The Asian Crisis and Korean Economic Nationalism

Of the five Asian economies most severely affected by the financial crises of 1997–98, the Republic of Korea has undergone the most fundamental institutional transformation. For some observers, the Korean response to the crises was all the more surprising because its long-term economic record had been far superior to that of the other crisis economies — Indonesia, Malaysia, the Philippines, and Thailand. Compared with the other four countries, Korea had sustained a higher rate of economic growth (an average of close to 8 percent) for a longer period (more than three decades).

Korean growth, unlike that of the Southeast Asian economies, had been based primarily on the nurturing of domestically owned and controlled companies. The Korean developmental trajectory emulated the technonationalist strategy of Japan. A measure of the success of this strategy was that Korean corporations became household names in the West in consumer electronics, automobiles, and domestic appliances. A Korean company, Daewoo, was the only company not based in Europe, Japan, or the United States that ranked in the mid-1990s in the top fifty of the world's multinationals. Korean firms had logged an impressive number of patents in industrialized economies (see Chapter 4 in this volume).

Like other East Asian countries, China has been undergoing a process of liberalization and of opening to the world economy. During the past twenty years, economic reforms have slowly moved the country as a whole toward a more open, more market-oriented economy, and science and technology (S&T) policies and institutions have been reformed in a similar spirit. Policy makers gradually dismantled a highly centralized and hierarchical model of technological innovation and began replacing it with a more flexible and “bottom-up” system. Leaders at all levels have moved away from a research and development system dominated by central planning and state-owned enterprises to one that increasingly relies on individual innovation and entrepreneurship, while foreign direct investment (FDI) and multinational corporations both play larger roles in Chinese development plans. The openness to a diversity of actors crucially includes both outside actors — multinational corporations (MNCs) — and domestic non-state-owned corporations. China's entry into the World Trade Organization (WTO) promises to consolidate these trends.

At first glance then, China seems to be part of a larger project of the recasting of technology policy within the region. But ironically, in recent years, China's policy has also evolved in ways that bring it closer to technonationalism, at least in some senses of the word.

This book is about crisis and choice, an enduring relationship in world politics and, especially, in economic change. Modern social science is filled with “shock adjustment” metaphors invoked to characterize the ways in which change occurs. Much like our understanding of evolutionary biology, notions of “punctuated equilibrium” or “paradigm shifts” presume that significant institutional and normative adjustments follow sudden major challenges to a previously stable system. War is the most common “punctuation.” We speak confidently of a post—World War II world that operated under different rules (as set by the superpower confrontation) and with different institutions (e.g., those of Bretton Woods) than the prewar one. New ideas, such as Keynesianism or communism, can have the same effect.

Similarly, technological innovations — in transportation, communication, or other elements of infrastructure — can also provide dramatic “punctuation” of a stable order. Entrepreneurs had different expectations of markets before the Industrial Revolution than later, before the diffusion of railways or of telephones than afterward, or prior to the introduction of just-in-time production than they do today. Similarly, microelectronics and then the Internet each transformed the business models deployed for generating wealth and profit. In each case, new technology led to the redistribution of economic and political power. New products, like new world orders, can transform what we believe to be the “normal” social, political, and economic conditions within which we make choices.

Japan's technoindustrial regime, which I call “relationalism,” has proved remarkably resilient in the face of powerful market and political forces for change. Despite a decade of economic setbacks capped off by the Asian financial crisis, Japan continues to be held together by a dense web of longstanding and mutually reinforcing relationships between government and business, between nominally independent firms, and between labor and management. This is not to say that Japan is immutable. It clearly is undergoing change in the distribution of economic gains and losses, as evidenced by growing income inequality. The “big tent” of relationalism today protects fewer Japanese citizens than it has at any other time in the postwar period. But the tent itself is still standing tall.

This chapter confirms a key assertion pointed out by several of the authors of this volume: globalization — or, more specifically, global financial integration — does not necessarily compel heterogeneous technoindustrial regimes to converge toward a single model. Variation survives because existing institutions, norms, and capabilities (both objective and creative) stand in the middle of the transmission belt leading from exogenous pressure to political-economic response, mediating the impact. Japan's experience reveals that a very large economy held together by intraelite cooperation can absorb such exogenous pressure better than a small economy driven by intraelite rivalry — at least for a while.

The greatest strengths in South Korea's national innovation system in earlier decades became its most serious liabilities in the 1990s, as South Korea failed to adapt to the rapidly changing political and economic environment. This chapter first assesses the impact of the Asian economic crisis of 1997 on South Korea's national innovation system. The crisis resulted in numerous negative consequences in the short term but also provided a rare opportunity for long-term reform. The chapter then discusses how South Korea has progressed in reengineering the various aspects of the technonational innovation system that has bearing on the future competitiveness of its economy. South Korea will make major changes to accommodate to multinationalization, but increasing globalism will be a means toward a nationalist end.

Beyond Technonationalism

South Korea's phenomenal economic growth in the 1960s and the 1970s, during the first two decades of its industrialization, may be attributed to its strong system for national innovation. But major strengths in the early decades have become liabilities in more recent times, as South Korea failed to adjust to rapidly changing political and economic circumstances. This failure, together with mismanagement of the financial sector and foreign investor panic, led to the onset of a major economic crisis in 1997.

The 1990s have been called Japan's lost decade. The decade began with the collapse of Japan's “bubble” as share prices plunged 40 percent in 1990, followed by a sharp decline in land prices. The heady spiral of the late 1980s “bubble economy” now became a vicious circle of bad debts and declining asset values. A string of high-profile corporate failures followed, and the decade closed without a resolution of Japan's financial crisis. Nor was the crisis limited to the financial sector. Major construction companies that had rashly offered developers collateral or guarantees during the bubble boom were kept alive only by massive injections of public funds in the form of stimulus packages.

Eventually, malaise hit Japan's dynamic manufacturing heartland. After a period of massive investment in the late 1980s a substantial cyclical adjustment was to be expected, but at the same time the cumulative hollowing-out effects of foreign direct investment (FDI) and difficulties in reorienting domestic operations toward higher-value-added, knowledge-intensive goods and services began to be felt, particularly in the small and medium-sized enterprise (SME) sector. Large trade surpluses continued, with new opportunities for equipment exports to power the growth in East Asian manufacturing prior to 1997, but there were now growing signs that many Japanese companies were falling behind in the fast-moving, fiercely competitive, global “new economy” that was emerging.