TED Case Study Template

TED Case Studies
Number 627
by Jae W. Jo

The Trappings of Globalization:

Korea's Modernization and the resulting Internal Labor and Social Problems

General Information
Legal Cluster
Bio-Geographic Cluster
Trade Cluster
Environment Cluster
Other Clusters

This case study will examine the intersection of Korea's effort to become an international economic force and the historical marginalization of Korea's blue collar work force which helped to bring about the Korea's economic miracle. This study will examine whether such a wage-driven economic policy was instrumental in Korea's success in becoming an economic power, or a flawed assumption that will lead to future economic inefficiencies caused by a reliance on cheap labor, with the resulting social costs of mass protests led by labor unions and the internal turmoil that it causes.

Korea's efforts to modernize since the end of the Korean War have brought about spectacular economic growth in what was the world's poorest country immediately after the War's end.

From an anecdotal standpoint, the many Koreans who helped to forge Korea's early modern economy felt that their primary motivation in the drive to modernize stemed from a central desire not to let Korea fall victim to the colonization it had endured under Japanese rule.

Many Koreans view that Korea in the 1800's had lost a vital opportunity to modernize by opening themselves to what the west had to offer. While Japan seized the opportunity in the 1860's in the face of Commodore Perry's black ships and the threat of colonialism from the west, Korea resisted such change until it endured the humiliation of Japanese colonialism from the late 1800's to the end of World War II.

Korea's miraculous economic growth since the end of the Korean War, however, was not without political and social costs. The Korean government under the military generals Park Chung Hee from 1961 to 1979 and Chun Doo Hwan from 1980 to 1987 brutally suppressed any labor activities not authorized by the government. The stated purpose of this labor policy was to hold wages down in order to keep Korean exports competitive.

Government intervention in market functions in Korea's push to become an international economic player were not without a heavy price paid by its labor force, however. The Korean governments until recently operated under the belief that anti-labor policies would be successful in keeping Korean products competitive in the international market.

The primary source of Korea's rapid growth lies in its effective use of labor. While the government's and entrepeneur's roles in achieving high growth were siginifcant, the key factor has been the abundance of good laborers. The governments of the first two Korean presidents collapsed with many accompanying socio-political crises, but the Korean economy has been able to sustain its robust develoment policy through a near unconstrained shortage of cheap labor. Changes have occured in this dynamic, however, which show that while wage rates have increased, labor productivity has been lagging behind.

These millions of new workers, mostly young males, wee part of the great wave of migrants leaving their family farms to be a part of the first generation of wage laborers. The younger workers came of age during a time when political dissent was still sharply restricted, and were very cynical about political restrictions. They also did not experience first hand the deprivation and poverty of the Korean War and its immediate aftermath. They were the muscle of the Korean industrial machine in its boom years in the 1970's and 80's, who had a high level of education of at least a high school level. But they had relatively little choice but to work very long hours with reltively low wages, which also imbibed in them a bitter sense of entitlement to the riches they saw being created around them.

The old economic structure of Korea was in general stratified and heirachical. And while authoritarianism was moderatley efficient, it had often been brutal for workers. The tensions of equitable pay and working conditions vied with those of increasing economic efficiencies in a babble of competing interests.

It is significant to note, moreover, that this hierarchical style of management-labor relations does not find its roots in an "Asian" confucian culture of rigid hierarchies. It stems from a male-military culture in Korea where military service is compulsory for all able-bodies Korean males. In Korea, almost all males have served in the military and indoctrinated in the military culture of strict regimentation or carrying out orders issued by superiours. This style has carried over to the corporate culture of Korea, even to this day. The decision-making power of a typical Korean company is usually concentrated in one man and his "trusted" faction of followers. The owner runs the company like a military unit, demanding unconditional "cooperation" from all workers.

