The Emergence of The Small Welfare State Under The Authoritarian Developmental State (1961-1987) (Yang, 2017)

2
The Emergence of the Small Welfare State under

the Authoritarian Developmental State (1961–1987)
This chapter examines the events that led to the small welfare state
during the period of authoritarian rule from 1961 to 1987. It was the first
critical juncture in the development of the Korean welfare state. Korea’s
modest Bismarckian social security system emerged, and, more import-
antly, structural and institutional foundations were laid in this period.
I put the logic of industrialism in the Korean context by highlighting
the impact of the developmental state and export-oriented industrializa-
tion (EOI), which was unfavorable for the inception of the welfare state.
Four sequences of events are illuminated here. The first is the emergence
of the developmental state that established a strong meritocracy and
cemented a pattern of state-society relations in which export industri-
alists became a core ruling ally with the state elites whereas labor was
excluded.
The second phase is the export-oriented industrialization that rein-
forced fiscal conservatism and low taxation regime. Unlike forerunners
of industrialization in the West, Korean workers’ distributive demands
could not be easily accommodated for fear of losing export competitive-
ness based primarily on cheap labor at the early stage of industrializa-
tion. As a result, not only wage restraint was imposed by the state but
also the introduction of major social security schemes was delayed. When
they had to be introduced, the coverage and benefit were minimized to
scale down the increase in labor costs. To encourage investment and fend
off workers’ discontent by increasing disposable income, direct taxes,
especially income tax, were kept low. Therefore, even with rapid eco-
nomic growth, the state faced a chronic shortage of financial resources
due to its massive economic investment. The government thus designed
62
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63
The Rise of the Developmental State 63
a social security system based on financially self-reliant contributory

social insurance and encouraged corporate welfare, which were confined
to affluent large firms. Large firms used occupational social welfare pro-
grams to recruit skilled workers and to reward loyalty and productivity.
Third, this chapter traces the emergence of enterprise unionism, which
was imposed by the state to suppress potential political threats to the
authoritarian regime. The state banned industrial unions and all political
activities on the part of the labor unions. Enterprise unionism was the
only form of labor movement until the democratic opening in 1987.
Finally, this chapter deals with the political institutions established
under the authoritarian rule. Presidentialism was strengthened to an
extreme, which was often called “Imperial Presidentialism,” and plurality-
based electoral rule was firmly entrenched. The industrial structure and
institutional arrangements established in the authoritarian period persist
and have enduring effect on welfare politics, constraining European-style
welfare politics.
The Rise of the Developmental State, New State-Society

Relations, and Centralization of State Bureaucracy
On May 16, 1961, General Park Chung Hee carried out a success-
ful military coup with the overarching goal of “modernization of the
fatherland” (Chokuk Keundaewha) (Park, 1963). Military leaders estab-
lished the Supreme Council for National Reconstruction (SCNR) as the
political authority commanding all executive, legislative, and judicial
powers. The SCNR dissolved all political and social organizations,
including the National Assembly, political parties, and labor unions, and
arrested allegedly corrupt businessmen, politicians, and bureaucrats. The
coup signaled the advent of the developmentalist authoritarian regime
in Korea.
Prior to the May 16 military coup, the governing coalition of the
old regime was formed by President Rhee Syngman, his Liberal Party,
and the new manufacturing business class, which processed the U.S. aid
materials and marketed them in the protected domestic market. Despite
Rhee’s autocratic political style, the state was weak during his rule in
the 1950s. Business interests established close rent-seeking relationships
with political elites who controlled the distribution of U.S. aid (Haggard,
1990: 54–62). After the coup, a revolutionary court was established in
July to try those accused of various crimes, including the illicit accumu-
lation of wealth, corruption, and “hooliganism.” One of the first tasks of
4
64 The Emergence of the Small Welfare State
the newly formed Korean Central Intelligence Agency (KCIA) was the
screening of 41,000 government employees, 1,863 of which were found
to have been involved in corruption and “antirevolutionary” activities
(Haggard and Moon, 1993: 65–69).
Also, two weeks after the coup, thirteen prominent businessmen,
including Lee Byung-Chul, the founder of Samsung, were arrested for
illegal accumulation of wealth and an investigation was launched into
the activities of another 120 businessmen. Initially, radical members of
the junta argued that all illegally accumulated fortunes should be con-
fiscated outright and the profiteers executed. The SCNR did seize all
outstanding shares of commercial bank stocks, thus gaining control of
a powerful policy instrument. However, to revive the economy, in the
end the junta compromised with large manufacturing and construction
firms. In return for pledges of collaboration, the military government
released the business leaders. On their release, leading businessmen
formed a business organization that later became the Federation of
Korean Industries (FKI), the most powerful business organization of
Korean conglomerates or chaebols. Newly organized business inter-
ests were actively involved in the restructuring of the Korean economy
(Haggard and Moon, 1993: 66–67).
Likewise, the military junta restructured state-labor relations. There
was a brief period of labor activism during the short-lived Chang Myon
government (May 1960–April 1961) established after the April Student
Uprising in 1960 that had toppled the Rhee regime. A particularly sig-
nificant development during this period was the rise of the left-leaning
white-collar unions, especially the Teachers’ League, which represented a
revival of the earlier leftist legacy in the Korean labor movement of the
revolutionary communist Chunpyung, the National Council of Korean
Trade Unions established in 1945. This brief flurry of labor activism
ended with the military coup. The Korean labor movement had to start
anew. Under a newly powerful anticommunist state, the labor movement
could exist only by denying and dissociating itself from its leftist tradi-
tions. Besides, corrupt rightist labor union leaders co-opted by the pre-
vious Rhee regime were also purged from the newly established labor
movement (Koo, 2001: 26–27).
The junta dissolved the existing labor organizations, arrested labor
activists, and banned strikes. Two and half months later, the SCNR legis-
lated the Interim Act for Collective Action of Labor on August 3 to allow
for the establishment of new trade unions. Acting behind the scenes, the
newly created KCIA selected a group of nine labor leaders and assisted
65
The Rise of the Developmental State 65
the creation of the new Federation of Korean Trade Unions (FKTU). The
new union structure was changed from enterprise unionism to indus-
trial unionism, and officially sanctioned unions were given exclusive
representation rights in a state corporatist structure. Unlike its Western
counterparts, however, this new industrial unionism was used to easily
control labor and to depoliticize the labor movement. A 1963 amend-
ment to Article 12 of the Labor Union Law prohibited political activities
of organized labor by prohibiting labor unions from collecting political
funds from their members or using union dues for any political purposes.
As such, the basic rights of workers to associate, bargain collectively, and
engage in collective action were only formally maintained. Korean work-
ers had been reorganized from the top and their activities fell under state
control (Koo, 2001: 28).
Although unions were organized along industrial lines, actual col-
lective bargaining continued to be conducted by branch unions at the
company level. In 1965, for example, 16 industrial unions composed of
892 company branches endorsed 664 individual collective agreements.
In 1971, 17 industrial unions of 3,370 branch unions recognized 2,848
individual collective agreements at the plant level. Only four industrial
unions in the public sector (railroad, electronic, postal, and tobacco)
made industrial-level collective agreements with the government acting
as employer (Lee, Won Bo, 1996: 347).
The centralization of political authority was matched by a centraliza-
tion of decision making in the state bureaucracy. At the top of the hier-
archy stood the Economic Planning Board (EPB) as a superministry with
the Ministry of Finance (MOF) and Ministry of Commerce and Industry
(MCI). The elite EPB and MOF made up the bureaucratic core. For the
two core ministries, Park Chung Hee offered diverse privileges, including
organizational growth, greater job security, and promotion opportunities
to inculcate both with a sense of mission for modernizing Korea and
unswerving loyalty to himself. Of the two core ministries, it was the EPB
that Park chose as the overall coordinator because the board was in no
direct contact with organized sectoral interest groups and thus relatively
free from being captured by them. Unlike the MOF and MCI, whose
sectoral organizational missions made each interface closely with the
financial sector and with chaebols as both as client and a patron of bur-
eaucratic power, the EPB was a planner without a sector-specific interests
(Kim Byung-Kook, 2011: 206–207).
Discovering the EPB’s potential as a lead agency, Park made its minis-
ter the country’s deputy prime minister in 1963, with the legal prerogative
6
to budget and coordinate state policies. Parallel to this effort to make the
EPB minister first among equals in the cabinet, Park allowed the EPB to
penetrate deep into other ministries for direct policy control. Between
1961 and 1980, the EPB sent 61.5 percent of its Grade I bureaucrats
to the others as vice ministers and 38.5 percent of those even became
ministers. It was a mini-state within Park’s larger patrimonial state (Kim,
Byung-Kook, 2011: 207).
Introduction of the First Compulsory Social Insurance

