Park Chung Hee Era

by Byung-kook Kim

  First, there was nothing “technocratic” about South Korea’s choice of developing a modern integrated—let alone, export-driven—steel industry.

  As the World Bank diagnosed in 1968, South Korea was without markets and resources to tackle the task. Yet, as early as March 1962, under pressure from the military junta, four chaebol groups joined forces to establish Korea Integrated Steel, Ltd., only to see it collapse owing to a lack of investment funds. However, rather than discouraging South Korea, the failure only led to its renewed attempts to construct an integrated steel mill in 1964 and 1967. That it was Japan’s 1969 provision of reparation funds rather than commercial loans that eventually enabled South Korea to launch its steel project attested to the centrality of Park and his ambition, not his state’s technocratic prowess. The goal of building an integrated steel mill cannot be explained by global market conditions or national capabilities. It was Park who decided to build POSCO against all odds. To explain his preferences and interest, Chapter 11 looks into not

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  only the interplay of military security, domestic politics, and economic imperatives as understood by Park, but also his lifelong ideological vision of “rich nation, strong army” (puguk kangbyông) modeled after Meiji Japan.

  Second, the analysis of South Korea’s efforts to overcome its lack of technology, capital, and human resources in developing POSCO into a player in the world market reveals that the key to its success lay as much with Park’s manipulation of great power relations as with its state’s

  “Weberian” internal organizational resources. It took seven years for Park to hit on a foreign policy strategy that got international geopolitics to provide South Korea’s strong, autonomous state with an opportunity to develop a transnational coalition of the technology, capital, and human resources required for the construction of an integrated steel mill. Until 1969

  many of Park’s initiatives were defeated by the American refusal to assemble an investor group of international financial organizations, bankers, and multinational corporations (MNCs) behind Park’s vision of statist development. That left only the option of using the Japanese reparation funds for the construction of POSCO, which profoundly influenced not only its technology and marketing strategy but also its organizational ethos. The funding also put POSCO on a financially strong basis from its very inception, as Japan provided reparation funds on a noncommercial basis, either as grants-in-aid or as low-interest loans, to compensate for colonial wrongdoings. Chapter 11 makes the building of a transnational coalition the key story of POSCO and foreign policy the central part of economic policymaking.

  Third, unlike developmental state theories, the story of POSCO puts the issue of moral hazard and rent seeking at the center of analysis. On the one hand, POSCO combined features that bred moral hazard. The company was funded by the politically driven Japanese reparation funds, whose noncommercial character presumably gave stakeholders greater leeway in rent seeking. Moreover, it was a state-owned enterprise (SOE) with a governance structure allegedly incapable of keeping under control the forces of rent seeking and moral hazard. Lastly, whereas Park opted to construct an oligopolistic industrial structure in each of the heavy and chemical industries reserved for the chaebol in order to balance the conflicting requirements of competition and concentration, he made POSCO a monopoly. Consequently, the risks of rent seeking and moral hazard, which were built into the macroeconomic growth machine built by Park (see Chapter 7), were that much greater. Yet POSCO was profitable and dynamic, growing into a world player within a mere decade. This spectacular performance requires a multi-level analysis encompassing a wide set of variables, from POSCO’s unique political relationship with Park and the state bu-

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  reaucracy, to its extensive transnational networks with the bureaucrats, bankers, big business, and Liberal Democratic Party (LDP) bosses of “Japan, Inc.,” to the internal organizational workings of POSCO, including corporate strategy, managerial practices, and company unionism. At the center stood Pak T’ae-jun, POSCO’s founding president. Enjoying an unparalleled degree of trust from Park and an extensive delegation of power, Pak T’ae-jun maintained the internal cohesion of POSCO’s state-business alliance and transnational coalition at all levels of corporate life by serving as political entrepreneur, mediator of interests, facilitator of dialogue, and business strategist all at the same time. Only forty-one years old when appointed in 1968, Pak T’ae-jun stayed on as POSCO’s top leader until he joined the National Assembly as a Democratic Liberal Party (DLP) member in 1992.

  The Wrong Start, 1961–1969

  Military Junta Years

  The frustrating search for a viable formula of development for the steel industry began with the military junta. South Korea was then not a fertile ground to build a modern integrated steel mill. The gross national product stood at only $1.9 billion, and per capita income roughly $80. Moreover, the country’s first electric furnace-based steel company began operation only in 1963, producing a meager twelve tons of crude steel. In lieu of the capital, technology, and markets required to construct a modern steel industry, the junta was determined to sow its seed through the mobilization of political power. The junta was then in the middle of prosecuting the chaebol for the wealth they had allegedly hoarded through illicit means during Syngman Rhee’s First Republic (1948–1960). Although the junta initially wavered between the radical position of imposing heavy penalties in the interest of satisfying the public demand for justice and the moderate stance of light fines to protect economic stability, it quickly came to link the issue of illicit wealth accumulation with its industrial policy with an eye to transform the chaebol into a partner for growth. The idea was to lure the chaebol into the junta’s pet industrial programs, including its steel mill project, by linking the reduction of fines directly to their entries into strategic industries. As part of this effort at arm-twisting, the junta invited the top chaebol groups to bid for an entry license for the steel industry in October 1961.

