SRC Winter Symposium Socio-Cultural Dimensions of the Changes in the Slavic-Eurasian World ( English / Japanese )

The Lessons of the Chinese and South-Korean Reforms for Russia (2)

Nodari Simonia
(Institute of World Economy and International Relations,RAS)

Copyright (c) 1996 by the Slavic Research Center( English / Japanese ) All rights reserved.

The model described above was very successful in the 1960s and 1970s. For 20 years, since the mid-1960s the average annual index of economic growth was 6.6. per cent, one of the highest in the world. The GNP rose from $2.32 bn in 1962 to $62.37 bn in 1979 and the per capita GNP from $96 to $1,662. South Korea turned from an agrarian into an industrialized country (at the beginning of the 1990s the rural population decreased to one-fourth of the whole population of the country).*25 In the beginning of the 1960s, light industry developed rapidly, and in the 1970s, emphasis was shifted to heavy industry (chemical, steel, motor-car, shipbuilding and industrial equipment). The share of the manufacturing industry in the country's exports rose from 22 per cent in 1968 to 88.2 per cent in 1973.*26 On balance, South Korea succeeded in creating a rather dynamic and flexible economy, which overcame the consequences of two energy crises in the beginning of the 1970s and 1980s relatively easily and made it possible to service its pretty sizeable debt on time.

However, any model has its limits. When its resources come to an end it begins to falter. At the end of the 1970s the crisis of social structures in South Korea came to a head. The imbalances between urban and rural development, between heavy and light industries and between the monopoly of big business, on the one hand, and small and medium-size businesses, on the other, became too great. The economy grew mostly at the expense of the available resources and accumulations rather than due to growth of the productivity of labor.*27 Internal accumulations were made chiefly at the expense of the ruthless exploitation of the working people (South Korea had long working hours, a six-day working week and the social security system was practically non-existent). This provoked growing opposition among the workers, discontent in the middle classes, and undermined social stability. These processes took place in the setting of growing pressure from its Western partners, who demanded that South Korea open the doors of its economy wider. Under the influence of these and many other factors, the Korean leaders, beginning with the government of General Chung Doo Hwon, modified the outdated model cautiously, step by step, adapting it to changed conditions. These modifications in the 1980s and early 1990s boiled down to the following:

1. Phased liberalization and "opening" of the South-Korean economy. The new trends were in evidence in the mid-1980s. First of all, in an effort to alleviate the burden of debt, the government restructured foreign sources of financing. It restricted the in-flow of nonessential capital and preferred direct investments to loans. Foreign state loans could be used only in minimum amounts as necessary and on easier terms than commercial loans. The results were felt in no time. In 1990 direct investments led in other foreign sources of financing accounting for 66.6 per cent of all foreign inflows. In 1982-86 direct investments amounted to $1,767,000,000 (for 579 projects) and in 1987-92 already $6,527,000,000 (for 1,980 projects).*28 Foreign trade was also liberalized. By the beginning of 1982 virtually all export subsidies had been abolished. But the West demanded the abolition of import tariffs on goods and services. In January 1988 the United States and the European Union withdrew from South Korea the right to tariff-free exports on the terms of the General System of Preferences because they did not regard it as a developing country any longer. South Korea responded soon by announcing in the beginning of 1988 that it lifted all restrictions on the importation of 445 goods. It approved the program for many years ahead for lowering tariffs and reducing the number of items on which no import license was required automatically (by the end of 1988 the number of such items had dwindled to five per cent of the total). After the GATT Uruguay Round of Negotiations 98.8 per cent of South-Korean imports were liberalized in 1993. But the United States continued to insist on fully opening the agricultural market, too (the weak spot of the South-Korean economy). In 1994, 92.3 per cent of this market was opened (against 50% in 1978). As for the import of technologies, liberalization in this sphere began as far back as 1978 but the gradual transition from a permission to a report system took place in 1984-92.*29 On the recommendation of international finance organizations, the Korean government drew up measures for macroeconomic stabilization and structural adaptation. It became evident in the 1980s that the strategy of dualistic industrialization, based on the combination of export orientation and import substitution, was at the end of its resources. The new domestic conditions it created and changes in the international situation (particularly with the beginning of the restructuring of the USSR and defusion of the bipolar confrontation crisis) brought the South Korean leaders face to face with the need to meet new challenges arising in global processes. This raised the question of deeper and complete integration into the world economy on common grounds rather than on the basis of one-sided export orientation, and of greater re-orientation of the country's production to the domestic market (similar to what Japan has been doing recently). Internal restructuring was needed to tackle this task.

