Park Chung Hee Era

by Byung-kook Kim

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  strument through which the state could secure business compliance with the goals of industrial policy and macroeconomic planning. By implicitly threatening to revoke preferential bank loans if the borrower failed to meet state-set targets, the MoF used commercial banks as both carrot and stick in its efforts to reshape the preferences, interests, and strategies of business companies in the direction of the first Five-Year Economic Development Plan (FYEDP).

  Once Park lined up his powerful arsenal of centralized economic bureaucracy and state-owned commercial banks by July 1961, he began looking for his business partners. His choice was the chaebol, whose owner-managers he had initially put under house arrest on the charge of illicit wealth accumulation immediately after the military coup. Although the public remained critical of these large companies’ activities of rent-seeking during Syngman Rhee’s rule (1948–1960), Park soon came to value their leaders’ proven record of business success. And in any case, the economies of scale necessary to fulfill Park’s vision of building a modern industrial economy in his lifetime could not be achieved by relying on small- and medium-sized enterprises (SMEs). The large enterprises with access to capital and technology were the only actors capable of participating in large-scale infrastructure projects and mass-producing manufactured goods for export.

  On the other hand, Park excluded multinational corporations (MNCs) from his potential business partners out of both choice and necessity.

  Still fresh in the minds of South Koreans were memories of Japanese colonial exploitation, which made the option of generating economic growth through foreign direct investment (FDI) unpopular. An admirer of the Japanese Meiji Restoration that modernized through the nurturing of “national champions,” Park also personally preferred to maintain national ownership of productive assets and chose foreign commercial loans over FDI to build infant industries. To keep Park on the nationalist path to modernization, moreover, South Korea was not a hospitable investment site for MNCs, suffering as it did from chronic political instability, limited domestic markets, and poor resource endowment. The economy was then still struggling with post–Korean War reconstruction as well.

  By contrast, the option of replacing private producers with state-owned enterprises (SOEs) as an engine of growth was briefly experimented with in mid-1962, when Park came to be frustrated by the lack of progress in the chaebol groups’ pledged investment in the first FYEDP projects. Endorsing the radical ideas of forced savings drawn up by the Kim Chong-p’il–led Korea Central Intelligence Agency (KCIA), Park identified a newly strengthened state-controlled Korea Industry Development Com-

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  pany (KIDC) as a conduit to channel the money in frozen bank accounts to FYEDP projects during the currency reform of June 1962. This brief play with radical statism ended as a political fiasco, with the United States lashing back with an interruption of aid because it charged that the military junta was trying to move toward a socialist economy.7 Securing over 90

  percent of the national budget from U.S. aid-generated counterpart funds as late as 1961, Park could not but backtrack from both the currency reform and the KIDC-channeled project financing. The junta found itself returning to the original task of negotiating a state- chaebol relationship that would transform the chaebol into a willing partner of the state in economic development.

  For South Korea, the exclusion of statist options in the early stage of economic development was to clear the way to hypergrowth. The SOEs of South Korea did not have the capital, technology, or managerial expertise required for developing the modern manufacturing sector. They had also been the hotbed of corruption and inefficiency during Syngman Rhee’s political rule, supporting his Liberal Party as a source of electoral funds.

  The military junta’s rhetoric of anticorruption notwithstanding, it was unlikely that the politically fragile coup makers—externally lacking ideological legitimacy and internally trapped in intense factional power struggles—could remain disciplined in their exercise of power and resist the temptation of corruption. The expansion of SOEs would only have provided the rival factions of the junta an added incentive to use the state apparatus for rent-seeking.

  Certainly by mid-1962, if not from the very day of the military coup in May 1961, then, teaming up with large domestic enterprises constituted the less politically risky and more economically viable option for Park.

  Consequently, he personally chose some of his life-long business partners from among the chaebol on the basis of two potentially contradictory criteria. On the one hand, Park searched for chaebol owners with a solid business track record to tap the best of South Korea’s entrepreneurial resources. In particular, he looked for businessmen with a zeal for growth and an appetite for risk taking. Park was looking for business leaders who resembled himself: visionaries. Chông Chu-yông of Hyundai captured this spirit more than any other among the chaebol. At the same time, however, Park patronized Kyôngsang-born chaebol owner-managers when possible, in order to give his regionalist ruling coalition a solid financial base. The strategy of choosing chaebol partners on the basis of entrepreneurial performance and regional background with an eye to balance the requirements of economic growth and political coalition building originated during the junta years when Park was challenged by coup makers from the

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  P’yôngan and Hamgyông region (see Chapters 1 and 2), but it came to be continually strengthened even after his presidential election in October 1963. However, it is important to emphasize that the partnership required two willing partners. Park’s choice also had to be the choice of the entrepreneurs if it was to result in actual investment. From their perspective, the junta’s vision of a big push into industrialization presented not only new opportunities but also new challenges. Depending on the outcome of their risk taking, the old-timer entrepreneurs might either construct an empire of affiliate firms across unrelated industries, or see their companies shaken from their foundations under financial pressures. To stay out of the race to grow entailed costs as well, because the second-tier firms were likely to take the risk to push aside the front-runners with the goal of winning Park’s political support. Once overtaken by the rising stars, the frontrunners would find themselves without the privileged access to bank loans that they had earlier enjoyed.