  Running for political cover, the Federation of Korean Industries (FKI), the umbrella business association established by the chaebol at the prodding of Park, welcomed the junta’s initiative. After reviewing the many in-

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  vestment plans announced by the junta, the FKI chose Samhwa as its candidate for pursuing the integrated steel mill project. But the attempt failed to bear any fruit. The project was revived in January 1962 as the FKI renewed its effort to reach a political modus vivendi with Park through its participation in FYEDP projects. Four chaebol groups jointly launched a Private Investment Council with the explicitly stated goal of developing the South Korean steel industry.5 With public and private funds, they established Korea Integrated Steel, Ltd., in March 1962, and signed an agreement with a West German steel producer for a feasibility study in April. The venture fell apart when it failed to secure investment funds both domestically and internationally.

  The problem was that despite an endorsement by the Van Fleet Commission, a private American advisory group, the request of Korea Integrated Steel for funds got nowhere with the United States Agency for International Development (USAID) or with the United States Export-Import Bank. One reason for their refusal was the danger of sending the wrong signals regarding U.S. policy on the issues of military rule and fiscal stabilization. The Kennedy administration was then twisting the arm of Park and his mainstream faction to set a date for the restoration of civilian rule as well as to keep inflation under control through budget cuts and tax increases. To approve Korea Integrated Steel’s request for loans when Park was strenuously resisting U.S. efforts at democratization and stabilization was judged to jeopardize United States interests. Besides, the USAID argued that the top priority of the junta should be not the steel industry but the energy, transportation, machinery, and communication sectors. The U.S. denial of the requests made the Van Fleet Commission
instantly deem the integrated steel mill project not feasible, because it was only with the U.S. provision of low-interest loans and grants-in-aid that the international financial community would join in support of the project.6 The commission soon dissolved itself.

  In July 1962 came a third attempt at the steel mill project—this time, from the Economic Planning Board (EPB). With an eye to securing Park’s trust, the superministry proposed the creation of an international financial consortium around the World Bank and the United States Operations Mission (USOM) in charge of administering aid in South Korea. Unfortunately for the EPB, USOM was then using its aid as an instrument both to streamline Park’s ambitious first FYEDP through the readjustment of investment priorities and strategies and to force Park to deliver on his earlier promise to democratize.7 USOM’s pressure on Park to change his target goals on the money supply, budget, foreign exchange reserve, and price stability to more realistic levels increased throughout 1963, culminating in Park’s abandonment of his inwardly-focused unbalanced growth strategy

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  based on heavy and chemical industrialization. Park could not pursue HCI without U.S. support, because without a dynamic domestic capital market, it was only through close collaboration with USOM that South Korea had any chance of getting the seed money to finance HCI projects. The EPB’s attempt at jump-starting the integrated steel mill project was defeated by this larger political and economic conflict with USOM over the issues of macroeconomic growth strategy and democratization.

  The signs of a U-turn in economic policy, however temporary, surfaced as early as December 1962, even before the United States confronted Park head-on with the question of the restoration of civilian rule and used aid to pressure Park to retreat in March 1963. The previous December, the EPB

  had successfully persuaded Park to scale down his HCI ambitions until the economy was ready to tackle the task. Park heeded the EPB’s advice because he had no choice. Since, under U.S. pressure, Park had given up on the KCIA-initiated idea of financing HCI with the money “frozen”

  through the currency reform of June 1962, he thought he could only rely on the private sector to implement FYEDP projects. The dependence on the private sector, in turn, meant that Park had to give a green light to the revision of the first FYEDP because no chaebol was capable of pursuing HCI projects without U.S. endorsement and loans. Unlike the original drafting of the first FYEDP in 1961, in which the EPB competed with the military junta, chaebol owner-managers, professional economists, and U.S. aid officials for influence, the plan’s revision was thoroughly dominated by the EPB, resulting in a shift of policy emphasis from import-substitution strategy with the steel industry at its core toward a strategy of export promotion focusing on light industry. The advocates of HCI-led unbalanced growth had to wait for another opportunity for vertical integration.

  On the other hand, for Park, the change of policy direction toward export-promotion in 1964 was tactical, not strategic. He chose to slow down rather than to scrap his HCI drive. Rather than plunging into a “big push” with a wide array of heavy and chemical industry projects launched simultaneously across multiple industries, Park became more selective in his choice of HCI projects. Among those selected for continued efforts at development was the steel industry. In light of the alterations in South Korea’s overall strategy of modernization that came with Park’s approval of the revised first FYEDP, the Ministry of Commerce and Industry (MCI) engaged in an extensive discussion of the industry’s fundamental importance, focusing on:

  1. Whether to include the steel industry in the category of “strategic sectors” deserving a concerted program of state assistance;

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  2. How to secure the capital and technology required for its development, and what budgetary programs to cut in order to channel resources into the steel industry;

  3. Whether to nurture the steel industry as an export sector from the very outset of import substitution, thus raising the target scale of production to an internationally competitive level; and 4. Whether to entrust the task of developing the steel industry to the hands of the private or the public sector.

