider causes of the Korean development, and to highlight the relative strength and weakness of Korean political economy. Chapter HI is constructed as follows: After the justification of the selection of the Korean machine tool industry in section 1, I map out in section 2, the fundamental and changing technological-economic logic in the world machine tool industry, so as to develop a basic criterion; which will be then used to measure the effectiveness or appropriateness of the Korean state policies towards machine tools.
Subsequently, in section 3, I describe the modest performance, as well as the weak competitive capacity of Korean machine tools. Then, they are related to the particularly disintegrated industrial structure as well as to the generally impoverished institutional context, which hamper the individual firm's flexible response and the development of an endurable competitiveness. Section 4 presents a historic overview of the Korean state policies towards machine tools and the evolution of the industry. An attempt is made to show that the current industrial performance of the Korean machine tool sector and its failure to develop multilateral exchange among major actors, as well as a more favourable arrangement of economic activity in this sector is not just a natural result of the operation of the law of economies of scale, but, to a considerable extent, a product of the state policy actions as well as structural influences. The primary focus is on the relative state "strength" both within the state itself and in the political economy at large.
Relying on the concept of "irony of state strength", an attempt is made to show how past policy actions and the exercise of state's strength, which was hardly hindered, caused a structural transformation of the Korean political economy, and thus imposed constraints on future policy implementation. The findings from the case study of the machine tool sector are then used to illustrate the general strengths, limits, and above all the vulnerability of the Korean industrial development path.
In the concluding chapter IV, the result of the whole study is summarized and analysed for its theoretical implications. A particular attention is paid to Korean state's steering capacity and its role in the machine tool development. Primarily, this paper is intended to serve as an example to illustrate the actual impacts of state intervention in industrial
development. Above all, it aims to provide a supporting case for the arguments that the state's role in industrial development should be analysed by its political logic and not by any derivation o f economic logic.
I. CURRENT THEORETICAL CONTROVERSY BEHIND KOREA'S
DEVELOPMENT SUCCESS
Since the surge of Japan and the Newly Industrializing Countries (NICs) in the heightened international competition, states have been increasingly confronted with expectations and calls for more active industrial policies. As a result, we now stand between the two obviously irreconcilable camps of mainstream economists, those who warn against the inefficiencies and distortions that allegedly are the result of state intervention and those proponents of strategic trade theory who urge state activism in promotion and protection of domestic industries.
Both sides use the Korean case as an empirical evidence to support their arguments.
Thus, the prevailing accounts of the Korean economic development emerged, either from the neoclassical economics, or the so-called new trade theory.
I argue in this chapter that both these explanations are incomplete and also misplaced.
My argument is that neither of them really answers the questions as to how Korea has actually achieved its rapid growth, and what the actual role of the state in the industrial development has been.
1. M arket Regulation View•f»
The explanations of Korean industrial growth emerging from neoclassical economists can be, in short, called the market regulation view.2 This view explains Korean industrial development as the natural result of market forces, and asserts that the
"neutral" free trade policies of the government have helped to establish an optimal environment so that its economy could expand along the lines dictated by its "given"
comparative advantage. The Korean industrial growth has been thought to be driven mainly by the forces emanating from the international market, and thus, the policies pursued by the government have been regarded as rational and market-oriented. This point of contention presents a clear rejection of any attempt which recognizes the importance of the state as a primary factor behind the Korean development success.
The neoclassicals have always been advocating minimal state intervention. In their opinion, the government's ideal role is none other than "to get the prices right". The neoclassical view holds that perfect competition is one of the prerequisites for allocating resources in the most efficient way, and that promotion of one industry over the others distorts market forces which in turn leads to a suboptimal distribution of a nation's resources. It also argues that governments should not selectively intervene in the market except when deemed necessary to overcome market failures. As a result, the neoclassical explanation of Korean success has focused mainly on its ability to get the prices right, and the ability of the private enterprises to respond to natural market cues.
Therefore, according to this explanation, the "invisible hand" of the market, a notion which goes back to Adam Smith, has simply worked to optimum level in Korea.
The fundamental contention of the Smithonian liberal doctrine, which has individual behaviour as its basis, is that each individual acting in his own economic interest would, when taken together as a collective of individuals, maximize collective well-being. Yet,
I use here the term "regulation" in the sense that the market is also one of many
"governing mechanisms" to coordinate economic activities. This kind of understanding of market hence justifies the expression of "market regulation" or
"state regulation".
See for the neoclassical interpretations of Korean growth, Balassa (1981) and various world bank publications on the Korean economic development
this would happen only if a free and unfettered operation of the market forces is guaranteed. Cannoy (1984, 23f) explains in his study on liberal doctrine that for Adam Smith the market is such a powerful force for bettering the human condition that it can even overcome "poor" laws and an "interfering" government.
Ricardo, whose theory of comparative (cost)advantage provides the basic arguments for free trade, and is now the core of the neoclassical prescription for a "neutral" policy regime, also remained strongly in the laissez-faire tradition - despite some significant modifications to Smith's theoretical framework. The theory of comparative advantage holds that nations trade to take advantage of differences in their productive capabilities.
