Park Chung Hee Era

by Byung-kook Kim

  The state of emergency formalized the establishment of a “national security state,” with its six articles defining national security as the first of state priorities, forbidding any social unrest threatening national security, disallowing the press from “discussing national security issues in a careless way,” calling upon the public to carry out their duties to defend national security, and justifying restrictions on freedoms and civil rights in the event of a national security crisis. By contrast, the Special Law for National Security provided the president with a wide range of emergency powers, including the power to declare a national emergency, to order economic emergency measures by presidential decree, to prohibit outdoor demonstrations, to restrict the freedoms of speech and the press, and to limit the collective action of workers.

  With this special law, South Korea no longer had even a semblance of democracy. The change was to be most visible in the shifting role of the military. To be sure, Park had repeatedly used the armed forces to defend his rule during political crises in the 1960s (see Chapter 6), but from December 1971 on, military intervention in politics was to become part of everyday life. And with the military’s political backing, Park gambled on the yushin. Because the NDP controlled 43.6 percent of the assembly seats, more than enough to block another constitutional revision, Park chose to bring a regime change through a “palace coup” when he was in a position of strength—that is, in October 1972, only a year since his third presidential election and still three years before the end of his third term. In October 1972, a majority of the South Korean electorate still endorsed Park as their leader for the modernization he had brought to society, and their belief in him was alive and strong. However, before making that final move, Park first had to resolve the country’s financial crisis.

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  Resolving the Financial Crisis

  The 1969–1972 period saw a severe financial crisis developing parallel to the transformation of the opposition into a more ideologically charged and socially broad-based political force. Like the radicalization of the opposition, however, the financial crisis did not persuade Park to retreat and critically reappraise his vision, goals, and strategies. Rather, it became a stepping stone for Park’s regime change. The economy’s entrapment in a vicious circle of inflation, current account deficit, and economic recession had multiple causes.20 The “golden age” of global economic growth and stability ushered in by the Bretton Woods system, which the Allied nations adopted in 1944 to rebuild the global economic system, was coming to an end in the early 1970s. Faced with an increasing deficit in its balance of payments, the United States suspended the convertibility of the dollar into gold, imposed wage and price controls at home, and introduced a tax on imports in August 1971, thus triggering the other developed countries’

  rush to adopt a floating exchange rate system and take protectionist measures in the midst of a growing worldwide recession.

  Because exports to the United States constituted 40 percent of total South Korean exports, Nixon’s economic policy seriously hurt South Korea, especially its light industries. Moreover, with Japan’s decision to follow the U.S. initiative with the adoption of a floating exchange rate system, which brought a revaluation of the yen, the cost of Japanese parts and components, intermediary products, and capital goods, upon which South Korea depended for economic growth since its manufacturers’ integration into the Japanese regional production networks through licensing agreements and joint ventures in the 1960s, South Korea saw its export competitiveness decline. The imports from Japan accounted for 40 percent of South Korea’s total imports. To trigger an even greater sense of economic vulnerability, many of the Japanese producers, including Toyota (see Chapter 10) accepted Zhou Enlai’s “Four Principles,” whereby foreign companies entering the Chinese market had to terminate their business with South Korea and Taiwan.21 And Nixon’s decision to gradually disengage the U.S. military presence in South Korea made multinational corporations even less willing to invest there for fear of military risks and dangers. These economic and security troubles caused foreign investors and creditors to panic, leading to an upsurge in the outflow of capital. For a country still dependent on foreign loans to finance about 25 percent of its total imports, and burdened with massive foreign loans to be refi-

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  nanced, the rising instability in financial markets constituted a grave threat to the sustainability of the entire economy.22

  Under the pressure of capital flight, foreign exchange rates climbed up, making banks pressure their industrial clients to speed up payments on the principal and interest on dollar-denominated foreign loans. The banks’ reluctance to roll over loans, in turn, drove a number of the foreign-loan-financed manufacturers to the brink of business failure.23 By 1969, eighty-six major companies found it difficult to pay the interest on their state-guaranteed foreign loans, instantly transforming corporate distress into bank crisis and domestic financial instability into foreign debt crisis. With a steep increase in deficit in the current balance of payments, whether South Korea could recycle foreign debt became the hot issue of the day.24

  Fearing South Korea’s default on foreign loans, the United States pushed Park to accept an International Monetary Fund (IMF) rescue operation.

  The IMF partnered with the World Bank and other international agencies to provide relief loans on the condition that South Korea devalue its currency, deflate its expansionary monetary policy, and work for a greater fiscal balance.25 South Korea signed a stand-by loan agreement of $25 million with the IMF in 1968, which it renewed again in 1969.

