When Mimicry Becomes A Virtue

Superficially, Korea may appear to have pronounced government intervention but it is qualitatively different from what we know about it in India. Government guidance has become market conforming because of its peculiar institutional features. The Korean economic system is divided into two sub-systems a public system committed to development goals and private system pursuing profit motives. The relationship between these two is continuous and interactive. Thus the intent of the public system is to manipulate the decisions of private enterprises so that its developmental goals are achieved, whereas the intent of the private system is to maximise profits, limit risks and achieve stable growth. Harmonious and mutually beneficial relationship between the two is maintained through coopting the financial system in a coalition to provide subsidised credit to the private sub-system. This relationship forms an internal organisation under the hegemony of the government which is a de facto senior partner. The

 

instruments used to forge these relationships are deliberation councils and discussion groups which transmit essential information more directly than through markets.

This quasi-internal organisation becomes a surrogate for the efficiently operating capital market which, to minimise risk and uncertainty, reduces credit rationing and fills the gaps in information channels necessary for the enterprises to minimise their profits. The efficiency of internal transactions relative to market transactions is ensured by two characteristics. First, the bounds of rationality are extended by the internal organisation because its hierarchical structure permits specialisation of decision-making. Second, it removes uncertainty by making it possible to co-ordinate the decisions of independent units to adapt to unforeseen contingencies. In Koreas case, both the characteristics were conspicuously present in its internal organisation led by the government. The government and large private enterprises were able to share the information through vehicles like deliberative bodies.

Generally, absence of competition involves losses but such hazards were avoided in Korea as the organisation was exposed to an outward-oriented development strategy. Prices being externally determined parameters, the government could not arbitrarily change them to cover the consequences of inefficient credit allocation. Because of this, an inefficient credit allocation which supports the wrong projects results in financial losses for the large enterprises undertaking the projects. They may be able to survive with subsidies but their losses remain internal, nevertheless, to the quasi-organisation. Thus, subsidies or not, the quasi-internal organisation will suffer losses and will be forced to reverse its pattern of credit allocation. The external impetus of competition, in this way, offsets the deleterious impact of government intervention in the form of credit allocation of subsidised credit.

Furthermore, the efficiency of the organisation is assured by a good implementation policy. The government co-ordinates inter-dependent enterprises to unforeseen contingencies, and it can resolve by fiat, small number of bargaining indeterminancies to the benefit of the public good.

The Korean experience seen in juxtaposition to several other countries is apt to lead to a wrong perception of Korean reforms. Those who are intellectually wedded to interventionist policies are likely to see a ray of hope in the Korean experience to justify the dirigistic approach to financial development. But they should ask why several countries in Asia, Latin America and Africa which did what Korea did and on a larger scale, failed miserably. Obviously, there are other reasons for Koreas success rooted in its history and its psychological and institutional make-up. The Korean experience demonstrates that a developing country can adopt a market economy by establishing non-market institutions, complementary to the market system and appropriate to its culture and history. The rewards came because the new institutions followed a market-dictated course. The FIs, even when they intervened, did not ignore market-enforced discipline. Nor did the big businesses indulge in rent-seeking activities as under the

interventionist regimes since the quasi-internal capital market had a built-in safeguard against it.

There is another lesson to be learnt. The governments role has to be viewed in a dynamic context. In the early stages of economic development when market imperfections are pronounced and persistent, the private sector is incipient, markets are either non-existent or still evolving, there is a need of the capital market of Korean vintage. Once the critical barrier is crossed by the private economy, the size of internal organisation reaches a point when diseconomies of scale set in and the organisation tends to outlive its usefulness. This means the repressed financial system, which previously worked to the advantage of the private economy, becomes redundant and harmful to the efficient allocation of reso-urces. This explains Koreas financial liberalisation. If other countries need to mimic Korea, then they should do so all the way.