2. Changes in relations between the state and big business. Under the government of Park Chung Hee the state bureaucracy and business were generally satisfied with each other in spite of strict control by the government and harsh punitive measures for the violation of its instructions. The model of rapid extensive industrialization suited both sides. But as the economy made progress, the chaebols (monopolies) grew strong and tended to become independent (provided they retained all the benefits and privileges granted by the government). But the government of Chung Doo Hwon understood that the chaebols, as they existed then, were not ready to fare on their own. They used the hot-house conditions created for them to expand "horizontally," extending their activities to ever new sectors of production. This led to the fragmentation of accumulations and held back the concentration of capital and growth of the productivity of labor. These chaebols could work successfully only on the domestic market where they were protected against interference from without, but they were noncompetitive on the world market. It is for this reason that the governments of Chung Doo Hwon and of two other presidents who followed him waged a continuous struggle against them, trying to break them up and make them agree to more narrow specialization, to concentrate, for instance, on some three major industries, give up numerous affiliated companies and sell their stock on the market. This would have facilitated control over them and diluted their closed "family" character. In 1991 the government promised to lift all bans and restrictions on their activity (which existed since 1984), and to grant tax cuts and other benefits if they agreed to limit their specialization. Those who disagreed were threatened with the withdrawal of bank credits and loans on easy terms for buying land and creating new companies.*30

It took almost 15 years before the struggle of the succeeding governments of the military-authoritarian, semi-authoritarian and democratic types against the chaebols bore fruit. There was a head-on collision when the president of Hyundai, one of the four leading corporations, issued a challenge by deciding to run in the presidential elections in 1992. Legal proceedings were instituted against him and his two sons for the "violation of the election law." The Samsung Corporation was the first to establish good relations with the government. It specialized in electronics, chemicals and heavy engineering. In 1995 Daewoo announced, too, that by 1997 it would carry out structural reorganization and concentrate on motor-vehicle, shipbuilding, power and construction industries. It promised to reduce the share of stocks owned by the head of the corporation and its affiliated branches from 42.4 per cent to less than 20 per cent. An amnesty was granted for the entrepreneurs from the unruly chaebols and the relations with Hyundai were also ironed out.*31

And yet, the government was aware of the need to modify its relations with business circles as the economy became more and more complex. Ten general trading companies, an export cartel and associations of businessmen were set up to hold consultations at a semi-official level. True, they were not so much the representative bodies of the bourgeoisie as an arm of the government. The turning point was reached in the mid-1980s when the Ministry of Trade and Industry initiated the institution of 20 Private Sector Consultative committees responsible for the respective sectors of public production. These committees consisted entirely of representatives from private business, including research and financial institutions and representatives of the mass media. The main function of these committees was to draw up recommendations for the government on formulating macroeconomic, industrial and technical policies. The acme of these initiatives was the creation of the Committee for Industrial Development, a private sector organization responsible for the review of industrial policy as a whole. Under the law of 1986 the Ministry of Trade, Industry and Power had to receive a preliminary endorsement by this committee of its recommendations on the regulation and development of industry. In 1987 it was announced that the state bureaucracy would limit its direct interference with the economy.*32 This was evidence of the growing independence of business from the political elite and of the weakening and changing role of the Council of Economic Planning, the superministry of South Korea, and the symbol of its centralization, in formulating economic policy, and of the gradual change of government functions from direct activities in production and trade to regulation at the macro level.