Due to the existence of cost differentials, trade appears to benefit all participants.
Economic growth is thought to be promoted by specialization of the countries in those areas where they have comparative advantages. The growth path is simply derived from considerations of given comparative advantages - in terms of a single key factor of production, such as, labour productivity or natural resource endowments, or in terms of technical differences. The optimum pattem of production and trade is determined by a comparison of the opportunity cost of producing a given commodity with the price at which the commodity can be imported or exported.
But this static model fails to offer a convincing explanation of how particular pattem of development emerges. Countries do not specialize according to the "iron law" of given comparative advantages. Recent studies have shown that a number of countries have been able to create comparative advantages, particularly by not letting national factor endowments dictate their growth pattern Thus, contrary to what is generally assumed, neither differences in factor endowments, nor the mere references to market efficiency can completely explain variations in economic performance. This leads us to the question of how political or other non-market factors affect economic performance.
Yet, the neoclassical view reduces, as Chu (1989, 656) criticizes, the question of trade and industrial policy to the purely economic analysis of given comparative advantage and the rational choice of policymakers acting free of interest group pressures.
3 The most comprehensive study is Porter's (1990) nationwide case study of successful industries, which clearly shows that economic performance not always depends on the factor endowment, but is often created.
Consequently, the domestic political process is treated merely as a "black box", with no explanation of how market forces are transmitted and mediated within government.
Because of its failure to account for the role of domestic political forces, the neoclassical writing is apolitical as much as the dependentistas writings. In both cases, the state system and the purposes of different actors receive little attention. By subordinating the analysis of peripheral development to the theory of imperialism, often in its most economistic and reductionist form, the dependentistas fail to account for the role of domestic political forces in structuring- and restructuring external economic ties.4 In his collection of case studies, Ruggie (1983, 39) argues against both the liberal and dependency writings, and sums up that the arguments of each in essence constitute the mirror image of the other. By stating that "neoclassicals tend to ignore the critical importance of, and dependentistas to discount the generative potential in, domestic political structures", he asserts that both neoclassical economists and dependentistas overstate the determining impact of the international division of labour on national welfare. Therefore, by ignoring the role of the political factors, the current neoclassical, market regulation view has proved to be deficient in explaining the Korean industrial development. $
The political pre-requisites of development are considered only in passing by most of neoclassical authors. Notwithstanding their implicit assumption of an autonomous or insulated political structure, according to Chu's critique (1989, 655f), few neoclassical accounts of Korean growth really specify the institutional sources for the degree of autonomy that state officials enjoy. Instead of analysing its politics seriously, they also simple-mindedly assume that the Korean industrial policy is the outcome of rational
For the excellent summary and comments on the dependentistas writings in connection with the Newly Industrializing Countries (NICs): See, Haggard (1983).
The studies revealing the inapplicability of the market regulation view as well as of dependency theory for the Korean case include: Haggard (1983); Haggard and Moon (1983); Deyo (1987). Their common message is that the state in Korea has played an important, mediating role, contrary to the neoclassical and dependency arguments.
choice o f policymakers. But the assumption that whatever policy is the most economically efficient will be adopted does not hold good in the face o f empirical scrutiny (Dillon et al., 1990, 46-47).
Rather, the fact is that:
the activities o f policy-makers are less concerned with the specification o f goals and the rational choice o f appropriate policy instruments, than with the management o f their relationships with each other and their external environments. Policy actors are more concerned with balancing than optimizing (Wright, 1988, 596).
The neoclassical economists simply neglect the fact that governments are subjected to a wide array o f pressures, legal and institutional environments, which affect the relative power o f interest groups and the ways in which their pressures are channelled. By simply applying the analytical techniques o f neoclassical economics to the material o f p o l i t i c s ,t h e market regulation view, thus, fails to move away from a purely economic reasoning into the practical realm o f politics o f Korean industrial policy.
2. State Regulation View
The other popular, but no less problematic interpretation o f Korean economic growth is the state regulation, or the so-called bureaucractic regulation view. Since Johnson (1982) found the main source o f the Japanese miracle to be the effective policy o f its developmental state, particularly o f the Ministry o f International Trade and Industry (MITT), the Korean growth has become increasingly cited as another successful case o f effective governmental targeting policies (Wade and White 1984; Deyo 1987; Cumings 1987; Johnson 1987). The leadership o f the Korean developmental state is regarded as the primary cause for its industrial success, and the popular reference to "Japan, Inc." - the characterization o f Japanese system in which government and business collaborate -
6 See, the critiques of Dearlove (1989, 532). See also Self (1990, 29) who argues that the neo-classical economic man o f public choice is not 'natural man', but an ideal actor within a historically specialised and rare institutional framework. He thus criticizes that political behaviour is here simply assumed as simliar to market behaviour.
is recently followed by similar appellation for Korea. Some authors even assert that
"Korea, Inc." is a more apt description of the situation in Korea than the case of "Japan, Inc." (Kuznets, 1988). These terms -"Japan, Inc.", "Korea, Inc.", or "industrial targeting" - imply that the Japanese or Korean state, taking an active role in leading industrial development to catch up with the West, working closely with business to channel resources into strategic industries (Anchordoguy, 1988, 1).
