1. Zaher Charara B200 AOU 1 CHAPTER 19 Government-Business relations in Japan and Korea

2. Zaher Charara B200 AOU2 Introduction Japan and Korea witnessed rapid industrialization. The governments of both countries had a very active role in this growth by developing industrial policies and building relations with priority industries and big businesses. Japan and Korea witnessed rapid industrialization. The governments of both countries had a very active role in this growth by developing industrial policies and building relations with priority industries and big businesses. In late 1980s, criticisms were heard about the defects of heavy governmental involvement in industries. In late 1980s, criticisms were heard about the defects of heavy governmental involvement in industries.

3. Zaher Charara B200 AOU3 Historical Perspective of Government-Business Relations A. Japan In 1860s, Japan did not have tariff protection and had a flood of imports which amounted to 71% of foreign trade. The reform of Meiji Restoration strengthened the role of government by allowing it to borrow private capital and invest it in strategic industries. The state then transferred these enterprises at very low prices to selected private hands (this built a partnership between government and business). 1880: with the first attempt to privatize, Large industrial and financial firms were formed (called zaibatsu). Zaibatsu supported the Japanese government.

4. Zaher Charara B200 AOU4 With the defeat of the Japanese Empire at the end of World War II, family-dominated and vertically-linked zaibatsu were dismantled and replaced with horizontally-linked keiretsu (forming an oligopoly). The focus shifted from military expansion to economic revival. The government, the ruling political party, and the private sector combined to form a triangle in which the government implemented a system of “administrative guidance”: Key government departments (like Ministry of International Trade & Industry) giving favors to and subsidizing businesses whose activities conformed to national priority.

5. Zaher Charara B200 AOU5 B. Korea The Korean war of 1950-1953 destroyed the industrial base that was left behind by the Japanese colonial rule. In 1950s Korea lived on American aid. Free market principles were introduced. Big companies like Samsung (called “chaebols”) were developing fast, and got favorable support from Korean President Syngman Rhee’s government. 1961: Military government overthrew president Rhee. The 24 big companies were required to pay $65 million for tax evasion and unfair profiteering.

6. Zaher Charara B200 AOU6 The Korean government established a superior position, and pushed big business into the priority industries. Ministry of Industry created industrial policies (under President Park Chung Hee). The government took over some commercial banks, and controlled bank credit. Chaebols established the “Federation of Korean Industries” and wanted good relations with govrnments. 1960s and 70s: economic boom; good relations between chaebols and government who made five- year economic plans. Large chaebols that had relations with government got strong support from it and developed rapidly.

7. Zaher Charara B200 AOU7 After 1974, President Park implemented measures to limit the excessive growth of chaebols. The share of the 10 largest chaebols in manufacturing was 24% in 1982. 1980s: Government started to allow the private sector to take more initiatives.

8. Zaher Charara B200 AOU8 Government-Business Relations in Japan I - The three major players (bureaucracy, business, and the LDP). 1) Bureaucracy: Ministry of International Trade and Industry (MITI) is responsible for constructing the industry’s structure, guiding the development of industries, coordinating foreign trade. Ministry of Finance (MOF) controls budgets, loans. 2) Business: Zaiki (business world) represents major big business associations like keidanren (federation of economic Organizations) which includes 100 associations and 800 large corporations. Keidanren gave massive financial contributions to the Liberal Democratic Party (LDP), and it has powerful influence on government.

9. Zaher Charara B200 AOU9 The large industrial groups (keiretsu) account for one- third of the total economy. The biggest 6 companies are Mitsubishi, Mitsui, Sumitomo, Fuji, Dai-Ichi Kangyo, and Sanwa. Keiretsus collaborate and resolve conflicts among themselves, and they depend on their “in-house” bank which is influenced by bank of Japan (BOJ). 3) The LDP: The ruling party has been very successful in winning elections and in having support of big corporations. The president of the LDP is usually the prime minister. Big business is the major source of funding, and the LDP president should have good capabilities of raising funds.

10. Zaher Charara B200 AOU10 II - The Dynamics of the Triangular Relationships in Japan There is frequent consultation and communication between the three players. Elite members who are in key positions in government and industry are all recruited from Tokyo University. The LDP acts like a referee between bureaucracy and business and holds the triangle together. Retired bureaucrats (from MITI or MOF) might become LDP members and ministers, or employed by businesses due to their connections: this movement of retired bureaucrats is known as “amakudari” (descending from heaven).