  Ironically, the business leaders’ efforts to establish channels of communication and cooperation with the new rulers of South Korea began in the worst possible situation for them, when the coup makers, with an eye to winning popular support, initiated an investigation into their wealth gained in the 1950s. The day after the coup, Park arrested twenty-one business leaders on charges of illicit wealth accumulation. Some younger officers in the junta even called for the execution of some of the chaebol leaders in order to clean up corruption once and for all. By the end of May 1961, the Supreme Council for National Reconstruction (SCNR) had formally established an investigatory committee and put the issue at the top of its agenda. The swiftness with which the military junta went after the large entrepreneurs and the seriousness of the charges indicate that its mainstream faction, led by Park and Kim Chong-p’il, had formulated a fairly detailed plan to prosecute these individuals prior to launching the coup. The entrepreneurs were accused of illegally acquiring state-invested properties, unjustly purchasing state-owned foreign exchange at preferential rates, profiting from unfair bidding, illicitly benefiting from state-distributed foreign loans, evading taxes, and illegally transferring property to foreign countries in return for providing Liberal Party politicians with political funds.8

  Since the modus operandi of business firms during the Liberal Party regime had been rent-seeking, which made corruption part of everyday business practices, most chaebol owner-managers of the day were vulnerable to the military junta’s charges. Those running businesses in the lucrative

  “three white industries” (sugar refiner
ies, flour mills, and textile mills), in particular, became a target of investigation because their prosperity owed

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  much to the state’s preferential distribution of U.S. aid goods, import licenses, production permits, and preferential bank loans. The oligopolistic market that ensured high profits for the three white industries was a state-sanctioned and -maintained structure. Under investigation were two of the most successful business tycoons: Yi Pyông-ch’ôl, of Samsung, whose illicit wealth was officially estimated at 800 million won (19 percent of the total illicit wealth), and Hong Chae-sôn, of K¤msông Textiles, which later became Ssangyong.9

  As dramatically as the junta demonstrated its power to shake up and challenge big business in May 1961 with its investigation into Liberal Party–brokered business deals, its gesture to put the past behind it and move forward to construct a growth machine with the same chaebol owner-managers as its junior partners came abruptly. On June 27, Yi Pyông-ch’ol returned from Japan to face charges. What awaited him, however, was not imprisonment but a historic meeting with Park Chung Hee.

  There Yi Pyông-ch’ol convinced Park that the prosecution would inadvertently prevent Park from pursuing economic growth by irreparably damaging business confidence. The Samsung chaebol leader added that Park would benefit more by having the business leaders work for South Korea’s rapid industrialization than by putting them in jail, which only wasted their talents. Park knew better than anyone that he had to work with big business if he were to put the country on the track to growth. Much of the managerial expertise, organizational capabilities, capital, and technology required for modernization were in the hands of the chaebol, not the armed forces. Moreover, even compared to the state bureaucracy, the chaebol, with their entrepreneurial spirit, looked like the ideal vehicle for penetrating export markets.

  Equally critical for Park, relying on the chaebol as an instrument of modernization did not threaten his political interests, because the chaebol were not the “conquering bourgeoisie,” sure of their historical mission and ideological legitimacy. Rather, the leading business groups were seen as rent-seekers, living off state licenses and loans and accused of illicit wealth accumulation. They were not in a position to claim political legitimacy, which made Park less hesitant in making a U-turn to partner with them and support their diversification and conglomeration. Thus began in June a series of arm-twisting and behind-the-scenes negotiations between the state and the chaebol, out of which new terms of political exchange were drawn up to clear the way for business investment in FYEDP

  projects.

  In August, with Park’s blessing, the business leaders launched a National Association of Company Presidents, which was to become the Federation

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  of Korean Industries (FKI) in 1968. Established as a summit organization of large industrial conglomerates, the FKI not only served as a channel to voice and defend the collective interests of big business but also enabled the state to control, shape, and influence those interests. The sense of camaraderie developed by the FKI was to help the state and the chaebol to jointly tackle the challenging task of negotiating the market shares required for the establishment of “industrial rationalization cartels” aimed at preventing “excessive competition” among rival conglomerates.10 At the same time, Park organized the FKI to monopolize the political loyalty of its members and preempt not only the opposition but also his potential rivals within the ruling coalition from securing an independent source of political funds. Once he had herded all of big business into the FKI, Park preferred to make business deals with the chaebol on an individual basis, often behind closed doors and in one-on-one conversations directly with their owner-managers, rather than in the open through the official channels of the FKI.

