What do welfare and R&D have in common? They’re both keys to an interesting policy lesson from Korea.

The nexus between the public and private sectors is an integral part of Korea’s development history during its middle-income period (from about the mid-1970s to the mid-1990s), and has always gotten special attention. Most known are the Chaebol conglomerates, private businesses which, through their very close relations to political power contributed to the country’s industrialization.

There are many lenses through which one can look at the relationship between state and private sector; here is an interesting and often overlooked one:

In many middle-income countries (MICs), development problems often revolve around capacity issues: state capacity to provide services, private sector capacities in investment or infrastructure-building for example. These challenges go along with that of properly negotiating the role of the state vis-à-vis private actors, ensuring cooperation for development. In this respect the Korean example is very germane, giving policy insight into a number of specific issues.

Two examples show rather well how the relationship between the state and the private sector was established and subsequently evolved over time.

The first one is that of research and development. In Korea, the state played a strong architect role, initially establishing research institutes in the 1960s such as the Korea institute of Science and Technology to promote technological ‘catch-up’. But from the mid-1960s onwards the state enlisted its tax regime, credit allocation system and trade policy to push for higher private sector investment in R&D. The private sector shouldered a very large portion of research and development investments starting in the mid-1960s, with its share in total investments reaching around 75% twenty years later. The state investments made early-on corresponded to the immediate needs of its developing private sector which, coupled with incentives, pushed the private sector into more ownership of the R&D process. The attached graph shows the rapid evolution in the private sector’s share of R&D investment.

Long-term Trend in Korea’s R&D Expenditure

The second example is that of welfare policy. The Korean welfare system started in the 1970s by placing almost the whole burden for financing on the shoulders of the private sector. The state instituted mandatory but privately funded welfare programs. For medical insurance, coverage was taken on by companies with more than 500 employees in the mid-1970s. This was subsequently expanded to companies with 100 or more employees (1984), then 16 or more (1986), then finally to the self-employed by the late 1980s. But it was with the 1997 financial crisis and increased public vulnerability that spurred increased state expenditure on welfare (the government instituted a minimum living standard guarantee for the first time). Here, the state-planned, privately-implemented system was brought further into the public realm as time passed.

These issues are of great importance to MICs as well. Countries like Thailand struggle to increase the portion of private investment in R&D, while countries like the Philippines are looking for ways to expand welfare coverage in the population.

To be sure there are setbacks, not the least of which was the exclusion of small firms and of the self-employed from social policies for the longest time. There is also the fact that the ‘transfer’ of the burden for R&D onto the private sector was not made in a fair or equitable way, and was very much tied to the political relations that different companies had with the state. This contributed to widening the gap between chaebol and small and medium enterprises.

The state was also had a rather limited idea of its social responsibilities for quite some time (still today really). It boiled down to the provision of different types of insurance, and was heavily weighted on employment. So when the 1997 ‘IMF crisis’ hit and the number of unemployed soared, or in the aftermath when the portion of temporary employment climbed to over 50%, the inadequacy of the systems of protection were laid bare. This is a problem that continues to this day.

But despite its shortcoming, the Korean experience raises interesting questions on how the state and private sector reinforced each other’s capacity weaknesses, and how that relationship changed over time with economic growth.

Is this pattern prevalent in other countries as well? How has financing for social policies and R&D been informed by the relationship between the state and private sectors?

Also, the Korean example is one of a very strong state, with a tight handle on its finances; but have similar policies been pulled off with any success (or not) by more decentralized states, and in more recent climates of economic openness?

And the most important question, are such policies possible in today’s climate of liberalized public services? That is, do countries have the policy breathing room to start taking on more welfare-related responsibilities given the push (free trade agreements are part of this) to privatize medical services and other ‘social’ allocations? Or is it more of a capacity problem, where the state is simply unable to envision upgrading its social service responsibilities in the first place?