Full text of DOI:10.1111/1467-7679.00109

The Rise of the Kore a n We lfa re Sta te
a m id Ec o no m ic Crisis, 1997-99:
Im p lic a tions for the Glob a lisa tion De b a te
Ja e -jin Ya ng *
Recent years have seen welfare states throughout the world undergoing
restructuring in varying degrees and forms. In the industrialised West, against
the backdrop of sluggish economic growth, the welfare state became the focus
of ever more contentious political debate between the new Right and the
traditional Left, and many significant reforms have indeed been made in Anglo-
Saxon and Scandinavian countries (Mishra, 1990; Esping-Andersen, 1996). In
Eastern Europe, new-born capitalist states are struggling with the reform of
social welfare systems constructed under the former socialist regimes (Standing,
1996). In Latin America, states which are suffering from repeated economic
crises, are nevertheless pressing forward with social welfare reform as a crucial
component of economic adjustment packages (Cruz-Saco and Mesa-Lago, 1998;
Mesa-Lago, 1994).
The main theme throughout the social welfare reforms across these regions
is that of neo-liberalism, and an adequate understanding of this reform trend is
inextricable from the momentous movement towards globalisation, that is, a
fundamental integration of national economies into a global one. Globalisation
has been seen as exerting pressure on all states to change their policies and
institutions in market-friendly ways. Liberalising trade policy, removing capital
controls, opening financial markets to foreign investors, and reducing the role
of the state in the economy are believed to be the generic policy prescriptions
for effective participation in a global economy. Because the welfare state is
premised upon national economic growth and government interventions in the
economy, pressure for the reduction - or even abandonment - of the welfare
state has been seen as an inevitable by-product of globalisation (Milner, 1998;
Teeple, 1995; Clayton and Pontusson, 1998).
Critics, however, challenge the conventional wisdom concerning the impact
of globalisation on the welfare state. For them, the net effects of globalisation
are greatly exaggerated because of its blindness to electoral politics (Pierson,
1996; Garrett, 1998). More importantly, it is often argued that greater social
* Jae-jin Yang is a Ph.D. candidate, Department of Political Science, Rutgers University, USA.
Development Policy Review Vol. 18 (2000), 235-256
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Development Policy Review
spending is required for effective participation in the global economy (Rodrik,
1997; Rieger and Leibfried, 1998), just as the capitalist development of past
decades called for the state to intervene in the economic and social spheres to
mitigate the insecurities and inequalities it had generated (Polanyi, 1964;
Cameron, 1978; Ruggie, 1982).
In sum, the former view expects that welfare states will shrink when
confronted with the forces of globalisation, while the latter view expects that
they will fare well and even increase their activities. Although both strains of
argument have been based on the experiences of the developed countries, the
assumptions and implications are not limited to those countries alone. As
Esping-Andersen (1996:2) points out, neo-liberalism influences strategic
thinking on social security development within developing countries: there no
longer seems to be a social democratic ‘middle way’ in the emerging industrial
democracies. Accordingly, policy recommendations lead to emulating Chilean
privatisation strategy rather than Swedish welfare statism, with the end result
being the retreat of the welfare state as we know it in the developing world.
However, critics maintain that advocates of globalisation are blind to the way
the real world works, and that developing countries also exhibit a positive
relationship between a high degree of globalisation and social welfare activity
(Rodrik, 1997: 26). In short, both schools of thought are in head-on
confrontation over the issue of globalisation and its impact on the prospects of
the welfare state in both developing and developed economies.
Which proposition is correct? This article attempts to give an answer by
examining the South Korean case. Although a single case study cannot confirm
a generalisation (one confirmation does add confidence, however) and can shake
an established practice only to a limited degree, the South Korean case can serve
as a critical research finding since it questions the most-likely case for the neo-
liberal conventional wisdom (Eckstein, 1975). In the early 1990s, the Korean
Government began to liberalise financial markets and lower trade barriers in
order to enter the OECD club, and as an OECD member it has further advanced
the opening up of the economy. Due partly to the financial liberalisation, Korea
was swept up in the Asian currency crisis in 1997, and since then the economy
has been rapidly liberalised under the auspices of the IMF. According to the
neo-liberal conventional wisdom, this urgency is supposed to compel the
government to recoil from building up an extensive social welfare system.
However, since 1997 the opposite trend has been observed in Korea. Although
the government is pushing forward with neo-liberal reforms in the economic
area, it is rapidly expanding its role in the social area – a situation reminiscent
of the welfare states of post-war Europe and of the FDR government in the
United States after the Great Depression.
This article, however, will not simply argue that globalisation has led to a
higher degree of welfarism in Korea. Well aware of the peril associated with
most macrostructural arguments that tend simply to correlate one macro