11. Zaher Charara B200 AOU11 Economic Planning Agency, MITI and MOF: they set up councils to communicate with business (Economic council, Industrial structure council and Foreign Capital Council). The triangular relationships benefit all three players. Some conflicts happened because of the USA’s continuing demands for reducing trade surplus. There is trust and interdependence between the three players.

12. 12 III – Industrial Policy Instruments The government had an industrial guidance model until the mid 60s, where MITI had a central role in allocating capital and licenses to businesses. The role of MITI started to weaken in the 80s (Mitsubishi had a joint venture with Chrysler rather than Isuzu, against the will of MITI). Strategic industries benefited from protective and nurturing instruments from the government. Protective policies included: trade tariffs, restriction of imports and foreign capital, and favorable tax system on local products. Nurturing policies included: low interest rates on loans, tax exemptions on new foreign technology and machinery, and subsidy grants. Public procurement have been used to enforce industrial policies. MITI and major industry associations have formed many cartels to regulate production and pricing. Recent cartels are designed to promote environmental protection and protection of small business from keiretsu.

13. Zaher Charara B200 AOU13 Government-Business Relations in South Korea I – Government Domination The government in Korea has a major role of regulating and supporting businesses. Government develops strategic plans to identify priority industries, and controls commercial banks and credit. Government maintains strong tax administration and owns many enterprises (banking, broadcasting, communications, and others). The state also gives approval to companies to enter an industry sector. It also heavily regulated wages and prices until early 1980s. Korean government provides financial, tax incentives and information services to selected large export-oriented companies. In 1980s this practice ended with the passing of the Monopoly regulation and Fair Trade Law. The Korean government is very authoritarian. The parliament and the leading parties have very minimal role.

14. Zaher Charara B200 AOU14 II - Government and the Birth of chaebols Chaebols of the late 1950s (Hyundai, Samsung): Self-made founders took advantage of sale of government (or enemy Japanese) property, preferential taxation and grants. Chaebols of the late 1950s (Hyundai, Samsung): Self-made founders took advantage of sale of government (or enemy Japanese) property, preferential taxation and grants. Chaebols of the 1960s (Hyosung, Sangyong): Took advantage of foreign loans to implement five-year plans. Chaebols of the 1960s (Hyosung, Sangyong): Took advantage of foreign loans to implement five-year plans. Chaebols of the 1970s (Daewoo, Lotte, Doosan): Developed due to rapid growth in exports and domestic demand. Chaebols of the 1970s (Daewoo, Lotte, Doosan): Developed due to rapid growth in exports and domestic demand. There was excess demand for bank credit because government kept interest rates on loans very low. Chaebols achieved rapid industrialization by using this cheap credit and government development funds. Tariff barriers, tax incentives, and wage controls were also offered by the government.

15. Zaher Charara B200 AOU15 III – The Role of Chaebols Chaebol founders took advantage of opportunities and had great vision and devotion. Rapid industrialization necessitated the diversification into new products and markets. Major chaebols are among the fastest-growing conglomerates in the world. Chaebols are less bureaucratic and more dynamic than state enterprises. Large chaebols can make big investments and acquire new technologies to match up with the power of foreign MNCs in the world as well as in the Korean market.

16. Zaher Charara B200 AOU16 Conclusion / Summary Both Japan and Korea have heavy government involvement, which they felt they needed in order to achieve leadership in economic development (to catch-up with industrial nations after major wars). Both Japan and Korea have heavy government involvement, which they felt they needed in order to achieve leadership in economic development (to catch-up with industrial nations after major wars). In Japan, policy is a consensus between equals (LDP, state, business). In Korea, the government sets the policies. In Japan, policy is a consensus between equals (LDP, state, business). In Korea, the government sets the policies. Heavy government involvement had some negative effects like corruption and distortion of market. Since 1980s, these governments tried to open the market to foreign competition, allowing market mechanisms, and promoting small and medium companies. Heavy government involvement had some negative effects like corruption and distortion of market. Since 1980s, these governments tried to open the market to foreign competition, allowing market mechanisms, and promoting small and medium companies.

17. Zaher Charara B200 AOU17 Large businesses also realized the importance of less government intervention in order to increase their international competitiveness. Large businesses also realized the importance of less government intervention in order to increase their international competitiveness. Despite the defeat of LDP in 1993 elections in Japan, and the democratic reforms in Korea, businesses in both countries still have till recently links to their governments. Disengaging business from government is very slow and involved. Despite the defeat of LDP in 1993 elections in Japan, and the democratic reforms in Korea, businesses in both countries still have till recently links to their governments. Disengaging business from government is very slow and involved.