As a part of the regime’s modernization project, a series of social welfare
laws was enacted and revised under the military government, including
the Livelihood Protection Law (1961), Children’s Welfare Law (1961),
Disaster Relief Act (1963), and the Basic Law for the Korean Social
Security System (1963). These welfare laws, however, did not have imme-
diate effects on citizens’ welfare due to the lack of adequate funding. This
was inevitable given the poor revenue to the extent that about half of
the government annual budget was financed by U.S. aid. Nevertheless, in
1963, the military government launched contributory pension plans for
state bureaucrats and military personnel to which the government made
contributions as an employer. Moreover, on July 28, 1962, about a year
before the scheduled presidential election in May 1963, Park Chung Hee,
the chairman of the SCNR, directed the cabinet to establish a social secur-
ity system (Cho, 2008: 72). Again, in his New Year speech on January 5,
1963, he declared “to introduce health insurance and industrial accident
insurance for workers as the first step toward a comprehensive social
security system” (Woo, 2008: 61).
As promised, laws for industrial accident insurance and health insur-
ance (i.e., Medical Insurance Scheme, MIS) were enacted in 1963. The
Industrial Accident Insurance Scheme (IAIS) was implemented in 1964,
covering firms with 500 or more employees, while the MIS started on an
experimental basis without compulsory coverage. The employer-funded
IAIS was relatively easy to implement because the Labor Standards Law
of 1953 already stipulated employers’ responsibilities for workers’ safety,
and collective bargaining had secured work injury compensation at most
large companies. Therefore, starting the program for large firms with
500 or more workers was not an additional burden for employers. This
does not mean, however, that employers and workers readily embraced
the government plan. Employers initially preferred direct compensation
67
Introduction of the First Compulsory Social Insurance 67
rather than social insurance payment in the paternalistic belief that direct
compensation from the employer would induce employees’ attachment
to the company. The plan also got a lukewarm reception from union
leaders who preferred direct lump-sum compensation through union-
backed negotiations with employers (Woo, 2008: 36). In addition, some
members of the SCNR worried about the government’s financial burden
due to the possibility of deficits in the state-run insurance program. Yet,
the expected positive effect of risk pooling and financial neutrality on
the part of the government overrode those doubts.
Unlike the IAIS, the medical insurance bill presented to the SCNR
would generate real costs. Employers of 500 or more employees would
have been required, under a mandatory program, to pay 50 percent of
the total insurance premium. Employers strongly opposed the manda-
tory feature of the plan. At last, the compulsory feature of the original
draft was replaced with a voluntary plan covering workplaces with
more than 300 employees. This voluntary health insurance program was
implemented in 1965. Not surprisingly, only two firms joined the scheme
(Wong, 2006: 45).
The introduction of industrial accident and health insurance pro-
vided the prototype of the welfare politics and policy principles that
had lasting impact on the subsequent development of the social security
system in Korea. First of all, despite the low level of per capita income,
the ruling elite used social welfare to secure political support. The early
beneficiaries were strategically important social groups: civil servants,
military personnel, and core workers at large companies. The intro-
duction of noncompulsory health insurance also demonstrated that
employers’ concerns were given significant weight in the social policy
making.
Second, elections had a trigger effect. If no presidential election had
been scheduled for a return to civilian government in 1964, there might
have been no social insurance legislation in 1963. Political considerations
alone, however, did not determine the form and content of social policies.
Equally important was the way in which feasibility was incorporated into
the social policy-making process. Given the weak financial and admin-
istrative capacity of the government, a highly selective social insurance
approach was adopted, with future developments left uncertain and at
the discretion of the state. This selectivism was also seen in the West in
the early period of welfare state development, but expansion in Korea
was to lag well behind the country’s rapid economic growth.
8
Implications of Export-Oriented Industrialization for

Welfare Politics and Poverty Reduction
From the outset, Park Chung Hee’s highest priority was to achieve rapid
economic development. The overall economic philosophy of the junta
was reflected in the “guided capitalism” of the first Five Year Economic
Development Plan (1962–1966) devised by the EPB. Under the philoso-
phy of guided capitalism, the government would observe the principle
of free enterprise and respect for the freedom and initiative of private
enterprise, but would either directly participate in or indirectly render
guidance to basic industries and other important fields. This philosophy
of guided capitalism became a central principle of the Korean develop-
mental state. A series of socioeconomic reforms were undertaken to real-
ize these efforts (Haggard and Moon, 1993).
But, the junta did not have a firm stance on overall developmental
strategy. Initial policy actions were an extension of former governments’
inward-looking industrialization strategy coupled with some new popu-
list initiatives. The junta sought to rapidly increase agricultural productiv-
ity and channel the expected surplus into industrial investment. As a way
to achieve this goal, the government restructured agricultural coopera-
tives (Nonghyup); decreed the abolition of all “usurious” debt to farmers
and fishermen; guaranteed government repayment of those debts within
new interest rate limits; and moved to guarantee high and stable prices
to farmers through subsidies. On the other hand, based on an import-
substitution industrialization strategy focusing on key basic industries,
the government planned large manufacturing plants including cement,
steel, and fertilizer. To mobilize resources for these activities, the gov-
ernment tried currency reform, ran large budget deficits, and adopted a
highly expansionist monetary policy. Creation of the Medium and Small
Industry Bank in 1961 also mirrored the inward-looking populist thrust
(Lew, 2002: 236–237; Kim, Se Joong, 2006; Haggard and Moon, 1993:
67–68).
However, the inward-looking strategy proved to be a failure. In 1962,
the economic growth rate was 2.2 percent against a target rate of 5.7 per-
cent. Primary industry shrank by 6 percent due to a poor harvest. A failed
currency reform and expansionary fiscal and monetary policies created
inflation of 49.3 percent in 1963 compared to 13.2 percent in 1961 (Lew,
2002: 237; Chung, 1992: 182). In retrospect, these policy failures were
inevitable due to the small domestic market, scarcity of natural resources
and land, and particularly the reduction of U.S. aid, which was the sole
69
Implications of Export-Oriented Industrialization 69
reliable source for financing development projects. The junta was com-
pelled to search for alternative developmental strategies.
After having managed to win the 1963 presidential election, Park’s
new government revised the Five Year Plan under strong U.S. influence
and finally adopted a more outward-looking EOI strategy in 1964. The
years from 1964 to 1966 witnessed remarkable economic policy reforms.
The Korean currency was devalued from 130 to 255 won to the dollar.
Trade began to be liberalized, culminating in the switch from a positive
list system to a negative list system.1 An Export Promotion Subcommittee
(EPSC) was formed in which economic ministers and representatives of
major associations from the private sector regularly communicated and
discussed policies to meet export targets. Cheap credit was provided to
exporting firms. To mobilize resources necessary for state-led develop-
ment, the Park government launched a sweeping reorganization of the
Taxation Bureau, and tax collection grew remarkably, increasing 68.7
percent in 1966. Park also pushed a doubling of the interest rate from
16.8 percent to 30 percent to induce deposits into the banking system
from the informal or curb market. Accordingly, savings rose rapidly at an
annualized rate of 71.6 percent during 1965 to 1969 period. Moreover,
diplomatic relations with Japan were normalized against fierce oppos-
ition from the public, securing a large amount of Japanese aid.2 Sending
troops to Vietnam as allied “paid” forces with the United States also con-
tributed to foreign exchange earnings (Kim, Il-Young, 1999: 133–135;
Haggard and Moon, 1993: 71).
This outward-looking EOI strategy turned out to be a wise choice.
Exports jumped from a mere $87 million in 1963 to $835 million in
1970, with the GNP increasing approximately 10 percent a year dur-
ing this period. The balance-of-payments situation improved. The annual
growth rate in the manufacturing sector averaged nearly 19 percent, and
unemployment fell substantially to 4.5 percent in 1970 from 8.2 in 1963
(Koo, 2001: 28–29; Lee, Won Bo, 2004: 85).
1
In a positive list system, only listed goods are permitted entry. In contrast, under the nega-
tive list system, all goods are permitted entry unless specifically listed. Nonetheless, under
the new negative list system, 42.9 percent of all import categories were still restricted
(Haggard and Moon, 1993: 72).
2
The size of the aid package was $800 million. It was regarded as compensation for pre-
vious Japanese colonization of Korea. The $800 million was used for infrastructure
building, including a state-run corporation, Pohang Steel Company, which has now been
privatized and renamed POSCO, the sixth-largest steel company in the world (Yang,
2011b).
0
The government’s drive for EOI established exporting firms in light

