CASE STUDY

Building Public Support for Major Policy Reforms

The Republic of Korea suffered from chronic inflation because of loose monetary policy, which mobilized resources to support heavy and chemical industries. Photo credit: http://www.ehistory.go.kr/.
The Republic of Korea suffered from chronic inflation because of loose monetary policy, which mobilized resources to support heavy and chemical industries. Photo credit: http://www.ehistory.go.kr/.

Major reforms toward a market-based, open economy required extensive public communications to gain public support in the Republic of Korea.

Overview

The Republic of Korea (ROK) is well-known for its rapid economic development since the 1960s. Yet, not many know the country suffered greatly from high inflation and its side effects during the course of economic development, which could have undermined the growth potential of the Korean economy. 

In the late 1970s, to address the ROK’s deteriorating macroeconomic performance, a group of reform-minded officials in the Economic Planning Board (EPB) advocated for the Comprehensive Economic Stabilization Policy (CESP). They called for a major shift from state-led industrial policy to a market-based approach: a complete reversal of economic development planning and strategies then. This met fierce resistance from various groups within and outside the government, including the late President Park Jung Hee, who advocated for nurturing heavy and chemical industries. Eventually, Park endorsed the stabilization policy. The CESP was fully implemented during the term of President Chun Doo Hwan,who took power after Park’s assassination in 1979.

Fiscal expansions and its resulting deficits were cut back, and the financial market was liberated from government-led industrial policies. After weathering the painful recession and balance-of-payments crisis that lasted until 1982, the Korean economy began to stabilize from 1983. The inflation rate was brought down, and exporting companies recovered their price competitiveness. By the mid-1980s, the growth rate surged to double digits, while the inflation rate stayed at around 3%.  

This case study focuses on how the ROK was able to shift successfully from a government-led to a market-led model of economic and social development through sustained efforts to build political support for needed CESP reforms among top decision makers. In addition, a series of well-planned public communication activities targeted changes in perspectives and behavior among major players in the Korean market and the general public.

Context

The 1970s was a decade of global inflation accompanied by a resource war.

Table 1: Average Annual Inflation Rates in the 1970s
(%)

United
States

Japan

Germany

United
Kingdom

France

Italy

Republic of
Korea

6.6

9.6

5.1

13

9

13.5

21

Source: World Bank.

The end of the Bretton Woods system of fixed exchange rates in 1971 and expansionary monetary policy contributed to the surge in global inflation. The oil price hikes in the 1970s were also devastating for resource-poor countries such as the ROK, which was completely dependent on imported oil. Prices quadrupled in the first oil shock in 1973.

The ROK had one of the highest inflation rates in the world in the 1970s. In addition to rising prices and the oil crisis, there were also strong concerns over national security because of changes in the United States’ foreign policy. The changing geopolitical environment drove President Park’s regime to double up efforts in becoming more self-sufficient in national defense, which could not be supported by light industries. The government shifted to a development strategy of promoting heavy and chemical industries, such as steel, petrochemicals, shipbuilding, machinery, nonferrous metals, and electronics.

Challenges

The ROK suffered from chronic inflation because of loose monetary policy, which mobilized resources to support the heavy and chemical industries. There were a great number of idle facilities because of overinvestment. The current account was running chronic deficits because of increased imports of machinery to support ambitious development plans, in addition to the heavy reliance on imported oil whose prices skyrocketed again in 1979.

Chronic inflation became the central concern of policy makers. Yet, explicitly recognizing its true causes and thereby designing proper policy actions were not easy since it was intertwined with the government-led development strategy. Controlling inflation would require a paradigm shift from the existing policy framework.

The critical economic situation in the late 1970s pushed President Park to approve a stabilization policy program. However, the government opted for piecemeal policies to lessen the pressure of high inflation temporarily, while major policy directions were not changed.

Solutions

The CESP was fully implemented in the early 1980s under President Chun’s administration. 

Its core principles were stabilization, autonomy, and competition. The CESP promoted stability by prioritizing inflation control over industrial policy, curbing fiscal expansion to reduce the budget deficit and public debt. It supported autonomy by reducing price controls and other government interventions in the market, and by restoring and strengthening market principles. It encouraged competition in the domestic market, moving away from a closed to an open economy by ending protection for monopolies and oligopolies, which enhanced consumers’ access to high-quality goods.

Controlling inflation required a strict fiscal and monetary policy. Government tightened fiscal spending by adopting zero-based budgeting and imposing a ceiling on government purchases. 

The CESP was a revolutionary departure from the previous economic development strategy of the government. It faced resistance from not just the private sector, which benefited from preferential loans, but also from government ministries that had exercised policy discretion. 

Policy advocacy 

During Park’s administration, reformists in the Economic Planning Board initiated efforts to build consensus toward stabilization measures. They formed a taskforce to gather evidence and prepare arguments and presentation materials initially for small groups—from working-level staff to key decision makers. They presented lessons and best practices from the development experiences of Germany and Japan. They used informal small-group discussions and networking.

