The Role of Administrative Reform in Korea’s Economic Development

The Role of Administrative Reform in Korea’s Economic Development Jin PARK, Ph.D. KDI School of Public Policy and Management

KDI • Gvt-funded (50%) research inst. in economic policy (1971~) • Mission: Economic Policy advice (economic planning in the past) • Covers all areas of economy with around 60 Ph.D.s and 80 Masters KDI School • Graduate School (’98~) for Master degree in Public Policy and MBA • Teaches in English and 100% scholarship for international students • 3. Annually admits 270 people with diverse composition • - international (20%), Korean civil serants(25%), Corporation(40%), • General students(15%) (www.kdischool.ac.kr) Introduction of KDI and KDIS

Presenter PARK, Jin (朴進)1991 : Ph.D. in economics, Univ. of Pennsylvania1992~1998 : Research fellow, KDI (韓國開發硏究院)1998~2001 : Director, Administrative Reform Team, Ministry of Planning and Budget (企劃豫算處 )2001~2004 : Professor, Associate Dean, KDI SchoolCurrentlyProfessor, KDI SchoolDirector, Center for Conflict Resolution and Negotiation of KDI School Member, Presidential Commission on Policy Planning(大統領諮問政策企劃委員會委員)

Table of Contents I. Administrative Support for Economic Growth during 60s ~70s II. Transition of Government for the Growing Market Economy after the economic Crisis

I. Administrative Support for Economic Growth during 60s ~70s

Capability for Development • Political leaders • Endowed resources • Means to organize the resources - Willingness to response to social needs - Capacity to set the right visions and strategies - Ability to build bureaucracy to implement the strategies - Ability to mobilize the resources - Capacity to generate and implement right policies to achieve the visions set by the political leaders What is the role of the administration system in Korea’s early economic development?

Three areas 1. Organizational Build-up - Concentration of information - Checking by the President - R&D 2. Personnel Management - Recruiting and training for civil servants - Job placement and promotion - Guiding Principles 3. Anti-Corruption - Evaluation and incentives - Monitoring Scheme

1.1 Organizational Build-up: Concentration of information • Presidential Office - President PARK had three senior economic advisers - 1 (General economic issues), 2 (Heavy and Chemical Industry), 3 (Tourism promotion, temporarily since 1972) • Economic Planning Board (EPB, 1961~1994) - Planning Bureau from Ministry of Reconstruction - Budget Bureau from Ministry of Finance - Statistics Bureau from Ministry of Interior - Foreign Capital Bureau (new establishment in 1961)

1-2. Organizational Build-up: Checking by the President • Monthly Economic Report Meeting (1963~) - Format: EPB reports to the President - Participants: President, EPB and other relevant Ministers, Bank of Korea, Major Banks, Private Firms, Economists - Role: Discuss current economic issues * anecdote: Feb. 5th, 1971 (Tong-Il rice for green revolution) • Monthly Trade and Export Promotion Meeting (1965~) - Format: Ministry of Commerce and Industry reports to the President - Participants: President, MOCI and other relevant Ministries Private Firms and Major Banks - Role: Check the export performance and discuss export promotion * Export Day (Nov. 30th): 0.1 billion $ of export in 1964 (284 b$, ’05)

1-3. Organizational Build-up: R&D • Korea Institute for Science and Technology (KIST, 1963~) Korea Development Institute (KDI, 1971~) - Start of government-funded research institutes - Attracted many scientists in the advanced countries with higher salary and other benefits (minimize brain-drain) * KDI research fellow in the early 1970s was offered: an apartment, a car with a chauffeur, an office, two RAs and one secretary. - Government played an important role in making a network between the industry and the government-funded research institutes

2-1. Personnel management: Recruiting and Training for Civil Servants • Recruiting System - Since 1963, the entrance exam for civil servants became an appointment exam, which was just a qualifying test before. * Different entrance exam for 5th degree, 7th degree, 9th degree - Top graduates from best universities joined government such as EPB and Bank of Korea. (No nepotism) • Training System - Massive retraining program started 1961 (influenced by the military) * average annual trainees: 136 (’49~’60) >>> 3,000 (’61~80) - Central Officials Training Institute was newly established in 1961 based on former National Officials Training Institute * In 1963, Officials Training Law was enacted to enforce training. - During 1970s, mental was emphasized with the start of the Saemaul Movement.