3. Other aspects of the economic policy of the government. Since the 1980s the government has paid more attention to small and medium industries. The number of industries banned from the chaebols was extended considerably, from 33 in 1979 to 237 ten years later. The banks were instructed to grant up to 35 per cent of the total sum of loans and credits to small and medium industries. The Small and Medium Industries Promotion Council had an annual budget of $120 m for granting loans on easy terms. The nine-year program of technical assistance was approved for 12,000 enterprises of this type. When, in the summer of 1995, the ban was lifted on the use of cheaper foreign commercial credits for the extension and modernization of production, $800 m of the originally earmarked sum of $1 bn was assigned to small and medium businesses. It should be noted that owing to the policy of encouragement conducted by the state, the share of small and medium firms in the manufacturing industry amounted to nearly 40 per cent of added value by the middle of 1988 (against 28% in 1980).*33 The South-Korean model began to resemble the Taiwan model in this respect, too.

The steep upsurge of the private sector in industry (the annual 12% growth of GNP in 1986-88) highlighted the inadequate effectiveness of the state sector, which included 133 corporations in the beginning of the 1990s. Then the question of privatization of part of the state enterprises came up. In 1991 the sale of eleven such enterprises was planned.*34 The results of government innovations in banking were more modest. During the rule of Park Chung Hee, banking was fully controlled by the state and the government set interest rates depending on the recipient of loans and credits. In the beginning of the 1980s the first two private commercial banks emerged. In July 1982 it was announced that the government planned to sell its stock in two more banks. The quota of commercial banks in the total sum of loans was increased from 10 per cent to 15 per cent and from 1981 the government began to allow foreign capital into banking, primarily to the joint ventures, on a limited scale. At any rate, until 1992 the stock exchange was closed to foreigners with two exceptions. However, even in the beginning of the 1990s private commercial banks were in an embryonic stage and the chaebols created extra banking financial institutions for their needs in contravention of government restrictions.*35

However, the major change, in our view, was the fact that during the second half of the 1980s the new stage of "dualistic economic development" in South Korea was characterized by the intertwining of two processes: completion of industrialization of the traditional type*36 and the first actions aimed at shaping the post-industrial productive forces. At the end of 1985 all social programs of industrial development were abolished and replaced with extensive legislation aimed at promoting the development of high technologies. To stimulate the creation of flexible manufacturing industries putting out durable goods and engineering products based on skilled labor and high technologies, the government began to encourage, on the one hand, the importation of the relevant technologies (as of May 1993 of the 8,335 instances of technologies transfers, electronics accounted for 2,072, machine-tool building, 2,190 and oil refining and petrochemicals, 1,361) and stimulated investments in R & D, on the other. Neither the government nor the chaebols wanted to reconcile themselves to the fact that the South-Korean corporations paid Japan $10 in license fees for each video tape recorder manufactured under VHS standards. Large corporations manufacturing electronic equipment discovered soon that the license fees constituted a larger share of the cost of production than the cost of the work force. A similar situation prevailed in the motor-vehicle and other high-technology industries. Bearing this in mind, South Korea allocated nearly 2 per cent of its GNP to R & D in the second half of the 1980s (the United States and Japan spent 3 per cent for these purposes in the same period). The Ministry of Science and Technology prepared a plan providing for an increase in expenditure of R & D to 5 per cent by the year 2001. If this is implemented, South Korea will join the ranks of leaders of high technologies. The chaebols pay three-fourths of the expenditure. Three leading corporations spend 5.9 per cent of their revenues from sales on R & D (the relevant figure of eight Japanese firms leading in electronics is 6.7 per cent). In three years (1992-94) the Samsung Corporation doubled its expenses on R & D to a total of $1.2 bn. In its turn, the government opened 16 laboratories and to prevent a brain drain, paid salaries to the staff at American standards.*37 It is obvious that South Korea made extensive preparations for completing the process of shaping its modern national economy and its full integration into the world economy on an equal basis.

