CHAPTER 4 Hollowing Out Bureaucracy

The developmental state in Korea in the 1960s was disaggregated in terms of the top leader, ministries, and specific bureaucrats as they are involved in recruitment, decision-making, and implementation. Yet analysis of it over time allows us to trace what happens to the developmental state in the course of economic development. The top leader’s perceptions of backwardness, recruitment patterns, decision-making, and implementation styles all carry long-term implications.¹ The current literature on the developmental state, regardless of its focus on macro-structural or functional aspects, does not capture changes within the state. For example, in understanding how the developmental state changes over time, the status at T0 is compared to that of T1 without a concrete trace of dynamics that might have occurred between the two time points. For instance, studies of state-business relations assume a dependent relationship of business to the state at T0, where business follows the state; changes at T1 then show that state interventionist functions are reduced while the scale of business grows to challenge the state. The conclusion from this model is that business has grown to challenge the state.²

However, such arguments contain serious logical flaws as they are based on the simplification of dynamics of the relationship between the weak and the strong. Even within a dependent relationship, the commanding side—or the side with more resources—is not necessarily always in a commanding position and fully free from the influence of the weaker side.³ Also, without a specific analysis of mutual impact through interactions between the two sides, it is not possible to conclude that the strong–weak relationship is reversed, simply due to changes to the initial conditions. As weak business does not necessarily mean a strong state; a weak state does not necessarily bring about strong business. At the same time, strong business does not necessarily result in a weak state. Such juxtaposition between the state and business makes it difficult to understand the specific process of the emergence of the weak state through time and leaves little room for a possible situation where both can be weakened.⁴

In addition, closely related to the lack of a dynamic approach to the state is the treatment of the state as an abstract entity. It may be a natural consequence of approaching the state in static terms. The static approach is easily seen in a macro-structural approach to the state where the state is understood in terms of how the status of the state changes in the contexts of social and political changes. As such, the micro-level internal changes of the state over time have not drawn much attention.⁵ Even micro approaches to the state do not deal with internal dynamics of the state as they primarily focus on economic functions of bureaucratic organizations.⁶ It means that understanding the dynamic process of change in the internal aspects of the state requires a disaggregate approach to the state rather than treating it as abstract entity. The disaggregate and dynamic approach to the state inevitably focuses on interactions between state agencies, on the one hand, and those between these agencies and external actors, including business, on the other.⁷ Most theories on the state or studies of the state neither establish disaggregate units nor analyze the interactive aspects in detail.⁸

An interactive approach to the state involves analyzing interactions between the state and actors outside the state and the mutual influence of such interactions; these influences encompass not only the state itself but also social actors outside of the state and sometimes society as a whole. This observation comes from the larger concern that in state-led industrialization, where inter-systemic boundaries are not clear, it is necessary to understand how major institutions and society in general are also impacted from interactions between the state and business.⁹

Neofamilism provides a unique lens to observe the dynamics of the Korean developmental state. The dynamic approach here refers to the analysis of changes within the Korean bureaucracy through the process of industrialization from 1963 to the 1980s, including the origins and characteristics of Korea’s strong developmental state, how it has changed over time, and the consequent changes in state-business relations. The case of the MCI’s recruitment, decision-making, implementation, and interactions with business illustrates how the state underwent changes.

The emergence of neofamilism influenced changing aspects of the developmental state in the process of economic development. The developmental state was disaggregated into the top leader, ministries, and specific bureaucrats, and interactions between the disaggregated state actors and business were analyzed as part of forming neofamilism. What happens to the developmental state during the course of economic development? Consideration of the top leader’s perceptions of backwardness, recruitment patterns, decision- making, and implementation styles shows that the Korean style of late industrialization brought about a weakening of bureaucracy (debureaucratization) and ultimately hollowed out bureaucracy.¹⁰

IMPACT OF PERSONNEL POLICY

Recruitments within the MCI were based on the combination of merit and regional ties, which overlapped high school ties. The combination was an institutional imperative to launch late industrialization out of the sense of urgency. President Park Chung Hee, the top leader, needed people who were both competent and loyal. Competency was secured by merit-based recruitment and loyalty by recruiting those who shared regional ties with the president (southeastern region). The most serious consequence of such regionalism- based recruitment for the stability of bureaucracy was the emergence of pervasive informal organizations based on regional and school ties. The formation of informal groups within the MCI was most visible among those from the southeastern region of Korea. Those who were alienated from southeastern region groups also followed suit, forming their own groupings.¹¹

Those from the southeast were organized based on regional and school ties such that they comprised the majority. Those who felt alienated from and resistant toward the southeastern region grouping, especially those from the southwestern region, organized informal groups.¹² Informal organizations of those from regions other than the southeast were not as visible, and their existence was not taken seriously by those from the southeast. Thus, the influence of informal groups without ties to the southeast drew little attention. Nevertheless, solidarity among the members of the ministry and their identity as one entity weakened while identities based on school and regional ties strengthened. Such informal identities came to affect not only day-to-day operations but also personnel policies.¹³

Informal organizations further facilitated the formation of identity based on school and regional ties and reinforced the combination of regionalism and merit in personnel policies, resulting in weakening organizational integrity and consistency. Accordingly, the ministry became vulnerable to outside efforts to infiltrate decision-making and implementation processes.¹⁴

Business owners entrusted family members, relatives, and school friends with issues that may involve illegality and corruption, while college graduates were recruited through open competition. As a result, people from the southeastern region and graduates of SNU worked within the business sector.¹⁵ Business owners thus recruited former generals as board members to establish access to state incentives and also sought former high-ranking bureaucrats. Recruitment patterns within the MCI facilitated company penetration into the ministry. Sharing common networks between state officials and business managers provide a fertile ground for collusion and laid the foundation for a deeply structured pattern of “mingling” between the state and business.¹⁶ It is clear that the combination of merit and regionalism in recruitment to facilitate late industrialization brought about sources for informal groupings and opened the door to the penetration of business into state bureaucracy.

