[EAI Governance Studies 1] Party Politics of Corporate Restructuring: The Institutional Evolution of South Korean Political Economy

EAI Governance Studies Working Paper No. 1

Author

Senior Research Fellow, East Asia Institute (EAI). He serves as the Team Leader of the Center for Asian Security Studies, which oversees the research support program for the Asia Security Initiative, funded by the MacArthur Foundation. His research interests include Japanese and Korean politics, comparative political institutions, and comparative political economy. He is currently engaged in research projects on party politics and legal production, the political causes of economic inequality, and state identity and international relations. His research findings have been published in journals such as Asian Perspective, Asian Survey, and Korea and International Politics.

He worked as a Senior Research Fellow at the Kyungnam University Institute for Far Eastern Studies from 1996 to 2002, and conducted research at the Graduate School of Intercultural Studies, University of Tokyo, as a Fox International Fellow from 2004 to 2005. He recently taught political science at the Korea University School of International Studies and is currently teaching political economy at Underwood International College, Yonsei University. He holds a bachelor's and master's degree in political science from Korea University and is expected to receive a Ph.D. in political science from Yale University.

Introduction: Party Politics and Institutional Reform

At the heart of the current theoretical innovation within the comparative capitalisms literature lie distinct institutional configurations of national economies that generate a particular sys-temic logic of corporate action. Especially, the notion of institutional complementarities in which different institutional arrangements across diverse economic domains have distinct merits and demerits for different kinds of corporate activity has gained considerable currency during the last decade. Facing problems of transactions costs and agency loss inherent in various business operations, firms seek to exploit comparative institutional advantage of national economies to coordinate effectively with a wide range of economic actors to the extent that a bundle of institutions surrounding them are mutually reinforcing the quality of relationships that they have developed. Accordingly, different complementary institutional arrangements of national political economies tend to produce different complementary institutional mechanisms of coordination over corporate behavior.

An influential scholarly distinction lies between liberal market economies (LMEs) where coordination problems of firms are generally solved through market mechanisms and coordinated market economies (CMEs) where the solution largely depends on associational cooperation between organized societal actors. According to the typological scheme, the Korean variety of capitalism is clearly differentiated from LMEs and seemingly shares several basic characteristics of CMEs. However, it appears that treating Korea as exemplifying the same variety of capitalism as Germany obscures as much as it reveals. While the organizational capacities of employers and unions in chaebol (gigantic industrial conglomerates) sector are stronger and more muscular than in LMEs, an institutionalized sys-tem of economy-wide bargaining between employers and unions are more fragmented and less well articulated than in CMEs. Even though they are unable to create an autonomous framework of coordination for the entire societal interest groups, they do hold sufficient capacity to resist institutional change that might harm their interests. More crucially, the dynamics of party competition has traditionally revolved around personal charisma and regionalist rivalry that largely deviate from representing the interests of organized societal actors. The institutional disconnections between political parties and societal interest groups have largely discouraged political actors from building an enduring social coalition for institutional reform. The absence of encompassing interest groups and programmatic political parties, which constitute the essential institutional infrastructure of associational coordination, therefore, makes us critically reconsider the coordination mechanisms of the Korean political economy as a unique case that is divergent not only from LMEs but also from CMEs.

As pointed out by many critics, mixed market economies (MMEs) like Korea, in which the state has acted as the primary coordination mechanism that introduces, extends, and consolidates institutional complementarities across different spheres of the political economies, uneasily fit into the LME and CME ideal types. The characterization of the Korean capitalism as a variety of MMEs builds on the developmental state literature that emphasizes the role of state intervention in the formation and evolution of production regime of the country. However, it differs from the literature in conceptualizing the coordination capacity of the state as a function of the characteristics of the party sys-tems and the internal organization of political parties in conjunction with the procedures to access to and the distribution of powers between the executive and the legislature. The effectiveness of the state-led coordination over corporate behavior is not static as many developmental state theorists assume, but dynamic, depending on the different degrees of institutional complementarities between the mode of policy implementation and the mode of political representation. As Gourevitch tersely puts it, “politics shapes the policies that shape the micro-institutions of capitalism.” From this perspective, corporate restructuring in Korea requires the corresponding policy reform of the state, which, in turn, largely relies on the institutional arrangements of political regime.

Drawing on the discussion, this paper endeavors to show the centrality of party politics in corporate restructuring in Korea. Specifically, it conceptualizes political parties as dual institutional linkage mechanisms to coordinate the behavior of pivotal actors for institutional change in political economic sys-tems. As micro-linkage mechanisms of political sys-tems, they try to coordinate the behavior of the executive and legislative actors in revising legal arrangements that enact institutional change of formal structures regulating basic modes of corporate activity. For formal institutional change to happen, a lawmaking majority coalition should form in favor of reform and adopt legislations that alter legal arrangements in the corporate sector, of which reform process is close to spot transactions in that reform policymaking and implementation are consummated in a relatively short period. Whether political parties succeed or fail in coordinating inter-branch bargaining of political sys-tems largely depends on how patterns of lawmaking process are organized, which, in turn, reflects the degrees of institutional complementarities of constitutional order, electoral sys-tems, and internalized norm of party actions. To the extent that one or more elements of political sys-tems deviates from institutional clustering of consensus or majoritarian democracy, institutional coherency of lawmaking process tends to decrease. This in turn reduces coordination capacity of political parties to connect the executive and legislative actors.

As macro-linkage mechanisms of political economies, they seek to coordinate the behavior of the state policymakers and labor market players in negotiating industrial contracts that trigger institutional change of informal practices governing strategic interactions among economic actors. For informal institutional change to occur, the state and labor market actors should coordinate their future expectations around new rules of the game and jointly shift their old beliefs to the new ones in economic spheres, of which reform process is close to inter-temporal transactions in that current resources are exchanged for the promises of future rewards. Whether political parties succeed or fail in coordinating the state and labor market actors of political economies largely depends on how patterns of interest intermediation are organized. This in turn reflects the degrees of institutional complementarities of organizational characteristics among the state policymakers, political parties, and labor market players. To the extent that one or more components of political economies deviates from institutional clustering of societal corporatism or market liberalism, institutional coherency of interest intermediation tends to decrease, which reduces coordination capacity of political parties to connect the state policymakers and labor market players.

Based on the conception of dual coordinating capacities of political parties to effectuate institutional change of political economic sys-tems, it is possible to visualize the fate of reform policy as illustrated in Figure 1. In spot transactions zone where formal institutional change occurs, the fate of reform policy depends on how credible the threat of political parties is in the realm of lawmaking. As long as the credibility of political parties’ threat is below the threshold, the reform policy tends to survive. This in turn diminishes the hazard rate of institutional change. However, if the credibility of political parties’ threat goes above the threshold, the reform policy tends to fail, which in turn raises the hazard rate of institutional change. In the inter-temporal transactions zone where informal institutional change occurs, the fate of reform policy depends on how credible the commitment of political parties is in the realm of interest intermediation. Thus, the fate of reform policy takes an inverse-U shape according to coordinating capacities of political parties to unite the executive and legislative actors in spot transactions zone and those to bond the state policymakers and labor market players in inter-temporal transactions zone...(Continued)