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
237
phenomenon with another without examining the true dynamics of the process,
it will seek to trace as precisely as possible the trajectory of the emergence of
the Korean welfare state since 1997, and suggest under what conditions the
seemingly demolishing force of globalisation transforms itself into a propelling
engine of the welfare state.
The first part of the article will review the theoretical debates on the
relationship between globalisation and the welfare state. The second section will
describe the rise of the Korean welfare state since 1997, focusing on the
legislation behind the new comprehensive public assistance programme and the
rapid expansion of four major social insurance programmes: on pensions,
health, unemployment and injury at work. The final part will discuss the
preconditions favourable to the growth of the welfare state in the light of the
Korean experience and draw some theoretical conclusions regarding the future
of the welfare state in the developing world in the era of globalisation.
Theoretical context: globalisation and the welfare state
Two contending views
After World War II, the welfare state represented a compromise between the
principles of market efficiency and citizens’ security and between those of
liberty and equality. The state intervened in the market by means of fiscal and
monetary policies to promote growth and maintain low unemployment, and
developed comprehensive social policies to protect those excluded from the
market on the grounds of sickness, old age, accident, unemployment,
incompetence, and even unwillingness to work. However, changes in the post-
war development of the welfare state have become evident since the mid-1970s.
The fundamental cause of these shifts was not change in the principles of the
welfare state or in political visions but rather what has come to be called the
‘new reality’, the coming of the global economy (Teeple, 1995: 55).
Globalisation has brought about two new trends in the working of the world
economy: (i) the global organisation of production, namely, complex
transnational networks of production which source the various components of
the product in places offering the most cost advantage; and (ii) global finance,
namely, a largely unregulated system of transactions in money, credit, and
equities which transcends all national borders (Cox, 1997). This global economy
has had two clear consequences for all states. First, they have had to embrace
market-friendly policies in order to maintain international competitiveness and
a favourable investment climate. Facing more credible threats of the ‘exit’
option on the part of the owners of industrial capital, governments have had to
cut corporate and income taxes and make the labour market more flexible in
order to attract foreign corporate investments and prevent the exodus of local

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companies. Secondly, they have had to implement anti-inflationary monetary
policies by reducing public spending, minimising public debts, and restraining
counter-cyclical expansionary fiscal policy in order to avoid the ‘punishment’
of owners of mobile capital assets for otherwise unstable macroeconomic
performances (Teeple, 1995; Pontusson, 1992; Heye, 1993; Notermans, 1993).
Despite variations in speed and extent in introducing neo-liberal policies
owing to their national differences and partisan compositions, it is believed that
these changes finally reveal numerous international parallels in social policies
among advanced welfare states. Effective rates of benefits and coverage have
been lowered, the effort to maintain full employment has been abandoned, the
public sector has been cut down, privatisation has been introduced, and
entitlement has been pegged more closely to work (Clayton and Pontusson,
1998; Schwartz, 1994; Teeple, 1995). The end result of these policy changes has
been the retrenchment of the welfare state, generating a conventional wisdom
that the welfare state is no longer viable in the globalisation era. This
pessimistic vision of the inexorable dominance of capital over the welfare state
is more applicable to developing countries since their economic performance is
becoming increasingly dependent on the inflow of foreign capital (Rudra, 2000).
The global dominance of capital and the subordination of the welfare state to it
seem irreversible.
Some writers, however, call into question the conventional wisdom that the
inexorable pressure of globalisation causes the shrinkage of the welfare state
(Garrett, 1998; Rodrik, 1997; Rieger and Leibfried, 1998; Pierson, 1996). They
argue that while monetary and fiscal policies may face new restrictions, most
governments are not nearly as shackled by economic globalisation as is
commonly believed, and thus that welfare states retain substantial autonomy in
regulating their economies, maintaining institutions, and designing social
policies, not to mention sufficient tax bases. Moreover, it is pointed out that
welfare states have considerably broader bases of support, which promote the
restoration of equilibrium and inhibit the kind of unravelling expected in the
conventional wisdom about globalisation. The challenge does not stop here.
Garrett (1998) even argues that exposure to the international market makes
growing demands on social policies and, through partisan electoral politics, in
fact induces greater government spending to reduce market-generated
inequalities of risk and wealth. In contrast to the neo-liberal conventional
wisdom, he argues that political and social stability induced by social policies
helps attract the investment of mobile asset-holders, maintaining that
‘macroeconomic performance under social democratic corporatism has been as
good as any other constellation of political power and labour market
institutions’ (1998: 11).
In a similar vein, Rieger and Leibfried argue that it is not globalisation that
limits the welfare state but rather the opposite: ‘the movement toward and the
trends in a globalised economy have been triggered, contained, differentiated

