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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, INDUSTRIAL POLICY 99
while businesses that it supported have consistently not lived up to expectations. 15 The areas in which the Japanese government restricted competition to encourage growth, such as chemicals and software, are the industries that struggle the most. 16 The strongest sectors of the Japanese economy—automobiles, electronics, and robotics—are the areas in which the Japanese government restricted competition the least. Similarly, South Korea boasts the second-largest shipbuilding industry world, but its industrial policy has dulled the firms’ competitiveness to the point where the industry depends on bailouts to survive. The connected chaebols in South Korea received larger shares of government assistance despite offering lower returns than smaller competing firms. 17 This evidence suggests that the South Korean and Japanese economies did not grow because of their industrial policies, but rather in spite of them. The social costs of state-driven industrialization policies are significant. They deprive consumers of low prices and expanded choice while forcing them to subsidize the companies that lobbied for the policies. The benefits of East Asian industrial policy can charitably be called mixed; although Japan grew substantially from the 1950s through the 1980s, and South Korea’s growth that started in the 1960s has continued into the twenty-first century, the industries that the government supported were not the only ones to drive this growth. Both countries started with the advantage of low wages and were able to adopt technologies that had been developed elsewhere. Their growth has slowed as they have approached the technological frontier and as wages rose so that they were no longer low-wage countries. 100 LIBERALISM AND CRONYISM
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LIBERALISM AND CRONYISM Two Rival P
Page 4 and 5:
LIBERALISM AND CRONYISM: TWO RIVAL
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CONTENTS Introduction 1 Chapter 1:
Page 10 and 11:
INTRODUCTION People often see polit
Page 12 and 13:
who have the power to make decision
Page 14 and 15:
CHAPTER 1: LAYING A FOUNDATION Befo
Page 16 and 17:
hijacking of the term to describe a
Page 18 and 19:
esources can be taken from some for
Page 20 and 21:
suffers from “market failure,”
Page 22:
is a group of cronies in a dictator
Page 25 and 26:
ecause it permits voluntary exchang
Page 27 and 28:
people’s economic well-being. The
Page 29 and 30:
consumer demands. Examples of rent-
Page 31 and 32:
the Politburo and the needs of conn
Page 33 and 34:
consider the benefits and costs of
Page 35 and 36:
upon state privilege and disproport
Page 37 and 38:
their loyalty to the socialist stat
Page 39 and 40:
cronyism from gripping every area i
Page 41 and 42:
communism are well documented and w
Page 43 and 44:
Accountability was embodied by refo
Page 45 and 46:
despite comprising only 3 percent o
Page 48 and 49:
CHAPTER 5: FASCISM Fascism, the pol
Page 50 and 51:
use the sword of the Nazi state to
Page 52 and 53:
planners created a back door for in
Page 54 and 55:
CHAPTER 6: CORPORATISM Corporatism
Page 56 and 57:
puts men and their possibilities in
Page 58: that this form of guided capitalism
Page 61 and 62: therefore provide sufficient benefi
Page 64 and 65: CHAPTER 8: PROGRESSIVISM Progressiv
Page 66 and 67: people who argue for limited govern
Page 68: Security, Medicare, and Medicaid do
Page 71 and 72: the direct election of senators, ch
Page 73 and 74: argue for narrow individual interes
Page 75 and 76: their roots to diverse sources of i
Page 77 and 78: promises to assume a company’s de
Page 79 and 80: enefits for his former venture capi
Page 81 and 82: prices of firms within the textile
Page 83 and 84: ment the power to make decisions an
Page 85 and 86: of social justice, cronyism has an
Page 87 and 88: for women in the twentieth century,
Page 89 and 90: ecause it advocates granting these
Page 91 and 92: should pay the same as comparable b
Page 93 and 94: way, the US government replaced the
Page 95 and 96: an individual, social justice advoc
Page 98 and 99: CHAPTER 12: CRONY CAPITALISM AND DE
Page 100 and 101: subsidies, political connections di
Page 102 and 103: CHAPTER 13: INDUSTRIAL POLICY The t
Page 104 and 105: “cottage industries” that clust
Page 106 and 107: of complex systems. He applied this
Page 110: The degree to which Japan’s and S
Page 113 and 114: to get involved in lobbying to prot
Page 116 and 117: CHAPTER 15: LIBERALISM VERSUS CRONY
Page 118: that power will arise with another
Page 121 and 122: with power support each other to ma
Page 123 and 124: an incentive to cooperate for the b
Page 125: environmental movement often advoca
Page 129 and 130: 6. Ludwig von Mises, Human Action,
Page 131 and 132: 12. James Heinzen, “The Art of th
Page 133 and 134: CHAPTER 5: FASCISM 1. Peter Temin,
Page 135 and 136: CHAPTER 8: PROGRESSIVISM 1. Terry L
Page 137 and 138: 16. Bruce Yandle, “Bootleggers an
Page 139 and 140: 3. Eamonn Fingleton, “Japan’s I
Page 142 and 143: FURTHER READING Acemoglu, Daron and
Page 144 and 145: ABOUT THE AUTHORS Randall G. Holcom
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