CORRUPTION, DEVELOPMENT AND MATURITY

A PERSPECTIVE ON SOUTH KOREA

Paper delivered by

Centre for Asia/Pacific Law and Business

and

Department of Geography

Victoria University of Wellington

P.O. Box 600, Wellington

NEW ZEALAND.

at

Fifth AFBE (Asian Forum on Business Education) Conference

Rangsit University

June 1997

Correspondence to Dr Tim Beal, CAPLAB, Victoria University of Wellington, PO Box 600 Wellington, New Zealand

Or to Dr Sallie Yea, email: Sallie.Yea@vuw.ac.nz

In many Asian countries corruption is an intrinsic part of political and economic life. Many claim that it is endemic in societies where there is excessive state intervention in the economy, or where there is a monopoly of authoritarian political power, or both. Corruption is seen as economically dysfunctional. It is associated with a lack of well institutionalised, accountable and transparent political and economic institutions. Hence, the story goes, the more developed a country becomes, the less corrupt its bureaucrats, politicians, and businessmen are expected to be.

This simple inverse relationship between corruption and development, we contend, obscures many of the more complex links between the two. In many of the rapidly modernising countries of the Asian region corruption has been a key element in the process of economic development itself. The interventionist state has played a leading role in promoting and guiding rapid economic growth but the intervention has been transmitted through a process of quasi-institutionalised corruption. Moreover, as this process of modernisation has proceeded, there has been a tendency in these countries for corruption to become more entrenched. In this paper we discuss these tendencies taking South Korea, where corruption between government and business has been strong and modernisation rapid, as our main referent.

Corruption is widely seen as one of the most pressing problems facing Asia. Asian Business, in it review of 1996 commented that "governments are facing increasing demands from their electorates for more open government and less corruption". Corruption is by no means confined to Asia - we argue in an accompanying note that it is prevalent throughout the world, including the USA and New Zealand. What is perhaps unique to Asia is the degree to which high economic growth and corruption have gone hand-in-hand. Nowhere is this better exemplified than in the case of the Republic of Korea.

White (1996: 40), in his discussion of the Chinese case, defines corruption as simply 'the abuse of public office for private gain'. Corruption, in this definition, is something that involves those in governmental and bureaucratic positions, and normally extends only to those who wield considerable influence within these public positions. However, underlying this basic notion of the abuse of public office for private gain is a huge range of corrupt practices. Again, White identifies three types of corrupt practices on the basis of his observations of China: first are "economic crimes" such as smuggling, embezzlement of public funds, stealing state property, large-scale bribery, fraud, and insider dealing in emergent stock markets; second is "state business" whereby individuals, political/ administrative agencies and local governments act to seize opportunities for their own benefit by exploiting loopholes or contradictions in official regulations and using their institutional power to exploit the market potential of resources under their control; and third are the invocation of personal and social ties and networks in achieving personal gains. To these types we can add a fourth, that is the use of institutional power and resources to further their political agendas and careers. In this case, politicians and bureaucrats are able to confer benefits to entrepreneurs and businessmen, such as access to cheap credits, infrastructure and amenities, cheap land, licences and so forth, in return for political support. This political support normally takes the form of financial contributions, or "donations", to election campaigns.

In this paper we will examine this last form of corruption which, along with the debate over reunification of the two Koreas, has become one of two major public issues in Korea in the 1990s. We place our discussion of corruption in the context of the relationship in Korea between corruption and economic and political change. We attempt to answer two questions in this paper. First, given that corruption has been an important defining element in Korea's strategy for rapid development, why did corruption enhance, rather than impede, Korea's rapid economic development? Second, given that corruption in Korea has appeared to become more entrenched recently, what are the likely scenarios for the coming decades? Signs have already appeared which indicate that corruption in Korea was not a transient phenomenon, but an entrenched structural element in Korean political and economic life, which is unlikely to disappear, even in an age of political liberalisation and economic reform. In a recent report on "The New Corruption", Barbara Harriss-White and Gordon White have suggested that, "in some contexts... the amount of corruption has increased along with and apparently as a result of economic liberalisation"

Along with the three other Little Dragons of Asia - Hong Kong, Singapore, and Taiwan - Korea has managed to achieve spectacular economic growth rates over the last three decades. These performances stand in marked contrast to those of most of the remainder of the developing world (see World Bank 1993). A proliferation of studies have subsequently appeared which attempt to characterise and explain these cases of rapid modernisation. Central to these explanations has been a heated debate over the role of the state in the development processes of these countries. It has now become received wisdom that, with the possible exception of Hong Kong, the state, rather than the market, has been a central actor in the growth process (see, for example, Amsden 1989; Woo-Cumings 1990; Wade 1990; Haggard 1990). The state, which has been variously characterised as bureaucratic-authoritarian, developmental, and relatively autonomous, exhibited its capacity to positively intervene in the economy and control the pace and direction of development. The strategy for economic development adopted by the Korean state during the period from 1961 to 1987 created conditions for corruption, which grew in line with accumulation. In this section we review the Korean states development strategy during this period in order to appreciate the role of corruption in the agents and institutions of rapid modernisation.