A heirarchical, miltiarized corporate culture extended all the way through the Korean conglomerates, especially Hyundai under its chairman and founder, Chung Ju Yung. Chung's temper was legendary. A former Hyundai executive recalls him huriling ashtrays at senior executives in rage. Another worker recalled that he would kick a general manager in the shins and then go out drinking with him and be his buddy. It was a combination of money, personal threats, and personal attention that Chung used to motivst workers. While Chung built Hyundai from an auto-repair shop during the Korean War to Korea's largest conglomerate, he did this with a fierce and miltaristic management style that was characterisitc of many other Korean corporate cultures. Indeed alomst all conglomerate chairman had direct phone lines to the Korean national police and the Korean Central Intelligence Agency if they had labor probelms they wanted taken care of. It comes as little surprise that theses conglomerates created some of the country's most militant unionists.

While national laws existied that allowed unions to exist, they were neutered by tha same laws that ensured that labor organizations and movements would remain fragmented and ineffective. Every company, or workplace, had to have a seperate union. That meant that workers at Hyndai automotive could not forge links with workers at Daewoo or other Hyndai subsidiaries. Even assistance from the Federation of Korean Trade Unions (FKTU), the government-sanctioned unbrella group, was restricted by law from providing any assistance in negotiating or resolving local labor disputes.

The Korean government authorized the formation of employee labor representatives to handle labor disputes at a "grass-roots level" with the management. The actions of employee representatives bordered on the comic. The government said that large companies had to establish these labor-management committees, which weres upposed to allow both sides to work out differences in an non-adversarial fashion. These committees were legally required to meet four times a year to discuss grievances. Inone case documented by a labor-relations attorney, the group met only once a year, but brought three changes of clothes. They took four photographs of members in the different outfits, and used the pictures as prook that they were meeting quarterly. It was a quintessential demonstration of the Korean capacity for form over substance.

The past Korean government's rationale that it needs to keep wages low in order to be price competitive may appear very plausible at first glance, but has some flawed assumptions upon closer examination. Past administrations under the military presidents Park Chung Hee and Chun Doo Hwan used State power to keep wages low rather than offsetting wage increases with productivity gains, with Chun Doo Hwan taking the most brutal steps of using the State's police and intelligence agencies to directly subvert any attempts by labor groups to voice dissent.

Through wage and price controls, it may be possible to keep nominal and real wages low in the short run. This policy, however, faces sustainability problems as tool of macro economic policy. Nevertheless, real wage growth may be held below productivity growth in the long run if the labor market becomes less competitive over time due to greater bargaining power by labor's employers. The increase in the market power of Korean employers such as the "chaebol" conglomerates has been facilitated by government support of business take-overs by the chaebols and the government's police-enforced low-wage, anti-labor policy.

To establish a Korea capable of sustaining the rapid economic growth it has enjoyed in the past, the government, labor and management must together reach a new understanding of their roles. One of the critical elements in determining the long-run economic sucesses of a country is a harmonious and cooperative labor-management relationship that works on achieving greater productivity efficiencies. Short-sighted neglect of the worker's needs by management and the equally short-sighted hostility of workers toward management are damaging to both sides and detrimental to the long term success of the economy as a whole. it does not require great insight to conclude that what is bad for the company is also bad for the employees, and vice versa.

II. Legal Clusters

III. Geographic Clusters

IV. Trade Clusters

The past Korean goverment's rationale that it needs to keep wages low in order to be price competitive may appear very plausible at first glance, but has some flawed assumptions upon closer examination.

During the early stage of industrialization, Korea had an abundant supply of surplus labor that was relatively well educated but unskilled due to its agrarian background and lack of industrial experience. The Korean governments were able to tap this resource at a low cost. However, as continued industrialization fully absorbed unskilled cheap labor by the early 1970's, wages began to rise and Korea's economy passed into a new phase in which the availability of cheap labor could no longer be counted on.