manufacturing as the leading sector and cemented a close business-
state alliance. However, concern for the price competitiveness of labor-
intensive light industrialization created structural conditions conducive
to the formation of a repressive labor regime, which had adverse effects
on the development of the welfare state.
The success of Korean light manufacturing depended on abundant
cheap labor. In apparel, textiles, and footwear, which were critical indus-
tries in this period, labor accounted for as much as 25 percent, 60 percent,
and 33 percent of production costs, respectively, and fixed capital costs
were less than 10 percent. Small producers used secondhand machines
and relied on double or triple shifts to spread capital costs and maxi-
mize the returns on low-cost labor. Low wages and long working hours
became the norm. The situation did not change throughout the early
industrialization period despite rapid economic growth. Low barriers to
entry also encouraged large numbers of firms to enter light manufactur-
ing industries, generating vicious competition. Firms had to be price com-
petitive and had to comply with clients’ detailed specifications and tight
delivery requirements (Shafer, 1994: 106–109). Under such conditions,
employers and the state could not afford to appease demands on welfare
and labor issues, which would surely increase labor cost.
Along with the rapid expansion of labor-intensive light manufactur-
ing, the number of urban wage workers began to increase rapidly, from
1.3 million in 1960, to 2.1 million in 1966, and to 3.4 million in 1970.
Wages, however, remained low. Throughout the entire 1960s, real wage
growth was a mere 3.4 percent per year, while the annual productivity
growth rate was 12.6 percent. Working conditions were poor. The inci-
dence of industrial accidents rose rapidly. The industrial accident rate
increased from 1.8 percent in 1964 to 4.9 percent in 1970, and cases of
work-related deaths jumped almost twenty times from 33 to 639 a year
in the same period (Lee, Won Bo, 2004: 92–97).
With this change in the economy, labor activism emerged in the export
manufacturing sectors. As the Korean economy ran into its first major
crisis toward the end of the 1960s, frequent labor conflicts occurred in
response to layoffs, delayed payments, and plant closures. In response to
the economic crisis and labor disputes, the Park government adopted a
more repressive labor policy, culminating in the Provisional Exceptional
Law Concerning Labor Unions and Law on Settlement of Labor Disputes
in Foreign Invested Firm promulgated in 1970. These new laws prohib-
ited strikes in foreign-invested firms and instituted various restrictive
71
Implications of Export-Oriented Industrialization 71
measures to deal with labor disputes in other sectors as well. The state
began to limit basic labor rights more significantly. This action marked a
major turning point in the Park government’s labor policies, “dictated by
the imperatives of the export-oriented industrialization strategy as well
as by the political necessity of the authoritarian regime to curb the oppos-
ition forces” (Koo, 2001: 29).
In this context, it is not surprising that there was no further social wel-
fare development. The only initiative during this period was the gradual
extension of the coverage of industrial accident insurance in 1965 and
1968 to firms with fifty employees or more. Nevertheless, thanks to suc-
cessful industrialization, poverty declined drastically. In 1965, 40.9 per-
cent of the population lived below the poverty line, but the poverty rate
dropped to 23.4 percent in 1970. Poverty reduction was most visible in
the industrializing urban areas in which the rate declined to 16.2 percent
in 1970 from 54.9 in 1965 (Hwang, 2006: 27).
Employment growth alone, however, does not explain the drastic
reduction of poverty. The Park regime systemized poverty relief under the
principle of self-help through public works. The Livelihood Protection
Law, the legal basis of public assistance, was enacted in 1961. This law
distinguished between the deserving poor and the nondeserving poor. The
government provided direct assistance only for people without the cap-
acity to work. For the nondeserving poor who were deemed capable of
work, the government provided public works. Land reclamation, build-
ing of embankments, and irrigation were major fields of public works.
The scarcity of resources limited the scale of public works. To over-
come this problem, the government negotiated with the United States to
control the management and distribution of PL 480, the massive U.S. food
aid program. Finally, in 1964 the Park government succeeded in securing
greater control over the program and channeled U.S. aid into public works,
which was renamed “self-help work”(Jajo Kenro Saup). Pork-barrel polit-
ics and corruption around the distribution of the PL 480 aid and self-help
work lowered the performance of these projects. Nevertheless, by linking
massive U.S. aid with public works, “the principle of ‘no work, no relief’
was established, and the large ‘reserve army’ was utilized for the building
of infrastructure” (Kim and Kwon, 2008: 216).
PL 480 ended in 1972 as Korea was regarded as an industrialized
developing country. Nonetheless, the Park government continued to
implement public works as an alternative to public assistance under
the New Village Income Earning Work (Saemaul Noim Saup), part
of the Saemaul movement. As such, the principles of “self-help” and
2
“work-first” became firmly entrenched during the developmental state

period. Even today, they remain an influential policy orientation.
The Yushin Regime and Heavy and Chemical

Industrialization
In May 1967, Park won the presidential election in a landslide. One
month later, his Democratic Republic Party (DRP) also gained a landslide
victory, garnering 70.6 percent seats in the National Assembly. Although
opposition parties complained that the election had been rigged, the
political victory was rooted in Park’s economic achievements. But his
political legitimacy suffered as soon as he pushed forward with a consti-
tutional amendment allowing a third presidential term. He managed to
secure the constitutional amendment through a referendum in October
1969. In the 1971 presidential election, however, Park barely escaped
defeat by the opposition candidate, Kim Dae Jung, despite the substantial
organizational and financial advantages Park enjoyed.
Kim’s challenge was threatening in that he represented the progressive
part of the civil society as a presidential candidate of the main oppos-
ition party for the first time in postwar Korean politics (Kim, Il Young,
1999: 136–141; Chung, 1992: 196–203). He proclaimed “DJ economics”
as a systematic alternative to Park’s developmentalism. Kim openly advo-
cated industrial democracy through worker councils and employee stock
ownership; fair distribution of the fruits of economic growth through tax
reform and social welfare; establishment of fair trade commission; and
promotion of medium-sized and small business (Kim, 1969).
This was a period of serious difficulties in the economy, as well as
society and national security. At the end of the 1960s, many export enter-
prises became bankrupt as a result of increased financial burdens caused
by excessive borrowing from the curb market. Labor disputes skyrock-
eted from 130 incidents in 1969 to 165 in 1970 to 1,656 in 1971. In
1971, about 30,000 urban marginal people staged a violent riot attacking
police stations and a government building in a suburb of Seoul. In the
same year, the United States began to withdraw U.S. military forces from
South Korea after the Nixon Doctrine,3 signaling the end of the Cold War
in Asia (Kim, Il Young, 1999: 136–141; Chung, 1992: 196–203).
3
The Nixon Doctrine (also known as the Guam Doctrine) was put forth during a press
conference in Guam on July 25, 1969 by then U.S. President Richard Nixon. Nixon
stated that “the United States would assist in the defense and developments of allies and
73
The Yushin Regime and Heavy and Chemical Industrialization 73
Park Chung Hee’s response to these simultaneous crises was harshly

authoritarian. In December 1971, he declared a state of emergency and
imposed martial law, paving the way for the institution of the Yushin
(revitalization) regime, a Korean version of bureaucratic-authoritar-
ianism (Im, 1987). Under the Yushin regime, which was consolidated
with the imposition of a Yushin constitution in October 1972, Park was
bestowed a lifetime presidency. Moreover, the executive’s control over
the National Assembly was de facto guaranteed by new electoral rules.
The electoral system was changed from a SMD to a mixed system with
two-member districts. The two-member district system helped elect at
least one candidate of the ruling party in each district, which made up a
two-thirds majority in the National Assembly. For the remaining third,
President Park used his constitutional right to appoint the so-called
Yushin representatives at his discretion. In addition, the state placed tight
controls on opposition forces including labor, students, opposition par-
ties, and dissident activists.
The “big push” toward heavy and chemical industrialization (HCI),
which characterized the direction of economic development in South
Korea between 1972 and 1979, developed in this new political context.
Industrial deepening through the promotion of the six strategic heavy
and chemical industries (steel, electronics, petrochemicals, shipbuilding,
machinery, and nonferrous metals) appeared to solve several problems
simultaneously (Haggard and Moon, 1993: 76). First, the HCI would
provide a new engine of rapid economic growth and export expansion
to counter eroding international competitiveness of light manufacturing
and growing protectionism in the United States. Second, it would also
increase national security with the creation of a defense-industrial com-
plex for military self-reliance. Third, improved economic performance and
national security would eventually enhance Park’s political legitimacy.4
EOI with a new emphasis on the heavy and chemical industries
proved to be successful in terms of economic growth. The Korean econ-
omy expanded at more than 9 percent annually between 1973 and 1979,
fueled by annual export growth of nearly 40 percent. This pattern of
friends,” but would not “undertake all the defense of the free nations of the world.” This
doctrine meant that each ally nation oversaw its own security in general, but the United
States would act as a nuclear umbrella when requested (https://en.wikipedia.org/wiki/
Nixon_Doctrine; accessed August 7, 2015).
4
In his January 1973 presidential press conference, Park made a tantalizing promise to the
nation that he would deliver “$10 billion in exports, a $1,000 per capita GNP, and a ‘my-
car’ age” by the end of the decade. Indeed, he almost kept the promise just before he was
assassinated in 1979 (Koo, 2001: 30).
4
Table 3.1. Indicators of economic concentration by chaebols
Number of Value-Added (% of GDP) Annual Growth Rate (%)