PENETRATION FROM POLITICAL POWER

Organizational stability and integrity of the bureaucracy are essential in deterring attempts by business to penetrate the bureaucracy. Organizational stability was easily compromised as bureaucrats had to cope with improvised policies, unrealistic goals, and frequent changes by informally coordinating with business to realize goals. Bureaucrats were evaluated by their ability to achieve such goals. When they did not meet said goals, bureaucrats were replaced without predictability. At the same time, a “parachute” style of recruitment took form, in which people from outside the bureaucracy were brought in to expedite the implementation of policies.¹⁷

The minister of the MCI took improvised measures to achieve goals, including contests for export ideas and improvement of the ministry’s administrative process, and used the results to decide promotions and transfers. For example, in 1976, the minister issued an order that required 300 bureaucrats, made up of section chiefs and below, take a qualification test and used the test results for personnel decisions.¹⁸ Lateral entries were frequently given to those possessing certain degrees and technical knowledge as a form of motivational pressure to the regular bureaucrats and to spur short-term goal achievement.¹⁹ Such measures damaged solidarity among bureaucrats and had a severely destabilizing effect upon personnel-related matters. Unsystematic and improvisational evaluation of bureaucrats and frequent outside hiring brought about destructive outcomes in terms of organizational stability. Under constant rumors about personnel changes and organizational reshuffling, bureaucrats could not concentrate on their work as they had to seek outside sources to secure their position and prospects for promotion. In short, all these gave rise to the “politicization” of bureaucracy.²⁰

Furthermore, President Park’s direct intervention in personnel decisions weakened organizational stability. Such intervention was closely related to his obsession with promoting exportation. As a former bureaucrat observed, Park frequently replaced bureaucrats who could not meet export targets:

Q: Was there pressure on departmental heads and directors of bureaus from President Park?

A: Ministers, vice-ministers, and deputy vice-ministers enjoyed stability if they performed well.

Q: How did pressure on the minister affect the ministry as a whole?

A: It manifested itself in terms of promotion and assignment of tasks. If the minister trusted some people, they stayed on. When I was director, I remember how often directors were replaced. They were fired for poor performance shortly after they were appointed.

Q: You said personnel changes were quite frequent. How frequent were they?

A: For those who were deemed incapable, replacement occurred every six months, and this was the case even with the minister. Minister Park Choong Hun himself was replaced after six months and later brought back to serve eight years, based on good export records. President Park never hesitated to cut people but did not completely abandon them and often brought them back again.²¹

The president’s instructions regarding personnel matters were issued when he received reports and was conducting frequent on-the-spot inspections. For example, in 1970 when the export target was set to $1 billion, he urged the MCI to achieve the target during his annual inspection at the beginning of the year and specifically instructed staff to conduct the status inspection twice a year and ordered the replacement of those who were responsible but failed to achieve the goals.²²

However, as export promotion was the most important concern of the top leader, exports were the most important standard whereby bureaucrats were evaluated; in addition, the tasks ordered from the president became the raison d’être and operational principles for the MCI. Under such circumstances, the ministerial level of personnel policies and bureaucratic stability gradually deteriorated. That is, the incessant imposition of tasks and the pressure to realize them, constant infusion of outsiders into the ministry, repetitive purges, and reshuffles and transfers caused chaos within the ministry. Personnel policies gradually became divorced from principles and predictability due to irregular staffing policies. In consequence, increasing penetration of the ministry by outsiders brought about the weakening of bureaucratic autonomy.

PRESIDENT-CENTERED DECISION-MAKING AND IMPLEMENTATION

President Park was more than just a commander in the style of the Japanese who sets the direction and oversees military units; he was involved in the details of decision-making. In his annual year-opening speeches, in addition to announcing new goals, he issued concrete directives as well as bringing up problems related to his decisions. Thus, he practically made decisions for ministries, and analysis and evaluations were conducted four times a year regarding progress on the president’s decisions.²³ Consequently, decision- making is highly centralized around the president; all the major decisions either originated from him or could not succeed without his support. Such a dependence upon the top leader gave rise to serious negative consequences for bureaucratic stability. Decision-making was greatly influenced by the level of trust that could be secured from Park by ministries and stakeholders, including the deputy prime minister, officials at the secretariat to the president, industry commissions (heavy chemicals, for example), or others close to the president. Groups that secured the president’s support garnered favorable decisions.²⁴

In addition to president-centered decision-making, bureaucrats had to work in a highly uncertain environment, as most of the projects were pioneering experiments in production and export. This rendered bureaucrats vulnerable to failure.²⁵ Such vulnerability led to increasing dependency on the president for certainty through necessary funding and personnel, based on quick-changing market opportunities. Adding to the uncertain environment were the frequent changes of goals, as seen in the constant boosting of export targets. Such frequent changes led to close contact between bureaucrats and business as new information necessitated consultation. The fact that such contacts were primarily based on individual enterprises rather than industry as a whole increased frequency for individual companies to penetrate into the ministry.

Finally, the most damaging among the negative impacts of president-centered decision-making upon the ministry was the enabling of business to intervene in decision-making via the president. Such chaotic, undisciplined, and abrupt intervention by business based on earning the president’s favor was dubbed the “wild horse phenomenon,” in which the regular process of decision-making is bypassed completely. The result was a top-down style of decision-making that frequently left ministries and ministers ignored, with higher-level decisions being simply imposed upon them.²⁶ It is clear that the prominent role of the president in decision-making caused dependency of the ministry on the top leader in various ways, shrinking autonomy of the ministry; the president’s personal initiation of policies, detailed intervention in decision-making, and frequent changes in decisions made are the main factors driving this dependency.

