POLITICAL ECONOMY OF THIRD WORLD BILATERALISM: 
THE SAUDI ARABIAN - KOREAN 
CONNECTION 1973-1983 
by 
CHUNG IN MOON 
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Dissertation submitted to the fac ul ty of t he Graduate School 
of t he University of Maryland i n partial fu l f i llment 
of the r equi r ements for the degree of 
Doctor of Ph i losophy 
1984 
Cvflj I 
VOI . I 
? Copyright Chung in Moon 1984 
AP PROV AL SHEET 
Title of Dissertation: Political Economy of Third World 
Bi 1 ate r a 1 ism: The Saudi Ar ab i an -
Korean Connection 1973-198J 
Na me of Ca nd id ate : Chung in Moon 
Doctor of Philosophy, 1984 
Dissertation and Abstract Appro ved: 
Dr. Dennis Pirages 
Associate Professor 
Department of Gove rnment 
and Politi cs 
Date Approved : 
ABSTRACT 
Tit le of Dissertation: Political Economy of Third World 
Bilateralism: The Saudi Arabian-
Korean Connection 1973 - 1983 
Chung I n Moon: Doctor of Philosophy, 1984 
Dissertation directed by: Dr ? De n n is Pi rages 
Associate Professor 
Department of Government and 
Politics 
The 1970s have witnessed a rapid change in the 
international economic system. One of the salient aspects 
of this change has been the rise of OPEC members and the 
Newly Industrializing Countries as significant actors on 
the international economic scene . Aware of the importance 
of these new actors, a growing number of scholars in the 
field have paid their scholarly attention to this new 
p he n o me n o n ? Nevertheless, little effort has been applied 
to the systematic under s t and i ng of significant economic 
interactions among these new actors. 
This s t u d y re pres e n ts an e ff or t t o u nd e rs ta nd this new 
phenomenon within the overall framework of international 
political economy. In carrying out this research task, the 
study constructs a pre-theoretical model of intra-South 
bilateral economic relations, and applies it to the 
bilateral ties between Saudi Arabia and Korea from 1973 to 
1983. 
The fin d ing s of this study offer a number of counter-
intuitiv e e x a mples t o the convention a l wisdoms of 
i ntern a t i on a l political ec onomy. First, the study shows 
that dev e loping countries are inclined to seek bilateral 
ti e s, rathe r than re 1 yi ng on collective multilateral 
sch e mes, in c oping with sensitivities and vulnerabilities 
r e sulting from their integration in the international 
division of labor. A second finding is that the rise of 
Thi rd World bilateralism is a function of a conscious and 
calculated state strategy to diversify external dependence 
and to reduce systemic vulnerabilities rather than the 
outcome either of spontaneous market forces or of 
developing countries' structural positions in the 
international economic system. This finding suggests that 
the state, even in 'dependent' developing countries, must 
be restored as the primary unit of analysis in 
u nd e rs t a nd i ng political economic behavior of Thi rd World 
countries. Thi rd, this study identifies the role of 
private entrepreneurs in the Third World as an important 
unit in tracing process -level dynamics of intra-South 
bilateralism. Finally, the findings in this research 
suggest that development strategy can be a useful starting 
point in analyzing political economic behavior of 
developing countries in general and the formation of Third 
World bilat e ralism in particular. 
DEDICATION 
TO MY PARENTS, YEO JUN KIM AND TAE SENG MOON 
WHOSE DREAM HAS BEEN TO HAVE A GOOD SCHOLAR 
AMONG THEIR FIVE SONS. 
ii 
ACKNOWLEDGEMENTS 
My special gratitude is ex t ended to Professor Dennis 
Pirages for the thorough guidance and personal kindness 
that he provided throughout the cou r se of this research and 
my gradu ate lif e a t Maryland. It was he who brought me to 
Maryland a nd co nst a ntly motiv a t e d me to pur s ue a sc hol a rly 
life. I would lik e to thank the members of my dissertation 
committee : Pr ofesso rs Edward Aza r, Davis Bobrow, Che ryl 
Ch ri s t e ns e n, Jerry Hag e , and Bartek Kaminski, as eac h one 
of th e m has made a unique a nd impo rt ant co ntribution not 
only to this st udy but a lso t o my success a t Maryland. I 
am particularly gratef ul to Pr ofe ssors Aza r a nd 
Christensen's personal encourage me nt and guidance . I truly 
owe th e m lots in my acad e mi c and personal life. 
I would a lso like to th a nk Amb assa d o r Ze in Da bb ag h, Dr. 
S t eve Elkin, Dr. Steph Hagg a rd, l a te Dr . Env e r Koury, Dr . 
Ce sar Majul , Dr. R o n Mc L au r i n , Dr ? Wa r r e n Phi 11 i p s , a nd 
Dr . Bob Richter for their s upport, e nc our age me n t , and 
criticisms . Especially, Dr. Richter kindly r ead the en tir e 
manuscript and offe r e d me a number of us ef ul co mm e nts on 
both susbtantive a nd editorial matter s . To thos e many 
teachers, friends and colleagues in US, Kore a , and Saudi 
Arabia, who, in one way or anot her, h a v e contributed to 
this effort, I owe much appreciation. No e no ugh 
apprec iation can be expressed to my wife Jai-Ok, son Ki -
Hyun, daughter Haeyun (Iris), and mot her -i n -1 aw Young -J a 
Hwang, whose patience and understanding allowed me to 
co mplete this research. 
Finally, I should like to acknowledge a doctor a 1 
dissertation fellowship from the Institute for the Study of 
World Politics which permitted me to conduct field research 
in Korea and Saudi Arabia. Research fellowships from the 
Center for International De v e 1 o p me n t as we 11 as from 
University of Maryl and he 1 ped me to complete this 
dissertation without any financial difficulty. I want to 
extend my thanks for their support and encouragement. 
'\ V 
I -
TAB LE OF CONT ENT S 
ABSTRACT 
DEDICATION ii 
AC KNO WLE DG EMENT S 
TA8LE OF CONTENTS V 
ILL UST RAT I ON S vii 
CHAPTER 
I. INTRODUCTION: GLOBAL INTERDEPENDENCE AND THIRD 
WORLD BILATERALISM 1 
Introduction 1 
Global Interdependence and the Third World 6 
Third World's Countervailing Strategies 23 
Dimensions of Third World Bilateralism 39 
II. THEORIES OF BILATERALISM: SEARCH FOR INDEPENDENT 
VARI ABLES 58 
Economic Explanations 59 
Comparative Advantage 59 
Technology and Product Cycle 62 
Demand-Side Effects 65 
Critique 67 
Ecological Models of Bilateralism 7 2 
Distance 73 
Zone of Influence and Hegemony 74 
Political Determinants 78 
Critique 81 
Entrepreneurial Dynamism and Bilateral Ties 84 
Toward An Integrated Model of Bilateralism: 
The State Entrepreneurship Perspective 94 
V 
111. THE SAUDI ARAB I AN - KOREAN CONNECTION: AN OVERVIEW 
OF HISTOR IC AL AND EMPIRICAL DIMENSIONS 1 18 
B ac kg ro und 1 1 8 
Historical Evo luti on of Bilate r a l Ties l 2 2 
Ko r ea a nd Sa udi Ara b ia: The Economic Context l 2 7 
Comm odity Tr a d e l 28 
Const ruct ion a nd Serv ice l 3 1 
Kore a n Ma npo we r in Sa ud i Ara bi a l 35 
J o i nt-V e ntures, Ca p ital Rec ycling , a nd 
Te c h n i c al Coop e r a t i o n l 3 7 
I mpact An a l ys is o f the Sau d i-Korean Co nne ction 1 4 2 
Ko r e a 1 4 2 
Sa u di Ar a bi a 14 6 
IV. P RECON DI T I ONS FO R THE RI SE OF T HE SAUDI AR AB IAN-
KOREAN CON NECTIO N 1 57 
Patt e rns of Dev e lopme nt S tra tegies 1 59 
Kore a 159 
Saudi Ar a bia 1 6 3 
Op portuniti e s and Co ns tr a in t s 171 
Oppor t unities: a NIC a nd OPEC 1 7 2 
Internal a nd Extern a l Constra i nts 176 
S t ate S tr a t eg ies and Bil a t e r a l Choice 1 8 7 
Kore a 189 
Saud i Arabi a 196 
V. ENTREP RENEURIAL DYNAMIS M AN D T HE F ORM ATION OF 
A BUSINESS CON N ECTION 2 14 
Korean Entrepreneurial Dy nam i sm: Motiva t ions 
and P e rc e ptions 216 
Dome stic Cons traints 218 
I nee nt i ves 2 20 
Optimi stic Market P e rception 221 
Intern a tional Links and Competence 223 
Entry Conditions in the Saudi Ma rket 224 
Bazaar Mentality 2 25 
The Ro le of the Int e rme diary 2 28 
Public Sector Concentration 2 30 
Oligopolistic Structure 2 3 2 
Entr e pr e n e urial Dynamism: P a tterns o f 
Korean Firms' Market P e n e tr a tion Strat e gy 2 33 
Flexibility 233 
Price Competitiveness and Risk Taking 235 
Non-Conventional Busine s s Practices 240 
Consolidating Government Support 245 
The Saudi Receptivity and th e Formation 
of Business Conne ction 24 7 
Limits of Entrepreneurial Dynamism.? 261 
vi 
VI. STATE ST R ATEG IES AND THE EVOLVING NATURE OF 
[HE SAUD I ARABIAN -K OREAN CON NECTI O~ 270 
The Korean Stra t egy : Its Cyclical Pa tt e rn a nd 
S t at e Ent r e pre ne u rs Iii p 27 2 
Facilitative Functions 2 7 2 
Facilitative Functions in a Co mp a r at ive 
Per s pectiv e 20 5 
Exte rn a l P o litical Management 28 6 
Insulative Functions 29 8 
Summa ry JU 8 
State Entrepreneursh ip of Sa u d i Arabia: 
C h a ng i ng St at c I nter es t s , Er od i ng P ol iti ca l 
Base , and Saudi-ization 3 0 9 
Facilitative Functions JlU 
Political Receptivity 3 16 
Ins u lat iv e F u nc t lo ns :.i:u 
Saudi-ization and Its Impacts JJJ 
Su mm ary JJ8 
Co nflict s, Power Asymmetry, a nd New Directions 
in th e Saudi-Korean Relations JJ9 
VII . CONC LUSI ON : THEORETICAL AND PRACTI CA L 
IMPLICATIONS 358 
Theoretic a l Implic a tions 359 
Practical Implications 366 
BIB LI OGRAPHY 374 
ILLUSTRATIONS 
Diagram 
l -1 : Ca u sa l Sequencing of Dependent Integr a tion 22 
l - 2: Evolution of Development Strategy 24 
2- 1: Existing Models of Bilateralism 95 
2-2: Statist Hodel of Bilateralism 109 
5 -1: Business-State Relationship in Saudi Ar a bi a 
:A Schematic Pr esen tation 259 
Figure 
2 -1: De ma nd Curves Under Different Political Conditions 70 
3 -1 : Patterns of Commodity Tr ade: Saudi-Korea 1 2d 
3-2: Composition of Commodity Trade: Sudi-Kor ea lJU 
J -J: Co mp osition of Saudi Imports by Country 131 
3 -4: Regional Composition of Kor ean Overseas 
Construction Exports 1J2 
vii 
3 - 5 : Korean Co nst ructio n in the Middle Eas t l 3 2 
3-6 : Sectoral Composition of Contracts in the 
Saudi Market 133 
3-7: Saudi Development Expenditure and the 
Share of Korean Co ntr acts 134 
3 - 8 : Expatri ate Manpower in Sa udi Ar a bi a 136 
3-9: Korean Ma np o wer in Sa ud i Arabia 137 
3-10: Major Pl a nt Proj ects by Korean Firms 140 
3 -11: Balance of P aymen ts and the Income from Saudi 
Co ntr ac t ma rk e t 14 2 
3- 1 2 : Na ti ona l Income a nd the Saud i Cons truction 
Sec t o r 143 
Table 
l -1: Cos t s of Interdependence 2 1 
l -2: S tr a t egies Under Dissociation 2b 
l -3: Strategies Under Selective Reassociation 29 
l -4: S tr a t egies Und er Associa ti o n 34 
l - 5 : Destination of Wo r ld Exports 40 
l -6: Tr e nds in Tr a d e a mo n g Developing Co untri e s 42 
l -7: Reg ional Exports to OPEC b y Region 44 
1 - 8 : Majo r LDC Trading P ar tners with OPEC 45 
l -9: Selected LD Cs' Exports to OPEC 4 6 
4 -1: Econo mic De v e lopme nt Plans in Korea 16 1 
4- 2 : Economic Development Plans in Saudi Arabia 166 
4 - 3 : Saudi Arabia: Oil Revenue by Source 175 
4 -4: Foreign Exchange a nd Payments for Oil Imports 178 
4 - 5 : Mo ney Supp l y a nd Inflation in Sa udi Arabia 1 8 2 
4-6: Korean Oi l Imports b y Co untry 190 
5 -1: Country Co mp osition of th e Sa udi Contract Market 23 2 
5 - 2 : Korean Co nstructi o n Business by Co ntr ac t Typ e 23 4 
5 -3: Comparison of Bid Pri ce b e tween Korean a nd 
Wes t e r n Fir ms 235 
5 -4: Changing Composition of Pr o j ec t Costs 23 7 
5 -5: Classification of Non - Co nv e ntion a l Business 
Pr ac ti ces 24 1 
5 -6: OCAK's Lobby Activities 24 6 
5 -7: Saudi Agents for Kor ea n Firms : Cl ass ifi ca tion 
by Social St a tus 25 1 
6 -1: Korean Banks' P a yment Guarantees 2 7 5 
6-2: Incentives and Disincentives for Overseas 
Construction Industry : Country Comparison 286 
6 -3: Financial Bal a nc e Sheet for the Saudi Contracts 30 3 
6 -4: Incentives for Joint - Ve ntur e in Saudi Ar a bia J l 2 
6 -5: The Evolving Patt e rn of Saudi Lo ca l Firms ' 
Competition 3 24 
6 -6: The Saudi Manpower Supply 335 
7 -1: Declining Saudi Contract Market 36 9 
7 -2: L a te-Co me rs in th e Saudi Co ntr act Market 371 
CH APT ER ONE 
INTRODUCTION: GLOBAL INTERDEPENDENCE 
AND THIRD WORLD BILATERALISM 
Introduction 
Bilateral economic relations among <level oping 
countries are not a new phenomenon. Although relatively 
minor compared to relations between the North and South as 
a whole, they remain a persistent pattern of economic 
trans actions affecting de ve 1 oping countries. Recently, 
these inter-South economic linkages have revealed a 
dynamic di mens ion with the rise of new significant actors 
from the Southern rim in the international economic system: 
OPEC and the Newly Industrializing Countries(NICs). 
The capital-surplus OPEC members and the NI Cs have 
shown remarkable upward mobility in the system with their 
increased economic capability in terms of diversified 
industrial structures, growing pure has i ng power, and 
entrepreneurial dynamism. The entry of these countries 
into the international system dramatically reactivated 
bilateral economic linkages among developing countries by 
providing new markets, increasing industrial 
complementarities, and by creating new incentives for 
mutual cooperation in the mid-197Os and after. It is 
difficult to predict whether or not this phenomenon will 
l 
become a solid and stable modus o pera ndi commonly pursue d 
by developing co untri es . Over the last ten years, 
howe v er , inter-South bil atera l economic transactions have 
b ec ome signifi cant in both relative and absolute terms ? 
A s s ha l 1 b e discussed in chapter one, the magnitude of 
inter-South dyadic transactions me as ured by amount, 
vol um e and pervasiveness constitute an important 
d i me ns ion of the international political e conomy. 
Earlier theories advanced under the rubric of 
int e r d e pendence and dependency -the mainstream of the 
int e rnational political economy- have, however, distorted' 
this di mens ion by omitting it from their analytical and 
empiric al universe. This may be partially due to their 
intentional neglect of the phenomenon based on theorists' 
shared perception of empirical insignificance , or their 
theoretical inability to capture it properly. Or it may 
have something to do with normative positions: 
interdependence theorists may fear entropic fragmentation 
of the world by uncoordinated bilateral search for economic 
gain, while de pe nd e nc i a theorists may deny the 
possibility of economic gain by unilateral or bilateral 
actions due to systemic weakness, domestic fragility, and 
the economic backwardness of de ve 1 oping countries. 
Whatever the reasons, the fact is that these dyadic inter-
South transactions are growing. 
This study is an attempt to explore this 'ignored' or 
'distorted' dimension of the international economy. The 
2 
dy is g uided by the three major theoretical and
 
stu
practical assertions . Firs t , it ass e rt s that co 11 e c
 ti v e -
mu 1 t i 1 ate r a 1 a p pro a c hes are no t t he ' on l y' s o 1 u t i on to 
t he 
cur r ent North-South economic stalemate . Disappointed w
ith 
empty r he tori c , s t a g n a n t n e g o t i a t i o ns , a nd the uncer
tain 
outcome of collective -multil ateral approaches, developing 
co untri es tend to opt for bilateral ties or diversific
ation 
in t e rms of explicit and/or implicit cooperative 
a r range me n ts ? 
Second, the study argues that the rise and permanence 
of 
Third World bilateralism is a f unction of a conscious and 
' ca lculated' state strategy to diversify external 
dependence and to reduce systemic vulne r abilities , both of 
which are the un avoida ble b y -pr oducts of integration into 
the int e rnational econo mi c system . This position therefore 
 and 
rejects the conventional understanding that the volume
direction of economic transactions b etween any dyadic pair 
is "totally" determined either by changing patterns of 
co mp arative adva nt age in the international economy or by 
systemic cons train ts and opportunities stemming from 
bor . 
structural positions in the international division of 
la
It does not, how eve r, imply an entire negation of the 
changi ng pattern of co mp arative advantage and systemic 
const raints and opportuniti es as factors affecting the 
dir ec tion and volume of bil ateral ties. These are 
tainly responsible for the rise of bilateralism, but n
ot 
ce r
in a deterministic manner. In my opinion, they are 
3 
c o nd it ion i n g fa c tor s to b e p e r ce i ved , fil t e r e d , a nd 
t r a nsla t e d i n to th e dec i sio n-m aking contex t of th e s t a t e 
a uthor i ti e s in s U C h a way t o yie ld s p e c i f i c fo rms of 
bil a t e r a lism i n te rm s of p a r t n e r and c o mmo dit y 
dive r sifica t io n. 
Th ird, as a co rr ola r y of the second a sse rt i o n , t h e s t u d y 
makes fo r ei g n econo mic p o l icy -m aki ng i n pa rt ic u la r a nd th e 
r o l e of the s t a t e i n ge n e r a l th e pr i ma r y un i t of a n a l ysis . 
I n o the r wo rd s , s t a t e b e h a vi o r in te rms o f fo r eig n e co n o mi c 
policy -m a k ing i s co n ce i ve d as th e c ru c i a l v a r ia bl e 
e x p lai n i n g th e ri se a nd g r o wth of Th i rd Wo rld bil a t e r a l is m. 
I t i s <l e d u ced f r o m t h i s line o f r eason in g th a t "the s t a t e " 
i n d e v e l o ping co untri e s i s n e i t h e r o bs o l e t e co n ce ding its 
p o we r t o ma rk et f or ce s, n o r h e l p l e s s l y tr a pp e d in a 
d e pen d e nt r e l a ti o nship with the ca pit a 1 i s t s ys t e rn. The 
asse rt io n of a n " a ut o n o mo u s " s t a t e as the p rim a r y age nt 
s h a ping the vo lume a nd di r ec t i o n of Thi rd Wo rld 
b i l a t e r a li s m i n t urn necessi t a t es a n exa min a tion of th e 
na tur e of "the s t a t e ", d o mes ti c po liti ca l s truct ur es , 
d y n a mi c int e rpl ay of "st a t e a nd bu s iness ", a nd o f th e 
st ru c tur e a nd p ro ce ss of f or e i g n eco n o mi c po 1 i c y ma k i n g i n 
th ose co u n tri es inv o lv e d in d ya di c t r a nsac ti o n s . 
With th e se issu es in mind, t hi s s tud y see k s t o a ddr ess 
the following se t o f qu es ti o n s ; 
1) Ho w e xt e nsi ve h a v e bil a t e r a l eco nomi c ti e s b e twee n 
d e v e l o pin g c ountri e s been f or the l a st two d ecad es ? Wh a t 
fac tor s a r e r es ponsibl e f or the ri se a nd ex p a n s i o n of th ese 
bil a t e r a l ti es? Wh a t h as b ee n th e n a tur e of ga in f r o m th is 
4 
lism? And how does this bilateral phen
omenon fit 
bilat e ra
o a la r ger f r amework of the interna
tional political 
int
ec onomy ? 
2 ) What factors inhibit or e nh a nc e bilater
al ties 
e nature of 
between de ve loping count ri es? Wha
t is th
dynamic patterns of interctions inv
olving these bilateral 
ties ? What are the salient fo
rms of coo peration and 
conflict revolving arou nd th
e int e r-S ou th eco nomi c 
th e p a tt e rns of diplomacy , b a r ga ining
, 
linkages? What a re 
iss u e -link ages , market p e n et rati o n and
 r ece ptivity, a nd th e 
decision st ru c tur es of this form of ec
o n o mic rel a tions ? 
3) What practical p olicy i mplications ca n b e deduced 
f rom such a study? What effects does this for
m of eco nomic 
r e 1 a t ions h ave o n th e orde r a nd stability
 of the 
in t e rn ationa l econo mi c syste m? What a bout th e ir perm
anence 
a nd pervasiveness ? What so rt s of theoretic
al lessons can 
b e learned f rom this study? 
In a ddr essi n g these sets of q u es tions,
 the study employs 
two strategies: one is the const ruction of
 a framework of 
ism, and the 
a n alys i s that ca n ex plain Third World 
bilat e r a l
o th e r is a case study . As discussed in Chapter Two
, th e 
co nstruction of a framework of a n a lysi
s i s motiv a t e d 
largely by the inadequacy or low theor e ti ca
l utility of 
sting theories or approaches in explain
ing inter-South e xi
dyadic r e l a tions. Th e cas e s t ud y has b ee n c hos e
n n o t only 
 
