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South Korean industrial policy gave rise to a backlash
that caused working-class Koreans to demand “economic
democracy,” or the extension of government privileges
primarily to the working class as a counterweight to
decades of business privileges. 12 The economic democracy
argument is that the government has favored one
group of cronies for decades, preventing the working
class from sharing in the benefits of industrialization. The
supporters of economic democracy want to change the
group of cronies who benefit from government favoritism
from those who run big businesses to the workers.
Such a change is plausible in a democracy, where workers
control a substantial share of the votes. Regardless of
the recipient, government-sanctioned favoritism tilts the
playing field in a certain direction at the expense of competitors
and taxpayers. If South Korea continues on its
path toward expanded government privilege, the tide of
cronyism in economic policy is not likely to reverse.
There is mixed evidence about the effectiveness of
South Korean and Japanese industrial policy. Economists
Raghuram Rajan and Luigi Zingales suggest that South
Korea’s and Japan’s positions as developing nations
with low contractibility and low capital opportunities
in the wake of World War II made a relationshipbased
finance system more attractive in the beginning, but
may be stifling growth in the present. 13 Both economies
did grow considerably under these policies, but so did the
economies of countries such as Hong Kong and Singapore
that did not entrust the government to pick the winners
and losers. 14 Others, such as economist Ben Powell, argue
that the governments originally discouraged some of
Japan’s and South Korea’s most successful businesses,
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