Corruption, Agriculture and Labor

Corruption

Corruption

• Strong state initiatives always invite rent-seeking behavior with bribery.

• Singaporean clean government was made possible by clean leadership of powerful leader Lee Kuan Yew.

• On the other hand, South Korea had sent two ex-presidents to jail, partly on corruption charges.

Corruption and Growth

• Corruption Perception Index by Transparency International awarded South Korea with cleanness point 4.29 (out of 10) and ranked 27th out of 41 countries surveyed in 1995.

• Nonetheless South Korea had man-aged to industrialize herself amidst the chaos of corruptions. Why and How?

Nature of Corruption

• Foreign loan rate of interest ranged 5-7% per annum, while local rate ranged 15-22% during the period around 1970.

• Borrowers of foreign loans were re-quired to “donate” a portion of their borrowing to the ruling party.

• The portion varied from 2% to 50% de-pending upon the borrowing condition.

50% of Principal Loan?

• Borrow US$10,000- from foreigner at the interest rate 5%, when local loan charges 22% for interest.

• If US$5,000-, i.e., 50% of loan princi-pal, is taken away as bribery, then you are borrowing only US$5,000- at the interest rate 10%.

• If you can roll over the loan, this for-eign loan with bribery is still favorable!

Bribery as Quasi Tax

• This bribery was used as “governing expenses” by the President and the ruling party.

• So it was a quasi tax in a sense, and the corruption had been nationalized.

• But its spending was informal and not subject to any transparent stan-dard of official fiscal spending.

Opacity of Spending “Governing Expenses”

• Opacity allowed collecting agents to tunnel some portion into their per-sonal pockets.

• The convicted ex-Presidents took the remaining money with them when they left the presidential office.

• Corruption of this kind had been only a small portion of “governing ex-penses.”

How Was Corruption Controlled?

• Each industrial project was closely monitored and analyzed.

• The bureaucrat in charge of supporting a project got promoted when it suc-ceeded, and demoted when it failed.

• So no bribe would enable a poor project to get state subsidy, and a good project would not be denied sim-ply because bribe was not big.

Expanded Monthly Council for Ex-port Promotion – An Example

• Every month President, ministers, top policy makers, major business-men, and bankers attended Ex-panded Monthly Council for Export Promotion.

• After extensive review on current performances, the President directly ordered specific actions to each bu-reaucrat.

An Example -continued

• In next meeting, each bureaucrat must report his action and the result.

• The responsible bureaucrat was to be promoted or demoted according to his performance.

• Solid governance of this kind had been able to contain bureaucrats’ deviation within a reasonable bound-ary.

Agriculture

Agrarian Korea in Early 1960

• 37% of GDP came from agriculture (cf. 14% in 1982)

• 58% was rural population (cf. 25% in 1982)

• Only 20% of the territory is arable.• The cost of rice farming was twice as

high as the world price of rice .• US PL480 aid had ruined the farming

of wheat and cotton.

Industrialization of an Agrarian Economy

• Priority of development investment: Agriculture first? Or manufacturing first?

• Poor prospect of Korean agriculture had let industrialization sacrifice agriculture.

• The idea of subsidizing manufactur-ing sector at the cost of agriculture resented rural population which made national majority.

Low Grain Prices and Low Wages

• Agricultural sector grew at an average annual rate of about 3%, while total GNP had expanded at about 8% for 1961-90.

• Prices of staple food grains had been kept low under PL480 US aid until 1965, to support low wages of urban workers.

• Low wages were good for industrial ex-port, but farming incentives withered.

Agricultural Policies

• Self-reliance of staple food grains- Readjustment of arable land. Irriga-

tion.- Expanded production of fertilizers- Dual pricing of rice• Saemaul campaign : Diligence, Self-

reliance, and Cooperation. Subsidies were awarded in proportion to self-re-liance effort and its performance.

Dual Pricing of Rice Started in 1969

• Government bought rice & barley at high prices to encourage production.

• Then sold them at low prices to ur-ban workers to support low wages.

• This dual pricing was a key policy feature to promote self-reliance of staple food grains, but entailed a huge deficit in government budget.

But Huge Budget Deficit

• Cumulative deficit was 2.3 trillion KRW in 1985, which was more than 15% of government expenditure.

• Agricultural agreement of Uruguay Round demanded phasing out of dual pricing.

Dual Pricing for 80kg Bag of Rice

year buying price + cost selling price 1970 7,664 6,500 1973 12,287 11,264 1974 17,248 13,000 1979 43,726 32,000 1982 65,328 52,280

Unit: KRW

Why Self-Reliance in Rice?

(1) To save foreign exchanges(2) To help social security for senior cit-

izens (3) To sustain up employment

To Save Foreign Exchanges

• Koreans needed a certain amount of rice and barley for survival.

• Domestic production of staple food grains had reduced their import and saved that much of foreign ex-changes.

• Dual pricing worked in a same man-ner as subsidies on unprofitable ex-port.

Desired Subsidies – A Digression

• Subsidies on industrial export had been phased out as the South Korean industry fostered global competitiveness.

• Dual pricing would never have achieved globally competitive agriculture.

• Industrial subsidy was the one for growth, while dual pricing (e.g. agricultural sub-sidy) was assistance only for daily living.

For Social Security

• Mostly young farmers migrated out to urban sector and older farmers remained in rural sector.

• Subsidies to rural sector were in ef-fect public assistances to most Kore-ans’ parents.