President Park also was as deeply involved in implementation as he was in decision-making. Even when decisions were made extemporaneously, he was willing to draw upon every means to speedily ensure expected outcomes. His obsession with detailed intervention during implementation was perhaps most clearly visible in the promotion of exports. He urged bureaucrats to apply rules and regulations flexibly when they were thought to be impeding exports; even then, speed was paramount.²⁷ These guidelines had serious implications for bureaucratic integrity and state-business relations, as they became the standards of daily administration of the MCI. Exports were the main priority in rendering state support to companies. So strong was the shared preoccupation with meeting targets among bureaucrats and businesspeople that colluding to falsify reports and export records frequently occurred. It reinforced target-oriented administrative behaviors and consequent “arbitrariness” in policy implementation, giving rise to an arbitrary application of rules and regulations while engaging in the international market through export.

The president’s intervention in implementation could be also observed in his strong encouragement of close cooperation and sharing responsibility between relevant ministries. He tried to reduce confusion by eliminating inter-ministerial differences, which led him to be closely involved in the details of implementation. Such intervention was not limited to export issues; rather, it encompassed virtually every industry. There are many examples for the sense of urgency and speed in decision-making and implementation, which led to the president’s crossing official administrative boundaries. For instance, an order issued on September 30, 1966, even mandated that the Central Intelligence Agency mobilize to facilitate implementation. Park also expressed deep concern about the delay in building the Hankook Fertilizer Company and ordered the KCIA to intervene to ensure that construction would be completed on schedule.²⁸

Another example is the development of the Changwon National Industrial Complex. The project was hurriedly implemented by presidential order starting in October 1973. In November of the same year, the leading agency for the project was changed from the Water Resources Management Corporation to the Industrial Complex Development Corporation. There was little idea as to the scale of the complex, land use, or location of factories. It was typical of the 1960s and 1970s style of development that lacked preparation of concrete plans.²⁹

Personnel policies of ministries were negatively impacted by such a sense of urgency. Interorganization boundaries were diluted from violations of boundaries among sub-units of the ministry, and all personnel resources of the ministry were concentrated in meeting export goals. As one former official of the MCI remarked, all sub-units of the ministry had to join in meeting export targets, regardless of their original official functions: “All of the departments of the ministry other than those in charge of textile and small-medium industries (which were directly responsible for exports in textile) scrambled. Under the minister who was assigned to meet export targets, the entire ministry needed to be united in achieving the singular goal of meeting export targets. The motto was ‘think while you run.’ And even though it was only six months, the results were remarkable.”³⁰

Naturally, companies inherited this pressure to export as state and business were put into constant contact during the process of implementation.³¹ Such pressure ultimately worked to change the nature of state-business relations in the long run.³² Business not only tried to secure maximal support from the state for exports but also went beyond by trying to expand the domestic market. Over time, moral hazard became rampant, particularly in the form of falsely inflating export records or including defective products. Some businesses secured permits under the guise of exporting in order to start new ventures unrelated to exports.³³

The president’s influence upon the implementation phase of key decisions via such capricious intervention led to the arbitrary breakdown of bureaucratic boundaries. The emphasis on exports begat unintended institutional consequences as international markets, which were beyond state intervention, limited administrative arbitrariness. The drive for exports at all costs resulted in arbitrary implementations of rules and regulations. Finally, the resulting constant and close contact between the state and business sowed the seeds for inescapable changes in the relationship dynamics between state and business. It is clear that the president’s sense of urgency gave rise to the dilution of administrative boundaries and more frequent and closer contacts between state officials and business, compromising bureaucratic autonomy and principled implementation.

STATE-BUSINESS INTERACTIONS AND HOLLOWING OUT BUREAUCRACY

The formation of neofamilism entailed serious institutional consequences for the dynamics of the developmental state itself. In a nutshell, neofamilism resulted in a weakened bureaucracy, which lost such bureaucratic characteristics as organizational autonomy, legalism, professionalism, and impersonalism. The hollowing out of the bureaucracy all began with President Park, who set ambitious goals with a high level of urgency.

Park’s recruitment strategy of combining merit with regionalism was a structural cause for intra-ministerial instability, reproduced through informal groups that were formed based on regional and school ties. Additionally, the top leader’s detailed intervention in goal-setting, decision-making, and implementation further impeded bureaucratic autonomy. The president’s sense of urgency also gave rise to ignoring boundaries between sub-ministerial units, as well as those between ministries. In addition, bureaucrats had to foster close relations with business as they moved expeditiously to meet stringent deadlines, set by a president who did not hesitate to penalize those who failed to meet his expectations. In fact, bureaucrats had to accommodate business’s efforts to penetrate bureaucracy through neofamilial ties to secure state incentives and render every possible assistance to ensure their business success. Without business success, bureaucrats’ careers would be endangered.

As for business, aware of the availability of financial, technical, and administrative incentives controlled by the state, executives resorted to every possible means in getting access to the incentives to open, maintain, and expand business. They sought to leverage every possible neofamilial tie, such as school and regional ties, from inside and outside of business to secure state incentives. What aggravated business penetration into state bureaucracy was the uncertain and volatile environment created by the president. Neofamilial ties played a bridging role between business and the state bureaucracy. The upshot of business-state interactions was a hollowed-out bureaucracy: rules and regulations were frequently violated with impunity, due to strong goal-attainment orientation. Thus, such mutual dependency blurred boundaries between bureaucracy and business and other social influence based on neofamilial ties.