b ecause o f th e c onc e ntration of th e ph e nom
e non in quit e a 
limit e d numb e r of developin g co untri es s uch 
as OP EC a nd 
5 
NICs, but also be ca use of the researcher's preference to 
examine the issue on a b asic level. The case in question 
conce rns bil ateral econo mic relations b etween Saudi Arabia 
and South Korea o v er the last d ecad e . The Saudi-Korean 
case has been chosen with an expecta ti o n that it may 
provide us with a s trong cou nt e r-exa mple to the existing 
theoretical trend in the field of i nt ernatio nal political 
eco n omy . Thus, the study does not attempt to generalize a 
theory of bilateralism from this particular case. The 
r esearch si mply aims a t d e lineating a solid empirical case 
which has been neg 1 e ct e d in the mainstream analysis, 
offering a proof for the framework of analysis posited, 
a nd opening a new horizon of r e search area for Third World 
students of the international political economy. 
Global Interdependence and The Third World 
Over the last quarter of a ce ntury, the degree of 
interconnectedness among countries in the world has 
dras ti cally increased. Through cob-web lik e networks of 
g lobal c ommunication, international trade, and human 
interactions, glo b al interdependence has increased not only 
in terms of quantity (i.e., volume of transactions) but 
also in terms of quality (i.e . , ex pans ion of intricate 
policy n etworks) . For exa mpl e, international trade has 
ex panded more rapidly th an n ational economies have grown . 
Along with the ex pans ion of the commodities market, 
international fin a nc i a 1 a nd 1 ab or markets hav e mad e 
6 
1 
q u a n t um 1 ea p s . Th e ex p a n s i o n of t h e indu s tr ial wo rld a nd 
t h e di ff u s i o n o f th e int e rn a t io n a l ma r ke t eco n o my h ave 
i ntegrated a ll p a rt s o f the glo b e int o one i nc r e as i ng 1 y 
i n t e r de p e nd e n t wh o l e , a b o ut whi c h Gil pin has wr i tt e n : 
Na t io n a l eco n o mi es h a v e b ee o me e nmes h e d i n a we b o f 
eco n o mi c int e rd e p e nd e nc e f r o m whi c h th ey ca nn ot e as i 1 y 
escape ." ( 19 7 5 : 4 1) 
T h e i mage of a g 1 o b a 1 s ys t e m, in whi c h a pr of u s i o n of 
t r a n s n a ti o n a l r e l a tions t a k e s place , h as b ee n b eneig n a nd 
is s e e n as a po s i t iv e s um g a me c a r e f u 11 y nu r tu r e d b y t h e 
ma r ke t co n ce pt. As Koeh a n e a nd Ny e h a v e not e d: "rhe t o ri ca l 
u ses of ' int e rd e p e ndence ' f r e qu e ntly ca rry highly p o sitiv e 
a nd eg alit a ri a n ov e rtones . "(1975 : 367) Inde e d 
i nt e rd e p e nd e nce h a s been a d o pt e d as a se manti c s ymbol 
a ll ege d t o b e co mpo se d o f s ymm e t ry , e qu a lity, peace , 
2 
i nt eg r a ti o n, a nd mod e rniz a ti o n. Th u s , th e hi g h e r t he 
l e v e l of g l o b a l int e rd e pe nd e nce , th e hi g h e r th e l e v e l o f 
h o moge n e ity and inte g ration a mo ng dif fe r e nt c ompone nt pa rt s 
o f th e g l o b a l system. 
T hi s propos i tion h as be e n butr es s e d by lib e r a l id eo l og y 
b e liev e d to be r e sponsibl e f o r th e e con o mi c o rd e r th a t 
e me rged as the dominant lo g ic of th e g lob a l sys t e m af t e r 
t he Wo r 1 d War I I ? Aft e r the ec onomi c c h a os o f th e int e r-
Wa r period a nd the d e vas t ation o f mu c h o f th e industri a l 
world durin g th e World War II, onl y th e US was in a 
posi t ion t o s e t th e basi c rules of th e post-w a r ga me . Th e 
US c hoi ce wa s t o struct u r e suc h rul es a round o n th e lib e r a l 
7 
eco n o mi c o r d e r . T h e i d ea b e hind this lib e r a l prog r a m wa s 
c l e a r: t o l e r a ti o n a nd / or ins titut io n a l g u a r a nte e s of fr e e 
tr a d e a nd the f r ee mo v e me n t of th e f ac t o r s of pr o du c tion 
wo uld e nh a nc e g l o b a l e ffi c i e n cy a nd we l fa r e thr o u g h 
i n c r ease d co nsumpti o n a nd ex p a nd e d ma rk e t s ( G ilpin 1977 
Ki ndlb e r g e r 1 9 76 Hirs c h a nd Doyl e 1978; Ca ldw e ll 1976; 
Hudson 1 97 9 ). 
F' o 11 o wing th is 1 og i C, GATT(Th e Ge n e r a l Ag r ee me nt o n 
T r a d es a nd T a r iffs ) wa s cr ea t e d to f a cilit a t e th e 1 o we ring 
of n a ti o n a l trad e b a rri e rs , th e l MF t o s e t up an 
i nt e rn a ti o n a l mo n e t a ry r eg ime built on f ixe d a nd fre e ly 
co nv e rtibl e r a t es a mon g n a tional c urrencies, and th e World 
Ba nk e s t a bli s h e d to provid e f or the int e rnational f low of 
c a pit a l t o me et eco n o mi c r ecovery a nd d e v e 1 op me n t needs 
th a t pr iva t e inv es tors we r e un a bl e t o s upp o rt(Knorr 1977:1-
2 ). Exp a nding int e rn a ti o n a l tr a d e a nd inv e stment in s uch a 
libe ral i ns t i t u t i o n a 1 se tting and th e us heg e monic 
s tability wa s s e en a s the mo st powerful e ngine f or 
tr a nsforming b a ckward a nd disrupt e d e c o nomi e s into national 
s yst e ms cap a bl e of self-sustaine d growth . Al th o u g h t his 
tr a nsformation wa s n o t p e rv a siv e , it g r e atly c ontribut e d to 
the post-war ris e of West Ge rmany a nd J a pan. 
This diffusi o n of g l o bal int e rd e p e nd e nce wa s n o t limit e d 
to the advanc ed i ndustr ia l c ountri es . Thi rd World 
d e v e loping c ountri e s , numb e ring mor e th a n 130 t o d a y, have 
b ee n int eg r a t e d into the glob a l ec onom y e ith e r b y c hoi c e o r 
3 
by histori ca l n e c e ssity. Th e e nd of c oloni a li s m and th e 
e me r ge n ce o f n e w, ind e p e nd e nt st a t e s broug ht n e w pr o bl e ms 
8 
to the fore . In their effo rt s to foster economic growth, 
the developing co untries we r e faced with fundamental 
co ntstraints: single crop econo mi c struct ur es , the lack of 
human and technological infrastructure, a nd persistent 
capital shortages. All of them were colonial legacies which 
impeded self-sustaining economic d e v e l o p me n t ? Und e r these 
cir cu ms ta nc es , the costs of c losing their eco nomi es were 
perceived to be prohibitiv ely high. Thus, they opened up 
their eco nomies in one way or ano th e r to further integrate 
into the international econo mic system going t hr oug h a 
variety of development strategies from import-substituting 
industrialization, regional economic integration, nd export 
4 
promotion strategy. Perhaps, as in the words of Wolfgang 
F. Stolper, small developing co untri es "never really had a 
choice b e tween open or closed eco nomi es , but only a cho ice 
of how open to b e ."(1966:59) 
At this stage, the message from the d e veloped world was 
clear: th e more integrated you are into the system, the 
higher the level of your benefits. Early integr a tionists 
a nd modernization theorists all strongly advocated th e 
opening up of societies and eco nomi es ass uming an eve ntual 
5 
conversion between the developed and d e ve loping world. 
More specifically, stud e nts of modernization theory 
conceived the modernization process as a g rand, universally 
achievable, e volutionary a nd pervasive p he no me no n 
applicable to all developin g -traditional soc ieties. 
Despite transitional disruptions a nd dysfunctionalities, 
9 
they believed that th e mo d e rniz a ti o n process would bring 
a bout prosperty a nd s t a b i 1 i t y. To a number of liberal 
ec onomists, inc r ease d mark et e xc h ang es with de ve 1 oped 
eco nomies would g uar a nt ee a lmo s t a utomatic a nd spontaneous 
transfer of benefits und e r the rubric of co mp ara tiv e 
a dv a nt age . They all argued that open eco nomi es contribute 
t o th e economic g rowth a nd we lfar e of developing 
6 
co untri es . 
The degr ee of integratio n into the g lobal ec anomic 
sys t e m v a ries from one country to nex t, de pe nd i ng on th e 
types of development strategy pursued. Countries with an 
outward -1 o o king orientation integrat e more deeply than 
thos e operating under inward - looking strategies. This 
inte g ration process has brought new benefits and 
opportunities to d e veloping countries in varying d eg rees. 
Through the g lobal network of market mec ha nis m, scarce 
goods, services, and capital flowed in, while external 
markets for primary commodities a nd manufactured goods 
origin at i ng f r om d e v e 1 o pi ng co untri es expanded . New 
te c hnologies were introduced, c on t r i but i ng to the 
industrialization process in some de ve 1 oping c ountri e s. 
Indeed in the absolute sense, eco nomic performances in many 
developing countries, me as u r e d by g rowth r a tes a nd 
industrial productivity, substantially improved as a result 
7 
of positive integration into the international economy. 
Notwithstanding these actual and perceived ben e fits and 
opportunities, however, a growing number of observers began 
8 
to pay a ttention to the other side of co in, arguing that 
10 
th e optimistic visions of the modernists, transact i o ni st s , 
integrationists, and liberal econo mists have not dovetailed 
with reality. On b al a nc e, it is a rgued, COS ts and 
constraints have been far greater than benefits and 
opportunities. These negative aspects are in turn 
attribut e d to a pattern of u nequal exchange under an 
asymmetric structure of global inte rd ependence. Rosenau, 
for e xampl e , perceives that the world evolving out of 
increased int e rd e pe nd enc e is not ne c es s a r i 1 y that of "ti d y 
symmetry", but of "ungainly asymrnetry"(l980:53). Contrary 
to the market analogy adduced by the liberal theo r ists, the 
s tructur e and process of the interdependent world were not 
symmetric, neut r a 1, and opti mal . I t i n v o 1 v e s " v a r y i ng 
degrees of interdependence for some and of dependence for 
others."(Waltz 1979:143) Certainly increased 
i nte rde pe nde nee has led to more c ollaboration, mutual 
knowledge, and be ne f i ts f or s o me ? But it has also led to 
de pe nd e nc y, vu l ne r ab i 1 it y, exploita ti on , and conflict for 
others(Holsti 1980: 31). 
I nte rde pe nde nee is then a Janus-like attribute of the 
contemporary international system . It offers to developing 
countries both cos ts -cons train ts and benefits-
opportunities. But the crux of the issue seems to lie in 
9 
the impression that the former outweighs the latter. The 
level of costs and constraints are not uniformly 
generalizable for all the developing countries. Depending 
upon each actor's power capability , issue-area, patterns of 
l l 
development s trategy, and structural position in the 
international sys tern, the level of costs and risks varies 
f rom one country to another( Koehane and Nye 1977 Burns 
and Baumgartner 1977 ; Christensen 1977;Baldwin 1979, 1980; 
Haggard 1983). The gro wing stratification and 
heterogeneity of most developing countries further 
prevents us from co ming up with common denominators for 
costs and risks originating from the pattern of integration 
into the global sys t e m. Never the 1 es s , it see ms possible to 
delineate s UC h COS t S and r is Ks in terms of three major 
factors : systemic vulnerability, dyadic sensitivity , and 
10 
structural dysfunctionality. 
One of the most obvious costs and cons tr ai nts faced by 
developing count ri es is systemic v ul ne r ab i 1 it y. The 
co nee pt refers to the pattern of COS t S or cons train ts 
i mp ose d the transmission of exte rn al shocks a nd 
tu r b ul enc e originating in the international system. 
Vulnerability of this sort is r ela t ed to the ex t e rn al 
econo mi c e nvirone mnt as a whole, rather than to S pe Ci f i C 
act ions of specific ac tors. Wid e s w i ng s i n world ma rket 
c o nd it i o ns , boom and bust cycles, int er n ational financial 
unce rtainties, protracted global r ecessions , roller-coaster 
pricing patterns of primary co mmoditi es and the like are 
good examples of the so ur ces of this kind of vulne r a bility, 
al l of which are the cu mulative result of the movements of 
sys t e mi c factors. As Koe hane a nd Nye point out, the 
ex t ent of this vulnerability is usually contingent upon 
"the relative availability and costliness of the 
l 2 
11
alternatives that various actors face. (1977: 13) Due to 
their highly unpredictable and undifferentiated natur e , 
however, the costs incurred are very high even after the 
l l 
policies are altered. In many cases they are not easi l y 
captured within the existing or altered policy framework, 
often le ad i ng to incapacitation of the state to make 
11 
policy. The recent polemics over co nd it ion a 1 it i es 
11 
imposed by international lending ins tit u ti o ns for 
structural adjustment and stabilization demonstrate this 
l 2 
point. 
The degree a nd e x t e n t o f systemic vulnerability is 
largely a function of the pattern of integration into the 
world capitalist system. The more integrated into the 
system, the higher the level of vu 1 ne r ab i 1 it y. For 
example, a country pursuing an export promotion strategy 
with external financing is more likely to subject to this 
l 3 
kind of vulnerability. However, countries ado pt i ng an 
inward-looking strategy are not immune from this kind of 
vulnerability eit her . High import costs of capital and 
i n t e r me d i a t e goods, global financial i ns e c u r i t i e s , and 
i ns t ab i 1 i t y of e x p o r t e a r n i ng s , all of whose origin is 
systemic, impose a varying degree of costs and constraints 
on these countries. Usually the 'backwash effects' 
accompaning this sort of vu 1 ne r ability are quite 
de v as tat i ng to developing countries ( He i 11 e i ne r 1976). 
Income and economic stability are negatively affected. 
Growth s 1 ows down. Inflation combined with unemployment 
l 3 
s e ri o u sly affects people's welfare. Moreover it threatens 
econo mi c sove reignty by limiting or constraining a 
co untry's "power to control a full r a ng e of poli cy 
instruments" (Holsen and Wa e lbo eck 1976: 11). 
Whil e systemic vu l ne r ability is ca us ed by th e 
s yne rg is tic effec t of the attributes of th e sys t em over 
which the individual component parts have little influence, 
dyadic s e ns i ti vi t y primarily ref e rs to the costs and 
co nstraints impo::;ed by a patt e rn of external r e liance in 
- - - 14 
t e rms of specific actors and issue areas. A pattern of 
external r el iance in the context of interd e pendence can be 
me a ng i n g f u 11 y u nd erst o od at the dyadic level because it 
involves mutual dependence by choice (Caporaso 1978:2) . 
Si nee th e level of liability to costly effects imposed by 
this typ e of external reliance can be reduced or changed 
after the a lt e ration of policies(or withdrawal of mutual 
dependence ) , the costs or co nstraints therefrom are 
'sensitive' in the sens e that they c a n be by and 1 arge 
captured or coped with by the deployment of a set of 
deliberate policies (Keohane and Nye 1977: 1 J) . This dyadic 
sensitivity is a co mmon attribute of any exchange 
relationship. But the problem germane to d e ve 1 oping 
countries arises from the fact that their dyadic dependence 
on developed countries is characterized by une qu a l power 
l 5 
re 1 at ions and disadvantageous outcomes therefrom. 
In this r ega rd, Hirschman(l978, 1980), q ue s ti on i ng the 
thesis of 'mutually beneficial trade', traces a set of 
COS t S involved in this trad e r e lationship. Acco rd i n g to 
14 
him, e xc hang e s between small and 1 arge states are 
ace ompanied by problems of inf 1 ue n c e, de pe nde nee, and 
do mi nation. Any s mal 1 country's gain from trade with a 
1 arg e country entails its de pe nde nee on the country 
bestowing it ? This dependent relationship enhances the 
1 a rg e country's leverage to control and manipulate the 
small countries external economic behavior as can be seen 
in the case of the relationship between Nazi Germany and 
its neighboring countries in the 1930s. Taking advantage 
of a small country's dependence, a large country may deploy 
various me ans to maximize its economic and/or political 
interests such as the sudden interuption of commercial or 
financial re 1 at ions and the imposition of discrminatory 
policies. Expanding Hirschman's insight, there could be 
many other C OS t S that emanate from this dyadic 
sensitivity: bilateral protectionism, positive and negative 
economic s a nc ti o ns , denial of supply, markets, capital, 
aid, technology, etc ?? 
While Hirschman looks at the costs of mutual dependence 
through the prism of unequal power relations, another group 
of scholars has examined the problem of dyadic sensitivity 
in terms of the structure of unequal exchange shaped by the 
historical pattern of bilateral transactions (Burns and 
Bau mg a r t ne r l 9 7 7 Singer 19 6 4 Prebisch 1979 Emmanuel 
1971). Hans Singer, for example, argues that the loss of 
spread or linkage effects of specialization le ads to 
unequal e xc hang e patterns between a dyadic pair of 
15 
d e v e l o pe d a nd d e v e l o ping c ountries, which limits sc o pe for 
t ec hn o logic a l progress or for economies of scale. The 
major reason behind this unequal exc hange is a high rate 
of profit repatriation from developing countries' privat e 
s ec tor by f or e ign investors(l964: 165). In other words, the 
typ e o f forei g n in v es t me n t a nd historical pattern of 
t ec hnolog i ca l progress often drive developing c ountries to 
put a ll their e mphasis on a sing le s e ctor, usually a 
primary commodity sector, resulting in a high level of 
dyadic dep e nd e nce and s e ns i t iv it y ? In a similar vein, 
Pr e bisch(l956, 197 0 ) asserts that deteriorating terms of 
trad e ar e a primary caus e for unequal exchang e leading to 
dyadic s e ns i t iv i t y. 0 n the other hand, Emmanuel(l971) 
c al c ulat e s the c osts of unequal exchange in terms of wage 
diff e r e nti a ls b e tween d e veloping and d e veloped countries . 
Ace o rd i ng to him, the price of ca pital is r e latively 
c ons tan t between countries because of its high mobility and 
similar rate of profit return. In most cases, however, the 
mobility of labor is restricted by geographic 
jurisdiction . Differences i n the price of goods are thus 
det e rmined by wage differentials in such a manner that 
developed co untri es produce higher priced goods, while 
developing countries produce lower priced goods . The 
i mmedia t e result of this unequal e xchang e is diminished 
income and decreased welfare for workers i n d e v e l o p i ng 
c ountries. 
The common thrust of these arguments is that the gains 
from external economic relations a re relationally or 
16 
s tructurally biased in such a way that they are nullified 
or traded-off by the accompanying dyadic sensitivity ? This 
posed persistent problems for most developing countries for 
decades particularly because of the higher level of 
partner and commodity concentration. In 1977, for example, 
almost 50 % of the developing countries relied on one or two 
primary commodities in their total exports while their 
trade partners were limited to a small number of developed 
count r ies (Pirages 1978: 232-5) . Even in the case of the 
NICs where econo mi c structure is relatively we 11 
diversified , partner and item concentration rate is quite 
16 
high . But dyadic sensitivity is not limited to trade. It 
is applicable to a wide range of external ec anomic 
transactions covering capital, technology, aid , and raw 
materials. In contrast to systemic v u 1 ne r ab i 1 i t y which 
involves a high level of undifferentiated and deterministic 
COS t S , dyadic sensitivity does not determine the fate of 
autonomy or freedom in policy choices . A deliberate 
policy choice with r egards to effective bargaining and 
diversification in co mmoditi es and partners may improve the 
developing count ries' position in de al i ng with this 
pro blem. 
A third major cost of inc re as ed inter dependence for 
developing countries is s truc tur al dysfunctionality. This 
refers to distortion or retardation of a co untr y 's 
l 7 
political and economic structure . While the first two 
constraints may affect both de ve 1 oped and de ve 1 oping 
l 7 
c ountries, structural dysfunctionality is a constraint 
unique to de pendent per i p her a 1 countries. It usually 
a ccompanies a "functional derrangement" or a "functional 
incompleteness " of developing economies by depriving their 
ontogenetic momentum of a 'big spurt' (Caporaso 1978: 23; 
Cardoso 1979: 16J). It is manifes t ed in many different 
for ms: 1) paralysing and distorting the domestic economic 
structur e through uneven development across sectors of the 
e conomy, resulting in an enclave economy, 2) undermining 
s e lf-sustaining or self-enforcing developmental 
possi bi lities by blocking a partial or total autono my of 
de v e 1 op me n ta 1 choices 3) ac c e le r a t i ng socio-economic 
inequality across sectors of the economy, and 4) othe r 
e xt e rnalities s UC h as deteriorating quality of life, 
pollution, and political repression(Amin 1974; Baran 1957; 
Baran and Sweezy 1966; Dos Santos 1970; Frank 1967, 197 2, 
19 8 l ; Mag doff 19 6 9 ; Capo r as o 197 8 ; Pal mer 19 7 7 ) ? 
While dyadic sensitivity is a co nstr aint on the external 
behavior of developing co untri es largely generated by 
process -level dynamics between a dyadic pair, structural 
dysfunctionality is a n internal outcome as well as a cause 
of asymmetric incorporation into the world capitalist 
sys tem. The latt e r is shaped largely by the dynamic 
inter play of domestic social forces and the logic of world 
capitalist development. While the former creates immediate, 
visible, a nd negotiable c o ns t r a i n ts on the exter nal 
behavior of developing countries, the latter poses s ubtl e , 
enduring , a nd struc tur al COS t S and constraints on the 
18 
i nternal a nd e xt e rnal capa biliti es of developing coun tri es . 
T his structural dysfunctionality is c ultiv ated a nd nurtured 
l 8 
i n the context of d e pendency. That is , the historical 
a nd c umulative pattern of integration into the world 
ca pitalist system cha r acte riz ed by st ru c tur al i ne quality 
in the distribution of opportunities or cons tr aints 
c onditions a pe culiar form of domestic social r e lations and 
productiv e s tructure . The type of development strategy in 
th is dep e nd e ncy co nt ex t is l a r gely determined and 
co ntrolled by th e n a tur e of the a lli a n ce betwee n do mes t i c 
c lass str u ct ur e a nd international capi tal. The most cited 
di r e c t c ause of s tructur a l dysfunctionality is foreign 
c ontro l of the means of production in terms of di rec t 
inves tment or indirect ca pit a l mov e men t. In particular the 
e xpa ns ion a nd penetration of multinat io nal corporations 
into de v e 1 oping countries has b ee n attri buted to th e 
deepening of structural dysfunctionality in terms of the 
vertica l integration of their tr a d e p atterns , the c r ea tion 
of an e ncl ave econo my, ex ternal dep e nd e nc y -bound production 
patterns, the monopoly of t ec hnology, a nd other Soc i O -
political impacts (Bierstekar 1978; Mo d e 1 ski 19 7 8 ; Hymer 
1972; Barnett 1974; Senghaas 1975; Sunkel 1974) . 
Recently a revisionist a r g ument ha s b een put fo rth by a 
number of schol a rs who a ss e rt that increased 
int e rd e pend enc e do es not ne c es s a r i 1 y bring about the 
deepening of structural dysfunc tionality. Warren(l973; 
1 98 0 ), Cardoso a nd Faletto(l979) a nd P e tr as (l982) a r g u e 
19 
a t wh i l e th e co nve nti o n a l p a tt e rn o f int eg r a ti o
n into the 
th
a ti o n a l ec onomi c sys t e m e nt a ils s U C h in t e rn
ion a liti es , g r o wth a nd indu s tri a liz a tion
 in th e 
dys funct
nt context i s s till possibl e a nd h a v e b ee n ac h
ie v e d 
de p e nde
numb e r of d e v e loping countri es s uch a s t
he NI Cs. 
by a 
Vie we d f r o m thi s p e r s pe c tiv e , e a r l y d e p e nd
 e nc i a t he or i es 
tha t und e r s t o o d th e 'd e v e l o pm e nt o f und
e rd e v e lopme nt' 
th r o u g h a mec h a ni s tic a nd d e t e rmin ist i c a n g l e 
nee d to b e 
mo d if i e d. A poss i b ility of d e pend e nt d e
v e l o pm e nt in 
pe ri p h e r a l co untri e s does not, however, tot a l
ly e liminat e 
l 9 
t h e ex isting s ubtle c o sts of int e rd e pend e nc e . To
 quote 
a we ll c i te d phr a s e fro m C a rdos o : 
L ac king ' a utonomous t e chnolog y' - a s vul ga r parl a
nce has 
a nd c ompell e d th e r e for e to utilize i mporte d i t-
y , dep e nd e nt c a pit a lism is c ripple d ? ? ? It tec hnol og
i s c rippl e d b eca us e it l a c ks a fully d
eveloped 
ca pit a l g ood s s ec tor. Th e a cc u mul a tion, ex
p a nsion, 
a nd se l f -r e aliz a tion o f local ca pital r e qu
ir e s and 
d e p e nd s o n a dyn a mic c ompl e me nt o utsid e its e lf : 
it 
mu s t ins e rt it se l f into the c ircuit of intern
ational 
ca pitalis m(l9 7 3: 16 3 ) . 
By wa y o f s ummarizi n g the n a tur e o f th e C OS ts a nd 
c o ns t r a i n ts , T a b 1 e 1 - 1 offers a synoptic c omparison 
of th e 
t hr e e major c onstrain t s res u lting from a n inc re
a s e d g 1 ob al 
i n t e rd e p e nd e nc e ? Syste mi c vulne rability ca n b e c o ne e i v e d 
a s being an exte r nally impos e d cost or c onst r a i
nt o f whi c h 
dura t ion is s hor t or medium, y e t produce s int e n
siv e s ec tor-
s pecific i mpacts on nation a l ec onomi es o f d e v e l o ping 
c ountri e s . On th e o th er hand , dy a di c se ns i tivity is a n 
ex t e r n al c ost and c o nstraint whi c h ca n b e me a n g i n g f u 11 y 
und e rstoo d on a st a t e act or or s ec t o r l e v e l. It 
acco mpa n ies imme di a t e , di f f e r e nti a t e d i mpac t s within a 
20 
term of which intensity is relatively 
moderate. The most crucial constraint is structural 
d ys function al it y which brings highly protracted and 
pervasive negative effects to politics and economies of 
developing countries and of which root causes are difficult 
to detect and to cure because of its subtlety. 
Table 1-1: Costs of Interdependence: 
Synoptic Comparison 
Type Level Determinant/ Nature/ Intensity/ 
constraint duration range(damage) 
s . v system/ structural immediate 
secto r ex ternal u nd if fer en ti ate d high/sector 
short-medium specific 
D.S sta te/ r e lational imm e diat e low - medium 
sector external differ e ntiated sec to r -s p e c if i c 
short-medium 
S. D system/ structural subtle high/ 
sector internal differentiated pervasive 
long 
S.V: systemic vulnerability, D. S: dyadi c sensitivity, 
S.D: structural dysfunctionality . 
Of course, these three types of cos ts and co ns train ts 
are neither mutually exclusive nor discrete . Rather they 
a r e c a us a 11 y i n t e r r e 1 a t e d , c r e a t i ng a n i n t e r d e p e n d e n t w ho l e 
of internal and external weaknesses . Diagram 1-1 indicates 
that structural dysfunctionality is the root cause as well 
21 
as the conseq u e nc e of systemic vulner a bility and dyadic 
se nsitivity. It is the ca use in the sense that a deformed 
productive structure and consequently limited developmental 
potential deepen systemic vulnerability by depriving the 
co untry of a defensive shield and e ndo geno us resilience 
against ex t e rnal shocks . Furthermore it is responsible for 
dyadic sens i ti vi t y not only by weakening bar g ai ni ng 
positions but a lso by reducing partner and item 
diversification capa b ility in the bilateral context . At 
the same ti me, str uctur al d ys f u nc ti o na 1 it y is the end 
result of the first two cons t r ain t s, given that their 
pro tr a c t e d pro 1 o ng at ion ( e ? g ? , deter i or at i ng t e r ms of trade ) 
and sporadic trauma of high magnitude(e.g., high interest 
rates and debt crisis or oil c risis) inhibit self -enforcing 
and self-sustaining 
Diagram 1-1: Causal Sequencing of Dependent Integration 
l systemic vu 1 ne r a b i 1 it y 
Dep e ndent 
Integ rati o n structural 
(asymmetric dysfunctionality 
integ ration) 
dyadic 
t s e ns i t iv i t y 
* Arrow indicates a positive causal relationship. 
22 
developmental possibilities by subjugating national 
e conomies to external force Ts h. e  causal sequence of these 
three cons tr a i n ts varies from one context to the n e xt, 
depending on the historical experiences of the de ve loping 
countries. 
Facing this set of the COS ts and c o ns t r a i n t s , 
de ve 1 o cp oi ung n tries as a whole have pursued a wide range 
of strate g ies to curb s UC h 
negative as pee ts of 
in A te gr r d oe wp ie nn gd  e nn uc me b. er of scholars have also 
shifted their attention from an analysis or diagnosis of 
these neg by-products to 
a s
a eti arch fv oe r  a set of 
work Ta hb el  e fos lo lolu wt ii no gn  s s. u rveys a broad spectrum 
of strategies s uggested or implemented 
by both policy-
makers and scholars. 
Third Wo Crl od u's n tervailin~ Strategies 
l 
In contrast to the liberal view of the benign nature j 
i 
of inc global in r te e a rs  d e e d   p e nd enc e , 
others perceive 
outcomes largely 'antinomical' 
in the sen
a ss e that global 
interdepe has an ccd oe mnc pe anied 
both 
 benefits-
20 
oppo crt and ou sn tsi  t -i ce os nstraints 
s i mu 1 ta ne o us 1 y. 
This mixed blessing of global interdependence has stirred 
up a wide range of scholarly as well as policy debates on 
ways means of ma an xd i mizing benefit-opportunity and of 
mini mi z i no cos It n-  c po an rs tt ir ca uin lat? r  various efforts b 
have been made over the last three decades to come up with 
23 
co unt e rv aili ng strategies to r e duc e , el iminat e , or avoid 
a bove mentioned systemic vuln e rability, d y ad i c s e ns it iv i t y 
and structural dysfunctionality. The list of suggested or 
i mple me nted strategies for d e v e loping countries covers a 
broad r a n ge of policy options . As Diagram 1- 2 illustrat es , 
scholars and policy-makers have come up with a number of 
strategy to ove r come one c rop economic structure a nd 
nega tiv e co nsequences of inte g ration into the international 
ec onomic system . St art i ng with import-substituting 
industrialization in the 1950s inspired by the Listian 
economic nationalism, developing co untri es have attempted 
to i mple me nt in chronological order s UC h scholarly 
prescriptions as regional econo mi c integration , collective 
bargaining through the proposal of the New International 
Economi c Order, co ll ec tiv e or individual self-re liance , a nd 
2 1 
finally expo rt promotion strategy . 
Certainly the historical evol ution of countervailing 
st rat egies can be regard ed as being largely a function of 
trial a nd e rror. Howev e r, there has been a dominantly 
common theme in this evolutionary process . That is the 
heavy e mphasis on systemic factors to which eco nomi c 
malaise is attributed and for which solutions are so u ght . 
Recent works by Di az - Al e jandro(l978), Wriggins (1978), 
Hansen ( 1979 ) , Kr as ner(l981), and I nog uc hi (19 8 l ) , which 
discuss the Thi rd World strategies from a gene r a l a nd 
co mp a rativ e perspec tive, well epitomize this common theme. 
By focusing on the form and degree of integration into the 
international econo mi c sys t e m, they identify thr ee 
24 
Diagram 1- 2 : Evolution of Development Stategy 
market Collective or 
saturation individual Self - reliance 
I 
I New Int'l Economic Order [
I1  Re g ion~l ~~ Import - Substituting Industrialization 
1 economic 
/integ ration 
Decola - ----? One crop_ __- ? ISI 
nialization economy '1' ~ 
1 Export -
I ,t. Promotion Inducement (Capital/technol ogy) C 
? 
te~ms of I ~ 
trade Item and Partner 
~ 
1 diversification 
I 
I 
interna l & Bilateral bargaining 
external factors 
Embourgegoisiement 
I ------------------------------- ?------------~---------------{.----------------------- I 
1945 and 
before 1950s 1960s 1970s and after 
dominant patterns of strategic 
c ho ice available to 
de ve loping countries: l ) to eliminate 
the COS ts and 
c o ns tr a i n ts by comp l e t ely 
withdrawing from the 
inte system (dissociationist), 
2) to red
rn uca et  ion tha el   
ts maximiz e the benefits by 
selectively re -
COS and to 
with
l  in thk ei  n sg y stem (s e l ective reassociationist), a nd 
3) e the opportunities 
and to maximize the 
to xploit 
bene positively 
integrating into the sf yits b
s
y t e m 
22 
(associationist). 
proponent belieT vh se   of the dissociationist option 
e 
that structural i ne quality 
inherent in t
t hh ee   
eco sn yo sm tei mc  a nd the related COSi  n t t S ernational a nd 
not cu ra
c bo l enstra are 
 or e
in xt ps l oitable in 
favor of 
developing countries because of the very logic of the world 
as in the wo
c rda sp  italis t syste m. For them, 
of Joan 
11 free,  R to  rab din es  o hn a d always be en the doctrine of the 
st ron wher e very little, 
or no chan
g c" ( e 1  96 a6 t : 24) a ll 
we
e ax ki  s dt es v eloping cofo ur n tries to benefit from the 
Any fu
s ry thst ee rm  . i ntegration into the capitalist system 
by developing countries drives them into a structural trap 
o which the tf i ppin in g mechanism dependenc oy f  
'development of underdevelopment' becom dee es pen e d. Thus, 
their logic isa  l tos  tr da iste sg oi cc ia to ep  tio (n d e-link) 
co frm omp  le tt he el  y inth tee ri nr ate ic oo nno am l ie es c onomic 
system. complete cut-T off 
can be done ei ther 
his on 
indiv bi ad su ia s l such as China (under Mao), 
North Kore a, 
and on the A colb lla ecti
suggeste
n di  a or ve basis as by 
25 
23 
G al t ung (l978), Hveem(l979), and Haq(l977) . 
As illustrated in table 1-2 , the dissociationist 
s t r a t e g y c o mp r is e s a wide r a ng e of t a c t i c a 1 p o l i c y c ho i c e s ? 
To eliminate str u ctural dysfunctionalities deriving fro m 
integration into the system , it emphasizes a self-reliant 
or autocentric development orienta t ion w here the priority 
is placed on balanced and eq uit a bl e growth with the 
satisfaction of the basic needs of the majority of the 
24 
population . This policy orientation involves 
nationalization of foreign direct investments, elimination 
of the domestic comprador c 1 ass, and other necessary 
measures to ensure the complete insulation of th e n a tional 
economy from the international eco nomic syste m. The s e 1 f -
reliant a ut ocentric development may b e pursued unilat e rally 
or collectively among developing countri es within a ce rt ain 
region or among al l the developing co un tr i es . 
Table 1-2: Strategies under 'Dissociation' 
unilateral bilat e r al multilat eral 
* a uto ce ntri c / collective 
S . D basic needs / self -r elia nc e 
n at ionaliz a tion 
closed economic inter-South intra-South 
D.S regime econo mi c arra n gement sectorial 
/barter c o ope rat ion 
default/ int er -S ou th regime -neg at ion 
S. V. ma rk et - coordination /collective 
withdrawal coordinatio n 
*S.D.: Structural dysfunctionality, D.S.: Dyadic sensitivity, 
S ? V. : Systemic vulnera b ility 
26 
T o co pe with dyadi c sensitivity, this strategy call s 
for c 1 o s e d t rad e reg i me p ra on pd o ses to promote bilateral 
trade, fin a nc i a 1 and technologic a l ties with other 
developing countries in ter ms of bart e r arrangements or 
s e ctorial based collective c ooperation among them, 
d e pendin g upon the t ype of de v e 1 op men ta 1 
s trategy(indivi or cd ollective) in uu sa el . 
Unde
 r s UC h 
c onditions (of dissociat s
vu 1 
i no ystemic e n r ) a, b  i 1 it y can 
not take place . However, in 
the initial stage of 
dissociation , countries pursuing this option may default on 
a ny outstanding external fin oa bn lc igia al t ion, withdraw 
f ro rn ext e rnal market transactions unilaterally or choose 
bilateral or collective coordination and bargaining options 
With other d e veloping 
countries to minimize the 
opport of de -linking on 
the
u  ni sty y st t emic COS S level 
(Frank 19 19 7 2; Se ng ha as 1 9 8 l ; 
Galt u
8  n1 g,  19 16 9 8 7 , 8  ,? Hveem 
1978?, Chichilinsky 1979; WallH ea rq s t1 e9 in7  7 1; 979?,A m1?.  n 
1974?,  Arrighi 1974). 
d iss oci ationis ts emphasize the While the zero-sum 
nature the preseo nf t  international economic 
system and 
P a ro cp oo mse p lete cut-off from such a highly unfair game, 
selective reassociationi
c
s ots ne e i ve 
of the
  COS ts and 
bene if nits of integra tion into 
ternational markets from a 
25 
Slightly differe Tn ht e  yp  e sr es ep  e tc ht ei  v ve. i rtues and 
th
o ep  p mo ar rt ku en t it ai ae s  s e man a ting from means of 
f
e o X re   h da en vg e e l oping countries if certain preconditions 
are if develomet ? T
p
h ia nt g  i cs o, untries can avoid or 
overcome negative s id e -e f f e c t s 
by partially managing 
27 
arket f o r ce s or by limiting undesirable spill-ov
er effects 
m
of the international links on the dom
estic economy and 
polity, integration into the world mark
et may be turned 
of 
into a positive sum game . Di a z -A
le j and r o , an advocate 
of ective 
this proach, explains the utili
ty sel
ap
re ass o c i at i o n is m i n t he f o 11 ow i ng way : 
ternational link may be useful to help 
the 
In
count r y ac hie v e so me de v e 1 op men ta 1 targets 
under 
some conditions and specific hist
orical 
circumstances, but it is fatal to regard openes
s as a 
good thing per se and to let exte r nal link
s and 
foreign demand determine the direction an
d the 
pace of the country ' s economic growth (1978:110
). 
Impli c it in reassociationist st
rategy is the 
realization that it is too COS t 1 y 
for s mal 1 and 
ec onomic al 1 y backward countries to clo
se off their 
e conomies from the international economic system
. Yet it is 
ually devastating to open their economies compl
etely 
also eq
to international market forces whose exchan
ge structure 
is bi as e d against the weak and fragile de ve 1 oping 
countries . The choice 1 ie s somewhere in the middle . 
Domestic re - adjustment and effective alteration
 of linking 
r de-linking policies, depending on the changing
 nature of 
o
the country's historical circumstance and the in
ternational 
market, must proceed in such a manner that the costs of 
ing are substantially minimized and that re-arra
nged 
re-link
1 ink to the international system enhances self-sustaining 
economic develop ment . 
28 
Table l-3: Strategies under 'Selective Reassociation' 
unil a t e ral bilat e r a l multilateral 
i n ward -1 o o k i n g 
S ? D. / b a l a nce d / 
basic need 
ind us tr i a 1 part ne r - div e rs i - r egiona l-
D. S . diversification/ fication/inter- int eg ration 
b a r g ai ni n g ca rt e l 
stabilization/ bar ga ining/ co lle c tiv e 
S ? V. d efa ult/partial selective c hoi ce / regime c hang e 
withdr a wal diversification (NIED) 
Ta bl e 1-3 illustrates some of th e t ac ti c s to be used 
b y d e v e 1 o pi ng c o u n t r i e s i n t he r e as s o c i a t i o n is t mode 1 . To 
r e duce a ny d o mes tic eco nomic a nd p oli tical distortion 
c a us ed by s tructural d ys f u nc t ion a 1 it y, th e 
r eassocia tionists choose an inward-looking policy option. 
T h e inw a rd-ori e nt e d d e v e 1 o p me n t s t r a t e g y i s i n pr inc i pl e 
des ig n e d to locate the e ngine of growth in the national 
eco nomy, not subject to external forces . As a result, it 
a ims at promoting balanced growth across all the sectors of 
the economy and enha n cing the satisfaction of b asic ne e ds 
26 
o f people . This inward -1 ooki ng policy orientation 
co mprises a num ber of strategies to c urb dyadi c sensitivity 
and systemic vulnerability. 
To reduce ext e rnal dependence, th e r eassoc iationists 
e nco urage a diversification of export commodities through 
industrial restructuring a nd infant industry p r o t ectio n a nd 
29 
attempt to e nsure domestic market expansion through a 
n 
provision of various protectionist measures. On the 
bilateral bas is, they try to diversify their trade, 
financial and technoloigcal partners so as to minimize 
dyadic d e p e nd e nc e ? In addition, they seek a number of 
policy options to enhance their bargaining position over 
their dominant economic partners in various issue areas. 
Bilateral diversification under the reassociationist 
strategy is usually directed toward the small non-hegemonic 
capitalist trading countries or toward other developing 
countries. But since most developing countries are weak in 
terms of international power relations and do mes tic 
e conomic structure, the capability to diversify their 
partners and commodities and to increase their b arg ai ni ng 
power as a means of reducing dyadic sensitivity is limited 
(Kr as ne r 1981; Diaz-Alejandro 1978;Hansen 1979; Singer 
1979) . 
In face of this weakness , most reassociationists 
0 pt for regional economic integration and /or collective 
action s UC h as prod u cer carte 1 schemes ? Regional 
integration schemes have been conceived as being a viable 
option since the pursuit of an inward-looking development 
strategy(i . e . , import substituting industrialization) often 
results in domestic market saturation . The expansion of the 
market in terms of regional economic integration among 
nearby de ve 1 oping countries might solve s UC h a problem 
without ne c es s a r i 1 y dee pe ni ng dyadic dependence on t h e 
JO 
advanced i n d u st r ia l co unt r i es (Ax e line 1 9 7 8 ; Myt e lka 19 7 3, 
19 7 9 ; Balassa a nd S t o utjesdijk 1 975; Nu ge nt 19 82 ). 
P r o du ce r ca rt e l s h a v e a l so be e n s u gges t e d as a wo rk a bl e 
o p ti on b as ed on th e s u ccess o f OPEC. Ex i s ting c omm o dity 
ma r ke t s a r e bi ase d aga inst sell e rs not o nly in t e rms o f th e 
d e t e r i o r a t i ng te rms of tr a de but a lso beca us e o f unstabl e 
expo rt inco me . Th e o nly e ff ec tiv e wa y t o co rr ec t thi s 
p r o bl e m a nd to r e duce d e p e nd e nc e i s t o se t u p i ntr a -S o uth 
pr o duce r ca r te l s in s e l ec ted c ommodity a re as a nd b y 
d i sca rdin g c on s ume r-produc e r ag r e ements ( H v e e m 197 8 ; 
Mi k dashi 1974, 19 7 7; Mc N i c o 1 l 9 7 8 ; Pi nd y e k l 9 7 6 , 1979). 
Th e r ea sso c i a tionist str a t eg y doe s not e liminat e 
s ystemi c vulne r a biliti e s, althou g h it minimizes th e m by 
se l ec tiv e r e a 1 i g n men t of e xternal 1 inks ? Developing 
co untri es und e r th is s tr a t eg i c plan mu s t import raw 
ma t e ri a l s , ca pit a l a nd int e rmedi a t e g ood s t o s ustain import 
s ub s tituting industrializ a tion. At the s a me ti me , they 
n ee d to fin a n c e their developme nt proje c ts by ex t e rnal 
b o r r o w i ng s ? In many cas es , export ea rnings from primary 
co mm oditi e s b ee ome another important source of f i n a nc i n g 
industrializ a tion. These pr e r e qui si t e s for s e l ec tive 
r e associationist strate g i e s e v e ntually push th e m int o th e 
v a rying degrees of syst e mic vulnerabilty. 
A c 1 ass i c unilater a l res pons e to t his probl e m i s 
r a pid domestic r eadjustment in issue a r e a s . For e x a mpl e , 
world-wid e inflation and f inancial inst a bility fore e 
d e v e l o ping countries to choose aust e r e s tabiliz a tion 
meas ur es o n a v o lunt a ry b a sis or to h a ve th e m ex t e rn a lly 
31 
impos e d. If a stabilization option is perceive
d to b e too 
cos tly in terms of do mes tic po litic al a nd
 social 
ilat e r a l 
Ca lculations of interest, other options suc
h as un
28 
d e fault  or tentative moratorium may b e considere
d . To
d 
minimize bilties resulting from boo
m a n bust 
vulnera
business cycles , co mmodity diversificati
on and o th e r 
related estic policy measures a r e introduc e d. 
On the 
dom
bilateral level, intensive bargaining with 
international 
orga nizations or transnational actors may be 
chosen as an 
ch vu 1 ne r ab i 1 it y . Si mu l ta ne o us 1 y inter -optio n to reduc e su
South diversification as a way of altering 
partners and 
markets is usually sought . Another favo
red option b y the 
proponents of reassociationism might 
be collective action 
to c h a nge the structure of the ex isting 
regime of each 
issue are a on a multilateral basis . 
Si nee systemic 
do with the 
vulnerability is conceived t o have so
mething to 
e syste m, this collective a pp
r oac h would 
structure of th
atte mpt to correct the existing rul e s
, nor ms, proc e dures, 
  e and d ec ision-making context governing 
certain issu
29 
a re as ? e llective regime change s
cheme is best 
Th co
New 
r e presented by recent efforts to institutionaliz
e the 
International Economic Order (Krasner 1981; 
Gosovic and 
 1 ; Jacobs on 1 9 8 3 ; 
Rugg i e 1 9 7 6 ; Chris t e ns e n 1 9 7 7 ; G a 1 tun
g 1 9 8
Cox 1979; Sauvant and Hapsenpflug 197
9). 
While the first two st rat egies advocate 
a total c ut-
onal 
off from or a partial realignment with the 
internati
eco nomic 
es 
system , the associationist strategy e mp
hasiz
32 
positive integrati o n into the international markets as a 
solut ion to econo mic backwardness and f unctional 
dera ngement of the national econo my . I ts pro pone n ts as s e r t 
that there is nothing wrong with the c urr en t international 
ec onomic system. Given small market size and scarcity in 
th e factors of production endemic to developing countries, 
any attempt to withdraw from the international market means 
a s ubstantial reduction of welfare for them . Artificial 
effo rts to manag e or coo rdinate markets e ither in terms of 
unilateral state interventions or of collective actions 
s UC h as in NIEO create distortions and the re by curtail 
e ff i c i ency and we lfare ? Naturally, its proponents do not 
deny the e xis t e nc e of costs and cons t raints implicit in 
the associationist strategy . It is a ssumed, however, that 
the benefits and op portunities outweigh the COS ts and 
c o ns t rain ts or th at those costs and constraints are 
transitional in the sense that the fuller exploitation of 
the opportunities offered by the opening of national 
eco nomies will eventually eliminate them (Bal ass a 1981; 
Krueger 1982; Bhagwatti 1977; Westphal 1979; Chenery 1981; 
Fishlow 1978). 
Compared to the first two approaches, the 
associationist strategy by definition entails a much higher 
level of costs and constraints (Keohane and Nye 19 7 7 ; 
Katzenstein 1977; Ruggie 1983; Haggard 1983). Within the 
g iven rules of the game defined b y the international market 
mechanism, however, countries following this option attempt 
to d e ploy a variety of countervailing strategies to hold 
33 
d o wn th e t S and c onstraints and to maximize  the C OS
b e nefits. Table 1-4 summarizes a number of policy option
s 
a v a ilable under the associationist setting. 
Tabl e 1-4: Strategies under Association 
lateral 
uni 1 at e r a 1 bilat e ral multi
growth/export-
S ? D . promotion/ 
liberalization 
item diversifi- contra-North regiona
l integra-
ctive 
D. S . cation/industrial bargaining/ tion/ col
le
deepening inter-South bargaining
 
diversification 
stabilization/ bargaining/ collect
ive 
 r at ion/ 
S ? V. ind us tr i a 1 diversification c o ope
restructuring barg
aining 
The proponents of the associationist strategy do not 
reject the claim that the initial phase of integration
 into 
the world economy ( in terms of their colonial legacy)
 has 
c reated some structural d is t o r t i o ns for de ve 1 oping 
e conomies. However, they do not go S 0 far as to
 
acknowledge the social and political consequences of 
the 
e ar 1 y pattern of integration . Structural distortions in
 
this context me re 1 y denote economic backwardness 
of 
originating from structural rigidity and lack of facto
rs 
30 
production . To overcome this distortion or 
d y s f u nc t i o n a 1 i t y deriving from the previous pattern of
 
linkage to the international economic system, it emph
asizes 
34 
tha t ping c ountries must pursu e more 
aggressive 
d e velo
mic owth bas e d on export promoti
on and a fuller 
ec o no gr
li b e ralization of their national 
e cono mies . In so 
inducement of foreign c apital and do ing, more active 
ec hn o logy on the bilateral or
 multilateral level is 
t
r eco mmended. Once growth is set in motion
 along with rapid 
i ndustrialization, developing 
countries will be able to 
 of growth 
eli minat e structural obstacles, 
and the benefits
will trickle down to the majority of people. 
Under the associationist scheme 
more serious problems 
a rise fr om dyadic sensitivity . Hist
orical patterns of 
ht industrial 
int eg ration(i.e., f rom primary co mm
odit y, lig
dustrial sector) u sually en tail partn
er 
sec tor to heavy in
a nd item concentration in the trade sector (
Galtung 19 7 l ; 
Sylvan, 
Sa ntos 1974; Duvall 1978; Duvall, Jackso
n, and 
rticular the concentration of partners is n
ot 
1979). In pa
only limited to commodity trade b ut also to
 such sectors 
s UC h as capital and technology. Th
is c o nc e n t r at i o n 
phe no me non puts small trading developing 
countries into 
ulation 
vulnerable positions in terms of control and
 manip
partners ? 
of large advanced industrial e conomic
 
pital 
Protectionism , high 
ca
COS ts of technology a nd 
transfe r, and selective blocking of bilat
eral economic 
r a i n t s 
transactions are examples of the COS ts and 
c o ns t 
s t e mming from this dyadic dependence. A c
lassic strategy 
to overcome them is to diversify their exports 
through 
industrial restructuring and deepening unilate
rally and to 
s witch 
s 
from large domineering partners to equal p
artner
35 
on b latter usually involvT eh se   an inter -ilateral base ? 
South partners in the areas of trade, diversification of 
capital , At the same 
ti me, developing 
and technology. 
countr? may pursue an intens1 ie vs e  and extensive bargaining 
in lieu of trade and With the Northern industrial countries 
Recent studies by 
Capital transan fed technology r . 
Y O deo 1f 1f ( 1l? 
983) show that 
e(l983), Gierico0982), 
and 
dev 1 inc 1 i ne t O Opt for 
extensive 
e oping countr di  es are 
bil Northern cow uit nh t rt ih ee s ' 
over 
ateral bargaining 
Multinationa
P l rat e cti. onist pressures or dominance of the 
co r multilateral level the Porat ions. On the 
assoc . . to rely on a laissez faire 
type of 
iationists tend 
in AS EAN, the 
1 oos e integration such as regional economic 31 
pa a. n df  . the early LAFTA scheme. 
Or 
Cl 1c Community, 
they ba rg ain i ni ng 
within the 
may engage  multilateral 
that of the Multife ix beis rt  ?i ng regime structure such as 32 
Agreement the Framewa on rd k  group in the GATT. 
the associationist s
C tre at
most 
rt ea gi yn  ly ri sks the 
Str econo mi es under this Uctural v u Si 1 n n ee e r  ab i 1 i t y ? 
sch r ather than internal, demands, e me are tied to external, 
and overealt lh  e e xport promotion efforts chiefly financed 
by 
external flu
m
c at r
s u
k
o a
e
u t
ts
io  n andrces, in 
world  
inter instability often exposes these national financial 
severe external 
-looking developing co untri es to 
Vulne w this 
problem, they might 
rabilities. Faced ith 
a dopt which would reduce the level stabiliz ation policies 
Of or rationalize the national 
these external shocks, 
36 
? 
e conomy g i Vi n g mor e lev e rag e to the private sector in 
33 
order to insure international competitiveness . In 
certain cases the domestic policy option may call for an 
inward-looking orientation in order to insulate the economy 
from extern a l shocks . In addition, efforts may be made to 
inc re a s e bargaining with the major international lending 
institutions o r transnational a ctors . Bilateral bargaining 
with th e I MF stand-bys and Eurodollar lenders are good 
e x a m p 1 e s o f t h i s t ac t i c s ? Apart from bilateral bargaining, 
association is t countries may seek other partners who can 
provide more favorable terms of transactions independent of 
34 
the e xisting regime rules and regulations. On the 
multilat e ral level countries might pursue more cooperati ve 
a ttitudes toward the existing regimes. For example, instead 
of assuming a confront a tional pose by participating in a 
producer cartel aimed at supply control , they might abide 
by the IMF comp e nsatory financial scheme or o ther consumer-
producer cooperative schemes . Also rather than pursuing 
a regime change, they could seek a regime-confirming 
multilat e r al solution to external financial problems as 
35 
shown by recent efforts by the Latin American borrow e rs. 
Explicit in all of this is the awareness that there 
is a wide range of possible strategies to cope with the 
COS ts and cons train ts ? The choice of a particular 
strategy may be c onc eived of as a function of the policy 
make rs' evaluation of the opportunity costs involved in 
e ach strategic choice . Or as Cox(l979: 23 1- 252) has 
e x pounded, it may depend on th e episte mological as well as 
37 
ideological tendencies of the decision-makers in question. 
For all these open-ended strategic possibilities, however, 
the literature in the field of international political 
e conomy appears to show a narrow trend in which scholarly 
inv e stigators are preoccupied either with multila
teral 
options to change or comply with the regime structure
 or 
with unilateral adjustment strategies in term
s of the 
degree of openess and closedness. 
The preoccupation with international sys
 terns and 
their rule structures is well reflected in th
e recent 
literature dealing with the problems of regional e
conomic 
. 
integration, producers ' cartels, and the 
NIEO In 
particular, the success of OPEC and its polemical linka
ge 
e NIEO as provoked theoretical and pr act i ca
 1 
to th h
concern over the utility of s UC h multilateral-co
llective 
ry of 
approaches. On the other hand, the s u ccessful e
nt
the NI Cs into the international economic system a
nd the 
popularization of self-reliant strategies s u ch as Mao'
s and 
Nyerere's has int rod uc e d a new di mens ion into the 
scholarly debates over the theoretical and practi
cal 
usefulness of unilateral adjustment to the constraints
 and 
opportunities of the international system in terms of 
36 
changes in d e v e 1 o p me n t strategies . The emphasis on 
these two behavioral dimensions ( unilateral and 
multilateral ) has, however , overshadowed another existing 
di mens ion, i . e ? , that of bilateral responses deployed by 
de ve 1 oping countries in the forms of bilateral bargaining 
38 
a nd div e rsifi c ation . 
Dimensions of Third World Bilateralism: An Overview 
As e 1 u c id ate d above , de v e 1 o ping c o u n t r i es bilater al 
behavior in CO ping with sys t e mi c const raints and 
oppo rtuni ties is a complex phenomenon. Its nature can vary 
from one context to the other depending on the pattern of 
linkage with the international eco nomic system. Under 
assoc iationis t and/or selective reassociationist 
st r ategies , developing countries may pursue a bilater a l 
bargaining posture over the North or inter-South 
diversification or both, whil e the dis association is t 
pattern of integration leads to more exp licit bilateral 
coo per ation between a dyadic pair of developing countries 
in terms of barter a rr a ng e me n t s a nd other poli cy 
coo rdin a tion. 
Recently several writers h ave b egu n to focus on the 
developing co untries' bilateral bargaining b e havior, 
particularly with industrial countries (Yoffie 1981, 1983; 
Gierico 1982; Odell 1982, 1983; Moran 1978; Clapp 198 2). 
They have all analysed developing co untri es bil a teral 
bargaining behavior over protectioni s t me as u res, the 
d omi nanc e of multin a tional corporations, a nd ot h e r 
regulative and penetrative practi ces of de ve 1 oped 
co untries. T his tr e nd rev e al s a s harp d e par tu re f rom th e 
ea rli e r preoccupation with systemic variables a nd 
39 
attempts yet have been made to understan
d a not her 
, namely Third World bilater
alism, which 
important dimension
is defined as economic re 1 at ions betwee
n de v e 1 oping 
al 
c ountries that are not necessarily bo
und to multilater
rights, and procedures, and 
that are 
arrangements of rules, 
th 
beli e ved to arise fr om delibe
rate inter-Sou
the changing 
div e rsification efforts in relatio
n to 
37 
 
configuration of systemic c
onstraints and opportunities.
mic relations in particular
 
Inter-South bilateral econo
ave n 
a nd intra-South economic relations as 
whole h bee
 volume compared 
neither c onsiderable nor dramatic in
 their
North-South economic re 1 at i
ons ? As 
with North-North and 
tra-South economic re 1 at ions
 
Table l -5 i 11 us tr ates , in
evidenced by trade have shown a ste a d
y increase over the 
ntries' 
last two decades. In 1960, non-OP
EC developing cou
ng  EC 
exports to other de vel oping countrie
s includi OP
But with the 
members was 21 ? 9 % out of total expor
ts . 
al x
ports to other 
parti e xc e pt ion of 1970 , the shar
e of e
ping countries continued to
 increase, reaching 2 2. l % 
develo
remental growth can be 
in 1 9 7 4 and 29 ? 2 % in 19 8 0 ? This
 inc
bers. OPEC's export to also found in the case of OPEC m
em
countries increased from 18 % 
in 1970 to 
other developing 
23.9% in 1980 mainly due to the 
Oil Crisis. 
Table 1-5 
40 
Table 1-5: Destination of World Exgorts 
From/To DC DME.S CPE World Export as % of 
$billion % $ billion % $ billion % $ billion % Total world exports 
DC 
1960 58.8 69.2 21.2 24.9 3.0 3.5 85.0 100 66.7 
1970 172.5 77 .0 41. 9 18. 7 8.4 3.8 224.1 100 71.8 
1974 398.5 73.5 113. 7 21.0 26.6 4.9 542.2 100 64.9 
1980 911. 3 70.5 300.7 23.3 64.0 5.0 1292.5 100 64.5 
OPEC 
1960 n.a n.a n.a n.a n.a n.a 8.5 n.a 6.7 
1970 14.3 80.3 3.2 18.0 0.3 1 . 7 17.8 100 5.7 
1974 95.6 78.2 24.5 20.0 1. 3 1.1 122. 3 100 14.6 Co 0 
1980 217.4 74.0 70.3 23.9 4.5 1 . 5 293.8 100 14.7 :::r 
Non-OPEC 
LDCs 
1960 19.8 72.3 6.0 21. 9 1.2 4.4 26.0 100 14.8 
1970 26 .4 70.6 7.8 20.9 2.9 7.8 37.4 100 12. 0 
1974 70.7 70.8 22.1 22.1 6.4 6.4 99.9 100 12. 0 
1980 152 .8 63.2 70.6 29.2 15. 8 6.5 242.0 100 12 . 1 
Source: The US and World Development Agenda 1977 and 1982, Wahsington DC, Overseas Development Council 
*DC:Developed Countr ies, DMES: Developing and Middle Income Countries(OPEC members included ) , CPE: Centrally 
Planned Economies . 
of Thi rd Wo
rld trade 
aspect 
One i n t e re s t i ng 
lies in that intr a -South exports have 
Pr act ices, however, 
hare of t
otal 
the developing countries' s
increased while 1 2. 1 % in 
from 14.8 % in 1960 to 
d 
world exports de
crease
of 
This trend implies an increasing relati
ve weight 
19 80. 
rade for developing countries' foreign 
trade. 
t
intra-South 
f i g u res in T able 1 - 5 i nd i cat e that w hi 1 e
 
At the same time, have 
c ountries' exports to developing countr
ies 
de vel oped in 
from 24.9 % in 1960 to 18.7% in 1970 and 
23.3 % 
declined both OPEC group 
980 i n t e r ms f a s hare of tot a 1 exports 
, 
1 O
have shown constant countries 
and ng non-OPEC develop
i
countries. 
in their exports to other developing 
inc re as e s 
m 18% 
OPEC's exports to other developing coun
tries rose fro
a share of intra-S
outh trade 
and 
in 1970 to 23.9 % in 1980 from 21.9 % in 
non-OPEC developing countries increased
 
for 
enon suggests that 
This phe
nom
1960 to 29.2 % in 1980 . ve 
a whole tend to seek more 
acti
d eve loping c ountries 
as 
an 
de ve loping count
ries th
other 
trade elations with r
developed countries. 
Growth in intra-Third World trade does 
not reveal much 
h "b". l 
l" trade. This 
? e 1.?n 1.?nter-Sout 1 atera 
about th e 1. nc re as 
s have e ng age
d in 
countrie
developing 
is bee ause many multilateral economic 
based on 
intra-regional tr
ade 
economic integrative regional 
in terms of 
arrangements ional trade accounted intra-reg38 
Schemes. Traditional
lY 
countries' trade ? For 
for bulk of i
nter-developing 
the the trade ace ounted for of 
this comp one n t 
example , in 19 60 Not only b e cause of 
of all inter-South trade. 
thr ee-quaters 
41 
also because of 
collective 
geographic proximity 
but 
riff and non-tar
iff 
 liberali
ze ta
regional efforts to
intra-regional trade continues 
barr1.?ers t o regi. ona 1 tra d e, 
5 3 % in 1978, of total 
to the m
ajor port ion, 
represent 
 out h t r ad e i n a 11 c om mod i t y g r o ups ( Ad a ms 1 9 8 3 : 11 3
 ) ? 
i n t e r - S
 meaningful fi
gures 
with
way t o c o me up 
Thus a simple 
' direction of inter-South and 
indicating the 
volume 
is to subtract the volume of such intra-
"b.1 .lateral" trade 
39 
In other 
trade from total inter-South trade. 
regional II i? the nter 
ti -regional 
rds, volu
me and direction of 
wo the 
major geographic 
between the ows 
trade , fldefined as 
can be useful indicators 
ies, 
regions of developing c
ountr
among developing 
transactions 
of bilateral economic 
countries. 
Table 1-6 provides such data by delineating a changing
 
d inte
r-regional trade 
an
l 
Pattern egi
ona
of intra
-r
Explicit in Table 1 -
ries. 
re 1 at . among developing cou
nt
1. o ns 
is the fact that inter-South bilateral trade rep
resented 
6 
compared to that of 
by l. .nter-regional trade is not large 
int r a-regional trade 
Tab 1 e 1 -6 
Asia, 
industrial countries except West 
and to trade with African countries. One 
certain 
 
