option of paying some back in the form of subsidies is a way of taking “hostages” to enforce corrupt agreements. If one also controls the banks and allows numbered bank accounts one has a way of moving money in ways that are hard to trace.

These various features are what one used to observe ex post in Korea. The government aggressively promoted the Chaebols, Korean conglomerates, under Park Chung-Hee in the 1960s. Business associations helped manage state-business collaboration. Initially, the goal was a “self-reliant” import-substituting economy under state control. Control was exercise through the banking system via preferential terms for credit. Even when banks were formally private, managers were appointed by the government. The use of anonymous accounts in banks was allowed. Accounting in Chaebols allowed detailed money flows to be obscured. A critical later innovation by the Park regime was that favors were provided to the Chaebol, only if they performed in export markets and paid unofficial political contributions (You, 2005). This set up a contest that provided incentives for the Chaebol to raise productivity (Stiglitz, 1996).

“Cultivating good relationships with the President became a golden road for business expansion” (You, 2005). The good relationships were punctuated by occasional prosecution of business owners or politicians for tax evasion or corruption, with cases typically dropped later, possibly because the desired disciplinary effect had been achieved. In one case the owner of Samhak, one of the largest conglomerates in the late 1960s, supported the opposition candidate Kim Dae-Jung in the 1971 election. He was convicted of tax evasion and the conglomerate forced into bankruptcy.

The outcome was spectacular economic growth and probably rising amounts of corruption in absolute terms till the early 1990s (based on data on actual corrupt payments culled from newspaper reports and trials – see You, 2005).

One might thus potentially interpret Korean industrial policy not just as a clever technocratic response to market failure, but also as a device to allow corruption to function in a system that generates productivity growth. Shleifer and Vishny (1993) pointed out that the Korea case was a puzzle. Maybe the design of “industrial policy” holds the key to the answer.

Yet, even the “Korean Model” has limitations. During the Asian crises of the late 1990s problems of corporate governance were prominently displayed. The structure of corporate arrangements placed minority shareholders at risk. Problematic financial practices such as excessive leverage came to haunt corporations. The large corporations were hard to understand and difficult to control and restructure. Close ties to politics may have exacerbated excessive risk-taking in the hope of political support in case of trouble. Limited transparency has been a legacy of the past. In addition, one of the macro-economic outcomes of exposing corporations to competition in export markets, while protecting them at home, is a dualistic structure of the economy – world class corporations honed in global competition live side by side with lowproductivity companies catering to a protected domestic market, just like in Japan.

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