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
239
or modified, weakened or strengthened, slowed down or speeded up through
national structures of social policy and their developments’ (1998: 366). Why
is this? Economic insecurity enhanced by globalisation will lead to the
emergence of new coalitions of interests urging protectionism and resisting
domestic deregulation. How salient such a development is depends mainly on
the capacity of social policy to withstand such protectionist backlashes. The
implication of this line of argument, therefore, is clear: in order that a country
may reap the net gains generated by economic globalisation, it must be equipped
with strong social safety nets.
For these reasons, critics of the neo-liberal conventional wisdom tend not to
be so pessimistic as their counterparts regarding the prospects for the
development of the welfare state in the less developed countries in the
globalisation era. Developing social welfare systems is unlikely to be
considered an obstacle to economic growth. Rather, it would be regarded as a
pre-requisite for effective participation in the global economy.
The need for domestic prisms
The two contending views discussed above seem irreconcilable. But, since each
has characteristic strengths and weaknesses flowing from their different logics
and analytical foci, it may be more fruitful not to decide once and for all
between the two but rather to explore what they can offer each other. In this
respect, Rudra’s extensive statistical analysis offers interesting points. She finds
that there are two contrasting trends: in the advanced economies, globalisation
has a positive effect on government welfare expenditure as the critics of the
conventional wisdom argue, while, in the developing economies, it has a
negative effect on social spending as the advocates of the conventional wisdom
expect. She attributes the contrasting impacts of globalisation to the
political/structural differences between developed and developing countries.
The developed countries have sufficient revenue bases to provide a high social
wage and, more importantly, formal democratic institutions through which
societal groups can express their concerns and input their interests, while most
developing countries lack such conditions (Rudra, 2000).
This account reveals an important missing link in the debate on the
relationship between globalisation and the welfare state: namely, domestic
politics and the institutional structures shaping those politics. The impact of
globalisation can be neither uniform nor unidirectional because of the different
internal responses to the universal external phenomenon. In explaining the
effect of globalisation, therefore, more explicit and concrete efforts need to be
made to find out what domestic factors deflect the impact of globalisation in
which direction. In this respect, it is timely that a growing number of studies
are now paying more attention to the domestic prism. For example, in the field
of pension reform, Brooks (1999) demonstrates that the global economy has

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differential effects on different countries according to their different levels of
capital accumulation and public debt. Countries with low capital accumulation
have a strong incentive to privatise their old public pension systems in order to
foster local capital markets; but this incentive is moderated by the magnitude of
public debt which will skyrocket during the switch to a private pillar, because
of the continuing liabilities to existing pensioners with fewer payers into the old
system. Kay (1999) seeks to explain the large variation in the outcomes of
pension reform driven by Latin American governments under the same pressure
from the IMF and the World Bank. He attributes the various outcomes to the
variation in the opponents’ ability to utilise institutional veto points such as
fragmented party systems and plebiscites. In developing countries undergoing
structural economic adjustment, Niles (1999) found that regime type and party
system determined the state’s commitment to targeted social programmes for the
poor rather than expansive entitlement programmes for narrow interest groups.
With such domestic prisms in mind, this article will pay attention to a
particular configuration of political coalition, financial capacity, and political
institutions. It will cover not only pensions but also health, unemployment, and
industrial accident social insurances and public assistance programmes in order
to achieve a more comprehensive picture of social policy reform amid neo-
liberal structural reforms in the era of globalisation.
The Korean case
Korea at the crossroads: economic crisis and two scenarios
On 21 November 1997 at the height of the Asian financial crisis, the South
Korean Government asked the IMF for stand-by loans, admitting its inability to
service its debt payments by its own means. Foreign reserves held by the
Central Bank had dwindled to less than $8 billion, and the Korean currency
rapidly depreciated from $1=Won 808 in 1993 to a record low of $1=Won 2,000
in late 1997. With the shock of this devaluation, the economy contracted to
–5.8% growth in 1998 from 7.1% in 1996. The unemployment rate soared to a
record high of over 8% in 1998 from a previous 2 or 3%. The government
budget balance plunged to –4.4% of GDP in 1998 from a string of balanced
budgets in previous years. In a word, the Korean economy had collapsed after
decades of economic miracle.
As part of its agreement with the IMF, the government pledged to take drastic
reform measures to deregulate and liberalise the economy. These are basically
threefold. First, restrictions on capital movement and foreign ownership have
been lifted in an effort to induce foreign investment in Korean assets. Secondly,
the government facilitated the laying-off of workers in order to increase labour
market flexibility. Thirdly, the government adopted a series of measures to

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
241
make the economic system more transparent and accountable, including the
introduction of consolidated financial statements and a ban on mutual payment
guarantees within sister companies of the chaebols, the family-owned business
conglomerates. In short, the core of these policies may be best understood as the
rejuvenation of the Korean economy by means of neo-liberal reforms (Mo and
Moon, 1998).
Against this backdrop, what would each camp expect regarding the issue of
social welfare in Korea? The supporters of the conventional wisdom would
argue that Korea could not afford to increase social spending. In order for it to
repay its international debts and re-start the wheels of factory machines, it had
to attract foreign direct investment and portfolio inflows, and generate a
considerable trade surplus. Given that social welfare increases labour costs and
aggravates the fiscal deficit, the government could not afford to opt for a high
degree of welfarism. High labour costs will not only reduce the international
price competitiveness of Korean companies but also discourage foreign direct
investment seeking cheap labour. Moreover, a high level of budget deficit will
make it riskier for international financiers to invest in Korean financial markets.
Given the lack of effective social safety nets, however, the government might
try to adopt poverty alleviation measures. Even in this case, neo-liberal social
policies will serve as a model for the Korean policy-makers, emphasising
privatisation, decentralisation, self-reliance, means testing, and workfare, to
name but a few. It could therefore be hypothesised from the conventional
wisdom that Korea’s neo-liberal reform in the globalisation era will not lead to
a higher degree of national commitment to social welfare, and, if anything,
Korea will follow the neo-liberal social welfare model.
In contrast, critics of the conventional wisdom may make a diametrically
different prediction for functional and political reasons. Functionally, social
welfare will dampen explosive social unrest and help restore economic,
political, and social stability, which is a necessary condition for attracting the
investment of mobile asset-holders. Politically, politicians will not miss the
chance to capitalise on the fear and reality of mass unemployment fuelled by
neo-liberal reform of the hitherto protected labour market, and to mobilise
support from the increasing ranks of the economically insecure latent in all
liberalised economies. They have, therefore, every reason to trade social
protection for the victims, real or potential, of economic insecurity under
globalisation, for votes. All in all, expanding the social safety net will be not
only an economically rational but also a politically sound policy option.
Therefore, another possible scenario, based on criticisms of the conventional
wisdom, would be that neo-liberal economic reforms in Korea will be associated
with a higher degree of national commitment to social welfare in the era of
globalisation.
Which pathway has Korea taken since the 1997 economic crisis? It may be
too early to reach a conclusive answer. Nonetheless, many writers cautiously

