Industrialization, Democratization, and Authoritarianism
Financial Industry, Service
Industries and Compressed
Obstacles of Financing
• Tight financial resources : Poor
savings cannot meet the demand for
• Deviation in incentives : Commercial
banking pursues after short-term
profitability of low risks, while
government takes high risk with longterm benefit for economic development.
• Government increased money supply
(i.e., forced saving) in order to acquire
• Commercial banks had to be coerced to
take high risk with long term benefit.
• Korean government took over the
management of all private banks by a
special legislation in early ’60s.
• Big portion of bank loans were directed
to strategic projects without considering
their short term commercial profitability.
• Favored loans were provided for
restructuring troubled ventures.
• Bank loans had been extended not by
commercial sense but by government
GD Credit Rationing 2
• Failure of bank-financed projects
created non-performing loans of nonnegligible size.
• Commercial banks made use of timely
stock market boom by issuing new
stocks to recapitalize their financial
• All banks’ losses were also covered by
increased money supply.
GD Credit Rationing 3
• Losses of banks had not been written
off and remained as liability to the
Central Bank in book keeping, even
though the Central Bank would never
demand its repayment.
Effect of GD Credit Rationing
• Succeeded in directing domestic savings into
• Supply side : Neither commercial mind nor
advanced financial skill had been developed
in commercial banking sector. Accumulated
bad debts undermined the credibility of
• Demand side : Business sector became
heavily reliant on governmental favor.
• OECD membership required financial
• Government formally repealed directedcredit-rationing, and disclosed banks
• Depleting foreign exchange reserves in
1997 undermined state credit and
thereby credit rating of commercial
Financial Liberalization 2
• Banking sector was unable to handle
properly the financial crisis 1997.
• Critiques argue that Korean financial
sector was not ready for full
liberalization. Weak financial sector
used to be a good target of Hot Money.
• Immediate task : Closed down hopeless
banks, and extended massive public
lending to viable ones to take care of
huge volume of non-performing loans.
• Long Term task : Extensive revision of
financial regulatory scheme, and foster
• Korea survived financial crisis of 2008
owing to Restructuring in late 1990s.
• What are services?
• Classical economists’ view on
productive and unproductive labors.
• Tourisms, Medical services, Educations.
-Tourism : Luxuries.
-Medical services and Educations :
Basic needs & Luxuries.
• Domestic tourism was O.K., but tourism
to foreign countries was viewed as
luxury and wasting of foreign
• Golf was deemed as a sport for riches,
and it was heavily regulated by high
special taxes and strict control of golf
• Medical services are for basic needs,
and therefore the fees were strictly
regulated so that average layman may
afford without difficulties.
• Hospitals aiming at commercial profit
are not allowed so that domestic supply
of high quality medical services is
• Plastic Surgery is an exception.
• Equal opportunity for education is the
fundamental principle for social justice.
• Does equal opportunity necessarily
mean identical content of education to
• Korean government imposed equal
education up to high school level by
banning inter-school competition.
Economic Development and
Demand for Services
• Successful economic development has
raised people’s income.
• Higher income enabled people to
demand high quality services.
• State regulation restricts domestic
supply of high quality services. What
Let’s Go Abroad!
• Golfers went abroad on golf tourism,
while foreign golfers avoided expensive
• Medical tour to foreign countries
• Early study-abroad program is
welcomed. 100 Korean students go
abroad while 5 foreign students visit
Korea. ※Wild Goose fathers.
Increasing BOP Deficit in Service
• Balance of Payment statistics (billion
2003 2004 2005 2006
Current Account 120 282 150
220 376 327 292
-74 -80 -137 -188
• Major portion of trade surplus is offset
by service deficit.
Old Mind Faltering in New Age
• Many Koreans became quite rich, and
their demand for quality services
constitutes as big a market as an export
market of some manufactured goods.
• But thrift-and-equality oriented mind of
the past does not tolerate domestic
activities to produce luxurious services,
and leave the market to foreign
Old Mind Faltering 2
• Thrift-oriented mind was essential in
early stage of development, when
domestic market was thin.
• Now income growth generated a strong
demand for high quality services.
