Historical origins and initial conditions for economic catch-up

Chapter 2 discusses the historical origins of the catch-up regime in East Asia, in particular Korea. Thus, this chapter first identifies the common initial condition to be the tradition of the hard Confucian state in East Asia. The East Asian states were Confucian hard medium states filled by respected elite who were autonomous from partisan interests both from the inside and outside of the country. Aside from the existence of a growth-committed hard political leadership and national consensus on the goals, our investigation has identified three important constituents of the catch-up regime. First, state activism was not only based on purely the political authority of the state, but more importantly on their real economic power, which was derived from the state ownership of banks or loanable funds, where the state’s financial control over big business worked as a highly discretionary and qualitatively different control instrument that was not available in minimal states. Second, their businesses were subjected to a double discipline mechanism—namely, market discipline, especially to exogenous world markets in the cases of the more outward-oriented Taiwan and Korea, and market-conforming network discipline based on the intimate long-term relationship between the well-informed state agencies and business. Third, state activism played a part, not in the small-business-oriented private sector, but only in targeted strategic sectors and big businesses where the private–public boundary was ambiguous or did not exist (as in the case of Taiwanese state-owned businesses). The above three elements can be the main building blocks of the regimes for economic catch-up. The regime would be based on market operation and private ownership of all businesses (except state ownership of banks, a few natural monopolies, or strategic industries) and run by a network of efficient bureaucrats and ambitious entrepreneurs with a strong outward orientation.