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agree that Korea has made considerable strides toward a welfare state (Y. Kim,
1999; Chung, 1998).
Pre-crisis social welfare system
Korean social welfare systems prior to the crisis may best be understood in the
context of the ‘high economic growth, low unemployment’ miracle economy of
the past 35 years (Y. Kim, 1998). Social welfare demands for health, housing,
unemployment pay, old-age pensions, and education were satisfied, primarily,
by fast growing real income in the market, which was buttressed by stable
employment, and, secondarily, by traditionally strong family ties and corporate
welfare. The Korean state undertook limited responsibilities for health and
industrial injuries and provided only minimum protection to those neither able
to participate in the labour market nor having family to rely on. Consequently,
in contrast to the rapid economic growth, the Korean social welfare system was
underdeveloped, as reflected in the low government commitment to social
spending in contrast to spending on economic services (see Table 1).
Table 1
Government commitment: % of central government budget, 1993
Country
Per capita Health Housing,soc.sec A+B Economic
income (US $)
24,740
23,560
19,850
7,660
(A) & welfare (B)
services
6.2
US
17.1
16.8
6.1
31.7
45.9
9.0
48.8
62.7
15.1
8.7
22.1
50.8
35.2
Germany
Singapore
Korea
Greece
Chile
9.7
11.5
18.8
9.4
14.6
7.5
1.5
7.2
7,390
3,170
2,930
7.4
11.5
5.2
14.7
39.3
30.0
Brazil
Source: World Bank,1995: 180.
This combination of high income growth and low government commitment to
social welfare has led Koreans to prepare individual safety nets: Korea is among
the highest as regards the gross domestic savings rate (for example, 34.25% of
GDP in 1997: World Bank, 1999) and second in the world as regards the
payment rate of private insurance premiums (for example, 15.42% of GDP in
1997: Korean Economy Daily, 11 August 1999). This imbalance between
individual and government commitment was a product of the economy-first
policy of previous authoritarian regimes under which the state was willing to
pull resources back from the economy to social welfare only when it was
functional to economic growth and political legitimisation. This reflects an

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
243
ideological bias embedded in the developmentalist coalition between
authoritarian political leaders, economic technocrats, and chaebols, claiming
that growing social needs would be best met through rapid economic growth
and self-reliance (Chung, 1998; Ahn, 1991; Kwon, 1999; Lee, 1993).
This developmentalist ideology began to fray gradually as Korean democracy
proceeded following the 1987 democratisation movement, but it was still
cherished by the ruling coalition and by and large accepted among the public as
well. This did not last long, however. It finally turned out to be a myth as soon
as the economy stopped working in late 1997. At this moment, as Young-hwan
Lee (1998) has pointed out, anxiety and hope co-existed in social welfare
academic circles: would the economic crisis further weaken the public welfare
systems because of budget constraints and the neo-liberal ideological offensive,
or would it serve as an opportunity for take-off by revealing the weakness of the
existing social safety net? They now see a welfare state arising amid economic
turmoil.
The rise of the Korean welfare state
The Korean Government has sought to complement the external strategy of
liberalisation with an internal strategy of compensation for those groups which
are most at risk. It tightened the nation’s loose social safety net by expanding
the coverage (see Table 2) and the benefits of the four major state-administered
social insurance schemes and by thoroughly overhauling the public assistance
programmes.
Due to the mass unemployment and related social problems, programmes
protecting individuals against unemployment are growing at the fastest speed.
The government poured more than 13.4 trillion Won (equivalent to 8.6% of the
FY 1998 and 1999 government budgets or US $12 billion) into unemployment-
related emergency programmes, including unemployment benefits, public
works, training, employment subsidies, loans, and tuition support and food
assistance for the children of the unemployed (Office of National Budget,
1999). Most striking is the rapid expansion of the unemployment insurance
programme launched in 1995 to cover full-time workers in firms with more than
thirty employees. Since the crisis, the coverage has been extended in January
1998 to those in companies with ten or more employees, and then in March to
workplaces with 5 or more workers, and finally in October to all employees
including part-time and temporary workers. Duration of benefits has also been
gradually extended from two months to one year, while the qualifying period
was shortened to three months from one year of work history (Moon Hwa Daily,
20 August 1999).