Accordingly, the predominance of the state is often regarded as the distinct feature of Korean capitalism. Thus, some argue, for example: "It is the government that is Chairman of the Board [of Korea, Inc.], with business holding a few directorships"
(Mason et al., cited in Cumings, 1987, 73). It is argued that mainly this predominance by the state in Korea over the dependent capitalists and labour led to the rapid industrialization process.
Thus, this view directly challenges the market regulation view which downplays the role of the state. It emphasizes the state and national interests as crucial to Korean economic development, and argues that Korea is far from being a liberal, market- oriented economy. Contrary to the free and neutral policy advocated by the market regulation view, it praises government's selective intervention, considering industrial targeting policies and protectionist measures as effective and even necessary.
This interpretation of the successful Japanese and Korean developments ultimately corresponds with the economic models of strategic trade policy. Such economists as Krugman and Brander seek to provide "solid" arguments for those who urge that their countries should also join the targeting game.
On the theoretical bases of strategic trade policy arguments, Cohen and Zysman (1987), for example, insist that if the U.S. economy is to regain its competitiveness in the manufacturing sector, its government will have to play a more active role, by using policies to create competitive advantages in specific industries. Borrus et al., (1984) also rely on this model, as they seek to show how the Japanese government's policy was able to affect the competitive position of their high-tech industries in enduring ways.
By emphasizing the permanent effects of subsidies and protection on international
competition,they argue that government policies have helped Japanese firms to create certain advantages in the areas of semiconductors and telecommunications.
The theoreticians of strategic trade policy go beyond the traditional rationale for government intervention (i.e., market failure). They point to the importance of such factors like the learning curve, economies of scale, entry barriers and monopoly rents for international competitiveness. By emphasizing the importance of dynamic comparative advantages, and referring to these rationales for government intervention, they contend that an interventionist policy should be necessary. Furthermore, they show how government intervention in the presence of market imperfections and increasing returns may have beneficial "strategic" effects. $ Their basic argument is that much of international competition takes place in industries characterized by oligopolistic competition with a small number of competitors where individual firms are capable of affecting prices and competition patterns. When innovation confers an advantage, albeit temporary, and scale economies and experience curve economies do exist, and also when considerable external economies (e.g., spillover effect) from technology-intensive industry are the rule, nations can gain from policies that help domestic firms. These policies enable them to gain certain advantages in world market, thereby deterring entry by new firms from other countries and increasing the monopoly rentsZa
The diverging rationales for government intervention between the traditional and strategic trade policy can be traced back to their basically different assumptions about the nature o f the market.
Strategic trade policy debates actually began with the critique on the unrealistic assumptions of perfect competition in the traditional trade theory.
Subsidies are regarded to have "permanent" effects, in which they create the enduring capacities with an influence on dynamics of comparative advantage.
"Strategic" in the sense that particular policy actions may alter the terms of subsequent competition to a firm's and country's benefit (Helpman and Krugman 1989, 6).
See, Krugman's classical edition of stretegic trade policy.models (Krugman, 1986).
They argue that few markets for industrial products meet these assumptions. Helpman and Krugman (1989) thus explain that the arguments for interventionist policies are deeper in the new trade theory. This is because the imperfections are built into the structure from the beginning, whereas in traditional trade policy analysis, distortions that could justify government intervention were in effect superimposed on a theoretical structure, whose basic logic was that of efficient, competitive equilibrium.
Another important difference lies in the underlying perception of new trade theory that trade policy and domestic polices for the development of specific sectors are inextricably linked to each other, with an implication that trade policy could be used as an instrument of industrial policy. Thus, Stegemann (1989) sees here the most dramatic break between the new trade policy model and past doctrine, which asserts that the optimal policy is a trade intervention but a domestic intervention that either removes the distortion or compensates for the distortion by intervening as closely as possible to its origin.
After all, this theory with neo-mercantilistic traits provides the basic models, under which government strategic promotion and protection policies may be able to improve national economic welfare. And its implicit notion that the state can and should shape the comparative advantage of its industry in favour of its national welfare is really a powerful one.
Yet, the insufficient discussion in the new trade theory about the requisites of such welfare-increasing policies undermines its potential value as a constructive policy guide. They fail to discuss important questions about government targeting such as whether it is possible to identify commercially strategic technologies or industries.
They do not discuss seriously enough the related information problems either. These problems are recognized by Helpman and Krugman themselves:
Although some models can be used to support neo-mercantilist policies - tariffs to improve the terms of trade or export subsidies to give firms a strategic advantage - slight variations on these models eliminate or even reverse their conclusions. No blanket vindication of aggressive trade policies emerges from the analysis, nor does it seem likely that a real- world government would be able to decide which model is most relevant.
The design of an advantageous trade policy requires information of a kind that is simply not available (Helpman and Kingman, 1989,186).