Analyzing the impact of Park’s personnel policies on long-term institutional dynamics reveals that merit principles were intricately combined with regionalism and other ties, which in turn played important conduit roles between the state and business. Political influence upon personnel policies gradually undermined bureaucratic stability. In short, the ministry was faced with two sources that penetrated its own decision-making and implementation, rendering bureaucratic autonomy to be precarious. Internally, the embedded regionalism and school ties in personnel policies gave rise to undermining of bureaucratic stability through the formation of informal groupings inside bureaucratic organizations, affecting promotion and transfer policies based on regionalism. Externally, state personnel policies were emulated by business sectors, and state bureaucracies were constantly penetrated by outside influence, especially business, ultimately causing hollowing out of bureaucracy.

DEBUREAUCRATIZATION

The hollowing out of bureaucracy is a form of “debureaucratization.”³⁴ It is one of the three patterns of dynamic interactions between bureaucratic organization and environment: continuation of the original relationship, bureaucratization, and debureaucratization. The first type refers to the continuation of equilibrium; the second to the expansion of the original bureaucratic boundary to the outside environment, and the third to the compromise of bureaucratic autonomy due to the influence of the outside environment.³⁵ There are internal and external factors that affect the long-term consequences of bureaucratic organization. Internally, personnel policy is an important mechanism. Externally, how a bureaucratic organization approaches and manages the outside environment determines the organization’s long-term institutional consequences.

In the first two cases of maintenance and bureaucratization, universal values, power equilibrium, and the principle of competition are secured in interactions with outside environment, and bureaucratic organizations actively engage the external environment to realize the goals set by them. In the case of debureaucratization, the bureaucratic organization is influenced by external environments and institutions.

Western literature on bureaucracy assumes a clear divide between inside and outside the bureaucracy, and cases deviating from this model are regarded as abnormal. From this perspective, debureaucratization is viewed as a stage in which the organization’s goals are vulnerable to change and penetration from the outside. Thus, the question on debureaucratization hinges on the degree of dependency that the bureaucracy has upon the external environment. Does the assumption of the lack of shared goals apply to the case of the MCI type of hollowed bureaucracy?

The state and business in South Korea share the same goal of industrialization in the context of late industrialization. The state needs business and business needs the state. Unlike the assumption set by sociologist S. N. Eisenstadt, the setting of strict boundaries is unclear in the case of the Korean bureaucracy. For instance, the economic goals of the MCI had to be realized via private business. The state maintained a superior position over business by providing various incentives, but the successful implementation of economic policies relied on private business. This can be characterized as “commanding dependency,” where a high degree of interlocking goals exists, a frequently observed characteristic of late industrialization. However, interlocking does not necessarily mean the goals are identical; it merely refers to some degree of sharing. The core issue is how to manage situations in which the respective expectations of the state and business toward each other diverge. Each case of late industrialization has its own way of handling the discrepancy between the expectations of the state and business.

From the perspective of bureaucracy, personnel policy and interaction patterns with business are important. In the case of Japan, strict merit-based personnel policies, internal consensus, and institutionalized relations with business are firmly established to prevent outside influence on bureaucracy.³⁶ The opposite case is the Soviet Union, where the state arrogates social interest to itself. The case of South Korea is distinct in that, unlike in Japan, personnel policy and interaction with business is not institutionalized, and thus goal identification and sharing between the state and business quite often fluctuates between the state and business. The arbitrary application of merit-based incentives—based on the degree of meeting export goals, ambitious goal-setting, implementation based on a high sense of urgency, and blurring boundaries with business—all contributed to the hollowing out of the bureaucracy.³⁷

Squeezed between political pressure from above and penetration from below, the MCI was divided into a three-tiered organization. The upper-level tier beyond the bureau director severely suffered from political pressure and ultimately became politicized, while the low-level tiers below the department fell victim to capricious bureaucratization based on frequent arbitrary decisions. The middle tier had to bear pressure from the other two tiers. The resulting bureaucratic chaos has frequently been regarded as a sign of bureaucratization that resists external pressure and tries to secure bureaucratic interests and becomes indifferent to outside influence (pokchibudong).³⁸

However, what happened to the Korean bureaucracy is not so much conventional bureaucratization in terms of formalism, legalism, and collective resistance to outside influence; rather, Korean bureaucracy is suffering from bureaucratic chaos that comes from the lack of predictability in personnel policy, passivity in decision-making, and arbitrary implementation. What is interesting about this phenomenon is that on the surface it closely resembles bureaucratization in terms of the lack of policy initiative and indifference to the outside due to its passivity, but debureaucratization stemming from the hollowing out of bureaucracy should be distinguished from bureaucratization.³⁹

DYNAMICS OF STATE-BUSINESS RELATIONS

The analysis of state dynamics and of interactions between the state and business in the process of industrialization sheds new light on how state-business relations evolved over time. The state’s perception of business at the beginning of industrialization, business approaches to the state, the modes and patterns of interactions, and ultimately the hollowing out of the state itself are important factors that need to be considered in understanding the changing aspect of state-business relations.