Middle East, 
and
bilateral economic 
inter-South 
imp ortant as pee t of rapid 
inter-regional trade is its 
telat? d by l. o ns represente
42 
Table 1-6: Trends in Trade among Developing Countries(l960-1980) 
Growth Trend in Merchandise Exportsa) ~hare of Merchandise Exeortb ) 
LDCs Intra- Inter-
From/T Ro e st of all LDCs region I ntra-region Interw -orld Rest of all ~ region region the world 
Lat i n America 
and Caribbean 
1960-1970 6.6 6.7 4.5 5.3 19. 9 18 .1 1 .8 8
1 0 9 .17  0-1978 28.8 26.5 46.3 24.2 24.0 19. 9 4 .1 76.0 
South)and East 
Asiac 
1960-1970 5. 1 4.5 6.8 6.8 29.8 22.7 7. 1 70.2 
1970-1978 27.3 24.8 35.3 28.2 29.0 19.8 9.2 71.0 
:., 
Mi dd l e East d) <--I 
and West Asia .::r-
1960-1970 7.5 8.6 6.5 9.4 18.6 7.7 10. 9 81.4 
1970-1978 58.0 38.5 68 .2 53.4 21. 9 4.6 17.3 78.1 
Africa 
1960-1970 6.0 6 .1 5.8 9.0 9.8 5.2 4.6 90.2 
1970-1980 28.3 19.8 35 .8 25.5 11.0 4 .1 6.9 89.0 
a) average annual percentage rate of growth, b) percentage shar
e en  t ar te  p tho et  t er na dd  e o fo  f e acS hin  g pa ep ro iore d , in cc ) luded, d) Northern African part of Middle East excluded. 
Source? G.Mernon, Bridges Across the South(New York: Pergamon
? , U 1n 9i 8te 0d )  N Ta at bio len  s ~, .3H !a  n pdb po .5o 6k -5o 7f   International Trade and Development Stat1st1cs 198?. 
growth rat e in both absolute and relative terms. In the 
case of the Latin American and Caribbean region where 
regional economic integrative schemes have be e n mos t ac ti v e 
40 
and have a 1 ong history, while the share of intra-
regional expo rts out of region ' s t otal ex ports had been 
stagna nt betwe e n 1960s and 1970s( f rom 18.1 % to 20.2%) and 
while the share with advanced industrial co untries 
dee re ased during the same period (from 80.1% to 7 6 %)  , 
ex ports to other developing reg io ns increased sharply from 
l ? 8 % in the 1960s to 8.8% in the 1970s. The Table 
illustrates that other de ve 1 oping regions experienced 
almost similar trends where intra-regional trade and trade 
with advanced industrial countries has been either stagnant 
or declined over the last two decades. 
The s ig nif ic a nee of inter-South bilateral eco nomic 
ties can be seen through another dimension as we 11. The 
left column of Table 1 -6 reveals an average annual 
percentage rate of increase of me r c ha nd is e exports by 
de ve 1 oping countries . In the 1960s average annual growth 
rate of intra-Latin and Caribbean region exports was merely 
6 . 7 %?  But in the 1970s, it reached 26 ? 5 %?  A similar 
rate of growth in intra-regional trade can be seen in other 
developed regions: fro m 4.5 % in 1960 to 24 . 8% in 1978 in 
the South and East Asia, from 8.6 % in 1960 to 38.5% in 1978 
in the Middle East, and fro m 6 .1 % in 1960 to 19.8 % in 1978. 
Compared to this intra-regional trade, however, inter-
regional trade has shown even more dramatic growth . 
43 
Whil e its g rowth r ate in t he 1960s was l ess th a n 5% per 
ye a r, it was mo r e th a n 45 % in the 197 0s for th e cas e of the 
Latin American and Ca ribb ea n r egion . Particularly the 
Mid dl e East a nd the West Asia n regions revealed v e ry r apid 
rates of inc rease f r o m 6.5 % in the 1960s to 68 . 2% in the 
1970s . Though not drastic, So uth East Asia n and Af ri ca n 
r eg ions also show modes t yearly increases in ex p or t s to 
o th e r dev e loping r e gio ns. 
This bil ate r al inter-Third World tr a d e improveme nt is 
not a pervasive ph e nom e non e nco mp ass ing all th e developing 
cou ntri es , how e v e r. For th e last de e a d e , particularly 
since th e oil boom, this form of econo mi c tr a nsaction has 
been c once n tr ate d r a th e r among particular groups of 
developing co untri es : th a t is, b e tween capital - surplus OPEC 
cou ntri es a nd the NI Cs. As s e e n i n T ab 1 e 1 - 7 , e x p o r t s f r o m 
the non-oil d evelo ping co untries to OPEC alone inc reas e d by 
6 3 7 %, o utp acing the g rowth of their ex port s to the rest of 
the world for most of the 1972-1978 p e riod. From $1.69 
billion in 197 2 , exports from non-oil d e v e loping countries 
to oil ex porters reached $1 1. 4 billion by 1978 in current 
Table 1-7 
d o 1 1 a r t e r ms ? For the ir part, the o i 1 ex porting co untri es 
increased exports to th e non-oil developing coo untries from 
44 
Table 1-7: Regional Exports to OPEC(1972-80) and Shares of Total by Regiona) 
%increase 
1972 1974 1976 1978 1972-1978 
% % % % % 
A1 1 non-oil b) 
LDCs l ,694 4,541 7,723 11 ,400 673% 
Non-oil 
Western Hemp. 218 13 868 19 1,452 19 1,971 17 904% 
Non-oil 
Mid. East 456 27 1,113 25 1,610 21 l , 528 13 335% 
,.:; 
~ 
Non-oil ::r 
Asia 814 48 2,157 48 4,287 56 7,378 65 907% 
Non-oil 
Africa 207 12 403 9 375 5 524 5 253% 
COMECON 653 l 00 l ,764 100 l ,994 100 2,667 100 410% 
OPEC intra-
trade 149 605 1 , 571 l , 783 1 , 197% 
a) Developing Countries' regional export to OPEC. b) US$ million 
Source: P. Hallwood and S. Sinclair, Oil, Debt and Development(London: Allen and Unwin, 1981) Table 7.1, p.132. 
IMF, Di rection of Trade, 1982. 
$ 7 ? 8 billion in 1973 to $46 billion by 1979 (Hallwood a nd 
Si nc 1 air 19 8 1 : 4 ) . 
However, not a ll developing co untri es shared in this 
strong growth in expor t s to OP EC me mb e r s . Indee d, 1 3 
developing countries acco unted for a bout 90 % of the o v erall 
increase in no n -o i 1 de v e 1 o pi ng c o u n t r i e s ' e x po r t s t o th e 
oil expo rt ers during 1972-1978 (Hallwood a nd Sinclair 1981: 
1 3 2) ? Table 1-8 offers a list of the thirteen maj or 
trading partners of OPEC . Apart from Bahrain, all ot h e r 
trading partners are from non-Middle East regions. And 
exce pt for Bahr ai n, Pakistan, and China, the r e mai ni ng 
part ne rs are th e core or second generation NICs. Among 
Tab 1 e 1 -8 
them, t he E as t As i a n N I Cs ( i ? e ? , S o u t h Ko r e a , T a i wan , Ho n g 
Kong, a nd Singapore) show the most r e ma rkable export 
per for ma nc e , constituting 42 % of total . During the period 
of 1972-1978, Korea's export to the oil producers inc r ease d 
astronomically by 7 , 558 %, followed by India (1,026 %), 
Taiwan (2 , 71 0% ), and Br a z i 1 (1 , 7 7 0 %)  ? Given the rec e nt 
export performance of the NICs in th e international 
eco nomy, this OPEC - NIC trade partner co n ce ntration is 
quite understand ab 1 e. According to Havryshylyn a nd Wolf's 
finding, the ten leading NICs of whi c h the c or e countries 
45 
Table 1-8: Major LDC Trading Partners with OPEC (1972-1978, $million) 
% share of % increase 
Country/Year 1972 1974 1976 1978 1980 total(l978) 1972-1978 
South Korea 19 146 388 1 ,436 15 7,558 
India 146 379 l ,065 1 ,498 14 l ,026 
Taiwan 42 208 440 1 , 138 11 2,710 
Brazil 53 461 582 938 9 1,770 
Hong Kong 127 307 463 897 8 706 
Singapore 132 358 795 903 8 684 
China 165 515 661 865 7 524 cr 
Bahrain 31 106 244 482 5 1 , 555 :":r'  
Thailand 49 236 322 515 5 1 ,051 
Pakistan 72 230 285 432 4 600 
Argentina 24 181 198 258 2 1,075 
Colombia 17 40 120 175 2 1,029 
Mexico 56 49 79 123 1 220 
( 100 %) 
Source: Hallwood and Sinclair, Oil, Debts and Development (London: Allen and Unwin, 1981) Table 7.2 
p.134. And UNCTAD, Handbook of International Trade and Statistics, 1982. 
fall into the above thirteen major 0 P EC' s trading 
partners ( e xc l ud i ng Taiwan) accounted for more than 80% of 
the inter-South trade in total non-fuel exports (1981:63). 
The increasing complimentarity between OPEC's rising 
demand 
ba c ked up by new surplu s ca pital and the NICs
' newly 
diversified industrial capability might have been 
res pons bile for such a high concentration between the
 two 
groups. 
As Table 1-9 indicates, the increase in these thirteen 
countries exports to OPEC members had been accompani
ed by 
growth in OPEC's share of their total exports. In the case 
of Kore a , the share of OPEC in its total exports rose f
rom 
3% in 1972 to 12% in 1978 . Pakistan, India, Thai 1 and, 
China, and Bahrain all indicate that OPEC members have 
b eco me siginificant trade partners whose share goes beyon
d 
more than 10 % of their total exports by 1978. 
Tab 1 e l -9 
ven for Brazil, Taiwan, Hong Kong , a nd S i ng a p ore , OP EC E
countries have emerged as modes t t r ade partners accoun
ting 
around 5 % of their total exports . These figures explain 
that those thirteen major trading partners of OP EC have 
been able to diversify their external trade links which 
were mainly characterized by hi g h pa r t n e r c o nc e n t r a t i o n o 
n 
46 
Tabl e 1-9 : Selected LDCs
1 Export to OPEC: Share of OPEC 
in Their Total Exports, 1972 and 1978, by value 
Country/Year 1972( %) 1978(
%) 
Argentina 1 4 
Brazil 1 7
 
Colombia 2 5 
Mexico 3 2 
Bahrain 14 30 
Taiwan 5 8 
Hong Kong 5 8 
India 5 14 
Korea 3 12 
Pakistan 11 27 
Singapore l 5 
Thailand 5 11 
China 6 10 
EEC 4 9 
All non-oil LDCs 3 7 
Source: UNCTAD, Handbook of International Trade and Statistics, 1982 
and Hall and Sinclair, Oil, Debts, and Development (London: 
Allen and Unwin, 1981) Table 7.4, p.136 
e d i ndu s tri a l c ountri e s, a primary cause of ec t t
h e 
se l
d e pend e n ce syndrome . 
A less well known, y e t si g nificant, a spect of O
PEC-
NICs bilateral ec onomic relations, in additi
on to the 
c ommodity trade discussed a bove, i s a d r a rn
 a t i c i nc r e a s e i n 
e NI Cs' partnership in OPEC c ountries' c
onstruction a nd 
th
e n g ine ering projects. Si nee 19 7 5, a 1 a
 rg e number of 
e xt r e me 1 y r e munerative contracts have been aw
arded to some 
s and other de v e 1 oping countries. Br a zilian
 
s el ec ted NIC
 ms articipated in a multi-million do
llar housing 
fir p
je c t in Algeria and the construction of a 
Trans -Saharan 
pro
road in Mauritania. Taiwan completed the 
al-Baha power 
 
pro j e c t i n S a u d i Ar ab i a , at a c o s t $ l 6 0 mi 11 i
 o n, a nd now is
e ngage d i n a j o i n t -v e n t u re p e t r o - c he mi c a 1 p 1
 ant in Saudi 
 
Arabi a . Turk e y has been an aggressive bid
der in the Middl e
more than $3 
East c onstruction market since 1978, winning 
on in 198 2 alone. For example, the i develop
ing 
bill
countries' share in tot al contracts in the
 Middle East 
cons tr uc ti on market (excluding Kore a) r
eached $ l 3 . 2 
billion in 1981. If Korea's total contracts 
are added, the 
:41). 
figure goes to $20.9 billion in 1981 ( MEED A
ugust 6 
icates that the total from the constructio
n 
This figure ind
ector far exceeded the total a mount of c om
modity trade 
s
between the OPEC countries and th is thirte
en c ountries 
listed a b ove. 
The most striking example of the Middle
 East 
construction boom is the record of the Ko
rean firms. From 
s , 
the status of a subcontractor for US and EEC c
ompa ni e
47 
Kore a be came the number one bidder in t
he Middle East 
c o ns t r u c t i o n market in 1981 outbidding its
 previous prime 
cont r ac tors ? In that year a lone, Korea won
 total contracts 
50 % f  
worth $7.8 billion, which constituted 
a bout o the
 market for the year. From 1974 to 1981
, 
total Middle East
the cumulative total amount of contracts 
won by the Kore an 
bidd ers reached $ 3 7. l billion. In 
addition, Korea's 
co ns t r uc ti on exports to Southeast Asian 
co untries amounted 
rean Ministry of 
to $2 .2 billion during the same period 
(Ko
41 
1982). Inter-South economic
 
 relati
ons 
Construction
a re not limited to the above mentioned sec
tors, but also 
ex t e nd to manpower migration, capital flo
w, and technology 
transfer . For example, the volume of remi
ttances by Third 
World workers in OPEC countries rose from 
$834 million in 
1973 to $5, ]68 million in 1977, and to 
$9,244 in 1980 
(Hallwood and Sinclair 1981: 148 K
atzousian 198 2: l l 4) ? 
 apart from the recycling of petro-dollar
s to developing 
And
countries via the Eurocurrency market, 
OPEC countries in 
general and 1 ow-capital absorbers in
 particular have 
directly transfered large sums of capital 
to other Thi rd 
t-ventures 
World countries in terms of bilateral aid, 
join
l institutions, a nd direct and indir
ect 
in f i na nc i a
in v es t men ts ? Furthermore, an increasi
ng number of 
developing countries, particularly the N
ICs, have become a 
diversified sou re e of tee hnolog y transfer
 to the oil 
exporters in the fields of petro-chemical p
lants, steel, 
le o ods 
shipbuilding, and other co nsumer du
rab g
48 
4 2. 
ind us t ri e s ? 
Factual su rv eys clea rly indicate that bilateral 
i nter-South eco nomi c r e 1 at ions a r e an i n t e r e s t 
i ng an d 
sig nifi ca nt phenomenon on both the theo
retical and 
s b e tween 
practical level. In particular, dyadic relat
ion
the OP EC co untri es a nd th e NICs provoke cu rio
sity as to 
ho w it was poss i bl e ? Viewed f r om a conve
ntion al 
perspective , this kind of phenomenon is
 impossible not 
only ecause of th e a bsenc e of industrial co m
pl ementa rity 
b
and mpar ative advantage derived fr O
 Ill eco nomic co
backwardness and rigidity, but also 
b eca use of the 
developing co untries' weak position in the inte
rnational 
power structure . 
n mpting to solve this puzzle, a nu
mber 
I atte of 
l tur es can b e mad e . One plausible theoretica co njec
con j ec ture is that because of geogra phi c 
proximity, th e 
oppo rtuniti es for intra-industry trad
e, and the importance 
ard 
of s imilar demand patterns, there is a 
trade "bias" tow
s 
mor e utual trading among developing co
untrie ( 
m
Havr ys hyl yn a nd Wo  1 f 19 8 l : 8 4) ? Apart fro m thi
s ec anomic 
exp lanation, the pheno menon might b e due to 
pys c hologica l 
e level of 
preference in the sense that " nations 
a t th e sam
stratification will inter ac t with one a noth
er as e quals 
e ns t different levels will not." 
( Gal tung whil natio a
1964:94) Or it could be a f unctio n
 of the 
Unilateral c losed 
'ineffectiveness' of previous approac
hes: 
to 
options (individual self-reliance) have prov e n b e 
failures (Bierstekar 1981) . Regional integrative sche
mes, 
49 
once highly re ga rded, h ave also b ee n subject to various 
setbacks a nd bottlenecks(Mytellka 1979; Axline 19 7 7 Nau 
1981 Nugent 1982). Moreover, the limited success of 
producers' cartel schemes a nd th e persistent stagnation of 
the NIEO might have induced some developing countries to 
search for bilateral options in terms of inter-South 
diversification ( Rothstein 1981; Premtlau 1981; Haq 1981; 
Loe he rand Powlsen 1983). The rise of inter-South 
bilateral ism is bee omi ng pervasive while multilateral 
inter-South preferential trade arrangements proposed under 
the idea of collective self-reliance adopted and readopted 
in Arusha and Manila within the framework of the UNCT AD 
still b e long to the realm of academic debate and policy 
speculation rather than actual reality. 
On the other hand, it seems pl a usible to assert that 
the loos eni ng of hegemonic power (i.e., monopoly structure) 
is responsible for the rise of inter-South bilateral 
economic relations. More specifically, the emergence of 
selected developing countries as significant actors in the 
international system ( capital-surplus OPEC and 
industrially dynamic NICs) and the r e lative decline of OECD 
countries might have introduced a n e w systemic 
configuration and a relative comparative advantage in which 
these new actors can excercise more maneuverability and 
flexibility in enhancing their bilat e ral ties (Wallerstein 
1974 Gilpin 1977 Krasner 1974 Turner a nd McMullen 
198 2 Haggard 1983 Babai a nd Haggard 1981). 
50 
All t his is me re c o n j e c t u re , however. Since the re 
have been no serious attempts to understand this 
p he no me no n , we cannot identify a set of definite
 variables 
responsible for the pattern of int e r -Sout
h bilateral 
earlier, 
e c o n o mi c r e l at i o ns ? Nonetheless, as we ex
plained 
 notion that inter-South bilateral
 
e have a eco
nomic 
w
relations are a pattern of economic transac
tions arising 
minate he 
from diversification efforts to reduce or 
eli t
ts and cons train ts of deeper integratio
n into the 
COS 
international system name 1 y dyadic 
sensiti vity and 
in mind, the 
systemic vulnerability. Keeping this 
ise 
following sections of the study attempt 
to dev a 
 ism 
workable theoretical model for Third Wor
ld bilateral
with specific focus on the case of a dyadic inte
ractions 
b etween the OPEC and the NICs (Chapter 2) 
and to apply the 
model to a case ( that of Saudi Arabia and Korea
 1973-
n 
19 8 2) in an attempt to understand the phenomen
o more 
e study seeks 
fully (Chapters J through 6). And finally th
11 
to address the question of permanence and 
the diffusion 
potential of this phenomenon along with asses
s ment of its 
impact on stab i 1 it y and order in the inter na ti o na
 1 system 
broadly perceived( Chapter 7). 
51 
FOOTNOTE 
1. Growth in global in t e rdependence is a controversal 
topic. While Rosecrane, et.al . ( 1 977:425 - 445), 
Katzenstein(l975: 1021-34), and lnkles (1975:467-9 %) argue 
that there has been an increasing level of interdependence 
for the last two centuries, Waltz (1970: 205-223) counter-
argues that interdependence is low and, if anything, is on 
the decrease . 
2. The root of this evolutionary conversionist vision of 
global interdependence can b e t race d back to th e tradition 
of idealism and functional and neo-functionalism. For 
this , ref e r to Et z ion i ( 196 5 : 1 31 - 148 ) , Mitra n y ( 196 6 ) , and 
Sewell(l966). For a comprehensive discussion of this 
topic, consult o'Leary(l978) and Koehane and Nye(l975). 
3. An analytical distinct io n between " by choice" and "by 
necessity" is quite ambiguous . However, a liberal 
interpretation proposed b y Ba lassa(l981), Krueger(l978) and 
Bhagwati(l978) posits that the Third World integration into 
th e international economic system is largely a function of 
conscio us policy choices of dev e loping countries 
particularly in terms of foreign trade r eg ime. On the 
o t he r hand , Frank ( 196 9 , 1980 ) , Wa  111 e rs t e i n ( 1 9 7 4 ) , and 
many others following the Marxis t -Dependencia tradition 
view that the incorporation of developing peripheral 
c ountries into th system is determined by historical 
necessity of capitalist development . 
JI 
4. The ways and means to overco me the cost and constraint 
of global interdependence h a ve been sought from the two 
major directions. One is to r ea lign the modes of external 
links( trade and capital ), and the other is to search for 
domestic readjustment in terms of tr a nsformation of 
development strategy as a whole. T his res ea rch combines 
both aspects in a synthetic manner. 
5. The theoretical aspect of c onversion thesis can be found 
in Almond(l970:224-33, :310-331) . Rostow(l960), 
Weiner(l966), Lerner(l967), and Morse(l969) projected this 
optimistic vision of the Third World future. 
6. For this, refer to Balassa(l980a, 1980b), 
Krueger(l978), Little, Scitovsky and Scott(l970) and 
Bhagwatti(l978) . For the ideologi ca l defense of liberal 
economy from the neo-classical perspective, consult 
Johnson(l974), Freedman(l977), and Bauer(l981: 185-190). 
52 
7. This claim needs a substantial justification. 
Viewed 
from the relative terms, the goals of the three Devel
opment 
Decades set by the UN have not been satisfactory . Fo
r this 
topic, refer to various issues of the US and the 
Third 
ent 
World Development published by the Ov e rseas Devel
opm
Co u nc i 1. 
8 . The disruptive effects of interdepend e nce have 
been 
viewed from various angles . Rugggie (1983) comes u
p with 
nomic, technological, and linguistic negative effects
 of 
eco
i n t e rd e p e n de nc e , w hi 1 e K. Ho ls t i ( 198 1 ) s u g g es ts po 1 
i t i c a 1 
costs( particularly political disintegration) 
of 
interdependence . But more intense critiques of ne
gative 
consequences of inte rd ependence come from the M
arxist -
Dependencia tradition. There is a pool of lite
r ature 
ion. 
dealing with this topic from the latter trad
it
However, for a succinct discussion of this topic, re
fer to 
ockroft, Frank and Johnso n(l97 2), Mahler(l980), 
and 
C
Lehman(l979). 
9. Certainly the perception or calc ul ation of th e 
costs 
 a nd 
and benefits is co nti n gen t upon the ontologica
l
epistemological positions of investigators. For this 
topic, 
refer to Gilpin (l976), Cox(l979) a nd Shaw(l979). 
10 . The concepts of vulnerability and sensitivity
 are 
borrowed from Keohane a nd Nye(l977), while the notio
n of 
structu r al dysfunctionality is derived f rom Capo
raso 's 
discussion of dependency(l978: 2 - 6) . Hagga rd(l9
83)'s 
initial efforts to identify the costs and constrain
ts of 
inte rdep e nd ence in terms of sensitivity, vulnerability
, and 
reliance helped this analytical distinction. 
11. It is unpredictable b ecause of syne r gistic uncer
tainty 
inherent in the international economc syste m. And 
it is 
undifferentiated since systemic effec ts are applied to
 all 
the co mponen t parts in the system , though in v
arying 
degrees. These two attri but es lead to a lesser degre
e of 
contro l by n atio nal actors. 
 by 
12. "Conditionalities" refe r to the terms impose
d
international financial institutions on borrowing cou
ntries 
as qualifications for the granting of credit . Usually
 they 
comprise a set of austere economic measures to freeze 
wage, 
to cut publi c s pending, and to liberlize the na
tional 
ec onomy. For this topic, r efer to Eckaus(l982: 767-780
) and 
t o Wi  11 i a ms on ( l 9 8 2 ) ? 
uctural vulne rability 
1 3. The degree a nd exte nt of str
depends heavily on relative power of 
integrated country , 
do mes tic adjustment capabilities, a
nd the a bility to 
displace costs a nd risks. 
14 ? Refer to Capo r as o ( 1 9 7 8 : 20 ) ? 
53 
1 5 . For a general discussion of power relations, consult 
Bl a u(l9 6 4), Emerson(l960), and Burns and Buckley(l977). In 
the c ontext of the international political economy, 
Baldwin(l979, 1980) and Caporaso(l978) make an excellent 
analysis of power and dependence relationship . 
l 6 ? T he N I Cs ' ma j or t r ad i ng pa r t n e rs a r e t he US A, J a pa n, 
and EC. At the same time, their exporting items are heavily 
c oncentrated in the light industrial sectors such as 
textile and clothing and consumer electric goods . For the 
partner and item concentration, refer to Harvylyshyn and 
Alikhani(l983) and Park(l980). 
17 . The conventional understanding of dependenc y focuses 
mainly on external exchange relations in terms of dominance 
and dependence . However, this research places its primary 
e mphasis on internal consequences of such e xternal exchange 
relations manifested in terms of limited developmental 
possibilities. 
18 . The context of dependency varies from one country to 
the next depending upon historical timing and domestic 
social formation. As Duvall and Freeman(1983) have 
suggested, however, the dependency context can be 
classified into the four major types: classical neo-
colonial, enclave, associate dependent, and recurrent 
dependent contexts . This typology can be useful not 
because it informs us of the pattern of external ties , b ut 
because it identifies the types of development strategy as 
conditioned by external ties and domestic social formation . 
19. This view follows a classical Leninist position in the 
sense that without a fuller maturity of capitalism in the 
South, socialist revolution as a historical end is not 
possible . Thus , in this view colonialism did not retard or 
distort indigenous capitalist development bu rather acted 
sa a poweful engine of progressive social change . Refer to 
Warren(l980 : 8) . 
20 . Articles in Ruggie(l98J) present various aspects of 
antinomical nature of inter de p e nd enc e in the context of 
de v e 1 oping countries . 
21 . For a succinct discussion of historical evolution of 
development strategies, consult Bloomfield(l973), 
Rot hs t e i n ( 1 9 7 7 ) , and Tod a r o ( 19 8 l ) . 
22. Although these authors focus on the systemic factors 
in the formulation of countervaling strategies, their 
theoretical sta r ting points are different. While 
Krasner(l981 : 172 - 20 1 ) derives a regime change option out of 
power analysis, Inoguchi(l981 : 255-276) suggests exit and 
voice options followi ng Hirschman(l970)'s line of 
reasoning . On the other hand, Hansen(l979) and Alejandro-
Diaz(l978) draw strategic options from the trans f ormation 
54 
of dev e lopme nt s tr ate g y. Wr ig g ins ( l 9 7 8 : 2 1 -11 7 ) id en ti f i es 
six options , both eco nomi c and political, largely by 
analysing previous experiences of developing count ri es . 
The three types of strategy described here (associationist, 
re-associationist, an d dessociationist) a r e mainly drawn 
from Alejandro-Diaz and Inoguchi. 
23 . The idea of self-reliance has b een the dominant theme 
in the Marxist-Dependencia literature . How e ver, there is 
no clea r-cu t co nsensus on strategic choice among 
individual, collective , and/or sectoral reliance . For a 
recent debate on this topic, ref er to Munoz(l982:117-314). 
And for a c riti cal analysis of individual self-reliance, 
consult 8iersteker(l980). 
24 . Of co urse, it is misleading to equate self-reliance 
st r ategy with basic needs strategy. Self-reliance and de-
link from the system may involv e two major types of 
s t r at e g y : o ne is t o f o 11 ow t he Mao is t 1 i n e e mp has i z i ng t he 
relations of production and thereby the provision of basic 
needs, and the other is to pursue the Stalinist line 
focusing on the forces of production as can be seen in th e 
case of North Kore a . 
25 . Not all the proponents of this selective re-association 
strategy conceive the int e rnational economic system in 
terms of positive sum game. The proponents following the 
tradition of th e Economic Council on Latin America and its 
ideologue, Raul Prebisch understand the dynamics of the 
international eco nomic system from the zero-sum game 
perspective . For the latter, thus, the reform of the 
international rul e structure in the direction of the 
positive sum game becomes the essential prerequisite for 
se lective re-linking . 
26 . Selective re-linking does not spo ntaneously lead to 
balanced growth and the satisfaction of basic needs. 
Rathe r, the reverse has b een the case . For this discussion 
of this topic within the framework of NIEO-Basic needs 
s tr ate g y d i c hot om y, ref e r t o Ga 1 tung ( 1 9 7 9 ) ? 
27 . Protective policy measures pursued under the ISI 
setting comprises a broad range of options including 
artificial ovrevaluation of exchange rate and high import 
tariffs. 
28. Stuart Greenbaum (Time , Jan. 1 0 , 1983 :50) succinctly 
summarizes the point in case as in th e following : " Imagine 
yo u are a Latin dictator deep in debt. If you (accept IMF 
terms and) cut back on imports, you get riots in th e 
streets . If yo u default, you are ostracized by the world 
capital markets. Now if the first approch leaves you 
s winging from a tree br anch, you know you are goi ng to go 
default route ." 
55 
29 . Young(l980 : J33 ), Haas (l9 80 : 358 ) a nd Kr a s ne r ( 19 8 2 : 1 8 6 -
189) offer excelle nt a nalys es on this topic. 
30 . There is a f und a ment a l probl e m of incommensurability 
between liberal a nd d epe ndencia int e rpret atio n of th e cost 
a nd co n s traint of interd e p e nd e n ce . The liberals suc h as 
Bauer, Johns o n an d Frie dm an perceive th a t eco nom ic 
b ac kwardn ess in developing co untri es is tr a nsition al one , 
which ca n b e ove rcome e v e ntu a lly as th ey b eco me mo r e 
int e r gra t ed into the g lob a l ma rket. 
3 1. Mytelka(l979:9-16) classifies thr ee dif fe r e nt typ es of 
r egiona l econo mi c integrativ e scheme: a laissez fa ir e 
type(e.g., LAFTA a nd CARFTA) , a hybrid combining a 
laissez fai r e with co mp e nsatory e l e me nts throu gh 
planning(e.g., CACM and CARICOM), and a dirigiste system 
linking planning to regul a tion within a re g i o nal 
con t ex t ( e ? g . , Andean Group) ? 
3 2 ? T he Mu ti f i be r Ag r e e me n t c an be re g a rd e d as 
multilateral reactions on bilateral r eg ul a tion by develop e d 
co untries, while the Framework g roup's efforts in the GATT 
a r e a multilat e ral a ction by the selected NICs within the 
ex isting rules of the game. Refe r to McMullen (1982: 78-97) 
and Turner and McMullen (1982). 
33. Usually stabilization measur es a re followed by 
e x t e r n a 1 p r e s s u r e s s u c h as I MF c o n d i t i o n a 1 i t i e s ? B u t 
co untri es may pursue such p o lici es on their own initiatives 
to cope with inflation . 
34. Search fo r petro-dollar r ecyc le in t e rms of OPEC's 
financial a ssistance or concessional f i na nc i n g is a n 
exa mple for this strategy. 
35. This is a loyalty option in Hirschman(l970)'s 
terminology or an embourgeogiement strategy in 
Hansen(l979)'s view. In this regard, Haggard a nd 
Babai(l981) identify four options in th e existing r egi me 
structure: 1) incorporate into the existing set of r egi me 
rules. 2) increase share of benef it s under th e ex isting 
regime rules. 3) restructure the ex isting regime rules 4) 
alter decision-making modalities and instruments of the 
existing regime. 
36 . The increasing preoccup a tion with r eg ime change or de-
linking option by the students of th e int e rnation al 
political economy has been motiv a ted by a series of eve nts 
taking place in the late 1960s a nd ea rly 1970s. The 
politicization of global hunger and a high publicity of 
Mao's and Nyer e re's self-reliant s trat eg y and the succ ess 
of OPEC and its diffusion ef fects on other commodity 
cartels a nd so on had induced scholary as well as practical 
concerns on su c h options. Gosovic a nd Ruggie(l975), 
Christensen(l977), and Krasner(l981) treat this topic in 
56 
terms of issue-linkage and ideological bandwagon effects. 
J7 . If we follo w the Grotian interpretation of regime as 
postulated by Young(l982) and Stein(l982), the Third World 
bilateralism defined here is ce rtainly regime-bound. 
However, the definition of regime used in this research is 
narrow and strict one b ased on structural realist 
conce ption (Krasner, 1982). In a ddition, the contents of 
bilateralism are not limit e d to trad e sector alone, but 
extended to overall sectors of economic transac tions. 
J 8 ? Me n o n ( 1 9 7 9 ) a nd Pavl ic et. al. (198 2) attempt to 
understand the South-South coo per a tion in terms of 
co mparison of intra- vs. inter-regional ec anomic 
transactions ? 
J9. Certainly, understanding bilateral ti es in terms of 
inter-regional econo mic transaction is controversal. Due 
to t ech nical reason, however, this resear c h avoids a 
co mplete disaggregation of inter-South bilateral ties. 
Even if we es timate the number of developing co untr ies 
modestly (i.e., 130 countries), in case of disaggregation 
it r e quir es a study of 130 X 130 = 16,900 dyadic pairs. If 
co mmodity dimension is a dded, it becomes much more 
co mplicated job. To avoid such a complexity, this research 
a dopts inter-regional ties as a relevant indicator of 
bilateral ism . 
40 . The African region also has numerous economic 
integrative schemes . However, the Latin American and 
Caribbean r eg ion has shown a much mor e active tendency. 
My t e l k a ( 1 9 7 9 ) pr o v id e s an e xc e 11 e n t rev i e w of t he Lat i n 
American integrative schemes . 
41. With the slow-do wn of the Middle East boom, South 
Korean government has set up so called the Post-Middle East 
strategy in wh ic h the South East Asian region has become 
the prima ry target. 
42 . More detailed exam ples of this case will be provided in 
c hapter 7 . Hambleton(l982) offers a goo d description of 
Korea -T aiwan-Saudi Ara bi an joint cooperation in the Saudi 
petro-chemical sector. 
57 
CHAPTER TWO 
THEORIES OF BILATER ALISM : SEARC H FOR 
INDEPENDENT VARI ABLES 
As we have see n in Chapter 0 n e , the SC Ope and 
int ensity of bilateral eco nomi c int e r actions betwe e
n the 
NlCs a nd OPEC co untri e s is impressive . This n ewly 
e me rging 
pattern of ex ternal eco nomi c b e h a vior on th e p a rt of th
ese 
selected d e v e l opi ng c ountries poses thr ee major 
qu estions 
that r e q u i r e f u r t he r r e s e a r c h a g e nd a : Wh a t are th
e ca u sal 
s r espons ibl e for the dr a ma ti c increase in ec a
nomic 
factor
interactions between two g r ou p s of co untri es? Thr
ough 
 
what mecha ni s m a nd how is thi s fo rm of in
ter - So uth
i la teral r ela tions promot ed o r dis co ur age d, a nd w
hat a r e 
b
th e p r ocess -l eve l dyna mi cs co nstituting these bil ate
r a l 
ties? And f inally wh a t a r e t he r e s u 1 t i n g o ut c o me s of t 
his 
type of int e r ac tion, and wh a t a r e th e major th eo r etic
a l a nd 
e mpiri ca l implic a tions th a t ca n b e drawn 
from this 
p h e n o me n on? 
Finding pr ec ise explanations fo r this se t of d e pend e nt 
variables is n o t easy , particularly since th e r e a
re no 
re ad i 1 y available theories o r ex pl a n a tory sche m
es 
ex pr ess ly designed to f i t the topics of our inquiry
. 
r 
Neve rtheless , if we treat th e topic within a bro a de
framework o f bil a teral eco nomi c relations defined as 
p a tt e rns of eco nomic interactions betwee n a dy a di c ~ of 
58 
countries e co nc e iv ed of as not being whi ch can b
constrained o r co nditioned~ collective a rrang e men ts 
of 
l 
rules , nor ms , and procedures, then it does 
see m possible 
to co me up o r m
odels . 
with a set of work a ble theories 
Bilateral have been the primary topic
 of 
econom ic relations 
investigation in modern theories of in t ern
ational t r ade . 
At the nal relations
 
same ti me, a numb e r of internatio
theorists holars
 
and international business m
anagement sc
have dealt with the topic in one way or a not
 her . 
This c hapter, ther efo r e , is devoted to 
a systema ti c 
delineation eral econ
omic 
of current theories of 
bilat
r ela ti o ns, c ritic a l applica tion of such theories 
to 
the 
the top1.?c identific
ation 
o f our inquiry, and fi nally 
the 
of a b 1 es through the formulatio n a se t of independent var i 
of R new ec l ec tic theoretical model e ntitled
 the statist 
mod el of inter-South bilat e ralism . 
The Economic Explanations 
s 
Comparative Advantage: Most tradition
al theorie
 th e 
r ega rdin g the international eco nomy are co ncerned 
with
pattern of trade . They usually ass ume a two co
untry - two 
co mmodity cha n ge in such a way so as to expla in wh
y and 
ex
how much excha nge of goo ds, se rvic es and c
apital takes 
place b etween whom (i . e ., a dyadic pair of 
co untries) and 
in what . Thus the study of the int er national 
economy 
b egi n s in a bil a t eral set tin g , a ma jor co nee r n 
of ou r 
2 
investi ga tion . 
59 
In a t tem pti ng t o make a qu a lit a tiv e ex pl a n a ti o n a nd 
p r ed i c ti o n of t h e d ir ec ti o n, v o lume a n d co mmodit y 
co mposition of bil a t e r a l eco n o mc f l o ws , the th eo r y of 
co mp a r a tiv e adva nt age h as b ee n wid e l y u sed . Th e th eo r y 
beg ins wi t h t he r ecog niti o n t h a t in th e a b se nce of fo r e i g n 
tr a d e do mes ti c co n s umpti o n a n d domes t ic r e l a tiv e pri ce s 
diffe r f r o m o n e co untr y t o a n o th e r . Th i s d if fe r e nce ma k es 
expo rt a nd i mp o rt goo d s a nd se rvi ces de p end ing o n th e ir 
co mpa r a ti ve a dv a nt age s o r di sa dv a nt ages . Th e r es ult i s 
th a t n e ithe r co untry s u ffe r s b y s u c h tr a de a nd both 
b e n efi t i f goo ds a nd se rvi ce s a r e exc hang e d a t s ome 
int e rmed i a t e pri ce r a ti o . How th e n a r e co mp a r a tiv e 
J 
a dv a nt ages or co sts deter mine d ? 
Rica rd o a r g u e d th a t tr a d e co uld occ ur e v e n i f one 
n a ti o n i s a b so lut e ly e f f i c i e nt in t h e pr o duction of a ll 
goods . T h e b as i s f or tr a d e in th e Rica rd ia n se ns e s t e ms 
f r o m p r ice ( cos t) dif fe r e nces whi c h in turn a r e g ov e rn e d by 
na tur a l o r ac quir e d c omp a r a tiv e a dv a nt age s a ff ec ting input 
pr o du c tiviti e s (labor). Althoug h Rica r do 's co mpa r a tiv e 
a dv a nt age princ ipl e has a norm a tiv e c h a r ac t e r, o n e wo uld 
a r g u e th a t th e pr e cis e p a tt e rn of spec i al i za ti o n i n 
production and tr a de , whi c h impli ci tl y indi ca t es th e 
direction , v o lume , a nd c omp o sition of tr a d e , wo ul d d epe nd 
o n c omp a r a tiv e costs me a sur e d in t e rm s o f a sing l e fac t o r 
of produ c tion: l a b or . 
T h e Ri ca rdi a n sing l e factor ex pl a n a t io n of co mp a r a tiv e 
cos t s w a s f u rth e r modif i e d a nd d e vel o pe d b y th e Hec ks c h e r-
60 
Ohlin th e or e m o f f a ctor e ndowment. The theo r em asserts 
that th e Ri c a rdi an s tipul a ti o n of labor as th e s ingle 
determinant of co mp a r a t i v e cos ts does n ot f ully acco unt fo r 
the patterns of trade. It pos tul ates that di ffe r ences io 
c o mpa r ative  COS t S a r e a f unctio n of diffe r e nces in the 
ratio of factors of production with whi ch co untri es of 
e xchange are endo wed . Thus it is not o nl y l a b o r but also 
capital a nd natural resources endo wed th at determine 
c o mp a r ative cos ts. 
Viewed fro m this perspective, co untri es t e nd t o e x po r t 
goods a nd se rvi ces r e pr es e n ting their relatively mo r e 
a bund ant factors a nd to imp o rt goods a nd se rvic es e mb o dyin g 
their relatively sca r ce r fac tor s . Fo r exa mple, a 
r ela ti vely capi t al a bund a nt c o u n t r y t e nd s t o ex hibit a ,,,, ,,,  
c o mp a r a t ive adva nt age in producing capi t a l int e nsiv e goo d s , '":! 
I I 
whil e a r e l a tiv e ly labor a bund a nt co untr y finds i t se l f 
co mp a r a tiv e ly mor e competitive in labor int e nsiv e goods . 
Given th e ass umptions of th e Ricardi an a nd th e 
He c ksch e r-Ohlin th e orem (p ar ticul a rly no-co untry specific 
r es ourc es or factors of production a nd two co untr y , t WO 
factors of production and tw o commo diti es amo n g 
4 
others), these theories of co mp a r ative a dv a nt age in 
general do not d ea l with the issue of the direction of 
trade in goods a nd services ex pli c itl y , a lthoug h th ey de a l 
5 
with volume a nd commodity composition . 
Notwithst a ndin g this limit a tion, Kru ege r(l977) a nd 
Baldwin(l979) have applied thi s Hec h sc h e r-Ohlin theo r e m t o 
developing co untri es a s a me a ns of u nd e r s t a nd i n g o r 
6 1 
e xpl a in i n g t he di r ec ti o n of tr a d e flo ws . B y r e p lac ing th e 
t wo - co untry f it b y a mu 1 ti-c ountry wo rld in whi c h 
co untries' r e l a ti ve e ndowm e nt s of ca pit a l a nd l a bor a re on 
a c ontinuum, they a r g u e d th a t th e dir e ct io n, v o lume a nd 
c om modi t y co mpos ition o f t r a d e f l o ws ca n b e ex p la in e d (or 
pr e di c t e d ) b y the mo dified Hec k sc h e r-Ohlin th e or e m. 
Acco r d ing t o th e ir a s se rti o n, a co untry will tr a d e in b o th 
d ir ec t io n s , se lling mor e l a bor - int e nsiv e g oo ds t o co untri es 
mo r e ge n e r o u s 1 y e ndow e d with ca pit a l a nd vi c e v e r sa . 
F o ll_owin g th is 1 i n e , th e y i n fe rred th a t d e v e loping 
co untri es , p a rti c ul a rly r a pidly g r o win g one s such as th e 
NIC s , will ex port mor e l a bor inten s iv e g ood s to de v e l ope d 
North e rn co untri es wh e r e th e l e vel o f ca pit a l e ndow me nt is 
,, 
r e l a t i v e l y hi g h e r a nd more ca pit a l int e nsiv e g o o ds to other I 
'I'  
d e ve l opi n g co untri e s e ndow ed with lowe r o v e r a ll c apit a l 
6 
f ac t o r s a nd v ic e v e rsa f o r i mport s . 
T ec hn o l ogy a n d t h e Produ c t Cy c le : Althoug h th e th eo ry 
of co mp a r a tiv e a dvant ag e r e ma ins th e c hi ef ex pl a n a tion f or ,111 1 
tr a d e p a tt e rns, it has suff e r e d from num e rou s c riti c isms, 
7 
ex t e nsi o n s , a nd modific a ti o n s . The most c ru c i a l 
c riti c i s m has focu s ed on th e a ssumption o f th e s t a ti c 
nat u re of co mp a rative a dv a nt age . As B a l a s sa (l979) h a s 
a r gue d, the o v e r a ll p a tt e rn of c omp a r a tiv e a dv a nt age 
c hange s as a c ountr y c h anges its r e l a tiv e f ac tor e ndowm e nt 
ov e r tim e . For e xampl e , r a pidly d e v e l o ping co untri es su c h 
a s th e NI Cs ga in a dv a nt ag e ov e r a ll in mo r e skill a nd 
c apit a l int e nsiv e ac tiviti e s whil e l os ing a dv a nt age t o 
6 2 
slowly g rowin g countries. 
The key determinants of th is dynamic change in 
comparative advantage are regarded as being human skills 
and technology which in the conventional theories of 
co mparative a dvantage we re assumed to b e common to all 
co untries with a universal standardization. In fact, the 
theory of comparative advantage treats the determinants of 
fac tor e ndowments as exogenous and overlooks the important
 
