POLITICAL ECONOMY OF INDUSTRIAL TRANSFORMATION: A CASE STUDY OF THE DEVELOPMENT OF AN AUTOMOBILE INDUSTRY IN KOREA by MOON-SOO LEE (Under Direction the of Christopher Allen) ABSTRACT The automobile industry in developing countries has been led by a few transnational corporations. There is one significant exception to this rule: the Korean automobile industry. Not only has the Korean automobile industry, within a relatively short time span, increased its production capacity to the level of advanced nations, but has also been able to maintain managerial independence over its developmental period by producing its indigenously-designed models. However, a careful examination reveals that the process of auto industrialization in Korea has been characterized by the variances of performance across not only different periods but also different companies. Contending paradigms cannot successfully explain such variances. For them, either the market-confirming initiative of private capital or market-distorting and top-down state policies seem to be a decisive factor in determining Korea's successful automobile industrialization. The variances of performance over time are explained in this study by what type of coalition between state managers and local firms prevails at a specific time. Two types of coalitions are highlighted: (1) the neomercantilist coalition made between the nationalist section of state managers and independent-oriented local firms and (2) the liberal coalition made between liberal-minded economic bureaucrats, stability-oriented political leaders and TNC-dependent local firms. To explain the dynamism of coalitional politics, I examine the structures governing industrial policymaking processes in Korea. Specific attention is paid to the insulation of the Ministry of Commerce and Industry from other economic ministries, particularly from the Economic Planning Board, to the organizational and financial prowess of individual local firms, and to the characteristics of state-business nexus. It is also pointed out that these institutional structures are not constant, but shifting as a result of previous industrial policies and the performance of the automobile industry. With this theoretical model, I examine the history of the Korean automobile industry, dividing it into six periods on the basis of the varying performance of the industry over time. One critical implication comes from this study. The achievement of the Korean auto industry is very precarious one. Once there appears the crack in the neomercantilist coalition, the degeneration of the Korean automobile is inescapable. INDEX WORDS: Industrial Policy, Automobile industry in Korea, The Role of Government in Korea, Political Economy of Korea. POLITICAL ECONOMY OF INDUSTRIAL TRANSFORMATION: A CASE STUDY OF THE DEVELOPMENT OF AN AUTOMOBILE INDUSTRY IN KOREA by MOON-SOO LEE Bachelor of Law, Korea University, Korea, 1985 Master of Public Administration, Korea University, Korea, 1987 A Dissertation Submitted to the Graduate Faculty of The University of Georgia in Partial Fulfillment of the Requirements for the Degree DOCTORAL OF PHILOSOPHY ATHENS, GEORGIA 2002 © 2002 Moon-Soo Lee All Rights Reserved POLITICAL ECONOMY OF INDUSTRIAL TRANSFORMATION: A CASE STUDY OF THE DEVELOPMENT OF AN AUTOMOBILE INDUSTRY IN KOREA by MOON-SOO LEE Major Professor: Christopher S. Allen Committee: William O. Chittick Markus M. L. Crepaz Robert Grafstein Han S. Park Electronic Version Approved: Maureen Grasso Dean of the Graduate School The University of Georgia December 2002 ACKNOWLEDGMENTS First of all, I would like to thank Professor Christopher Allen. My interest in comparative political economy in general and industrial policy in particular originated in his class. Without his constructive guidance and strong encouragement, this dissertation would not have been come to an end. I am also grateful to Professor Robert Grafstein, who has always reminded me how the scientific study of political phenomena should be. I am in debt to Professor Han S Park who taught me how to carry out an in-depth case study, particularly in the area of Third World politics. My special thanks go to Professor Ho-Jin Kim at Korean University who guided my master degree. Working with him as a student and a research assistance, I learned a great deal from his thoughtful insights on the dynamism of Korea's political economy. My thanks go to my family. My parents have for a long time assisted me in every respect. I am afraid this small achievement can live up to their love and contribution. Lastly, but most importantly, I would like to pay the deepest tribute from my heart to my wife and son, Miae and Byong-Joo, who have made me realize how precious their love and support are in my life. This dissertation is dedicated to my family. iv TABLE OF CONTENTS Page ACKNOWLEDGMENTS ................................................................................................. vi LIST OF TABLES........................................................................................................... viii LIST OF FIGURES .............................................................................................................x LIST OF ABBREVIATION.............................................................................................. xi CHAPTER I INTRODUCITON.........................................................................................1 1. Purpose of the Dissertation..................................................................1 2. Why an Auto Industry? .......................................................................8 3. The Korea's Auto Industry in a Comparative Perspective ...............10 4. Research Design, Methodology, and Data .......................................23 5. Organization of the Study..................................................................34 II EXISTING APPRAOCHES TO INDUSTRIAL TRANSFORMATION IN DEVELOPING COUNTRIES ....................................................................40 1. Contending Approaches Explaining the Rapid Industrial Growth in the East Asian Countries ......................................................................42 2. The Background of the Emergence of Market-Centered Approach..43 3. Market-Centered Approach: Product Cycle Theory .........................45 4. State-Centered Approach ..................................................................53 v 5. Conclusion.........................................................................................61 III THEORETICAL FRAMEWORK OF THE STUDY .................................63 1. Major Concepts of the Study.............................................................63 2. Institutional Factors Determining the Outcome of Coalitional Politics and the Conditions of Their Changes................................................88 3. Analytical Model.............................................................................119 IV PRE-1970s: SETTING THE STAGE .......................................................121 1. Background of the Korean Auto Industry .......................................122 2. Auto Industry in the 1960s ..............................................................127 3. Conclusion.......................................................................................147 V THE EARLY 1970S: CRISIS AND SEARCHING FOR A NEW STRATEGY OF INDUSTRIALIZAITON (HCI PROJECT) ..................149 1. Automobile Policies in Korea between 1967 and 1971 ..................151 2. Economic Crisis and its Institutional Repercussions ......................162 3. Political Crisis, the Formation of an Authoritarian Regime and the HCI Plan..................................................................................................173 4. Conclusion.......................................................................................178 VI THE 1970: NEW DIRECTION OF AUTO INDUSTRIALIZATION.....180 1. Enhanced Performance of the Korean Auto Industry During 1973-1979........................................................................................184 2. Auto Policies during the Era of HCI ...............................................188 3. The Formation of a New Coalition..................................................198 4. Conclusion ......................................................................................236 vi VII THE EARLY 1980S: COLLPASE OF YUSHIN REGIME AND THE POLITICS OF STRUCTURAL ADJUSTMENT.....................................239 1. The Legacy of Heavy-Chemical Industrialization Policy ...............240 2. The Politics of Restructuring the Auto Industry, 1980-1981 ..........251 3. Conclusion: Institutional Legacy of the Merger Policy ..................262 VIII RECOVERY OF THE AUTO INDUSTRY AND SEARCHING FOR A NEW INDUSTRIAL POLICY ................................................................ 265 1. The Recovery of the Korean Auto Industry in the 1980s................268 2. The State’s Auto Policies in the 1980s............................................279 3. Institutional Structures of the Auto Policies in the 1980s...............291 4. Conclusion.......................................................................................324 IX THE 1990: FADING AWAY OF A DEVELOPMENTAL STATE ........327 1. Performance of the Korean Auto Industry in the 1990s..................327 2. Searching for New Institutions of Industrial Policymaking............331 3. Samsung's Trial of Entering the Auto Industry...............................346 4. Conclusion.......................................................................................373