Park Chung Hee Era

by Byung-kook Kim

  South Korea’s comparative advantage was thought to lie in the labor-intensive machinery industry.12 After the World Bank’s negative appraisal, KISA’s British and West German members declined to finance the project.

  In April 1969, USAID urged the EPB to support the country’s existing small-scale electric-furnace steel mills rather than seeking to construct a new integrated steel mill. Questioning South Korea’s ability to repay any KISA-incurred foreign debt, the World Bank refused to provide a loan. The United States Export-Import Bank, too, announced that it would not provide loans.13 Without support from its member countries and international lending agencies, KISA soon dissolved. Like Chang Ki-yông, Pak Ch’ung-hun was also dismissed—but in June 1969, after several more unsuccessful attempts at mobilizing international support for the steel project.

  The Japan Card, 1969–1973

  Another “Japan, Inc.”

  As KISA was collapsing in May 1969, the indefatigable Park began toying with the idea of engaging in political, rather than commercial, negotiation to secure Japanese consent to the use of reparation funds for the steel mill and adopted a two-track strategy. Park entrusted the EPB with negotiations at the intragovernmental level while employing newly established POSCO’s Pak T’ae-jun to do the groundwork for negotiations with Japan through his talks with the Japanese private sector. The change in Park’s

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  strategy was signaled by the appointment of Kim Hak-ryôl, one of his most trusted aides, to the post of deputy prime minister and EPB minister in June 1969. The EPB negotiators formally proposed that some of the Japanese reparation funds be allocated to the POSCO project.14 They expected Japanese steel producers to assist POSCO if much of the funding was to come from reparation funds, permitting the Japanese to construct POSCO with Japanese plants and technology.

  The bilateral talks were begun informally even before the dismissal of Pak Ch’ung-hun in June 1969. POSCO president Pak T’ae-jun, in his role as a facilitator, pursued the strategy of first contacting Japanese big business for support and then approaching Japanese LDP bosses and bureaucrats on the basis of the response from Japan’s business circles. The goal was to get Japanese big business to lobby for POSCO from within Japan on behalf of South Korea.15 In February 1969, three months before the United States Export-Import Bank formally turned down POSCO’s request for a loan, Park dispatched Pak T’ae-jun to meet with the leaders of the Japanese steel industry.16 Although Japanese steel producers and plant manufacturers feared that support for POSCO might boomerang and create a rival able to compete on the world market, they, as expected by EPB, kept their misgivings to themselves and came out in support of the POSCO

  project as a means of getting a share of the new markets created by reparation monies.17 In response to Pak T’ae-jun’s overtures, Fuji Steel, Yawata Steel, and NKK submitted a positive appraisal to EPB in August 1969 on the basis of their joint feasibility study.18 The report became a basis for bilateral discussion at the Third Annual Korea-Japan Ministerial Meeting and was instrumental in persuading the Japanese state to support the POSCO project.19

  Aside from delivering a positive report to the political authorities, leaders of the Japanese steel industry also lobbied for POSCO in the corridors of the Japanese bureaucracy. Initially, the idea of tapping the reparation funds drew support from Japanese steel producers, plant manufacturers, and LDP politicians, but not bureaucrats, except the Ministry of Foreign Affairs. Because the 1965 Normalization Treaty stipulated that any diversion of the reparation funds for projects not enumerated in the original agreement required prior consultation with and consent of the Japanese government, the Japanese business and political elite’s endorsement of the EPB’s proposal caused interministerial conflict in Japan. The Japanese finance ministry, concerned that the reallocation could cause a budget shortage, opposed the plan. Japan’s Ministry of International Trade and Industry was also in opposition, wanting to guard Japanese export interests from potential South Korean competition. But with the support of

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  LDP politicians and business leaders, the foreign ministry was able to override these two ministries. Nagano Shigeo of Fuji Steel and Inayama Kazuhiro of Yawata Steel led the drive, arguing that the economic development of South Korea was the key to the prosperity and security of Japan.20

  “The future fate of the Japanese industries,” Nagano Shigeo stated in a newspaper interview, “totally rests on the five hundred million people of Indochina, the natural resources of Indonesia and the prosperity of [South]

  Korea fighting communism [on] the front-lines in Asia.”21

  In bilateral negotiations, South Korea followed the likes of Nagano Shigeo and Inayama Kazuhiro in appealing to regional security interests.