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Table 2
The growth of social insurance coverage rate (1990-99)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Pensiona
31.4
31.4
32.3
32.7
33.2
41.3
41.5
43.7
44.7
75.8
Healthb
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Unemploymentc Work Injuryd
-
-
65.8
69.1
61.5
60.5
63.4
68.8
71.1
71.8
66.1
79.7e
-
-
-
30.66
30.71
31.78
51.8
70.0
Notes: a) contributors/labour force; b) contributors/population; c) contributors/total employees;
d) contributors/total employees as of 1995; e) forecast for 2000.
Sources: National Statistics Office, 1999; Ministry of Planning and Budget, 1999; No and Lee,
2000.
This pattern was followed by injury insurance at work which is one of the
oldest and most mature social insurance schemes in Korea. Industrial accident
insurance law covering 7.5 million workers in industrial firms with 5 or more
employees was amended to include an additional 1.6 million workers in small
businesses with 4 or fewer employees from July 2000, and with this
amendment, small business employers are also eligible to be covered (Ministry
of Planning and Budget, 1999).
The state-administered pension and health insurance schemes made another
impressive expansion. The National Pension Scheme (NPS), which began by
covering private sector employees in 1988 and then expanded until it covered
rural residents in 1995, was extended to provide financial security for old age,
disability, and survivors for all urban residents aged between 18 and 59 in a
single pillar in April 1999. Most Koreans, therefore, are now covered under four
public pension schemes: the NPS, the Government Employees Pension, the
Military Personnel Pension, and the PrivateTeachers Pension (National Pension
Corporation, 1999).
A series of reforms of National Health Insurance (NHI) also contributed to
the tightening of the nation’s social safety net. The NHI, which already covered
the entire population in 1989, is now being unified into a single integrated
system. Formerly, it was enforced by 142 insurance associations serving
company employees and 227 regional insurance societies for general citizens

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
245
including the self-employed, not to mention separate administrations for public
employees and private teachers. In October 1998, the 227 regional insurance
societies and the administrations for public employees and teachers were
integrated into a new authority called the National Health Insurance Corporation
(NHIC). By the National Health Insurance Act passed in the National Assembly
in January 1999, the remaining company associations were scheduled to be
incorporated into the NHIC from 1 July 2000. Along with the unification
measures, the government enhanced the quality of benefits, including a gradual
extension of the duration of benefits from 270 to 300 days a year in 1998, to 330
days in 1999 and then to 365 days from 1 January 2000 (National Federation of
Medical Insurance, 2000; The Korea Herald, 5 August 1999).
The four major social insurance schemes generally base eligibility for
pensions and other periodic payments on length of employment. Although a
redistributive function is built in in the case of health insurance and national
pensions, the amount of pensions and other periodic payments in the event of
unemployment, sickness, or injury at work is related to the level of earnings.
The social safety nets are therefore insufficient and inefficient for urban and
rural marginals and those without work capacity. For these poor groups, the
Kim Dae-jung Government rejuvenated public assistance programmes with
fresh legislation to guarantee a minimum standard of living. Under the old
scheme, the allowances were not available to households including at least one
person aged between 18 and 64 deemed capable of working, even if their
incomes were less than the minimum cost of living. Now from 1 October 2000
the needy will receive monthly payments of up to 324,000 Won (or US$300) per
person from the government, and the number of recipients will triple to 1.54
million from the present 0.54 million. Although the law requires recipients to
continue to seek or train for jobs, it marks a turning point from the Elizabethan
Poor Law-style public assistance in which the state distinguishes the deserving
from the non-deserving poor and protects only the former (Ministry of Planning
and Budget, 1999; Ministry of Health and Welfare, 1999).
As such, substantial improvement has been made in social welfare systems
since the 1997 crisis. It will, however, take time for the nation to feel the full
benefit of the cost of living payments since these programmes have not yet
matured. Moreover, these schemes are basically funded by payroll contributions
split between the employer and the employee, and, only in certain limited cases,
supplemented from general government revenue. Thus, they will not quickly
become a major drain on government revenues. Nonetheless, it is undoubtedly
clear that the expansion of social safety nets will call for more government
commitment. Indeed, the government’s social spending has been outgrowing the
total budget increase. During fiscal years 1998 and 1999, social expenditure
grew by an average 19.5% while the total government outlay increased by 5.6%
(Ministry of Planning and Budget, 1999).

