Recognizing and Shaping Appropriate Government Roles: Some Lessons from the Korean Policy Framework

In the course of industrialization and technological development, the Korean government has employed both direct and indirect measures to spur economic growth and technological innovation.

The Korean government used trade protectionism, pursued export promotion policies and provided subsides to favor a few chosen chaebols, among other interventions. It is arguable that policy instruments for rapid economic development in the 1960s and 1970s had moved in the right direction, or they had crippled the development of other important factors needed for robust economic development over the long haul. At the later stages of industrialization, the government changed little in response to global market changes and the political and social environments. The productivity improvement of the government sectors has been long overdue.

The government’s frequent intervention in markets and unnecessary regulations often distorted a free market economy. A dubious collusion between the government and chaebols not only led to political corruption but resulted in misallocation of resources and huge non-performing loans. Technological competence acquired by chaebols didn’t generate technology spillover effects on innovation at other domestic companies. Further, insufficient R&D funds were given to SMEs, triggering the polarized R&D structure.

Whether the Korean government’s promotion of a particular industry through various kinds of taxation and financial incentives was desirable is debatable. Although this policy initiative might had been necessary to build the industrial foundation in the early stage of industrialization and helped chaebols grow, it may have caused unintended consequences such as lost opportunities in other promising sectors and problems of skewed industrial structure in the later stage.

All in all, the Korean policy framework predicated on the state-led economic development model imposed both advantages and drawbacks on the economic landscape of Korea.

Japan has had the similar industrial structure and predicaments. In fact, Korea has emulated the Japanese-style economic development model in the process of industrialization.

Probing into the Korean policy framework teaches us how public policies not only accelerate the economic development and technological advancement but incur some structural risks, intended or not. In some cases, costs of the government’s direct interventions seem to have outweighed benefits. Bearing in mind that each country operates in different political, economic, historical, and cultural contexts, one might have to realize that there is a limit to what governments can do and there are unintended consequences of government’s excessive measures.

Government interventions might have to be geared toward providing support environment where innovation and entrepreneurship can flourish on a level playing field (e.g., tax incentives for emerging business and technology, a healthy financial market mechanism, and solid National Innovation System) and building social infrastructure in which human capital can be nurtured and mobilized and foreign firms are willing to locate their production and R&D centers.

Regardless of what economic system a country has, it feels to me as though government interventions a country adopt and pursue would be key defining factors to grow the economy in the coming years, given the current global economic conditions, like it or not. That’s why one has to be more mindful of policy decisions, and a government needs to think long and hard when instituting various government-sponsored programs.