  As expected, the result of these internal debates was the MCI’s reaffirmation of the goal of constructing an integrated steel mill on an internationally competitive scale, which was widely known to be Park’s preference and also in the organizational interest of MCI. Nonetheless, the painful experiences of the 1961–1963 period made the MCI and EPB

  come up with a new strategy to deal with the structural obstacles Park and his FKI partners had tried to grapple with since 1961. Reflecting Park’s

  “can do” spirit and his obsession with steel, the MCI and EPB unequivocally reconfirmed the steel industry as a strategic sector, but also proposed to make it an export sector, thus putting into motion Park’s fourth attempt at constructing an integrated steel mill. The South Korean economy was then engulfed by the vision of an export drive after the model of Japan.

  The decision to pursue an export-led steel industry had the effect of dramatically raising the size of funds needed, because export competitiveness rested on economies of scale. Partly because of this upward adjustment of target goals and partly because of the chaebol groups’ failure to assemble a transnational coalition of investors in 1961 and 1962, the MCI and EPB

  also opted for public ownership of the integrated steel mill. Building an internationally competitive integrated steel mill was too big a project for any one chaebol group. Entrusting the monopoly production of steel to a single chaebol would also entail the additional cost of politically alienating the rest of the South Korean business community and causing a public uproar over distributive implications. The only remaining unanswered question was how to secure the money and technology required for the development of a state-owned and export-oriented integrated steel mill.

  The Wrong Partner

  The failure to bring in the United States as a partner or a patron in the development of an integrated steel mill in 1961 and 1962 did not lead Park to look elsewhere for potential investors in his fourth bid to construct an integrated steel mill. Even when Park backed the chaebol groups’ recruit-

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  ment of a West German steel producer for a feasibility study in 1962, he looked to the United States for financial support. In his state visit to the United States in 1965, Park even went out of his way to inspect an integrated steel mill in Pittsburgh and discuss the possibility of developing an indigenous steel industry with Koppers. The hope to partner with the United States continued into 1967, because he thought that the trust and support of the superpower he had won through the dispatch of combat troops to South Vietnam would result in his hoped-for donor’s change of heart. Although huge Japanese reparation funds were ready to flow into South Korea as the result of Park’s normalization of relations with Japan in 1965, he hoped to construct an integrated steel mill on the basis of U.S.-

  brokered commercial loans and/or international aid. Yet the United States still could not or would not take on the role of a partner or a patron. In the eyes of U.S. policymakers imbued with the neoclassical conception of economic rationality and a static view of comparative advantage, Park’s steel mill project was based on wishful thinking or, even worse, on recklessness.

  In addition, USOM had been urging South Korea to become less dependent on U.S. aid by diversifying its sources of capital to Japan. This encouragement was consistent not only with the United States’ long-standing policy of reducing grants-in-aid since it had begun to register a trade deficit in 1958, but also with its long-standing military security strategy to integrate East Asia’s “free countries” into a loose regional alliance system, with Japan increasingly sharing the burden of regional and peninsula security as a junior partner of the United States. For this, the United States had been pressuring Japan to supply more development funds for the East Asian region, as well as nor
malization of its diplomatic relations with South Korea.8 To make the USAID and United States Export-Import Bank even more reluctant to finance the development of the South Korean steel industry, U.S. steel producers were also worried about losing the South Korean market to newly established local producers at a time when Japanese and European steel producers were threatening the U.S. home market and saturating the world market.9 Nonetheless, Park still looked to the United States for leadership when he announced the integrated steel mill project with the promulgation of the second FYEDP in 1967 in the middle of his presidential campaign. Based on the MCI-EPB policy review since 1964, the second FYEDP designated the steel industry, along with the petrochemical and machinery industries, as South Korea’s “core” sector. The drive to build an integrated steel mill reached a new height when Park dismissed deputy prime minister and EPB minister Chang Ki-yông in October 1967 for his failure to make any progress on fund-raising. Pak Ch’ung-hun was then made EPB minister with explicit instructions to launch

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  POSCO. To raise money, the EPB jump-started its negotiations with the Korea International Steel Associates (KISA), which it had established with Koppers, Blaw-Knox, and Westinghouse Electric International from the United States, Demag and Siemens from West Germany, Wellman Engineering from the United Kingdom, Ensid from France, and Impianti from Italy in December 1966 with the goal of constructing an integrated steel mill. Japan did not join KISA because its steel producers could not reach a consensus on the goal and method of participation. In October 1967, KISA reached an agreement with Pak Ch’ung-hun to build an integrated steel mill with an annual production capacity of 600,000 tons.

  KISA soon collapsed, however. In November 1968, after a feasibility study, the World Bank recommended that South Korea give priority to its machinery industry rather than to its steel industry.10 According to the bank’s “Evaluation Report of the [South] Korean Economy in 1968” submitted to the Third General Assembly of the International Economic Consultative Organization for Korea, plans to develop an integrated steel mill were premature because of the lack of capital, technology, and market.11