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Growth of welfarism and three preconditions
Social welfare as a functional necessity
Since the 1997 crisis, Korea has seen a rapid expansion of its social welfare
systems and social expenditures. This upward trend defies the prediction of the
neo-liberal conventional wisdom on the relationship between globalisation and
the welfare state. The Korean case strongly suggests therefore that globalisation
is not necessarily negatively related to social welfare.
At this point, the shifting emphasis on the part of the international financial
lending institutions must be noted. In the past, the IMF and the World Bank
were criticised for their welfare-busting ideology and practices (MacGregor,
1999; Deacon, 1997). But their involvement in South Korea presents a
somewhat different picture. They recommend East Asian debtor countries to
respond to the social consequences of the economic reforms and to safeguard
budgetary expenditures for social protection (World Bank, 1998a). After
admitting that ‘social policy has come to the forefront of the international
debate,’ Michel Camdessus, then managing director of the IMF, claimed that
‘Asia’s experience with crisis reminds us that countries need strong social
policies….Social safety nets are essential to protect those affected by the
dislocation – such as unemployment – that remains a risk in even fast-growing
economies’ (Camdessus, 1999: 3-4).1
It is not yet clear whether such a shift in attitude implies a fundamental
realignment of their position on social policy. Nonetheless, it seems that the
international financial institutions acknowledge the need for compensation for
the victims of an ever-integrating world economy. Structural reforms take place
in an open political environment. It is virtually impossible, for instance, to carry
out labour market liberalisation in the same way as currency devaluation or
tariff reduction. Vested interests have particularly strong incentives to resist
institutional changes. Without due compensation in one way or another,
structural reforms cannot be carried out (Nelson, 1996). The Korean case is an
impressive testament to this. By means of long negotiations in the Tripartite
Commission, more extensive forms of social protection were promised to labour
in return for its agreement on the introduction of lay-offs which would promote
labour market flexibility and ease corporate restructuring, but at the same time
end the cherished tradition of lifetime employment (Chosun Daily, 21 January
1998). Korea’s relatively ‘peaceful’ industrial relations since then contrast with
1. Since the 1995 World Summit for Social Development in Copenhagen, the IMF has paid
increasing attention to ensuring that social developmental goals have been integrated into IMF-
supported programmes with the help of the World Bank. For detailed evaluation of such a
policy shift, see IMF (2000).

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
247
its notorious history of labour militancy which had aborted the controversial
labour law reforms of the Kim Young Sam Government to promote labour
market flexibility in early 1997.2 The reaction of foreign investors has been very
positive: foreign direct investment (FDI) has been soaring from the pre-crisis
level of US$3 billion in 1996 to around US$9 billion in 1998 and reaching
US$15.5 billion, or 9% of GDP, in 1999.
The underlying political logic
There is also a political logic behind the provision of social welfare. The Kim
Dae-jung Government seems to be pushing social welfare reform beyond
functional necessities. From the beginning, it faced the complex dual tasks of
meeting the demands of international lenders and foreign investors whose help
it needed to recover from the economic crisis, as well as those of the lower
middle classes, including blue-collar workers, the urban self-employed, and
white-collar salariats, the main support base of the Kim Government. Despite
the robust economic recovery, its effect has yet to be felt by the constituency
who suffered job losses and pay cuts under the structural reforms. According to
recent studies by the Korean Institute of Finance, income inequality in Korea is
reaching levels not seen since the early 1980s. The Gini coefficient, a measure
of income inequality, rose to 0.37 in the first quarter of 1999, a 17-year peak,
contracting the proportion of the middle class to 64% from 70.6% in 1992, and
swelling the ranks of the poor (The Korean Herald, 16 June 1999). The leaders
of the ruling party were therefore worried about the widespread popular
backlash of the reform efforts among their constituencies, and this caused them
concern about the general elections in April 2000 and the party’s prospects
beyond 2000.3 This situation drove President Kim to reinforce his efforts to
build a stronger social welfare system. His Liberation Day speech in August
1999 reflected his concern and the new strategies to restore popular support (D.
2. The Korean Confederation of Trade Unions (KCTU), the then outlawed peak organisation
of democratic unions, conducted general strikes mobilising 5 million workers for 26 days and
costing 3 trillion Won, or US$2.7 billion (Chungang Daily, 22 January 1997). The KCTU was
legalised by the current Kim Dae-jung Government and participates in the Tripartite
Commission.
3. Since Korea adopts a 5-year single-term system for the presidency, the general election was
critical for the second half of the Kim Dae-jung Government which ends in 2002. The result
was something of a mixed blessing for the ruling party: it increased its share by 17 seats from
98 to 115, the largest gain among political parties participating in the general election, but it fell
short of becoming the largest party. The conservative opposition Grand National Party (GNP)
remained the largest force in the National Assembly. Once again, the ruling party has secured
a majority in the Assembly partly by forming a ruling coalition with the United Liberal
Democrats and partly by co-opting independent representatives, see footnote 7.