  As Park’s messenger, Kim Hak-ryôl justified the use of reparation funds as part of Japan’s responsibility to share South Korea’s burden of fighting the cold war as a front-line state for the entire “Free World,” including Japan:

  “[South] Korea is building its economy while fighting North Korean military aggression. In order to ensure peace and prosperity in the Asia-Pacific region, Japan with its strong economy needs to cooperate with [South] Korea, [who disproportionately bears the costs of military deterrence for the entire region] with its army of six hundred thousand. The POSCO project is a perfect opportunity for [building security] cooperation between the two countries.”22 Park thus asked Japan to pay some of the costs incurred by South Korea to secure a favorable regional security environment.

  By contrast, Japan’s calculation was more complex. Economically, its business community saw the launching of POSCO as an opportunity to make a deep inroad into the South Korean economy, which not only increased Japanese plant exports but also established a new division of labor within the steel industry between Japan and South Korea. The establishment of a Japanese presence in a strategic South Korean sector as critical as the steel industry was also judged to put the Japanese keidanren groups in a position of strength to penetrate related heavy and chemical industries. Moreover, through the use of reparation funds, Japanese producers could collaborate without incurring any financial risk. Political stability and peace on the Korean Peninsula were also critical to Japanese national interests, which Japanese politicians and bureaucrats thought the POSCO

  project served well. Japanese conservatives believed that Park’s strong political leadership, coupled with the developmental state supporting modernization, would enable South Korea to overcome the political, economic, and security challenges of the 1970s. Coming to the aid of the integrated steel mill project also provided Japan’s ruling LDP with an opportunity to show its U.S. ally its commitment to sharing the cost of regional military security.

  Equally critical, unlike the United States and the World Bank with their

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  neoclassical stance, Japan evaluated the POSCO project through its own time-tested dynamic theories of comparative advantage and recognized South Korea’s ability to learn quickly with Japanese assistance. Japan had no ideological inhibitions holding it back from promoting the development of an infant steel industry, because it had grown out of poverty through the same belief in state activism. The two countries talked in a political language they both readily understood. Interestingly, after Japan’s decision to support the integrated steel mill project in September 1969, the World Bank reappraised it as viable, so long as South Korea provided necessary infrastructural support, including the construction of ports, roads, and water service. The Japanese pledge to provide reparation funds in the form of grants-in-aid and low-interest loans instantly cleared away the World Bank’s fear of a financially vulnerable POSCO.

  The deal was finally sealed at the Third Annual Korea-Japan Ministerial Meeting in August 1969. Under political pressure and aware of the prohibitively high barriers against the construction of an integrated steel mill on a commercial basis, K
im Hak-ryôl adopted brinkmanship tactics, bluntly stating that there would be “no joint communiqué unless Japan agreed to the construction of POSCO” using Japanese reparation funds and technology. The Japanese agreed, thus setting in motion the construction of the steel mill. In September of the same year, Japan set up the Akazawa Commission to coordinate Japanese actions. The former head of Fuji Steel’s foreign operations, Ariga Toshikiko, oversaw the transfer of funds and technology in his capacity as the director of the Japan Group, a consortium of Japanese companies involved in the POSCO project. The Japan Group handled all procurement of machinery and equipment, worth $107 million, from Japanese sources. The export of a steel plant amounted to another several million dollars, which the Japanese steel industry welcomed as a way to overcome market difficulties created by the United States’ imposition of voluntary export restraints (VERs).

