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The Importance of 'Administrative Systems' Proven by Korea, Taiwan, and Singapore
*For those who haven't seen the previous installments of the Development Economics series, please refer to them.
① "Why did Korea, Taiwan, and Singapore cut off their right arms just before economic development?" (https://www.fmkorea.com/9894107417)
② "Why it is difficult for poor countries to succeed... Why only 14 countries made it" (https://www.fmkorea.com/9898151708)
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Leadership will alone is not enough... A 'strict administrative system' is absolute for developing countries
- Stephen Bryan, Development Economics Expert
https://hiddenrules.substack.com/p/commitment-is-necessary-but-not-sufficient
In the previous post (https://www.fmkorea.com/9894107417), we discussed the 'will' of the highest leadership. This is the determination to force painful sacrifices upon their own core support base before visible results are achieved.
- Korea: Mercilessly arrested leading entrepreneurs.
- Taiwan: Seized and redistributed land from mainland supporters who were strong backers of the Kuomintang.
In this post, we take this 'will' as a basic premise and ask the next question: Why did some countries achieve miracles while others ended up empty-handed, despite having the same firm determination?
◇ What it looks like when an administrative system functions properly
In 1961, Korea's Economic Planning Board (EPB), unlike general planning agencies, held the power over the budget.
All other ministries had to obtain approval from the EPB to secure their budgets.
Companies seeking loans had to present specific export targets and achieve them unconditionally; if they failed, their funding was cut off.
Monthly performance review meetings were held to pressure companies.
Even massive general trading companies lost their status if they failed to meet export targets (four companies were ousted between 1979 and 1984).
These dazzling achievements were by no means due to the individual genius of a minister or detailed planning techniques. Behind them was a single structural mechanism—granting national resources only when results were produced—that operated without exception and without compromise.
◇ Where will stopped: The failures of Peru and Egypt
Peru (Velasco regime) and Egypt (Nasser regime) had all the outward appearances necessary for economic growth—planning agencies with reform authority, high-ranking economists, and excellent policy documents—and possessed the highest level of will. However, the results were disastrous.
- Peru (Disconnection in the execution stage): The controllers and the controlled were in cahoots. Because the Ministry of Agriculture directly appointed the cooperative managers, the strict performance conditions demanded by the planning agency never reached the actual business sites. There were reviews, but no subsequent punishments.
- Egypt (Wrong conditions applied): The system ran, but the destination was wrong. State-owned enterprises guaranteed employment without productivity, "sweet" loans flowed to incompetent companies, and subsidies went into the mouths of the core support base without any cost. Painful accountability was shifted only to the opposition.
The failure of these two countries is not simply a matter of where resources were spent. Even when giving resources to core supporters, they could have attached harsh performance conditions, but instead, they scattered money without any conditions.
This is because the administrative system was hijacked (Peru) or the system was directed toward the wrong goals, such as employment protection rather than economic growth (Egypt).
◇ Administration: The bridge between will and results
A strict administrative system is the institutional gear (personnel, budget, performance conditions) that ensures the firm will of the highest leadership leads to actual economic results, or conversely, allows it to devolve into protecting the interests of the established elite.
This is completely different from national capacity or the will of the leadership. Even if will and capacity are overflowing, if there is no administrative system at all or if it is used only to take care of one's own side, it is merely a shell and cannot bring about any change. A strict administrative system operates mechanically regardless of the goal. Korea used this system for export-led growth, and Estonia used it for market-liberal fiscal discipline.
◇ Four ways administrative systems operate by country
- Korea: Control based on principles and rules
Instead of tedious individual screenings, Korea established firm 'principles.' If a company brought an export letter of credit, they were automatically given preferential interest rates without question.
The strict administrative system held and manipulated all lifeline funds, including national loans, foreign exchange, and import licenses.
Since the state was the only source of money, the chaebols had to be completely dependent on this system.
This system was operated mercilessly from the starting point (1961), not after results were confirmed.
*Success factor: The ruling power endured bleeding first before squeezing the companies. They arrested entrepreneurs in large numbers and abruptly abolished import privileges (exchange rate unification) that protected their associates. The 'record of prior sacrifice' shown by the regime gave immense power to the harsh performance conditions.
- Taiwan: Personnel is policy
Taiwan placed thoroughly trained elite bureaucrats in key positions.
In the early 1950s, seven core powers, including factory permits, foreign exchange, and loans, were concentrated in the hands of one official named Yin Chung-jung. He discovered a talent named Wang Yung-ching by searching through bank deposits and gave him all the privileges at once (founding Formosa Plastics).
Although the organization was split and changed numerous times (founding of ITRI, TSMC, etc.), the bureaucrats' strict investment screening standards and sense of professional calling remained steadfast.
Even during the worst economic slump of 1974 (growth rate below 2%, inflation rate 47%), they pushed forward semiconductor investment with persistence, without using the immediate crisis as an excuse. Taiwan controlled the stage of technology diffusion instead of the money flow, and that was enough.
- Singapore: A self-reproducing system
Unlike Taiwan, which concentrated power in individuals, Singapore embedded that power into the institution itself.
Bureaucrats at the Economic Development Board (EDB), launched in 1961, served as an omnipotent single window that cleared all necessary government permits for foreign investors at once.
The bureaucrats' livelihood (promotion) was strictly tied to attracting investment and producing promised results. Even when seniors left, successors inherited the same weapons and the same survival methods.
When the first recession hit, the government slashed worker retirement savings contributions by 15 percentage points. The ruling party forced pain upon its own core support base before the crisis had even ended.
- China: Betting the bureaucrat's life (career)
Instead of money, China used the promotion and dismissal of bureaucrats as a weapon.
By allowing local governments to keep the money they earned directly, the promotion of local officials was tied completely to economic growth performance. If they produced results, they were promoted; if they slipped, they were mercilessly fired (proven by data from 1979 to 1995).
Around 1984, the administrative system proved its authenticity as bureaucrats were fired in succession due to poor performance. In 1994, it targeted local governments that had tasted the sweetest fruits of reform and reclaimed the resource allocation power to the center. By mercilessly striking not only the opposition but also the biggest beneficiaries, trust was pushed to the extreme.
◇ Conclusion: The one true requirement
The systems of these four countries look entirely different on the surface. This is because they did not copy others' systems but designed them fiercely to fit their own political and economic environments. However, they share one single essence: while the highest leadership endured the sacrifice of their own side, this conditional system operated without exception.
- Egypt and Peru: They failed miserably by running a shell system without sacrifice.
- Korea and China: They swept away incompetent companies and bureaucrats using national resources and promotions as weapons.
- Ireland and Estonia: They tied future funding through tripartite agreements or laws that shared the pain of the crisis.
Trust cannot be printed out as a policy.
For an administrative system to function properly, the painful condition that everyone is punished without exception is essential. True trust is built only when it is shown that this blade pierces not only political enemies but also the associates of the ruling power. No matter how many elite bureaucrats are appointed or how much the system is overhauled, if there is no record of sacrifice—of cutting one's own flesh—all remedies are useless.
Governance lacking a record of sacrifice goes beyond simple failure; it degenerates into protecting the interests of the established elite and drops the nation into a more terrible abyss. Successful nations had the courage to endure bleeding first, even in the midst of a dark period where the future was invisible. The trust that changes a nation is not given for free; it is built directly by cutting bone and shedding blood.
*Stephen Bryan led the 'Legatum Prosperity Index' in government agencies and development/strategy fields in the UK, Middle East, and Africa. He serves as the Chairman of the Social Security Advisory Council in the UK.
Source: https://www.fmkorea.com/best/9904354962