But, a really fundamental problem lies above all in its failure to account explicitly for the political process (associated with any targeting policies) and the institutional requirements for their successful implementation. In short, it does not show the circumstances in which state intervention helps or hurts. Despite their awareness of the potential risk of rent-seeking activities in the name of national welfare promotion, 1®
they really tell little about the political and institutional conditions under which active industrial policies are likely to work, thereby leading to better allocations. They merely connect particular forms of state intervention and targeting measures to economic efficiency, without explaining why these "targeting" policies and instruments have worked, for example only in Korea, but not in other countries.
Likewise, the state regulation view also suffers from similar shortcomings resulting from the exclusion of politics.
Politics may be implicit in its simple assertion that the relatively autonomous and strong Korean state has been able to shape the policy preferences and behavior of societal groups; so as to serve state-defined development goals. But, this view does not explain
the ways in which control of productive resources is derived from political choice, and (is not) explicit about the ways in which competition and conflict among organized political interests determine the final organizational form of state intervention (Samuels, 1987,12).
Also, its proponents don't explain why they expect governments to behave in the ways they advocate. Richardson criticizes that the policy conclusions derived from this view,
"fall under the familiar Platonic rule that philosopher-kings (in these cases, technologist-kings, engineer kings, or economist kings) provide the best policy".* 11 As a matter of fact, this view conveys an almost ridiculous image of a state that is omnipotent and autonomous as Frankenstein's creature. Jacobsen (1987, 94) describes:
1® Krugman admits that "there is a risk that interest groups that have a stake in trade policy will simply find in new ideas an excuse to advocate policies that are not likely to benefit the nation as a whole" (Krugman, 1986,19).
11 See, Richardson's (1990) analysis of the political economy of strategic trade policy.
The stronger a state is, the more autonomously it acts, and so the more likely are the preferences of potent societal groups to be overruled when conflicting with the most pragmatic course plotted by formal policy makers.... Such states may appear to act as autonomously as Frankenstein's creature.
Such a view can also lead us to a misguided conclusion that the Korean industrial policy is nothing but effective and the state coordinates the economy in such a way it wants.
Despite its failure to show that state control caused growth independently and efficiently^ this view is used in many cases to justify the voices urging to join in the targeting game and trade retaliations against "Japan, Inc." or "Korea, Inc.". In decrying the "unfair" advantages derived by the Japanese or Korean firms through these policies, protectionism is also often sought as a retaliatory answer. And another unfortunate fallout from this view is the us versus them attitude, in which the international trade is considered as a "zero-sum game" where one nation can benefit only at the expense of others. The political implication of this kind of perception is quite severe, as it leads to a misguided inclination of thinking that the competitive game could be won by enough collaboration between state and business and by enough targeting subsidies.
Despite all the pros and cons about state activism, there are fundamental questions still to be answered. Does the state really lead Korean capitalism, by choosing freely any instruments and intervention forms, as portrayed by the state regulation view? And does the stereotype of "Korea, Inc." reflect the reality of the Korean political economy?
There are abundant evidences contradicting to this image of the Korean state as a leading, omnipotent or efficient one. Haggard and Moon (1983, 1611), for example, state that the ruling military has relied heavily on domestic entrepreneurs to perform the economic miracles. Other studies also came out with more ambiguous findings concerning the efficiency of the Korean industrial policy; the record of the industrial policy performances is rather mixed. There have been a lot of critiques concerning the government expansion policies during the HCI-Drive (Heavy, Chemical Industry Drive era), which ultimately resulted in serious problems regarding the excess capacity of several industries. The most notorious examples are the shipbuilding industry and
12 See, Friedman's critique on the state regulation thesis (Friedman, 1988, 202-11).
general machinery. Further, contrary to what is generally assumed, there is often rivalry between the ministries, for example, between the Ministry of Trade and Industry (MIT) and Ministry of Science and Technology (MOST) (See for examples, Korea Industrial Technology Promotion Centre, 1989).
The state regulation view certainly contributed to the reassessment of the potential and critical importance of the state in economic development. But it hardly advances our understanding of state's role in Korea. The inability of its proponents to provide a coherent explanation with regard to these phenomena is largely attributable to its simplistic assumption of the "uniform" state strength and its effectiveness. And, as Chu (1989) finds out, this assumption makes the state regulation view liable to the same criticisms raised against the familiar strong-weak state typology.
Since Skocpol drew attention to important exceptions to state strength and state weakness as ideal types - especially in her famous "New Deal"-study (Skocpol 1980), scholars have become increasingly aware of the disadvantages of using such highly aggregate and static characterizations of the political system as "strong" or "weak".
Critics abound especially from the scholarship doing researches on a single country.