fact that technologies and the quality of labor a re not the 
same among nations producing the same goods, and this in 
turn greatly affects the direction, volume, and commodity 
charateristics of ec onomic flows . 
For i ns t a nc e , Keesing(l966) takes the skill-content of 
labor force out of the Heckscher-Ohlin theorem . Ace o rd i ng 
to him, th e quality of labor is not homogeneous , unlike the 
Ricardian a ssumption . The quality of the labor force varies 
depending on the degree of training and sophistication . 
Thus countries t h at are relatively well endowed with 
professional personnel and highly trained labor will 
specialize in and export skill-intensive goods . Conversely, 
the relative a bu nd a nc e of u ns k i 11 e d labor promotes the 
export of goodss produced by mostly untrained labor . 
While Keesing focused on t he ski 11 - cont e n t of labor, 
Posner(l961 : 323-341) and others posited technology~ as a 
determinant of the patterns of trade in the process of new 
commodity development, growth and maturity . The proponents 
of the technology ga p model argue that the industrially 
63 
so phi s ti cate d co untri e s a r e t h e e a r l y pr o du ce rs of new 
prod u cts a nd th e r efo r e t hey e nj oy easy acces s t o fo r e i g n 
ma r ke t s a t a n ea rly s t age of ma nu fac tur e . L a t e r a p r oce ss 
of immit a t i on se t s i n, a s o th e r co untr ies s tart pr o du c ing 
a n d e xp o rt i n g thes e goods by r ely ing o n l o we r wages o r so me 
o t he r fact o r-c os t a d va nt age . In o th e r wo rd s , the ti me l ag 
involv e d i n t h e i mit a ti o n pr oce ss l a r ge l y de t e rmin e s th e 
dire c t i o n , vo lume , a nd co mm o dit y c o mpos it io n o f tr a d e 
f 1 ows ? Acc o r d ing t o thi s mod e 1, r ap idl y d e v e l o pin g 
c ou ntr ies s u c h as th e NI Cs w o uld h a v e a g r ea t e r pr o p e n s it y 
to e x p o rt t h ose ma tur e d goods a nd se rvi ces t o o th e r 
d e ve l opi n g c o untri es a s J a p a n did in it s ea rli e r s t age of 
d e v e l o pm e nt. 
A mo r e r e c e nt a nd co nvinc ing mo d e l of ex pl a ining the 
pa tt e rns o f tr a d e a nd cap it a l fl o ws in t e rms o f 
8 
tec hn olog i ca l fac tors is th e pr o du c t cyc l e th eo ry. 1 n s t e a d 
of e mph asizi ng the time l a g in t he im i t a ti o n process , th e 
p r od u c t c ye 1 e the or y s tr es s es th e s t a nd a rd i z a t i o n pr ocess 
of pr od u c t s Furth e r mor e it r a di ca lly r e vi se d th e s t a ti c 
as sumpti o n s o f th e c o mp a r a ti ve a dv a t a n ge the o ry in s u c h a 
ma nn e r t ha t: 1 ) k nowl e d ge o r t ec hn o l o g y i s c o untr y -
s p ec ifi c , 2) kn o wl e d ge o r t ec hn ology i s u n e v e nl y 
distri b ut e d ov e r t h e world, a nd ] )kn o wl e d ge o r t e c hn ology 
is s lowly diffuse d o v e r th e world . Ad d ing thi s d yn a mi c 
qu a lity of t ec hnolo g y to th e ex isting b o d y of c o mpa r a tiv e 
a dvant a ge t h e ori es , th e theo r y po s tul a t es t ha t ea rl y 
ma nuf ac tur e o f a n e w produ c t inv o lv e s ex p e rim e nt a ti o n with 
b o th the f ea tur e s of the pr o duct a nd th e manu fac turing 
6 4 
process. Thus in its beginning stages the good or service 
is non-standardized. As markets gr ow and the various 
techniques become common knowledge, both the product and 
the process become more standardized and perhaps even 
subject to internationally set standards and 
specifications ? At t h i s j u nc t u re , p r o d u c t i o n c a n be g i n i n 
less sophisticated count r ies (Vernon 1968). 
This product cycle theory in particular and the skill-
tee hnol og y factor explanation in general offe r us a number 
of implications to the direction , volume, and commodity 
composition of developing countries . First, a developing 
country might trade goods and services of a given level of 
sophistication in all directions . Second, the co untry 
would be unlikely to trade goods and services of similar 
level of technology with other dev e l oping countr i es . 
Third , as standardization continues, rapidly growing 
co untri es s UC h as the NICs may pick up n ew products a nd 
expo rt them (the sta nd ardized goods and services) to other 
de v elopi n g co untri es until the latter begin to produc e 
9 
these standardized goo ds a nd services later. 
Demand-Side Effects: Hoth the comparative advantage 
a rgument a nd the t ec hnolo gy fac t or expla n atio n attemp t to 
co me up with qu alitative predictions of the pattern of 
trade an d ca pit a l flows in terms of the level of i nt e r-
indus tri al co mpl e me nt a rity from a s uppl y-side perspective. 
In othe r words, international trade co mp ensa t es for 
national deficiencies of co untri es involved in an exc h a nge 
65 
of g oods and s ervic wes h, e ther in capital, 
labor skill, 
manage me n t or t e c h n O 1 o g i c a 1 s op his t i T c h a et   i go an i ? n  from 
trade derives from the fact that it e cn oa ub nl te rs i es to 
specialize in goods and services that require these factors 
in The reab suun ltd  a in st   ts hu ap tp  l cy o. untries import 
and export diss dim isi sl ia s mr e ilg r ao v ro id cs e
 in
 s  a ,n  d 
terms of one or more factors 
of production me nt i one d 
e arlier. divergent the 
countries' 
Thus, the more 
endowments and the level of techno
s
lo og pi hc ia sl t ication ' 
the exchangedmo tr h
 an
e e d gis oi om dsi  la anr d  services 
d 
10 
the greater the gain f rom t ra d e. 
supply-s
I iden  c e o xn p t l ar nas a t t iow ni ,t   h a t h ne u mber 
of issue from quite ec a ono tm heis  ts have cone e i ved 
ct 1? f ferent that o df e mand-side 
and of intra -
a ng 1 e: 
11 Acc
i on rd diu ns gt  ri toa  l thec  o pm rp opet oi nti eo nn ts.   of 
the d pe am ttern
a coun
a tn rd y-sid trade 
s, 's 
e explanation of 
exports are merely an extension of production for the home 
market s production caters 
to the needs of the 
UC h 
maJ?or? and it is through producing y f' ot r  that m1. arket that 
the country acquires a comparative a d vantage in the product 
The slig
t hh tly different d e man
of the 
en exports i t ? d s 
m. can be met w
l itn ho  r ii mty p oro tf s po  p from 
a 
the ulation 
c tho ou sn et  ry are 
of the maJ?ority . But 
whe re such tas t es 
Since in a country is thougho tf   good to the type s demanded 
be determined
u  n biq y u te hl ey   overlap of do
de
m me as nt dic   
Str by the level of per capita income, uctures supported 
lllos t of
e   x gc oh oa ds 
p
an lad c s take 
e between 
ng es ervices 
66 
... 
l 2 
co untri es of simil a r industrial st ructur es . This 
model of demand similarity ( or of overlapping dem ands) 
vie ws trade in residual terms . That is, domestic demand fo r 
a particular good is substracted from the do mes ti c 
production of t he s a me goo d , a nd the r e maind e r is de emed 
the net expo rt of a gi ven co untry . And the g lob a l ma r ket 
place is then a p oo l co mpos e d of net ex port supplies a nd 
n e t import demands . At the same time the import d e mand of 
a particular co untry for a g iv e n goo d from a specific 
s upply country b eco mes a function of income a nd relativ e 
p rice s following a ge neral Hicksian model of demand (Marg ee 
1975 Pollins 1982 Armington 1978) . 
Utilizing the demand similarity model, Linder(l961) 
a ttempts to ex pl a in the patt e rns of tr a de among developing 
co untries . Assuming that tr a de flows will r a di a te outwards 
towar ds proximate a nd similar mark e ts, h e asse rts that the 
g r ea t e r the similarity b twe e n the pat t e rns of do mes tic 
d e mand, the higher the trade betwe en two co untries. Si ne e 
d e ve loping countries are more similar to on e anot h er than 
to industrializ ed countries, the impli ca tion is sizeabl e 
trade, other things b eing eq u al , among d e veloping countries 
and r ela tively little trade b et we e n North a nd South . 
C rit iq u e : The eco nomi c explanation rapidly summariz e d 
a bove provides us with thre e major independent variables to 
ex plain the patt er n of inter-South bil a t e ral rel at ions : 
c ompa r ative a d vantage , technology, a nd d e mand-side effects . 
lo fact , those variabl es a r e c hi efly r es ponsible for the 
67 
s hi f t s in t h e di r e c ti o n o f e c onomi c flows in Third World 
c o untrie s a nd for th e rise of bilateral economi c 
c o n ce ntration between the NI Cs and 0 P EC . Structural 
c hanges in the NICs and the advent of comparative advantage 
i n favor of the NICs with th e gradual spread of te e hnolog y 
t o thes e countries have enhanced their international 
c o rn p e t it iv e n e s s in certain goods and sectors and have 
o pe n e d a way to inc r e ased economic transactions with oth e r 
d e ve lopin g c ountries. At the same ti me, these Newly 
I ndu s trializing C ountries' increased demands for oil and 
o ther Ric a rdian goods as a result of their rapid economic 
g r o wth and structural chang e might have contributed to the 
ri se of inter-South bilateral r e lations with OPEC 
co untri e s. 
0 n the other hand, demand-sid e e ffects may account for 
t h e c ont e nts of inter-South bilateral relations, 
pa rt ic ularly th e c oncentration of e c onomic flows between 
t he NICs and OPEC. The compe titive formation of relativ e 
pri c e for c e rtain standardiz e d goods and services 
o r i g i n a t i ng from the NICs and a greater level of income 
i n e 1 a s t i c i t y of demand for OP EC countries with th e ir 
ma s sive oil revenues following oil c risis mi g ht hav e 
induced such a concentration phe nomenon b e twe e n these two 
s p ec ial groups of developing countries . In other words, 
th e NICs could offer competitive prices, as a consequ e nc e 
o f changing comparative advantage a nd t e chnology, for those 
g o ods a nd services which OPEC countries needed. On th e 
o th e r hand, OP EC members could afford to pur c hase thos e 
68 
g oods and se r vices with o ut a n y fi n a ncia l co n s tr a int s w h ile 
l J 
o t he r de v e l o ping co untri es co u ld n ot . 
For a ll thi s ge n e r a l ac c o unt a b i lit y of int e r-So uth 
bi l a ter a l r e l a ti o n s hip s , h o we v e r, eco n o mic mo d e l s a r e n o t 
witho u t so me limit a ti o n s . T h e f ir s t co me s f r o m th e ir 
d e pend ence o n t he ' agg r ega t e ex pl a n a ti o n.' 1 nd e e d th e 
mod e ls a r e a bl e t o ma k e a q u a lit a ti ve p r e di c ti o n of th e 
dire c tio n, v o lume , a nd co mm odit y co mp os iti o n of eco n o mi c 
f lows , but o nly in th e agg r ega t e sens e . I f th e Third Wo rld 
c ou ntr ies a r e di sagg r ega t e d into s e t s of num e r o us dy a di c 
pai r s an d i f a pr e di c ti o n of a nd / or ex pl a n a tion for th e 
S pe C i f i C dir ec ti o n s of bil a t e r a l f l o ws f o r tho se dy a dic 
pairs i s n ee d e d, these pur e ec onomi c mod e ls los e th e ir 
theo r e ti ca l power . 
Fo r e xa mpl e , l e t us exa min e t h e d e ma nd-s id e e xplan a ti o n 
of i nt e r-So uth bil a t e r a li s m. I f th e pat t e rn o f tr a d e is 
de t e rmined b y d e ma nd simil a rit y , inc ome a nd r e l a tive pri ce , 
t he r e is no r e ason why the Middl e Ea st OP EC c ountri es 
imp o rt mor e g oods a nd s e rvi ce s fr o m the E a st As i a n 
c o untri es than e l se wher e . The r e i s a n a mpl e numb e r of 
c o u n tri es a round them ( I s r ae l, S p ai n, G r eece , a nd t h e 
Eas tern European countr ie s) whi c h ma int a in a s im i l a r 
e c onomi c structur e a nd d e mand t a st e a s we ll as a simil a r 
le v e l o f c omp a r a tive a dv a ntage a s th o s e of th e E a st Asi a n 
N I Cs . If th e mar g in of pri ce i s co mp e titiv e e no u g h 
b e twee n the E a st Asi a n NI Cs a nd th ese n e i g h b o r i ng 
c o untr ies , n o dis ce rnibl e ex pl a ntion i s po s s ibl e fo r the 
6 9 
larg e inflow of the East Asian goods into the Middle East 
O P EC c ountries . 
To ela b orate this point f urther , consider a 
hypothetical situation of demand curves as in figure 2 -1. 
While the price for a certain good is identical for these 
three demand curves , the quantity d emanded sharply differs 
from one curve to the other . Here economic variables 
(i . e ., comparative advantage and technology) determine the 
shape of the d emand c urv es . But the location of the demand 
curves , name 1 y quantity differentials, is largely 
determined by exogenous and non-economic variables such as 
distance, commercial policy, embar goes , and other political 
factors . In this diagram, the D11 -D 11 c urve reflects a 
hostile dyadic relationship such as that b e tween Saudi 
, 1 
I 
Ara bi a an d Israel. The D-D c urv e may indicate a neutral ,I 
I 
relationship such as b etween Saudi Ara bi a a nd Singapore. ' 
Finally , the D'-D' curve may be found in a very congenial 
and friendly dyad such as the relationship b etween the us 
14 
and Saudi Ar a bia. 
Figure 2 -1 
What is implied here is that there is no inf in it e 
substitutability of demand in the re al world . Various 
market imperfections , either caused by envi r o nmental 
factors or by the conduct of deliberate state policies, 
make it difficult to explain and predict the direction, 
70 
Figure 2-1: Demand Curves under Different 
Political Conditions 
D' 
Price D 
1: 
D" 11 
p ii 
, 1 
,,,,  D' ?'!  
I 
I 
I D 
I 
I 
" I 
q3 q2 
C\lantity ,, 
Readpated from Pollins (1983) p.30 
TO q 
v o 1 u me , and c o mm odi t y co mp osition of tr ade a nd capi t al 
flows pure 1 y by eco n o mi c var i ab l es . Thus, a n eco n o mi c 
ex pl a n a tion a l o n e does not fully cove r th e ca usal facto r s 
responsible for the rise of bil atera l economic 
c oncentratio n between the NICs a nd OPEC . 
Ano ther majo r limit a ti o n of econo mi c ex pl ana tions ste ms 
from their neglect of dynamic political factors as decisive 
determina nt s of the p a tt e rn of tr a d e a nd capi t a l flows . 
Alt h oug h co mp a r at ive a dvant age a nd t ec hn o l ogica l l evel are 
important variables, they n ee d further expla n a tion to b e 
p r ope r independent variables. As Balass a( l9 79) point s ou t, 
compa r a tiv e a dvant ages a r e not s t a tic, but dynamic. And 
this dy n a mi c nature of co mpar a tiv e ad v a nt age is not 
reshaped on ly b y c h a nging th e l e vel of t ec hnolo gy a nd the 
leve l of eco n o mi c development. Parti c ul a rly in cases of 
developing co untri es , th e n a tur e of st ate inter ve ntion int o 
the market as co ndition e d by th e s t ate o bj ec tiv es grea tly 
15 
influences the p a tt e rn of tr a d e a nd cap ital f 1 OWS ? F o r 
exa mple, the s tate i mp 1 e me n t a t i o n of various non-
discretionary mac ro polici es such as foreign excha nge 
policy, tr ade policy and th e r e lat e d t ariff a nd non-t a r iff 
barriers, and interest rat e poli c y a l so affec ts the 
pattern of trade a nd ca pit a l flows . Furth e rmor e th e sta t e 
ca n play a mor e d ec isive rol e in determining spec i fic 
econo mi c partners and co mmoditi es by providing private 
co mp a ni es inter es ted in a specific t a r ge t co untry or 
co mmodit y with a mix of vari o us discretionary incentives 
7 l 
\ such as tax benef its, technical and informational services, 
I 16 subsidies , financial supports etc. In so me cases the 
Pattern of trade I a nd capital flow and th e t e rms of market 
e ntry may be arranged by bilateral neg o ti a t ions b e tween 
I 17 governments invol Hv ee avily relying od n . p ure 1 y 
I e nog e no us conditie oc no sn  o am ni dc   positing the mark.et as 
the sole mecha nism of bi economic fl  1a 0t  We Sr  a , tl h ese 
eco nomic mod e 1 s of bilateral ism 
appear to Eail fully  
expl dyna1. a. mn ict  h e p roca cu esse ses s, and th e outcomes of 
bi 1 at eral eco nomic relations in general and those among the 
Thi rd World countries in particular. 
18 
Ecological Models of Bilateralism 
Explicit in economic models i ds emth aa nt d -supply - or 
Side the conditions effe  c nt es c esa sr ae r y and sufficient 
Eor th p a ttern of bilateral trade a nd e explanation of the 
Capital however, while s u pp 1 y -s id e f 1 ows ? In reality, 
e ffects policy adjustment and are subject to do mes tic 
Chan equally ing fe l, u enced by demand-s aide effects 
r e 
 
Var?1 It is qu0 i us exo varia b les . 
te 
non-economic genous 
capital are usu a lly 
that goods, services, 
and 
d if f 
ere . n ngt  ia tote  d th eir d ca oc ue n
o
o t
r
r r
i
y g io nf ,  a nd  1. 
the e 1 inf in it e ? As a way 
asticity of substitution is not 
Of 
com 1 conomic explanations, 
a number 
P e me nt i ng these we ak e
Of have 
ec and 
id
p eo ntified a on om.1 .sts litical scientists 
ec 1 en that dv i1 r.? ero cn tly 
0 o mg ei nca tal l o vr ariables 
Or n vc oi t l? ume and compol sr ie tc iot nly   affect the direction, 
Of 
trad Ne o n-economic 
and non-price 
and capital floWS ? 
7 2 
varia bl es S uch a s th e n a tur e of po li tic al, cultural, and 
historical ties and geographical distance may induce each 
buyer or seller to discriminate among goods, services, and 
capital in a particular market according to their country 
of origin. 
Distance : In discussing these ecological determinants, 
th e physical distance and the related transportation 
COS t 
is usually singled out as the primary variable. This is 
particularly so because transportation COS ts are usually 
assumed to be zero in conventional models of international 
trade. In fact, when a sector is marginally competitive, 
transport a tion COS ts do make a significant difference 
between marketing it or not (Roemer 1977:322). Certainly 
the closer, the more competitive. Thus, distance bet1Neen 
traders ma y have a crucial effect on the direction and 
magnitude of trade flows. In many cases, however, physical 
distance al one may not have such a crucial impact ? As 
Ki nd 1 e b e r g e r ( 1 9 6 4 : 1 5 ) has observed, s i nee transport a tion 
COS t S , even for bulky heavy machinery goods, amount to 
p e rhaps less than 2% of delievered value, they may be 
safely ignored by economists. 
Cons id er i ng this problem, Tinbergen(1962) and 
Linnenman(l966) expanded the notion of distance more 
comprehensively and excluded prices as a key determinant of 
19 
trade flows. To reflect the issue of dist a nce more 
realistically, they ca me up with a II gravity des i g n II which 
7 3 
a ttempts to loca te ' trade biases' affecting gross, 
bilateral flow of trade. In this model the trade volume 
and direction between any dyadic pair of countries have 
been perceived to be a function of size and geographic 
distance. Size indicated by national income is chosen 
because it reflects supply potential (for exporters) and 
market size and demand (for importers). On the other hand, 
geographic distance is operationalized not only by 
transportation costs but also by non-economic variables 
s UC h as political ties, shared colonial experiences and 
availability of a customs union. This gravity model was 
further developed by Parker(l979) and participants in the 
20 
SAR UM mode 1. In this model the size variable is further 
specified in terms of relative prices as well as income 
effects which are designated as the most important 
variables affecting the direction and magnitude of 
bilateral economic flows. As s u pp 1 e me n t a r y variables, 
historical, cultural, and political ties are incorporated 
into the model along with transportation costs and 
commercial policy. 
Zone of Influence and Hegemony: The conjunction of 
economic factors and distance variables was a major 
adv anc eme nt in explaining and predicting the patterns of 
trade and capital flows. Nonetheless, these 'distance' 
models gave their prime values on economic variables by 
treating non-economic exogenous ones as "dummy" 
21 
variables. Roemer(1977) attempted to spell out this 
74 
neglect by developing a notion of "sphere of influence". 
lo his words: 
(E)conomic distance or sphere of infl
uence 
factors- which include factors beyond tra
nsportation 
costs, such as historical and cultural ti
es between 
traders, the tying of aid, the set
ting-up of 
multinational subsidaries, and preferentia
l treatment 
of one country's exports for other reasons-
bias trade 
s: countries tend to market their weakes
t 
as follow
sectors of manufactures disproportionally
 in their 
sphere of influences. Moreover it is show
n that this 
biased pattern of trade cannot be explained
 solely by 
istance between traders, but must result in
 part from 
d
that are not economic in the narro
w 
causes 
sense (1977 318). 
The above statement indicates that market i
mperfections 
are the salient feature of international eco
nomic 
ansactions and that the trade biases result
ing from non-
tr
economic factors greatly affect the directio
n, volume, and 
composition of trade and capital flows. 
R o e me r ( l 9 7 7 : 3 2 2 -
 
323) identifies five major non-economic variables
 shaping
ries in 
the 
t
trade biases between a dyadic pair of cou
n
ic variables indicated by transportation addition to econom
costs. They are: communication channels represented
 by the 
siness and information connection, pre
ferential 
level of bu
tariffs and other forms of discrimination, 
aid policy such 
as conditional exchange of goods and services
 for aid 
given, multinational subsidaries and intra-firm tra
de, and 
finally consumer tastes shaped by historic
al and cultural 
22 
facto rs. 
ll 
The 
e
Roemer thesis of zone of influence' matches
 w
with various arguments advanced by the studen
ts of 
23 
de pend enc i a, world system, and power exchange theo
ries. 
75 
For e x a mple, it summarizes neatly Hirschman(l98l)'s idea 
on the political power basis of economic dependence in such 
a manner that politically powerful countries market more of 
their competitively weak sectors in areas where they have 
influence, for historical and political reasons, than they 
would otherwise. At the same time, this zone of influence 
thesis epitomizes the arguments raised by dependencia and 
world s ystem theorists. Colonial legacies and the 
resulting pattern of the peripheral countries integration 
into the international division of lab or led to a 
vertically structured hierachical relationship between 
former colonizers and th e colonized. This rigid vertical 
relationship mainifested i t s e 1 f i n f or ms of dependence-
dominance a nd the related unequal exchange between the two 
(Galt u ng 19 7 l: 89; Wallerstein 1979, Prebisch 1971; Stewart 
24 
1975; Frank 1980). The zone of influence' scheme, 
however, is not limited to a dyadic pair of the influencer 
and the influenced. To expand this notion a little further 
in terms of hegemonic leadership or world system 
25 
perspective, it helps to delineate additional systemic 
factors which affect or determine the patterns of trade and 
capital f 1 OWS ? The domination of financial a nd trade 
networks by the multinationals, the oligopolistic pricing 
of international shipping conferences (Yeats 19 7 2; Laing 
197 7 ), variable currency clearing arrangements tied to the 
core countries' currencies, and other marketing, production 
and financial barriers, are greatly shaped by the 
76 
L 
intenti ao tn  s and operational modes of influencer countries 
26 
the core of the global economic system. 
or hegemony perspective 
Th inis zone of 
fluence' 
understanding of 
provides us with ample insights for the 
international economic transactions. However, it is largely 
South where the 
limited to cases bet .,,ee n 
North and 
influe mn uch 
more 
cing and influenced is 
relationship of 
When applied to inter-South economic 
clearly demarcated. 
it appears to have very 
behaviors of developing countries, 
in
m teai rn -l Sy o ub the  cause the 
narrow implications 
is t re ate d as t r iv i a 1 a nd therefore 
relational di mens ion 
27 it is still possible to draw some 
Omitted. Nonetheless, 
bilateral 
by which the patterns of inter-S
gu oi ud te hl  ines 
First, the economic flows 
relationships can be examined. 
random dyad ai rc e  pair of developing countri
b ee st  ween a 
to a lack of 
channels of 
likely to be l o"1 due 
Second, the direction of 
com munic at ion and information. 
economic flows of developing countries is largely shaped by 
zones
the commonality t
 
ied to different of 
level of 
Shared colonial experiences between a pair of 
inf 1 ue nc e. 
as former British or F re nc h 
deve1 op countries suin eg  h  
higher level of economic 
Colonies a may promote 
they would otherwise. 
tra than ns actions between them 
les cs o ul nik tre iely s  for developing to 
Fina11 Y, it is 
ties with other developing countries 
develop their economic 
Inter-South bilaterain l itiatives.
s  olely on their o"1n 
more apt to be conditioned or determined by 
re 1 at i ons are 
corporations and/ or 
the role of multinational mediating 
I 
77 
L 
international f inanc ial institutions in terms of intra-firm 
trad e , intern a tion a l subcontracting, finan c ial recycle, and 
28 
information sharing. 
Political De t e r mi n a n t s : Only recently have politic a l 
sc ientists singled out the pattern of bilateral trade and 
ca pital flows a s a dependent variable (Pollins 198 2 ). 
Prior to this new trend, most political s ci e ntists tre a ted 
e conomic flows as an ind e pendent vari a ble to e xplain 
certain political phenomena, namely integration. A 
pioneerin g work a long this line was done by Savage and 
De u t s c he ( 1 9 6 0 : 5 5 l - 5 7 2 ) ? By postulating transaction flows 
as indicators of the level of integration between two 
countries, th e y asserted that the larger the trade over 
what would be randomly e xpected, the l a rger the relative 
29 
jl U1 
acceptance (RA), and the more integration between the two ,,, 
11 ,:'. 
I 
countries In the Savage-Deutsche mod e l, differentials in 
,,1 
,,: 
relative acc e ptance are explaine d by ec onomic 
(transportation and resources differences) and political 
(common cultural background, treaties, and coloni a l 
ex per i enc es etc ? ) f ac tors ( 196 0 : 5 5 l - 5 5 2) ? 
This model was further dev e loped by Russet(1967), who 
along with Savage and Deutsche, believed that the level of 
economic transaction flow can be a proper indicator of 
integration. However, he went much deeper in the sens e 
that he identified a set of background conditions affecting 
the level of economic transaction flows. Russet(l967:123-5) 
78 
suggested that cultural similarities, the nature of 
political bonds (e.g., converging or opposing) and the 
related external economic policies and geographic 
proximity have major effects on commercial choice in terms 
of partner and commodity. These cultural and political 
b ac kg round conditions continued to be sing 1 ed out as 
important fact ors influencing the pattern of economic 
trans ac ti o ns not only in the Deutche-Russet transactionist 
mode 1 but also in the functional and neo-functional 
30 
integrationist models. 
Instead of relying on these background conditions, on 
the other hand, Rosenbaum and Taylor(l975: 254-265) 
attempted to explain the patter n of economic relationships 
between countries from an alliance-system perspective. 
Specifically focusing on the pattern of interactions among 
de vel oping countries, they argued that relations vary 
according to association with different political 
subsystems and the dominant political system. By dividing 
the current international system in terms of intra- vs. 
extra- dominant systems and sub-systems, they asserted that 
developing countries belonging to the same dominant or sub-
system are likely to engage in more cooperation and thereby 
a higher level of economic transactions ? For example, 
North Kore a and Brazil are very unlikely to engage in a 
high level of economic relations because they belong to the 
different dominant systems as well as sub -s ys t ems , North 
Korea being an ally of the Eastern bloc located in the East 
Asian subsystem, while Brazil an ally of the Western bloc 
79 
Jl 
in the S out h America s ubsytem (1975: 253-5). However, 
th ey postulated that there has recently been an increase in 
the quantity and visibility of South-South relations and 
that th is comparatively new phenomenon is the result of a 
de c 1 i ne in great-power capabilities and the loosening of 
the a 11 i a nc e system which in turn allowed developing 
countries to re-interpret their interests and policies and 
32 
to take initiatives to pursue such interests. 
While Rosenbaum and Taylor e mp has i zed system -1 eve l 
political impacts on the pattern of trade and c
apital 
flows, Polachek (1980: 550-78) and Arad and Hirsch(l981) 
tried to examine the statistical relationship between 
co nflict or hostility and trade patterns ( trade creation 
a nd diversion / trade level) between a dyadic pair of 
33 
countries. For example, Polachek's hypothes i s is that " 
dyads with the most trade are expected to exhibit the least 
c o of l i ct ( and most cooperation)" and vice versa (1980: 
5 60). And he gave the following rationale for this 
f ormulation: fl - -G reater levels of conflict make conflict 
more difficult. Reasons include retaliatory t a riffs, 
quotas, e mbargoes, and other trade prohibitions. Conflict 
thus raises the cost of trade, thereby maki ng at least one 
of the countries worse-off (in a welfare sense ) ? The 
implicit price of being hostile is the diminution of 
welfare associated with potential trade losses."(1980: 560) 
Explicit in the above argument is that the l e vel of 
conflict and cooperation directly affects the terms of 
80 
trade ? 
Combining some of the above arguments, Pollins (1982; 
1983) under the Globus Project of the Berlin Science Center 
recently attempted to model bilateral trade flows in six 
commodities between t went y five countries. His basic 
co ntention was that II dyadic as we ll as historical, 
c ultural, geographical and perhaps contractual relations 
will lead each buyer to discriminate between g oods in a 
particular mark e t according to t he i r count r y of origi n 
(1982:6-7)." Specifying each bilateral trade flow, Pollins 
(1983:13) identified five major political determinants: 1) 
the nature of external behaviors measured by friendly or 
hostile actions of one country toward another, 2) the 
general political affinity or emnity between two countries, 
3 ) co-membership in an economic union such as the EC, 
LAFT A, or COMECON, 4) 1 i ng U i St i C , cultural, or former 
colonial ties, and 5) geographic distance separating 
34 
them. 
Critique: The ecological or environmental explanation 
of bilateral economic relations, which comprises a wide 
range of divergent and convergent assertions, provides u s 
with a set of implications for the systematic und e rstanding 
of inter-South bilateralism. First, the di rec ti on of trade 
and capital flows of devel o ping countries is more likely to 
be shaped by the nature of their ties with developed 
c ountries or the international economic system. Given th e 
existing zones of inf 1 ue nc e and the resulting pattern 
81 
of a hi e r ac hie al North-South relationship, de ve 1 oping 
co untries tend to involve themselves in e conomic 
transactions more with developed countries than with other 
developing ones. Second, the degree or extent of inter-
so uth bilateral relations appears to be influenced by 
ge ographic distance, political similarity, and SOC i O -
c ultural homogene ity. Usually these factors in commonality 
iead to regional integration schemes such as customs unions 
and free trade zones under which bilateral ties are 
promoted. The volume of trade and capital flows into other 
de ve 1 oping countries located beyond certain regional 
co ntexts is expected to be low due to various institutional 
1,, 
I 
a nd policy barriers. Third, the pattern and content of I 
these inter-regional trade and capital flows is affected by 
nature of external al 1 i a nc e relations and the 
intervening and me diating roles of core countries or their 
c:rans national actors such as the multinational 
c orporations. 
Viewed from this perspective, the pattern of economic 
interactions between t he Ea s t As i an NI Cs and the Middle 
Eastern OPEC countries, the primary unit of inquiry in this 
study, should b e neither convergent in direction, nor high 
in volume. It is not only because these two groups of 
countries are geographically far away, but also because 
the r e is a very low degree of mutual complementarity in 
b ac kg round co nd it ions ? These two regions have h a d 
different historical and colonial ex pe r i e n c es , and lack 
82 
s o c i o -c u 1 t u r a 1 homogeneity (on e belonging to the Chinese 
socio-cultural sphere and the Japanese zone of influence 
and other to the Islamic culture and the Franco-British 
35 
zone of inf 1 ue nc e ) ? At the same time, the level of 
transaction and of mutual knowledge is extremely low. No 
previous or current attempts to set up an integrative 
scheme can be found. There is a low degree of political 
similarity between these two groups of countries as they 
are constituted by various heterogeneous countries ranging 
from traditional monarchical regimes to socialist 
revolutionary regimes ? Furthermor e , these two regions 
maintain loosely defined a 11 i a nc e con ne c ti o ns , and the 
level of conflict and cooperation in the direct terms is 
totally non -e xis t e n t except for some diplomatic 
entanglements around the Arab-Israeli conflict. Ag al n 
given this ecological consideration, the level of economic 
interaction between the East Asian NICs and the Middle 
Eastern oil producers should have been very low or non-
existent, which is quite contradictory to the empirical 
findings provided in Chapter One. 
This grave incongruity of ecological models with actual 
reality is largely a function of their reliance on 
aggregate data analysis based on static cir c u ms t anti al 
c o nd it ions ? Ecological variables may offer a set of 
parameters c o nd i t ion i ng the pattern of trade and capital 
flows among developing countries, but not causally 
determine their direction, volume and composition. These 
e nv i r o nme n t al variables are simply a set of input factors 
83 
to be translated into actual decisions and behaviors of the 
private businessmen and governmental officials. Thus these 
variables should be interpreted and re-interpreted within 
specific contexts of countries involved in dyadic 
interactions ? To 1 oc ate the causes, processes, and 
c o ns e q u e nc es of dyadic intreconnectedness, "one must 
examine pairs of states and avoid the ecological fallacy" ( 
Holsti 1981: 28) of arguing that sys t em properties or 
circumstantial conditions pervade the relationships in all 
dyads. Depending on the internal political and economic 
conditions and on the nature of the st ate and private 
business' objectives, external ecological variables may 
turn out to have quite different policy outcomes ( i . e ? , 
direction, volume, and composition) that cannot be properly 
ex plained by the present models. Indeed as in case of 
economic models of bilateral relations, the ecological 
perspective falls short in coming to terms with a set of 
dynamic factors directly responsible for the formation, 
maturing, and decline of inter-South bilateral relations. 
Entrepreneurial Uynamism and Bilateral Ties 
What is apparently 1 ac king in these economic and 
ecological perspectives is an adequate identification of 
the actual agents which shape the process and outcomes of 
bilateral ties. Sup ply and demand-side effects and 
ecological variables are necessary but static conditions 
84 
whose b ilateon the natur e of 
ral ties can be 
impact 
perceptions, 
understood only in terms 
of images, 
and a
d ce tic oi nsi sons ,  of the actors involved in bilateral 
or 
econ to im esic ,  whether they are private entrepreneurs 
36 actors, 
state Despite the importat nr ca ed  e or fs  . t hese 
both economic and ecological expla o on r mat ii t ons ignore 
in dex ire
volume, and 
their role plaining
the ction,  
comp Wos hi it li eo  n i no  f e cb onil oa mt ie cr  al economic flows. 
that they are rational 
mode 1 s , such actors are ass urned 
countries, ecological 
Profit all maximiz toer  s common 
a partial 
m fao cd te ols r  as discussed in termst  reat them as 
of communicao tit f
o
 n channels 
or business 
he level 
conn ections ( Roemer 1977). 
the role of these actors, In reality, however, 
is very important. 
Particularly private entrepreneurs, 
role in exp 1 a in i ng the Le i be ns t e in emphasizes their 
Pattern of market transaction by st ating: 
If all inputs are marketed and their prices are 
known, and if all outputs are marketed and their prices 
are known and if there is a definite production 
function that relates inputs to ouputs in a determinate 
way, then we can always predict the profit for any 
activity that transforms inputs into outputs. If net 
Profits are positive, then this should serve as a 
signal for entry into this market. The problem of 
marshalling resources and turning them into outputs 
appears to be a trivial activity. From this point of 
View it is hard to see why there should be a deficiency 
of entrepreneurship? The answer is that the standard 
competitive model hides the vital function of the 
entrepreneur (1968: 72). 
this statement is the importance of th e Explicit in 
entr defici e ncies. In epreneur in compensating for mar k et 
l 85 
the dynamic world of market exchanges, as a matter of fact, 
the re is no such thing as perfect information on a set of 
demand and production functions and of prices. 
Imperfections and uncertainties prevail. It is much more 
so for the cases of developing economies and of market 
exchange re 1 at ions hi ps between them. The markets of 
de ve 1 oping economies provide very little information of 
this sort, and the perception of market opportunities and 
acting and deciding thereupon becomes more than a trivial 
task. Emphatically put, such entrepreneurial functions may 
bee ome the c r UC i a 1 factors in reshaping the direction, 
fill 
1111 
volume, and composition of bilateral economic flows in the 
strict sense. 
Theories of entrepreneurship have been developed within 
the framework of issues covering economic development but 
so far no theoretical attempts have been made to apply them 
37 ,,, 
' 
to the study of bilateral economic flows. Given the 
centrality of entrepreneurship in an integrated model of ,,, 
economic developemnt ( Schumpeter 1934: 3 4), however, it iii 
appears possible to apply theories to the object of our 
inquiry. According to Schum peter, a n e n t re pre ne u r i s a n 
innovative organizer of "new combinations of means of 
production" (1934: 34) whose major functions are: 1) to 
introduce a new good, 2) to open a new market, 3) to assure 
a new source of supply of raw materials or half -
manufactured goods, and 4 ) t o imp le me n t a ne w or g an i z at i on 
of an industry such as the creation of a monopoly position 
or the break-up of a monopoly position (1934:66). 
86 
In 1 i ne with Schumpeter, but in more c ompre hens ive 
manner, Kilby (1971) developed four categories and 13 roles 
to be performed by entrepreneurs. The first category is 
related to the exchange relationship of entrepreneurs whose 
major functions inc 1 ude: the perception of market 
opportunities, gaining command over scarce resources, the 
marketing of the product and responding to competition, and 
the purchase of inputs. The second entrepreneurial 
function comprises both the external political 
administration capabilties dealing with the public 
bureaucracy, concessions, licenses, taxes and so forth and 
intra-firm management of human resources and supply and 
consumer relations ? The management and control of 
I 
financial and production matters constitutes another 
I 
" 
important category of entrepreneurial functions. Kilby 
identified the tee hnol og ic al function as the fourth 
category which involves acquiring and overseeing the 
assembly of the plant, industrial e ng i nee ring , upgrading I' 
ii 
processes and product quality, and the introduction of new 
production techniques and products (1971: 27-28). 
Although Schumpeter's and Kilby's descriptions chiefly 
concern the roles and functions of private entrepreneurs in 
the domestic ec anomic setting, they offer rich 
implications for the study of inter-South bilateralism. For 
example, a private entrepreneur's ability to perceive and 
monitor new markets in other developing countries and to 
come up with new products and new processes of production 
87 
can significantly affect the direction, volume and 
composition of bilateral economic flows ? This is 
particularly true given the fact that most developing 
countries suffer from entrepreneurial scarcity and there;by 
from a low level of market and product information exchange 
(Hirschman 1958: 16-19; Myint l 9 6 6 : l 7 J ; Mei e r and Baldwin 
19 5 7 : 29 9). If private entrepreneurs in a dyadic pair of 
countries involved in mutual market exchange are competent 
enough to monitor information on new demands more 
effectively and to develop corresponding products, the 
level of bilateral ties between the two countries should be 
Ill 
Ill 
higher than it would otherwise be. Thus the monitoring 
function of private entrepreneur in a bilateral setting is 
one of the crucial factors influencing the nature of dyadic 
economic transactions between two countries. 
The perception and monitoring of new markets by itself 
may not adequately promote bilateral ties. Perception 
should be translated into specific market acquisition. At ,,, 
I 
I' 
I' 
th is point the second important entrepreneurial function 1/ i 
comes into play in the context of inter-South bilateralism: 
market pe net ration and setting ~ of sol id business 
38 
connection. In many cases, new markets in developing 
countries are not easy to develop by other developing 
countries' fir ms. This is true either because local 
businessmen under the umbrella of import protection or tied 
to multinational f i r ms f r o m t he c o re countries maintain 
monopoly or oligopoly market structures for certain 
88 
c ommodity markets or because consumers as a whole may have 
a bias against goods and services originating from other 
developing countries. In this sense, effective market 
penetration into other developing countries, in addition to 
the timely monitoring of new markets, is determined by the 
eventual shaping of the nature of bilateral ties between 
the two countries. In other words, breaking-up the 
existing monopoly or oligopoly structure, transforming the 
consumer or buyer's image of goods and services to be sold, 
and consequent 1 y inc re as i ng the market share e merge as 
important tasks for private entrepreneurs. ill Iii 
This market penetration task involves a number of Ii! 
,11 
ilf 
entrepreneurial functions s UC h as flexible price-
39 
setting, aggressive corporate strategy, co-opting lac al 
bu ye rs or agents in terms of side-payments, kick-backs, 
persuasion, and a mix of other tactics to gain market entry 
40 
and to increase market share. However, this supp 1 y -s id e 
unilateral approach to new market alone does not solve all 
the problems. Above all, this unilateral approach should 
be matched with the profits for or other motivations of 
the demand-side entrepreneurs. The complementarity between 
these two types of entrepreneurs should be more than that 
41 
which can be found in an auction market. It should be 
enduring and solidified in terms of a tight business bond 
between the two in order to promote continued business 
c o o pe r a t i on in other market areas. In addition, these 
business ties should be correct in the sense that supply or 
89 
demand-side entrepreneurs find well-placed and efficient 
counterparts in their business transactions ? This is 
particularly so given the fact that in the developing 
countries' market context information is very u ne ve nl y 
distributed among priva t e entrepreneurs and correct 
business c on ne c t ions are essential to the ti me l y and 
effective acquisition of such information and acting
 on 
42 
it ? 
Effective market penetration and the establishment of 
firm business connections are in turn contingent
 upon 
en tr e pre ne u rs' ability to deal with governments o
f both 
sides. This political management capability constitutes
 