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Kim, 1999):
My fellow citizens,…..[a]s the ruling party, the National Congress for New
Politics will take the lead in a renewal. It will be born anew a party worthy
of the people’s trust and hope. Built around the middle and working classes,
the new political party will rise as a reformist party of the people. It will
uphold human rights and social welfare….. To nurture the middle class and
enhance the living standards of the masses, I will actively seek to implement
constructive social welfare policies built around the principle of human
development…. Now, all citizens, including those getting by with less than the
minimum level of income, will be provided with institutional guarantees of
education, medical care, and other basic requirements of decent living…..
The medical insurance, unemployment insurance, national pension, and
industrial accident insurance systems will be beefed up so as to build a
comprehensive system of social security under which all citizens can enjoy
stable, secure lives (emphasis added).
Such a political rationale explains why Korean welfare systems are being
constructed in a style closer to the traditional ILO model which upholds the
principles of the post-war consensus on social welfare: social rights, solidarity
and equality. Despite both the World Bank’s policy recommendation for the
Medical Savings Account (MSA) and the Chilean-style multi-pillar pension
system (World Bank, 1998b) and the political pressure in favour of market-
friendly social policies from local supporters, including private insurance
companies, big business, medical associations, conservative economic
bureaucrats, the opposition party and a segment of labour unions (Federation of
Korean Industries, 1999; Korea Centre for Free Enterprise, 1999), the Korean
Government has taken the opposite path with the political support of, and under
pressure from, civic activist groups and the democratic labour unions.4 It
pressed forward with the unification of the administrative bodies and funds of
numerous health insurance associations into a single authority and the
incorporation of the company pension fund into the mono-pillar national
pension system, both of which are designed to generate redistribution and
national unity or solidarity. It is hard to say whether the rising Korean welfare
state follows the social democratic or Scandinavian model. Nonetheless, it is
4. The pro-welfare social forces include civil activist groups led by People’s Solidarity for
Participatory Democracy (PSPD) and the Korean Confederation of Trade Unions (KCTU). The
social pressure groups were born in the wave of democratisation in the mid-1980s when Kim
Dae-jung’s party was the major opposition party against the authoritarian regime. They formed
what could be called a ‘triangular’ alliance with the ruling party as far as social policy is
concerned. For a detailed account of the political dynamics behind social welfare policy-
making, see Yang (2000).

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
249
clear that the Korean Government followed a different path from its
counterparts in Latin American and Eastern Europe, most of which are keen to
follow the World Bank’s prescriptions. Why is this? Answering this question
will help to define the preconditions for the development of the welfare state in
the developing world in the era of globalisation.
Fiscal capacity, democracy, and political leadership
Among others, three preconditions must be highlighted: fiscal capacity,
democracy, and political institutions which enable strong political leadership.
Social welfare of its very nature induces higher government spending. Thus,
without sufficient revenue flows, states cannot afford to develop an extensive
social welfare system. Brazil is a good case in point. The key macroeconomic
problem for Brazil is the public finances. The consolidated public sector deficit
amounts to more than 6% of GDP a year. Thus, as Stanley Fischer, first deputy
managing director of the IMF, points out, ‘without a substantial and sustained
reduction in the public sector debt….the economy will remain vulnerable to
shifts of market sentiment’ (1998: 7). In this situation, all the Brazilian
government can do is to concentrate on some programmes targeted on the poor.
In contrast, it is the financial and corporate sectors of Korea, not the public
sector, that have accumulated unsustainable debts and thus served as a primary
reason for the troubled economy. Since the Korean Government had maintained
balanced budgets, when it was hit by the currency crisis the Kim Dae-jung
Government had more leeway for social welfare spending.5
Democracy also matters. Social welfare, of its nature, means a transfer of
income from one group to another: the rich to the poor, the healthy to the sick,
the young to the old, the employed to the unemployed, and so forth. Thus, it
entails distributive politics. Without democracy, the disadvantaged could not
express themselves and realise their interests in the formal political processes
which tend to be dominated by the more fortunate. In this regard, it was very
lucky that the ordinary Korean people were able to elect the centre-left Kim
Dae-jung Government by free election, and to articulate and inject their interests
through the normal political processes. Also, the legal institutionalisation of the
Tripartite Commission deserves attention since it marks the end of exclusive
politics. Unlike the past where it was ignored and excluded, labour now
participates in the national policy-making process with the same status as
business and the state. The Commission has served as an important channel
5. In 1996, the total central government debt was only 8.6 % of GDP and interest payments
accounted for only 2.3 % of current revenue. The total Brazilian central government debt as a
share of GDP is not available, but its interest payments amounted to 47.9 % of current revenue
(World Bank, 1999).

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through which labour has articulated its views on social welfare policy and
exerted its influence.6
Democracy, on the other hand, allows individuals and groups to become
maximisers of their own particular interests. The logic of collective egoism is
a pronounced norm of political behaviour and discourse (Moon and Kim, 1996).
Given the redistributive nature of social welfare, it would be easy to expect
hyper-political activism among social groups over the direction of social policy.
Thus, it is rarely observed in democracies that a particular collective decision
is made and pushed through all possible veto points within a short period of
time.
In this context, political leadership becomes a very important variable. This
may be why top political leaders are always in the spotlight. And Korea is no
exception. It would be no exaggeration to say that the fate of the Korean welfare
state depends on President Kim Dae-jung. As chief executive, he is the only
man powerful enough to silence the voice of conservative economic bureaucrats
who are tied to the chaebols, imbued with neo-liberalism, and obsessed with
what is often called the welfare disease. Yet, the President’s intentions and
commitment are not enough to ensure the transition to the welfare state. The
President and his government must overcome the ‘notorious’ executive-
legislative stalemate (Linz and Valenzuela, 1994). Fortunately, the President
copes with this built-in problem by means of ‘partisan power’ (Mainwaring and
Shugart, 1997). Korean political parties are highly disciplined, since the party
chair exclusively controls the party’s nomination of parliamentary candidates
and their political funds under a single-member district system which tends to
generate a stable two-party system. The Korean President is the chair of the
ruling party, and thus has a firm grip on it. In addition, the President’s party
rarely loses a reliable majority in the legislature. From 1948 to the present,
there have been only two short periods of minority government: between 1988
and 1989 in the 13th Assembly and in the first half of 1998 (the current 15th
Assembly) (Kang, 1998: 104). The latter occurred under Kim Dae-jung’s
presidency and it was overcome by forming a ruling coalition with the United
Liberal Democrats and by so-called Jung-gye-gae-pyon, or an artificial
reshuffling of party shares in the Assembly by co-opting independents and
opposition party members into the ruling coalition.7
6. For details of tripartite compromise on social issues, see Kim, T. (1998). Heo (1999) neatly
outlined the strategies of democratic labour unions on the issue of social welfare.
7. They are usually guaranteed party nomination and political funds for the next general
election in return for their ‘disgraceful’ defection. Under the single-member district plurality
system, party nomination in the ruling party’s regional bases means de facto re-election. Thus,
guaranteeingnominationisaverytemptinginducementtorepresentativeswhoseekre-election.
So far, 26 Assembly members have switched to the ruling party (Juang-ang Daily, 19 October
1999). For a detailed discussion of the effect of the nomination process on party discipline, see