Chaebols (1973–1978)
1973 1978
Top 5 8.8 18.4 35.7
Top 10 13.9 23.4 30.0
Top 20 21.8 33.2 27.5
Top 46 31.8 43.0 24.4
Source: Chung, Moo-kwon (1992: 217).
growth transformed the industrial structure of the Korean economy. The

industrial output of the heavy and chemical industries grew from 37 per-
cent in 1970 to 51 percent in 1979, while the share of light industry
declined accordingly (Chang, 2007: 24; Lee, Won Bo, 2004: 299–302).
The Social Consequences of the HCI Drive

Industrial deepening had several socioeconomic consequences that became
highly prominent by the end of the 1970s. First, the HCI drive produced
a high level of economic concentration in big business conglomerates, or
chaebols, including Samsung, Hyundai, LG, SK, and Hanjin. They were
selected by the state to participate in risky priority projects of the HCI
plan on the condition that they would meet economic performance or
export targets set by the government (Amsden, 1989; Jones and Sakong,
1980). In return they received credit, monopoly positions in the domestic
market, extensive trade protection, tax exemptions, and guaranteed sales
through government procurement. These favors cemented their domin-
ant position in the Korean economy by the late 1970s.
Table 3.1 shows that total production of the top forty-six chaebol
groups accounted for 43 percent of GDP on a value-added basis in 1978.
Even more striking is the economic power of the top five chaebols, which
accounted for almost 20 percent of total value-added. Their annual
growth rate was a staggering figure of 35.7 percent from 1973 to 1978
(Chung, 1992: 216–217; Lew, 2000). Along with these structural changes
in Korean economy, a strong political coalition was formed between state
elites and big business, which had significant impact on welfare politics.
The HCI drive also resulted in the rapid expansion of wage workers,
especially in the manufacturing sector. Their numbers increased about
sixfold, from 417,000 in 1963 to 2.5 million in 1980. Not surprisingly,
75
The Social Consequences of the HCI Drive 75
the expansion of chaebols increased their share of employment: The top

thirty chaebol groups accounted for 22.4 percent of total employment in
1980. Their workers were also concentrated in several new industrial cit-
ies such as Ulsan, Masan, Changwon, Kumi, and Okpo, all of which are
in Kyeongsang Province. This organizational and geographical concen-
tration of industrial workers facilitated the development of working-class
communities and close interfirm social networks, leading to the devel-
opment of working-class identity and solidarity (Koo, 2001: Chapter 2).
The development of a working class was considered a potentially ser-
ious threat not only to the authoritarian Park regime but also to capital
accumulation by the chaebols. Despite industrial upgrading, the Korean
pattern of capital accumulation did not allow employers to take an inclu-
sive approach to industrial relations. In the 1970s, the international com-
petitiveness of the Korean heavy and chemical industries continued to rely
on mass production using relatively cheap labor. Technology, machinery,
equipment, key parts, and raw materials were all imported from abroad.
Semiskilled workers were good enough for the Fordist form of mass factory
production in Korea’s major export industries; the products produced were
not sophisticated high-end goods. The major focus of business owners was
to participate in the state’s HCI projects or discover new profitable niches
in the international market and move into them faster than their rivals by
mobilizing external funds from the state-owned banking system.
Reflecting tight control on wage, there was wage compression among
production workers. For example, earnings of production workers in the
small firm with ten to twenty-nine employees were 66.8 percent of those
working for the firm with 500 and more in 1973. The wage gap nar-
rowed to 89.8 percent in 1980 (see Table 3.2). This contrasted with the
normal process of the formation of an internal labor market. In other
words, large companies had no special interest yet in developing a stable
and committed workforce or in cultivating workers’ skills and productiv-
ity by offering higher wages or other incentive mechanisms like corporate
welfare (Chang, 2007; Kim, Hyung Gi, 1988; Koo, 2001: 32; Lew and
Lee, 2003).5
5
Some labor economists argue that the labor surplus ended by the mid-1970s, pointing
out that many large firms competed with one another for skilled and technical work-
ers. There was also a rapid increase in wages in the late 1970s. However, this was not a
structural phenomenon. It was caused primarily by the business cycle. Overinvestment
in heavy and chemical industries and a construction boom in the Middle East, where
many Korean construction companies started business, also contributed to rapidly ris-
ing wages. More importantly, as far as semiskilled workers are concerned, a relatively
large pool of untapped labor existed in the countryside and in the reserve army of female
6
Table 3.2. Wage compression: Earnings of administrators and production

workers by firm size (% of earnings of firms with 500 or more employees)
Firm Size 1973 1975 1977 1979 1980

Administrators 10–29 – 54.9 66.1 79.8 63.8
30–99 – 70.0 80.0 83.9 73.8
100–499 – 87.7 87.1 95.5 84.0
500 or more – 100.0 100.0 100.0 100.0
Production workers 10–29 66.8 76.0 83.3 84.2 89.8
30–99 82.0 79.8 87.8 89.2 86.2
100–499 95.8 88.3 84.4 100.0 97.3
500 or more 100.0 100.0 100.0 100.0 100.0
Source: Lindauer (1984).
In short, borrowing Paul Krugman’s (1994) language, rapid economic

development in the 1970s still relied on an aggressive increase in inputs
of capital and labor rather than productivity growth. According to the
OECD (1994: 18), out of annual average growth rate of more than 9 per-
cent in the period between 1973 and 1979, only 2.25 percentage points
were attributable to total factor productivity growth. This particular
growth process was facilitated by tight control on labor set by the 1971
Special Law Concerning National Security that suspended two basic con-
stitutional rights: collective bargaining and collective action. The 1973
amendment to the Labor Dispute Adjustment Act reinforced this tight
control by prohibiting any collective bargaining without a prior Labor
Committee certificate of legality. In addition, the government penetrated
labor organizations to weaken their political voice and organizational
strength. In 1974, for instance, the KCIA directly intervened in the FKTU
convention when there was an effort by dissident union leaders to replace
a government-imposed secretary-general with a more popular candidate
(Deyo, 1989: Choi, 1989). In this situation, it was premature to expect
the Korean economy to develop inclusive industrial relations and social
welfare for skill formation.
Because the undemocratic Yushin regime’s economic growth strategy
was by nature labor-exclusive, the Park regime co-opted the rural sector
to compensate for its deficient popular support base. The New Village
labor until the mid-1980s (Koo, 2001: 32). Actually, as the investment and construction
boom peaked off, monthly real wages began to drop to 64,000 Korean won in 1982 from
70,000 won in 1979 in manufacturing and from 144,000 won to 114,000 won in con-
struction during the same period (Lindauer, 1984: 14).
77
“Reaganomics before Reagan” & Formation of Low Tax Regime 77
(Saemaul) Movement, a top-down rural development project, was instru-

mental in this regard (Kim, Hyung-A, 2004: Chapter 6). The government
provided resources for renovation of rural communities and generous
grain and fertilizer subsidies throughout the 1970s. Park’s New Village
Movement reversed the perception of the state’s neglect of the rural area
and transformed countryside to a core political support base for the
regime, which was often called Yeochon Yado or rural support for the
ruling party and urban support for the opposition party.
“Reaganomics before Reagan” and Formation of the

Low Tax Regime
Park Chung Hee established the National Tax Service in 1966 and con-
ducted extensive tax reforms in 1967 to provide more systematic financial
support for the Second Five-Year Economic Development Plan (1967–
1971). The inflation-insensitive per unit tax was superseded by the ad
valorem tax; a global income tax was introduced; a real estate speculation
control system was established; and the maximum marginal tax rates for
earned income and inheritances were raised. The modern tax adminis-
tration and tax reforms substantially increased Korea’s tax revenue. The
internal tax revenues shot up by 66.5 percent in 1966, 48.3 percent in
1967, 50.6 percent in 1968, and 39.4 percent in 1969 (Lee, 1995: 34). As
a result, the government’s fiscal self-reliance ratio was sharply improved
from 65.8 percent in 1965 to 95.2 percent in 1971. The increased tax reve-
nues generated a fiscal surplus and expanded government savings to 178.3
billion won in 1971 from 100.9 billion won in 1968 (Lee, 1991: 178).
The increased tax revenues since 1966 were a direct result of success-
ful industrialization that broadened tax base. Especially, income taxes
accelerated tax revenue due to its progressivity to the extent that it gener-
ated 48 percent of the total increase in tax revenue in 1965 (Lee, 1991:
177). As a result, the tax burden rate nearly doubled in only six years,
from 8.6 percent in 1965 to 15 percent in 1971 (Yoon, 1997: 123).
As discussed previously, overall wages did rise continuously along
with the economic growth. But the wage growth rate was controlled by
the government to remain below the rate of productivity growth. Under
these conditions, it was difficult, both economically and politically, to let
income tax increase further because it would substantially curtail work-
ers’ disposable incomes. Reduced disposable income would have insti-
gated greater demand for wage increases, which, in turn, would have
crippled the exporting company’s price competitiveness.
8
Subsequently, the Park government carried out a historic tax cut in