Calder (1988, 9) for example, complains that such characterizations cannot account for the substantial and generally sudden change which has distinguished Japanese policymaking over time, while Haggard and Moon (1990, 214) complain about the missing analytic tools to grasp variations in state capacity across issue areas. Thus, the critics focus firstly on the failure of the "strong-weak state concept" to explain the historical and sectoral variations in state capacity (Skocpol, 1985). Another critique concerns the single dimension of "state strength" that conflates different features of state organization and resources (Evans et al., 1985). One aspect of the state structure can either compromise or compensate for another, and Chu (1989) therefore contends that
13 Stimulated by Skocpol, many works have come out, which demonstrate exceptions to the archetype of strong or weak states. These works range from Japan to Canada, covering various policy areas. For example, the works on Japan by Boyd (1987), Samuels (1987), Ikenberry (1986), and Friedman (1988) reject the notion of a "strong" state. On the other hand, Ikenberry's work (1989) on the U.S.A. shows the evidence that the American state is not so "weak". On Canada, see works of Atkinson and Coleman (1989), and on Taiwan, see Walter (1989).
See also other case studies (Wilks and Wright 1987).
the institutional characteristics of the developmental state should be carefully disaggregated in order to examine the enabling and constraining roles of the various aspects of state structure and also to develop empirically informed answers to the question of how a particular state structure can delimit the range of policy options .... (648: emphasis added).
However, the most serious critique, raised once again by Skocpol and her associates, relates to the tendency to confound the matter of state autonomy with issues of the capacities a state has for performing certain kinds of tasks. According to Evans et al., (1985, 354f) state autonomy and state capacities for effective socio-economic interventions do not necessarily go hand in hand. Drawing on the case studies collected in their edition, they argue that state organizations that are controlled and directed "from within" by their own leading officials are not necessarily those with the greatest capacity and will to intervene in social and economic affairs. The relationship of state autonomy to state's capacities is dialectic (Evans et al., 1985, 354f). Thus, as Samuels (1987, 289) warned, an undifferentiated notion of state capacity may misdirect inquiry and profoundly underestimate or overestimate the possibilities for public policy in particular nations. Even if the states were strong and impervious to various societal pressures, they might still be incapable of formulating an efficient policy or of implementing it successfully in practice. The strength or autonomy of the state would not guarantee efficient policies either. Strong states do not always exercise good judgement in identifying strategic industries. "Korea's own experience suggests", Haggard and Moon criticize,
that strong institutions, although effective, are not necessarily efficient.
The excesses of the Heavy-Industry Drive of the 1970s were partly a result of the very concentration and autonomy of the Korean political system (1990, 236: emphasis added)
Altogether these critics make it clear, how misleading the state regulation view is, which explains the Korean economic development only by a single, independent factor like a "strong" state, ignoring straightforwardly all the dialectic interactions and
14 See for the distinction between "state automy" and "state capacity": Skocpol (1985, 9).
variations. Despite some useful references to the sources of state strength, 15 it appears too static to account for the dynamic, complicated dimension of the Korean political economy, and thus is incomplete as an explanation of Korean development.
For these reasons, we should move beyond such aggregate and descriptive characterizations as a "strong" state, and such a single, narrow focus as Chalmers Johnson's M i'l l. They provide us with no insights into the distinct ways and dynamics of state intervention through industrial policy. This is above all because the state strength per se is, as Samuels (1987, 5) noted, less relevant than historically determined coalitions and conflicts for explaining the ways in which states discriminate between firms and sectors. The identity of the Korean state may look very much like the
"leading" state in the final explanation. The analysis of the Korean industrial development may present thereby even a powerful evidence to the characterization of Korean capitalism as "Korea, Inc.". Nonetheless, we should identify the mechanisms of collusion and interpenetration. The vision of a monolithic, state-led capitalism should be carefully replaced by more accurate explanations which specify the dynamics and identify the complex mechanisms underlying industrial development in Korea.
II. BEYOND MARKET AND STATE: NEW -INSTITUTIONALISM AS AN ALTERNATIVE PERSPECTIVE ON THE "STATE"
In order to specify the dynamics of the state-market interactions and to identify the complex mechanisms of Korean industrial development, we first of all need an alternative analytical perspective on the "state" itself.
15 For example, financial system as a source of state strength (Zysman, 1983) and the centralization degree of society and state as a determinant of state strength (Katzenstein, 1978).
16 See for comparison, Samuels' critique on the notion of Japan as a "monolithic, consensual, machine-like organism bent on national aggrandizement" (1987, 19f).
For this purpose, the new-institutional perspective is adopted or, more strictly, the
"modified statism of New-Institutionalism"; which "will not bring the state' so far 'in' that politics is obscured and that the bureaucracy is all that matters" (Samuels, 1987, 8).
In so doing, It is aimed to replace the current static accounts of state strength with a dynamic, relational one tying state strength to the institutional structure of Korean political economy. The New-Institutionalism, which lays the basic claim to a careful, dialectical analysis, contains no a priori assumption of the predominance of "state" or
"market". So the "actual" state capacity in the industrial development process can be in a concrete, historical situation empirically probed than being simply derived from some overall level of generalized "state strength" (Evans et al., 1985, 353).
Recently, scholars have begun to recognize the political and institutional origin of economic performance, finding out that variations of domestic political structures have an important influence on a country's economic development.^ Thus, Calder (1988, 6), for example, argues that states can help or fail to help the economic development of their countries through political struggles which are rooted in and mediated by preexisting institutional arrangements. This kind of perspective on the state and its intervention capacity clearly deviates from those embedded in the state and market regulation theses.