4. Economic development and democracy. The modification of the South-Korean model took place in the context of an overall change of the sociopolitical situation in the country. The process of the democratization of South Korea began in the summer of 1987 under violent pressure of the working and middle classes and mass actions of radical students. At the end of the year, the new constitution was adopted and for the first time the new president came to power peacefully, following the direct and free elections. The process of democratization was an important factor which induced the leaders of the country to modify the strategic course of development. One of the effects of democratization was a substantial rise in the cost of labor and greater expenses on social security, which undermined the basis of the former strategy of export orientation. In 1987 when the wages of workers were substantially raised, (by 30%), for the first time the law on the minimum wage was adopted and the government began indexing it systematically. In the beginning of 1988 the national pension scheme was approved and state medical insurance was introduced. It covers virtually all the population today.*38 Although the turbulent events of the period of transition to democracy made themselves felt in the economy, (in 1989 the volume of exports declined for the first time), the country's economy as a whole had already been boosted to such an extent that it could overcome the problems that arose relatively painlessly. In 1987-94 annual economic growth exceeded 8 per cent on average.*39

To sum up, in three and a half decades South Korea has covered more than half the distance within the framework of catch-up development and closely approached the developed capitalist countries of the West and Japan. Let us see now what the market reforms in Russia look like against this background.

Russia Versus South Korea

If we compare the liberal reforms launched in Russia by Yegor Gaidar and his companions in 1992 with the transformations in South Korea what strikes the eye first of all is the fact that both countries followed the model of catch-up development but have chosen different guidelines for themselves. In spite of strong negative feelings for Japan, South Korea has chosen Japan's experience of economic development as the model to emulate. It was soundly pragmatic in this respect because Japan had gone all the way as the catch-up model of development and accomplished spectacular successes. Russia has picked as its guiding star the modern model of developed Western (i.e. American) capitalism. It wanted to transfer this Western model to its soil directly, i.e. skip over the historical phase of catch-up development and join the club of developed capitalist states right away. This served no useful purpose because the gap between the "catching up" states and the already developed states in their tasks and goals was too wide. The result has been the deep social crisis we have been witnessing during the past five years, and if the liberal course of reforms launched in 1992 is pursued consistently, Russia will have to be content with the role of an unequal subject in the neo-colonial division of labor for many decades to come, rather than an equal partner in the club of developed states.

The next thing that catches one's eye in comparing the reforms in the two countries is the great difference in the order of priorities of socio-economic transformations. South Korea first laid the foundation of the future edifice of its economy and raised the walls (i.e. implemented the strategy of dualistic industrialization), covered it with the roof (macro stabilization and structural financial adaptation) and only then began to invite "guests" (liberalization of foreign trade and foreign financial activity), doing it very cautiously and selectively. Gaidar and Chubais built the roof on flimsy supports first thing and invited the "guests" right away. Not surprisingly, the first to arrive in Russia were all kinds of dubious businessmen who easily found their worthy partners (birds of a feather flock together). The respectable corporations assumed a wait-and-see attitude, making so bold at best as to dip their finger in the troubled waters of our disorganized economy. Russia's integration into the world economy and equal partnership with the Big Seven became the all-consuming "idee fixe" for Gaidar, Chubais and Kozyrev. Meanwhile it took more than 30 years of complex and phased development for South Korea to reach this goal, even though today it is much more integrated in the world economy and has closer relations with the United States and other developed countries.

In fact, Gaidar and Chubais uncritically adopted the conception of the EBRD and IMF which lays excessive stress on macroeconomic stabilization and structural (financial) adaptation and which has been tried out in many developing countries without any success. As far back as 1991 the Japanese government officially criticized this approach and insisted that to reach the goal of self-supporting economic growth, the governments should pursue a policy of stimulating investments, that the leading branches of production should be clearly identified, and that target- oriented and subsidized credits should play the key role in promoting industrialization. It is for these purposes that the financial resources of the EBRD and IMF should be channeled.*40 In other words, the Japanese government favored the restructuring of all social production of the developing countries rather than the structural adaptation of the underdeveloped (and all the more so crisis-stricken) economies to the needs of the world market, which is dominated by transnational corporations and banks. At best, this would have solved the problem of linking the underdeveloped economies with the process of globalization developing on the terms of the leading Western countries. But this approach of the Japanese government (and the preceding experience of that country) did not fit in with the liberal model, which rejected the decisive role of the state in the period of catch-up development and believed in the omnipotence of the "invisible arm" of the market.*41