the third important element of private en tr e pre ne u rs hip
 
affecting the level of bilateral economic flows. In most
 
de ve loping countries, governments t e nd to mono po 1 i z e all 
the nee es s ar y information on new markets or new demands 
s i nee a great portion of market demand comes from the 
43 
public sector. In addition, governments directly or 
indirectly are involved in the regulation of the marke
t in 
general and of the behaviors of private entrepreneurs in 
particular by issuing licenses, imposing taxes, and m
aking 
concessions etc. Or in many cases, governments themselv
es 
ecome traders in terms of public enterprises. Given thes
e 
b
crucial roles of governments, private entrepreneurs should 
know how to handle the bureaucrats in charge not only to 
tap new market information but also to ensure the smooth 
f u nc t i on i ng of market entries, payments, and other 
necessary ( or unnecessary) regulations. In many c ases, of 
90 
c ourse, 1 oc al busine ss partners handle these domestic 
problems. However, for new market demands which emanate 
from the state authorities for large scale infrastructure 
projects in the service sector such as the construction of 
roads , dams, ports and schools, s up p 1 y -s id e private 
en tr e pre ne u rs must directly enc ou nte r government a 1 
officials in order to settle any possible business 
e n t a ng le me n ts ? 
This may be done through lawfully established channels 
as in the advanced industrialized countries. Often, the 
relative position of supply-side entrepreneurs may be 
enhanced vis-a-vis host governments by diplomatic support 
of the investors' governments. In reality, however, these 
two options are rarely workable in the context of 
de ve 1 oping countries. More aggressive cooptation and 
covert persuasion are needed to buy " official favors" from 
host governments. In so doing, the deployment of vari9us 
non-conventional means of en tr e pre ne u rs hip bee ome s 
essential from time to time. These often include bribery 
and side payments of all sorts. In "dependencia" jargon, 
supply-side entrepreneurs must set up a "tri-pe" coalition 
with the host gover n ment (or state) and local counterparts 
to initiate market penetration and to expand market share 
44 
( Ev ans 19 7 9). Vie wed from this perspective, the 
political management capability of both e n tr e pre ne u rs can 
be very critical in the final shaping of the direction, 
volume and co mposit i on of bilateral economic flows be t wee n 
9 1 
any dyads ? 
This private entrepreneurship approach to the study of 
bilateralism comp 1 e men ts the economic and ecological 
models in a very important way. By placing entrepreneurial 
f u nc t i o ns at t he c e n t er, it activates the static causal or 
b ac kg round conditions and helps us to understand the 
pattern of bilateral economic flows more dynamically. 
When private entrepreneurs monitor or perceive new market 
opportunities (i.e., demand -side effects ) and decide to 
penetrate these markets, t hey must rationally assess the 
organization of supply-side capabilities and evaluate the 
ecological variables. In this sense, private 
entrepreneurs become integrative monitors, organizers and 
performers configurating these three clusters of variables 
(i.e., supply-, demand- side, and ecological). For 
example, if Northern industrial countries raise tariff and 
non-tariff barriers, private entrepreneurs will seek 
markets in Southern developing countries where protective 
barriers are low and various incentives are provided. At 
the same ti me, if their home countries are on the verge of 
conflict with their host countries, privat e entrepreneurs 
will pull out of these markets and diversify into other 
markets where demand, supp 1 y, and e co 1 o g i c a 1 var i ables are 
more favorable. The entrepreneurial pursuit of profits 
then plays the crucial role in determining the nature of 
bilateral economic flows. 
Indeed focusing on private entrepreneurship explanation 
is a great theroretical advance for the study of inter-
92 
South bilat e ral ism. Growing protectionism and tightened 
business opportunities in North, the opening of new markets 
in selected developing countries such as OPEC, and th e 
increase in supply capability on the part of the NICs may 
have pushed private entrepreneurs in the NICs into OPEC 
markets. As a result, it may be expected that bilateral 
economic ties between OPEC and the NICs should be high. 
In reac hing this conclusion, however, one caveat is in 
order. The approach has not taken into ace ou nt the 
relations hip between private entrepreneurs and the state. 
In a laissez-faire market setting, private entrepreneurs I I 1 
I 
may pursue whatever they want. However, where mixed 
economies are involved as in the majority of developing 
countri e s, the private sector cannot make independent and 
I' 
autonomous decisions ? They are largely constrained and 
their decisions filtered through the objectives and 
preferences of the states on both sides of demand and 
supply. On the supply side , the private sector in the 
I , 
developing countries, especially in the e xternal sector, is 
weak and fr ag i 1 e in terms of finance, organization, 
management and industrial capability. Unless g o v e r n me n t s 
bee ome directly involved in facilitating these factors, 
the re by reducing production COS t S a nd enhancing 
international competitiveness, the private sector cannot 
45 
effectiv e ly penetrate the desired markets. 
In addition, there is a growing tendency to politicize 
economic flows between a dyadic pair of countries who s e 
YJ 
r- e ac h e xt e nd s b e yond the pr-iv a t e sector . Political 
co ncessions, bar g ains , and advantages emerging out of the 
linkage between e conomic and political issues affect the 
level of t he pr iv ate sec t or ' s s u cc e s s 1? .n certain markets. 
An additional missing e 1 e me nt in the pr-ivate 
e n t r- e pre ne u r- i a 1 nlod el is the f ac t t1l at the state's direct 
i n v o 1 v e me n t in trade and capital transfer is ever 
incr e asing . Tod a ys not o nl Y s oc i a 1 is t s t ates but also 
c apitalist developing as well as developed states directly 
e ng age in the actual exchange of goods and services by 
determining pr ice a nd volume or- by specifying 
d e s t i n a t i o ns ? Faced with these weaknesses and defects, we 
need to develop a more viable theory of inter -S outh 
bilateralism. 
Toward an Integrated Theory of Bilateralism: 
The State Entrepreneurship Perspective 
The three perspectives described in the previous 
sections , namely th e economic, ecological, and 
e n tr e pre n e u r i a 1 models, a r e not mutu al l y exclusive , but 
supplement each other in explaining the phenomenon of 
bilateral economic f 1 ows ? Diagram 2-1 is a schematic 
presentation of such an integrated model which is composed 
of four modules: demand, supply, ecological, and 
en tr e pre ne u r i a 1 . A basi c theoretical assertion which can 
b e deriv e d fro m this mod e l is that the pattern of bilater-al 
economic ties is a function of the level of the 
94 
c om p 1 e men tar it y in demand- and s u p p 1 y -s i de effects and 
ecological variables a nd of the nature of the private 
entrepreneurship involve-d . 
Diagram 2 -1 
As we have already noted, this way of conceptualizing 
the empirical universe (i.e . , inter-South bilateral ties) 
entails a serious theoretical and empirical problem. The 
problem comes from the inability of these four variables ( 
demand, supply, ecological , and private entrepreneurial) to 
qualify as the appropria t e ind e p e nd e n t variables . In 
order for these variables to e xplain or predict the 
direction, volume, and composition of bilateral economic 
f 1 OWS, they themselves need to be explained by so met hi ng 
else . 
For example, the supply-side module is composed of 
three su b -modules : price determinants, non-price 
determinants, and technological det e rminants . None of these 
deter minants are, however , endogenous to the market and 
require no further explanation . The price determination 
(production cost and extra - firm policy factors) itself is 
shaped by t h e nature of state intervention ranging fro m 
the direct or indirect control of labor, capital, and 
pu b lic u tility costs to a set of public policies s UC h as 
95 
Di a gram 2- 1 
Exi sting Model s of Bilateralism: 
A Schematic Integation 
Direction/ 
Volume/ compo-
sition 
Price Determinants 1 Demand -determinant s 
(Production Costs/ 
policy factors) Ent repreneu rial 
(rclc1tivr p1?icr / 
Dynamism nati onal income size / 
cons  um e r u, s t e s ) 
Non-price determi-
nants (conmodity Policy Factors (tariff 
factors/ market Supply-side ~IL Demand-side & non - tariff policies / c 
factors) --+--? Effects Effects -----exchange rates/ administ - ?~ 
rative factors) 
Technological deter- Inte rnational market 
minants ( administr- conditions ( number of 
ative/ R & D / man- entry / level of 
power-skill capability) substitutab ility / 
Ecological Effects price compet i tiveness) 
i 
distance 
political-cultural 
-linguistic si milarity 
alliance pattern 
customs union/ regional 
economi c integrative schemes 
trade, foreign e xchange, and other macro-economic policies. 
Non-price and technological sub-modules are also subject 
to similar kinds of state i ntervention. Thus without 
c 1 ar if yi ng t he n a t u re of s t a t e i n t e r v e n t i o n v i s - a -v is the 
supply-side mod u 1 e, the latter cannot properly qualify a s 
an explanatory variable. The same can be said of the other 
three modules as were noted in the previous section. 
The important point here is that the afore mentioned 
four variables do not causally determine the nature of 
bilateral economic flows by themselves. They serve as 
nee es s ar y conditions to the analysis of inter-South 
bilateral relations (with a partial exception of private ?1,,114  
46 
11 1 
entrepreneruship) whose explanatory contents can be 
meaning f u 1 only in relation to the nature of state 
intervention revealed in specific c a ses of bilateral 
1 ' 
economic ties. To put it differently, the basic theoretical , , 
I 
I 
contention to be explored in this section is that inter-
South bilateralism can be better explained by carefully 
J. , 
examining the nature of state strategy or e n t re pre ne u rs hi p 
deployed which is based on the state's careful monitoring 
and rational calculation of changing market conditions, 
non-economic circumstantial constraints and opportunities 
and on the effective utilization of private 
e n t re pre ne u rs hi p to accomodate the state objectives. To 
carry this point further, it may be argued that the rise 
and e xpa ns ion of inter-South bilateralism is neither a 
natural extent ion of economic interdependence between a 
96 
dyadic pair of countries nor the deterministic outcome of 
the nature of these countries' integration into the 
international division of labor. 
Why this concern about state objectives? What is the 
rationale behind organizing the state as the primary unit 
of analysis in the study of inter - South bilateralism'? What 
characteristics make the state in question so central to 
our present inquiry? Wasn't the state downgraded as one of 
many competing actors on domestic and international 
political see ne with the recognition of the spread of 
47 
comp 1 ex inter de pend enc e ? Or to borrow another argument, 
1 I 
11j 
is n' t the state simply a mere reflection of what is going 
on in the system, whose policy outcomes are wholly dictated 
by the internalization of systemic factors (e.g., logic of 1:' 
49 I? 
1?1 
world capitalist system)? pi 
My assertion is that the state is not merely a concept I' 
I' 
whose role is determined by dominant class interests tied 
to the international division of labor, nor can it be 
placed along a continuum of tiny domestic and international I, 
actors such as interest groups, companies, and labor 
unions. As Krasner (1978:33) succinctly argues, the state 
as an autonomous actor pursues goals associated with the 
general interest of the society. This goes beyond the 
Smithian minimalist vision of the state whose functions 
are limited to providing collective goods and 
infrastructures ( neutral administrative, institutional and 
physic al) enabling the market to function. Whether it 
relates to power, stability, welfare, or security, the 
97 
state as an autonomous realm of public authority creates 
and maintains national or public interests that cannot be 
reduced to the narrow interests and goals of any group or 
coalition ( Stephan 1977 Kr as ne r 19 7 7 Smith 1979; 
Nordlinger 1981). 
Nor is the state " an executive committee for 
domination by ruling class" as ins tr u men ta 1 is t Marxists 
40 
c laim. In her recent study of macro social change in 
China and Russi a, Skocpol (1979) argues that "any state 
first and fundamentally extracts resources from society and 
deploys these to create and support coercive and 
administrative organ i z at ions" (1979: 29) which in turn 
e nable it to act against the preferences and wills of the 
most powerful societal actors. In her view, the state is 
f ar from being absorbed into society and maintains a more 
fund a men ta 1 interest than that of the d o minant classes. 
50 
Ev e n f o r s o me Marxists, this instrumental vision is 
flatly rejected. Presenting a new concept of the 'relative 
autonomy' of the state, Poulantzas(l974) a sserts that the 
state in the capitalist mode of production has an objective 
function to perform in manipulating social cohesion so that 
capital accumulation can proceed unhindered. The overall 
capitalist system needs 'autonomy' of the state in order to 
handle various contradictions inherent in the system in a 
more flexible and adaptable manner. Yet its autonomy is 
relative in the sense that the basic 'template' or socio -
economic context of the cap it a 1 is t mode of production 
98 
limits the par a mete rs of variation in state policy 
formation. In other words, capitalism is neither self -
regulatory nor self-sufficient. Its characteristics are 
manifested in terms of successive contradictions and 
c rises. Without adaquate st ate intervention, these 
c o n t r ad i c t i o ns and crises weaken the legitimation of the 
state, threaten the v e r y f o u nd a t i o n of the capitalist 
syst e m and interrupt the accumulation process. In this 
sense the state can function on behalf of capital~ if 
it can equate the needs of capital with the national or 
public interest and secure popular support for measures 
I 
1j 
that maintain these conditions necessary for accumulation 
14 
while respecting its private sector (Offe 1975; Offe and "ii  
Range 1 9 7 5 ) ? 
For all the theoretical differences and the alleged 
epistemological incommensurability of the above critiques 
of the conventional notion of the role of the state in the 
51 
capitalist system, they share a common tone in reaching 
the following set of assertions: 
1) The state has its own autonomous objectives and 
preferences which could either coverge with or diverge 
from those of the social forces. 
2) The state ie endowed with a set of intrinsic and 
autonoaous capabilities described as insulative ( Krasner 
1977), extractive (Skocpol 1979), regulative or balancing ( 
Poulantzas 1974; Offe 1975; O'Connor 1974), and 
facilitative or accumulative ( Hirschman 1979, Frank 1980, 
Baran 1956) in translating its objectives and preferences 
into authoritative policy outcomes and implementing them. 
3) The state's preferences, decisions, and actions 
are, however, not totally free from a set of interactive or 
structural constraints. The state's behavior is constantly 
conditioned, if not determined, by internal and external 
constraints. 
99 
Although this way of conceptualizing the nature of the 
st ate derives from public and foreign policy debates in 
52 
advanced industrial countries, it finds a convenient 
theoretical application in the case of developing 
countries. Relatively spe aking, the state in developing 
countries has much clearer objectives and preferences or at 
le as t a stronger ne c e s s i t y f or articulating them than 
developed countries mainly because of situational 
imperatives. Economic backwardness, ethnic fragmentation, 
external and internal fragility, and chronically pervasive 
distributional i ne quality in developing countries shape 
the state's objectives i.e. , growth, integration, 
security, stability, and redistribution re s pe c t i v e 1 y ) ? 
Preference ordering out of this matrix of objectives is 
also done more discernably since the ordering itself is so 
closely and explicitly tied to the legitimation and the 
SJ 
survival of the state. 
Second, the s t ate i n de v e 1 oping countries, defined 
he re as public authority and its occupants whose core is 
54 
executive authority or political leadership in power, 
appears to take more autonomous dee is ions and actions than 
in advanced industrial countries because of the enormous 
concentration of power. Viewed from Myrdals' observation of 
hard and soft states in developing countries, it could be a 
55 
controversial argument. From an empirical point of 
view, however, the structure of public authority in 
developing countries represents concentrated power, 
100 
s pr i v a t e -c i v i 1 society, and is ac
tive 
dominate
ventionist rather than neutral and arbitra
tive. This 
inter
is so either because the authoritarian and
 coercive form 
 easily allows the "statization" of
 society ( 
of governance
O'Donnell 1974), or because of the hi
storically and 
ally structured concept of political
 community which 
cutur
f ac i 1 it ates s C h power concentrat
ion, as can be seen in 
U
idea of organic corporatism (Stephan
 1977). 0 r it may 
the 
be due to situational imperatives s
uch as the nee es sit y 
for rapid growth or radical redistri
butive reforms both of 
which require the heavy centralizati
on or monopolization of 
56 
. 11 
coercive power and resources in the han
ds of the state 11 
On this aspect of the state's role 
in developing countries, 14 
ti 
11 
Tony Smith provides a concise descr
iption: 
te power must be both concentrated 
and expanded 
Sta " 
n each case 
in a complex process that will depen
d i
n specific configurations of s
ocial forces. 
o rent 
Different regimes will choose to p
romote diffe
ariety of 
sectors of their populations, and
 a v
itical structures may be used t
o the same 
pol  
functional ends. But the final produc
t must be a
apparatus that can effectively knit to
gether 
state 
 social forces under its jurisdict
ion, and 
the
 future growth (1979: 281 my emphasis)
. 
provide for
namely th e 
The two characteristics listed 
above, 
l of state pref e re nc es 
and power 
autonomous re a m 
n e xecutive authority, in turn
 are apt to 
c once n t r at i on i
 state in developing countries more
 interventionist 
make the
nomy. Rather than 
vis-a-vis the market and the nation
al eco
g the market untouched as in a clas
sical lassez-faire 
leavin
s depoliticizes it 
setting, the state politic izes as well 
a
101 
to serve th e state objectives as they are perceived. When 
rapid economic growth is perceived to be a crucial 
political objec ,tive, the state attempts to depoliticize 
and insulate the market and private sector from the immense 
s wi r 1 of competing social forces. On the other hand, if 
the pursuit of rapid economic growth bee omes a 
destabilizing force undermining the legitimacy of the 
state, the state may politicize the market and the national 
economy in terms of bargaining and concessions so as to 
e nha nee equity and redistribution (Hirschman 1979; Olson 
1964; lllchman and Uphoff 1969). In this sense, unlike most 
advanced industrial countries, developing countries lack a 
clear demarcation between the state and market. This 1 ac k 
of the clear division of labor between the state and the 
market, which might be a reflection of relative weakness of 
the private sector, tends to place the state in the 
position to command, coordinate, and tame the market and 
57 
the national economy as it feels necessary. 
This interventionist nature of the state offers an 
important implication for our inquiry. That is, foreign 
economic relations in general and inter-South bilateral 
ties in particular are subject to the intentions , 
calculations, and the decisions of the state. This 
inc re as i ng state intervention in external economic 
relations is well summarized by Zysman: 
Nation states increasingly act to control and 
direct trade, cond u cting exchanges and directly 
influencing patterns and terms of exchange, rather 
10 2 
than simply maintaining a system for private trade. 
These direct and political arrangements have moved 
the state to the center of the stage (1977: 265). 
It is from this observation that we come to an 
assertion that inter-South bilateral ism is largely a 
function of foreign economic policy of the state. Of 
course, this is not to deny the essential role played by 
private entrepreneurs in shaping the nature of bilateral 
economic flows. As disc us s ed earlier, they are an 
important agent? but not an exclusive one. Furthermore, 
the scope, direction, and mode of their business conduct in 
the bilateral setting can be understood only in relation 
to the nature of foreign economic policy pursued toward a 
specific target country and in a given ti me framework. 
This is mainly because their perceptions, dee is ions, and 
actions in choosing partners and commodities are filterd, 
managed, and directed by the state authorities especially 
o I? 
in the case of developing countries. 
The above discussion now helps us to identify a set of 
research tasks in 1 oc at i ng independent variables 
accountable for the rise and dee 1 i ne of inter-South 
bilateralism. The first task is to investigate the 
variables affecting the nature of foreign economic policy-
making in a given country and its relationship to the 
choice of inter-South bilateral ism. The task of 
elucidating this cluster of variables may be done by 
identifying the following factors: 
First, what are the internal and external c ond it i ans 
l O 3 
r 
affecting foreign economic policy-making? More specifically 
what kinds of s ys t em i c cons t rain ts and opportunities do 
decision-makers face and what are their domestic 
cons e q ue nc es and how do they affect the structure and 
process of foreign economic policy-making? 
Second, these internal and external conditions are not 
straightforwardly translated into policy outcomes or 
strategic choices. They are filtered through images or 
perceptions of authoritative decision-makers with regard 
to a set of st ate objectives situationally defined and 
the availability of domestic resources and strategies to 
cope with the constraints and to exploit the opportunities . 
This in turn requires us to examine the d e c i s i o n -ma k i ng 
structure (i . e., perception, as s es s me n t , and strategic 
choice) which le ads to the selection of inter-South 
bilateral policies vis-a-vis a specific target country. 
Thi rd, although state autonomy has been assumed, the 
decision structure leading to the choice of inter-South 
bilateral ism is not totally free from domestic political 
constraints. The domestic political structure conditions, 
g not determines, such a decision structure. Thus, it is 
nee es s ar y to discuss the pattern of power distribution 
among major social forces and to trace the nature of the 
relationship between their interests and the state's choice 
of an external partner in a bilateral setting. 
The second major task is to delineate the nature of the 
state-business relationship in bilateral economic flows . 
Although the state may designate a specific target coun t ry 
104 
and commodity items with a view to diversifying external 
economic ties, such a strategic choice alone does not tell 
as much about the actual process of a bilateral tie. Of 
course, the state itself may intervene in such a process by 
playing s UC h roles as trader, investor, and capital 
inducer. However, in many cases its magnitude is relatively 
limited, with the exeception of centrally planned economies. 
Instead the state tends to utilize private entrepreneurs as 
dynamic agents in bilateral economic flows. Or private 
entrepreneurs themselves may directly initiate, promote or 
discourage such a process in cons u 1 tat ion with public 
authorities of both countries . T h us , i t be c o me s e s s e n t i a l 
to examine the intentions, decisions, and behavioral modes 
of the private sector and its re 1 at ions hip with public 
authorities of both sides. 
For example, what is the pattern of market penetration 
strategy and the receptivity to it in host countries? What 
is the nature of business connections between private 
en t re pre ne u rs of both sides? What is the nature of the 
political back-u p structure surrounding such a connection 
on both sides? To what e x tent is it effective in collecting 
information, ex p andi n g market shares and breaking up the 
existing mon opol y structure? How or through what mechanism 
do private e n t r e pr e ne u r s manage their political 
connections? Do bri b ery, side payments, and other non-
conventional instr uments wo rk in buying political influence 
for business inte r ests? 
The 1 as t c r u c i a 1 t as k i n t hi s i n q u i r y is t o s pe 11 out 
105 
various entrepreneurial behavior patterns (or policy mixes) 
employed by the state to promote or curtail bilateral 
economic flows. They are important not only because they 
shape the process and outcome (e.g., volume or contents) 
but also because they indicate a set of signals portending 
possible changes in the direction of bilateral flows. The 
state can deploy a wide range of entrepreneurial behavioral 
patterns to influence bilateral economic flows. These can 
be proper 1 y understood by examining the three major 
di me ns ions : the facilitative or coordinative function, the 
external political management function, and the ins u lat iv e 
function. 
The facilitative or coordinative function refers to a 
state policy behavior that enhances or f ac i 1 it ate s any 
specific bilateral ties in terms of the provision of 
i nee nt i ves or disincentives. For example, what kinds of 
supply-side incentive policies are deployed to promote a 
specific bilateral economic flow? More specifically, what 
sorts of taxation, ad minis t rat iv e , f i na nc i al, and other 
macro-economic policies are provided to boost international 
competitiveness in general and a specific bilateral 
economic flow in particular? The same can be applied to 
the demand side. What kinds of preferential treatment are 
extended to a specific supplying country in tariff and non-
tariff policies? What sorts of administrative and taxation 
benefits are available to a specific economic partner? Are 
there any restrictive policies affecting market entry? 
106 
The se c ond important function comprises a set of 
explicit political management policies of the partner 
country. This external political management involves 
diplomacy, bargaining, issue-linkages, bluffing and 
cheating, and political concessions, etc. For instance, a 
country may make a huge political concession to gain 
economic interest in the target country. Or a country may 
show political support over certain issue areas implicated 
by the target country. Sometimes the home country may 
extend a series of goodwill gestures by establishing a 
technical and educational assistance agreement with host 
countries to facilitate the market entry of its private 
,I,I,  
sector. Likewise, a variety of explicit political 111 
management tactics to enhance a country's economic 
interests in the host countries could be introduced. The 
examination of these tactics and bargaining strategies will 
he 1 p us to understand the dynamic process and the outcome 
of bilateral economic flows. 
The third major entrepr e neurial function is that of Il
l 
insulating the bilateral selection and its promotion from 
competing internal and external political pressures and 
demands. The pursuit of preferential policies toward a 
specific country may incur political opposition from social 
sectors which would be deprived of benefits by sue h a 
choice. Alternatively enhancing supp 1 y -s id e 
competitiveness, the home country may involve suppr e ssing 
wage costs or disproportionally allocating f i na nc i al and 
107 
admlnistrative resources to a c e rtain private sector which 
the state favors. These kinds of discretionary policies 
and their implementation may bring about complaints from 
the labor sector and other affected social sectors. Sue h 
pressures may also come from e xternal forces. For example, 
if dominant monopoly actors in certain developing 
economies' market are deprived of their market share with 
the new entry, they may use political influence directly or 
through their home c o u n tries ' govern me n ts to deter or 
suppress the business activities of their competitors. If a 
certain country is able to insulate its bilateral choice 
from these internal and external pressures, the resulting 
outcome would be a high level of bilateral trans ac t ions 
with the target country on a continuous basis. If not, the
 
level may be lowered. Thus, this insulative function of 
the st ate becomes an important variable to trace the 
outcome of bilateral economic flows. 
To summarize, this statist model of bilateralism starts 
with the three basic assumptions: 1) the state in 
developing countries is autonomous and interventionist: 2) 
t h e state is a unitary rational actor, ('unitary' in the 
sense that the state is conditioned by competing domestic 
po litical claims, but not mechan i cally determined by them, 
and 'rational' in the sense that the state calculates the 
COS ts and benefits in line with a set of objectives and 
p references with expected pay-offs) 3) the nature of 
inter-Sout h bilateral ism is thus largely a function of 
f o reign ec o nomic policy ( or rationally caculated state 
108 
stragety ) of the state. 
Diagram 2-2 
atic presentation of this statist model based on
 
A schem
these three assumptions in Diagram 2-2 p
rovides us with 
five major assertions which will guide 
our inquiry by 
linking the existing theoretical models (
i.e., economic, 
ent 
ecological, and en tr e pre ne u r i a 1 
) in a coher and 
comprehensive manner. Those assertions a
re: 
Assertion 1: The rise of inter-South bilateralism
 is 
a function of the state's strategic choice evo
lving out of 
the interplay of the decision structure and 
surrounding 
internal and external constraints and opportuni
ties. 
Assertio n 2 : The chan n el and process -l evel dyn
amics 
of inter-South bilateralism is a function of 
the state-
business relationship in general and the natu
re of the 
business connectio n in particular. 
lateral 
As s e r t i o n 3 : The outcome of inter-South bi
level 
econo mic flows is largely a function o
f the of 
comple ment a rity in e n tr e pre ne u r i a 1 functi
ons ( 
tive, external political managemen
t, 
facilita an
d 
insulative) deployed by the states involved. 
These assertions are mere conjectures yet to be 
tested. 
As a way to test or explore the theoretical viabi
lity of 
 
these assertions , this study presents a case s
tudy
teral economic relations between Saudi Arabia an
d South 
bila
Korea 1973-1983. The rationale behind this methodo
logical 
choice sterns from the fact that the empirical 
universe 
(i . e ., inter-South bilateralism) is yet to be firm
ly 
109 
Di a gram 2- 2 
Stati st Mode l of Bil at eralism: 
A Schematic Presentation 
Internal and exte r - state -business 
nal constraints ( state objectives/ relation ship 
dependency/ sensi- t1 ?va1labil ity of (pri vate sector tivity/ vulnerabi- choice(strategic ) mobilization) 
1i ty / political I format i on 
-strategic costs) -: 1-/ of dyad ic business i 
state / connection direction / 
decision- strategic volume/ 
--~)structure choice of commodity 
( monitoring/ bilateral ism composition 
evaluation/ (inter-South ) 
C 
choice) c-
o 
changes in _J 
Internal and exter- ,,.. demand and 
nal opportunities ( I ?supply str-
higher growth/ new I ucture 
purchasing power/ internal poli t i cal 
new export potent- .,__ ___ structure/ coali-
ials/ dyadic com- tion patterns 
plementarity - ec- state entre -
onomic & political) preneurship 
(fac ilitative/ 
political 
ma na gement/ 
insulative 
roles ) 
structured and that it might be better explained by 
examining the micro-level working mechanisms of a sing 1 e 
58 
case, rather than an aggregate data analysis. We are 
aware of the pitfalls of using a case study in testing 
theoretical assertions. However, the aim in this inquiry 
is not to confirm or generalize the theoretical construct, 
namely statist model of bilateralism, from a single case. 
Its al m is to further explore the viability of the 
theoretical conjectures made above and to open a new 
horizon of understanding the foreign economic behavior of 
developing countries. It is our belief that an empirical 
demonstration from a single case, though narrow, can serve 
the purpose of our inquiry. 
The case of Saudi Arabia and South Kore a has been 
chosen chiefly because of its salience. As illustrated in 
the empirical data in Chapter One, the re is a high 
concentration of bilateral economic flows between these two 
countries. This salience, which implies a solid case of 
inter-South bilateral ism, induced us to select the Saudi-
South Korean connection as the primary unit of 
investigation. Of course, this salience may lead us to 
speculate that the case might be "unique" or "deviated" 
from the standard cases. Given the immaturity of the 
phenomenon in terms of the empirical contents (e.g., 
volume), however, this deviated case may be able to offer 
us a better proto-typical scheme by which we can me as u re 
the distance of deviation from other yet-to- mature cases. 
110 
 Chapter deals with empirica
l di mens ion 
The f ollowing
of volume, 
of the Saudi-South Korean connection i
n terms 
ains and losses. Chapter Fo
ur focuses on 
composition, and g
and 
the interface between decision structur
e and internal 
es and traces the 
external constrainst and opportuniti
sal ture responsible for the r
ise of the Saudi-
cau struc
ter Five examines the nature of the
 
Korean connection . Chap
state-business relationship in 
both countries, the 
 
resulting formation of business con
nection, and its impact
 ed  
on bilateral tie ? Emphasis wi
ll also be plac on
urial behaviors such as 
corporate strategies and entrepren
e
-conventional business 
corruption, bribery, and other non
empirical case studies.
 Chapter Six 
practices through 
ysis of entrepreneurial
 functions 
devotes to the anal
deployed by both states in promoting 
their c o n ne c t i o n ? 
e mination of 
This chapter mainly centers around 
th exa
s policies employed and some empir
ical cases related. 
variou
this , 
Chapter ven, as a way of conclud
ing inquiry
Se
iscusses the general theoretical 
and empirical 
d
 this case study and briefly tries
 
implications drawn from
r-South 
to project the durability and pervasivene
ss of inte
nnection. 
bilateralism in lieu of the Saudi-K
orean co
11 l 
-FO-O--TN-O--TE- 
1 . B l'. l atera1 ? 
relations b l.sm is usually understood as a pattern of economic 
l etween a 
r ues, norms dyadic pair of countries governed by a set of 
t h e parties ' a nd procedures intent i onally agreed upon between 
a rr an concerned 
gement nd ? The principle of reciprocity, barter 
t wo Parties' a a other formal institutional agreem e nts between 
r e des ? 
re sear ch h ignated as c o mp o nents of bilateralism. In this 
. , ow e ver th 
i n such a way ' e notion o f bilateralism is bro a dly d efined 
co untries th. , be it at any economic transactions between two 
b il a t e ral via instituti o nal arrangements or market, are 
a rr a n gementsas.  l o ng a s th e y are n o t tie d to expli c it multilateral 
2 . I n a 
vir tu a ll y r ea l i sti c se n se , a ll t h e e c o n om i c t r ans actio ns 
b i l ate r a l are wh en th e y a r e d i sa g g r e g a t ed . 
3. Theories 
advant age are of int e rnational ec onomy begun with comparative 
now b_ ei? ng a pplni eodt  lim ited only to international trade. They are 
Purvis 1 972 t o international factor movement Ozawa 1 9 79; 
Mund e ll ' 99 11 9 57 -
9 9 9; Schmitz e and He lmb e rger 1 9 70, 791-797; 
3 2 1
s ervi c es sect' or {L-u3tz3 5?,  Rybcz y ns k i 1 9 55, 33 6 -341) as well as to 
and sapir 1 98 1, 1 9 83). 
4. Ot he r a 
wor ld stoscsku mpti o ns includ e : co nst a nt returns to s c ale, a common 
identit ? of knowledge and a standard technology, and 
1 
followinigc a seccto? nsumption tastes. As shall be discussed in the 
s ubst a ntially iond, ' tf h? is stat;~ c th e ory of comparative advantage is 
as sumptions. m o i i e d com p l e m en tin g var i o us d rawba ck s i n th ese 
Kindleberger ( F or._  a bri e f disc ussi o n o f this t o pi c , s e e 1973 53-69) and Kreinin (1978: 214-253). 
5 . F o r a succin c t 
disc u ssion of the d i rection s of trade , refe r 
Hav r yshylyn and to 
Wolf 1 98 1 6 - 10 ) 
6
? Kee s ing (1 978 :1 5 ), Hug h es (1 960 ) , and Rhee and West phal (1980) 
offer a s i m il a r f.i nd i ng. 
7. Fo r th i s , r efe r to Sam ue l so n ' s extension and modif ica tio n of 
idea li stic assu~ p t io n s of the He cksc her - Oh lin th eo r e ~ the 
co nd i tions o f com petitive eq u ili brium w i th many tra d e d g o ods  a n d 
se r vi ce s / t he e f fects o f various d ome s ti c distorti o n s a n d 
irnpe r fec ti o ns in c l udio n g 1-aon opo ly power and fix e<l factor 
p aymen ts / th e effects of d istorti o ns s t e mm i ng from tariffs and 
q u a ntit a tive res t ric t io ns / the i~p li c a ti o ns of trade f or o utp u ts 
o f non -tr aded goods a n d c u stoms u ni o n s . See Bal d ~in anct 
Richardso n (1 9 7 4 ) and Ki ndl e ber ge r (1973 ) . 
8 . Fo r a d e t a il ed disc u ssio n of prod u c t cyc l e theor y, see Ve rno n 
( 1 966 : 190- 2 07), Ve r no n (1 9 70), a n d We ll s (1 9 7 2 : 3 - 33 ) 
112 
9. Besides aforementioned technology factors, R & D factor, 
economies of scale , and industrial policy e t c . are regarded as 
variables affecting supply-side competitiveness of int ernational 
trade . For this topic, see Watanabe (1966) , Kindleberger (1 973 : 
53 - 69 ), and MITI (1977). 
1 0. On the issue of comp lem entarity vis-a-vis competitiveness of 
intra-South trade, r e f e r to Am s de n ( 1 9 7 6 ; 1 9 8 0 ) . 
11 . For an overv iew of demand side theories of international 
trade, refer to Kindleberger (1973: 35-52). 
1 2 . As shal 1 be discussed in the following section, international 
relation s scholars have mainly focused on this demand side of 
internatio nal trade as a primary unit of analysis. See Pollins 
and Kirkpatrick (1983). 
13. Demand inelaticity of import of OPEC co unt ries is ce rtainly a 
function of e normous oil wealth accumulated since the first oil 
cr isis. However, recent oil glut and diminishing oil revenues 
for these countries are imposing various constraints on demand 
pattern . 
14. This is borrowed from Pollins and Kirkpatrick (1983: 1 8) 's 
disc ussion o f A rm i n g to n ( 1 9 7 1 ) 
15. State int erve ntion in foreign trade is not unique to 
developin g co untries. The states of OECD countr ies show a 
similar pattern of intervention to a varying degree. Katzenstein 
(1977) provides different patterns of state intervention in 
foreign trade among advanced industrial countries. 
16. Balassa (1981) offers a succinct description of developing 
co untries' export promotion policies . Haggard (1983) and Haggard 
and Moon (1983) also discuss the patterns of state intervention 
in foreign trade in selected NICs. 
1 7. A typical case of state trading can be found in COMECON 
member countries, whose trading pattern is chiefly based on 
barter a r r a n gem e n t s . For the practices of state trading in 
advanced industrial countries, refer to Zy sm an ( 197 7) 
1 8 . "Ecological" connotes e nvironmental factors affecting the 
patterns of economic transacti o ns. 
19. For this issue, refer to Poyhon en (1 963 : 93-99), Kuznets 
(1964: 1-106) and Kindleberger 1973: 89 - 106). 
20 . SARUM is an abbreviation of Systems Analysis Research Unit 
Model. The siginificance of this model consists in the fact that 
it incorporated non-economic factors into a poo l of variables 
affecting the direction of trade along with eco nomi c factors such 
as relative prices and income. 
113 
2 1. The major drawback of previous models of bilateral trade 
fl o ws is that although they recognize the importance of non-
eco nomic variables, they do not specify the political contents 
o f 'bias' co-efficients by treating them as 'dummy' variables. 
F o r a concise critique , refer to Pollins (1982; 1983). 
2 2. Classical cases of dyadic pairs within the zone of influence 
c an be found in pairs such as Korea-Japan, Algeria-France, 
and Philippine- Amercia etc. 
23 . For a comprehensive discussion of dependencia, world system, 
amd power-exchange theories, see Caporaso (1978: 1 30- 143). 
24. There is no a single unified theory in explaining the pattern 
of dependency in the North-South relationship. At least , three 
versions within the same tradition can be delineated: unequal 
e xchange school following the lead of Prebisch (1954) and Singer 
(1966), classical dependencia school under the influence of Frank 
(1969) and Baran (1956) , and finally a revisionist view 
e xpounded by Cardoso and Faletto (1979) and Evans (1979 ) For 
a general overview , see Palmer (1977) and Chilcote (198 1 ). 
25. Regarding the thesis of hegemonic stability, refer to 
Kindl eberger ( 1974 ), Gilpin (1975), Krasner (1976 : 317-347), and 
Koe ha n e ( 1 9 8 0 : 1 3 1 - 1 6 2 ) . 
26 . On the monopoly structure of the world capitalist system and 
its impacts on inter-South economic intercourse , there are 
d iverse opinions . For a factual survey, s e e Havrylyshyn and Wolf 
(198 1 5-19) . 
27 . Gal tung 1971:89) is a perfect example where the 
r e lationship between peripheries is blurred. The same drawback 
c an be found in world system theory Wallerstein, 1974). 
28. These issues constitute the core of the NIEO debates . For an 
overview of this topic , refer to Savaunt (1982). 
29 . Relative Acceptance is defined as an expected value of 
trade between two countries where the proportion of country i ' s 
exports which go to country j will correspond to the mean of the 
proportion of i ' s exports in all world exports and j ' s import in 
all world i mpor t ( Savage and Deutche 1960: 551-2) For an 
application of this model , see Al ker and Puchal a ( 1968: 3 15) 
30. Major common background conditions include: social and 
cultura l homogeneuity , pol i tical attitudes or external behaviors , 
a network of supranationa l or inter-governmental and political 
i n s t i t u t i o n s , a n d g e o gr a p h i c p r o x im i t y ( Ru s s e t 1 9 6 7 : 1 2 3 - 5 ) . F o r 
a critique of these backgro u nd conditions, see Myltelka (1973). 
3 1 . Rosenbaum and Taylor make a dualistic argument. According to 
them , while the nat u re of the East-West system (dominant system) 
shapes politica l parameters of inter-South interactions , a 
114 
ce ntr a l dim e ns i o n of South - South relati o ns is that they are 
no rmally det e rmin e d by North-South relations (1975: 244) . 
3 2 - In a sense, their argument resembles to structural balance 
theory which refers to a greater inter-alliance conflict will 
p roduce a greater intra - alliance cohes i on , both strategically and 
eco n om i ca 11 y Hoppman n l 9 6 7 : 2 1 2 - 2 3 6 ) . Al so refer to s u 11 iv an 
(1976 : 226) , Coser (1956:88), and Simmel (1955:92- 9 3). 
3 3 . While Pola c hek concerns about the reciprocal relationship 
b e tween dyadic conflict-cooperation and trade ties, Arad and 
Hirsch (1981) attempt to measure the effects of a cessation of 
ho stilities between two co unt ries upon trade creation and trade 
d iv e rsion . Besides trade area , a number of studies has been made 
to trace the relationships between political instability and 
di re c t investment in t erms of political risk ana lysi s ( Kobrin 
1 980 , 1982; Sneider 1984). 
34 . His model is a partial modification of Armington (1971) 's. 
3 5. As shall be discussed in Chapter 5 , the intermediating role 
o f the us as a hegemonic power should not be overlooked in 
1 inking OPEC countries and East Asian Nies. 
3 6 . The rationale behind distinguishing private and state 
e ntrepreneurship com es from the fact that the state in developi ng 
as well as deve l oped countries acts like an entrepreneur. Thus, 
o ur position here is that the notion of state entrepreneurship 
g o es beyond the traditional defi niti on based on the state 
o wnership of th e means of production. It connotes profit or 
interest maximizing behaviors of the state in lieu of capital 
a c cumu lati on or welfare pro t ection. For a related disc ussion, 
refer to Haggard and Moon (1 983 ), Kaminski and Moon (1984), and 
Moon (1984). 
37. Traditional approach to private entrepreneurship chiefly 
foc uss ed on risk-taking behaviors of e nt repreneurs (Baum ol 1 968 : 
68) . But few paid attention to external economic aspects of 
private entreprene urship. 
38 . This business connection can be compared with the notion of 
eli te socialization, though different in form and substance . For 
the concept of elite socialization, see Nye 1971: 69-7 3) and 
Lindbergard and Scheingold (19 69 ). 
39. "Flexible" in the sense that entrepreneurs do not 
necessari ly pursue profit-maximization or risk minimization 
behavio rs i n setting prices. Rather with the perception of 
uncertainty condition , they set the prices mor e flexibly . 
4 0 ? They include advertisement, public relations, and after-
services etc. 
4 1 ? The esse nce of auction market is chaotic , undiffer e nt i ated , 
and one-shot, while routine business connection is d ura ble , 
115 
o r de rly, and highly differentiated . 
4 2 . Since open bidding for procurement or project contract is 
q uite infrequent and the nominated bidding is a routine form of 
b u s iness in many developing countries , the accessabi l ity to 
i nformation becomes the key criterion on which business partner 
or sponsor is selected. Chapter Four will discuss this a s pect of 
busi n ess practic e in Saudi Arabia . 
4 3 . F o r e x am p l e , i n t h e c a s e o f Saudi Arabia about 90% of 
business transactions is government related . Many OPEC countries 
s how a similar structura l pattern. 
44. For an int e resting discussion of this topic, refer to Jacoby 
e t . al (1 9 77). 
45 . A similar role of the state can be applied to advanced 
i ndustrial countries . In particular, France and Japan mong them 
r e veal this mercantilist policy attitude (Zysman 1977; Johnson 
1980 ; Pempel 1977). 
4 6 . Private entrepreneurship is an exception sinc e it serv e s as a 
s uffi c ient condition to the shaping of bilateral economic ties 
b e twe e n a dyadi c pair of co untr y by directly involving in the 
process - level dynamics . 
47 . This view of the state is held by interdependence theori sts. 
S ee Cooper ( 1968), Morse (1969), Koehane and Nye (1977), and 
Ro secran e ( 1979 ). 
48. Thi s view has been advanced by the first and second 
g e neration dependencia and world system theorists. Refer to 
Frank (1969; 1980) and Wall erstein (1974; 1979) as exemplar 
wo rks . 
49. For a compara tiv e and comprehensive debate o n the nature of 
the cap it a li s t state , see Stephan (1977), Held (1983), Jessop 
(198 1), and Cro u ch (1 978 ). 
50 . This structurali st version of Marxism can be found in Grams c i 
(19 71), Al th us ser (19 6 7), and Poulantzas ( l 9 7 4 ; l 9 7 5 ) . For a 
c omprehensive revie w of this version , ref e r t o Jessop (1976; 
l 9 8 1 ) . Ham i l t o n ( l 9 8 0 ) attempts to apply this version to th e case 
o f Mexico . 
51 .This incomensurability is elegant l y dis c ussed in terms of the 
whole and parts relationship by Olmann (1974) and Unger (l 9 7 5 ) .
 