Thus, this chapter starts with a general debate about the basic elements of the New- Institutionalist perspective, in connection with the other opposing society-centred paradigms. After that, it will be explained how the New-Institutionalist perspective
Although scholars provide varying explanations about exactly how the political and institutional factors will affect the economic performance, they all agree on the point that politics, and especially, a nation's institutional nodes around which the politics unfold, do matter. See, for example, Katzenstein (1987) who saw the source of Germany's success - along with certain special features of the German private sector - in the sufficiently flexible German political structure which fostered incremental policy adjustment. See also Okimoto (1989) who attributed the distinct flexibility and apolitical cast of the Japanese industrial policy to the organization of political power, exploring the relevance of the LDP-dominated political system, various public-private bodies and relationships between government, industry and interest groups for the evolution and efficacy of the industrial policy.
differs from those of the state and market regulation theoreticians', and why it is more suitable for the study of the state's role in industrial development.
The New-Institutionalism contrasts with both (neo-)marxist and rational choice models of politics. As a reaction against these society-centred perspectives, New- Institutionalism advocates the revival of the state as an analytical object. Its analytical strategy is to explore the impacts of states on the content and workings of politics (Skocpol, 1985). Unlike the neo-Marxists who explain patterns of state intervention and political conflict (in analytic terms) directly derived from a model of the capitalist mode of production, the institutional paradigm fundamentally contends that the state intervention in economic development should be analysed by its political logic, not by any derivation from economic logic. State activities and industrial policymaking should be understood as an essentially political process, not reduced to the economic context. 18 it further differs from the rational choice model, as it challenges the latter's narrow, simplistic conception of rationality and the inattention of the latter to the context of policy choice. Thereby, it seeks to offer a perspective on political choice that takes better account of contextual and organizational factors. While the rational choice theoreticians explain political outcomes by aggregating individual utilities, and portray institutions as the derivative of human choices, the New-Institutionalists see preferences and political choices shaped and structured by institutional arrangements.18 19 Thus, as Krasner (1988) points out, New-Institutionalism views institutional structures as the building (and moreover as persisting) blocks of social and political life, and see the range of options available to policymakers at any given point of time as a function of institutional capabilities that were put in place at some earlier period. Accordingly, institutional codes and constraints invalidate interpretations of behaviour as rational
18 See, Skocpol's critique (1980, 200f) on the view of Neo-Marxists.
19 New-Institutionalism debate in; Atkinson and Nigol (1989,114).
maximizations, and rule out functional explanations for policy outcomes. 2® Peter Hall's critique on functional explanations and his praise of "organizational intelligence" makes this point more clear. He says:
It is an organizational intelligence rather than the intelligence of the individuals that ultimately determines such factors as the capacity of the state for strategic thinking or the quality of policy (1986, 233).
The institutionalist claim is "that the organizational structure of state and society shape and constrain policies, and that, at periodic moments of crisis, those structures themselves may be reworked or transformed in the process of policymaking"
(Ikenberry, 1988, 229). Putting it more simply, it is the claim that the institutions mediating the political struggles make a difference and hence should be appreciated.
New-Institutionalism is not a grand theory.21 "It is simply an argument that the organization of political life makes a difference" (March and Olsen, 1984). It stresses the importance of an institutional setting for the understanding of specific policy outcomes, from the standpoint that the institutional bases of policymaking are crucial in forging the final outcome, and that an understanding of these institutional bases provides important insights into the capacity of the state.
Thus, to analyse the role of the Korean state in industrial development from the institutional perspective means exploring its roots and consequences, by focusing on the dynamics of institutional structures which shape and constrain societal and governmental actors.
2® According to Krasner, even some authors who recognize the importance of institutions regard institutions as being constantly subjected to the rational maximizing calculations of individuals, and, thus, as "fluid". Krasner distinguishes this "fluid character of institutions" from the real institutionalist view, in which institutional alteration is regarded as neither easy nor costless. See for the concept of "institutional stickiness" (1988, 77f).
21 Many commentators consider New-Institutionalism as a "middle range theory".
See, for example, McLennan (1989, 239f). Skocpol herself actually stated that her scholarly aim is not a new grand theory of the state, but rather solidly grounded and analytically sharp studies of the causal regularities that underlie the histories of states (Skocpol, 1985, 28).
There are several variants of the so-called New-Institutional approaches. This study of the Korean state and industrial development is based upon the "modified statist variant" of New-Institutionalism. Here, the term is used to describe the cautious approach in line with the calls for a "careful empirical scholarship" by Evans et al., in
"Bringing the State Back In" (1985).
