3. Korea's experiences.
3.1 Patterns of economic management.
Korea has achieved a remarkably high level of economic growth over sionists the last thirty years.
Its economic development process during this period has generally been described as following a govemment-led export promotion strategy.
The government has been actively involved in almost every important aspect of economy related decision-making and the private sector has followed the signals given by the government.
The government-led order has always taken precedence over the spontaneous market order.
In the context the optimal utilization of economic resources, the economic development process usually entails two interrelated aspects the of resource utilization - the mobilization and the allocation of economic resources.
very little attention has been paid to the possible side-effects of emphasizing the active role of government in resource mobilization.
The mobilization drive has tended to create a detrimental environment for macroeconomic management.
In general, once priority is given to domestic resource mobilization, monetary and fiscal policies will also tend to be'mobilized The Instrument to support economic development, thereby making the role of macroeconomic stabilization inoperative.
Low Interest rates, base money creation, and tax-and-expenditure Instruments all tend to be utillzed to support policy loans for important Industries.
The search for the best methods of mobilizing available resources to support economic development becomes the dominant concern to the detriment of macroeconomic stability.
Broadly speaking, the Korean government has actively participated In resource mobilization, even though the degree of participation has fluctuated during the development period according to the situation to faced by the country.
In the course of these developments, Korea evolved a very peculiar macroeconomic management pattern.
While the economy was subject to inflationary pressure stemming from the base money and credit expansion and the low official Interest rates geared towards maximum mobilization of investment funds, convention monetary policy Instruments such as control of the money supply and Interest rate policy became inoperative.
Direct controls on Individual prices, important for the CPI basket and even to economic activities within the private realm, became widely utilized as the Instruments for maintaining macroeconomic stability.
In sum, macroeconomic policy function was performed by micro regulations.
On the other hand, the Korean government intervened directly in the microeconomic resource allocation through discriminatory policies - such as favoring certain sectors and groups of economic agents.
The government controlled the financial resource allocatlon by regulating Interest rates and the lending activities of financial Institutions.
In the earlier stage of development - until the late 1970s - the large business groups and heavy and chemical Industry sector were favored, but since the 1980s, small and medium-sized firms have been relatively favored.
Instead of allowing market competition freely rein as a kind of discoery procedure', the government has assumed the responsibility of making important
allocatlon decisions.
The government has determined the sectors the conglomerates can engage in, and stipulated that the financial Institutions can lend only to selected businesses.
This pattern of direct Intervention in private decision areas has improved somewhat through the liberalization process in recent years, but has generated far-reaching and long-lasting
Interventionistic mind-set of the policy makers regarding the role of the market.
In contrast to such legacies of government-led development, the environment for Korea's economic policy has undergone a drastic en change In recent years, forcing the reform the existing economic management system.
The Korean economy became increasingly open during the 1990s, Integrating with the global economy through various policies of financial liberalization, Including capital flow liberlization.
Given the Increasing openness of the economy, Korea can no longer rely on direct regulations for macroeconomic management.
3.2 Characteristics of government-led economic management.
It is generally accepted that the Korean government has played a decisive role in the nation's successful economic development during the last thirty years.
However, one should be aware that it is very difficult to define the concept of government-led economic management precisely.
For the purposes of our analysis, we suggest that a government - led economic management regime is an economic policy regime in which the government determines major endogenous economic variables within the realm of private economic agents by imposing its will on the market as an outsider.
Under such a regime, the government pre determines the outcome that would otherwise be determined the endogenously through market competition processes.
A government-led economic management such as that defined above exhibits the following characteristics.
The government macroeconomic management generally relies on direct regulation such as credit rationing over open-market operations for money supply control and on wage-price controls over aggregate demand management for anti-inflationary policy.
In addition, the government microeconomic policy takes the form of picking the winners before the market process works itself out and provides the means (i.e. financial support) necessary for the chosen to win.
In order for this Interventionistic economic management to be successful without causing severe distortions In resource allocation, the government must hate Informational superiority over the private market participants, as well as a complete set of solutions ready to be put into action to tackle difficult policy issues.
Unfortunately, the requirements that must be fulfilled so that government intervention can be benefit are difficult to satisfy - particularly as the economy grows in size and complexity.
since a complete recipe for solutions to various economic problems cannot be readily available, the degree of government Intervention should be reduced In order to benefit the economy. Korea seems to have entered this stage of economic development already and is in need of active Initiatives on the part of the private sector In order to secure further sustained economic development.
3.3 Legacies of government-led economic management.
More than thirty years of active government Intervention have created legacies that pose serious obstacles to the policy regime shift toward greater participation by the private sector.
Although informational requirements for efficient economic policy making have become Increasingly difficult to maintain, Korean policy makers, including economists who are accustomed to the mind-set of the past regime, still assert that they can and should manage the economy down to the finest details.
These economists believe they can and should regulate the deregulation process.
This mentality severely impedes the processes of economic reform and liberalization.
To compound this problem, many private economlc agents have lost their sense of independence and fear that liberalization may create chaos.
Thus, they often seek government Intervention, even in the affairs of the private sector, and ask the government to 'control the process of economic liberallzation'.
For example, it was the Korean government which made decisions for commercial banks over such issues as how much to lend to what important business and at what Interest rates.
Indeed, even during the process of financial liberalization, before the financial crisis of 1997, the commercial banks were asking for government Intervention through guidance on how to manage banking businesses.
In addition, active government economic management has created various barriers to entry that have led to the creation of monopolistic and oligopolistic Industrial structures.
The tendency to rely on direct regulations for economic management has also produced widespread regulations of prices and quantities, which have created a distortion in the economic Incentive structure.
As a result, the Individual economic agent has not been presented with sufficient motivation to economize and Innovate.
Finally, as government intervention has become more widespread, thereby creating an excess demand for intervention beyond its true capability or necessity, the effectiveness and therefore the credibility of government economic management policy has rapidly declined.