  That business, political, and bureaucratic leaders agreed to back POSCO within a mere nine months of negotiations was remarkable, given Japan’s slow policymaking processes driven by the principle of consensus building. The singularly decisive force moving Japanese policymaking processes forward arose from the fact that the project, as proposed, required only the diversion of part of the already committed preferential loans earmarked as reparation payments. To be sure, there was a limit to which the EPB could build a transnational alliance using a reparations-based strategy. With the funds soon exhausted, the bilateral economic relationship between South Korea and Japan soon reverted back to commercial relations driven primarily by profit motives, prompting POSCO to put its steel

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  mill on a profitable basis as quickly as possible. POSCO was born out of political negotiation, but its survival required competitiveness in the world marketplace. Park was its mother and the EBP its midwife, but its hus-bandry needed a capable CEO, in addition to the continued support of its mother and midwife. That CEO was Pak T’ae-jun.

  Developmental State

  As chief of staff Kim Chông-ryôm recalled, Park remained the “driving force” behind the POSCO project after 1969, too.23 Wielding even greater power and authority than in the 1960s, Park made sure that interministerial bickering would not slow down the construction of POSCO and obstruct its profitable operation. During the 1970–1973 period alone, Park made thirteen visits to the construction site to demonstrate to the state bureaucracy his unequivocal interest in the project. Equally critical, he had Pak T’ae-jun report directly to him on the recruitment of top managers.24

  Moreover, upon Pak’s plea, Park exempted POSCO from making contributions to his political party’s coffers. He was not to let POSCO falter under political pressures after all the troubles he had gone through since 1961.

  Interestingly, Japan joined in this effort to put POSCO on the right track. As part of the deal, the Japanese steel producers asked Park to strengthen state capabilities to establish a solid institutional foundation for POSCO. Echoing their request, Akazawa Shouichi, head of the Japanese Economic Planning Agency’s coordination bureau, gave South Korean deputy prime minister Kim Hak-ryôl three prerequisites for Japanese cooperation in the steel industry in his capacity as the chief of the Japanese delegation:

  1. The South Korean state should continue playing an active role in the mobilization of domestic capital in order to minimize the financial risks and costs entailed in the construction and operation of POSCO;

  2. As in Japan, South Korea should enact a special industry law in support of POSCO in order to ensure POSCO a stable supply of electricity and industrial water at discount prices; and 3. The South Korean state should assume responsibility for constructing the infrastructure for POSCO, including the building of a breakwater and rock wall.25

  Park agreed, ordering the EPB in June 1969 to design a comprehensive plan to promote the development of the project. In collaboration with the

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  Ministry of Commerce and Industry, the EPB drafted a Steel Industry Promotion Act (SIPA) in January 1970. Following Akazawa’s advice, the SIPA stipulated that only a steel producer with an integrated steel mill with an annual production capacity of more than 100,000 tons would be eligible for state support, from long-term, low-interest, and state-guaranteed foreign loans, to financial subsidies for raw material procurement, to state construction of ports, railroads, paved roads, and other infrastructure. Because of the stipulation on production capacity, POSCO was the only steel producer legally eligible for such support in South Korea.

  The EPB could have made the promotion act exclusively for POSCO, but it chose not to do so by drawing up an industry law. Apparently, the EPB feared that a special law tailored only to the needs of POSCO would run the risk of making POSCO a perpetual infant company, constantly looking to the state for subsidies and frequently captured by external rent-seekers, including bureaucrats, politicians, and business forces. By contrast, adopting an industry law would keep POSCO on its toes and pressure it into raising productivity because under an industry law, entry was, in principle, not closed to outsiders. Provided that a would-be steel producer met the scale requirement, that company could become eligible for the same state support as POSCO. The possibility of industry entry by another business firm was very low at that time, given the prohibitive entry barriers. Yet the possibility was left open, which the EPB hoped would force POSCO into productive activities. The same entry principle, moreover, would leave the excluded private business groups less frustrated. The existing electric furnace-based steel producers could endure with the hope that they too would be able to meet the scale requirement and enjoy state support through growth.