Methodologically, it calls for inductive, systematic and historically grounded studies of states in the conduct of policies. It urges a careful attention to the specific circumstances shaping state capacites. Even though Skocpol and her associates place the state at the centre of their work, their actual focus is, as Cammack (1990, 160) remarks, on the state capacities in interaction with societal institutions, exploring thereby the internal structure of the state and its complex links with the various social actors (Cammack, 1990, 160). The term "modified" is used here in the sense that the state capacity is probed, not in isolation, but in relation to social forces. It is drawn from the state-society interactions. And this is the very difference between the New- Institutionalist perspective and that of state regulation theoreticians. In contrast to the strong statist standpoint ä la Chalmers Johnson, it does not replace politics by a straightforward, a priori overstatement of the primacy of states.23 Rather, it seeks to
"look at more than states as such" (Skocpol, 1985, 19). Instead of citing administrative capacity alone, it pursues an explanation of the relative capacity of the state through a fully relational approach to states and societies. It does so because the power of the state is embedded in the structure of its relationship to the rest of society. As Colburn (1988, 488f) points out, a state may be the single most consequential actor in most politics, but what it does is conditional upon society; and its power is also conditional in the sense that it emerges from its relationship to societal groups.
Owing to this point of view, the modified statism is considered to possess certain merits, as it allows for variations in the role and efficacy of state. Its further merit is that it enables us to pay due attention to the competition within the ruling triangle, which is often regarded as non-existent in the monolithic "Korea, Inc." view. It also helps us to resist the temptation, simply to take the government's ability - to intervene 22 Fach and Grande (1988) classify these variants, providing a good overview of
New-Institutionalist approaches.
23 See, Samuels' critique on Johnson (1987, 2f).
efficiently in pursuit of dynamic comparative advantage - for granted. Under this perspective, even the Korean "strong" state does not have to appear automatically as
"the subject of extreme rationality" or as the omnipotent "engineer-king". In addition, since it seeks to specify state structure, focusing on state capacity or policy instruments, it also helps to disaggregate the institutional characteristics of the Korean developmental state. With this perspective, the black box of state can be disassembled, which is certainly an important analytical merit especially compared with the market regulation view.
m . THE POLITICAL ECONOMY OF KOREAN INDUSTRIAL
DEVELOPMENT: THE CASE OF MACHINE TOOLS
In order to identify the complex mechanisms underlying industrial development in Korea, and to analyse, in which specific ways the Korean state mattered, the New- Institutionalist perspective on state and the concepts emphasizing the importance of organizational efficiency for industrial performance are brought together (i.e., the concepts underscoring the importance of intangible organizational innovations as sources of growth). Relying on the latter concepts that types of institutional organization of a machine tool sector have profound consequences on its competitive capacity and its performance, this study looks into the ultimate role of Korean state in machine tool industry's development - through the analysis of state's impacts on institutional organization of the machine tool sector. And in order to analyse "the historically unique and institutionally circumscribed character" (Ikenberry, 1986) of state interventions in the economy, the study depends on the differentiated concept of state of the New-Institutionalists. By doing so, it ultimately seeks to overcome the failure of both state and market regulation views which tend to explain highly subtle, interactive process of Korean industrial development only by a single, dominant factor like "state" or "market".
1. Justification o f Case Selection
The debate concerning the state's role in the industrial development should proceed on a sector-by-sector basis. This is not only because no general answer is likely to exist which is valid for the whole industrial sector, but also because the effectiveness of certain institutional arrangement differs according to the different types of economic problems in different types of industries and sectors.
Thus, in the following part, the focus will be on a specific industrial sector, in order to study how the Korean industrial policy has been developed and implemented and also how it has influenced competition and corporate decisions. For this purpose, one of the most important branches of the capital goods sector, i.e., machine tools is chosen. The case of the machine tool industry is appropriate for the debate pertaining to Korean industrial policy. The intervention of the Korean state in the economy can be quite well illustrated through the study of this industry. Because it has been subjected, as a subsector of the machinery industry, to an extensive government intervention as one of the priority industries. Particularly during the HCI-Drive period, the Korean government viewed the machinery industry as strategic to long-term economic growth.
Since the capacity to produce capital goods and machine tools in particular is usually associated with a country's capacity to overcome technological dependence, it also provides a good example of Korea's performance in the technological catching-up process. Its study is further instructive because the machine tool industry helps to illustrate some of the wider causes of the Korean development success, by highlighting the relative strength and weakness of the Korean political economy. For instance, we find in the machine tool industry the typical dual structure of many Korean industries, in which a small number of the leading large firms account for a disproportionate share of output, with numerous small and medium-size firms sharing the rest. Since it is not always one-sidedly advantageous either to large or small firms to become or to remain competitive in the machine tool industry, the relative strength and limits of the Korean path of growth - which is built on the rapid expansion of large firms, above all of conglomerates - can be illustrated better.
2. Machine Tools: Industrial Characteristics, Changes and Policy Implications
In the following parts, an attempt is made to analyse what the general industrial characteristics of the machine tool sector are, and the extent of changes, both economically and technologically, which has occurred recently in the sector, and finally the implications these changes have for the formulation of national industrial policy.
2.1 Basic Characteristics o f the Machine Tool Industry
The industry encompasses a wide range of products, ranging from simple drilling machines and lathes to machining centres with tool changers and flexible machining systems. According to the generally accepted definition, machine tools are the tools for making machines and/or components of machines. The huge differences in complexity of manufacture and operation mean that machine tools can be made in highly advanced factories or in simple workshops (UNIDO, 1987c, 1). The machine tool industry refers to the category of general machinery. Since most of the machinery and equipment are made of metal, ferrous or nonferrous materials, machine tools are roughly divided into two groups, i.e., metal cutting machine tools and metal forming machine tools (The classification of machine tools is given in figure-1).