One response to market pressures of rising labor wages would be to improve the quality of labor input and thus compete on the basis of higher productivity instead of relying on cheap labor to maintain low fixed costs. However, past administrations under the military presidents Park Chung Hee and Chun Doo Hwan used State power to keep wages low rather than offsetting wage increases with productivity gains, with Chun Doo Hwan taking the most brutal steps of using the State's police and intelligence agencies to directly subvert any attempts by labor groups to voice dissent.

The increase in the market power of Korean employers such as the chaebol conglomerates has been facilitated by government support of business take-overs by the chaebols and the government's police enforced low-wage, anti-labor policy.
The market power effect on wage increases is illustrated by the wage increase data for 1984 which shows that, in a year of robust economic growth, the larger the company size was, the smaller were the wage increases. As a result of this phenomenon, real rage growth has lagged far beyond productivity growth:

It is difficult to de-emphasize the Korean government's influence in the increase in the Korean employer's market power it its policy to consistently favoring the chaebols. The anti-labor policy which was enforced by the government as an facet of this policy was critical in increasing the concentration of market in the hands of fewer and larger employers and the maintenance of wage increases which lag far beyond productivity gains.

Theoretically, adverse effects of wage increases can be offset by productivity gains. Therefore, if excess demand labor results in an increase in wages, which in turn makes Korea's exports less competitive, Korea's employers will be forced to seek measures to boost the productivity of their workers. However, employers will have a weaker incentive to improve labor productivity if they believe they can count on government policies to keep labor costs down.

Because of the limited size of the Korean domestic market, Korean firms survive mainly by selling their products aborad. Thus, they cannot rely on import restrictions when their products become less competitive. They have to stay competitive internationally, and without a low-wage policy, Korean firms will have no choice but to seek productivity growth. But if there is reasonable assurance that the government will do all that it can to keep wage costs artificially low, employers are likely to become complacent. During the 1970's, for example, American steelmakers neglected improvements in labor productivity because they knew that import restrictions would enable them to pass on cost increases to their buyers.

Indeed, this complacency was a factor in why Korean products have lost their competitive edge since towards the build-up of the Korean economic crisis of 1997.

Economic growth in Korea can be sustained by producing high value-added products and by striving for technological innovations and productivity gains, as Korea has lost its competitive edge in such labor-intensive products as textiles, apparel, leather goods, footwear and the like. These had been the leading export items during the early stages of Korea's industrialization. Korea's competitiveness has been overtaken by the cheaper labor offered by low wage competitors in China and Southeast Asian countries.

On the other hand, in the mid-level products where Korea's industry specializes, such as autos and electronics, Korea's reputation for quality has been seriously damaged as a result of labor oppression which spawned tenuous labor-management relations.

In these industries, Korea is hard pressed to compete against Taiwan, Singapore, and Hong Kong, not to mention Japan. In this regard, a reputation for quality is the most important element which has been overlooked in the competitive strength of expensive durable goods. In this regard, worker's care for quality is key to success in international competition.

In the old days of Korea's modernization, Korea competed in the market for law quality products based mainly on low prices, and when employment opportunities were not abundant enough for workers to be able to choose between many options. It was possible to exact hard work from workers without offering them decent and dignified treatment.

This is no longer the case today, and it is difficult to compete in world markets without the workers' voluntary cooperation and creative participation.

Therefore, Korea needs to improve labor-management relations in response to the fundamental change in the international economic environment in the goal of promoting future growth. Such growth cannot be maintained by outdated notions of labor relations.

The Korean corporations' reputation for quality has been seriously damaged as a result of labor oppression which spawned tenuous labor-management relations and a misguided focus maintaining low wages to keep prices down, as opposed to increasing productivity efficiency and increasing quality.

V. Environment Clusters

VI. Other Factors

Korea's labor, which in the beginning had no reputation for militancy, were in their view, provoked into violent behavior by governments that have consistently sided with management and unilaterally imposed the burdens of a low-wage policy. A continued adversarial management-labor relations will only perpetuate economic inequalities and inequities in the Korean economy and society.