  POSCO’s Pak T’ae-jun opposed the adoption of a special company law even more aggressively than the EPB. Pak argued that the state could intervene in support of POSCO as extensively under a general industry law as under a special company law, and that the risk of POSCO’s becoming a captive of rent-seekers was much higher in the case of the latter. To minimize inefficiency, Pak also argued that the general industry law should be time-bound, to be terminated after the completion of POSCO’s expansion stage. Presumably, the prospect of the termination of the law’s benefits would give POSCO an incentive to build up its comparative edge through innovation in the short run. In the long run, this stipulation would undercut the chaebol groups’ entry into the steel industry. The would-be chaebol steel producer would be unable to enjoy state support at the level of POSCO because, by then, the time-bound industry law would have been terminated. Moreover, by enabling Pak to argue that he had a specific

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  deadline to meet in making POSCO a self-sustaining profitable business venture, the specification would have provided him and POSCO with an unprecedented level of freedom from the state bureaucracy. However, Pak T’ae-jun was frustrated by EPB bureaucrats, who prepared the Steel Industry Promotion Act as a general industry law without any time limit. The bill was duly enacted by the National Assembly in January 1970.

  By the time POSCO completed the construction of its integrated steel mill in 1973, it boasted powerful patrons and effective intermediaries working on its behalf within the country’s innermost policy circles. The central figure was its CEO, Pak T’ae-jun himself. Having served as the chief of staff to then-junta chairman Park Chung Hee in the first year of military rule, Pak T’ae-jun enjoyed the unswerving trust of the president.26

  Park was always ready to uphold Pak’s stand on both strategic and technical business issues, with an eye to strengthening Pak’s political credibility within the state bureaucracy, the Democratic Republican Party, and POSCO itself, because Park knew the importance of the protection of CEO prerogatives if he was to achieve his political goal of modernization.

  Pak T’ae-jun remained “Mr. POSCO” with easy access to Park through the very end of the yushin regime in 1979, deciding with Park virtually every strategic business issue pertaining to POSCO.

  Working in close
cooperation with Pak T’ae-jun inside the state bureaucracy was the EPB. The two had the combined resources required to put POSCO on the right track. Whereas Pak had Park Chung Hee’s personal trust as a professional manager with absolute loyalty to Park, the EPB

  boasted of Park’s institutional confidence after its successful orchestration of an economic takeoff in 1964. They had made a great team in 1969, with the EPB negotiating the terms and conditions of Japanese support at the ministerial level and Pak backing that negotiation with his private talks with Japanese steel producers and LDP bosses. Later, interests of the two diverged over the Steel Industry Promotion Act, but after this brief conflict, the EPB and Pak T’ae-jun collaborated closely to achieve their common goal of making POSCO an efficient state enterprise.

  The relationship between Pak and the EPB was not zero-sum. On the contrary, with the division of labor constructed by Park, Pak T’ae-jun and the EPB were both tsars in their respective spheres of influence. Whereas Pak T’ae-jun enjoyed a high level of managerial autonomy regarding POSCO’s internal issues, the EBP was the implementer within the state bureaucracy of Park’s ambition to transform South Korea into a major steel producer. The superministry transmitted Park’s policy decisions and Pak T’ae-jun’s business ideas to the wider state bureaucracy, monitored bureaucratic execution of presidential orders, and drew up a division of labor

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  among relevant ministries to provide POSCO with a concerted program of state support. That South Korea developed POSCO in a coherent, effective, and coordinated manner owed much to the availability of the EPB as the executor of Park’s presidential vision. Equipped with powers to allocate the budget and approve foreign loans, the EPB was taken seriously by all state actors. The others cooperated with the EPB in the hope of winning EPB support both in the budget and in foreign loans, without which no programmatic action was possible, given their centrality as the source of financing. The support of such a superministry became part of Pak T’aejun’s leverage in securing assistance from line ministries.