CESP supporters quickly realized the need for a strong public communications plan while facing strong resistance from almost all stakeholders involved. The assassination of the President Park in 1979 left a vacuum in political power, forcing the ministries to speak in one voice. When President Chun took power in 1981, the government adopted an aggressive campaign to persuade the public of the importance of the stabilization policy. Measures to control high inflation, such as tightening fiscal policy, controlling wage rates, currency retrenchments, and industry restructuring, were bound to be unpopular.

The government developed multiple channels of communication with targeted messaging strategies for specific audiences. 

The Korea Development Institute also gave a series of lectures to cabinet members, business people, and political leaders. At the Annual Korea Chamber of Commerce and Industry in January 1983, it made a presentation on the five countries.

The media was tapped to deliver key messages to the public. For example, the Korea Development Institute worked with the MunHwa Broadcasting Company (MBC) to produce and broadcast the “Inside Story of Inflation” program. Documentaries on the economic situation of five advanced economies: France, Germany, Great Britain, Japan, and the United States were developed with an economist on board and broadcast through MBC. 

The government established the Department of Economic Education Planning under the Economic Planning Board to educate not only civil servants but also the teachers. Economic education classes also became part of the military training of reserve forces.

Results

The second half of the 1980s was probably the most successful stabilization period in Korean history. The Consumer Price Index (CPI), which had hovered around 20%, went down to around 3% percent from 1983. Along with consumer prices, real estate prices also began to stabilize.

Inflation stabilization contributed greatly to resolving the balance of payments crisis. As the price competitiveness of exporting firms improved, the trade deficit narrowed. By 1986, the ROK achieved for the first time a trade surplus equivalent to 4% of the gross national product (GNP). In 1988, the surplus expanded to more than 6% of GNP.

Foreign debt began to decline in 1986 with the trade surplus. Its size relative to GNP was reduced to 13% in 1990 from 56% in 1985 as the economy expanded rapidly.

By applying zero-base budgeting, the government was also able to end the chronic budget deficits in 1986. 

The Korean economy regained its growth momentum, growing by 10% per year in 1983–85 and almost 12% annually in 1986–88.

Lessons

The Korean experience offers lessons for developing countries. It should be noted however that much has changed in the world today and developing countries would need to adapt these lessons to their local context and political systems. 

Policymakers’ understanding of macroeconomic policy matters

Macroeconomic policies should be used for short-term stabilization only rather than for long-term growth. Macroeconomic policies such as monetary, fiscal, and exchange rate policies, reallocate resources between the present and the future, rather than change the economy’s growth path.

Chronic inflation is not a necessary evil for long-term growth. The average growth rate was similar in more than two decades (9.1% in the 1970s versus 9.6% in the 1980s), while the inflation rate was dramatically stabilized (16.5% in the 1970s versus 6.4% in the 1980s). Inflation is always and everywhere a monetary phenomenon, which should be managed by adjusting macroeconomic policies.  

Central Banks cannot add real resources by printing money. The more money a central bank supplies, the more resources are transferred from the private to the public sector (inflation tax) with no increase in aggregate resources.

Strengthen institutions that can protect sound macroeconomic policy

The ROK’s experience in the 1970s shows how politically motivated macroeconomic policies could ruin overall economic stability. President Chun drove the stabilization policy in the early 1980s, yet it was an exceptional case in economic history. Most governments, including those in advanced economies, are likely to be affected by shortsighted politics, while macroeconomic policies need to be conducted free from politics. Therefore, in order to ensure that macroeconomic policies can be implemented more soundly, institutions need to be improved. 

Communicate with the public

Engage stakeholders early and explain policy changes and initiatives in detail, using plain language. Maintain transparency with the primary goal of building public trust for better governance.

Resources

D. Cho and Y.U. Kang. 2013. Korea’s Stabilization Policies in the 1980s. Seoul: Korea Development Institute. 

K-Developedia. Korea’s Stabilization Policies in the 1980s.

Ask the Experts

  • Young Uck Kang
    Communications Specialist (Knowledge Management), Department of Communications, Asian Development Bank

    Young Uck Kang currently leads the Development Asia project at ADB. His areas of expertise are strategic leadership, policy-making process, microeconomics, economic analysis, statistics/econometrics, economic and social development policy, public finance and income distribution, governance, and knowledge management. Before joining ADB in July 2014, he was a professor at KDI School of Public Policy and Management in the Republic of Korea. He has a PhD and MPhil in Public Administration from New York University, MPP from University of Chicago and MBA from Rensselaer Polytechnic Institute.

  • K-Developedia

    K-Developedia is an open access repository established to allow easy access to resources on the Republic of Korea’s 70 years of development experience. It targets decision makers in developing countries and researchers in the development field.

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   Last updated: August 2019



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