2-2. Personnel management: Placement and Promotion for career civil servants • Two purposes: Dissemination and Incentive - Presidential Office: After serving 2~3 years at the Office, those elite officials were sent back to their home Ministries with a promotion. - EPB: Many EPB members became vice Ministers and Ministers of the other Ministries. • Technocrats were respected. - Up to the Assistant Minister level, career civil servants completely filled the positions. In fact, most of vice-Ministers and many of Ministers were from career civil servants. * Since 1999, an open system was introduced so that 20% of director-generals should be appointed by open competition. - Ratio of Ministers with career military background: 38.3% in the non-economic Ministries 14.9% in economy-related Ministries (0% in Ministry of Finance)

2-3. Personnel management: Guiding principles • Evaluation criteria - Result oriented rather than process-oriented administration * Sometimes, quality of the performance and democracy was sacrificed due to so-called ‘Bulldozer’ administration geared only to the target. (e.g. collapse of apartment, export without profits) - The target was very simple. e.g. 10 billion $ export, 1,000$ GDP/capita by 1980. • Administration vs. Legislation - Political influence on the economic decision making process was minimized by the President. (The other side of the coin of the underdeveloped democracy.) * Legislation has gained a power since KIM Dae-Jung Administration (1998~2003).

3-1. Anti-Corruption: Evaluation and Incentives • Corruption has been an important issue in Korea, but not that serious enough to endanger the development potential. • Evaluation system - Result-based evaluation system with very simple target decreased the possibility of corruption. * Especially, when the target is ‘export’, one has to go through international competition to prove oneself. • Incentives - Technocrats had many opportunity to serve in the related areas after their retirement. So it is to their benefits to stay clean. * During mid 1980s, 150 out of 470 EPB retirees are working for private firms and 196 out of 311 are working for banking sectors. * Of course, this created ‘conflict of interest’ issue, and it is now regulated by the government.

3-2. Anti-Corruption: Monitoring Scheme - Mutual check and balance among intelligence agencies - Although not as strong as it is now, a monitoring scheme by news media and the scholars was working. - The President himself was very clean.

II. Transition of Government for the Growing Market Economy after Economic Crisis

Korea’s Economic Development Model • Government-led growth • High savings rate, active investment • Export-orientation • low wage, work ethic • Market friendly strategy (WB, 1993) • Economic development before democracy Is this a right model in Korea in 1990s?

Growth Decomposition of S. Korea 1971~1980 1981~1990 1991~ 2000 (%) 8.6 1.0 7.6 4.6 2.5 2.1 3.0 1.4 0.7 0.9 7.4 -1.0 8.4 5.6 3.2 2.4 2.8 1.4 0.8 0.6 6.1 -0.7 6.8 3.4 1.5 1.9 3.4 1.5 0.7 1.2 Real growth rate Irregular factors Pot. growth rate(A+B) Factor inputs(A) Labor Capital TF Productivity(B) Economies of Scale Resource allocation Technological prog. Is Government intervention effective for tech. progress?

Consequences of Government’s Intervention Development of a market economy was seriously hindered. Government intervention is at first effective, but as private sector grows, it is not effective and even hampers economic growth. The government became increasingly bloated and unresponsive to demands for reform. The economy was hampered by collusive ties between government and businesses, arbitrary regulations and corruption.

Crisis and Reforms • Korea suffered the economic crisis in 1997 because it did not transform the government and its role when it had to. - To start a new as a government that sets an example for other sectors of the society to follow. - To start a government that truly serves the public >>> The government reform had to be implemented with utmost priority. the need to establish a firm foundation upon which to rebuild the economy

Efforts for Government Reform after the Crisis Efforts of previous Administrations Efforts after the crisis The reform drive was almost unprecedented in its comprehensiveness, proceeding simultaneously on all fronts, Including both central and local governments, public enterprises, and quasi-government organizations. The only exceptions were the political and judiciary divisions. Past attempts were partial in nature, whether they focused on government reorganization, privatization, or deregulation.

Korean Government’s Transition Open Economic System Government as a Fair Coordinator Frequent Intervention and Over-regulation of the Private Sector Rapid Economic Growth through Government Intervention 1980s 1960s Since 1997

New Role of the government • The role of the Korean government has changed from an active leader and planner of economic activities to a fair coordinator and regulator of the economy, permitting greater reliance on private initiative. • From rowing to steering. (David Osborne) To maximize private sector autonomy and initiative, government intervention and regulation has been sharply reduced, superfluous government functions has been abolished, reduced, or transferred to the private sector. The government’s role in protecting the weak, establishing a social safety net, market supervision and environmental protection, among others, has been substantially strengthened.

Lessons Learned • Lesson 1: Strong political foundation and support are critical • Lesson 2: Maintaining consistency is a crucial factor for success • Lesson 3:Breaking up some myths is important for winning people’s support in the early stage • Lesson 4: Finding a right time for important issues may influence the whole process of reform • Lesson 5: Introducing new systems for reform doesn’t matter much; what matters is how to implement them and how to make them deep-rooted

Lessons Learned - continued • Lesson 6:Reform agenda needs to be placed on the short list of the top leader • Lesson 7: Reformers should be well aware of the true nature of the reform process • Lesson 8: Reforming the culture is more important and takes more time than reforming laws and regulations. • Lesson 9: There should be a balance between efficiency and better service

“The innovator makes enemies of all those who prospered under the old order, and only lukewarm support is forthcoming from those who would prosper under the new.” --- Machiavelli Thank you

The Role of Administrative Reform in Korea’s Economic Development