Explanatory frameworks differ on the reason for a shift in state-business relations. One view is that the state effectively became a hostage to business as it could not abruptly stop supporting business, mainly due to the growth of business influence and partly due to the path dependence of past behaviors.⁴⁰ Another view highlights the exhaustion of state roles and functions in relation to business. Here the overlapping functions of the state with those of business are highlighted in that as the business grew in size and scope, the functions of the state became obsolete.⁴¹ Besides, with democratization the developmental state had to face challenges from new political actors, such as labor.⁴² A third view is that the image of business challenging the state is based on the phenomenal growth of business in terms of volume and scope. Indeed, Korean chaebols grew phenomenally: in 1979, the total assets of the 30 largest chaebols were 52.9% of GDP of South Korea, which jumped to 56.5% in 1986 and 66.7% in 1994.⁴³ Such expansion of the chaebols was quickly interpreted as a source of autonomy upon which chaebols even came to challenge the state.

This transformed image of business is all the more remarkable considering the historical backdrop regarding business dependency on the state. First, the image of business’s lopsided dependency on the state has historical origins. When the military took power in 1961, it issued a special law punishing illicitly gained wealth in the past. Businessmen were arrested and forced to comply with state demands. Such measures contributed to the perception that business was subject to political control. Second, the state’s perception of business was that business was not ready to develop on its own to compete, especially in the international market for exports. This perception in turn led the state to take a strongly protective approach by providing a wide range of incentives to business.⁴⁴

Although business undeniably shifted from being weak and dependent to becoming bigger and stronger, we still lack a more nuanced picture of state-business relations in terms of the specific changing dynamics of the developmental state and their mutual impacts upon each other. Whether the developmental state ended up being constrained by strengthened business, or the state graduated from its own functions and thus business came to substitute for the state, or state autonomy was challenged by new actors, what is needed is a close examination of the dynamically changed institutional character and ethos of both the state and business over time. To do this, it is necessary to go beyond functional logic, to transcend a structural dichotomy between a strong state and weak business or between strong business and a weak state. There is more to state-business relations than a purely zero-sum logic, which can only be understood through analyzing the micro- dynamics of state-business relations over time.

Even in a one-sided relationship of command and subjection, the strong side is not completely free from influence of the weak side, nor is the strong side always superior to the weak. Furthermore, the existing approaches do not pay close attention to the process and consequences of mutual impact between the strong and the weak over time. Without understanding such processes, it does not logically stand that those mere changes in original conditions reversed the relative positions of the strong and the weak over time. How did the business sector affect state dynamics, and in turn how did those dynamics affect state-business relations? Strategies of business in dealing with the state also need to be analyzed. Without attending to interactions between the state and business over time, the changing nature of the state- business relations cannot be properly understood.⁴⁵

State-business relations evolved within the context of business’s extreme level of dependence on the state from the outset. Dependent relations are not a static or monolithic concept; they can manifest in different forms over time. At the same time, dependency once established seldom disappears completely.⁴⁶ We should not assume the weakening state and ascending business without understanding interactions between the two over the course of industrialization; a dependent relationship takes on different forms over time.⁴⁷

COMMANDING DEPENDENCY AND DEPENDENT MANIPULATION

Dependence on Business for Goal Achievement

At the initial stage of industrialization, the state enjoyed a commanding position in state-business relations, whereas business was dependent, in that it had to follow the state. This situation began to quickly change as implementation progressed. A new dynamic between commanding and dependence emerged through state-business interactions that focused on exports. The MCI had to promote exports at all costs by mobilizing every possible means.

Against this backdrop, the MCI executed export promotion policies to meet targets set by the president. Favoritism frequently became a controversial issue but was not taken as seriously when rampant pragmatism drove implementation. Violation of regulations were tolerated if targets were met, as shown by one case that happened in the mid-1960s. The MCI opposed inspecting the taxes of trading companies as it might negatively affect export promotion. When criticism arose surrounding favorable treatment in relation to big enterprises’ cartel issues, the MCI changed its ministerial decree before the law for the coordination of SMIs (small-medium industries) was made. These demonstrate that procedural measures, legal or otherwise, could be liberally applied when exports were at stake.

Meanwhile, contact between the state and business further increased and became more institutionalized. Since 1965, the president began overseeing export promotion meetings on a monthly basis and export goals were scrutinized.⁴⁸ The president issued orders and received feedback every month. Within the MCI, monthly consultative meetings with business examined export-related problems and obtained concerns from business. Thus, private businesses involved in exporting came to be involved in institutionalized processes and held regular contact with the president and related ministries, including the MCI.⁴⁹ Under intensifying pressure to export, the ministry’s coordinating power began to weaken. For example, in the second half of 1966, the minister of the MCI called in businessmen and encouraged them to achieve export goals.⁵⁰ Initially the MCI put pressure on companies that were unable to meet export targets but shifted over time toward methods of persuasion and ultimately entreaty when the situation became urgent and difficult.

Bureaucrats at the MCI busily pleaded to companies to meet export targets. At first, they threatened to cut support to business unless export targets were met by a given deadline. Where this approach failed, an alternative attempt promised incentives for realizing targets, namely a recommendation for a presidential citation. When even this did not work as intended, bureaucrats were ultimately forced to defer to companies by asking about the bottlenecks to increasing exports. In response, companies issued every detailed complaint and bureaucrats had to listen. Thus, companies held the upper hand in promoting exports.⁵¹ In order to realize export targets, companies had to comply with commands from the state and yet tried to take advantage of state bureaucrats who were constantly under pressure from the president to realize export goals. Knowing the vulnerability of state bureaucrats, companies’ perceptions of the state changed visibly to take advantage of it.