Yang, The Rise of the Korean Welfare State and the Globalisation Debate
251
The sweeping reform of the health and pension programmes and the
launching of a controversial public assistance programme that guarantees a
national minimum livelihood may be best understood in such an institutional
context. Strong party discipline, a stable bipartisan system, and a majority in
the Assembly enabled the President and his government to implement the social
policies as planned. The stagnation in Brazil’s social security reform confirms
the importance of stable political institutional settings. In sharp contrast to
Korea, the combination of a fragmented party system, undisciplined parties, and
federalism blocks the initiative of the able President Cardoso to mend the frayed
social safety net, and makes the Brazilian economy more vulnerable in the
globalisation era (Madrid, 1999: Ch.6).
In sum, Korea was blessed with favourable conditions when it was swept by
the forces of globalisation. Civil society was able to articulate and inject its
interests via normal political processes, and the centre-left Korean Government
could afford to allocate more national resources to social welfare. More
importantly, a strong presidential system protects Korea’s unique method of
social welfare reform from being wrecked by a traditional developmental
coalition in favour of neo-liberal social policies.
Conclusion
Globalisation has shifted the post-war balance between the public and private
sectors and contributed to a weakening of the state’s autonomy in formulating
its own social agenda. The Korean case, however, suggests that the rationale for
social welfare has not been eroded even in the globalisation era, and that nation
states still retain a considerable level of policy autonomy, sufficient to construct
distinctive social welfare systems. The Korean case verifies Cameron’s long-
established conclusion that ‘[g]overnments use a variety of policy instruments
to shelter their economies from the competitive risks of the international
economy’ (1978: 1260). It also confirms Katznelson’s observation on the
political aspect of welfare state development (1986: 318). As Katznelson notes,
welfare states develop not only in a problem-solving way. Under certain
conditions, political parties, interest groups, and social movements make use of
elections, lobbying, and protests to achieve valued ends at a more rapid pace or
in a direction qualitatively different from that dictated by the emergence of
manifest problems in the operation of the existing welfare state. Korea provides
an interesting contrast to other developing countries, especially those
experiencing the same economic crises and supervisions by the IMF and the
World Bank, in that it has combined ‘neo-liberal’ economic reforms with social
Carey and Shugart (1994).

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Development Policy Review
welfare reforms based on ‘social democratic’ principles. The Korean
Government has expanded coverage and benefits at a speed unprecedented in
history, and has made remarkable progress in unifying segmented social
insurance administrations, all of which emphasise the state’s responsibility for
its citizens’ wellbeing.
This unique policy combination was possible largely because of three
preconditions: strong fiscal capacity, democracy, and strong institutionalised
political leadership. As democracy consolidated, citizens were able to elect as
their President a centre-left candidate, Kim Dae-jung, who had been vetoed by
the military and conservative social forces for the previous 30 years, and civil
activist groups and democratic labour unions inserted their interests through the
ruling party and the Tripartite Commission. The Kim Dae-jung Government in
coalition with the lower-middle and working classes utilised relatively healthy
state revenues and stable political systems to achieve desired social policy goals.
Contrary to the expectations of the conventional wisdom, the integration of the
Korean economy into the global market has not been hampered by the dramatic
upgrading of social welfare systems. Rather, it has eased economic restructuring
and contributed to social stability, which seems to be associated with a
significant improvement in the nation’s credibility and increasing inflows of
foreign capital.
The Korean case allows us to be less pessimistic than most believed possible
about the future of the welfare state both in the developed and in the developing
world. Most developed countries enjoy relatively stable revenue bases and
democratic political systems that can be utilised by politicians to counteract the
dark side of economic globalisation. In developing regions also, we observe the
spread of democracy and its consolidation along with more successful launches
of economic restructuring programmes than before. If these developments are
combined with more stable political systems, governments could rationalise
existing poorly managed social welfare systems and weave more effective social
safety nets. We have seen such a possibility and its realisation in Korea and
there is no reason for us not to expect similar cases in other developing
countries in the future.
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