Can informal networks positively influence economic growth and development? The case of South Korean Yongo networks Sven Horak The 21st Century Human Value Form Andong City, Korea May 29 – 31, 2015

The conventional approach to economic development Conventional approach to economic development: The Washington consensus I.e.: privatization, subsidy abolishment, removal of trade barriers, deregulation, integration of developing countries into the world economy Mixed success. E.g.: Latin America  (Brown, 2009; Hutchison & Noy, 2003), South Korea  during the Asian financial crisis, rather hurt than supported sound economic recovery (Bustello, 1998; Feldstein, 1998; IMF, 2003), Rather successful: Poland, Estonia and Mexico Why do liberal policies contribute to development in some countries but fail in others? 2

Economic development and social capital Critique from socioeconomists: informal institutions (values, norms and ‘social capital’) are largely ignored that make formal institutions (laws, regulations, courts) work effectively (Coleman, 1988; Jones, 2006). The establishment and maintenance of social capital plays a role, as well as informal social networks. However, currently the view on informal social networks is largely negative. They may dampening or even preventing the effectiveness of formal institutions. Mafia-like informal clubs, corruption, bribery, cronyism, favoritism, unfair competition, etc. (Helmke and Levitsky, 2004). 3

The positive view on informal social networks Informal social networks are wide spread. Most prominent examples: Guanxi (China), also Blat (Russia), lesser known: Yongo (Korea) The negative side is widely documented for China (Fan, 2007; Gu, Hung, & Tse, 2008; Li, 2011; Taube, 2013), South Korea (Kang, 2002; Kim, 2000; Lee, 2000) and Russia (Larsson, 2006; Ledeneva, 1998, 2006). The positive side is widely ignored. Positive features include: strong trust, loyalty, cooperation, reduction of free rider opportunities, reduction of transaction cost: quick efficient and effective economic transactions. Why are informal social networks not an integral part of economic development theory yet? 4

Will informal networks disappear anyway? Current debate: Will informal networks persist or diminish? I.e. Are they institutionally or culturally driven? E.g. Peng et al. (2008) tend to classify informal networks in general as rather institutionally driven as an argument for their decline in the long run. I.e. the further an economy develops and the further formal institutions develop towards effectiveness, the less people rely on informal networks. If informal networks would be rather culturally driven it would suggest that informal networks persist as culture is rather rigid and does not change fast (Hofstede, 2007). 5

Informal social networks: Case study South Korea South Korea developed from extreme poverty in the 1950 to a strong economy by the 1990s (‘miracle on the han river’, World Bank, 1993). South Korea today: Economic powerhouse, world class MNCs (Samsung, Hyundai, LG, etc.), stable democracy, rule of law, etc. Conventional explanation: Strong state (policy level), guided economic policies (investments), large firms (Chaebol) executed industrial development policies (business level), export orientation (trade policy). Recently, Lew (2013) points out that a third dimension, the socio- cultural dimension remained unrecognized so far. Informal social networks, in Korean: Yongo, shall be considered “the missing link” to explain South Korea’s rapid economic development. 6

Economic growth and the informal sector 7

Informal social networks in Korea: Yongo Yongo is the term for personal relationships in Korea that are attached to affiliation to an informally organized group. Hakyon ( 학연 ) – Education-based ties Hyulyon ( 혈연 ) – Family, blood ties Jiyon ( 지연 ) – Regional origin-based ties Yongo is embedded in a Confucian value system 8 University-ties Regional-ties Family-ties Confucian values

Informal social networks in Korea: Yongo Characteristics: Partly pre-set, given by birth Every Korean is a member of a Yongo network (“network society”) Cannot be established, ‘it exists’ Strongly homogenous and exclusive Yongo networks are often hostile towards each other and in competition Life-long lasting relationships Not purpose-based, it is a conventional social relationship in Korea. Sometimes perceived a burden Used for job acquisition, carrer progression, information gathering, government relations, etc. 9 University-ties Regional-ties Family-ties Confucian values

Directions for research and challenges Consider informal social networks explicitly in economic development theories The respective socio-cultural environment must be understood including existing formal and informal institutions and their interplay A better understanding of ‘indigenous social networks’ is needed Research should be directed to the question whether networks are institutionally or culturally driven? How can strong networks be established if nonexistent? How to suppress the negative aspects of strong networks? How to support the positive aspects? Transparency? 10

Contact Sven Horak Assistant Professor of Management The Peter J. Tobin College of Business St. John‘s University, New York 11