Democracy and the Korean Economy

Jongryn Mo, Chung-In Moon

• Publisher: Hoover Institution Press
• Year: 2021
• ISBN:
  9780817995539
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Gobierno y empresas

South Korea has been one of the great success stories of postwar economic development, rising from one of the poorest nations on earth in the 1960s to become the world's eleventh-largest economy by 1996.

But Korea's model of economic development began to unravel in 1987. When the authoritarian rule that helped propel economic performance gave way to increasing public pressure for democracy, the Korean economy was confronted with fundamental transformations. With democracy came increasing consumption, labor activism, and rising wages. Yet many of the old policies of the export-oriented, pro-business authoritarian rule remained in place. The complex and multifaceted economic effects brought about by democratic change have defied analysis—until now.

Democracy and the Korean Economy is an authoritative study of the new model of Korean political economy and the first book to analyze the economic impact of democratic change in South Korea. In addition to analyzing patterns of change in major policy areas, authors Jongryn Mo and Chung-in Moon closely examine specific industries—such as automobiles—and the family-controlled industrial conglomerates known as chaebols to analyze their market positions and political influence under both the authoritarian and democratic regimes. They show how conflicts in key policy areas have evolved, identify the political and economic factors that have been important to resolving those conflicts, and reveal the wide range of effects, both subtle and significant, of democratization on the Korean economy and on its economic policy.

Jongryn Mo

Democratization, Labor Policy, and Economic Performance

Since the late 1980s, East Asian countries like Korea and Taiwan have democratized after decades of authoritarian rule. Japan too is experiencing a political realignment after the end of the Liberal Democratic Party’s (LDP’s) rule in 1993. Will these political reforms bring about fundamental changes in economic policy and performance?

Few studies address how democratic change in East Asia has affected its economic performance. Democratization literature has described the transition to democracy and its consolidation (Huntington 1991; O’Donnell and Schmitter 1986; Higley and Gunther 1992; Diamond, Linz, and Lipset 1989). Scholars have also tried to show a relationship between regime type (democracy versus dictatorship) and economic performance (Olson 1993). But empirical research so far has produced inconclusive results (Przeworski and Limongi 1993; Helliwell, 1992; Bhalla 1994). Moreover, it is not clear theoretically why regime type per se should affect economic growth (Gourevitch 1993).

In this chapter, I attempt another approach, taking policy choice as the key intervening variable through which democratization affects economic growth. Since a wide range of economic policies can be adopted under democracy, the economic effects of democratization can vary considerably, depending on the nature of the actual policies chosen. Thus, the first step is to find out what kinds of economic policies are chosen under democracy and whether they are conducive to economic growth. Then I identify the political and economic conditions that led to the choice of particular policies. Through this exercise, we can derive hypotheses explaining why democratization is associated with good economic performance in some cases but not in others.

I offer four criteria to evaluate the actual economic policies:¹ The first criterion is how well a newly democratic government manages political pressure for redistribution, especially from those who suffered under authoritarian rule. Income redistribution lowers savings and investment and, thus, economic growth in the short run.

The second challenge for new democrats is to maintain policy consistency. Inconsistent policies can undermine economic growth by introducing uncertainty to productive economic decisions such as investment, production, or labor supply. Faced with such uncertainty, risk-averse economic agents hesitate to take economic initiatives (Alesina et al. 1992; Alesina and Perotti 1993).

Third, the new government should also manage the size of unproductive transaction costs that may rise under a new democracy. Democracy brings open competition for electoral office and the decentralization of power, which may create a fertile ground for rent seeking. Transaction costs can also rise as political and economic actors seek to reduce the inherent uncertainty of the democratization process.

Lastly, a newly democratic government must achieve what I call policy legitimacy. Even if government policy is progrowth and consistent, and thus conducive to short-run economic growth, it will undermine long-term economic growth when it lacks legitimacy. Policies become legitimate when major disputants settle their differences through negotiation.² The adverse effects of illegitimate policies are twofold. First, when policies are illegitimate, political actors may resort to violence and other illegal means to protest the policies, thus threatening economic and political stability. Second, they are unlikely to cooperate when they view government policies as unfair. For example, when a country is undergoing rapid industrial change as Korea is now, voluntary cooperation from labor is needed to increase productivity.