The period of rapid modernisation in Korea began with when Park Chung Hee took power in 1961. Park is considered to be the architect of Korea's economic modernisation. His economic strategy essentially comprised three elements: labour control and repression; neglect of agriculture in favour of support for industry; and a reliance on big business to carry out manufacturing activities. The three elements were interlining and mutually reinforcing. In particular, the outlawing of union activities and control of labour allowed the private sector to exploit a cheap labour base in achieving competitiveness for its manufactured exports.

Following the overview of development periods provided by Haggard and Moon (1993) we can identify the increasing importance of the relationship between the state and business since the 1960s (see Table 1 below).

Source: Adapted from Stephan Haggard and Chung In Moon 1993. The State, and Economic Development in Postwar South Korea, in Hagen Koo (ed.) State and Society in Contemporary Korea, Ithaca, Cornell University Press, pp. 51-94.

According to Table 1, there is a positive relationship between the degree of authoritarianism and the growth of big business as the agent of economic growth. Simultaneously the state was able to exclude both labour and the rural sector from the development process. During each stage of industrial expansion (the import substitution, export promotion, industrial deepening, and structural adjustment phases) the state has directed big business involvement. The ability of the state to determine private sector business activities corresponded with the increasing authoritarianism of the state itself. Particularly during the phase of industrial deepening during the late 1970s, businesses were virtually coerced into heavy and chemical industrial production by a strong, authoritarian state.

Overall there were several elements of state intervention in Korea that contributed positively to the growth process. The most important one was the provision of cheap credit, particularly loans and subsidies, to the private sector in exchange for producing certain targeted manufactured goods, and fulfilling export quotas for these goods. Extensive government support, particularly in the form of subsidies, only went to businesses which fulfilled the government's ambitious export targets, or which increased productive capacity in an officially designated priority sector. In several cases the state subsidised private investment from public funds in what became known as 'policy loans'. The state also provided other concessions to the private sector, such as the provision of sites for manufacturing plants, infrastructure and amenities, and tax breaks. In addition, there was a lax or, in some cases, complete non-enforcement of legal provisions relating to labour rights, deliberate oversight of irregularities in company accounts and holding patterns, and government toleration of vast real estate acquisitions (Kong 1996: 50).

This government-business relationship was thus a central one to the growth process. The government was able to pick winners and rewarded businesses who took risks, increased production, and met export quotas. Simultaneously, as a result of their increasing profits, these successful businesses were able to return some of their profits to the government that was helping them to prosper. Maintaining the political system that was ensuring their growth was an integral component of Korean business strategies during this period. This relationship came to be known as chongkong yuchak, literally politics and business growing together.

Significantly, in this relationship business always remained in the more subordinate position, and businessmen were relatively powerless to act independently of the states industrial and export directives. To the extent that the state-business relationship was skewed in this way the Korean state was said to have had relative autonomy (Evans 1979) to pursue its agenda and implement its strategy for economic growth. Because of the power relations involved in this relationship, business effectively became dependent on state favours and the conferral of concessions.

It was this skewing in the power between government and business in the yuchak (growing together) relations that lent it to high levels of corruption. During this period of rapid growth the most common form of corruption was political donations from businessmen to President Park's ruling DRP (Democratic Republican Party), and then to the DJP (Democratic Justice Party) founded by Park's successor, Chun Doo-Hwan in 1980 (see Kong 1996: 49). Because business success depended directly on state support, businesses had to compete with each other to receive favourable consideration. The most expedient means of assuring this support was to contribute funds to the coffers of the ruling party. As Kong (1995: 49) notes, "...such donations greatly advantaged the ruling party within an institutional framework that already confined legal opposition within very narrow parameters. In exchange, business received a plethora of economic concessions...". Apart from support for the ruling party itself, firms also kicked money back into the ruling party via individual officials whom they were able to bribe in exchange for the plethora of concessions which the government controlled. Thus, the strategy for economic growth paved the way for government-business collusion and created virtually unlimited opportunities for graft. Financial gain under this system extended to the ruling party, as well as their relatives and associates, who were in a position to dispense favours to business. In this way the 'developmental alliance' that formed between businessman, bureaucrats and politicians came to operate as an arena for grant, bribery and corruption.

To summarise then, the relationship between the command capitalist economy that has characterised Korean development over the last three decades and corruption has been a strong and enduring one. It was expected that, with economic reform and political liberalisation in the 1990s, the level of corruption would decline. Despite these expectations, the 1990s have been a decade that has, if anything, shown the entrenched and enduring. In the section that follows we examine the some of the major instances of corruption in the 1990s, and speculate as to the reasons for the persistence of corruption despite extensive reforms.

The relationship between corruption and economic and political development has traditionally been posited as an inverse one. In other words, it was thought that increasing economic and political development in a country would bring a concomitant decline in the level and scope of corruption. The assumptions informing this relationship were reasonably logical: political maturity, particularly the transition to a democratic polity, would be marked by increasing public accountability and civil voice (expressed particularly during elections and with the increasing role of civic organisations and social movements); that this accountability would ensure governmental responsibility; this responsibility would be manifest in more transparent and procedural institutions and practices. Economic reform, which would accompany political liberalisation, would help to make businessmen, as well as the bureaucrats and politicians, more accountable.

