Korean Industrial Policy: Legacies of the Past and Directions for the Future (World Bank Discussion Paper)

Korean industrial policy, which has guided the Korean economy through nearly three decades of spectacular growth, is showing its age. The policy has not been adjusted fully to the new challenges facing the economy, and it has not recognized the obsolescence of its key instruments. This paper argues that the time has come to disengage the government from managing the economy's structural development and to adopt a new compact to delineate the responsibilities of business and government. Under this compact, responsibility for allocating investable funds would be shifted fully to the industrial and financial sectors, but at the price of greater competitive discipline and regulatory oversight. Establishing this new framework presents an enormous challenge to policy. In addition to complexities of the transition, the government will have to maintain macroeconomic stability and the momentum of savings and investment, tackle the new market failures associated with Korea's rising technological level, and develop new institutions to increase the flow of information, reduce conflict, and ensure the equitable sharing of the fruits of economic progress. In coming to concrete policy recommendation concerning financial sector reform, the role of the chaebol (Korean conglomerates), and the emerging new role of the state as epitomized by Korea's legendary bureaucracy, the paper reviews Korea's industrial policy environment and the experiences of other more developed economies. The Republic of Korea's industrial policy has directed that nation's economy through nearly three decades of spectacular growth. But the authors of this paper maintain that this policy is showing signs of being outmoded. The time has come, the authors argue, for the Korean government to stop managing the economy's structural development and to redefine the responsibilities of business and government. Under this proposed compact, the allocation of resources would shift from the government to the private industrial and financial sectors. The transformation of the government bureaucracy from an ad hoc policy role to one of a transparent and predictable regulator is a key to the success of this undertaking. These new directions would present the government with enormous challenges. Greater competitive discipline and regulatory oversight would be required. While dealing with the complexities of the transition, the government would have to maintain macroeconomic stability and the momentum of savings and investment. For comparison, the study examines the industrial economies of France, Germany, Japan, and the United States, which underwent similar shifts