In 1992-93 all but the lazy ones in Russia wrote and spoke about the "invisible arm" and ridiculed the idea of state regulation of the market. The state all but relinquished its function of maintaining and supporting production and made feverish efforts to get rid of the property it owned. While the government of South Korea created ever new industries in spite of the recommendations of international financial organizations and pressure by the United States and other Western countries,*42 the Russian state handed out its property at first in the form of vouchers and then at auctions, regarding this as its main task. In fact, its role was confined to the function of "primary accumulation of capital." In two or three years, at least 70 per cent of property (without land) was handed over for private use. This kind of "privatization" of dozens of thousands of enterprises was carried out at balance cost prices without taking into account the rate of inflation and without restructuring the market.*43 The parasitic forms of bureaucratic capitalism were in full bloom. (The bureaucracy used its prerogatives and state material and financial resources to set up their own private enterprises.) In fact, state-owned property went out of control. Privatization was not a panacea for the ailing economy. In 1995 the GDP declined to 39.7 per cent of 1989 levels, the last year of economic growth. Industrial production shrank by 53.5 per cent and capital investment decreased by 70.3 per cent in the same period.*44 The only consolation and a matter of pride for the government during the last few years was the fact that the rate of fall in production was less in the given year than in the preceding one, although the decline has continued steadily to this day. In 1994, Mr. Yeltsin in his statement on the third anniversary of his presidency summed up the pitiable results: 20 per cent of Russia's population lived below the poverty line, i.e. their incomes were not enough to meet the cost of living. Another 20-30 per cent were on the brink of poverty. According to official statistics, in January 1996 the number of people with incomes below the cost of living was 37.3 m, i.e. one quarter of the population. In 1995 alone, the real incomes of workers dropped by 13 per cent and unemployment grew from 7.5 to 8.2 per cent. In the first three months of 1996 it rose to 6.5 m and if we take into account those who did not work a full week, by the beginning of 1996 there were 10 m unemployed, or 13.5 per cent of the economically active population. The ratio of income of 10 per cent of the upper stratum to the least provided for population was 13.5 times.*45

These are the results of the economic policy which was pursued in Russia in the early years of its existence, and aimed, not at organizing highly effective production, but at stemming inflation. The radical liberals now in power made believe that they were in favor of de-ideologizing social life, but in fact vigorously propagated an ideology of early, uncouth, and simplified liberalism.*46 Under present day conditions in Russia, this ideology became, of necessity, the banner of crusaders of "primary accumulation of capital." Speaking at the Kennan Institute for Advanced Russian Studies in Washington, the American scholar, Marc Garcelon, justly pointed out that the gross error, made in the course of discussion of monetary stabilization policy in Russia, lay in the fact that discussion was led as if shock therapy were the only alternative possible.*47