Stephan( l 97 7) i s a ls o a good source to consult with r e gard to 
d e veloping countries . 
52. The recent theoretical polemics on the nature of the 
c ap i ta l ist state were a theoretical as we ll as ideological 
r e sponse to the changing chara t eristics of the state at a time of 
transi t ion form t h e lat e stage of monopoly c apitalism to welfare 
s tat e in advanced ind u stria l co u ntri e s. Ho wev e r , this d ebate was 
116 
soon diffused into the Third World countries with the 
polemiciza tion of dependencia paradigm . For an introductory 
overv i e w of this topic , refer to Held (1983). 
53 . This preference ordering in the co nt ex t of developing 
c ountr ies is well discussed in Uphoff and Illchman (1971), 
Rothchi ld and Curry(l978) , and Almond (197 1). 
54 . This is strictly a Weberian interpretation . See Krasner 
(1977:33) and Nordlinger (1 981:25-26). 
55 . Myrdal 1968 : 935) argues that most developing countrie s are 
' soft ' state in the sense that there is a huge gap between 
plan ning and implementation. Ho wev er , his assertion does not 
seem universally valid . In terms of domestic political structure 
and potential for implementative capa bility, developing countries 
can be viewed as having 'hard' state, e sp ecially compared with 
advanced industrial co untries where pluralism prevails. 
56 . On this ' 1 a t e - c om e r ' thesis , refer to Gerschenkron ( 1 964) and 
Kurth (1979) 
5 7. Of co urse, this does not mean that the state in developing 
c o untri es are totally free from internal and externa l 
c onstraints . The state is constrained by a number of internal 
and external factors , but neith er subjugated nor determined by 
the m 
58 . To borrow L ijphart (1971 691 - 693)'s justification , the case 
st u dy method employed here may perform th e functions of theory -
conf irming or informing within a framework of newly es tablished 
assert ions or asserted generalizations) and o f studying a 
sing le c ase that deviates from established generalizations . 
117 
CHAPTER THREE 
THE SAUDI ARABIAN-KOREAN CONNECTION: AN OVER-
VIEW OF HISTORICAL AND EMPIRICAL DIMENSIONS 
The Background 
South Korea ( henceforth refered to as Korea except to 
d is t i ng u is h the two sectors of the divided country) and 
Saudi Arabia are t w o ext re me 1 y he te roge nous countries. 
Geographically far removed from one another, they do not 
share any common political, cultural, historical, or 
economic denominators. Politically Saudi Arabia is a 
conservative monarchy where one family (the House of al 
Saud) rules the entire country. Islamic law (Sharia) 
provides all the societal rules, and political ideology is 
largely derived from Islamic precepts filtered through the 
l 
fund amen ta 1 is t Wahabbi tradition. Political leadership is 
embodied by the monarch (Malik), supreme leader of the 
Islamic community ( Imam~ Mu'minien), and the de~ as 
we 11 as de facto head of all tribal leaders ( Shaikh al 
Mushayikh) (Spencer 1962: 30 8). There are neither formal 
electoral procedures nor political parties or interest 
groups in the Western sense. 
Korea, on the other hand, is a secular state. Though 
limited by a number of authoritarian rules, political 
parties and interest groups and the their interactions 
shape the process and structure of Korean politics. 
118 
Political ideology in Korea is derived from a mixture of 
secular ideas and notions s UC h as nationalism, 
modernization, a n t i -c om mu n is m e t c ? Perhaps the sing 1 e 
commonality between two countries may lie in the mode of 
governance through which political power is concentrated in 
2 
the hands of executive a uthority and a bureaucracy.
 
Culturally and historically a much wider gap exists 
between the two countries. While Saudi Arabia can be 
characterized by the interplay of Islamic and Arabic 
, 
cultures, Korean culture represents a mix of Confucian
ism
Buddhism, Taoism, and even Chirstianity. The re is no 
) 
liguistic tie. Viewed from an historical perspective, 
nothing is shared between two countires. Until her forma
l 
unification and the creation of the Kingdom in 19)2 by 
King Abdul Aziz al Saud, Saudi Arabia was a primitive 
multi-tribal society under the Ottoman rule and later 
British influence. In contrast, Korea had been a highly 
homogeneous country in terms of race, language, and 
cummunal ties until the division into north and south in 
1945. Traditionally influenced by China, Kore a was also 
colonized by Japan from 1910 to 1945. 
Although b oth countries belong to the Group of 77 and 
share no mi n a 11 y c om mo n s t r a t e g i c i n t e r e s t s v i s - a -v i s t he 
Northern industrial countries, no explicit consensus on 
multilateral economic arrangements s UC h as the New 
International Economic Order exists between two countries. 
Because of different structural positions in the 
international division of labor (e.g., Saudi Arabia i s a 
1 1 9 
producer and exporter of oil and Ko re a an exporter of 
manufactured goods and an importer of raw materials), both 
countries ad opt from time to time mutually conflicting 
4 
postures in international economic fora. Although neither 
is tied to specific security arrangements, they are both 
strong allies of the US. Nonetheless, this does not mean 
that they share a strategic consensus. The Koreans' 
traditional tie with Israel, shaped by American influence, 
has produced some precarious political tension with Saudi 
Arabia with regard to the Arab-Israeli conflict. 
The most striking dissimilarity between the two 
countries lies in their economic structures. Saudi Arabia, 
with a population of 7 million, f u nc ti one d on a backward 
one crop economy until the oil boom of the early 1970s. 
Normadic agriculture in the Nejd and Asir, coastal commerce 
in the Hejaz, and the ARAMCO-based oil economy in al Hassa 
characterized the economic geography of the Kingdom. Even 
th r oug hou t the 1970s, a sharp economic dualism ( 
traditional backward sectors in the rural are as and 
hinter 1 and and modern sectors in the urban areas) marked 
the economic structure of Saudi Arabia. Recently thanks 
to its enormous surplus capital, Saudi Arabia has attempted 
to enhance her industrial capability and to diversify her 
industrial base not only by promoting the agricultural 
sector via new sedantrization policies but also by 
broadening her hydro-carbon related industries (Mallakh and 
Mallakh 1982; Mallakh 1982; Wells 1976: al-Qushaibi 1979). 
1 20 
Korea, by contrast, is a new dynamo in the 
international economic system. Over the last two decades, 
it has purused rapid industrialization which has resulted 
in a relatively well diversified economic structure and 
remarkable industrial capability. Because of this, Kore a 
has bee ome one of the most rapidly growing exporters of 
manufactured goods in the world. s UC h export-led 
industrialization has reduced the importance of s UC h 
traditional sectors as agriculture and 1 ig ht industry, 
making more capital and technology-intensive sectors (heavy 
industry, semi-conductor, etc), the new leading sectors of 
the Korean economy. In sharp contrast with capital-
abundant, yet labor-scarce Saudi Arabia, Kore a has low 
capital and natural resource endowments, and a plentiful 
supply of skilled labor (Hassan and Rao 1978; Westphal 
1979; Mason 1980). In this sense, the economic structures 
of Saudi Arabia and Korea are complementary rather than 
homogeneous -competitive. 
Given the fact that the two countries share virtually 
no similarity or homogeneuity in bac kg round conditions 
which allegedly lead to higher levels of political and 
5 
economic intercourse, it see ms natural to expect a low 
level of bilateral ties between the two countries. This 
expectation holds true in the areas of historical and 
political interactions. However, the picture changes when 
we examine the economic dimensions of the bilateral ties 
between the two over the 1970s. 
1 21 
The Historical Evolution of Bilateral Ties 
Contrary to the popular assumption that the Korean 
connection with Saudi Arabia is quite recent and originated 
with the growth in economic interdependence following the 
oil crisis, the interaction between Koreans and Arabs 
dates back to the 11th century. According to one historic 
source, some 500 Arab merchants visited the Korean 
peninsular in the early 11th century to promote commercial 
e xc ha nges via China (Koryosa Book 5; Sega Book 5) ? They 
brought mecury, spices, and med i c i ne s , and brought back 
6 
gold, silver, and silk in e xc hang e. Ace o rd i ng to 
historical records, however, that there were no further 
v i s i t s b y t he Ar ab me r c h a n t s o f t he 1 0 4 0 ? 
Two centuries 1 ate r during the period of Mongol 
domination over the Koryo dynasty (1274), an Arab named 
Samka who came to Korea as a servant to a Mongolian 
princess ( Jekuk) from China settled on the peninsular, 
leaving his Arab descendants, the Duksu Chang family (Choi 
1971 / Kim 1979 / Koryosa, Yulchun Book 36) which had been 
completely assimilated into Korean culture and society. 
In spite of these hoary antecedents, it would be 
extremely misleading to suggest that Korea and Saudi Arabia 
have had a history of extensive and intensive interactions. 
Rat her these two examples are illustrative of paucity 
rather than the richness of the historical relationship 
between the two. For a variety of reasons, this 
relationship never developed in breadth or intensity. As 
122 
listed in above, the distance between the two countries was 
one obvious hurdle precluding the development of greater 
ties. Another impediment was their cultural heterogeneity, 
most importantly a lack of religious tie. Yet another was 
the absence of economic complementarity, for in fact both 
are as were largely isolated from the mainstream of 
international trade with the weak purchasing power. Later, 
their diverse colonial experiences also played a role in 
preventing Kore a and Saudi Arabia from promoting mutual 
interaction. 
It was only after the 1960s that both Saudi Arabia and 
Kore a began to develop significant mutual interaction. 
Throughout the 1950s, Korean tie to the Middle East in 
general and to Saudi Arabia in particular was minimal. In 
the aftermath of the devastating exp e rience of the Korean 
War, Korean foreign policy was dominated by North Korean, 
American, a nd J a panes e is s u es ? Indeed, in the 1950s, a 
period of continued and rapid decolonialization in the 
Middle East, Seoul maintained full diplomatic re 1 at ions 
with ~ one country in the entire r e g i o n - -T u r k e y ? 
Turkey was the w i nd ow t hr o u g h w hi c h Kore a s aw the Middle 
7 
East. Saudi Arabia was totally out of the scene. 
While Korea's interest in the Middle East remained 
passive, and its policy virtually non-existent, in the 
1950s, the sa me cannot be said of North Korea which had 
already undertaken a major diplomatic offensive in the 
are a. The North recognized the anti-colonial forces in 
1 23 
- .. . ..,__...,...,.. 
Algeria ( the FNL) at an early date, and provided arms and 
at her support. Pyongyang also moved actively and rather 
effectively consolidated its backing from among the 
"progressive" countries of the region--Egypt, Iraq, Syria, 
and Yemen. By the late 1950s and ear 1 y 1960s, these 
countries cooperated extensively North Kore a on 
bilateral as well as multilateral bases. In particular, 
these progressive Middle Eastern countries' support of the 
North in various international fora including the United 
Nations made North Korea victorious in the diplomatic 
battle over international recognition and legitimacy in 
8 
lieu of the representationship of the Korean peninsular. 
It was North Korea's diplomatic success in the Middle 
East that triggered the South's new foreign policy 
orientation toward the region. In s harp contrast with 
North Kore a, South Kore a targeted the 'conservative' 
monarchies, i.e., Saudi Arabia, Morocco, and Jordan, in its 
initial diplomatic counter-offensive in the region. In 
August 1961, the South Korean official delegation led by 
Ambassador Chichang Yoon stationed in Turkey paid its first 
Visit to the Kingdom of Saudi Arabia and succeeded in 
obtaining the Saudi ruler's agreement to normalize 
diplomatic ties with South Korea. In the following year 
(1962) a cultural delegation was dispatched to the Kingdom. 
Until the formal opening of a residential embassy in Jeddah 
in 197 3, however, only seven official delegations visited 
9 
Saudi Arabia. 
This weak political link during this period, along with 
l 24 
------ ------...-?- -
the complete absence of economic transactions between the 
t WO, was primarily attributed to the 1 ac k of mutual 
interest in the political and economic arena. Furthermore 
the Saud is were somewhat reluct a nt to promote bilateral 
ties between the two countries because of the South 
Korean attitude on the Arab-Israeli conflict. Largely 
uninvolved in the region, South Korea had formally 
recognized the State of Israel in 1962, and permitted the 
Israeli government to establish a full embassy in Seoul in 
1969. The agreement to allow an Israeli embassy in Korea 
in 1969--two full years after the June 1967 war, when 
virtually all Ara b countries broke diplomatic relations 
with the United States-- aggravated the Saudi attitude 
toward South Korea delaying the latter's request to open 
10 
i ts re s id e n t i a 1 e mb as s y i n t he Ki ng d om. 
The East Asian region in general and Kore a in 
particular we re simply not of any political and economic 
importance to Saudi Arabia at that time. Uriven into the 
swirl of a regional hegemonic power struggle by Nasser, 
Fiasal's foreign policy was limited to the consolidation of 
regional power and stat us under the banner of pan-
Islamism ( Abir 1974; Gaspard 1969; S u 1 t a n 1 9 8 1 ; Mc L au r i n 
1982). The Saudi pursuit of political relationships with 
other Thi rd World countries beyond the Arab region was 
chiefly focussed on the Muslim states in Africa, West Asia 
and Sout h East Asia. Given its limited resource base and 
the foreign policy objectives it faced at the ti me, 
1 25 
Saudi Arabi a did not pay any " special" attention to Korea
T . he Saudi 1 ac k of interest in Korea is 
well revealed in the 
fact that throughout the 1960s 
the Saudi government sent 
~ one delegation to Korea led 
by the Saudi Ambassador 
stationed i n T o k yo i n De c e mb e r l 9 6 5 , who was in charge of 
Taiwan and l l Korea simultaneously. 
The major event that led 
to a fundamental change in the 
Korean-Saudi 
Arabian relationship was undoubtedly the oil 
crisis of 197)-1974. 
The rapid industrialization of Korea 
during this period had produced a new and dangerous 
economic vulnerability--the dependence on Middle East oil. 
Because of the petroleum supply equation and the rapidly 
changing demand situation created by a skyrocketing 
inc re as e in worldwide oil requirements, South Korea found 
itself heavily dependent on an Saudi Arabian oil. 
Quietly, almost imperceptibly, t he pr i c i ng , av a i 1 ab i l i t y, 
and security of oil had become a critical component of 
Korea's national security. This economic vulnerability was 
further menaced by the partial embargo during the October 
1973 war and drove the Korean g overnment for the first 
time to adopt a policy line overtly sympathetic to the Arab 
l 2 
position. 
At the same ti me, Korea began to pursue intensive 
diplomatic efforts to promote bilater a l political ties with 
the Kingdom by dispatching highly regarded diplomatic 
l 3 
delegations to Saudi Arabia Finally, in 1973 Kore a 
opening its embassy in Jeddah in 1973. As a result of 
persistent diplomatic efforts, Korea was able to persuade 
l 26 
the Saudi government to open a consular office in Seoul in 
14 
1 9 7 5 and a f u 11 e mb ass y i n 1 9 8 2. I t is int e res ti ng to 
note that while the Korean approach to Saudi Arabia in the 
1960s was motivated by political goals in terms of 
diplomatic competition with North Korea in the Arab region 
a nd international fora, the approach in the 1970s was 
e nha need by economic interests arising not only out of the 
need for a stable supply of oil but also because of the 
p e rception of an enormous potential market in the kingdom. 
Korea and Saudi Arabia: the Economic Context 
The re can be no doubt that the essence of Korea-Saudi 
Arabian relations is mutually beneficial economic 
interactions ? Few people outside the group i mm ed i ate l y 
involved in managing these inter ac ti o ns realize its 
magnitude, either for South Korea or for Saudi Arabia. Nor 
do many understand the multi-dimensionality of the economic 
relationship between Korea and Saudi Arabia. A simplistic 
model of Korea's economic linkages with Saudi Arabia might 
suggest that they feature the exchange of Saudi oil and 
capital for Korean goods. in many respects such a model 
would not be far from the mark, but in truth the 
relationship is far more dyanmic. 
From the Korean side, the exports involve not only 
merchandized goods but also services, mostly construction 
and e ng i nee r i ng rel ate d , that account for the presence of 
ext re me l y large numbers of Korean workers in Saudi 
1 27 
Arabia. Apart from the commodity trade, c onstruction, and 
manpower/services sectors, th e economic relationship is 
a lso characterized by close and growing cooperation in 
industrial joint ventures and financial r e cycling. 
Commodity Trade: In the first business transaction 
between Saudi Ar ab i a and Korea which took place in 1966, 
Kore a exported tires and tubes valued at only $ 17,000. 
As f i g u re 3 - 1 i nd i c a t e s , commodity trade between two had 
been stagnant throughout the 1960s and the early 1970s. By 
1971 although Korean exports to the Kingdom reached $ 3. 7 
million, this constituted less than 0.01 % of the Korea's 
total exports. This low commodity trade may be attributed 
to two major factors: First, Saudi Arabia was not yet a 
capital surplus country with a national income large enough 
to allow massive imports. Second, Kore a was not fully 
diversified in its selection of external economic partners 
and commodity composition. 
Figure 3 - 1 
But the oil crisis in 1973-1974 reshaped the entire 
Saudi-Korean connection. In 1974, Korean exports of $31.5 
million to Saudi Arabia approached 1% of total Korean 
exports. Since 1978, the share of the Saudi mark e t in 
Ko rea ' s total world exports has been maintained at 
1 28 
Figure 3-1: Patterns of Corrmoditx Trade: Korea -Saudi Arabia 
Export Import 
Year Korea-Saudi Korea-Middle East % increase Korea -Saudi Korea- Middle East % increase 
(K-S.A) (K-S.A.) 
1970 0.311) 7.9 177. 9
2) 38.3 191 . 5 75. 8 
1972 3.7 22.9 200. l 87.7 295.2 86.4 
1974 31. 5 141. 3 203. l 670.5 985.7 334.9 
1976 326.5 749.5 193 .4 714.6 l ,641. 3 18.0 oc 0 -
1978 717 .1 1,445.6 6.8 1,280.7 2,233.3 14.0 
1980 946. l 2,066.0 34.4 3,288.4 5,445.0 l 07 .4 
1982 1,300.0 2,544.0 4.9 3,751.0 5,058.0 -10.5 
l) million US dollars, 2) % increase vis-a-vis the previous year 
Sources: KOTRA, SuChul ChongRam (Overview On Export) (Seoul: KOTRA, 1982) 
Office of Commercial Attache, Korean Embassy in Jeddah, Saudi Arabia. 
approximately 6 %, which is quite a significant increase 
given Korea's trade dependence on its two major partners, 
the US and Japan. In particular, data in figure 3-1 show 
that a rapid expansion of Korean exports to Saudi Arabia 
took place during the 19 7 0-1976 period with a triple digit 
rate of growth. Since 19 7 8, however, the rate of growth 
has been rather incremental perhaps signifying that Korean 
exports had reached a certain threshold level. 
On the other hand, Saudi exports to Kore a have 
constantly increased except for the two soaring points, one 
in 1974 (334.9%) and the other in 1980 (107.4%). These two 
soaring points reflect increases in prices of the Saudi 
exports (mostly oil) rather than in volume following the 
two waves of the oil crisis . It is apparant from these 
statistics that a tr emend o us trade imbalance existed 
between Saudi Ar ab i a and Korea. Si nee 1970, Kore a 
experienced trade deficits with Saudi Arabia every year. At 
the same ti me, the Saudi share of Korean total imports has 
been constantly increasing hovering around the 15 % level . 
In 1982, Korean imports from Saudi Arabia dropped for the 
first ti me due to the adoption of energy conservation 
policies and o i 1 i mp or t diversification policies which 
15 
c oi n c ided fortunately with the global oil glut. 
Figure 3-2 illustrates the commodity composition of 
Korean exports to Saudi Arabia ( the composition of Saudi 
e x po r ts is om i t t e d be c au s e one s i ng le i t e m, oil, dominate 
the entire export sectors, approximatley 98%). Over the 
1 as t decade, major Korean exports include construction 
l 29 
mat e rials such as steelpipe, cement, plywood, a
nd related 
machinery. These construction related exports peaked in 
d 1977 and have declined since then probably be
cause 
1976 an
of scarcity in the supply of these goods in Kore a, the 
e merg e nc e of competitors from India and the Eastern 
Figure 3-2 
European socialist countries, and the gradual Saudizatio
n 
16 
pl ans pursued by the Saudi government since 1979. On 
the other hand, the general mer c ha nd i s e sector (e.g., 
textiles, garments, general machinery, consumer 
electronics 
et C ? ) shows a gradual increase since 1976 compensating
 for 
the losses in construction materials exports. 
Saudi Arabia's import composition by country over the 
1970s is illustrated in figure J-J. Until 1977 th e share 
of Korean goods in Saudi Arabia's total imports was 
neg 1 i g ea b 1 e ? The US, Japan, and EEC countri e s dominated 
the Saudi commodity market . Si nee 1978, however, Kore a 
pidly increased of its share of the Saudi marke
t. 
a From a
 
r
rank of 14th comprising less than 1 % of the Saudi total 
imports in 1977, Korea has emerged as the largest exporter 
to Saudi Arabia next to the US, Japan and the EE
C countries 
since 19 7 8. Its share i nc re as e d f r om le s s t ha n l % i n l 9 7 7 
to more than 3 % of S a udi total imports s i nee 1978. Two 
l 30 
Figure 3-2: Composition of Corm,odity Trade: Korea-Saudi Arabia 
composition/year 1976 1977 1978 1979 1980 1981 19821 ) 
Construction 
materials 
(steel/ ply\<JOOd/ 153.22) 466,9 417.3 335.5 489.7 519.2 520.1 
steel pipe/ machinery/ 
cement/ etc) 
Increase in % 157 . 9 204.8 -10.6 -19.6 46.7 l O. l 8.2 
C 
Share ( %) 46.9 69.5 58.2 47.6 51.8 50.2 50.1 C 0\ 
General Commodity 
(textile/ garments/ 
general machinery/ 173. 3 204.5 300.3 368.7 456.4 534.7 508.3 
consumer electronics/ 
ship/ auto/ etc) 
Increase in % l 01 . 3 69.9 87.7 22.8 23.2 17. 2 l. 7 
Share (%) 53.1 30.5 44.8 52.4 48.2 49.5 49.9 
Total 326.5 671 .4 717. l 704.2 946.2 1,073.9 1,028.4 
Increase in % 193. 4 105. 6 6.8 -1.8 34.4 13.5 4.9 
1) As of November, 1982, 2)In Million US Dollars 
Sources : Korean Ins t i tute for International Economi cs (Jeddah Office) 
Off i ce of Co ITTnerci~l Attache, Ko rean Embassy in Jeddah . 
noteworthy points here are: Kuwait and Syria, which served 
a s major trade p 1 at for ms to Saudi Arabia, 1 OS t their 
a dvantage to South Korea . At the same time, Korea was able 
since 1978 to surpass Saudi Ara bi a's two major traditional 
trade partners, the Netherlands and Switzerland . 
Figure 3-3 
Construction and Service Secto r: Alt hough commodity 
trade between Saudi Arabia and Ko r e a has increased 11 fl 
1 l 
significantly over the last decade, its magnitude is stil
l 
minimal. It would be difficult to allege that Saudi Arabia 
and Korea have sufficiently enhanced their bilateral trade 
to diversify their dominant Western and Japanese trade 
c on ne c t ions ? Each is still dependent upon its major 
suppliers. However, this merchandized goods trade is 
rather secondary to the Saudi-Korean connection. The most 
important bilateral economic relations between these two 
countries take place in the construction-service sector, 
w he re prior to 197 3, there was virtually no activity. At 
this time Korean overseas construction firms were chiefly 
engaged in the Vietnam market as subcontractors for us 
fir ms such as Bechtel and Vinnel and on a smaller scale in 
l 7 
South East As i a n mar k e t s ? Ever since the Korean firm 
Samwhan Construction Co. initiated its first $ 25 million 
highway project in December 19 7 3, however, Korean 
penetration in the Saudi construction market has been 
l 31 
Figure 3-3: Composition of Saudi Arabian Imports by Country 
country/ year 1976 11977 1978 1980 1982 
U.S.A l ,627 i l) 2,730(1) 3,956 ( l ) 6,087 ( l ) 8,989(1) 
Japan l ,057 (2) 1,699(2) 2,857(2) 5,452(2) 7,687(2) 
W.Germany 719 (4) 1,225(3) 
I l , 96 7 ( 3) 2,761(3) 4,299(3) 
l Italy 426 ( 7) 899(5) 1,291(5) 2,226(4) 2,595(5) 
l 
U.K. 514 (6) 903(4) l , 383 ( 4) 1,971(5) 2,682(4) 
France 233 (l 0) 490(9) 707(8) 1,648(6) 2,159(6) 
~ 
-
Netherlands 322 ( 8) 646 ( 7) 851 ( 6) 962 ( 7) 1,001(8) c<'. 
S. Korea 62 ( 21) 189(14) 717 ( 7) 946(8) l , 304 ( 7) 
Taiwan N.A. N.A. 427(9) 678(9) N.A. 
I: Syria 572 (5) 515(8) 
Kuwait 762(3) 652(6) 
\1 
I 
#:Figures are in US million dollars. Number in bracket indicates rank. 
Source: IMF, Directions of Trade: Yearly Report (Washington, D.C.: IMF, 1983) pp.456-457 
f,_ 
... 
I 
phenomenal. Boosted by the oil boom and subsequent massive 
d e v e 1 o p me n t plans, Korean construction firms literally 
created a new myth in the desert of the Arabian Peninsular. 
As seen in figure 3-4, regional composition of Korean 
overseas construction was highly concentrated in the 
Southeast Asia till 1974. However, since the oil crisis 
and the massive inflow of su r plus capital into the hands of 
Figure 3-4 
II 
I 1 
I 
the Middle East OPEC countries, the Korean construction 
activity began to shift rapidly from Southeast Asia to the 
Middle East. Nearly all the construction contracts (97.1% 
in 1976, 98% in 1978, and 94.7% in 1980 ) came from the 
Middle East, cumulatively totalling$ 37.1 billion as of 
1980. Yet a great portion of the Middle East market was 
heavily concentrated in a sing 1 e country, Saudi Arabia 
(figure 3-5), which accounted for more than 70% of the 
Middle East contract total during 1973-1981, a mo u n t i ng t o 
$27 billion. Compared with the volume of commodity trade 
during the same period, the magnitude of this construction 
sector is quite impressive. 
Figure 3-5 
132 
Fi.9.ure 3-4: 
Regional Composition of Korean Overseas Construction 
C 
1966-73 1974 1976 1978 1980 Total Contract ,-{ ~'; 
Ar:10unt (US$1, 000) 
R.u.i2,n 1 X 1 1 X Cases 
Middle East 5.7 34.l 97.1 98.0 94.7 1,034 37,154,654 
Southeast Asia 71.0 55.8 1.4 1.1 s.o 316 2,206,966 
Pacific area 22.3 8.7 0.7 0.2 0.1 114 173,223 
Africa 0.6 1.4 0.6 0.3 0.2 16 
241,162 
Latin America 0.4 0.3 0.4 5 53,950 
Source: Hui-Woo Kim, Our Country's Construction Export to the Middle 
Ea s t and 
Supporting Policies (Seoul: Korea Inatitute for Industrial Ec
onomics and 
Technology, 1982), in Korean, pp. 20-21, Tables II-1 and II-2. 
Fi .9.ure 3-5: 
truction in the Middle East b~ Countr~
 
Korean Cons
(Selected Countries) Unit: US$ mill ion 
0 1981 I2tal % Mideas
t Construction 
1973-76 1978 198CQ!i!DU:I 5,888 27,435 73. 8
 
Saudi Arabia 2,752 6,404 5,2
38 
- 168 1,366 1,689 3,446 
9.3 
Libya 
205 528 379 85 
1,917 5.2 ...:. 
Kuwait 764 1,277 3,4
 (~ 
- 30 431 Iraq 
16 113 227 126 
856 2.3 '" 
U.A.E. 1. 6 
Iran 54 282 
63 - 601 
173 69 7 23 
382 1.0 
Bahrain 7 334 0. 9 33 
Qatar 8 89 79 18 82 324 
0. 9 
Jordan 58 37 225 0 . 6 
Yemen'A. R. (North)- 86 
23 
107 16 186 
0. 5 
Egypt 10 31 - 88 - 10 120 
0. 3 
Sudan - 0.2 22 - 52 
0.1 
Omag f Ove rsea~ 
Republic of Korea, Hinistry of 
Construction, Present Status o
Source:  31, 1981. 
C2nstruction Export (Seoul), Oc
tober
As f i g u re 3 -6 indicates , the contracts won by Korean 
fir ms called mainly for the construction of physical 
infrastructure (ports and roads ) , soc i a 1 infrastructure 
(housing and hospitals), and plants and e ng i ne e r i ng 
services. Until 1977, the major component of these 
contracts was physical infrastructure, while in the post-
1978 period the construction of social infrastructure, 
most 1 y housing projects, and of plants and e ng i nee ring 
services constitutes the major portion of contracts 
awarded. The changing nature of the contracts largely 
Figure 3-6 
reflects the sequencing pattern of the Saudi development 
pl ans whose initial emphasis was placed on physical 
infrastructure and later on social overhead sectors and 
18 
industrial projects . 
The extent of Korean penetration into the Saudi market 
can be easily understood by examining two major factors. 
Figure 3-7 illustrates the Korean share of total Saudi 
contracts annually available under its de v e 1 op me n t 
expenditure. In 1975, the first year of the second five-
year d e v e 1 o p me n t pl an, Saudi Arabia's tot al government 
expenditure was $131 billion out of which $ 7 5 
133 
Figure 3-6: 
Sectoral Composition of Contracts in the Saudi Market 
million US$ 
Hou sin 
- -i-~ 
port -roa-d~  plants/ 
, ~ricit 
75 76 77 78 79 
Source: Ministry of Constructi on, 
Present Status of Overseas Constructi on 
Figure 3-7 
billion was allocated to the de v e 1 op men t budget. The 
Korean contract share out of this $ 75 billion development 
budget was 6.8% in 1975. From this modest ratio, the Korean 
share in the total development budget gradually increased 
until it peaked in 1978 with a share of 22.9 %. During 
1976-1982, Ko re an f i r ms annually won on average at le as t 
14% of the development budget ( the total available public 
sector contract amount). Since defense and industrial 
development related projects in addition to those contracts 
originating from the private sector are not included in 
this development budget, the share of Korean contracts in 
the Saudi construction market is substantial, especially 
given the fact that a large portion of contracts came from 
the defense sector, most 1 y from the US Army Carps of 
19 
Engineers and the National Guard. 
When compared with the commodity trade, an interesting 
aspect emerges in the construction and service sector. 
While the dominance of the US, Japan, and EEC countries in 
the Saudi commodity market has been stable in terms of 
share and ranking, the re was a sharp reversal in the 
construction sector. Traditionally the Saudi construction 
market was a monopoly of US firms. The deep involvement of 
ARAMCO, the us Army Corps of Engineers, and other us 
134 
Figure 3-7: Saudi Development Expenditure and 
the Share of Korean Overseas Construction 
Unit: 100 million US$ 
1975 1976 1977 1978 1979 1980 1981 1982 
Total Public 
Expenditure 1 31 317 375 384 425 499 881 914 
[)eve l opment 
Expenditure 75 213 271 279 291 413 609 594 
Contract amount 
awarded to 
Korean fi nns 5.1 21. 5 24.1 64.0 47.4 52.4 77 .6 83.5 
Share(%) 6.8 10.1 8.9 22.9 16.3 12.7 12.7 14 .1 
source: Data supplied by the Office of Conts
i rn u cJ te iod nd  a Ah, t taS ca hu ed ,i   KA or ra eb ai na  . Embassy 
academic and research institutions in the formulation of 
de v e l op me n t plans and consulting in the Kingdom had paved 
20 
the way for American firms in the Saudi market. As a 
result, the contracts awarded to US firms until 19 77 
constituted almost half of the Saudi total construction 
market, with West Germany and France in second and third 
place. This monopoly structure was reversed by the entry 
and expansion of Korean firms. By 1981 Korean firms bee ame 
the number one contractors in the Saudi market, taking more 
than 30% of the total contracts, when amounts of principal 
as well as sub-contract projects are combined ( ENR Nov. 
198 2; MEED August 1978 MEED Jan. 1982). T he expo ne n t i a 1 
growth of Korean firms in the Saudi market is indicated by 
the fact that by 1982 30 Korean firms operating in the 
Saudi market were placed on the list of world's top 200 
contractors (ENR Nov. 1982). Among these Korean fir ms, 
Hyundai International marked ranked 10th, topping a number 
of the US, Japanese, and EEC firms. 
Korean Manpower.!..!! Saudi Arabia: Saudi Arabia occupies 
a vast geographic area, but is a s ma 11 s t ate me as u re d b y 
21 
the size of its population (about 7 million). About 
half of the population is either under the age of 20 or 
above SO (Si nc 1 air and Birks 198 2) ? Thus, Saudi Arabia 
severely lacks a sizable manpower to initiate and implement 
its massive development projects. This manpower shortage 
had led Saudi Arabia to depend on an expatriate workforce. 
135 
Jordanians for the ARAMCO projects, 
upon 
Eg Y Pt i ans 
other skilled professional jobs for 
including doctors , urses 
and engineers, and on 
n
the Yemenis for u ns k i 11 ed 
1978: 193-5; labo
r 
(Lackner Salameh 19 8 2: l 1 5 ; Abir 1983). 
Figure 3-8 projects the past, present d 
an future trends of 
expatriate workforces in 22 the Kingdom. 
Data in this 
figure indicate that even prior to the oil boom the re was a 
s izable number of expatriate workers, most 1 y from the 
Figure 3-8 
Arab states (345,000). However, in 19 81 the number of 
foreign workers r a p id l y i nc r e as e d ? Most Arab workers come 
from North- South Yemen ( about 1 million) and Egypt ( 
about half million). At the same time, th 
e number of Asian 
workers has substantially increased reaching more 
23 than half 
million . 
As a part of the exp a triate labor force, Korean 
manpower, known for its strong disc i p 1 i n e , productivity, 
and hard work has contributed substantially to th e 
d e v e l o p me n t of Saudi Arabi a . Starting with 3,003 workers 
in 19 7 5, the Korean labor migration into the Kingdom has 
shown a phenomenal growth. As Figure -3--9 shows , the total 
Korean work force in Saudi Arabia increased almost 900 % 
from 16,812 in 1976 to 116,075 in 19 8 2 . Of c ours e , 
migration of Korean workfor c e is different in its nature 
from other Arab migrants. Korean workers are a part of a 
l 36 
Figure 3-8: Expatriate Manpower in Saudi Arabia 
(in thousands) 
Ethnic / year 1963 pre-1973 1975 1980(est.) 1985(projection ) 
origin 
Arab ---- 345 699.9 1540-1571 1810-2245 
Asian1) ---- ---- 38.0 85-1002) 140-195 
Other3) ---- 65 35.5 78-90 107-140 C 
,....,9.._  
-
Total 4) 237.5 400 773.4 1703-1761 2057-2580 
1) Asian ethnic origin includes Koreans, Indians, Pakistanis, Taiwaneses, Philipinos, and Thais. 
2) This figure derived from Kerr and Yassin (1982). But this figure seems too conservative. 
Shaw and Long (1982) estimate 792,000 Asian expatriate workers as of 1980. This approximates 
with author's finding from the Saudi Ministry of Interior. 
3) This label includes Africans, Europeans, Turk1shes, and Americans. 
4) Figures in this total section are not authoritative ones. Many different figures have been suggested . 
Sources: M. Kerr and E. Yassin, Rich and Poor States in the Middle East (Boulder, Co.: Westview, 1982) 
ILO, Manpower and Employment (Geneva: ILO, 1975) ??~ ~? 
Birks and Sinclair, InteLnationaLMigratfon and Development in the Arab Region (Geneva: IL0, 1980) pp.134-
135 
J . Turner, Middle East Business Exchange, Jan. 1983, p.25 
contract 
pack age ' t he i r 
duration of stay being usu
l ai lm lyit  ed to 1-2 
years of project period, while Arab workers 
are rather 
individually employed under Saudi sponsors, thus 
having more permanent employment. The rate of change in 
Figure J-9 
the Korean workforce in Saudi Arabia is contingent upon 
the size of th e contracts awarded to the Korean firms. As 
shall be discussed in Chapter Five, however, there is a 
tendency to decrease the number of Kore an workers as 
Korean fir ms seek cheaper labor from other Thi rd World 
countries due to a rising wage demands of Korean workers. 
Joint-Ventures, Capital Recycling, and Technical 
Cooperation: As we have shown above, t he main e 1 e me n ts of 
the Saudi-Korean con nee ti on can be found in the 
construction and commodity trade ? However, we should not 
overlook other newly emerging di mens ions of bilateral 
economic relations between the two countries. These new 
di mens ions are industrial joint-ventures , financial 
rec ye 1 i ng , and technical cooperation. 
Traditionally Saudi Arabia has tended to prefer package 
or turn-key base deals as the primary form of foreign 
participation in Saudi d e v e 1 o p me n t plans. Recently, 
however, both the private and public sectors in Saudi 
l 3 7 
Figure 3-9: Korean Manpower in Saudi Arabia 
Annual Trend 
Unit??  10 thousands 
15 
14 
13 
12 /'-?z__, 
/ 176,075 
11 . 
/1fJ9,0BO 
10 . 
9 
8 
7 
6,089 
6 
5 
4 
8,344 
3 
2 /6,8?1 2 
1 
? 3 ,9 31 
32 
76 77 78 
79 80 31 
75 
Source : Office of Labor Attache, Korean Embassy in Jedda h, Saudi Arab i a 
Arabia have begun to advocate 
industrial j o 
b i e n t t w -ve  e e n n  t ul  o rec sa  l and f ore i g n f i r ms ? 
Given the nature
p  ack oa fg  te h e deals, it seems quite natural for the Saudis to 
prefer such a form of business 
participation through whic
th h ey can promote the transfer of 
technology and skills to 
1 oc als in a constructive manner. This trend toward 
' partnership' 
with foreign companies has incresed as the 
pattern of development pl ans h as shifted from physical and 
social infrastructural projects to more technology-
intens 2i 4v  e industrial projects. 
Responding to this policy shift in the Kingdom, Korean 
firms and the Korean government have begun to promote 
these industrial joint-ventures. This positive response by 
the Koreans was quite understandable. The shifting pattern 
of development plans from labor- to technology- intensive 
projects began to bring about the loss in competitive 
advantages of Korean firms which depended primarily on 
cheap labor. In addition, in order to overcome various 
barriers to expand the market share in Saudi Arabia such as 
preferential treatment to local firms and the technological 
supremacy and market dominance of Western firms, Korean 
firms had to form an industrial al 11 i a nc e with 1 oc al 
e nt re pre ne urs via joint -ventures , no matter what the 
25 
terms. Up to 1980 only 14 joint-ventures between 
Korean and Saudi firms had taken place and these were 
predominantly concentrated in the construction sector( 11 
out of total 14 ventures). There was only one joint-
venture in the manufacturing sector. Since 19 8 2, how e v e r, 
1 38 
t he n at u re of j o i n t -v e n t u re s 
has changed. 
ventur Oe us t  of 8 joinco t-ncluded in 1982, only three was locate
c do  ns tt hru e ction sector while the 
other five projects were 
the i nm  anufacturing sector. At the pres e n t ti me , 11 Ko
f ri er a m ns   are engaged in a feasibility 
survey of j o i n t -v e n t u re s 
with Saudi local firms in the industrial sector ranging 
from a PVC plant, a steel pipe plant, a concrete pre-cast 
plant, ship repairing facility and a furniture plant. 
Compared with the US, Japan, and the EEC countries, the 
share of Korean participation in joint-ventures is minimal, 
representing less than$ 100 million in total i n v e s t me n t ? 
Yet, the future potential of this kind of economic 
cooperation appears to be quite significant in terms of 
diversification of capital and technology for both Saudi 
Arabia and Korea. This is particularly true since Saudi 
local e nt re pre neurs have begun to recognize the 
technological competence of Korean firms in the engineering 
and industrial plant construction fields. As seen in 
figure over the last three years Korean firms have 
successfully completed the construction of complicated 
plants which were previously the monopoly of Western and 
Japanese firms. Their demonstrated ability to build de-
salination plants and to participate in the construction of 
petro chemical industries, both of which are essential to 
the future industrial development of the Kingdom, might 
have induced the Saudi government to encourage Korean 
joint-ventures with locals. 
1 39 
Figure 3 - 10 
w level, t he rec ye 
1 i ng 
o o
f 
lthough operati
ng at a l
A
udi 
ace between S
a Arabia 
has been takin
g pl
surplus capit
al 
s om he 
foreign exch
ange earning fr t
and Korea. Indeed 
ion exports thems
elves are an 
ity trade and con
struct
commod d 
ecycling. However,
 Korea wante
pparent patte
rn of such r
a  
than that, artly
 becausep of a 
ore m Saudi Ara
bia 
m fro
 from the second 
eral trade ba
lance derived
Worsening bilat
 foreign cap
ital 
for
 because of a 
need 
0 artlyil shock and 
p
e 
l drive begun
 since th mid -
to ay for a rap
id industria
p ent 
ly needed cap
ital investm and 
has bad
l970s. While Korea 
m Saudi Arabia
, 
o the
 
nsfer fr
0 t her types of 
capital tra
forign 
 growing need
 to divert th e ir 
feel a 26 
Saudis began t O 
odollar marke
t. In this 
the Eur
Capital investm
ent from 
mpany, a f i r m be
 1 0 ng i ng 
ing Co
the Triad Hol
d
Setting it wa
s t 
al Saudi busi
nessman, tha
Khashoggi, a c
ontroversi
to Adnan any in Korea
 
stment and ho
lding comp
O int -ventured 
an inve
j y a i 
This was then
 followed b Saud
. 
With o
n
some $10 milli  
Kore an govern
 me n t bonds ( $ l 5 
t i n tmen
8overnment inve
s
es we re succe
ssful 
parti
 same time 
Korean 
mi 11 ion). At th
e
c 1 oa ns from Saudi 
ell as pu
bli
in uring priv
ate as w 
sec t received a $70 
 Kore
an governmen
the
Arabia. In 1979 Arabia for port 
loan from S
audi 
million public ing for a dditiona
l 
egotiat
is currently 
n
construction an
d 
140 
gure 3-10: Major Plant Projects b,l Korean 
Fi nns (selected) 
Fi
Unit: $ US mi 11 ion 
-
Type Projects Amount Contract-
Finn- Project
type name nature 
lant nt Plant 235 principal Kore
a Heavy- turn - key 
Cement P Jizan Ceme Machinery base 
II m infra/ 
Gas Plant Usmania LNG Plant 119 
Daeli
e 1e ctri city/ 
i nsta 11 at ion of I 
machinery 
II II 
II 
Yanbu LNG plant 200 
De - salination 
Pl ants Al-Khoba De-salina-
373 II Hyundai consortium tion plant 
Jubai 1 De-salination II 
37 II plant 
Daelim/ infra/ electricit 
Stee l Plant Juba i1 Steel Plant 126 sub -con
tract 
J ungwoo / machinery 
installation 
Fe rt i 1 i zer 
Pl ant Juba il Fert i 1 i zer II 
plant 33 prin cipal 
Daelim 
II  rn-key base 
Po we r Plant Assir Power Plant 183 
Hyundai Tu
Sour ce: Of f i ce of Constructio n Attache, K
orean Emba ssy in Jedda h. 
so
o uf r ce$ . 
The Korea 
1 oa ns 125 million from the same 
for a $ 250 million als opting Ind Bank is ou  strial 
while the Sunkyung from a Saudi bank, 
commercial loan 
private loan obtained a$ 78 million 
C O ng 1 o me r ates have 
active neg o ti at ions are currently, 
from Saudi Arabia. 
under way to establish one or two commerial banks in joint-
and 
venture form with the Saudi National Commercial Bank 
27 
th e Riyadh Bank. 
Finally, along with these commercial transactions, more 
take place 
cooperation has begun to 
explicit technical via governmnt-to-government 
tw
b oe  tw ceen th
o
e u ntries the Saudi percepetion of 
In orde
a rg  r te oe  m coen rr
28 
ts e c? t 
Saudi connection, the 
Korean gain
u sn  i f. rl oa mte  r ta hl e  involved in promoting 
Korean government has been actively 
1979. Over 
cooperation with Saudi Arabia since 
technical 
the years it has dispatched 51 agricultural technicians, 29 
railroad system experts, and small number of scientists and 
Keeping pace 
planning experts to Saudi Arabia. 
economic private firms have Korean 
efforts, 
With government a 1 and 20 0 e ng i nee r i ng 
petrochemical technicians 
invited 120 
Students of the King Abdulaziz University for training over 
the last ( Korean EmbassY in Jeddah 1983). 
three years and 
political, economic, 
Given these 
few mutual 
two countries, the 
bet""een the 
cultural interactions some further 
dimensions described above deserve 
economic 
The volume and range of bilateral economic ties 
analysis. is of consider ab 1 e Arabia 
between Kore a and 
Saudi 
1 41 
p 
 any other
 bilateral relati
onshi
with
mag nitude c ompared 
intensity 
can be 
nd 
in ird World.
 Sue h magnitude 
a
th e Th
lation to the re v
arious 
haps to
od in 
Per better under
s
companied ac these 
impacts th
at have 
Positive and negati
ve 
transactio
ns ? 
onnection 
udi-Korean
 C
a
 Analysis 
of the S
l_mpact
es 
ic activit
i on 
rean econo
m
Ko ?  imp
acts of Ko
---r-
e= a? The  areas. But the most in many
Saudi Arabia ca
n be seen 
 domestic
 
n macro
 -
hemselves 
i
important 
t t
impacts m
anifes
sert Kingd
om 
 de h
as 
boom in th
e
i nd i c a t o rs
 ? The 
of the rean 
to the imp
rovement Ko
ributed 
stantially
 cont ustrates, Sub 1 ill
ition. As F
igure 3-1
alance of payments 
pos
b
s from the
 Saudi 
change e
arning
the net foreign 
ex
gure 3-11 Fi
ntial port
ion 
a
ted a sub
st
rket alone
 constitu
a  an 
Constructi
on m
 to 2 5 % i n 
1 9 7 9 and
. es: fr O m IO 
% i n 1 9 7 7
Of f 0 rvreign rese st urplus 
 1977-1981.
 The fir s
rough
of 17 _3 %
 th
conomic history
 
