It has been broadcast as an impressive, almost spectacular recovery from the financial crisis. From the beginning of 1999, the South Korean economy appeared to show extraordinary potential for bouncing back from the major recession into which it had plunged over 1998. Growth rates of national output and of industry over the past one and a half years have been in the region of 8 to 10 per cent, and even though investment has remained subdued, the stability of the Korean won also suggested that foreign "investor confidence" had been restored.
 
But even in this apparent bull run, serious analysts had already noted tendencies that were causes for concern. A major impetus for the revival in economic activity and growth rates was the expansionary fiscal stance, through very large government deficits that were enabled by Japanese aid in the form of Miyazawa Plan funds and allowed by a somewhat chastened IMF. The inflow of foreign direct investment that contributed to the stability of the won was dominantly in the form of acquisition of domestic assets by multinational investors at what were described as "bargain basement" prices.
 
And most importantly, the weaknesses of the large industrial giants that were the backbone of the Korean growth miracle of the preceding decades, have been more rather than less evident. The chaebol, which are now much reviled as privileged, opaque, cronyistic and unwieldy monopolistic conglomerates created by state patronage, were in fact the most significant elements in an industrialisation process that even dared to shift core-periphery economic relationships in the latter part of the past century.
 
Thus, the Korean chaebol, and in particular the four conglomerates that were most successful in creating internationally accepted brands - Daewoo, Samsung, Hyundai and Lucky Goldstar - challenged the traditional division of labour between metropolitan centres of capital and developing countries that were at best recipients or objects of such capital. As emerging and successful multinational companies with a home base in the developing world, they offered both hope and a threat to the existing international economic order.
 
The building of these conglomerates was the result of strategic industrial policy that took much from the Japanese example, along with the specific political economy features of South Korea. Systematic state intervention, especially in credit allocation, and crucial protection of domestic markets in the initial growth phase, were important elements of that strategy. The strong interlinkage between finance and industry that is now being interrogated, was actually a necessary part of both the high domestic savings and investment rates that fed the boom, and the rapid expansion and export success of these companies.
 
It is now apparent that many of the current troubles of the chaebol can be traced not to over-regulation, but to the deregulation of both industry and finance in the early 1990s in South Korea. The internal and external financial liberalisation measures of 1992-93 allowed the chaebol to access cheap finance freely, also because their impressive sales and export performance made them attractive to many creditors. This money was used for very ambitious investment in diversification and expansion, which in turn was possible because of the concomitant deregulation of industry.
 
This is what led during the 1990s to several of the chaebol overextending themselves in often unrelated activities, or creating huge capacities in some sectors, which have not been justified by subsequent demand patterns. The automobile industry is a case in point. Prior to the early 1990s, fairly stringent industrial regulation prevented capacities from exceeding the combination of (buoyant) domestic and external demand. But the 1990s witnessed a massive expansion of capacity as the Korean car producers sought virtually to corner the world market.
 
Cars were in fact the main instruments in Daewoo’s plans to become a major global player. The story of Daewoo is itself the most absorbing rags to riches saga of the late twentieth century. The company was founded by Kim Woo Choong who began his career as a shirt salesman. Aided by systematic state industrial policy, over thirty years he was able to build Daewoo into an important multinational company with more than 200,000 employees (half of them abroad) and annual turnover of more than $60 billion. By the end of the 1990s, Daewoo was involved in a wide production range spanning goods as unrelated as ships in South Korea, fertilisers in Vietnam, electronic goods in Europe, and of course cars.
 
By the mid-1990s, Daewoo controlled a quarter of the domestic South Korean market of around 2 million cars, and was expanding its production capacity into India, Poland and Romania. At the time, it was difficult to find an industry analyst or financial expert who could find any fault with Daewoo’s aggressive expansion strategy. Of course, once the financial crisis broke in late 1997, the carpers were quick to arrive, and accusatory fingers were
pointed at Daewoo’s unjustified diversification, its over-accumulation, and its huge debt to equity ratios of around 600 per cent.