This study comprehensively reviews existing studies on the economic roles of government and suggests ways to improve Korea’s current policies and systems and proposes specific policy tasks.
Traditional economic roles of the government can be categorized into property rights protection, market failures correction, merit goods provision, income and wealth redistribution, and macro-economic stabilization. Countries are now trying to reduce government interventions, strengthen the private sector initiative, and help market systems operate better by enhancing the predictability of public policy-making in each of the fields. Many of the state-owned enterprises established with the purpose of correcting market failures are being privatized. Regulations in the goods, financial and labor markets are being lifted. The competition principle is increasingly gaining voice even in the area of redistributive policy. Macroeconomic authorities are employing more market-friendly measures such as inflation targeting, mid-term fiscal management, and freely floating exchange rate systems. These transformations, however, do not automatically represent the general shrinkage of governmental roles. The role of government is actually expanding in those areas experiencing market failures. The same trend can be seen in Welfare states.
Since the 1960s, Korea has relied upon various state-driven strategies for rapid economic growth. By concentrating state support on sectors deemed strategically important such as export and heavy chemical industries, Korea repressed financial markets, restrained imports, and secured industrial monopolies. Although these policies certainly brought about certain positive results, they also created serious problems such as overinvestment in the heavy chemical sector, high levels of economic concentration, unstable prices, and brutally suppressed labor campaigns. Risk-sharing schemes were set up between the government and private sector, and poor management practices spread across corporate and financial sectors, which eventually combined to lead to the economic crisis in 1997. Korea’s state-driven growth era created, above all, a wave of unrealistic and excessive confidence in the ability of government, which made it painfully difficult to embed sound market disciplines. In a sense, the 1997 crisis helped resolve some of the problems. Many of them, however, still remain.
The heavy chemical industry support policies, among other things, have been highly contested. Some argue for them from the perspective of dynamic comparative advantage. The fact that other East Asian countries achieved higher economic growth than Korea without resorting to similar interventions, however, weakens this argument. The policies’ success may be attributed to their corrective effects of the market failures that resulted from the state-initiated export drives.
한국경제의 성장과 정부의 역할(Korea’s economic growth and government’s role: Past, present and future)
과거, 현재, 미래
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < General|
|Holding||한국개발원; KDI 국제정책대학원|