77 in Koren
 e
nt balance
 of 19
accou n 
major fore
ig e xc ha nge 
pected 
gely due t
o U nex
l  lar  the a so
on sector
. Furthermor
e
i construc
ti
om the Sa
ud
 accounts
 
income fr transfer
n service
s and 
i
ecuti ve surp
 1 us rnings fro
m 
Cons f the ea
 also the 
result o
9 was
through 19
77-197
eral and the Saud
i 
?on sector
 in gen
 t 1 
overseas co
nstrue
l 4 2 
3-11: Balance of Payment and Overseas Construc
tion 
Figure 
Sector (1977-1981) 
Unit: US$ million 
1981 
1977 1978 1979 1980 
Foreign Reserve 4,310 4,940 5,710 6,560 
Merchandise 
de  -4,395 -4,384 -2,958
 
Tra -447 -1,781
Services and 
nsfers 72 244 -937 -1
,520 
Tra 489 4
(Overseas 
construction 1,395) (1,355) ( 1 , 73 8) 
) (634) ( 1 , 008) (balance
(Saudi constru-
ction balance) (446) ( 885) ( 1 , 1 38) (1 , 134) 
( 1 , 300) 
Earning from 
Saudi construction 
as a share of 10% 
17. 9% 25% 17 .2% 
Foreign Reserve 
Cu rrent Account -4,478 
Balance 12 -1,085 -4,151 -5,321 
Source: Korean Overseas Construction Associati
on, Five- Yea r History of 
rea n Overseas Construction (Seoul: KOCA, 1982) 
p.5 / Data 
Ko
provided from t he Office of Financia l Attache,
 Korean Embassy 
in Jeddah. 
142- o. 
market in particular. The sharp reversal of this trend in 
1980 and 1981 caused by sec and oil sh QC k, worsening 
economic conditions and the related heavy foreign debt 
services virtually nullified the importance of continously 
sizable receipts from the Saudi market. If commodity export 
income is combined with construction income from the 
Kingdom, the extent of the contribution to the Korean 
balance of payments position made by increased economic 
transactions with Saudi Arabia would be much greater. 
The bilateral economic tie with Saudi Arabia has also 
substantially contributed to the remarkable economic growth 
rates Korea has recorded over part of the 1 as t d ec ad e 
(Figure 3-12). The gross construction earnings from Saudi 
Arabia have over the last seven years marked nearly 11% of 
Korean GNP when combined with commodity export earnings. 
And net earnings have constituted more than 2% of GNP on 
the average during the same period, adding to the overeall 
GNP growth rates (i.e., increase in net foreign earnings 
from the Saudi commodity and construction market divided by 
the amount of increase in GNP). At the same time, these 
earnings aided the rapid expansion of capital formation as 
Figure 3-12 
well as export promotion through industrial linkage 
effects (as was indicated in the increase of construction 
14 3 
tion 
the Saudi 
Construc
1 Income 
and 
2: Nationa or 
Figure 3-1 Sect 0 mi77ion 
Unit: US$
 10
1980 1981
 
1979 
978 
977 
1
1976 
1
 574.3 600. 7
Gross atfonal . 7 47
3.5 
P N 351
l"Oduct 274.2
 
11.3 13.2
 
Net Fo .  11.3 
E:xch re19
n  
rning 
.9
.5 
8
from a;:e ~
a 4
rabia Ud1 A 9% 
 1.8
% 1. 
1.9%
1. 3% 
-Ratio 
 Financia1
 Attache, 
ffice of
data provi
ded by O
m i Arabia. 
Source: Ca1cu7ated
 fro ud Jeddah, S
a
Korean Em
bassy in
I 
I 43 <J 
materials exports). 
One of the mixed impacts derived from the Saudi 
connection occurs in the labor sector. Saudi construction 
activity had a favorable impact on overall employment 
creation in the construction sector and other sectors 
through industrial linkage effects. However, the re were 
some adverse effects. The average monthly wage for Korean 
workers in Saudi Arabia was $ 765.00 in 1980, almost double 
the average wage for Korean workers employed in other 
sectors. This high wage trend in the Saudi construction 
area entailed two negative consequences: one was the acute 
shortage of skilled la b or that resulted in the domestic 
market, and the other was the related wage inc re as e 
pressures on other sectors which aggravated inflationary 
trends already in evide nce. 
In general, the Saudi connection was crucial in helping 
Korea to overco me sporadic balance of payments crises, to 
boost its growth rates and to emboss its international 
image, which in turn was instrumental in building political 
legitimacy for the Park regi me then in power. At the same 
ti me, the Saudi bo om provided a way for the Korean public 
and private sectors to further their political and 
economic objecti ve s in other Middle Eastern oil producing 
countries, es pee i ally those progressive Arab states 
traditionally maintaind strong diplomatic ties with North 
29 
Korea, such as Li b ya and Iraq. These positive impacts are 
not limited to macro-economic and political indicators ? 
They significant ly appear on the micro-level too. The 
144 
OJects 
growing ability of Korean firms to win large-scale pr? 
and the severity of 
(e.g., over $100 million per project) market 
competition in the Saudi contracting 
international backward and traditional 
fir ms, 
have forced Korean private innovative 
to be more efficient and 
in management style, styles. As 
internationalization of management 
h the the Hyund
ai 
wit
shall be discussed in detail in Chapter Five, 
International, perceived to be the Korean corporate miracl
e 
was chiefly a creation of this Saudi 
by Western observers, 
Arabian boom. 
the Saudi 
all these positive impacts, 
Not withstanding In the wake of the 
not without drawback. 
The first 
c O nne ct ion was 
various negative impacts began to emerge. 
foreign 
boom ? aggravation of has been the 
of 
and most serious inflation throughout the latter part 
ced for
eign 
exchange-indu the massive inflow of 
cause o
f 
Be 9 
the 1970s. 
exchange earnings from Saudi Arabia in 1977, 1978, and 197more 
Korean government increased the monetary supply 
the ThiS increased money supply plus wage 
than it had planned? with rapid investment in the heavy 
coupled nary 
remitances about serious 
inflatio
brought 
sector the 
industrial 
during this period and was responsible for 
first 
pressures 
economic collapse in 1980 that produced the 
partial 
negative economic growth rate (-S.S%). the Saudi boom provoked 
an 
as mentiond earlier, 
Second, labor-sho r tage as well as an escalation of 
This 
acute skilled economic 
sectors. 
demands across the various 
wage 
145 
de c lining international competitiveness in 
1 a te r produc ed 
to overall wage sectors (due 
the commodity export 
an additional 
i nf 1 at i on a r y 
constituted 
pressures) and 
source. the overseas 
heavy Korean concentration in 
Third, made the Korean 
construction market in Saudi Arabia later 
the Saudi Easy entry into 
uniquely vulnerable? 
e conomy led the 
rapid expansion of market share 
market and the business risk 
diversion 
overlook classical 
Kore ans to This heavy reliance 
strategies of market diversification. 
the following: a loss of 
produced 
on the Saudi market consecutive bankruptcies 
bargaining power over the Saudis, other 
sharp competition from 
of Korean firms ( due to labor), the negative 
based on cheap 
Thi rd World f
irms 
repercussions of these on the Korean economy as a whole and 
and unrealitistic 
the financial sector in particular 
on and the consequent 
competition by Korean firms 
price will 
on the Korean go<ernment and on labor ( this 
burdens 
be dealt with in chapter Six in detail). 
concrete 
to the unavailability of 
Due the 
Saudi 
is quite difficult to analyse the impact of 
precision. 
data, it 
Kor i n saudi Arabia with the same 
e an c on ne c t on o number of plausible to suggest a 
see ms 
, it First, it is an Neve the less 
well as negative impacts. 
as in Saudi positive Korean participation 
that 
undoubted truth 
de?elopment accelerated the ooerall rate of the deoelopment 
As shall be discussed in Chapter 
in the Kingdom? 
process 
146 
more than 90% of development projects won by Korean 
Five, original contract 
completed earlier than the 
firms we re the 
thus contributing to the accomplishment of 
schedule, than targeted. This 
plan earlier 
annual d e v e 1 o p me n t development 
implementation of 
in it i at ion and 
efficient significant political carried 
Kore a n f i r ms 
projects by timely alleviation of the 
ly t
he 
especial
implications ' socio-
housing shortage which was then a source of 
severe 
political discontent in the Kingdom. 
Another im?ort?nt contribution to S?udi dev?lo?m?nt by 
reducing inflationary 
their role in 
orean firms was
 
K the mid-1970s. 
There 
rampant in the Kingdom over 
trends One of 
multiple causes for this inflationary surge. 
we re public 
w?? th? ????n?ion ?nd/or w??ting of 
them until 1975 the Saudi 
As mentioned earlier, 
expenditure. was dominated by 
both construction and commodity, 
high 
market, 
firm? which u??d to indulg? in int?ntionally 
May 
Western 1978; MEED Lackner 
escalation (Mallakh 1982; 
price 
For ?????1?, for a ?roj?Ct that would norm?lly cost 
than 
1979). $ 00 million W??t?rn firm? charg?d mor? 
less than 1
sive 
partly because of 
exces
double or triple that amount, endemic to a 
profit considerations 
or JO this 
overhead COS tS The prevalence of 
market structure. for 
monopolistic was partially responsible 
business practice 
type of The entry of Korean firms with 
the demand-pull inflation? 
com?etitiv? ?ric?? r?v?rs?d thi? trend, which in turn ??v?d 
th . f bliC resources and reduced the demand-pull 
e wasting o pu 
147 
inflationary pressures. 
Korean workers 
massive influx of skilled 
Third, the 
shortage of local 
labor. 
compensated for 
the discipline and effectiveness of the Korean 
Furthermore , 
workforce relieved the Saudi rulers of potential political 
anxieties over labor disputes and political unrest that was 
expatriate labor forces. 
often traced to 
of Korea as a reliable 
Saudi choice 
Finally, the political pay-
partner has produced a number of 
economic First, such a policy orientation 
offs to the Saudi rulers. 
that the Kingdom impression 
widely held 
reversed a on 
as a mere rentier economy totally dependent 
functions the 
Western firms. the Korean connection demonstrateed that 
economic 
government was capable of diversifying its 
Saudi Second, the entry of 
in its own national interest? 
ties opportunities for a 
created new business 
Korean fir ms c 1 ass e n t r e pr e ne u rs , middle 
of growing large pool and bureaucrats who had felt deprived by 
traditional actors allocation of business opportunities. 
the traditional risks and therefore 
political 
to 
Western fir ms about the selection of local sponsors and agents 
concerned from 
we 11 
their counterparts chiefly 
preferred merchants or from royal family members 
established He j az ? ates Thus there was 11?ttle room 
1
and  their immed
iate assoc ? ? me re ha nt s and local 
newlY emerging middle class 
for the 
elites to develop business connections with Western firms. 
the entrY of the Korean firms and their 
for these 
At this juncture, tices created an opening 
Prac
aggressive business 
bur ea uc rats ? This 
businessmen and 
isolated middle-level grievances 
the growing political 
to assuage 
in turn helped 31 
from this sector. 
It is equally difficult to measure any negative impacts 
of 
the Korean connection on Saudi Arabia as in the case 
of However, the decade-old bilateral 
positive side analysis? some 
two countries began to create 
these 
tie between One of these issues 
on the Saudi side. 
problematic issues t's the Kore an 
governmen
dislike of 
was the Saudi's 
manipulation of private Korean firms operating in the Saudi 
below, the 
Korean 
 discu
ssed 
As s hal 1 
be the 
market. actively involved in coordinating 
government bee ame 
business practices of Korean firms in Saudi Arabia in orde
r 
to prevent excessive competition among them in that marke
t 
Faced 
the gains from Saudi Arabia. 
t ere by to enhance ace used the and h the Saudi government 
vior, in 
with sue h 
beha
forming a new monopolistic market struture 
of umbrella. The 
Saudi 
Kore ans government 
di Arabia
 under the and 
Sau that the Saudi market was laissez-faire 
other, thus 
position was had to compete with each 
32 
the Korean 
fir ms 
enhancing the Kingdom's gain? discipline and to earlier 
contrary 
addition, labor disputes 
by 
In number of 
a growing ass as in at i O n of 
effectiveness, the Kingdom following the 
Korean workers 
in gave the impression that the Korean 
hat s UC h 
President Park in 1979 tcontrol over labor and 
1 os i ng other 
government was 
labor disputes in th? Korean ~ork camps might affect 
149 
rumors about 
Added to this were 
e xpatriate workers. bribery and 
mal-practices such as 
Korean businessmen's 
ruptcy of Kore an 
consecutive 
bank
kickbacks , the market as a in the Saudi 
operating 
construction firms 
and the delay in contrac
t 
of irrational pricing, 
result of contracts 
the increasing s
izes 
by 
schedules ca used 
100 million). 
(e.g., over $ historical, political 
and 
examination of 
The above 
economic dimensions of the Saudi-Korean connection raises a 
First, despite 
number of theoretically interesting points. the 
lack of complementaritY in 'background conditions', 
a Kore a is 
economic tie between Saudi Arabia and 
bilateral Sec o nd , i n a s ha r p 
impressive in its magnitude and range. both Saudi 
with recent dependencia literature, 
contrast of flexibility 
and 
Korea show a high level 
Arabia and in 
in th? formation of foreign economic policy 
res i 1 ie nc e 
and in the shaping of bilateral tie in particular. 
general Saudi -
inter-South bilateral ties typified by the 
Thi rd , able indicates that bilateralism may be 
Korean connection especially impacts ( 
economic 
positive 
to produce indicators 
and 
by macro-economic 
me as u red 00 
productivity 
measured by ,mployment effects and wage levels) 
involved 
welfare 
the parties concerned without necessarily getting rules and 
arr a ng e me n t s of 
, 
in viewed from the Saudi-Korean case 
FinallY, s ynd r orne 
ip rocedures). i not exempted from the 
nter-South bilateralism s Cooper 
of complex interdependence ( Bergsten and Nye 1975; 
that mutually 
Nye 1977) in the sense 
Koe hane and 1969?, 
1so 
a new set of
 COS ts and 
1 e ad to 
n e ficial excha
nges did 
be rability. 
nsitivity an
d vulne
onstraints 
such as se
c  following chap
ters 
se points in
 mind, the
Keeping the
ding to the
 rise 
s lea
ce the caus
al variable
attempt to tra
etween Kore
a and Saudi 
b
ec onomc ti
e 
of the bilater
al 
 -level 
 dynamics 
of process
mine th
e
a
Arabia , to ex nd finally to 
these two co
untries, a
 
interaction
s between
a broad fram
ework of 
a tie in 
the outcomes
 of such 
analyze 
nomy . In pu
rsuing this 
political ec
o
the internation
al  role of 
will be pla
ced on the
y emphasis 
inquiry, a 
primar
the private
 
reneurial dy
namism of 
 entrep
the state 
and the
tatist mode 
of 
e s
etical param
eters of th
theor
sector with
in 
hapter Two. 
ation ident
ified in C
explan
151 
FOOT NOT ES 
Wahabbi tradition is an offshoot of the Hanbalite 
1. The whose founder is Mohammad Abdul Wahab in the 18th 
sccehnotuorl y. This tradition reveals the most fundamentalist 
aspect of the Sunni sect which strongly adheres to the 
Quran and sunna as th? basic sources of Islamic law and 
which refutes any innovations or deviations fromto  pthies, e stweeo 
sources. For a succinct discussion of this 
Arbberry (1973) and Hynat (1982) to Kim 
For a general overview of Korean politics, refer 
a2n. d Wright (1977), A. Kim(l973), and Kihl( 1984). 
J. As of 1975 there was not a single Korean who could 
peak Arabic fluentlY? Even today, a number of Koreans who 
cs an command goo' d Arabic is verY limited despite hugh 
ec onomic and personal transacti?o ns . 
4. For example, Korea strongly opposed the supply control 
scheme of Intergrated program for Commodity (IPC) within 
the NIEO debate which was proposed by primary commodity 
Producing count~ieS including saudi A:abia (5. Kim 1979). 
For the topic of internal fragmentation of the Southern 
bloc in the NIEO forum, see Rothstein(l9Bl), Loeber (1982), 
and Ajami(l980). refer to Haas 
S. For the concept of back.ground conditions, And for its 
(1966), Russet (1966), and Caporaso(l970). Nau(l981) are 
critique, Mytelka (1973), Axeline(1978), and 
good sources to consult? 
6. The visit of Arab merchants to Korea was facilitated by 
a unique poliCY of the Mong?17an rulers during the Won 
Dynasty which favored and ut1l1zed the non-Han Chineses in 
foreign trade as a counter-balance to the dominance of the 
Han-Chinese (J. Kim 1979)? 
7. The close tie between Korea and Turkey was chiefly 
shaped by the us. president Truman's strong defense of 
Turkey in 1947 from the soviet Union and subsequent 
alliance formation between TurkeY and the US made Turkey 
dispatch its trooP to Korea during the Korean War. The 
troop dispatch by Turk?Y played the essential role in 
promoting friendly tie between two countries in the later 
8p.e rioNdo.r th di iomatic initiative had coincided with 
the Kore an f P anti-imper1? a l 1? st an d nati? onalist 
ideol ?~ergence o in the Middle East a s was 
ogies and movements 
152 
n i e s t e d i n t he f u 11 
m b a l  o s?  sf  om of N as s e r is m A a f nr  di  c ta  hn e  B Asl  o i c a  m _ ovemen
e t.  
th
pe T hiso  
T r
ov
h t 
erall political mood 
ird orW eao  r tld o  mh a il n tad i n N i t
i
s n
e  
 
e h 
ed
K g
n
c e
 
  au or  ven ra  n
So  uth o onK  or 1e 9a 8. 4) S a nd M M OL F  ( i 1979)
e 
d . M ( 
foreign minis
c tea rs  e lei dn   w oh fic fh i cial 9 ? Except one other delegaN to iv o. n s 1 were low delegation ( 966), by Korean ambassador stationed 
weighted ones primarilY led 
in Turkey ( KMOF 1979). 
lO. According to an interview with 
J Sa ap ua dn i , AZ mei bn a sD saa db ob ra  gh t, o who was then
i  n i n t ch he a rgeM  i on fi  st ArY si ano  f bf uo rere auig  n Affairs
l ,s  ra te hl ii s  po Kl oic rey a nw 'sas   n po rt o -a serious
i  t obw sta as cler ,a  th He er a   argufu edn  ct ti ho an t  of Korean gov
a ett ri nt mu ed ne t 's in l ukem wa ak rin mg   such a request ( Interview at his 
residence in Tokyo, Jan- 23, 1983). 
ll. Low profile in the Saudi's diplom
A ats ii ca   efw fa os r ts pr ii nm  a Er ai slY t  a result of f
s ih no ar nta cg iae l  i an n d th me a na pr oe wa e ro  f foreign 
K ao fre fa a irsw .a  s In no  t adth de i tic oo nu , ntry which 
p do rel wit  ic aa nl y  san igd nife ic co ano nm t ic attention
l  e fd ro m to S auth de i  AS ra au bd iai'  s win his ce hn  sitivitY t
i o  a Kl- oG reh aa  m (Id ni tervieAl? who
w
  was w ita hT  hird Secretary at audi 
S Embassy 
in Tokyo from,1968-1973). 
l2. Korea's new position was an o
UN v ertR  e res co olu gt nio itn io n2  42 o f ep thit eo  mized in the fo
1 l) l owT ih ne g  A sr ta ab t- eI msr ea ne tl si ,  conflict must 
an bd e  ree sq ou lvit ea db  l oe n  te prm ea? c? efu2 l)   conflict s
t eh te t lemw eit nh td  r maw usa t l ino vf o1 lvs er  ael from th? A
J re aw b ish te rrs it ta ot re i eso  cc tu hp ei  ed during 
?a tht eio  Jn ua nl e  1r 9i 6g 7h  ts w ao rf .  th 3e )  Pa Tl he es  tine peo
i pn l e a mn uy s t A be ra rb ec-l os gr na ie zl ei d  settlement. 4) Kor
s eao  ve sr ue pi pg on rt ty s,   thi en  dependence,
i  nte eg xr ii St ty e no cf : , all a ndth  e tc eo ru rin tt ori re is a l of the Middle East. Dong Ah 
I l Bo Dec ? 16 , 1 9 7 3 ? Arabia were 
13. Since 1973, Korean delegation
e sl  e t
o
v oa  t Se ad ~ di
n
 e led by 
to the ministerial level includ bi yn  g foreign 
P  rime minister (MaY 1975)
1  97 a9 nd other minister(March 1975) (KMOF )? 
14. Until 1982, Saudi ambassador 
o tore  a J. a panT  whe a s is nta  ctu hs a rge of
bec oo fm  s
 
e audi emba. ssy in Korea ha
cKo . g polit
s
i  ca ll a ted re  
an 1.nterest1.nt
b
h a i
t
s e  ,.,1?. l bl e tb we e ed no  cum twen ot  ed in chapter 6. 
u n t r i e s ? De t a i 1 s o n .. 
15.There was another factor cont
o rii bl u tid ne gm  a tn od   thf ir so  m d rs oa pdeff u
 
di i n,  ;racboi a? th Kor
Teahna t cownass truthceti.o npsa yfm1~.rnmt s ionf  
ered contract 5  expens ae n d Libya chat suf eref  frd o m oil e form of oil bY 1 raq 
&lut. 
153 
16 ? As s ha 11 b e d i
S s ca uu sd sed in 
the 
ization Chp  ala pn t e  r(   6p  in
le rv oe te
 
ct di ev  te a lp l , rage in o li ici
m
e orempo sr )t  
 
b which a llowed abo
n u ueg sia nt e
t 
iv sse   toi  m Sp aa uc dt is   loo cn a ls K bo rr oea un g he t xp So ar ut d
A p
i 
e
r ra fb oi ra m. a nce to 
17. As will be seen 
w init  h c hat ph te es re   5A , me thri ec  an Korean con
p  l fa iy rmed s  a r ipsu e
n
n ee cd ti od nu  bstanti ra inl g  ro thle e  Vin ie tp ne amne  tr ba ot oi mng   the Saudi ma rket. 
18. Chapt e r 4 documents sequ pe an tt ti ea rl n  of the 
Saudi 
development p 1 ans in de t ail f if r r s o tm   five-year 
plan 
to t ht eh  e third five-year plan. 
19. Defense contract
p sh  e fn ro om me  n to hn e  No an tl iy o na af l te Gr u arp dr  in wc ee re  A a bd ru ecN ll ea nt ti  onal Guard, h aa hd ,  be cc oo mm me anC dr eo rw  n oP f rin tc he e-  
to F oc r h da ep tt ae ir l ,6  . r efer 
20. T he Stanford R
an ed s eart ch he   IU nS st-S ita uu td ei , Jo Fin ort d  Ec Fo ono um ndic a tiC oni ,n  volved in the os mha mp ii sn sig o no  f ht ah ve e  
th S
d
i a
e
s u
ep
 dt io  
ly 
p deic ve, lor pe mf ee nr t  t po l aL na sc . kn Fe or r  (1978:151)? 
21. A more conserva
i tid ve en  t ei sf ti ie ms atit oh ne   ss hi az re e d of b y S Sau ad ui d i localsm  illion, f pa or ps uh lao tr iot no  f a s th ae b oo utf  f 4i  c ti oa  l 4fi .g 5u  re of 7 million. 
22 . There are many 
t do ifferent p
t
r ho ij se ,c  ti ro en fer the Economist ( s? For Long (K  1e  9r  8r 13 Feb, 1982), S   2),a  nd Yassin(198 h2 aw),   and 
S W
Birks and 
i n oc r 1 l da   i re B an( k 1   9 (8 0 1 ) 9 , 8 1a )n , d I LO ( 1 9 7 5 ) ? 
23. According to 
P aa  ki Ss at ua dn ii  s, sou1 r5 c0 e, ,0  00 t heP r
I h
e
i  lip ai re 3ndian ns, o sa , 
00
nd 1
,0
1 00 0 50 ,, 00 00 00   KT oai rw eaa nn se ,s  e 1a 0s 0 ,o 0f 0 01  980 (SMOI, 198
2 24 ). .  As Saudi Arabia e
p nla ten r ed w thh eic  h t hie rm d p fh ia vs e
i iz
-
nd e
y
d e ar ustr b
developme
i oa tl hi  za mti ao np
n
n o, w
t 
 er th dis e velf oo pr mm entbegan t oo f
 
  r in
a
d nu d apid sl ty r iai ln  cre joa is ne t -v(S eM nO tP u r1 e9  82; SAMA 1982). 
25. As shall be discusse
c
d h  api ter 7, the Sex autr ne  
di
m 'se  ly protect v
i i
 i
n v
 s
e  - a -vp  io  svestme s
 
tu f o r e i g n d i r e c t nt reb  egan t no u ma bc ec r of negativeo  n e fth fee o mK pany a indu cts st  orean efforts to p rir aom l o jt oe int-ventures. 
26. For the Saudi d
( i1 v9 e8 r
re
1 s) i, ficat
s
io trn a tegy, 
fer to Babai 
 Ward (1980), Birks S i na cn  1d  a
( 19 8 1), 
various is  
 ire and 
sues of MEED. 
n
2 7 e ? g otT iahe ti ons for thisd  
a rb o
b
r p
a
u p
n
p e
k
d i ngb  y joth ine t-S va eu nd ti u ret  ly w ere ins pt aa rb tii eli st ,y   f po rl imapolitical lowe
ri
d l y by duth e e ta os  sasinat
p ir oe ns P  id a ofe r  n k. lt  
ate 
154 
28. This 'unilateral' gain has become one of major foreign 
policy disputes between Korea and Saudi Arabia. Citing 
worsening bilateral balance of trade, Korean government has 
argued that its gain is not unilateral and that Saudi party 
should make more concession. However, the Saudis were 
reluctant to accept this Korean claim . Chapter 7 documents 
this debate in detail. 
29. Despite ideological differences, such progressive Arab 
states as Libya and Iraq began to recognize economic 
benefits by having Korean firms involved in their 
development projects. The Korean success in Saudi Arabia 
had induced these countries to allow Korean firms to do 
business in their countries in spite of absence of formal 
diplomatic ties with Korea (McLaurin and Moon 1984). 
30. The most notorious case was a telecommunication project 
scandal in 1978 in which the Dutch Phillips and prince 
Faisal ( son of then Crown Prince Fahd) inflated project 
cost almost by US $ l billion (MEED Nov . 1978). 
31. As will be seen in chapter 5, in the initial stage of 
Korean penetration in the Saudi market, the Saudi agents 
f o r Ko r e a n f i r ms we r e c hi e f l y f r O m mi d d 1 e -1 e v e l me r c h a n t s 
and bureaucrats. However, as Korean firms began to engage 
in huge projects, the socio-political character of the 
Saudi sponsors have changed. 
32. The rationale behind the Saudi position was very clear. 
The Korean government's regulation of over-competitive 
business practices among Korean firms in the Saudi market 
and the exclusion of certain firms from the entry list 
created political grievances from the Saudi sponsors of 
these excluded firms. In addition, oligopolistic pricing 
behavior under the control of Korean government began to 
produce diplomatic protest from the Saudi side. 
155 
There is no pag e 156 in this di ssertation . 
CHAPTER FOUR 
PRECONDITIONS FOR THE RISE OF 
THE SAUDI-KOREAN CONNECTION 
pr e viou s ch a pter illustrated the scope and magnitude 
T h e economic 
Korean bilater a l 
Arabian and 
of the S audi Within a short ti me span, 
r e lati o ns over the 1ast decade? 
became an important economc partner of Saudi Arabia, 
Kore a joint-ventures 
c ommoditY ,rad? flows and industrial 
Whil e emerged as the most 
Korean contractors 
we re i nc re me n t a 1 , and other outpacing American 
in the Kingdom, 
su c cessful uefying a commonlY accepted interpretation 
Western firms. on Marxist-action based 
of inter-Sou
a
t  h t his p he no me non not o n l y rev e al s 
bil
d ae t epe nd e nc i a theories , a ral 
of inter-south cooperation on 
existing 
n e w di mens ion 
but also poses a serious challenge to the 
of 
bas is 
' explanation of the foreign economic be havior 
modes of 
this 
developing countrieS? 
What were the pre-conditions for th? emergence of 
ln chapter rwo, we asserted chat the rise of 
ph e nomenon? bilateralism is a function of scrace g ic c hoi c e 
decision-making 
inter-South of the 
interplaY 
of the the surrounding evolving out and of 
countrY 
given the particular 
str au  ctures of stemming from 
constraints 
and ThiS assertion in 
turn 
opportunities 
of development st rategY? 
types 11o~ing components: 
f 0
to ex h 
l ae m a id ns e  t e us 
157 
1) th e pattern o f development strategy pursued and the 
resulting relative position of the country in the 
international division of labor; 
2 ) the nature of internal and external conditions ( 
opportunities and constraints) derived from 
development strategies and th e pattern of 
integration into the international economic system; 
3) images and perceptions of authoritative decision-
makers regarding the internal and external conditions 
within the context of a set of st ate objectives 
situationally defined; 
4) the nature of the domestic political structure (defined 
in terms of distribution of capabilities amon g major 
socio-political actors) which affects policy outcomes 
vis-a-vis bilateral choices. 
A primary hypothesis deriving from these assertions is 
that the higher the level of complementarity in development 
strategy, patterns of constraints and opportunities, and in 
th e state's foreign economic policy between a pair of 
c ountries, the more extensive and greater the volume of 
bilateral economic transactions between them. Keepin g 
these f ac tors in mind , the following sections deal with 
development s trategies, economic and political 
environment a 1 settings, and the forei g n e conomic policy-
making mechanisms of Korea and Saudi Arabia. 
Patterns of Development Strategies 
Korea and Saudi Ara b ia have pursued quite a diverse 
patterns of development strategies. Being poorly endowed 
with natural resources and capital, but rich in manpower, 
Kor e a chose a development strategy sharply differe n t from 
that of Saudi Arabia where t h e opposite was the cas e . This 
l 58 
 of de v e 1
 op me n t 
pattern
difference in factor endowment and of industrial 
a high 
level 
created 
s trategy as we shall explain 
complementarity between two countries, 
later. 
ly 
with many other 
new
the case 
Korea: As 
is 
independent countries, the Korean economy from 1945 to
 
1950 presented a bleak picture, The political disorde
r 
the country deepened 
that prevailed earlier in 
s the Korean 
War(l950-
and chao Furthermore, 
uncertain t y. for economic 
e conomic potential 
completelY devastated anY -spread 
1953) Economic malaise in Korea was wide 
modernization. with 
triple digit 
the Korean War, 
following 
immediately 
inflation, The annual average GNP growth per capita was a 
mere Q.4% per annum (Rhee and Hong 1975, 4956). At the one 
the industrial structure revealed a rigid 
same ti me, 
crop economy pattern where over 65% of the labor force was 
employed in agriculture, producing 42,5% of GNP from this
 
us economic aid played a substantial role in 
sector a 1 one ? 
improving these rrade imbalances by covering almost two
 
thirds of needed imports? In general, the Korean economy
 
in the os can be described as backward, stagnant,
 
195
dualistic, and foreign aid dependent, Indeed none had then
 
the devastating 
from 
to escape 
Kore a circle of poverty 
ever expected from the vicious 
a f t e r mat h of t he war and 
Korean economy 
and backwardness? 
these initial liabilities, the 
what Western 
Despite 
1ast two decades has performed 
over the 
159 
described as a 'miracle', elevating itself to a observ e r 
new status of a NIC in the international division of lab or. 
The average annual growth rate o f re
al GNP during 19621979 
was 9.4%. Per capita GNP increa
sed dramatically from less 
79 in 1979. In the same perio
d, 
than $200 in 1962 to $1,5
exports increased by 40% per year and industrial production 
The share of GDP rose from 14% in 1960 to 
by 20% per year. 
2ti% in 1981, while the share of manufactured goods in these 
 9 0 % in l 9 8 0 ? 
exports reached 
nearly
economists have come up with a plethora of 
De v e l o p me n t 
labor quality, market size, Confucian work ethic, 
reasons: 
and de v e 1 op men t seq ue nc i ng s, 
flow of external resource
Krueger 1978; Westphal 1979; Hassan and Rao 
(Balassa 1981; 
All these factors were responsible 
1978; Ade 1 man l 9 7 ~) ? 
Among them, 
for the Korean success in one way or another. 
however, two factors appear to be most crucial: appropriate 
strategies and state 
of development sequencing 
Under 
intervention in terms of consistent economic plans. 
Kore a had formulated and 
military government, Park's 
which medium-term 
economic plans of 
imp 1 e men t e d five year
 
As illustrated in Table 
il l sustain
ed. 
t
P 1 an methods are 
S
reflected 
economic development strategy 
4 -1, the Korean 
is characterized by the 
medium-term plans 
through these a strategic choice 
a big push for growth, 
three features: 
h engine of growth, and fin a 11 y, 
l 
of industrialization as t e industrialization. 
s an i n s t r u me n t of 
a
export promotion 
160 
Table 4-1 
-------------- ----~ plan up eac  h sef ti  ve ye a r 
in Table 4-1, 
As shown The highest priority 
relatively high growth rate targets. 
achievement of 
planning efforts was given to the 
of all this The line of reasoning behind 
these growth targets? 'big 
orientation corresponds to the Gershenkronian 
g rowth the 
2 To catch up with developed economies, 
spurt' thesis. of 
Korean government committed itself to the acceleration 
Following basic principles 
economic growth at res our c es had bee n c once n tr ate d 1 y 
of d eve 1 opme nt planning, sectors, and the 
industrial 
leading 
allocated to the 'growth first an d 
policY 
th oe f  
government adopted 3 It was thiS strong governmental 
red?1 
lat
. est rr 'i .b  ution target 
comm?1  t t me nt plan(l977-1981) which 
the fourth 
rates. Except 
for 
the first three plans exceeded their 
emphasized stabilitY, 
goals by almost a 2 % margin? 
original Korea's 
development 
important feature of 
The sec and industrialize 
c ns is t e d f a po li cY d e c i s i o
O  n  t o 
way to escape from strategy O 
that 
Perceiving 
rapidly. povertY and to realize rapid growth on a self-
the gS  ot vr e r nme nt uctural 
bas is was allocatios n u ss   t ai ni ng resource 
directed 
and 
focused attention 
F
s oe lc loto wr i. n g 
industrial 
the each
p  re de evm ep loti pv me ely tO 
nt 
unbalanced growth strategy, 
Hirschman'
p s lan singled out keY strategic sectors which were perceived 
l 6 l 
Table 4-1: Economic DeveloQment Plans in Korea 
Is t Plan 2nd Plan 3rd Plan 4th P
( l6 a2 n-  66) 5th Plan (67-71) (72 - 76) (77 - 81) (82 - 86) 
Plan 1) Correcting socio- l)modernization 1) Harmonious pursuit 
Go 1a )l  s p romotion oe fc  onom li )c s tm abal ia li is ze a tion oo ff   industrial of growth, balance bal
2 a) ncP er  e vp ia ar  ing ec os ne ol mf y- , 2)promotion structure and stabilit y , 2) social de
s vu ef lf oi pc mie enn tc  
of 
y s ocial develo2 p) mac ec ne t,l  erating realization of self - 2)technological 3) institutional 
economic self - sufficient economy innovation and reform and emphasis 
sufficiency emphasis on efficiency on productivit y 
Growth-
Rate : 7 .1% 7.9% 8.6% 9.2% 
target (7 .9%) (9.7%) (10.2%) (9.1%) 1) 
(achieved) 
C 
~ 
Strategies l)correcting l)self-sufficienc
Y y  l)food self - sufficiency, l)self - supply ( oin f terrn le )d oi va ercoms i2 t
n
r gu  c it nu fr la al - in food, 2) pre - 2)expansion of social investme
o nb tj  e cc ati pv ie tas) l  li em db  a ecla on nc omes y, ,  2)p  aring indus tria l overhead sector, 3) 2)balance of paym
2 en) tt  ec rh en co ol vo eg ri yc  a ol f  d ie nep t'e ln  ing, 3) em- industrial deepening, improvement,3)indu
p sr -omo coti mon p, e t3 it) i venp elo sy s m ie nn  t creation, 4)expansion of qualified/ trial restruc
b ta ul ra in nc ge  
hea
 vo yf   industry,4 3) )b  alance of payment manpower, 5) halance and enhancem
p ea ny t m oe fn  
pu
t rsim uip tr  o ov fe  - econi om mp ir co  vement of payment betterment int'l compet itive-
me ln it b eralization, 4) ness expansion of social 
development 
Sectoral key indus tr ial light industry/ high value-added high-value added tec
e hm nop lh oa gs yis - sectors(cement, labor intensive heavy-chemical heavy industrial intensive 
fertilizer, etc . ) heavy industry industries(steel, sectors(heavy- sec t ors(semi -
/ph ysical infra- shipbuilding, machinery, shipbu i - conductor, 
structure electronics etc . ) lding, auto, etc.) communica t ion, 
enetic engineering 
Foreign 
Tr ade Import-s ubsti- export-promo- export - promoti on export - promotion 
r egime tu ting tion 
(C'Onr Lnurd - - - ) 
1) The achieved growth rate of 9.1% during the fourth plan is only for the period of 
1977-1979. In 1980, Korea showed its first negative growth of - 5.5%. 
2) It is usually difficult to differentiate strategies from intermediate objectives of 
economic plans. However, these intermediate objectives are the means by which ultimate 
plan goals are to achieved, they are treated as strategies in this table. 
Source: Byungrak Song, Thesis On Korean Economy (Seoul: Bak Young Sa, 1982) p.273 in Korean 
Economic Planning Board, The 4th Five-Year Economic_Pl~r1__(Seoul: EPB, 1977) in Korean 
_;,, 
--9 
to be high in forward and backward linkage effects. The 
industrial sequencing pattern through each plan period was 
well articulated. As T ab l e 4 -1 i nd i c a t e s , the first plan 
period (1962-1966) emphasized essential industrial items 
s h as cement and fertilizer and social and UC physical 
infrastructure such as roads, ports, and housing ? 
With the anticipation that concentrated development of 
these key or leading sectors would generate backward and 
forward linkages, the second plan (1967-1972) was geared 
toward the enhancement of labor intensive light industrial 
sectors such as textiles, garments, and other consumer 
durables and toward the initiation of heavy industrial 
sectors (e.g., petrochemicals and steel). The massive and 
speedy modernization of the industrial structure fueled by 
the success in labor intensive light and heavy industries 
was linked to industrial deepening phases in the third and 
fourth plans(l973-1981). The direction of industrialization 
shifted into tee hnol og y-i nte ns i ve and high value-added 
industries s UC h as chemical industries, electronics, 
shipbuilding, and even semi-conductor industries. What is 
distinctive about the Korean industrial de v e 1 op me n t 
strategy is a clear sequencing of strategic sectors in 
4 
line with product cycle patterns. 
The 1 as t important aspect is that this 
industrialization process based largely on outward-looking 
or export promotion policies. After having experienced an 
economic crisis in 1962-1964, Korea pursued major policy 
16 2 
reforms in 1964-1965. Partly to overcome economic 
stagnation and par t 1 y d u e t o t he I MF and us gave rnme nt 
pressures, the Korean gave r nme nt adopted massive 
stabilization and liberaliation policies, which signalled 
an apparent transition from import-substituting 
industrialization to an export promotion strategy. Foreign 
trade and exchange regimes were realigned to accomodate a 
new emphasis on exports. The influx of foreign capital, 
spurred by the enactment of the Foreign Capital Inducement 
Law of 1966 began to expedite investments in key industrial 
infrastructural sectors and light-industry based export 
sectors (Balassa 1981; Krueger 1978; Haggard and Moon 
1983). This outward-looking strategy worked out well, 
matching the then burgeoning world economy. 
Saudi Arabia: While Korea successfully pursued its 
e conomic de v e 1 op men t with a mix of ti me 1 y industrial 
sequencing and aggressive export drives by fully exploiting 
comparative advantges (e.g., labor abundance), Saudi Arabia 
follwed quite a different path of economic development. As 
Waterbury and Mallakh have noted, "without oil, it (Saudi 
Arabia) would have as much economic viability and regional 
clout as Mauritania." ( 1978:35) More than two thirds of 
its vast land ( over 1 million square meters) is bar re n 
desert area chiefly occupied by the Rub al-Khali (the Empty 
Quarter). The hot and dry year round temperature, along 
with th is geographic torpology, limited substantially 
opportunities for viable economic development( Mallakh 
16 3 
Fars y 1982). 
and Sha-w 1982; 
19 8 2; Long the Kingdom prevented 
constraints 
ecological Rather, the These 
from achieving a modern and unified economY? 
economy was a collection of several more or less developed, 
some 
economic reg ions te nous l Y linked by air and 
1 2 7 ) ? The 
isolated 
hard surface roads (Knauerhase 1974: 
the He j az 
improved , ound trading ar
astal 
and 
co
Pilgrim economy and Jeddah), oasis agriculture around the 
(Mecca , Medina, ARAMCO related cities in al Hassa (Damman, 
an 
Nejd (Riyadh), and mountain agriculture and 
oharan), area were 
al-Khobar and 
tr' ading base with Yemen around the Asir 
The regional disparities 
in.land 
e only viable economic regions? 
th by ecological barriers had deepened the pattern of 
modern 
created the petroleum-based 
and 
a dual economy in the Kingdom, agriculture 
and prim it iv e 
one hand, Wells 19 7 7 : 4 -6; 
sector on the other ( 
husbandry on the 
bedouin amimal 
Johany 1982:1-14). 
It was with th? discovery of oil in 1Y38 that the Saudi 
In the 
transformation. 
a substantial 
economy underwentht e oil sector contributed to the change in 
initial stage, 
the Saudi econo?Y in two ways: first, it raised substantial totally 
which -was then 
f or t he S au d i g o v e r n me n t 5'  fter the 
Especial 1 y 
a
revenues 
Haji economY? and on 
the 
de pendent on of th? 50-50 profit sharing agreement by 
c nc 1 us ion ~ on each barrel of oil produced O 
a ta $56 million in 1950 
the imposition o 
f " rose from 
Mallakh 1982: 
ARAMCO in 1951, 
,J4l million in 1955 (fAl 1977:219-244; 
to 
164 
141-144; Lackner 19 7 8: b0-64). Since then, the oil sector 
has become dominant in the Kingdom's foreign exchange 
ea rnings, government revenues, and as a source of growth of 
national income . Even in the mid-1970s, pe t r o 1 e um 
contributed more th a n 80 % of GDP, more than 9U % of 
govern me n t revenues , and 99 % of foreign exchange earnings 
(SAMA 1979). Sec and, the exploration of oil by ARAMCO 
e ntailed the construction of infrastructure. Although it 
was mainly related to the oil sector, a nc i 11 a r y 
co nstruction of roads, ports, housing, electric generation 
plants, and water systems began to produce some linkage 
6 
effec ts to the local economy (Mallakh 1982: 142). 
Despite the increased oil revenues, the Kingdom was in 
the throes of a financial crisis by 1956. The rand om 
bud ge ting system, the uncontrolled government spending tied 
to the whims of the royal family, a nd ARAMCO's reduced 
production caused by the Suez Crisis and the entry of new 
7 
i nde pendent oil companies placed Saudi Arabia on the 
brink of collapse Lackner l 9 7 8 : 6 0 -b 4 ; Ad am 1965). 
Government employees were erratically paid, and the public 
debt rose by late 1957 to 1,800 million riyals. Gold and 
foreign reserves fell to their lowest point, a nd the 
riyals' market value sunk to half its official v a lu e 
( Lack ne r 1 9 7 8 : 6 2; Mallak.h 1982: 141 ) ? The World Ba nk/ 
IBRD finally intervened and suggested a set of financial 
8 
and institutional reforms. At the same ti me, th e crisis 
ga ve birth to a major political change in the Kin g dom. 
Kin g Saud was replaced by the reformist Prince Faisal af t e r 
165 
9 
It was King 
politic a llY traumatic incidents. 
a s er ie s o f major economic 
in thit ei  
Kingdom's 
F a i sa l who ated his reformist 
tutelage of 
modernization under 
the 
he announced Ten Point 
the ear 1 y l 9 6 0 s , 
leadership. In the 
which were instrumental in setting 
r e form pro g rams s oc i o -economic -politic a 1 
and direction of 
ov e rall rate 10 it wa s not until 
1970 
c hange in Saudi development 
Saudi Arabia pursued systematic economic 
th a t planning 
the introduction of medium-term economic 
through the all King Faisal's efforts to diversify 
methods ? For infrastructure 
, 
and to c reate physical and social 
economy the 
revenues during thiS period fell short of forming 
oil 
ne cessarY to realize a 'big spurt', 
Sau
c dir  itic a l mass 
With the help of an American consulting firm 
economic plan 
in 
its
Arabia completed
 