  Ironically, it was the issue of illicit wealth accumulation that Park leveraged to construct a system of state- chaebol coordination on his terms. He could destroy any uncooperative chaebol owner-manager by levying exorbitant fines, or protect cooperative ones by acquitting them of shady business deals. It was through the adjustment of fines that Park thought he could set the chaebol groups’ terms of participation in FYEDP projects and their place in partisan politics. The negotiation for the acquittal of the business owners from the charges against them was a well-orchestrated play, with Park as its producer interested in getting maximum compliance from his future partners. The chaebol owner-managers, including Yi Pyông-ch’ol, who were under house arrest, well understood Park’s intentions. They knew that the politics of rapid industrialization—not elections—was the only game in town and that they had to help Park achieve his economic vision and ambitions if they were to survive. They also understood that the most critical issue was not the threat of imprisonment, which was not going to happen, once Park met with Yi Pyông-ch’ol on June 27 to start talks on state- chaebol cooperation, but Park’s decision on the two closely coordinated issues of how much to levy in fines and how to distribute FYEDP projects among the chaebol. Depending on the nature of the projects allotted and the level of fines imposed, the owner-managers had an opportunity to grow into an industrial conglomerate in both name and reality, or could go insolvent under the pressure of market forces and legal fines.

  For the two parties to come to a final deal, however, several attempts at negotiation were necessary. In August 1961, the junta enacted a Special

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  Law on the Disposition of Illegally Accumulated Capital, which allowed the business leaders convicted of illegal wealth accumulation to “donate”

  to the state the factories they were to construct under state guidance in lieu of a fine. This was the chaebol owner-managers’ idea. By persuading Park to enact the special law rather than to expropriate the illicitly accumulated wealth immediately, the business leaders bought time to gain Park’s trust through their participation in various FYEDP projects and to use that trust to renegotiate the fines later.11 With the strategy of renegotiating the terms of the fines and maybe even winning their revocation from a position of political strength, eighteen of the original twenty-one illicit wealth accumulators began building the factories Park had designated for them.

  As the owner-managers hoped, Park soon discarded his plan to nationalize the factories to be built by the illicit wealth accumulators. Rather than nationalization, Park went back to the option of levying fines. But by January 1962, he had reduced the fines twice, by 90 percent in the first round and again by a half in the second round. In the end, the chaebol owner-managers got away with a mere slap on the wrist. Apparently Park never intended to punish the chaebol for their past shady business deals.

  On the contrary, from the beginning the top priority was getting the chaebol to acquiesce in his vision of modernization and accommodate the state’s administrative guidance on investment. The issue of illicit wealth accumulation was a mere instrument in this game of arm-twisting to “persuade” the chaebol to collaborate with Park.

  Once Park ventured into negotiating new terms of state- chaebol cooperation, moreover, big business inevitably came to increase its leverage on Park. First, once resources were concentrated in the chaebol groups’ investment projects, Park was bound to look at the business failure of chaebol conglomerates as the political failure of the developmental state he was building up as the partner to the chaebol. Consequently, the balance of power shifted toward the chaebol, because the state thought their bankruptcy threatened the financial viability of the state itself. Second, the political weakness of the chaebol became a source of influence on economic policy, because it allowed Park to support big business without fear of inadvertently fostering an alternative center of political power. Confident of the business groups’ political weakness, but also fearing the negative political fallout of economic recession, Park made subsidies available for the chaebol to enter new frontiers of growth.

  Third, the dynamics of political e
xchange itself strengthened the hands of the chaebol. Because the owner-managers made their entry decision on the basis of Park’s pledge of support, the withholding of state subsidies during business difficulty would be perceived as a breach of the political

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  understanding between Park and the chaebol, which could irreparably damage Park’s credibility and, hence, his ability to persuade future investors to take risks. In a sense, the moment that Park and the chaebol agreed to pursue FYEDP projects jointly as part of their efforts to put the issue of illicit wealth accumulation behind them, they both lost much of their political maneuverability. The state could not withdraw support as it liked. Nor were the chaebol free to exit from their lines of business simply because of financial losses. The alliance between Park and the chaebol meant that they were each other’s guarantor and that they had to weather corporate and financial distress together.

  Even during the formative era of military rule, it was not unusual to see the chaebol helping Park formulate goals and the state bureaucracy implementing chaebol ideas. It was Yi Pyông-ch’ol who persuaded Park to make concessions on the issue of illicit wealth accumulation in return for chaebol participation in FYEDP projects in June 1961. Thereafter, Park periodically consulted Yi Pyông-ch’ol for advice, and even backed Yi’s effort to organize big business as the first president of the newly established FKI. In that role, Yi Pyông-ch’ol led a delegation of business leaders to the United States and Western Europe as part of efforts to attract foreign capital. At stake was nothing less than the survival of their businesses, as the owner-managers worked to construct the factories they were required to build in return for Park’s agreement to defer and reduce their fines. Shortly after the trip, on January 11, 1962, the FKI submitted a proposal for the construction of the Ulsan Industrial Complex. Three weeks later, Park held a groundbreaking ceremony. The Ulsan project was to popularize the idea of building a cluster of backwardly- and forwardly-linked industries in a geographically compact area with an eye to facilitating well-coordinated collective actions between the state and the business community, suppliers and assemblers, and industrial and service sectors. A myriad of industrial complexes and export zones eventually emerged throughout South Korea during the 1963–1979 period.