When Kim Young Sam, the first democratically elected civilian President in Korea since 1961, was inaugurated in February 1993 he took it upon himself to reform the political and economic system of the country. In particular, Kim proposed to eradicate the entrenched corruption that had plagued Korea during the period of rapid economic modernisation. Kim began his term in office with the so-called '100 days reform', which was a symbolic first step towards realising this goal, supposedly revealing Kim's genuine commitment to transforming the system that had operated during the previous authoritarian era.

The reforms were comprehensive and swift. One of the main elements of the reforms was a "real name banking system" introduced by government decree in August 12 1993 in which banking deposits held under pseudonyms were outlawed. Previously, the "false name banking system" had allowed dirty money to pass from businessmen to politicians without detection, as well as allowing politicians to withdraw illegal election contributions and bribe money without being detected by the tax authorities.

The reform purged the bureaucracy of its corrupt elements, punished politicians involved in corrupt and irregular practices, similarly targeted and punished corrupt businessmen, and was initially heralded by the Korean public as highly successful. Virtually all owners of Korea's top thirty conglomerates are facing trial for alleged contributions to former President Rho Tae-woo and Chun Doo-hwan's slush funds. Equally as dramatic have been the results of the fight against corruption within the state itself, with over 5000 civil servants, including cabinet ministers and legislators in the National Assembly, being dismissed or imprisoned on corruption charges to date.

In this initial reform period, the 'slush fund scandal', involving former president Roh Tae-woo, was the major focal point of the reform. In autumn 1995 it was revealed that Roh had amassed a secret political fund amounting to 500 billion won (approximately $US 650 million) while holding political office between 1988 and 1993. Roh had also managed to accumulate 170 billion won in false and borrowed bank accounts after leaving office. Roh was arrested in October 1995 on bribery charges. Fearing that others involved in the scandal would be named publicly, long time opposition leader Kim Dae Jung admitted receiving 2 billion won from Roh during the 1992 Presidential election, and Kim Jong P'il, another major opposition figure, denied ruling party allegations that he had received 10 billion won from Roh. To make matters worse, Kim Dae Jung also alleged that President Kim Young Sam had spent up to one trillion won, or nearly thirty time the legal limit, on his election campaign, and that some of this money had also come from Roh.

Despite the optimistic start to Kim's reforms, confidence soon vanished. A series of events began to unfold to challenge Kim's commitment to reform, and, eventually, to place him squarely within the arena of the corruption that he had so vehemently opposed. The Hanbo scandal which erupted in January this year has raised serious doubts about Kim’s reform agenda, with the governments popularity taking a plunge from immediate post-election levels of approximately 90% to a low of 10% recently. Hanbo, the country’s fourteenth largest conglomerate, is believed to have received special treatment in return for helping along Kim’s 1992 election campaign by contributing large ‘donations’. In return, Hanbo got the government’s approval to build a massive new steel mill. Hanbo founder, Chung Tai Soo, then allegedly bribed legislators and bankers so they would press the banks to approve loans for the project. But when Chung borrowed US$ 6 billion, the company went into bankruptcy and Chung went public.

To add insult to injury, despite initial public support for Kim's commitment to reform, the motives behind Kim's reforms have been met with a great deal of scepticism. As the reforms proceeded it appeared that Kim was merely seeking to increase his own public support by promoting an image as a corruption fighter and, at the same time, curbing the power of the major conglomerates. The Korean media have speculated that the number of corruption related dismissals and arrests are merely an effective, and publicly laudable means of removing undesirable elements in the state and business community. Even worse for Kim, there are now widespread allegations that his second son, Kim Hyun-chul, was involved in the Hanbo and other cases of corruption.

Despite economic reform and political democratisation in Korea, corruption has persisted, and many believe it has actually been on the increase. By opening up the political system and subjecting bureaucrats, politicians and businessmen to public scrutiny, democratisation supposedly creates a more accountable and honest state. Similarly, economic liberalisation leads to the separation of government from business and, in the Korean case, the demise of direct government influence and intervention in the economy. Thus, the main motivation for collusion between government and business, the exchange of financial favours for political support, disappears. However, the government business nexus and system of tukhye relations is still very much alive and well in Korea. This raises important questions about the extent to which Korea is likely to eradicate corruption in the future. Despite democracy, the structural elements that have been the most serious offenders have not been challenged or displaced by the new system.

In this paper we have explored the relationship between economic development and corruption in Asia through an examination of the Korean case of rapid modernisation. In Korea the institutional foundation of the country's economic dynamism was also a major source of corruption, creating the 'collusive economic system that powered its growth'. Hence, major Korean business groups who undertook directives for export-led manufacturing activities since the 1960s have developed an intimate relationship with state officials in a position to dispense favours to businesses. This combination of rapid economic growth with endemic, quasi-institutionalised corruption challenges the stereotype of corruption being economically dysfunctional. Moreover, the argument that corruption will be cleansed from the system as it matures and becomes democratic is also shown to be over-optimistic.

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