  On the surface, most of the macroeconomic indicators, from growth rates to the consumer price index, to investment and consumption, moved outside the danger zone; some even seemed to be signaling the usual adjustment after a period of high growth. However, in possession of micro financial information at the firm level, Park knew that the South Korean economy was on the verge of collapse under the pressure of massive nonperforming loans (NPLs). Behind the spectacular growth of the 1960s lay the absence of independent institutions to put in place modern-day prudential regulations over the state’s underwriting of foreign loans. To correct the financial imbalance resulting from the absence of prudential regulations and to induce corporate restructuring as an integral part of the debt rescheduling and write-offs required to create greater financial balance, South Korea agreed with the IMF on a stand-by loan agreement to put in place a ceiling on myriad financial indicators, including the growth rate of foreign credit, the size of the central bank’s credit to government entities, new foreign loans, and the financial institutions’ possession of foreign currency. Moreover, in the negotiations for additional financial assistance in June 1971, the IMF demanded that South Korea restrict the inflow of short-term foreign capital, pursue a deflationary fiscal policy, devalue the currency from 329 to 450 won per dollar, tighten monetary policy, reduce bank loans, cut government spending, and abolish export subsidies. The

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  South Korean negotiators accepted all except the abolition of export subsidies. On the issue of the exchange rate, they partially accommodated the IMF, settling on 371.6 won per dollar.

  To the disappointment of Park, the IMF’s shock therapies proved to be insufficient to arrest the tides of financial and corporate distress. The rate of inflation rose sharply due to the devaluation. The easy monetary policy Park pursued to help him win the 1971 elections also became a factor in driving up prices.26 For the first time since Park embarked on export-led industrialization in 1963, the South Korean economy experienced a recession, taxing the manufacturers with even greater NPLs.27 The steep increase of bad loans by the manufacturers discouraged many of the state banks from rolling over loans to help the firms pay back the principal and interest, lest their own financial solvency came to be further tied to the financially vulnerable manufacturers. As a consequence, many large companies of the chaebol went ban
krupt, prompting Federation of Korean Industries president Kim Yong-wan to appeal to Park for state rescue. Given the colossal size of the NPLs, the FKI president asked Park to convert the private curb-market loans held by business firms into low-interest bank loans, to reduce corporate taxes by a half, and to relax the tight monetary policy.28 Receptive to the demands of big business, Park resorted to the emergency powers recently vested in him by the 1971 Special Law for National Security. In August 1972, he issued an Emergency Decree on Economic Stability and Growth (EDESG).

  The financially most critical and politically most controversial of the policy measures adopted by the emergency decree was the measure to temporarily freeze the business companies’ payment of the principal and interest on allegedly “usurious” private curb-market loans. The measure sought to relieve the pressures of financial and corporate distress and, with it, prevent default on foreign loans by transferring much of the costs of adjustment from the chaebol and state banks to the private lenders in the curb market. There was also an injection of massive policy loans, which again reaffirmed the time-honored principle of socializing corporate restructuring costs to continuously generate hypergrowth rather than weed out moral hazards to stop the vicious circle of financial distress. Given the scale of the financial crisis brewing in 1972, the emergency decree distinguished itself from previous rescue operations in the size of preferential policy loans.29 The emergency decree converted the high-interest short-term bank loans held by business firms into low-interest long-term loans through the issuing of special bonds worth 200 billion won and by the establishment of a public fund to finance industrial rationalization programs. (See Chapter 9.)30 Apparently Park thought that his regime could

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  suffer irreparable political damage if he failed to contain and remedy the financial and corporate distress. Believing the situation to be in urgent need of repair, Park brushed aside the criticisms of the EDESG’s infringement of private property rights and its further concentration of income in the chaebol. The emergency decree worked. The chaebol were relieved of the pressures of the liquidity squeeze and the South Korean economy re-bounded remarkably, increasing investment by 40 percent and export by nearly 100 percent in 1973. The growth rate in the first quarter of 1973 hit 19.3 percent, three times that of the same period in 1972.31

  Having put the chaebol on a more solid financial footing through the EDESG, Park was now in a position to take an economic gamble to justify his long-prepared political gamble of regime change. With the chaebol out of the liquidity squeeze and the danger of default on foreign loans overcome, Park could launch heavy and chemical industrialization in earnest as a showcase of the soon-to-be-unveiled yushin regime’s capabilities. As shown below, that program of regime legitimation also had the benefit of constructing an industrial base for national security and an engine of hypergrowth. Most important, by adjusting the overheated economy through the socialization of corporate restructuring costs, Park’s EDESG

  further consolidated his symbiotic partnership with the chaebol. The manufacturers were in debt to Park for their survival in 1972, and they were ready to repay him with an aggressive pursuit of his new economic goal of HCI. More generally, by overcoming the seemingly intractable financial crisis, Park once again strengthened his popular image as the leader who delivered. Having stabilized the financial markets, strengthened the chaebol’ s trust and loyalty, and proved his capacity for problem-solving through his EDESG, Park was a half step away from the goal of regime change. To take that remaining other half step, Park had to come up with a forward-looking grand vision capable of justifying the imposition of an authoritarian regime. The search for such an idea ended with the launching of inter-Korea dialogue in the security realm and the pursuit of heavy and chemical industrialization in the economic realm.

