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The Birth of a Welfare State in Korea: The Unfinished Symphony of Democratization and Globalization

Published online by Cambridge University Press:  24 March 2016

Ho Keun Song
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Globalization pressured a rebirth of the state in Korea, but in an unexpected direction. Whereas the welfare state retrenched in Western Europe under pressures of the borderless global economy, the Korean state reinvented itself into the guardian of public welfare. That regime shift occurred when the “Asian crisis” struck in 1997 to end the developmental state's way of growth. Previously, the state channeled subsidized bank loans to the chaebol firms (monopolistic conglomerates in strategic industries) and the chaebol company welfare to its workforce in order to secure industrial peace in strategic growth sectors. This de facto class bargain, partly forced by the developmental state and chaebol firms and partly prodded by organized labor, crumbled with the Asian crisis. No longer too big to fail, the chaebol firms plunged into downsizing and restructuring in order to raise profitability, thus precipitating a profound social crisis. The rules and norms of lifetime employment and promotion by seniority gestated during Park Chung Hee's authoritarian rule (1961–1979), and labor's acquiescence—if not consent—to the chaebol-led hypergrowth strategy collapsed as the crisis damaged a third of Korea's top thirty business conglomerates in 1997 and 1998.

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Articles
Information
Journal of East Asian Studies , Volume 3 , Issue 3 , September 2003 , pp. 405 - 432
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Copyright © East Asia Institute 

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References

Notes

This is a revised version of the paper presented at the “International Conference on Globalization and Social Policy” held at Brown University, October 1999. I am deeply indebted to Miguel Glatzer, Dietrich Ruschemeyer, and two anonymous readers for many insightful comments and suggestions as I have revised my analysis. This paper is financially supported by Korea Research Foundation, Grant No. B00113. Any errors or omissions, of course, are mine alone.Google Scholar

1. To be more accurate, the retrenchment thesis has proved true only in a few national cases in spite of the popular belief in the neoliberal proposition that globalization brought the end of the welfare state. Even in most of the advanced industrialized countries where the neoliberal thesis gained wide support, the state has maintained its welfare regime or modified it only marginally with globalization. While the reliance on market mechanisms has increased in financial markets and in the employment system, institutional protections for social welfare remain largely unchanged or only slightly modified. At most, the state in Western Europe has shifted from guaranteeing unconditional and universal protection to that of providing welfare benefits with greater conditionally with the goal of promoting work incentives.Google Scholar

2. Korea stands out from this Western European pattern in three ways. First, as shown in Table 1, it was a “welfare laggard” with social expenditure taking up a mere 2.6 percent of gross domestic product (GDP) as late as 1987, the year when the authoritarian Fifth Republic (1980–1988) collapsed and financial liberalization began. By contrast, most Western European countries channeled more than one-fifth of GDP into social expenditures. Even some Latin American countries with per capita GDPs lower than that of Korea were “advanced welfare states” by its standard, disbursing more than 10 percent of GDP for social expenditures. Second, however, once democratization set in and globalization began in earnest after 1987, social expenditures increased gradually but consistently to hit 6.8 percent of GDP by 1997. This upward trend temporarily stopped in the aftermath of financial crisis, but when it picked up again in 1999, the rate of growth accelerated. Social expenditures exceeded 10 percent of GDP in 2000 for the first time in the history of social welfare in Korea.Google Scholar

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11. To show more clearly the relationship between globalization and social welfare, the table below displays two sets of data: the share of trade in GDP and the volume of capital inflows and outflows as proxies for globalization; and the share of social expenditure in GDP as a proxy for social policy development. The high positive correlation that social expenditures had with the trade/GDP ratio (r = .941) and with capital mobility (r = .923) shows that for Korea, a welfare laggard, the increase in economic openness meant the expansion of state role in social policy. The positive and strong correlation between TRADE and SOCIAL is consistent with Daniel Rodrik's argument that increases in trade generate negative impacts on workers' livelihood and thus stimulate government efforts to compensate for worker distress. See Daniel Rodrik, Has Globalization Gone Too Far? Nonetheless, it is unlikely that trade increase played a greater role than capital mobility in expanding social expenditures. Trade accounted for more than half of Korea's GDP during the Fifth Republic, but it was only after its demise in 1987 that social expenditure grew at a rapid pace. Given the already very high share of trade in GDP in 1987, it is difficult to attribute the expansion of social expenditures since then to any further change in Korea's dependence on trade. By contrast, the sudden, rapid, and extensive opening up of capital markets after 1987 was new, allowing not only the chaebol conglomerates to finance their massive entry into unrelated industries with foreign loans, but also the declining light industries to seek an exit from the Korean economy and seek new homes abroad, especially in the rising Chinese market, thus creating for the first time in Korea's economic development the societal demand for the state to intervene regularly to provide a social safety net for worker distress. Even before the Asian crisis, in the isolated areas of the depressed light industries, company welfarism showed signs of breakdown. The system of company welfarism, however, would have survived longer, had the Asian crisis not occurred. It was only with the Asian crisis that the Korean state came to realize that company welfarism was not politically as well as economically compatible with the requirements of the borderless global economy.Google Scholar

Pearson Correlation Between Globalization and Social Expenditures

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14. The measures included the termination of bank loans to financially insolvent firms, the enactment of a restrictive monetary policy through an interest rate hike, the restructuring of financial institutions unable to satisfy newly tightened prudential regulations, and the lifting of the ceiling on foreign ownership of stocks.Google Scholar

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17. Among the target goals, only the reform of financial institutions yielded unquestionably positive results in the first two years of reform. Through the sale of one of the five major nationwide commercial banks to foreign capital and the closure of merchant banks, insurance companies, and other secondary financial institutions, Kim Dae-jung managed to reestablish the disciplinary power of the market in the financial sectors by the end of 1999.Google Scholar

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20. Prior to 1998, the unemployment budget stood at a very meager level even though unemployment insurance was legally in place.Google Scholar

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24. A similar relationship between globalization and social policy also existed in Japan. With the economy in depression for a decade, the Japanese public increasingly demanded the state to intervene and fill the vacuum left by the fall in company welfare benefits, one result being the state proposal to support the elderly in the areas of health care. The proposal was also justified as a way to reduce the burden on women in caring for older family members.Google Scholar

25. For an analysis of the importance of social performance in the consolidation of democracy, see O'Donnell, Guillermo and Valenzuela, Samuel, eds., Issues in Democratic Consolidation (South Bend, IN: University of Notre Dame Press, 1992); Schmitter, Philippe and Karl, Terry Lynn, “What Democracy Is … And Is Not,” in Diamond, Larry and Plattner, Marc F., eds., The Global Resurgence of Democracy (Baltimore: Johns Hopkins University Press, 1991); Choi, Jang-Jip, The Vision and Condition of Korean Democracy (Seoul: Nanam, 1997) (in Korean); and Im, Hyug Baeg, Market, State, and Democracy (Seoul: Nanam, 1994) (in Korean).Google Scholar

26. Diamond, Larry and Plattner, Marc F., eds., The Global Resurgence of Democracy.Google Scholar