Korean labor policy during the democratic transition makes an ideal case with which to study these issues. Progrowth labor policy, based on authoritarian control of labor, made a significant contribution to rapid economic growth during the authoritarian rule (Deyo 1987). But when Korea began to democratize in 1987, the pressure to change state control of labor became intense. In this chapter, I explain how the democratic government in Korea responded to the new political environment and how its response has affected economic performance.

The plan of the chapter is as follows: I provide an overview of the Korean labor policy since 1987 in the next section.³ I then characterize the government policy according to each of the four performance criteria and explain why these policies were chosen. In explaining the policy choice, I argue that the political and economic conditions at the time of democratization shaped the subsequent political development and, thus, policy choice. In the concluding section, I describe the implications of this case study for the general relationship between different modes of democratization and economic performance during democratic transition.

Overview of Labor Policy, 1987–1994

The transition to democracy began in June 1987, when Roh Tae Woo, then chairman of the ruling Democratic Justice Party (DJP), agreed to the direct election of the president and other political reforms. The DJP, with Roh Tae Woo as its candidate, went on to win the presidential election in December 1987. Hopes for Roh Tae Woo’s new democratic government were high. The economic policy of his party was already producing low inflation and sustained growth. Unlike the Latin American countries, the economic policies of the authoritarian regime were not a direct cause for democratization, so there was not as much pressure to change them.

This is not to deny that some government policies and practices were untenable under democracy. In the case of labor policy, the government’s arbitrary enforcement of labor laws was as much a problem as the content of the laws themselves. For example, the authoritarian government pressured workers not to exercise their legitimate right to strike and persecuted them for exercising their right to organize. Thus, the democratic government had to restore the rule of law and due process.

Before that happened, however, the demands for change erupted. First, workers demanded the revision of labor laws, especially those that governed industrial relations such as the Trade Union Act and the Labor Dispute Adjustment Act. In particular, labor pressed the government to repeal the following clauses in labor law: (1) the single union representation clause, (2) the ban on third-party intervention, (3) restrictions on the labor rights of government employees, (4) restrictions on the labor rights of the workers in the defense industry, and (5) prohibition of union political activities. Labor argued that these laws, which were inherited from the authoritarian regime, discouraged union activism and labor disputes.

Second, workers demanded that the democratic government not intervene in labor disputes and that it remain neutral in mediating disputes between labor and management. The authoritarian regimes in Korea had enforced the labor laws to prevent or bring an early end to labor disputes on behalf of management. It was not uncommon for the authoritarian government to use police intimidation to discourage workers from organizing or taking collective action (Choi 1983).

In this section I describe how Roh Tae Woo and his handpicked successor, Kim Young Sam, responded to labor demands. Although they did not make any major revisions of the labor laws, their positions on labor reform and government intervention in labor disputes over these four periods have been characterized as cycles of reform and reversion and of nonintervention and active intervention. I illustrate this cycle by dividing government policy into four periods.

The Co-optation Period (1987–1988)

During the first two years of democracy, the government restrained direct intervention in labor disputes and instead focused on workers’ material welfare. Labor standards were strengthened, and the minimum wage was legislated. In July 1988, the Ministry of Labor showed some flexibility, hinting at a possible repeal of the single union representation clause, but withdrew the plan in October 1988.

The debate over labor reform also began during this period. Although significant changes in labor laws were made in 1987 after the June 29 declaration of democratic reforms, including direct presidential elections, unions and opposition parties demanded further reforms. The opposition parties formed a coalition to pass a reform bill in March 1989, but it was vetoed by Roh Tae Woo. This proposal would have allowed low-level government employees to form trade unions and take collective action, facilitated the registration process for new unions, and allowed third-party intervention in labor disputes.