Beginning in 1975, the MCI pursued a policy to establish large-scale comprehensive trading companies as a way to secure export bases. Once granted permission to operate a trading company, a company could receive guaranteed state support in the form of financial, tax, and foreign currency incentives.⁵² The introduction of comprehensive trading companies meant a larger portion of big business involved in exports and greater room to secure incentives from the MCI, making it more difficult for the MCI to control companies. “Business grew indifferent or insensitive to government policies. A situation developed where it became difficult to hear even words of appreciation from business.”⁵³ The scale of “trading companies” grew in the course of specialization and growth through export.⁵⁴

Comprehensive trading companies took every measure, legal or not, to maximize state support. Rather than improve competitiveness or productivity, their primary goal was to demonstrate visible export results regardless of legality: “The state provided incentives based on export volume regardless of profitability. Thus, there was no difference between a company making a 99-dollar profit with one dollar cost and another making one dollar profit with a 99-dollar cost. Under such circumstances, which companies would choose the first way with all the troubles and effort?”⁵⁵ The government strongly demanded export increases in return for the incentives provided to business. This encouraged the practice of dumping, or exporting a product at a loss, and even the purchasing of export records from other companies to meet state expectations.

Policy Learning and Manipulation of Business

Business circles learned how to increase their influence on the MCI. They learned that it was quite effective to go through political channels to influence the ministry, and when involved in projects of high priority to the state, this approach allowed business to obtain additional benefits. The best example of this was a presidential ordinance to freeze private loan markets on August 3, 1973, from which the business sector learned that the state would still continue supporting them despite their mediocre performance.⁵⁶ Such confidence led all the major companies to participate in the government’s large projects under the Heavy and Chemical Industries (HCI) program without much critical thinking or planning. Business also learned that the most effective means to exercise influence on bureaucracy was through high-level political channels rather than through legal and rational bureaucratic channels.⁵⁷

Squeezed between political influence and business sectors, bureaucrats gradually lost their coordinating power. Regular meetings between business and the president provided new grounds for political approaches to business matters. Decisions made by bureaucrats were frequently changed due to external influence, as seen in the cases of investment coordination and exiting underperforming business.⁵⁸ When many companies ended up with large debts due to unrealistic expansion, the government tried to apply special measures to correct the situation, yet companies used political connections to try to avoid sanctions. In turn, the capacity for government to correct the situation weakened.

The government adopted a policy to promote the HCI sector by guaranteeing all possible supporting measures after selecting individual companies. A good example is the shipbuilding industry. The government urged Hyundai Construction Co. to conclude a contract with a Greek shipbuilding company and used it to obtain loans from British banks to establish Hyundai Heavy Industries. Also, in an attempt to develop the heavy chemical industry by inviting related companies to industrial sites, different sites for different industries were decided on: the second steel plan in the end of Nakdong River; nonferrous metals in Onsan; machinery in Ch’angwŏn; shipbuilding in Kŏje; electronics in Kumi; and chemical industries in Yŏsu and Kwangyang.⁵⁹

Based on such investment plans by the government, it was presumed that strong supporting measures would follow. In fact, special support was given to all the major firms in the HCI sector. In the case of Hyundai’s Ulsan shipyard construction, the government directly adopted a plan to construct port facilities. The opposition party at that time criticized the plan as being a special favor to Hyundai, but the project was carried out.⁶⁰ Thus, businessmen were well aware of their influence on government. That is, they learned through experience and assumed that if they started big projects, the government had to support them. The more the government emphasized certain projects, the easier it was to get support from the government. This led to a dilemma: the government, once committed, was put into a position in which it could neither render continuing support nor stop supporting business.⁶¹

To summarize, at the beginning of industrialization, the MCI or the state was able to mobilize business with support from the president. However, faced with ambitious export targets imposed by the top, the MCI lost control over business and their autonomous position vis-à-vis business began to erode. However, this does not signify a fundamental change in the relative position between the state and business. Instead, it meant the state’s dependence on business expanded and intensified during industrialization. That is, the state’s command over business became more dependent on the latter for success, reaching the point of commanding dependency. Business, however, embraced state projects with a high degree of confidence that the state would support them. In a mutually dependent situation, business learned how to maximize state support. Business responded to the state’s commanding dependency through what could be termed manipulative dependency: a shift from the one-sided dependence of business on the state to business manipulating the state at both political elite and bureaucracy levels. As the president’s top-down decision-making intensified, bureaucrats had to comply with increasingly over-ambitious targets, which in turn increased contact between the state and business. Bureaucrats had to command business while being dependent on it (commanding dependency), whereas business learned to affect internal decision-making of the state (manipulative dependency).

THE CHANGING NATURE OF STATE-BUSINESS RELATIONS

With the state bureaucracy undergoing a hollowing out, the nature of state-business relations evolved from business merely taking advantage of resources and opportunities given by the state to business more actively mobilizing the state to their benefit through resistance and threats to change state policies. The forced restructuring of underperforming companies is a good case in point. Overinvestment and redundant investment had become a serious problem by the mid-1970s. The ambitious and urgent implementation of heavy chemical industries ended up with excessive facility investment, resulting in the proportion of “policy-related finance” constituting 80% of total bank loans.⁶² Companies ended up overinvesting without considering actual demand, under the expectation that there will be ample state support behind state-promoted projects. Such investment dysfunction gave rise to excessive competition and decreased productivity, to the point where the situation could not have improved without forced restructuring.

