30 years after OECD: Time to move beyond Korea’s developmental state

This year marks the 30th anniversary of Korea’s accession to the OECD. The OECD has assessed that Korea has achieved substantial quantitative growth, with per capita GDP approaching the OECD average, an improvement in addressing inequality and an overall rise in the quality of life, as reflected in longer life expectancy.

The Korean economy achieved compressed growth through the developmental state model. In the 1960s, the government protected and nurtured infant industries. In the 1970s, it shifted toward export-heavy and chemical industries, creating an industrial structure centered on family-run conglomerates.

Samsung, which began in the fertilizer industry, expanded into electronics. LG built the foundation for its electronics business with the help of the government’s radio distribution movement and import restrictions. Hyundai moved into the automobile and shipbuilding industries, based on national infrastructure construction, while Hanjin, after accumulating logistics experience during the Vietnam War, acquired Korean Air.

From the 1980s onward, the government focused on fostering IT industries such as semiconductors, electronic switching systems and computers. Its strategy was to localize core technologies, commercialize them in the domestic market before exporting them. This approach led to the commercialization of 2G CDMA mobile communications in the 1990s.

A joint development system involving the Korean government, the Electronics and Telecommunications Research Institute and private firms, combined with Qualcomm’s core technology, laid the foundation for the mobile communications industry and handset manufacturing. These sectors became a pillar of Korea’s recovery from the IMF foreign exchange crisis and helped establish Korea’s current standing in IT.

From the perspective of Western institutionalism, Korea is a distinctive case. Although it began under an authoritarian political system, the country achieved inclusive economic growth through exports, education, industrialization and infrastructure investment. The problem is that even as the economy has matured and the scope for government intervention in the market has narrowed, the inertia of the developmental state has persisted.

The government promoted an evolved CDMA path for 3G and WiBro as a 4G standard, but neither gained a firm foothold in the market. WIPI was promoted to reduce overseas royalty payments for mobile chipsets, but competition in mobile internet and smartphones accelerated only after it was abolished.

Slogan-driven industrial policies such as Green Growth and the Creative Economy also produced limited results despite their ambitious propaganda. In real estate policy as well, excessive intervention in the market only deepened price distortions and public distrust.

The reason such intervention keeps recurring is clear. Political administrations prefer visible national projects over long-term structural reforms, while ministries need to present new growth engines to secure funding and maintain their relevance. Added to this is a tendency toward “overdesigned full-package policymaking,” which seeks to make every policy appear large and comprehensive. Combined with memories of past success, this has kept the state from escaping the temptation to intervene in the direction of industry.

It is no coincidence that Korea ranks in the lower tier among OECD countries in IMD and WEF indicators related to administrative complexity, unpredictable policy change and state intervention in market operations.

As an economy matures, the government should no longer intervene in industries. It instead should act like pump-priming water — providing rules and initial support so that private firms can take risks, experiment and compete. Thirty years after joining the OECD, Korea must move beyond the developmental-state mindset of selecting industries and become an enabling state that lets markets discover opportunities on their own.

Lee Nae-chan is a professor of economics at Hansung University