Freed from government interference in labor-management disputes, Korean workers pressed their demands at an unprecedented pace. Strike activity rose rapidly; the number of disputes jumped to 3,749 in 1987 from an average of 171 during each of the previous six years. Although the number of disputes declined after 1987, they became larger and longer (see table 1).

TABLE 1

Government Policy and Strike Activity

^a One before policy shift in July and two afterward for a total of three for 1993

SOURCES: Ministry of Labor, Korea Labor Institute, Korea Trade Union Congress

The Crackdown Period (1989–1992)

After taking a hands-off policy in the beginning, the government changed its course in 1989 to bring labor under control. It cracked down on the union leaders and workers who violated the labor laws.⁴ In 1989 alone, the government arrested 602 workers, a 662 percent increase from 79 arrests in 1988. As labor disputes slowed in 1990 and 1991, the number of arrests also declined, to 485 in 1990 and 486 in 1991. However, the average number of arrested workers per dispute did not drop. In fact, it continued to increase, from 0.37 in 1989 to 1.51 in 1990 to 2.08 in 1991.

In 1991, when the effects of the crackdown began to show—for instance, in a declining number of strikes—the Ministry of Labor initiated another round of debate on labor law reform. The ministry proposed (1) to extend the minimum duration of collective agreement, (2) to allow unions’ political activities, (3) to remove the limit on union dues, and (4) to lift spatial restrictions on strike activities. In return for these concessions, the ministry asked labor to accept the elimination of the ratification requirement for collective agreements and a wage negotiation system based on a total compensation package. But both the DJP and the trade unions rejected this compromise proposal.

Another important development during this period was the role of the courts in mediating the disputes over the labor laws. The courts made a number of important decisions that clarified the legal basis of the disputed labor laws. The Constitutional Court ruled that prohibiting third-party intervention was constitutional in January 1990. It also upheld the government’s refusal to recognize the National Teachers Union in April 1992. The courts’ rulings against labor in illegal dispute cases were instrumental in inducing compliance. For example, the Supreme Court ruled in 1991 that refusing to work in order to protest a prison sentence for a coworker was an act of business interference because such a demand was not a legitimate subject of a labor dispute. Thus, it was an illegal dispute, and their collective action amounted to a use of force interfering with the normal operation of business. This landmark decision justified the government’s prosecution of violators of labor dispute adjustment laws.

In the case of single-union representation, however, the courts were more sympathetic to labor’s position. In July 1992, the Seoul High Court overturned the Ministry of Labor’s decision to deny labor union status for the Hospital Workers Union on the basis of single-union representation. The court also ruled that the government’s position was contrary to the legislative intent.⁵ This decision opened a path for some other unions (e.g., the Construction Industry Union) to obtain legal status.⁶ The courts also supported labor by ruling against the restrictions on government employees’ labor rights. In March 1993, the Constitutional Court found “inconsistency with the constitution” in Article 12(2) of the Labor Dispute Adjustment Act, which restricts government workers’ rights to take collective action. The court directed the National Assembly to revise the relevant clause to at least permit blue-collar government workers to strike.⁷ The courts also challenged some of the Ministry of Labor administrative guidelines. For example, the Supreme Court ruled in April 1992 that subsistence wages should be paid during a strike, challenging the “no-work, no-pay” policy.

These rulings showed that the rule of law was a double-edged sword for the government, for although the government used the rule of law to crack down on illegal disputes, it was also restricted by it. Thus, while the government continued its hard-line policy toward labor during this period, there were signs that both the government and labor had begun to show more respect for the law (Mo 1996).

The Reform Period (1993)

When Kim Young Sam came to power in February 1993, labor hoped that Kim Young Sam’s emphasis on economic deregulation and nonintervention would lead to less government intervention in labor disputes. Indeed, Kim Young Sam later proclaimed noninterference to be the basic principle of his labor policy.

But the labor movement did not anticipate a significant change in the government position on legislative labor reform. Although Kim Young Sam pledged to introduce an unemployment insurance system and further strengthen labor standards, he did not commit himself during the campaign to revising any labor laws. Moreover, before ...