• Service industries are ready to serve as
next stage strategic industries for
Examples of Medical Tourism
• Singapore’s Healthcare Service Working
2000 2002 2004
F. patients (1,000) 165
Spending (mil $) 430
• Thai aims at Healthcare hub and
deregulated medical industries.
• Shanghai World Link Medical and Dental
Center invites first class MDs.
Korea in 1950s
• “It is much easier for you to see a
beautiful rose making flowers in
garbage field than to see democracy
working in South Korea.”
• “The economic aid to Korea will have no
target, since the natural environment is
very much unfit to agriculture, and the
work force is too unskilled for Korea to
try any manufacturing industry.”
Aiming at An Advanced Country
• The successful industrialization has
raised Korea’s GNI to about
• Democratization has brought forth a
government of the people, by the
people and for the people at least in
• Is South Korea an advanced country?
• What on earth is an advanced country?
Social Services and Providers
• Each human society provides a variety
of services to its members.
• Advanced societies provide services of
high quality, tangible and/or intangible,
while developing ones cannot.
• There are agents for each service
provided, we call them service providers,
who make decisions and actions on
provisions of that service.
Less Developed Economies Are
• LD economies lack qualified providers.
• Poor provision mechanism – institutions,
custom, and culture.
• Only a limited number of providers are
capable of providing services of poor
qualities in insufficient amounts.
• Shortage of services strengthens
• Providers’ power helps to build up their
own authority in their own sectors,
• Authoritarian ruling, not democracy,
prevails in political regimes of most LD
• Political authoritarianism is a
representation of provider-centrism in
• Providers dictate, and people
• Services tend to be provided mainly at
the providers’ convenience rather than
for the improvement of people’s
• Providers’ tyranny may not be properly
controlled as there are usually no
• Sometimes, the shorter and the poorer
the services are, the stronger the
provider’s authority becomes.
• Incumbent providers even tend to
exclude the emergence of promising
new candidates for providers.
Provider-Centrism : Examples
• Less efforts are spent to improve commodity
qualities and AS is poor for the goods sold.
• Education is provided at the convenience of
teachers rather than for the needs of students.
• School programs are needed not for study
bur for degree. Degree matters in eligibility
for positions of providers, capability not .
• Politicians buy votes cheap from voters, who
have lost every hope, vision and enthusiasm
in the future of their country.
• Create and maintain a maximum
number of regulations to entrench the
positions of providers.
• Extra perquisites come in the form of
briberies to buy favor from providers
generate a variety of corruptions.
• A provider’s position is quite safe
regardless of her/his performance.
How To Break Down the
• General Principle : “If a provider is not
acting properly, then replace her/him by
• There are two problems with the
General Principle. The one is “How To
Replace?”, and the other is “Is There
Any Better Alternative?”
How To Replace Bad Providers?
• Providers belong either to the private
sector or to the public sector.
• Marketization : Introduce competition
among providers in private sectors.
• Governance : Establish a solid
monitoring and rewarding system over
providers in public sectors.
Market and Competition
• A provider-centered market is the
• Make sure that there be no unfair barrier
• Active competition will dismiss inferior
providers and invite superior ones.
• Make up legal arrangements so that the
market may remain ever competitive.
• Make the process of public providers’
decision and action as transparent as
• Award appropriate prize for good
performances and due penalty,
including replacement, for bad
Is There Any Better Alternative?
• The shortage of the qualified manpower
constitutes the basis of provider-centered
• So when a provider is to be replaced, the
replacement is not guaranteed to be any
• But only the belief that “Only Good Providers
Will Retain Their Posts” will drive providers to
improve their capabilities.
Present Status of South Korea
• Rapid growth of income empowered
consumers to discipline providers in
• Globalization has opened markets for
• Providers in service industry still retain
provider-centerism owing to heavy
• Democratization has demolished
authoritarianism in public sector to a
• But governance system is not ready yet.
coexists in mixture with amateurs, who
are temporary replacements, wielding
• Transitory chaos.
From Hungry Society to Angry
• Rapid change challenges vested
interest every moment.
• Everybody in keen to defend his own
interest in confrontation with everybody
• Everybody is angry now despite that
they are not hungry any more.