  Transforming Security Crisis

  into a Political Opportunity

  Park was in a position of strength in 1972, but even then he needed to develop a rationale for regime change if he was to not only justify his planned actions but also defend his very position of strength. The rationale was provided by South Korea’s rapidly changing security environment. In

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  many ways, the yushin regime emerged as Park’s reinvigoration of South Korean cold war ideas and their adjustment to the new global and regional security environment of détente. The impetus for the change came with the retrenchment of U.S. military engagement in East Asia under President Richard M. Nixon’s Guam Doctrine of 1969. The United States was then trying to end the Vietnam War through diplomacy, launching a détente with the Soviet Union and eventually with China to bring North Vietnam to the negotiating table. The timing of the adjustment in U.S. global and regional security policy could not have been worse for Park, because North Korean military threats were on the rise on the Peninsula, following Kim Il Sung’s announcement of the aggressive “Four Military Principles.”

  Tensions remained high on the Korean Peninsula into 1968 and 1969, with North Korea shooting down a U.S. reconnaissance plane and sending armed guerrillas into Seoul and, then, into the Uljin and Samch’ôk areas (see Chapter 6). In 1970, a South Korean marine broadcasting ship was seized by North Korea on the Yellow Sea, and in the Tongjakdong National Cemetery a bomb exploded that had been planted by North Korean agents. Armed guerrillas from the North continually infiltrated the South via the Kyôngnyôlbi archipelago, Kunja Gulf, and East Sea.

  The contradictory trends of global-regional détente and the rise of military tensions on the Korean Peninsula brought domestic political fissures.

  Park held the orthodox view, diagnosing the continuing military threats from the North in the new era of global-regional détente to pose a security challenge of unprecedented scale, forcing South Korea to face threats from the North with much weakened U.S. support and possibly even under diplomatic isolation. The South was then tailing far behind the North in winning support from “non-aligned” countries of the Third World. By contrast, Kim Dae-jung saw the situation as requiring a paradigmatic shift in security policy. As already noted, during the 1971 election, Kim Dae-jung had announced his own proposal for a mini-détente on the Korean Peninsula that called for the establishment of peace and ultimately a negotiated unification of the two Koreas through diplomatic dialogue with the United States, the Soviet Union, Japan, and China. Kim Dae-jung also criticized Park’s cold war strategy of military confrontation as a conspiracy to bring about Park’s permanent rule by exaggerating North Korean security threats.32 Against such charges, Park argued that the United States’ military disengagement from East Asia might have brought détente to the great powers at the global level but not necessarily to the Korean Peninsula, because of the existence of the two separate states on the peninsula with mutually incompatible national identities, regimes, and military alliances with the rival great powers. Contrary to Kim Dae-jung’s assertion

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  that the global-regional détente opened a window of opportunity to bring about inter-Korea reconciliation, Park argued that South Korea became more vulnerable militarily as a result of the unilateral U.S. actions. In his eyes, the U.S. reduction of its military presence in East Asia was premature, occurring at a time when the South was still struggling to catch up with the North in military capabilities. The result of the U.S. decision would be a break in the inter-Korean military balance in favor of the North, which could lead to the repeat of an all-out North Korean invasion.33 Presenting the Six-Day War in the Middle East as an example of modern warfare, Park warned that South Korea should not lower its guard, lest the North launch a blitzkrieg to capture Seoul and then to present the action as a fait accompli to the United States in the hope of negotiating a new armistice. In return, critics accused Park of deliberately resisting the coming of détente to the Korean Peninsula for the sake of his own political interest in remaining in power under the pretext of combating the continu
ing North Korean military threat. In the event of détente on the Korean Peninsula, critics predicted that peace and coexistence would finally reign.

  The mounting criticisms and dissent against cold war orthodoxy did not change Park. To prevent South Korea from becoming “another South Vietnam,” which had aligned with the United States only to be abandoned by it in the midst of military conflict, Park called for “recharging the security state.” Describing South Korea as in a state of war because the armistice of 1953 had not been replaced by a peace treaty among the warring parties of the Korean War, Park established new reserve forces 2.5-million-men strong to defend the rear area. The president also set up the Student Corps for National Defense with the goal of operating military training programs on campuses, and the defense industries were promoted as never before.

  Then, in December 1971, Park declared a state of emergency and enacted the Special Law for National Security.

  As soon as Park made his regime a garrison state in December 1971, two problems arose. First, in order to put the garrison state on a solid basis, Park needed to come up with a more positive, forward-looking programmatic vision in addition to the existing negative doctrine of security threats. Second, during the 1971–1972 period, the number of North Korean military provocations decreased dramatically. The great powers’

  détente at the global level was finally affecting the North Korean regime.

  To continue on the path of Kim Il Sung’s “Four Military Principles” entailed too many risks for North Korea, as it could no longer assume that the Soviet Union and China would support it in an escalation of military conflict. For the North as much as for the South, the détente meant an ad-