In 1979, the government announced the so-called Comprehensive Economic Stabilization Policies of April 27 to deal with overlapping investments, especially in the areas of shipbuilding, generation facilities, petrochemicals, construction machinery, and specialty steel.⁶³ The Investment Adjustment Measures of May 25 focused on generation facilities and Daewoo’s overinvestment in shipbuilding. Investment in generation facilities was divided into two groups, Hyundai and Daewoo/Samsung. Hyundai Heavy Industries particularly presented various demands, such as support for investment, operation funds, and administrative support, and was passive in taking over the Hyundai Yanghaeng, so that it only took over the assets while excluding debt.⁶⁴ Later, investment in generation facilities was divided into three companies under the investment adjustment for the HCI sector. Hyundai took over automobiles while Daewoo absorbed Hyundai Yanghaeng. Daewoo came to ask the government for 700 billion won in support, and the deal could not be completed at the ministerial level and was brought back to the drawing board.⁶⁵

Under the new military government in 1980, all previous polices were nullified and a new plan for investment adjustment was prepared for generation facilities, automobiles, and heavy construction machinery. Daewoo was supposed to take over Hyundai Yanghaeng but was not able to come up with even half of the 200 billion won that was needed for the takeover. Therefore, Daewoo ended up asking for the rest of the amount from the government. Ultimately, Hyundai Yanghaeng, renamed Hanguk Heavy Industry, was reorganized as a public corporation.⁶⁶ Another typical example is the case of Daewoo Shipbuilding, which complied with President Park’s order to take over Okp’o Shipbuilding and established Daewoo Heavy Industries in 1978. The president promised 250 billion won of support in return for the takeover.⁶⁷ However, additional support did not arrive smoothly after Park was assassinated in 1979, so when Daewoo completed the shipyard in 1981, it faced worldwide depression and came close to bankruptcy. Chairman Kim Woo-choong threatened the government with bankruptcy unless the government provided additional support.⁶⁸

The Daewoo case demonstrates that to the state, a takeover of a troubled company meant the acquiring company would rely on itself. Yet, from the acquiring company’s perspective, a takeover was understood as a guarantee of state support. Business followed state policies, but when things became difficult, they asked for state support. That is, business reasserted claims based on what they had learned in the process of industrialization, indicating the business sector’s improved bargaining power.

Business has succeeded in overturning government decisions to their benefit in other ways. On June 28, 1980, the government adopted financial reform to abolish preferential interest rates for policy funds that the government renders to business.⁶⁹ The measure also prohibited fake names in financial transactions to enhance transparency (real name reforms). The business community successfully blocked this measure through lobbying.⁷⁰ Another significant case involves the decision for the Sunkyong Group’s entry into the mobile communications industry in July 1992. The MCI originally wanted to postpone the decision, arguing that the designation of companies for the second mobile communication industry would negatively impact the trade deficit. However, the Ministry of Communication advocated pursuing the project in the name of developing communications services. The Economic Planning Board (EPB) sided with the MCI, citing the same reasons about the trade deficit. However, President Roh Tae Woo made a political decision to complete the decision before his term was over. The chaebols originally supported the Ministry of Communication, but once Sunkyong was designated as the main company, they politicized the issue and tried to link it to the presidential election in December 1992. Sunkyong ultimately returned its business permit.⁷¹

The most salient example of a business’s persistent effort was Samsung’s announced intention to enter the auto industry in January 1990.⁷² The Korean Automobile Industry Association and the existing auto companies strongly opposed the plan, arguing that the move would create excessive competition. Considering the opposition, the MCI delayed making a decision until August 1990, when the MCI further postponed the decision until the second half of 1991.⁷³ Samsung once again expressed its intent to enter commercial vehicle production, and existing auto companies continued to collectively strongly oppose Samsung’s decision. The MCI once again took a cautious reserved position and did not make a definitive decision. Existing automakers also launched political lobbying. In the meantime, Samsung Heavy Industries announced that Samsung was planning to start auto production. The MCI refused to open public hearings, a procedure required by law, and finally in July 1991 permitted Samsung’s entry into the auto industry.⁷⁴

The implications of these cases are that the bureaucracy, which had been hollowed out due to excessive penetration of external influence, had more difficulty in making autonomous and consistent decisions. Decision-making capacity based on technical and rational criteria was hampered due to increasing influence from the outside, including the political sphere. In this respect, the hollowed-out bureaucracy that emerged in Korea is distinct in nature from what happened in Western Europe. In the latter case, hollowing refers to the weakening of central state power due to the liberalization of state functions to the private sector; in Korea, however, state bureaucracies eventually came to lose bureaucratic functions based on laws and lose professionalism due to the penetration of external influences.⁷⁵ A key problem was that the state had become so accustomed to wielding state initiatives to support business during industrialization that they could not sufficiently perceive the extent to which business had learned to exploit state support. Even when the government threatened to stop support when business didn’t comply with demands for investment adjustment, business knew that the government was ultimately bound to take over investment losses.⁷⁶

HOLLOWED COMMANDING AND BARGAINING DEPENDENCY

Due to the many irregular measures and constant revision of decision matters, business perceptions toward the EPB and the MCI had already changed. Business, through various contacts with the state, fully learned how to turn even disadvantageous situations to their advantage. Under such circumstances bureaucrats had to change the measures that they took due to the manipulations by political and business circles. The repeated practice of such behavior gave rise to hollowed commanding, in which state decisions lost their effectiveness due to weakened state capacity. Meanwhile, with state policymaking and implementation becoming ineffective due to this hollowed commanding, the chaebols’ approach to the state evolved to actively manipulating the state beyond merely receiving advantages and resources in a dependent manner.