1971 and moved to a low tax regime to support EOI. It reduced the tax
rates for earned income and business income, increased basic deduction
amounts to curb the tax burden, and slashed corporate tax rates. Also,
it shortened the duration of depreciation to promote investment and
expanded the limits of facility investment reserves subject to nontaxa-
tion. Furthermore, it raised the deduction amounts and exemption limits
for inheritance and gift taxes.
The 1973 Oil Shock further reinforced such tax-reduction trends.
Unlike Western welfare states at that time, President Park, rather than
adopting Keynesian countercyclical measures to boost effective demands,
turned again to what was later called supply-side economics. The Third
Presidential Emergency Decree on January 14, 1974 substantially slashed
the income tax by doubling the exemption limits, cut residence and
acquisition taxes. The government also temporarily reduced personal
and corporate income taxes by 30 to 100 percent in accordance with
income levels for 1974. By the same logic, Park postponed indefinitely
the implementation of the National Welfare Pension Scheme (NWPS)
by the Presidential Emergence Decree. As shall be discussed in detail in
the following section, the NWPS was initially planned to be launched in
1974 according to the enactment of the National Welfare Pension Law of
1973. However, employers vocalized about the burden of pension contri-
bution amid the economic crisis following the first oil shock (Yang and
Min, 2013).
To offset the deficient tax revenues caused by the reduction in dir-
ect taxes, the government increased indirect taxes. It dovetailed with
the EOI-based economic development plan because consumption taxes
have profound effects on suppressing consumption. The developmental
state restrained, not spurred, consumption to solve balance of payment
problem, which was caused by excessive foreign borrowings to fund
infrastructure and HCI projects. The government tried to reduce foreign
imports to save the foreign currency earned through exports.
As a part of the 1971 tax reform, the liquor tax on beer and rice wine
and commodity tax on luxury items were drastically raised, forming a tax
regime centered on indirect taxes. The state again increased consumption
taxes on luxury goods, such as expensive liquor, luxury sedans, and jewelry
with the 1974 tax reform. Korea implemented the value-added tax (VAT)
as early as in 1977, the first in Asia. With the VAT, the government final-
ized a tax system that delivered at least the minimum required funding for
the country’s operations mainly through consumption taxes. The indirect
79
Welfare Politics under the Yushin Regime 79
Table 3.3. Trends in effective income tax rate during industrialization

in Korea
Income class 1970 1976 1978 1980

Lower 0~10% 2.24 0.00 0.00 0.00
~20% 2.06 0.00 0.00 0.06
~30% 2.40 0.19 0.59 0.74
~40% 2.07 0.71 0.84 1.21
~50% 2.17 1.20 1.25 1.56
~60% 5.29 1.73 1.62 1.90
~70% 6.18 2.40 2.07 2.32
~80% 5.71 3.42 2.69 2.89
~90% 7.50 6.07 3.89 3.79
~100% 7.74 7.30 6.29 5.20
Average 3.90 3.11 2.63 2.49
Source: Na (1997: 198).
tax accounted for 61.7 percent of all internal tax revenues in 1979 while
direct tax decreased to 37 percent from 48.8 percent in 1970. Most of the
decline came from income tax, which accounted for only 20.2 percent of
all internal revenue in 1979, down from 29.8 percent in 1970. The effective
income tax rate consistently decreased across all income classes, hitting the
lowest level of an averaged 2.49 percent in 1980 (see Table 3.3).
Unlike the Keynesian welfare states in the postwar Europe, which
intervened in the demand side of economy through “tax and spend” pol-
icies, the Korean government focused on the supply side of the equa-
tion, employing tax cuts to promote investment and work even at low
wage. Similar to the “Keynesian policies before Keynes” set forth by the
Swedish Social Democratic government in 1933 amid Great Depression,
“tax cuts before Reagan” were introduced by the Korean developmental
state amid world economic recession in the 1970s (Yang and Min, 2013).
Welfare Politics under the Yushin Regime

Under the Yushin regime, there was little room for social welfare despite
growing social risks and increasing distributive conflicts. However, there
was some development in the social security system. A NWPS for the pri-
vate sector was legislated in 1973 and compulsory health insurance was
implemented in 1977. Not surprisingly, however, the agenda-setting and
policy-making process were driven by state elites and accompanied by
strong interest inputs of the business circles.
0
The National Welfare Pension Scheme

As noted previously, the history of the public pension system goes back
to the early 1960s, when the military junta sought loyalty from the mili-
tary and state bureaucracy and implemented special pension schemes for
career officials in military, police, and government and teachers and pro-
fessors in public school and universities. The government enacted the
Private Teachers Pension Law for private school teachers and profes-
sors in 1973 and implemented it in 1975. For private-sector workers,
the Park government enacted the National Welfare Pension Law in 1973.
However, the implementation of the NWPS was suddenly deferred at the
last moment, reflecting opposition by employers.
On November 30, 1972, after consultation with the minister of the
EPB, Kim Man-je, head of the Korean Development Institute (KDI), pro-
posed to President Park a national pension program as a means of mobil-
izing domestic capital for the HCI drive. He emphasized that a prefunded
pension scheme would accumulate pension reserves equal to half of the
necessary capital for the HCI project. According to Oh Won-chul, who
oversaw the HCI project in the Blue House (or the Office of President),
funding the ambitious HCI plan was a daunting task because it required
investments of approximately $10 billion at a time when Korea’s annual
exports were a mere $1.8 billion (Oh, 1999: 37). Park was attracted to the
idea and immediately ordered the preparation of the pension scheme. The
pension plan was also politically useful because it would offset the loss
of political legitimacy from the imposition of the authoritarian Yushin
regime. Park announced the introduction of the NWPS in his New Year
Press Conference on January 12, 1973, just one month before the first
general election under the new Yushin Constitution (Yang, 2008; Kwon,
1999; Chung, 1992).
Following Park’s order, a joint working committee consisting of the
EPB, the KDI, and the MOHS (Ministry of Health and Society) was
formed on January 31, 1973, to prepare the first draft of the pension
program. In the committee, the EPB/KDI and the MOHS submitted their
respective pension plans. Concerned with redistribution and feasibility of
policy implementation, the MOHS’s plan adopted a gradual approach by
expanding the coverage over time, starting with workplaces with thirty
or more employees. Contribution rate was set at 5 percent of salaried
income (3 percent from employers and 2 percent from employees) for
income replacement rate of 40 percent for the average income earner.
The benefit formula contained redistributive mechanism to boost pension
81
benefit of lower-income class at the expense of higher-income earners.

The self-employed were exempt from enrollment but could enroll on a
voluntary basis.
The EPB/KDI’s proposal was basically designed to quickly mobilize as
much savings as possible on a financially sustainable formula. It planned
to cover more workers from the beginning (firms with ten or more work-
ers) with higher contribution rate of 10 percent of income (half from
employers and the other half from employees) and lower income replace-
ment rate of 30 percent. The self-employed with monthly income of
more than 15,000 won would also be required to pay the premium. On
September 20, 1973, after twelve meetings to reconcile the competing
proposals, the minister of the EPB and minster of the MOHS announced
the final government proposal in a joint press conference. The NWPS
would cover firms with thirty or more employees with a contribution
rate of 8 percent. The coverage would be extended fast to firms with
ten employees by 1977. Together with the redistributive mechanism, the
income replacement rate was set at 40 percent of the average income in
the final five years of employment.
After the joint press conference, however, public opinion turned nega-
tive because it was announced that the NWPS was a way to mobilize
domestic capital for the HCI plan (Yang, 2008: 113–114). The FKI, the
influential association of chaebols, claimed that the contribution rate
of 8 percent would be a heavy burden for employers and maintained
that the government should share the cost. The FKI also demanded that
employers should be permitted to use pension funds by managing contri-
butions within their own companies if the purpose of the program was
to mobilize domestic savings to finance HCI investment. The FKTU, the
umbrella organization of labor unions, supported the pension plan on
the condition that the existing retirement allowance scheme would not be
replaced by the pension plan. It also insisted on the right to participate in
the management of pension funds (Yang, 2008; Chung, 1992: 246–248).
The opposition New Democratic Party criticized the government plan
for not providing immediate pension benefits to the elderly while levying
contributions. It argued that “the plan will aggravate the poor working
family’s life and will be too burdensome for small business” (Chosun
Ilbo, September 22, 1973).
In response to increasingly critical public opinion, Park made a spe-
cial order to cut the contribution rate from 8 percent to 7 percent and
to provide low-paid workers with a matching contribution from the
2
government or exemption from contribution.6 After the modification,

