Economic Prosperity of South Korea

In this post, I want to summarize the key ideas from two forum threads and two articles that provided answer to the forum question, “Why is South Korea so successful?”  I think the attribution of the primary cause to the “meteoric rise” of the economy of South Korea is the central contention in this question. Is the economic success of South Korea really the product of government’s intervention? Or is it the work of the free market?

Collaboration between the Government and the Chaebol

The initiator of the first forum thread acknowledged the limitation of his knowledge concerning the history and status of Korean economy. He is so concerned about the question for refuting the mainstream story about Korea’s economic miracle due to government intervention would provide a strong defense for the free market.

The first responder identified the vital role of the ties between the “chaebol” and the government explaining Korea’s economic success. Such ties started during the regime of Park Chung Hee (1961-1979) where the government recruited the “chaebol” to boost the national economy through industrialization and giving priority to export industry. The government is capable to provide the necessary huge funds for the “chaebol” to accomplish these economic ends through the nationalization of banks of Korea. The “chaebol” enjoyed special privileges from the government by receiving huge loans with low interest rates. This deprived medium-sized enterprises to avail of necessary capital. All of this was made possible by inflating the money supply.

However, the dominance of the “chaebol” was greatly affected due to two critical changes – the end of Park’s regime and the financial crisis in the late 1990s. South Korea now is looking for economic alternative to “chaebol” system since 1999.

Result of US Intervention on Korea’s Economy

The second thread deals with a difficult subject. It is about the impact of US intervention on Korean economy. One thread contributor recognized the difficulty of the subject for dealing with speculation and alternative history are difficult to avoid.

The dominant sentiment in the thread is that simply describing South Korean economic explosion as the total outcome of US intervention is a distortion of the picture. This is because the story of North Korea is intentionally left out. It appears to me that the picture closer to reality is that US intervention actually results both to economic prosperity of South Korea and economic poverty of North Korea. So basing on this second thread, the answer to our central question about the economic development of South Korea is closely connected to US intervention.

An Experimental Period

The third link is more focused on the situation in North Korea. However, I choose to limit my comment on the data concerning South Korea.

The writer, Tim Swanson, identifies that the situation in South Korea is still under experimental period between two ideological forces – pure socialism and relatively free market. Historically, South Korea “flirted” with dictators, but still the free market has survived for five decades. The economic miracle of South Korea is a product of neither the ideal libertarianism nor pure capitalism. If my understanding is correct, the writer is saying that Korea’s economic miracle is an outcome of the combination of these two forces. Moreover, the writer predicts that the free market will triumph over socialism in the end.

Chaebol Using the Government

The fourth answer came from George Reisman. He refused to buy the mainstream story about the economic success of South Korea attributed to government intervention. To him, accepting the mainstream story is tantamount to biblical miracles like raising the dead person to life or the virgin birth. In his mind, the New York Times actually reported the result of a defiance of an economic law, which is impossible to happen. Instead of uncritically accepting such misleading report, Reisman offered a different story. He saw the real cause of the success of South Korea’s economy from the fact that big businesses used the government for their own ends.

For Reisman, the story of big businesses using the government is not new. This has been happening in the US and similar scenario is also true in South Korea; the “chaebol” dictates the decision of the government. Two quotations from Reisman’s article support this assertion:

“The same principle of businessmen using the government for their own ends undoubtedly applies …to every other case of alleged government responsibility for the economic success of a country.”

“It’s sign of the corruption of our culture that today, businessmen feel the need to hide behind the mantle of corrupt ideology and pretend that what springs from their fundamentally life-giving self-interest comes instead from the government, the agency that can give only destruction and death.”

Answering our central question about the economic prosperity of South Korea, we came up with four different but interrelated answers. The chaebol’s collaboration with the government, American intervention, an outcome of economic experiment between socialism and the free market, and chaebol using the government are the answers we gathered from the two forum threads and two articles taken from Ludwig von Mises Institute.


Typical Misunderstanding of Capitalism

In November 2008, Scott Stephens wrote his piece in response to global economic crisis. Rev. Stephens is the minister of Forest Lake Uniting Church and teacher of theology and ethics at Trinity Theological College. His article, Dishonest money: What the financial crisis tells us about ourselves is a typical example of misunderstanding the real character of capitalism.

Free Market

If a capitalist billionaire himself with the caliber of Warren Buffett could misunderstand capitalism, it is but natural to see typical misunderstanding of capitalism similar to Rev. Stephens’. This is where we need discernment to see beyond the appearances of things and also the ability to distinguish between dominant social themes and alternative story.

The influence of mainstream media is very powerful to shape public opinion. Add to it the popularity of both the external and internal critics of capitalism. From the outside, we have the Marxists; and from the inside, we have people like Scott Stephens who himself enjoyed the blessings of capitalism. Both camps agreed in their analysis of the inherent flaws of capitalism.

The fear of Peter Schiff is not at all baseless. He is worried that the worsening crisis would be blamed on capitalism. This is exactly what is happening. Only few are able to take a deeper look at capitalism and realize that the so-called “inherent flaws” are really not coming from the free market, but from another version of it.

A good place to start in this social discernment is to learn the distinction between the economic positions of Warren Buffett and George Reisman. But before we do that, allow me to identify first the misunderstanding in Scott Stephens’ article. After reading Stephen’s article, you can compare it with George Reisman’s open letter to Warren Buffett and see for yourself the discrepancy between two versions of capitalism.

Scott Stephens rightly identifies as “dishonest money” the modern economic phenomenon of monetary expansion. The 2008 crisis not only exposed its faulty foundation, but according to Stephen should also lead to self-examination as to our participation in this crisis due to greed and extravagant lifestyle. Furthermore, it ought to direct us to a realization working for common good and the need for alternative community with a different economic system. He looks to the Church to provide such a community with an economic system different from capitalism.

This is the point that disturbs me, his association of “dishonest money” with capitalism. He appeals to history as his basis. He identifies that monetary expansion has been in existence since 4th century B. C. Aristotle was actually “shocked to observe that the efficiency and simplicity of the market seemed to unleash something monstrous in the human heart.” He further narrates that as people perceived the potential of monetary expansion, they started to lust after unlimited profit. This seemingly unlimited increase in the quantity of money carried with it destructive moral vices like greed, dissatisfaction, and loss of self-control.  Stephens then mourned that those destructive vices in time have been turned into “celebrated virtues” serving as the basic foundation of modern economy. He then concluded, “Capitalism thrives only through these vices.”

As we will see in Reisman’s open letter, it is not actually the free market that unleashed those destructive vices. It was something else. It was the government intervention appearing as “free market.” Stephens’ reading of capitalism is a typical example of misinterpretation of capitalism and an evidence of the success of intervention done by the state.

Stephens’ hope “that those in positions of influence will find a just and effective response to the current credit contraction,” is actually a resignation. Can we really expect that those in power would initiate genuine monetary reform apart from the initiative of an informed public? As Murray Rothbard rightly identifies that due to the combination of both evil and good in human nature, those in power could actually utilize their privilege position for legalized theft.

Stephens’ longing for an alternative community with a different economic system exemplified by the Church could only happen on the basis of a solid understanding of what is really going on. This requires education leading to concrete action. Here I think the Austrian school of economics could provide the necessary tool for us to re-examine the real nature and character of free market economy. 

Part 2