Figure-1: The Classification of Categories of Machine Tools Machinery Industry
General Machinery; Electrical Machinery; Transportation Equipment Machinery;
Precision Machinery, etc.
General Machinery
Intemal/Extemal Combustion Engines, Boilers, Agricultural, Mining, Chemical, Construction and Textile Machinery, Machine Tools, etc.
M achine Tools
Metal-Cutting Machine Tools: Metal-Forming Machine Tools (Source: Seoul Consulting International, 1988, 18; 47)
The machine tool industry, though a very small part of manufacturing, is generally regarded as strategic. Machine tools produce both themselves and other capital goods.
Their level of technological sophistication affects the efficiency with which capital equipment is produced, and thus the competitive position of all industries. If there are deficiencies in machine tool production, they will have a direct impact on the other capital goods sectors. Machine tools are further important because they are leading carriers of technological innovation throughout the economy (Chudnovsky, 1986). Its importance derives from the strategic nature rather than from its , quantitative significance; namely from the pivotal role of "mother machines" or as the "spider in industrial web" in its relation to other manufacturing industries.
Besides this striking qualitative/quantitative contrast, we can trace the following characteristics as fundamental to the machine tool industry:
The machine tool industry is a very heterogeneous industry which produces a number of products that differ in function, usage, shape, size and precision. The formulation of proper industrial policies for machine tools is often complicated by this heterogeneity.
The machine tool industry is traditionally a small firm industry. Its production structure is marked by a prevalence of small and medium-size firms often privately owned and specialising in highly specific product areas. In Japan, for instance, 69 per cent of the 113 members of the national association have less than
300 employees. In West Germany, there are 425 companies with an average workforce of roughly 220 with only a handful of firms employing around 2,000 employees (O'Brien, 1987, 23).
Another important, basic feature of the machine tool industry is that it encompasses a wide range of technologies from mechanical, electrical, hydraulic and control engineering to computing and tooling skills (UNIDO, 1987c, 16).
Because of this extensive interrelationship with other industries, it needs to secure a wide spectrum of technologies simultaneously across many related industries.
For this reason, unlike chemical, textile and electronic industries, the manufacture of machine tools cannot be achieved through just a few technical licensing agreements. Import substitution of machine tools is considered as one of the most difficult tasks for the developing countries.
Because the key aspects of machinery technology do not lie in the manufacturing process but in the physical structure of the final product, machinery and machine tool technology is classified as a product-based technology (Bae and Lee, 1986, 330f).
The last, but not least, distinct characteristic of the machine tool industry lies in its strongly cyclical market. The machine tool industry is an industry, whose demand emanates from a quite small set of major industries (primarily automobile, aircraft, military related production and electronics) that are dominated by a relatively limited number of large firms. The extent and location of machine tool output are strongly influenced by shifts in the demands and conjunctures by these firms (UNIDO, 1987c, 29).24
Over the years the crucial industry in this respect has been the automobile industry. For example, in Japan the car firms and their related contractors and sub-contractors absorb one half of all machine tool output (O'Brien, 1987, 24).
2.2 Changing Technological and Economic Logic in the Machine Tool Industry
Due to the recent technological change and the introduction of micro-electronics based Numerically Controlled Machine Tools (NCMTs), the overall character of the industry and the nature of global competition have been significantly altered.
For example, the heterogeneity of machine tools has increased significantly over the years. Also, the level of sophistication now varies more considerably. It ranges from simple conventional machines to numerical control multi-spindle machining centres with magazines holding up to 48 tools. At the most sophisticated end of this broad spectrum, Computer Aided Manufacturing (CAM) and Flexible Manufacturing System (FMS) now constitute a broad area where machine tools are interfaced with robotics. Now, modem Computer Numerical Control (CNC) machine tools are almost in a class of their own and bear only superficial resemblance to manually operated conventional machine tools.
The advent of NC machine tools and increasing demand for them thanks to their easy adaptability to new tasks and products, which bring labour cost savings, better quality, and more importantly, greater flexibility to manufacturers, led to a corresponding decrease of market for conventional machine t o o l s . F o r example, the proportion of NC lathes to all other types taken together increased - in the U.S.A., Japan, Germany, France, Italy and the UK - from 30 per cent in 1976 to 73 per cent in 1984; whereas the market for conventional lathes has declined to much less than half.
Furthermore, the advent of NC machine tools has changed the nature of competition in the machine tool sector. In this traditionally small-firm sector, size is becoming a much more important factor than it used to be. Economies of scale
2$ A s changing global circumstances eroded the stability of mass markets and the mass production strategies in machine tool user industries became problematic (See, Friedman 1988, 2221), the demands for general-purpose, small-scale NC machinery rose (See for the details of increasing demand for flexible NC machine tools: Friedman, 1988,16).