the government sent the National Welfare Pension bill to the National
Assembly, and it was passed on November 7, 1973. To utilize the pen-
sion fund for industrialization, the National Investment Fund Law was
enacted on December 14, 1973, under which the government could
move pension reserves into the National Investment Fund (NIF) at will.
The government finished the preparation for the implementation of the
NWPS by creating the National Welfare Pension Bureau and the Pension
Contribution Collection Bureau in the MOHS and the National Tax
Administration (NTA), respectively.
Park, however, suddenly suspended implementation of the plan by a
Presidential Emergency Decree on January 14, 1974 in the aftermath of
the first oil shock and the worldwide recession that followed. Kim Jung
Ryum, then chief presidential secretary, recalled that business opposition
was critical in the suspension: “the oil price quadrupled overnight and
inflation loomed large. There was no other way except accommodating
business demands” (interview with the author, May 10, 2006). The NWPS
was no doubt a useful means for capital mobilization. Nevertheless, the
regime could not risk losing support from business given that exporting
companies’ survival was dependent on price competitiveness.
Nevertheless, the National Investment Fund Law that permitted the
government to use savings deposits of commercial banks and insurance
companies were instrumental in mobilizing domestic savings (Hyung-gu
Lee, former finance minister, interview with the author, May 25, 2006).
The idea of utilizing pension fund reserves for economic development
was revived in the mid-1980s when the Chun Doo Hwan government
prepared for the implementation of the NWPS.
Implementing Health Insurance

The welfare politics of the compulsory Medical Insurance Scheme (MIS),
currently renamed as National Health Insurance Scheme (NHIS), is simi-
lar to that of the NWPS. It was characterized by President Park’s personal
initiative, business inputs, and selective inclusion of beneficiaries. In late
1975, President Park asked Kim Jung Ryum, the chief presidential secre-
tary, to screen candidates for the MOHS who had credentials to improve
the health care system (Kim, 1993: 309). Shin Hyun-hwak was appointed
6
Low-waged employees under 15,000 won would receive a matching contribution of
1 percentage point out of 3 percent and those under 8,000 won would be exempted from
contribution duty.
83
to the minister and strengthening health care became his major task. Park
announced to the public at the 1976 New Year’s press conference that the
government would improve health care. One month later, he ordered the
implementation of the compulsory MIS during his visit to the MOHS in
February 1976 (Cho, 2008).
There were no visible demands from society for this proposal, but
two factors were considered to have influenced Park’s decision. First,
Park became more sensitive to North Korean propaganda proclaiming
the superiority of the North Korean social security system, especially
free access to health care (Kim, Yeon Myung, 1989; Hwang, 2006: 86).
Second, public health was popular and had been long awaited since the
enactment of Heath Insurance Law in 1963; strengthening health care
would increase popular support for the regime. The upcoming 1978
general election increased that payoff. Although Park’s ruling party was
guaranteed an absolute majority in the National Assembly by the Yushin
constitution, winning more votes than the opposition parties had undeni-
able importance.
As promised, the government strengthened public health care by intro-
ducing a tax-based health assistance program (Medical Assistance) and
making the MIS mandatory for all firms with 500 or more employees
from July 1977. Medical Assistance provided support for more than two
million people living below the absolute poverty line through public sup-
port for their medical bills (Kim, 1993: 310–311). The MIS was based on
company-level health insurance societies with the employer and employee
each paying half the contribution rate, which ranged from 3 percent to
8 percent of the employee’s monthly wage. There was no government sub-
sidy to the MIS. Insurance societies set their own premiums according to
enrollees’ utilization rates under the auspices of the National Federation
of Medical Insurance (NFMI), an umbrella organization of firm-based
health insurance societies (Wong, 2006: 47).
In the early policy-making process, the EPB and the KDI proposed a
state-run single-payer system, arguing that the MOHS’s self-governing
company-based system would incur inefficiency and eventually face
financial weaknesses. Although they opposed the company-based system,
the EPB and the KDI were probusiness in that they argued for a sys-
tem funded by employees only to relieve firms of the extra labor costs.
Initially, employers had been cautious about the compulsory coverage of
the MOHS’s plan due to their negative experience with the NWPS.
But employers of big firms soon became strong supporters of the
MOHS’s company-based multiple health insurance system on the
4
condition that the MIS would guarantee managerial autonomy. Large

companies were proactive because they had already provided their
employees with some form of medical benefits.7 For them, employers’
contributions did not mean a new extra burden. Moreover, they would
get tax exemptions on the employer’s contribution and they could use
the MIS reserve as collateral for bank loans. Kim Il Chun, who oversaw
the implementation at the MOHS, recalled, “The Federation of Korean
Industries (FKI) did everything in cooperation with the MOHS. They
founded and funded the NFMI without any government subsidy. They
surveyed and checked eligible firms, published guidelines, and educated
them” (Cho, 2008: 81).
Of course, there were some important disagreements between the
government and business. The FKI maintained that mandatory cover-
age should be limited to workplaces with 1,000 or more employees
instead of 500. They also insisted on government subsidy for the oper-
ation of health insurance societies. However, none of those demands were
accepted (Woo, 2004: 63). Neither were the demands of the FKTU, which
requested the government to provide workers with financial support or
reduce their contribution while increasing employers’ contribution to
two-thirds of the total contribution (Choi, 1997: 289–290).
Four hundred and eighty-six health insurance societies began to oper-
ate in 1977, covering 8.8 percent of the entire population. The health
insurance coverage was gradually extended to the military, public offi-
cials, public and private teachers, and private firms with 300 employees
by the end of 1979, covering 21.2 percent of population (Cho, 2008: 83).
Neo-Conservative Economic Reforms and Enterprise

Unionism Enforced under the Authoritarian Fifth
Republic (1980–1987)
The ambitious HCI drive put Korea in a situation similar to many Latin
American countries in the late 1970s: excessive borrowing from inter-
national capital markets, inflationary pressures, real appreciation of the
Korean currency, and declining export competitiveness. Although Korea’s
economic troubles did not reach Latin America’s, the Korean economy
was running to its worst economic performance since the Korean War
in 1980: Economic growth rate plummeted to -3.3 percent, inflation
7
According to FKI’s survey, as of 1975, eighty-five companies provided financial assistance
for their employees’ medical treatment, and ten companies gave loans to employees in
medical need (Woo, 2004: 70).
85
Neo-Conservative Economic Reforms and Enterprise Unionism 85
soared to 28.7 percent, and wage dropped by 4.4 percent (Haggard and

