Rent-Seeking and Economic Development in 20th Century South Korea

South Korea is often regarded as a success story of economic development, as it went from a largely agrarian society with widespread poverty to an industrialized and pros- perous nation in a handful of decades. However, this development was accompanied by widespread rent-seeking and corruption within the political system. Much of this early growth was created through the rent-seeking relationship between the authoritar- ian government and the chaebol; the large conglomerate corporations which produced much of the growth observed during the 20th century. Contrary to the popular notion of corruption’s negative impact on economic growth, political corruption in Korea ac- tually aided its economic development. This was due to the incentives and constraints attached onto the chaebol’s rent-seeking by the government. The government forced the chaebol to use its gains from rent-seeking for productive purposes through the for- mer’s control of the banking industry and its guarantee of financial protection as long as the chaebol followed the government’s lead. Additionally, rent-seeking in the government was constrained because of the limits placed onto entry into the authoritarian political system. However, this relationship no longer functioned in an effective way after Korea democratized, the consequences of which led to the problems and reforms of the Asian financial crisis.