The liberal model chosen in Russia ushered in the reign of trading and finance capital, which relied on import cuts and unprecedented freedom of "banking" activity. At the beginning of 1996, there were 2,580 commercial banks in the country, of which 80 per cent were created by pooling the resources of industrial, trading, investment, and insurance companies.*48 This is several times as many as in the entire Western world. But in Russia, most of them are engaged in money-making, currency exchange and similar activities. They deceived the state, and with its tacit approval, shamelessly robbed the population by taking advantage of its ignorance of financial matters and boundless trust in official financial institutions and their advertising on state television and in the media. Even the state sector and budget organizations were financed by a network of authorized commercial banks (at the the beginning of 1996, 50 commercial banks had this status).*49 Delays in paying wages, salaries and pensions, denials of long-term credits to the enterprise and similar facts became routine. The Central Bank all but gave up its control and supervision functions. As distinct from the banking system of South Korea which was oriented to granting low-interest credits to strategic branches of production, the commercial banks in Russia charge appalling interest rates, bringing even the efficient enterprises, with competitive products on the world market, to the brink of bankruptcy. No wonder internal investment dropped from 20.6 per cent of GDP in 1990 to 15.1 per cent in 1995.*50 The industrial basis was rapidly washed away. Export orientation began to take shape in Russia, too, but, as distinct from South Korea, it consisted of raw material exports, i.e. colonial or neo-colonial type. According to expert estimates, in 1995 exports amounted to 20 per cent of GDP but the share of exported goods in material production (excluding services) was at least 40 per cent of exports. According to the Russian Foreign Trade Ministry, up to 40 per cent of extracted oil, 50 per cent of synthetic rubber, 70 per cent of refined copper, more than 80 per cent of nickel, and 63 per cent of rolled ferrous metals, among other items, were exported. The main source of budget revenues is the Ministry of Fuel and Energy. In 1996 it must provide more than one-third of budget revenues or 87 trillion roubles.*51 However, there is no real guarantee that this will happen because, in this sphere too, everything is done at the dictation of the IMF, which, in exchange for the loan granted at the beginning of 1996, demanded that all export tariffs on oil and gas be abolished by July 1, 1996, and that excise taxes be imposed to compensate in part for the gap, which would inevitably emerge in the revenue part of the budget. This action would certainly be favorable for world markets but would create new difficult problems for industry and, in the final analysis, would create a burden which would have to be shouldered by the population. Characteristically, even the foreign oil companies which had already invested up to $800 m in oil extraction in Russia, reacted bitterly to the policy of the IMF. They believed that the decision taken by the government of the Russian Federation under pressure from the IMF would "destabilize present and future investments in the Russian oil sector and undermine the economic successes," which the IMF claims it wants to achieve.*52

The slant of the liberal economic policy of the Russian government towards trade and finance had an extremely adverse effect on education and science. Ignorance of the catch-up character of our model of social development was most painful here. In the framework of this model, education and fundamental science were developed and financed by the state. For five years now, the Russian government has financed science and education with left-over funds and repeatedly tried to restructure them on the American model, shifting the emphasis in scientific research to the universities, and even dissolve the Academy of Sciences. (Some people are still envious of the laurels of Khrushchev who was about to do it.) In this manner one can raze fundamental science to the ground rather than reorganize it in the Academy as is necessary, and it is doubtful whether it can be rebuilt on the American model even decades from now. The state of affairs in R & D is similarly bleak. A brain drain is in progress, the most valuable highly-skilled and unique professionals are fleeing the country, some of them to South Korea and other developing countries.

Last but not least, a few words about democracy and economic development. The process of democratization in South Korea began as a consequence of a) successful economic development leading to major changes in the social structure and political consciousness of society and b) a long, difficult and even bloody struggle of working people, middle classes and radical student militants. Democracy was born by the Korean people by painful labor, and the peaceful transition in 1987 to the process of democratization on the basis of a compromise between the ruling circles and the opposition, speaks volumes about the political culture of the two. Democracy in Russia was proclaimed "from above" and remained the privilege of a thin stratum of intellectuals who turned bureaucrats when they enrolled in the government machinery. In the period of military-bureaucratic dictatorships in South Korea, it was possible to separate economic decision making from political processes through the mechanism of the "dominant party" in a quasi-parliamentary system. This was a guarantee of the efficient fulfillment of all five-year plans. The pseudo-democratic system in Russia turned into a permanent scuffle between the executive and legislative branches of government and between their factions. The process of adoption of major economic decisions and laws became a kind of tug of war. The economic process was politicized to a great extent and was always threatened with destabilization.

In conclusion, I should like to emphasize once again that the present article is not about copying the Chinese or South Korean model but about a thoughtful and critical approach to the positive aspects of their historical experience. It is high time that we stopped learning exclusively from our own mistakes, looked around and saw the world as it is.

SRC Winter Symposium Socio-Cultural Dimensions of the Changes in the Slavic-Eurasian World ( English / Japanese )

Copyright (c) 1996 by the Slavic Research Center( English / Japanese ) All rights reserved.