Kaufman, 1995: 237 and 246).
On the brink of the economic crisis, the reformist faction of young
economic bureaucrats in the EPB moved to persuade President Park to
carry out a stabilization program in the late 1970s. But Park’s commit-
ment to the heavy industry drive and concerns about the electoral effects
of macroeconomic restraint blocked a coherent stabilization effort in the
period prior to the general election of December 1978. After the elec-
tion, Park relented and on April 17, 1979, the government announced
the Comprehensive Measures for Economic Stabilization, which not only
included traditional means of slowing credit growth and cutting expen-
ditures, but also a wide-ranging set of structural reforms8 (Haggard and
Kaufman, 1995). The measures, however, could not be fully implemented
because of a series of traumatic political changes: the assassination of
President Park in October 1979, a brief democratic opening followed by
the illegitimate seizure of political power by General Chun Doo Hwan, a
Kwangju massacre that cost more than 300 civilian lives, and the launch-
ing of a new authoritarian Fifth Republic in 1981.9
Following a brief period of countercyclical policy in its first six months,
the Chun government picked up Park’s stabilization and adjustment plan
and pushed it vigorously. Fiscal austerity was a central component of
the program. The increase in government expenditure dropped from
21.9 percent in 1981 to zero in 1984. These figures are quite impressive
when compared to average annual growth rates of government spend-
ing of 28.9 percent between 1962 and 1969, and 28.1 percent between
1970 and 1979. Fiscal discipline involved severe reductions in expendi-
tures for social and economic services. Substantial fiscal cuts were also
made in the Grain Management Fund, by which farmers received average
annual grain price increases of 20 percent during the 1970s; increases
were cut to 14 percent in 1981 and frozen in 1982. A similar cut was
8
These included changes in the style of economic management: a shift in the system of
monetary management away from direct credit controls toward indirect monetary man-
agement; greater independence for the Central Bank; the privatization of the banking
sector; liberalization of imports; and more general, rather than targeted, forms of indus-
trial policy, including a realistic exchange-rate policy. The plan also promised to address
the problem of increasing industrial concentration by regulating mergers, takeovers, and
noncompetitive business practices (Haggard and Kaufman, 1995: 85).
9
Chun came to power first by undertaking a mutiny within the military in December
1979, and then through a quasi-military coup in May 1980. Chun’s illegitimate seize of
power ignited nationwide mass demonstrations. The Chun regime cracked down on them
brutally. The Kwangju massacre, which cost more than 300 lives, was the unforgettable
testament to its brutality.
6
also made in the Fertilizer Account and thirty other public funds. Even
the “untouchable” defense budget was subject to incremental trimming.
Fiscal restraint was accompanied by tight monetary and credit controls
(Moon, 1987; Haggard and Kaufman, 1995: Chapter 3; Haggard and
Moon, 1990; 1993).
The Chun government also reorganized the industrial policy associated
with the HCI drive. Two principles guided the government’s effort: the
rationalization of six problem sectors and a reduction of economic con-
centration. The first task included automobiles and power-generating
equipment, in which problems of excess capacity had emerged. Business
lines were consolidated by merger, particular products were assigned
to specific firms, and foreign participation was invited. As to the reduc-
tion of economic concentration, the government enacted the Monopoly
Regulation and Fair Trade Law in April 1981. Special emphasis was
placed on attempting to curb conglomerate concentration through prac-
tices such as cross-investment, reciprocal buying, and cross-debt guar-
antee among chaebol subsidiaries. Other significant measures included
liberalization of the financial sector and trade. The state-owned commer-
cial banks were privatized, and restrictions eased on imports and foreign
investment (Haggard and Moon, 1993: 83–84).
In sum, the Chun Doo Hwan government tried to realign the state’s
role in the economy by pursuing a more market-oriented style of eco-
nomic management. The stabilization and structural adjustment meas-
ures appeared to undermine the developmental coalition. Yet, beneath
these structural reforms, the core relationship between conservative state
elites and chaebols did not fundamentally change. Unlike fiscal auster-
ity, there is no clear evidence that the structural adjustment measures,
particularly chaebol policies, produced their intended effects (Kim, Eun
Mee, 1988). The reciprocal relationship between the state and chaebols
endured and no serious effort was made to dismantle chaebol domin-
ation of the economy (Lee, 1999; Chung, 1994: 155).
Likewise, the state’s role in the labor market did not change. The
regime cracked down on newly created independent unions during the
Seoul Spring, the short-lived political opening between the assassination
of President Park in October 1979 and the imposition of martial law by
then General Chun Doo Hwan in May 1980. The Seoul Spring sparked
labor activism. Calls for wage increases and distributive justice took
center stage. Labor disputes quadrupled in 1980.10 The Chun regime’s
10
In 1980, there were 407 labor disputes, quadrupling from 105 in 1979.
87
Neo-Conservative Economic Reforms and Enterprise Unionism 87
response was ruthless. Independent labor union leaders and collaborators

as well as political activists were sent to jails or “purification camps.” This
attack on the democratic union movement continued until 1983.11 The
drop in the number of unions and union membership demonstrates the
harshness of the antilabor stance of the Chun regime. The number of
unions dropped dramatically, from 6,011 before May 1980 to 2,618 by
the end of the year; the number of union members also decreased from
1,120,000 to 950,000 during the same period (Koo, 1993: 148–149).
More importantly, the government limited labor’s institutional power.
Through amendments to the Trade Union Law in 1981, the government
banned industry-level unionization and permitted union activities only
at the company level. This measure aimed to decentralize, segregate, and
atomize the labor movement. A new Labor Dispute Law also increased the
government’s power in the mediation of disputes by subjecting collective
action to prior government approval and prohibiting the intervention of
“third parties” in collective bargaining and labor disputes. This prevent-
ive measure effectively forbade any involvement of outside groups (e.g.,
independent labor activists, antigovernment grassroots church organiza-
tions and students) in labor disputes. As a result, “[W]hile the concept
of the company and establishment level as the primary ‘locus of bar-
gaining’ also exists in other countries, for example Japan and the United
States, this clause in Korean labor law carried the concept to an extreme”
(OECD, 2000: 44).
At the same time, however, the Chun government tried to cultivate
cooperative industrial relations through labor-management councils at
the workplace. Through an amendment to the Trade Union Law, labor-
management councils became mandatory at workplaces with more than
100 employees. A new Labor Management Council Law specified the
duties and powers of labor-management councils by stipulating the scope
of the items that they were allowed to discuss at the regular meetings.
The law allowed discussion of virtually all matters except wages. Labor-
management councils increased from 4,720 in 1981 to 5,627 in 1985
while union density declined from 14.6 percent to 12.4 percent in the
same period (KEF, 1986: 68–69; Woo, 2004: 56–57). With the imposition
of atomized enterprise unions and labor-management councils, distribu-
tive issues were confined to the workplace.
11
Employers took advantage of this antilabor atmosphere and fired hundreds of workers
who had actively participated in the democratic union movement. These fired workers
were then blacklisted by the security agency and barred from employment.
8
Fiscal Conservatism and the Emergence

of Corporate Welfare
The state and business cooperated in repressing labor and staving off dis-
tributive issues. They opted for forced wage restraints to preserve price
competitiveness. The government set a “productivity-wage principle” in
which wage increases must be less than productivity growth. The gov-
ernment supervised wage negotiations at targeted firms, especially those
having more than 100 employees. They became pace setters in wage
negotiations (Ministry of Labor, 1983). In short, industrial peace was
enforced by repressing and excluding the autonomous articulation of
workers’ demands, not by co-opting and incorporating social demands
as seen in Europe and arguably in Latin America.12
Moreover, the surge of neoliberalism championed by Thatcher and
Reagan in the early 1980s reinforced state elites’ fiscal conservatism
regarding social expenditure. Sakong Il, then Chief Economic Secretariat
at the Blue House, recalls,
President Chun was determined to keep inflation low, since he was very proud of
the successful economic stabilization. Against all pessimism and political resist-
ance, inflation was brought down to 3 percent from 30 percent in a short period
of time. He regarded it as the greatest achievement of the 5th Republic. Therefore,
Chun had inbred reservations about social expenditure. (interview with the
author, August 17, 2007)
Under such conditions, we would not expect any noticeable devel-

opment in the social policy area. Although the early years of the Chun
regime witnessed a series of new welfare laws, including the Senior’s
Welfare Law (1981), a Welfare Law for the Handicapped (1981), and
Social Work Law (1983) as the government sought to establish its legit-
imacy, these changes were cosmetic and at best peripheral because they
received no budgetary support. In short, the Chun Doo Hwan period was
“the off season” for the development of social welfare in Korea (Lee, Hye
Kyung, 1993: 73).
The Chun government sought to escape from the dilemma posed
by its commitment to fiscal conservatism and the political necessity of
providing social welfare through expanding contributory social insur-
ance programs and promoting corporate welfare. The MIS, the most
12
This marred but continuing alliance between the state and business became clearer at this
critical juncture in the democratic opening in the mid-1980s. Unlike its Latin American
counterpart, the private sector did not defect, but provided support for the Chun govern-
ment (Haggard and Kaufman, 1995).
89
Fiscal Conservatism and the Emergence of Corporate Welfare 89
popular social insurance program, was extended continuously to firms

with 100 employees in 1981 and finally to firms with five employees
or more in 1986, covering 47.4 percent of the entire population. Yet,
President Chun blocked a movement in the MOHS to integrate segre-
gated health insurance societies to enhance efficiency and solidarity. He
replaced the minister of welfare and society and sacked Cha Heung-bong
and other high-ranking bureaucrats who argued for the idea of integra-
tion. Business opposition to the integration movement was critical in his
decisions (Cho, 2008: 87).13
By contrast, in close cooperation with business, the Chun government
expanded the IAIS and promoted corporate welfare. In 1982, the gov-
ernment extended coverage of the IAIS to include workplaces with ten
employees or more, and increased work injury benefits to head off civil
suits by undercompensated injured workers, following the policy rec-
ommendations made by the Korea Employers Federation (KEF) (KEF,
1981: 186–188; 1982: 206–207).
The Chun government also doubled its effort to establish labor collab-
oration by encouraging voluntary corporate welfare through the labor-
management councils. Employers were receptive. According to KEF
(1982), the participation of employers in regular meetings of the councils
was as high as 91 percent. Corporate welfare became the top issue at the
council meetings (refer to Table 3.4). Corporate welfare was discussed
as an incentive to improve productivity (KEF, 1986: 69). But at the same
time, corporate welfare was used to compensate for falling wages. As
mentioned previously, the government aggressively forced wage restraint
and real wages decreased accordingly. For instance, monthly real wages
decreased to 64,000 won in 1982 from 70,000 won in 1979 in manu-
facturing and to 114,000 won from 144,000 won in construction during
the same period (Lindauer, 1984: 14). Therefore, employers had room to
accommodate distributive demands from employees through the labor-
management councils.
In tandem with the smooth operation of the labor-management coun-
cils, the government encouraged firms to increase voluntary corporate
welfare through tax incentives and policy loans. In 1983, the Ministry
of Labor set a guideline for the introduction and management of intra-
firm welfare funds. In addition, the government announced comprehen-
sive policy recommendations differentiated by company size in 1984.
13
For a detailed debate between integrationists and separatists, refer to ‘The Politics of
Health Insurance’ in Chapter 4.
0
90
Table 3.4. Labor-management council meetings and agendas
Year No. of Agenda Items