Such an overly aggressive and demanding posture of business can be viewed as challenging a weak state. For example, Kim Eun Mee observed that the fact that chaebols were deeply involved in major economic decisions about chaebol consolidation in the early 1980s is proof for a compromise between strengthened chaebols and a weakened state.⁷⁷ To fully understand the institutional legacy of dependency characterizing chaebols or business, an analogy is in order. State-business relations are analogous to father-son relations: when a grown son tries to be independent of his father, he is bound to cause friction or disagreement with his father. Yet the son may ultimately return to his father for help, in which case the father cannot but help the son. In the 1980s, business tried to avoid state control but attributed any troubles to the state—and ultimately expected the state’s protection and support. Accordingly, business frequently does not attribute its troubles to itself, with the majority of responsibility attributed to the state. It was not easy to locate businessmen who were willing to take risks; why take risks when there were easier ways? Business pointed fingers at the state, expected special favors, and denied the state’s attempt to oppose chaebol initiatives: “Chaebols wanted limitless state support … chaebols wanted favors without state and political intervention. What they want is a laissez-faire environment along with state favors and the suppression of labor.”⁷⁸

Business during industrialization can be compared to a child who pilfers money from the father’s pocket; business pursued its own interest through the state’s industrial policies. The chaebols, which grew in scale and scope over the course of industrialization, took advantage of the state in increasingly sophisticated ways. However, what is important is that the growth of the chaebols did not bring about a fundamental change in state-business relations. As a son returns to a father when he is in trouble, so did chaebols return to the state with their woes, asking for special favors, as one former high-ranking bureaucrat testified:

A: From the perspective of the government, supporting business was regarded as “incubating.” The state tried to push out business to stand on its own as there was a limit to what the state could do.

Q: When did the government take such a position?

A: It was when the heavy chemical industries were started. The government tried to drive out chaebols and encourage them to be independent. The reason for the failure to do so is simple. There was a time when the government provided special favors to business mainly to concentrate capital, which was scarce. The government used that as leverage over business for some time. Now the government urged chaebols to fight against bureaucracies to become independent of state influence. The position at higher levels was that it was time to wean.

Q: What was the chaebols’ response? They did not like to be weaned?

A: Of course, they did not want to. They wanted to do away with government controls while holding on to the special favors that they received.⁷⁹

As pointed out earlier, the current literature on the relationship paints a dichotomous picture for state-business relations. In contrast, our analysis demonstrates how the strong state–weak business dynamic at the beginning of late industrialization changed to one of strong business–weak state. The reference for such a dichotomy comes from a state-society confrontational model drawn from Western experiences. As shown all along, state-business relations were not simply one between the strong and the weak in which the order simply reverses over time. In late industrialization, goals are shared and the state has to support business for success. The state maintained a superior position over business with its incentives. This relationship can be characterized as commanding dependency on the part of the state and dependent manipulation on the part of business, in which business tries to maximize state benefits within the context of dependency.

With time, the state came to lose control over business due to this hollowing- out process, not only due to business challenging the state from a position of greater size and strength. This weakened capacity of the state can be called “hollowed commanding.” For business, a better understanding of how to take advantage of the state without fully overcoming dependency or still maintaining a willingness to depend on the state creates bargaining dependency, in which business wants to exercise greater bargaining power with the state but continues to be dependent on the state. The underlying assumption of this analysis is that dependency once established cannot be easily shed, and thus a mechanistic approach to state-business relations based on size and scale needs to be reviewed critically.

The top leader’s sense of national backwardness and urgency to industrialize had a decisive impact on setting goals as well as on the style, substance, and speed of decision-making and implementation. This in turn affected the modes of operation of the ministry and ultimately led to changes in bureaucratic integrity. The president’s ambition was a considerable source of pressure upon bureaucrats, making bottom-up decision-making virtually impossible. Dependence on the top leader in decision-making and initiation of new policies gave rise to heated competition among bureaucrats to secure the president’s trust and support, along with the so-called wild horse phenomenon in which outsiders sought direct contact with the top leader, bypassing bureaucrats. All these brought about the politicization of public bureaucracy.

Decision-making from a sense of urgency also heightened the need for information from outside the bureaucracy. However, more importantly, the president’s drive to export forced bureaucrats to develop closer relationships with business. Such mingling inevitably led to arbitrary decisions and situational responses due to company-specific policy not based on institutionalized procedures. Related to these outcomes are the double-faced consequences of export-oriented policies. On the one hand, export volume worked as an objective standard for evaluating bureaucrats and a constraining force on corruption, as exports depend upon the international market. On the other, obsessive export promotion permitted loosening standards in applying rules and regulations, giving rise to arbitrariness in decision-making and implementation.

Last, president-centered decision-making patterns easily crossed boundaries between administrative agencies and hampered institutionalized interactions between administrative units. The MCI’s ability to coordinate different units within the ministry crumbled. President Park’s regional background and sense of urgency to industrialize created an organizational culture combining regionalism and merit in personnel policy. Through use of the merit system and regionalism, the top leader secured loyalty and enhanced effectiveness and efficiency of economic developmental policies. Consequently, the proportion of MCI officials from the southeastern region of Korea created informal organizations based on regional backgrounds. Such a phenomenon was not unique to the MCI and spread to business and the rest of society.⁸⁰ Such mimesis of state by society in turn exposed the bureaucracy to greater risk of being penetrated by external social actors, particularly business. In addition to such structural factors, the president’s frequent warnings and punishment of failure to meet export targets through personnel changes further undermined organizational stability.

In terms of decision-making, rapid economic development meant decisions had to frequently change, resulting in pragmatism where every possible means had to be mobilized to realize goals. During implementation, the phenomenon of particularism emerged, in which governmental policies were aimed at specific companies, which further reinforced mingling between bureaucrats and business in decision-making. Pervasive particularism in policy implementation indicates an extremely volatile environment with a high degree of uncertainty, as there is much ambiguity in daily decision-making and implementation.⁸¹ Thus, the merit system lost its effectiveness when combined with regionalism, and overly ambitious goals and their hasty implementation blurred internal and external boundaries. As a result, the organization of the MCI was not bureaucratized; rather, the bureaucratic nature of the MCI was hollowed out over time from constant penetration of outside influences.