Korea can learn from Germany's and Japan's cooperational style of management-labor relations that brings all members of a company together in a more equitable environment where corporate goals are shared together.

The hostile labor-management relations fostered by the anti-labor policy favored by the government and industry have fostered labor dissent that provoked workers to the point of militancy.

Apart from public hostility towards trade unions, repressive labor laws were the most serious impediment to union development. These laws limited union activity and blocked the intervention of industrial unions in labor disputes and collective bargaining at enterprise level.

Labor leaders who dared to call strikes were likely to be arrested on charge of violating other regulations. The government would oftentimes play on the general public's fear of communism by painting labor unions in a socialist light, which served to discredit the efforts of workers to unionize in the eyes of the public. In the first half of the 1980's when authoritarian laws were strengthened, more than 2,000 labor leaders were imprisoned.

The Park Chung Hee administration actively used the Korean Central Intelligence Agency to spread disinformation on labor unionists' allegedly communist motives.

This situation received international attention since labor repression generated serious problems concerning human rights and workers' rights. The labor movement remembers the 1970s and 1980s as years of bitter struggle against political repression and unfair labor practices. During this period there were massive and violent strikes at shipyards, automobile factories and steel mills, some of which received worldwide attention, notably the labor disputes of 1987.

These continued for four months in most factories and workplaces in support of workers' rights and better working conditions. About 1.3 million workers actively joined these disputes which were a watershed in Korean labor history, not only in the number of workers mobilized but also in the impact on industrial relations. Most chaebol owners remained viscerally anti-union. Samsung's founder stated that: "I will have earth cover my eyes before a union is permitted at Samsung."

Additionally, the practice of awarding contracts and licenses in exchange for bribes and kickbacks, as well as the low-wage, low-productivity bias in industrial policy has also created an environment in which profits are made by cutting corners. The most dramatic examples of such practices were the infamous collapses of the Haengju Bridge and several subway construction sites which killed hundreds of people, and the collapse of the Sampoong Department store in 1995 which killed 600 people. An economic consequence of cutting corners has been a steady rise in workplace accidents and work-related injuries, deaths, and illnesses.

Mark L. Clifford, Troubled Tiger: Business, Bureaucrats, and Generals in South Korea (M.E. Sharpe 1998).

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		(Per cent, billion won, current price)
		1970	1975	1980	1985	1990
31 32 33 34 35 36 37 38 39 All	Food, beverage, tobacco Textile, apparel, leather Wood and furniture Paper and printing Chemicals, petroleum Non-metallic mineral products Iron, steel, non-ferrous metal Machinery and equipment 381 Fabricated metal 382 Machinery 383 Electronics 384 Transport equipment 385 Optical and precision Other manufacturing Manufacturing All	25.2 21.8 4.3 4.4 18.2 4.2 6.0 12.2 (1.8) 81.5) (3.5) (5.1) (0.4) 3.6 100.0 1,796	28.3 16.3 2.7 2.7 24.4 3.3 6.3 13.7 (1.4) (2.1) (5.6) (4.0) (0.5) 2.3 100.0 29,974	20.6 18.2 2.0 3.2 23.7 3.7 9.5 17.0 (2.4) (2.8) (7.1) (3.9)(0.8) 2.1 100.0 60,261	18.5 14.7 1.5 3.6 21.9 3.6 9.9 24.2 (3.4) (4.6) (9.0) (6.4) (0.8) 2.1 100.0 94,110	14.2 13.7 1.7 3.8 17.0 3.7 10.4 34.1 (3.7) (7.8) (11.5) (10.3) (0.8) 1.6 100.0 206,673
Source: Bank of Korea, Input-Output tables, various issues. Found at: http://www.ilo.org/public/english/employment/strat/publ/etp39.htm

I. Identification

II. Legal Clusters

III. Geographic Clusters

IV. Trade Clusters

V. Environment Clusters

VI. Other Factors