Meetings
Total Productivity Corporate Training Dispute Grievance Safety/ Others
Welfare Prevention Handling Health
1981 37,905 99,480 16,063 26,587 5,176 2,231 21,380 7,633 20,410
(100) (16.1) (26.7) (5.2) (2.2) (21.5) (7.7) (20.5)
1982 24,180 66,600 12,377 19,924 2,900 1,622 9,882 5,199 14,606
(100) (18.6) (29.3) (4.5) (2.4) (14.8) (7.8) (21.9)
1983 23,786 65,322 14,473 19,192 3,067 1,314 7,714 6,572 12,990
(100) (22.8) (29.4) (4.7) (2.0) (11.8) (10.1) (19.9)
1984 24,960 69,216 14,628 17,959 4,440 1,629 8,933 7,445 14,182
(100) (21.1) (25.9) (6.4) (2.4) (12.9) (10.8) (20.5)
1985 21,631 60,627 9,231 18,927 2,757 1,682 4,247 6,269 17,514
(100) (15.2) (31.2) (4.5) (2.8) (7.0) (10.3) (28.9)
Note: Numbers in parentheses indicate percentage of discussion subjects.
Source: Woo (2004: 58).
91
Concluding Remarks 91
For small firms with thirty to forty-nine employees, working clothes and
workers’ asset-building savings (WABS) programs were recommended
as a minimum standard for corporate welfare. On top of these, a din-
ing hall, rest rooms, and shower rooms were recommended for firms
with fifty employees or more. A fitness center, reading room, dispensary,
and scholarship for workers’ children were added to the list of corpor-
ate welfare for firms with 100 and more employees. For big companies
with 300 employees or more, the list expanded to include a co-op store,
friendly society, and commuter bus. Larger companies with more than
1,000 employees were encouraged to offer employees’ stock ownership
and housing loans. The tax incentive was not only available to employ-
ers; employees also benefited from it. For example, the WABS program
was tax free and 15 percent of the cost of purchasing corporate stocks
was eligible for tax exemption (Yang, 2004b: 98).
Employers’ response to the Chun government’s initiatives for volun-
tary corporate welfare was quick and positive. Company-specific welfare
was a compensation for improved labor productivity and forced wage
restraint. It was also an effective attraction to lure skilled workers given
that the government had imposed wage restraints that leveled wages off
among competing companies. According to Choi (1992: 55), recruit-
ment of workers (59.5 percent) and improvement of labor productivity
(19.9 percent) were the two biggest reasons for the voluntary provision
of company welfare.
The Korean labor market in the 1980s was relatively homogenous
compared to the present. However, as Korean large firms in heavy and
chemical industries grew to be international competitors, an internal
labor market began to emerge although the process was very gradual.
Accordingly, the labor cost associated with voluntary corporate welfare
grew to account for 6.9 percent of the total labor cost in 1988 (Song,
1993). It is no doubt that relatively affluent large company employees
benefited most. Along with the state’s sponsorship, corporate welfarism
began to be rooted in the Chun period, signaling a widening gap between
the large and small businesses in the future.
Concluding Remarks
Korean economy grew rapidly by the successful state-led EOI. Like other
industrialized countries, Korea developed its social security system. The
nation’s social security system was basically built on a selective “light”
Bismarckian contributory scheme rather than the Beveragian model in
2
which tax-based universalism was the norm. Korea’s low tax regime
made it difficult to opt for the latter.
The political context in which Korea’s Bismarckian social secur-
ity system had emerged was not the same as the German case: Labor
was missing from the process in Korea. Unlike the German case, the
social insurance schemes were neither based on workers’ friendly soci-
eties nor were comanaged by labor and employers. Korea’s social insur-
ance schemes were also not industry-wide programs. Although they are
income-related programs, the levels of benefit were very modest. They
were basically firm based, and employees of large firms were the only
ones who benefited from social insurance coverage. When voluntary cor-
porate welfare was encouraged on top of the social insurance schemes,
solidarity-based social welfare became increasingly difficult to achieve
despite the growing sense of solidarity among workers resentful en masse
of oppression by the authoritarian government.
Since the mid-1980s, Korea has experienced unprecedented fundamen-
tal socioeconomic changes: democratization, union activism, and glo-
balization. These changes offered a new window of opportunity for the
Korean welfare state. Democratization and the labor movement opened
distributive demands from below and globalization increased exposure
to the vagaries of the market. Could the Korean welfare state leap over
the limits placed on it by the legacy of the developmental state? We turn
to this question in the next chapter by looking at change and continuity
in the small welfare state in Korea under the conservative governments of
Roh Tae Woo and Kim Young Sam presidency (1988–1997).

The Emergence of The Small Welfare State Under The Authoritarian Developmental State (1961-1987) (Yang, 2017)

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The Emergence of The Small Welfare State Under The Authoritarian Developmental State (1961-1987) (Yang, 2017)

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The Emergence of the Small Welfare State under

The Rise of the Developmental State 63

a social security system based on financially self-reliant contributory

The Rise of the Developmental State, New State-Society

64 The Emergence of the Small Welfare State

The Rise of the Developmental State 65

66 The Emergence of the Small Welfare State

Introduction of the First Compulsory Social Insurance

Introduction of the First Compulsory Social Insurance 67

68 The Emergence of the Small Welfare State

Implications of Export-Oriented Industrialization for

Implications of Export-Oriented Industrialization 69

70 The Emergence of the Small Welfare State

The government’s drive for EOI established exporting firms in light

Implications of Export-Oriented Industrialization 71

72 The Emergence of the Small Welfare State

“work-first” became firmly entrenched during the developmental state

The Yushin Regime and Heavy and Chemical

The Yushin Regime and Heavy and Chemical Industrialization 73

Park Chung Hee’s response to these simultaneous crises was harshly

74 The Emergence of the Small Welfare State

Table 3.1. Indicators of economic concentration by chaebols

Number of Value-Added (% of GDP) Annual Growth Rate (%)

Source: Chung, Moo-kwon (1992: 217).

growth transformed the industrial structure of the Korean economy. The

The Social Consequences of the HCI Drive

The Social Consequences of the HCI Drive 75

the expansion of chaebols increased their share of employment: The top

76 The Emergence of the Small Welfare State

Table 3.2. Wage compression: Earnings of administrators and production

Firm Size 1973 1975 1977 1979 1980

In short, borrowing Paul Krugman’s (1994) language, rapid economic

“Reaganomics before Reagan” & Formation of Low Tax Regime 77

(Saemaul) Movement, a top-down rural development project, was instru-

“Reaganomics before Reagan” and Formation of the

78 The Emergence of the Small Welfare State

Subsequently, the Park government carried out a historic tax cut in

Welfare Politics under the Yushin Regime 79

Table 3.3. Trends in effective income tax rate during industrialization

Income class 1970 1976 1978 1980

Welfare Politics under the Yushin Regime

80 The Emergence of the Small Welfare State

The National Welfare Pension Scheme

Welfare Politics under the Yushin Regime 81

benefit of lower-income class at the expense of higher-income earners.

82 The Emergence of the Small Welfare State

government or exemption from contribution.6 After the modification,

Implementing Health Insurance

Welfare Politics under the Yushin Regime 83

84 The Emergence of the Small Welfare State

condition that the MIS would guarantee managerial autonomy. Large

Neo-Conservative Economic Reforms and Enterprise

Neo-Conservative Economic Reforms and Enterprise Unionism 85

soared to 28.7 percent, and wage dropped by 4.4 percent (Haggard and

86 The Emergence of the Small Welfare State

Neo-Conservative Economic Reforms and Enterprise Unionism 87

response was ruthless. Independent labor union leaders and collaborators

88 The Emergence of the Small Welfare State

Fiscal Conservatism and the Emergence

Under such conditions, we would not expect any noticeable devel-

Fiscal Conservatism and the Emergence of Corporate Welfare 89