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Development Overview

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Overview of Korea’s development experience

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Development Overview
Industry and Technology General

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General

Industrial rationalization

Toward the end of the 1970s, attention was increasingly drawn to the over-capacity and low profitability of HCIs.1) In response, the government set out an investment coordination plan as part of the Comprehensive Economic Stabilization Program (May 1979) and implemented the plan in two rounds in 1980. The first round (August 20, 1980) was targeted at power generator, automobile and construction machinery, whereas the second round (October 7, 1980) at heavy electric machinery, electronic switchboard, diesel engines and copper smelting. In these industries, the investment coordination plan aimed to merge enterprises if there were too many of them; to reduce excessive capacity and cancel new investments; and to guarantee monopolies if excessive competition was aworry.

In addition to the investment coordination, a series of industrial restructuring programs were carried out in the 1980s to help distressed sectors overcome their difficulties. The shipping industry underwent several rounds of restructuring (December 1983, May 1984, July 1985 and December 1985), in which many shipping companies were merged with the aid of tax benefits and financial support from the government. The restructuring of the overseas construction industry began in 1984 and gained speed in 1986.

The industrial restructuring of these and other industries had its legal basis in the Tax Reduction and Exemption Regulation Act (TRERA) and the Manufacturing Development Act (MDA). These laws enabled the government to designate certain industries for rationalization, provide various tax benefits (such as exemption from capital gains taxes) and financial support, and regulate market entry and investment. The rationalization period was specified in advance for each industry. Nine industries were rationalized after 1985- automobile (1986-1989), construction machinery (1986-1988), diesel engine for ships (1986-1989), heavy electric machinery (1986-1989), alloyed metal (1986-1989), textile (1986-1997),2) dyeing (1987-1988), fertilizer (1987-1990) and footwear (1992-1995).

The industrial rationalization program was meant to improve the competitiveness of the industries. But its success was limited because the government did not adopt reasonable standards in assessing what business categories and companies should be chosen for rationalization. In addition, the government failed to monitor the results of corporate asset disposals.

The industrial rationalization program produced negative side effects as well. It accelerated the concentration of economic power in the hands of the chaebol , which were the only business enterprises with the financial resources to take over troubled companies.
In some cases, it blocked the entry of new competitors and left key industries under the dominance of a few companies. This led to a monopolistic or oligopolistic market structure in many industries. More importantly, it represented another example of questionable government intervention in the economy following the HCI drive of the 1970s, which hindered the development of market mechanisms.

Recognizing these problems, the government changed its industrial policy in the late 1980s. Instead of directly intervening in the market, it decided to rely more on indirect and functional methods such as R&D support. It also began to liberalize the financial sector.
But the reliance on the private sector in taking the initiative also had its share of drawbacks. The government failed to keep close tabs on excessive investments by the large industrial groups in the early 1990s as they sought to expand their business empires.
This eventually led to the 1997 financial crisis. The fundamental problem lay in the inappropriate sequence of liberalizing the economy before strengthening market discipline by abolishing the risk partnership between the state and the private sector as discussed in Chapter 2.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

NOTE


1) See the discussion in Section 4 of Chapter 2.
2) The rationalization of the textile industry began in July 1986 and was extended three times in July 1989, July 1992 and July 1995, and was completed in December 1997.