• More emotional than economic.

To Sustain Employment

• Many farmers migrated to urban sector to attain jobs in manufacturing industry.

• But newly emerging industries had not yet been able to absorb all the latent unemployment in rural sector.

• Activization of agriculture would retain remaining farmers for the time being to sustain a high level of employment.

A Program to Phase Out

• Korean economy grew up to provide comprehensive coverage for foreign exchange earnings, social security ser-vices, and profitable jobs.

• The dual pricing was no longer needed, and actually it had been effectively diminished as from 1995 by reducing the amount of ‘government purchase’.

• WTO enforced UR agreement.

Angry Farmers

• The Korean farmers feel they have been unduly neglected in the entire process of industrialization.

• Why subsidize 10% of population in manufacturing at the sacrifice of 60% of population in agriculture?

• Regulation Absolute Farming Zone had confined farm land only to farm-ing.

Policy ‘Specialization at Larger Scales’

• Government directed farmers with fa-vored loans to specialize exclusively in rice farming and cattle raising in order to prepare for opening agricultural sector.

• Soaring demand for rice field raised cost for rice farming, and the expanded cat-tle raising only invited collapse of beef prices and had led numerous farm households into bankruptcy.

Loss of Trust

• Several emergency measures to re-lieve farm bankruptcy did not work.

• Government conceded whenever an-gry farmers rallied on street. “Asphalt farming is the most profitable agri-culture!”

• Farmers do not trust government any more and reject the idea of opening agricultural sector.

Lifting Protection Measures on Rice

• Korea must develop out promising items of agriculture to survive inter-national competition, while letting others go.

• But early restructuring policy for opening failed miserably.

• Farmers regard any restructuring plan as an attempt for opening, which they reject stubbornly and fu-riously.

Labor

Urbanization

• Early industrialization had attracted rural latent unemployment into ur-ban factories.

• Massive migration to urban sector in the middle of 1960s.

• Labor supply at subsistence wages supported the competitive export of simple labor intensive goods.

Labor Market Situation

• Turning point of 1977-8(unemployment rate 3.2%)

wage D D* S

D*: 1977-8 w* O workers

Repressive Labor Policy

• After the turning point, the market began to push wages upward, which undermined profitability of export.

• Repressive labor policy followed in order to remain competitive in world market.

• Government controlled strikes tightly, but tolerated unfair labor practices of employers.

On the Other Hand …

• The Industrial Accident Insurance started since as early as in the mid-dle of 1960s.

• Government was paternalistic and frequently extended the state cover-age of the Insurance.

Trade Unions until 1990’s II

• All the union officials were on the payroll of each company, even though they work only for union, not for company.

• All ‘third party’ interventions had been outlawed from collective bar-gaining until 1990’s.

Explosion of Labor Disputes

• Repressive labor policy had been an-gering workers, and arousing public sympathy for workers.

• Democratization, the political turn-around in 1987, had provided more democracy.

• Unlawful wildcat strikes exploded all over the country immediately after Seoul Olympiad in 1988.

Union Densities and Dis-putes

Year Density(%) Disputes Lost Work Days

1980 14.6 206 61,000 1985 12.4 265 64,000 1988 17.8 1,873 5,401,000 1989 18.6 1,616 6,351,000 1990 17.2 322 4,487,000 1995 12.5 88 393,000 1998 11.4 129 1,452,000 2000 11.4 250 1,894,000 2005 9.9 287 848,000

Rule of Law Disappeared

• Unions intentionally designed unlaw-ful strikes in protest against the gov-ernment’s tolerance for the employ-ers’ unfair labor practices.

• Rule of law was missing and unions attained unilateral victories.

• Korea Federation of Trade Unions, challenging FKTU, started in 1995 with 0.4 million members.

Unlawful Strikes, Unlawful Labor Practices

• Employers warned that wage-hikes were very likely to undermine the competitive base of the Korean ex-port, and blamed unlawfulness of strikes.

• Workers retorted that unlawfulness was more problematic in employ-ment practices such as unfair labor practice.

• Short run result was wage hike and trade surplus!

Wage Hikes

1972 1986 1990 2002 wage(m) 100 1,552.8 3,115.6

9,689.5 GDP(pc) 100 1,765.7 3,198.4

9,627.2 Trade balance 1988 1992

1993 (billion US$) 11 -2 1.8 Growth rate : 5.4%(1992),

8.3%(1994).

Hostile Industrial Relation

• Deep hostility developed between unions and employers.

• Government stance lacked principle, and rule of law was missing in han-dling unlawful strikes as well as un-fair labor practices.

• “Hardliner always wins” mind encour-aged dead end confrontation.

Labor’s Unilateral Victory

• Labor reform in the middle of 1990s accommodated KFTU as a lawful na-tional center.

• “No Pay for No Work” was aban-doned.

• All the union officials continued to remain on the company payroll.

• Employment protection legislation was adopted.

EPL and Temporary Workers

• Employment protection legislation was adopted in minimum labor stan-dard law during 1990s.

• It strengthened workers bargaining power and the labor market became inflexible.

• Corporate restructuring program to handle over-manning, after financial crisis 1998, invited temporary work-ers.

Recent Legislation

• Differentiated wages for the same work in the same factory. What to do?

• Recent revision : Allow temporary employment of a work up to 2 years. What will happen?

Diagrammatic Analysis

wage

D D’ S

wr A B

wt E

O er’ er e e’ employment