 then, the Kingdom 
11 As i nd i c ate d i n t ab 1 e 4 - 2, s i nc e 
1969. economy 
through 
efforts to develop the 
made consistent some major characteristics revealed in 
planning met h
r
o ad ps i. d  the pursuit of 
strategies are: 
Saudi de v e 1 op men t the promotion of 
endo g enous human growth , 
creation 
social welfare, 
and the acceleration of infrastruc ture 
res ourc es 
(Wells 19 7 6 : 5 3 -6 0 ) ? 
table 4-2 
Table 4-2: Economic DeveloQment Plans in Saudi Arab i a 
pre-plan Ist plan 2nd plan 3rd plan 
period (70-75) (75-80) (80-85) 
Plan economic diver- preserving Islamic preserving Islamic Defense and security / 
Goals sification/ values/preparing and moral values/ ba lanced growth/ 
preservation economic diversi- increasing defense socia l welfare/ pursuit 
of Islamic values fication/ increasing capability / pursuing of economic diversifica tion/ 
defense capability rapid growth/diversi- preserving Islamic values 
f ying oil economy 
2
growth oi l sector 10.34
1) 14.80 4. 78 1.34 ) 
ra tes non-oil 6.96 11.66 15.13 6.19 
t otal 10.34 13.41 8.04 3.28 
c--
in f rastructure institutional re- human resources develop- inducing structural change 
~ 
-3 
creation/ structuring / reduc ing ment/ expanding physical in the economy/ intensifying 
. 3) 
s trategies human r esource dependence on oil/ and social infrastructure/ human resources development 
(intermedia te development/ enhancing physical efficient regional alloca- /increased economic and 
objec t ives) preparing i n f rastructure tion of economic and administrative efficiency 
industrializa- social programs 
tion 
public 4
expendi tur e N.A. $92 bi llion $198 billion $235 billion ) 
s ec t or a l physical infra- physical and soc ial agriculture/ non-
emphasis petroleum/ s truc ture/ oil i nfrastructure / hydro- oil light industries / 
mineral sec t ors re l a ted sec t or carbon related heavy- other non-oil productive 
chemica l i ndus t ries sectors 
For eig n open ope n se l ec t ive l i be r a - S) select ive libera l iza t ion 
economic r egime li za t ion a nd exp ort pr omot ion in 
pe t r o- chemica l sector 
- - - - - - --- -- (rnn r 1?n112d- --
...... 
l)Growth rate in the pre-plan period is d
2 e) rF ii vg eu dr  e fs r oi mn   1th 96e 6 -3 1r 9d 7 0p .l  an are planned one
3 s) .A  s in the case of Korea, intermediate ob
4 je)T ch tii vs esfi  g ou f re e ad cho  e ps lan no  t arin e cl ru egd ae r dd ee df  en ass  e s te rx a
S p
t
)B e
e
y n
g
 d
i
" i
e
t ss u
.
r  el ee .c  tive liberalization" is meant to 
go rv ee crn em nte  n St audiw -ih zic ah ti or ne  f ple oc lt ic is eom s e pup rr so ut ee dc  t bi y
f o
 
o n
S
re i
a
s u
ig t 
d
n e
i 
 li en mv ee nst tm s e in nt  . i mports, contracting, and 
Sources: Ministry of Planning(Saudi Arabia), The 2
a nl d  M ana dll  a 3k rh d  ( F1 i9 v8 e2 -Y) ep ap r .1 E4 c1 o- n2 o5 m1 i, c  W Ple al nls s( ,1  9 17 96 75).   and 1980. 
~ 
....5)-
-9 
Like ma ny other developing countries, Saudi Arabia was 
obssessed with the idea of rapid growth. The Saudis wanted 
to "catch Up II but within the constraints and parameters 
l 2 
create d by the Wah a bbi ideology. Ghazi Al q us a i bi, the 
then minister of Industry and Electricity, explained it as 
follows: 
I know many economists tell us we cannot 
compress the century long process of development--
industrialization, infrastructure creation, and 
ma npower training- into a few decades. But since 
no nation with our resources has ever tried to do 
so, no one really knows if it can be done. We 
shall try ( Washington Post, Feb. 13, 1977). 
The rationale behind this emphasis on growth seemed 
quite natural: Do all we can, while the oil lasts. As shown 
in table 4-2, the Kingdom was quite successful in pursuing 
this goal. Except for the 3rd plan, the targets for growth 
were set at a relatively high levels, and the actual 
achievements exceeded the targets. During the ls t plan 
(1970-1975), the growth target was set at annual average of 
9. 8 % per year and the oil sector 9.1 %. But the act u a 1 
growth rate turned out to be 10.J4i.. This was chiefly du e 
to the multiplication of oil revenues following oil crisis. 
However, high growth performance continu e d during the 
2nd plan(l975-1980). A planned target of an average annual 
growth rate of 10.2% was exceeded by more than a 3.4% 
margin. The ambitious development program was initiated a nd 
imp l e me n t e d during this period with a view to increasing 
a bsorptive capacity. An amount of $143 billion, which is 
almost ten times larger than allocated in the 1st plan at 
167 
pl an. The pursuit was 
19 s7 c4 he- d1 u9 l7 e5 d  p fr oi rc  e ts h, i s 
of u ne xpec t e d 
o bf egan to entail a nur ma bpi g
e
r rd o
 
wth 
inflation, heavy Spiralin
S gid  e -effects however? 
regional and 
sectoral 
de pe nde nee on foreign 
and grosing opposition from
im  b ta r aditional actors 1 a nc es 
led Saudi 
political 
such and tribaa l s u ll ea am da e rs check 
the rate of development and to 
le ad e rs to re-think Reflecting these 
nati
t oh ne a l economYth ? overheating of e an average 
growth rate
c  on w as targeted at Straints the 
the non-oil sector GDP grosth at 6. 27.. 
annual rate of 3. 2 %, pace 
aas expected to gro? at
T  h ae   much sloser oil sector 
(1.3%).13 
sa du ed v i e  1 o pme nt 
salient fea
T tuhe r e of ths ee  cond When Saudi 
industrial sequenci
S nt gr ?a  t eg Y is its unique was plan, the re 
Arab?l.  a 1 aunc hed itS 
1st 
por
N tse ,
public 
i  ther roads, 
v?l .rtually no infrastructure? to industrial 
Utilit ? s ystems l.e s nor water major attention was paid 
d eve1 opment were availa bl e ? share in 
tot al 
to i n f r as t r u t u re -c re at ion 
the defense
b
 udget 
ex exceeding Pend it ure was z9.2%, the 1st plan aas exclosivelY geared towar
( d2  3 ? l %)  ? While bottl th
2nd 
en e ecks, 
of infrastructural 
alleviation of 
economic 
on the dual fronts 
Plan placed its emphasis physical and 
to further expa
d nd the eve1 o pme n ht y? One to de rox  p -e
w da its e  
So and other C:ial infrastructure, at the risk 
of 
Even 
C:arb on-r wae s lated 2nd plan budget 
ne
& a a 1 r1 lY  so% of the Oping inf 1 at ion, 
Put i nto c r ea t i n g phy s i c al a nd social infrastructure. Mass-
te l ec ommunications systems and massive de -s a 1 i n i z at i o n and 
Power plants were begun during this period. At the same 
ti me, transportation systems were substantially improved 
With the construction of lJ,000 paved roads, 10,000 
a g ricultural roads, commercial ports of Jubail and Janbu, 
14 
a n d th e expansion of Riyadh and Jeddah airports. 
At the same ti me, the government ruthlessly pursued 
hydro-c a rbon based industrialization. The rationale behind 
this was two-fold first, diversify the national economy 
in order to transform the rentier economy, and fully 
exploit comparative advantages stemming from unique factor 
e ndowments (i.e., oil) (Al Qusaibi, 1979 Turner and 
Bedore 19 7 9: 1 9 - 20 ) ? To activate this petro - chemical 
industrialization, the t WO most ambi t ious d e v e 1 o p me n t 
projects were attempted: the creation of industrial cities 
at Jubail and Yanbu to accomodate a full range of refinery, 
gas gathering, and petrochemical manufacturing entities 
together with a full blown steel plant (Shaw and Long, 
l 5 
1981: 15-16; Halberton 1982; Third Plan 1980). 
As Saudi Arabia beg an its 3rd Pl an, its 
industrialization policy became much more elaborate. In 
pursuing economic diversification and petroleum-based 
industrialization, the Saudi planners began to think about 
more efficient linkages between the oil sector and non-oil 
industrial sectors. In line with this inter - ind us tr i a 1 
linkage concept, a strong emphasis was placed on light 
industry, agriculture, and non-oil mining sectors. This 
169 
e-orientation in industrial strategy at
tempted through 
r a 
change of the national economy was al further
 
st ructur
ural 
facilitated by redu
ced investment in infrastruct
. The ultimate
 goal of the Jrd plan was to 
sectors
reduce Saudi's dependence 
on the oil sector and to ch a n g e 
a 
the structural comp
osition of GDP into b a 1 a n c e d 
between the oil and non-oil sectors which the proportion 
Third plan set its planned ratio as oil sector 56.6 vis -a -
vis non-oil sector 43.4 ( MOP, Thi rd 
Plan 1980). To 
achieve this goal, the Saudi govern
ment tried to persuade 
the private sector via subsidies etc. to enter into as many 
are as of manufacturing as possible in order to red
uce the 
16 
heavy burden of imports. 
The last important aspect of the 
Saudi d eve l opme nt 
strategy was a shifting of its external economic posture 
from an open pattern to a closed one. During the 1st plan 
and in the early period of the 2nd pl an, the re was no 
substantial domestic industrial sector other than oil. 
This rentier economic structure forced Saudi Arabia to 
import virtually every item from abroad and export 
petroleum alone. Low tariff rates were imposed on these 
17 
imports and non-tariff barriers did not exist. Durin g 
the 2nd plan, however, Saudi Arabia began to produce some 
aluminium, s t e e 1 , c e me n t , and f e r t i l i z e r u nd e r t he i mp O r t -
1 8 
substituting industrialization scheme. Along with 
afore mentioned items, J2 other goods, d o mes t i c a 11 y 
produced, were placed under 20 % import tariff (KTA 1982; 
170 
KIIE 198 2 ). 
At th e same ti me, the Saudi government began to pursu
e 
a positive inducement policy to promote foreign d
irect 
investment in j o i n t -v e n t u re s with 1 oc al fir ms ?
 The 
policy was based on the realization that the c o
mbination of 
foreign technology and Saudi f i n a nc i a 1 resou
rces could 
ribute to the Saudi goal of sust
ain a ble 
nt eco
nomic 
c o
ation. T o e x p e d i t e t h i s po 1 i c y, a w id e r a n
g e of 
diversific
incentives were provided to foreign invest
ors. However, 
this openess was protected by the Saudis in suc
h a way that 
foreign investors we re not allowed to 
acquire majority 
19 
equity shares. This protective attitude was
 exemplified 
in Saudi manpower and contracting poli
cies. Under the 
log an Saudi-ization, the inf 1 ux of
 expatriate s of the 
manpower was strictly limited. And the 
Saudi government is 
obliged to award contracts to local firms even 
if they are 
lowest bidders. Furthermore, in those cases w
here 
not the 
foreign contractors are awarded, s o me of t he w
 o r k mus t be 
subcontracted to Saudi fir ms. In ad
dition, foreign 
ontractors must procure equipment and 
other materials c
from Saudi import agents (MEED July 1980: 
l 4 Mallakh 
1982). 
Opportunities and Constraints 
Considering the rate, direction, and
 scope of 
development strategies, Korea and Saudi Arabia s
hare more 
dissimilarities than similarities and create a unique 
l 7 l 
p a tt e rn o f mu t u al comp le me n t a r i t y. This dissimilarity or 
het e rogeneity of is chiefly shaped by different sets 
opportunities and constraints endemic to each country 
in 
the process of economic development, which in turn 
driv e s 
each and country to adjust and r e align its interna
l 
e conomic policies. 
Opportunities as a NIC and an OPEC: In case of K
o re a, 
its export-led ind ustrialization coincided with favorable 
world market conditions . During the period 1962-1970
 in 
which a major strategic shift in the direction of outward-
l oak i ng policies was initiated and actively i mple me nted
, 
the rat e of growth in the world economy averaged more than 
5 % annually. This expansionary trend in the world economy 
in turn t r i g g e re d s t r o ng overseas demand for Korean goods. 
During 1962-1972, growth in the volume of world trade 
reached 8%, dramatically re v e rs i ng t he rec or d 1 ow g r ow t h 
rate of 0 . 9% between 1913 and 1939 (Anell 1981: JJ-39). 
The synchronization in the timing of the strategic shift 
with an unusually b uoyant world market sustained and 
20 
expanded Korea's export-led industrialization of Ko re a. 
In addition to this external market factor, Kor ea 
experienced another developmental opportunity stemming from 
the international economic system. As t he c o u n t r y be g a n t o 
pursue an outward -looking d e v e 1 o p me n t strate g y via 
industrial restructuring , li beralization and stabilization, 
it was able to induce foreign capital in th e form of direct 
investment and commercial as well as public loans. In 
1 7 2 
particular the normalization of ties with Japan, a 
decreasing demand for capital in advance
d industrial 
countries, and industrial relocation efforts by 
multinationals in the developing countries faci
litated in 
one way or another the massive inflow of for
eign capital 
essential to the pursuit of industr
ialization (Frieden 
1980; Haggard and Moon 1983; Caporaso 1981; Lee 197':I). The 
mese boom in the latter part of the 1960s ea
sed 
Vietna the 
foreign exchange burden and helped smooth the d e v e l o p me n t 
21 
phase of the 2nd plan and the early part of the 3rd plan. 
 o ns , 
Besides these favorable external co
 nd i ti the 
lified 
availabity of a pool of abundant and 
qua manpower 
enabled the Koreans to exploit aggressively t
hose newly 
e mme rg i ng co mp arati ve edges in the nexus 
of spreading 
product cycles of s tand ardized goods and services (Adelman 
1974; Westphal 1979; Westphal et . al 1983). Furthermore, 
the existence of a strong, though authoritarian, government 
under the reformist leadership f ac i 1 it ate d the 
imp le me n tat ion of consistent a nd a rti culate development 
policies without major interruptions from socio-political 
pressures (Haggard and Moon 1983; Mc Mullen 19 8 2; Turner 
et.al 1982; Krueger 1978; Chennery 1979). 1 n all, Kore a 
rose quickly to the status of a NIC and is still perceived 
to be a major challenger to the advanced industrial 
countries in the area of export competition. 
Sa udi Arabia, on t he o t he r hand , followed quite a 
different path. Its opportunities derived chiefly from 
l 7 3 
the o il. s e ctor. As of 19 7 3, the Kingdom's oil reserves 
we r e estimated at 136.8 bill.ion barrels which accounted for 
3 6 % of the Middle East total and 24.5 % of OPEC total (MEES 
Apr i 1. 26 , 197 6 : 8 0 i 1 and G as J our n a 1 Dec ? 2 5 , 1 9 7 9 : l O 2 ) ? 
Sa udi Arabia had the highest level of proven oil reserve of 
t h e world. 
How e ver, this bounty from heaven was not quickl.y 
tr a nsformed into real opportunities for the pursuit of
 a 
r a pid economic de v e 1 op me n t ? Un ti 1 the onset of the oil 
c risis in 1973, the Kingdom still suffered from financial 
c onstraints. However, the collective actions taken by OPEC
 
me mbers since the Teheran conference in 1973 signalled a 
n e w chance for the Kingdom. The growing power of OPEC and 
the subsequent decline of the oil majors' bargaining power 
brought about the dissolution of the international oil 
r e gime governed by multinational oil companies (Barnett 
1974 Odell 1978 others). The immediate outcome of this 
r eg ime collapse was a sharp increase in oil revenue. As 
c an be seen in table 4-J, t he S au d i o i 1 i nc o me c om pr i s i n g 
royalties, income tax, oil product tax, tapline fees, and
 
profits out of the equity participation in ARAMCO 
production f ac i 1 it i es increased astronomically Erom ~ 1. 2 
billion in 1970, the first year of the 1st plan, to $ 25 
2 2 
billion in the beginning of the 2nd pl an (1975). Of 
course, this jump in oil income was a joint result of 
price hike and of production increases. As oil prices 
increased, the level of production rose as well from 3. 8 
million b/d in 1970 to 8.48 million b/d in 1975. Within a 
l 7 4 
fou r year period, the production level more than doubled 
(SAMA annual report 1979:137). 
Table 4-3 
As can be seen in the cases of Iran, Iraq, an<i Nigeria, 
a g reat increase in oil revenue itself does not necessarily 
guarantee the acceleration of the d e v e 1 o p me n t process. 
The relationship between oil revenue and investment in 
de v e 1 o p me n t is largely determined by the level of the 
absorptive capacity of a given country. In other words, 
it 
depends upon "how much of total oil income at a given price 
and export volume of oil will be absorbed in the current 
account balance of payments in the form of imports of goods 
and services, including remittances abroad of immigrant 
workers." ( Habluetzel 1981: 10). The absorptive cap
acity 
 the 
of Saudi Arabia during the period of the 1st plan and
ear 1 y part of the 2nd plan was very 1 ow, compared with 
other PEC members. This created the problem of excessive O
surplus capital. Low absorptive capac
ity in turn 
f ac i 1 i t ate d the diversion of a massive amount of capital 
into investment in the development of social and physical 
infrastructure. This was particularly true given the fa
ct 
that the value of the dollar, the instrument of oil payment 
and foreign invest ment of surplus capital, was depreciating 
rapidly in the 1970s along with a growing instability in 
175 
-
Table 4-3: Sandi Arabia: OjJ Revenue by Source 
Unit:US$ million 
Index 
(I 970 = 
Year Aramcoa Getty Oil Co . Arabian Oil Co . Other cos. Total 100
) 
6 
19 39 3.2 3.2 
0.2
1946 10.2 10.4 
0 .86 
4.67 
1950 56 .7 56 .7 
.6 340.8 28 .07 1955 338 .2 2
2 .8 18.4 2.5 333 .7 31.10
 
1960 31
1961 352 .2 22 .9 2.5 377.6 33 .75 
1962 381 .7 25 .0 3.0 409 .7 
1963 571.1 23 .0 13.6 607 .7 
50.06 
1964 482 . 1 23 .7 17.4 523 .2 
43 .10 
1965 618 .7 23 .8 20 .4 1.2 66
4 .1 54 .70 
66 745 .8 20.6 21.4 2.1 7
89 .0 65 .07 
19
1967 859 .2 17.8 31.8 0 .8 90
3 .6 74 .43 
1968 872.0 13 .6 34.3 6 .5 92
6 .4 76.31 
I 1969 895 .1 15 .2 37 .1 1.7 
949.2 78.19 
1970 1. 148.4 17.2 40.3 8.1 v' 1,21
4 .0 100.00 
55 .26 
1971 1,806 .4 
1
20.6 44.2 I 3.7 1,884.9 
4.6 226 .08 
1972 2,643.2 28 .0 68 .7 4 .7 2,74
973 ,195 .0 22 .0 91.4 31.7 4,
340.0 357.50 
1 4
1974 22,375 .0 53.3 113 .6 31.6 t1 22,573 .5
 1,859.43 
,115 .01 
1975 
 2
24 ,838 .6 191.1 642.7 3.8 25,6
76 .2
.7 559.2 3.6 30,754.9 2,533
.35 
1976 29 ,937.3 254
571.6 1.2 36,540.1 3,009 .89 1977 35,703 .8 263.4 
1978 31,609 .0 286.6 338.2 32,23
3 .8 2,655 .17 
575.2 48,443 .1 3,990.37 1979 47,590 .1 277 .8 
Note . a . Including the value of royalty oil payments in kind and Saud
i Arabian 
government's share in the Abu Sa'fah oilfield . 
Source: al Mallakh(l982: 62) 
23 
inte rnaiton al financial markets. 
Owin
I gn  t te or  n a al and External Constrai
s
n et ts  : of 
favorable international Ka on red a  e wx at se  rnal conditions, 
successf ul in its export-led industrialization program, As 
the c ountry accelerate
b
d e cai mts e a  d ne dv  elopment phase 
in
m to
labor 
ore i
 
n tt he eg  ra inte ted r national division of 
with a new ~tr iuctu hr ow
t 
al evp N eo Is C, 
r, 
ition called a 
was faced with a number of obstacles and constraints. One 
salient co growing systeo mf it ch  e most nstraints was a 
fr av nu  lne or ma  b ii tl s 
of 
ity derived 
aggressive pursuit 
24 
o tu ht T eward -1 o o king str
h
a e 
 
te ig ncy r. e ased openess of 
K ca ino fr le oan e
p wc o itn a
 
omy a
l 
 in terms of trade nd 
c reated numerous channels through which
in
 ternational 
d i es c tu r b a nc es were transmitte to the 
domestic onomd y. 
While in 1960, two-way trade( import and export) was 16 % of 
GDP, it had risen 
m o
b ay k i1 n9 g7  5 this 
pen 
 to 6 s4 m% a, ll 
economy mo
s
r ue sceptible to the boom 
c
a  n yd e  le
of 
b  su  st 
in Wt he ir len  a ati lo l n da el v eb lou ps ii nn ge  s cs o. untries rely 
te ro an w external inputs su cc hh n oa logy, 
and  
s capital, 
materials, K
ex im
o pre oa r' ts - led growth proved to 
p
b oe rt 
This p
a and debt i
t
n tete rn ns  i ov f e o. penness has entailed 
many r unexpected ec ono W em hic en  c to hes  deep 
cession 
ts. 
and weak recovery hit the world economy, export performance 
staggered a
p
n od the bal a nee of payments s  ition 
was 
jeopardized . International financial 
instabilities and 
soaring interest rates shook the national economy by 
adding an exces sive burden d eo bf t -service ? 
Roller-coast 
176 
e ff e cts of international primary commodity markets 
imposed a cyclical pattern of economic uncertainty on Korea 
which relies on imported raw materials to a great extent. 
The most dramatic example of systemic vulnerability w-as 
provided by the Korean economy in the vortex of the oil 
c risis. As noted previously, Korea shifted its industrial 
s eq ue nc i n g from labor-intensive light industry to e ne rg y 
a nd c apital intensive heavy-chemical industry in the middle 
of the 2nd plan. In pursuing this industrial 
r e s t r u c tu r i ng, the degree a f reliance on imported e ne rg y 
substantially increased from 16.8% in 1966 to 55.1% in 
1974. In addition, the composition of energy consumption 
had be e n d r as t i c a 11 y c ha ng e d f r om c o al as t he ma j or e ne rg y 
source to oil all of w-hich had to be imported (EPB 1978: 
25 
244-247). This c h a ng i ng p a t t e r n o f energy consumption 
dealt a severe blow to the Korean economy during oil crisis 
of 1973-1974. As figures in table 4-4 illustrate, foreign 
e xchange payments for oil during the oil crisis rose from 
$305 million in 1973 to $1.l billion in 1974, re pres e n t i ng 
almost a 300% increase in foreign e xchange payments w-ithin 
a one ye a r per i ad, although the volume of oil imports was 
lowered during the same period. This tripling of the oil 
import bill was chiefly responsible for the record balance 
of payments deficit ( $1.9 billion) in 1974, which a 1 most 
paralysed the Korean economy. The economic trauma caused by 
the oil shock w-as coupled with the onset of a global 
recession, weakening the Korean economy even further. 
l 7 7 
Table 4 -4 
As Korea pursued further integration into 
the 
i nternational economic system, the seco
nd major external 
c on s traint beg an to emerge which we have 
identified as 
dy a dic s e nsitivity arising from economic partner a
nd item 
26 
tration. Toward the end of the 2nd plan (1
970), 46 
c oncen
% of Korean exports were going to the United 
States with 
t side, dependence 
a n o t he r 2 8 7. g o i ng t o Japan. on the imp
or
on Japan was extremely heavy, creatin
g trade imbalances. 
text i le and g a r me n ts and other light In the same ye a r, 
industrial goods accounted for 
almost 6 2% of export 
composition. This partner and item concen
tration produced 
two visible constraints: one was the mounting protecti
onist 
pressure om these countries, a
nd the other was the 
fr
creation of bilateral dependence which tied the fate o
f the 
ean to the economic performance of i
ts major 
Kor economy 
trading partners, Japan and the US. 
In fact, in the early 
ive restraints 
1970s, the US began to widen its quan
titat
nd apparel affecting $ 517 million worth of on textiles a
trade value in 19 7 2 and 19 7 4 under the
 umbrella of th e MF A 
 trade 
(Ode 11 1984). Despite the politicization of 
Kore a and Japan, Japan maintaine d imbalances between 
27 
protectionist stance. Furthermore, w
ith the onset of the 
worldwide recession in 1974, the subsequ e nt s h i ft i
n th e 
direction of restrictive import policy in OECD c
ountri e s 
l 7 8 
Table 4-4: Foreign Exchange Payments for 
Oil Imports and Balance of Payments in Korea 
Year Total Amount Import Price Current account trade Expor
( to  i Il m i pm op rto  rt) (oil) balance balance 
1965 23. 61) 13.33 2) 9 .03) -241 17 5 416 
1967 37.9 12. 92 : -192 -574 <Z3 " 35 909 cC 
\'"-
1969 97.6 10.99 - 549 --992 658 1,650 
1971 178.7 13.16 -848 - 1,046 1,132 2,178 
1972 221.1 15.02 -371 - 575 1,676 2,250 
197 3 305.1 18.59 -309 -567 3,271 3,837 
1974 1,104.8 61. 67 -2,023 -1,937 4,515 6,452 
1975 1,328.1 70. 92 -1,887 -1,671 5,003 6,674 
1) US$ million, 2) US$/kl, 3) US$ million 
Source: Economic Planning Board, Handbook of Economic:,Indi_cators (Seoul: EPB, 1978) p. 37 and p. 245 
as a whole signaled an imminent increase in protectionist 
measures for other export items. T his tightening of export 
markets by the major trading partners further aggravated 
the slow recovery, which in turn reduced demands for K
orean 
g oods (Mitra 1979). 
The final but equally troubling constraint was the 
s tiff e ning of inter-South horizontal competition and
 the 
d e clining international competitiveness of Korean exports. 
Korean growth had been built around a fairly narrow range 
of products. In 1970 textiles, apparel, plywood, and wigs 
accounted for almost 60 % of exports. This mix was 
vu 1 ne r able for a number of reasons. Real wages in the 
oth e r Asian NlCs had risen much more slowly than those in 
Korea over the late 196Us. New low-wage entrants including
 
China and India were seeking to replicate Korean success
es 
in the export of light manufactures again on the far -
ranging tide of the product cycle. On top of all
 this, 
the collapse of the Vietnam boom drastically
 reduced 
28 
foreign e xc hang e income in the ear 1 y 19 7 0 s ? The combined 
result of these external c o ns t r a i n ts 
was immediately 
translated into acute balance of payment crisis, reces
sion, 
and unemployment, which i n turn caused the outstanding
 debt 
d 
to jump from about $300 million to $3.3 billion, a ten
-fol
increase within a period of ten years (Moon 1984). 
The internal, external constraints in Saudi Arabia wer
e 
different from Korea in a number of ways. The direction of
 
the Saudi development strategy was neither outward-lo
oking 
179 
Its developmental 
t o ward industrial deepening. 
nor gea r e d primitive 
mainlY on the transformation of a 
e mphasi s was 
economY Into a viabl e modern, diversified economy 
dualistic
i nfras tructure c reation, hum a n resource development 
t hrough . comparative oil-based 
exploitation of 
a nd a f uller 
systemic 
e xternal o r 
Korea 1o1he re 
Unlik e of th e a dv a nt age . dominant factors in the shaping 
c o n s t r we re 
Saud
a ii   n A ts r abia's 
a nd direction of economic development, systemic 
r a t e typical 
included 
cons
e trx at ie nr tn sa  l dyadic depe ndence arising from a n one 
cons t rain ts 
vu 1 ne r a b i 1 it y and internal 
structure , and a 
c rop e c onomi c backwardne ss, 
rigiditY? 
structural 
c onsisted of 
from tWO 
s hortag e of vulnerabilitY in th? Kingdom came and the 
Syst e mic ne was a heavY dependence on oil, 
into Saudi 
ma j or f a c tors; 0
other wa s an saudl oil revenue 1s chi e fly a function of 
The AlthougA h ra a b sia h. a rp rise in oil 
t: h e 
oil demand a
w no d rl sd u pplY ? 
development 
price 
stability or 
th
fo u erm 1   ation by 
greatlY aff e cted market. 
str ateg1.. es were 
Fporre deixcatmabpillei,t Yh uge development spending habit? forme d during 
of rh? mid-19)0s and th? r e sultant pat terpnr oil ice
osf  
the heyday 
In that 
budgeting beC ame plung d 1?. nflati? on coo l< off in 1978. in its 
e and do mes tic the first deficit 
In the following 
year, Saudi r the oil crisi s ? 
afte
b al a nc e of p ayments 
180 
ye a r, the rate of development had slowed because of 
budge t a r y s t r i n g e nc y. The assumption was that oil prices 
might continue to fall with the decline in oil demand 
because of c o ns e r v at i o n, alternative e ne rg y resource 
development by consumer countries, and the entry into the 
market of new independent oil producers such as Mexico, the 
United Kingdom, and China . However, when the second oil 
shock came, the trend was reversed. The same can be said 
of the period of 1 9 8 2 -1 9 8 4 d u r i ng which Saudi Arabia 
suffered from a cyclical pattern of oil price formation 
and the uncertainty involved in the linkage between oil 
revenue and spending committments (Stevens 1981: 214-234; 
29 
Erb 1979: 21-30; MEED June l 1979: 3). 
The visible effect of world-wide inflation also imposed 
a serious constraint on the Saudi development process. The 
oil crisis had been accompanied by a world-wide cost push 
inflation which in turn brought about a boomerang effect on 
the Saudi economy . In the Kingdom imports made up a 
significant share of total goods and services. The heavy 
dependence on imports had made it unavoidable for Saudi 
Arabia to confront the world -wide inf 1 at ion which was 
multiplied in the circulation process (Keran and al-Malik 
19 8 2: 113-149; Erb 1979: 24; Mallakh 1982). As can be 
seen in tab 1 e 4 - 5, about 4 -5 % g 1 ob a 1 inf 1 at ion during 19 7 4 -
1975 was res po ns i b 1 e f o r an a 1 mos t 2 0 % increase in the 
impor t price index in the Kingdom from a 4.6% level the 
previous year. When the Saudi inflation is calculated in 
181 
US do l l a r s th e o nly international oil payment instrument, 
the si tu a t i on a ppears even worsened. I ts d i minis hi ng 
purchasing pow e r c aused by cons e cutive devaluations in the 
mid-197 0 s e levated the import price index measured in US 
dollars from 9.9 % in 1972 to 61 .4 % in 1975, more than a 
t e n f o l d inc r eas e during a three year period. The result 
wa s an unpr e c e dented domestic inflation . The cost of 
l i ving ind ex went up from a 4 % level in the pre-oil crisis 
period to 34.6% in 1975. Over the 1974-1977 period 
c umulativ e inflation raised the cost of living index by 
150 %, which in turn necessiated a sharp reduction in 
g over nme n t spending and a readjustment of the development 
process as a whole. 
Table 4-5 
The sudden inf 1 U X of petro-dollars had allowed the 
Saudi government to pursue a mbit ious but import de pendent 
de v e l o p me n t plans. T he Ki ng d om had t o i mp or t ever yt hi ng 
from economic planning, commodity, and technology to 
services. This import intensive de v e 1 op men t pattern 
began initially with a high level of partner concentration. 
Planning and consulting were virtually monopolized by us 
g over nme nt agencies and private f i r ms i n t he 1 s t and 2nd 
JO 
pl an formulation. The us, J a pan, and EEC countries 
accounted for more than two thirds of the Kingdom's imports 
18 2 
Table 4-5: Money Supply and Inflation in Saudi Arabia 
Year money supply of inflation non-oil import import cost of 
supply(M3) goods & services gap sector GDP price index price living 
( 1) (2) (1)-(2) deflater in US$ index index 
1970-71 12.1 1.0 11.1 2.6 3.3 3.3 4.9 
1972-73 38.8 21.3 17.5 9.9 13.0 4.6 16.2 
1973-74 40.4 21.8 18.6 17.6 33.2 19.9 21.4 
1974-75 61.0 18.7 42.3 61.4 20.9 19.7 34.6 
.~ 
c--, 
1975-76 73.9 47.7 26.2 40.4 0.6 0.7 31. 7 -<J'> 
1977-78 43.6 23.4 20.2 14.6 8.2 8.0 11.2 
1979-80 18.4 15.4 3.0 9.6 13.8 13.8 5.0 
Unit: average annual growth rate 
Source: Saudi Arabia Monetary Agency, Annual Report 1980 
31 
of goods and se rvi ce s. This excessive partner 
c o nc e n t r a t i o n brought about a typical dilemma of dyadic 
sens ti vi t y to Sa udi Arabia. The dilemma was revealed in 
the monopolistic a nd/or oligopolistic business practices of 
the ad vanced industrial countries' fir ms. The following 
state ment made to the Western firms by the Saudi government 
(Co u n c i 1 of Ministers) s uc c inc t 1 y ch a r act er i ze s some of 
those practices: 
l ? So me c o ns u 1 t i ng f i r ms recommend sizes and 
specifications for projects greater that the 
original goals. 
2. Pre-arrangement of tenders among themselves 
to show illegal profits. 
3 . Seeking business opportunities through 
personal influence regardless of cost and size. 
4. The fixing for their exports to Saudi 
Arabia higher than to other countries for the same 
goods at th e same time of year. 
5 ? Kais i n g c o s ts of pro j e c t to illegal levels on 
the condition of accelerating the completion of the 
projects. (Saudi Business March 2, 1977; MEED March 
4, 1977:3)32 
The outcome of this dyadic sensitivity was waste and 
inefficiency of g over nme nt expenditure, which in turn 
fueled inflationary pressures by inducing a higher level of 
money supply than planned. At the same time, the 
pers istence of these business practices created spill-over 
33 
effects to other new entrants in the Saudi market. As a 
matter of fact, faced with this constraint, the Saudi 
government had taken drastic measures. In Feb. 1977, the 
Saudi government announced the cancellation of tenders by 
foreign firms for electrification and sewerage projects and 
t hre ate ne d to blacklist certain Western firms for pric e 
18 3 
rigging on the g rounds that the prices asked we re 
alar mingly high ( Shirreff 1977:3). Three months 1 ate r, 
another major project, a $ 7 billion contract for a nation-
wide telecommunication installation to the Dutch Philips, 
was ca nceled for the same reason, which involved the loss 
of $ 100 million commission fee by a Saudi sponsor (MEED 
34 
Dec ? 3 1 1 9 7 7 ; Lackner 19 7 8 : 17 0 ) ? 
Exter nal constraints , systemic vu l ne r abilities and 
dyadic s e ns i t iv it i es , brought about less devastating 
effec ts on th e Saudi economic development than the 
endo ngeous problems. As the development process deepened, 
the lack of infrastructure, manpower shortage, and socio -
political rigidities posed more serious cons train ts and 
directly affe cted the deve 1 opme nt al potentials of the 
Kingdom. The first most serious problem was the acute 
sho rtage of physical and social infrastructure. A Western 
observer dramatically described th is infrastructural 
dilemma as follows: 
The chief battlefield where the struggle to 
industrialize Saudi Ara b ia will be won or lost is 
Jeddah port. Congestion persists, --;I"thbet~ 100 
and 130 ships clouding the horizon, waiting anything 
between a fortnight and six months or more to unload 
a t t he l 3 o v e r w o r k e d be r t h s ( MEE D Dec ? J l 1 9 7 6 : 5 ) ? 
( my emphasis) 
Port congest ion and supply bottlenecks slowed down the 
overall rate of development . Major industrial projects 
s UC h as desalinization and power plants and a pet r o -
chemical complex construction etc. had to be postponed or 
r e du c ed in capacity and size due to this poor transporation 
184 
infras truct ur e . When port congestion was eased with the 
n e w c onstructio n and the e xpansion of Jeddah, Jubail, and 
Y anbu c ommercial ports, another problem a rose--inland 
c o n ges tion. Port entrances, cargo compounds , streets of 
major cities, a nd highways were not adequate to meet the 
expo ne n ti a 11 y growing c a r go trans port at ion needs , although 
about 1 , 8 0 0 i<. m of n e w roads had bee n bu i 1 t during the ls t 
plan. An e qual, if not more devastating, contraint was 
the se v e re housing shortage. The massive influx of 
expatria t e labor a nd the expansion of major urban centers 
fo llowing th e development boom was accompanied by excessive 
demands for housing, pushing up the annual rent for a three 
b ed room villa to about SR 100,uOO ($28,000) during 1975-
1976, an 500 % increase over the pre-oil crisis period ( 
v a riou s special issues on Saudi Arabia, MEED 1975, 1976; 
Saudi Business 1975, 1976). 
Certainly infrastructural problems were not 
insurmountable. They merely took ti me . However, the re 
was a more fundamental domestic constr a int substantially 
reducing the chances for "big spurt" of development. That 
was and remains the shortage of indigenous labor. This 
dilemma was described by a Saudi buinessman: 
How can a nation determined to preserve Islam and its 
own security at the same time throw open its doors 
to foreign technology, manpower and all other kinds of 
influence? Who is going to run all these industries 
and services when they are finished? Look at it this 
way, there are a maximum of 4 million Saudis in this 
country. Discount half of them because they are 
women, another 25% are children, which leaves a 
potential workforce of 1.5 million. After manning 
the armed forces, the National Guard and the police, 
185 
many Saudis are there
h  ow le ft to run the government P r i v a t
a  en  d s e c t o r ? ( ME E D De c ? 3 1 l 9 7 7 : J 2 ) 
Eve
m n an bp eo fw ore er  s thh eo  The rtage was not a new issue. 
crlsis, the King
O di ol m  heavilY relied on expatriate labor, 
acc uo  nu s 
Y n
of k i 11 e d 
e tm ede  ni fs o and Om
r 
an ti hs e  bulk 
the foL re  v
la a
1 
b no tir n e
a
s b or , perfw orh mil ee d  skilled 
skilled and white 
ARAMCO Egyt ph te ianan sd    worked in 
jobs often serving a
c s ol mla edr ical doctors and educators 
As of 1 9 7 5 , the t o t a 1 
(Si nc 1 a?1.  re and Birks l 9 8 2: 16 1 -1 7 1 ) ? 
numb
th era  n sso,u oo, a 
native work force was 
less 
manage and 2ni dn  itiate
i  n ts h u ef   $1f 4 31. 
 billi
. oci nent to 
 
8
T 1h 0e ,02 0n 0d   plan th
P el a r n e. f ore projected a need for 
which number di on u bf la ec dt   
additional foreign laborers, 
1 9 8 1 : 6 J 2 -6 J J ) ? This 
at the end of the 2nd plan ( McHale 
manpower shortage allowed
a  c du ote m estic a nd imported labor 
% as go iv ne crn rm e ae sn et d  expenditures 
COS t S to rise by 200 
24). 
the d emand for labor (Erb 1979: 
external and 
internal 
these 
The consequences of 
Among them , inflation present e d 
canst raints were manifold: 
Inflation in the cost of living, 
the most press i ng is s u e ? made it 
industri
i an l  materials and in the cost of l a bor 
its ov e rly Saudi  government to br a k e 
nee es s a r y for the Since too mu c h c ash wa s 
amb 1? .ti develop
p
m lae nn st  ous  
? 
s u
t ph  pe l yg  overnment had to e ase 
chasing too few items, 
money s upply 
to trim the 
bottlenecks as well 
as
  de v el op me n p t l a ns 
Si m thu elt  
Saudi 
aneously. While othe r major inflation, 
su nff ige hre the tmd fro arm e  of 
The ac cel e ration 
socio-political problems were emerging? 
ess accompanie
d by rapid 
nt proc
of the developme
framework and 
g tradition
al social 
urbanizatio
n was erodin
; Abir 19 8 J; Salom
e h 
nces (Johns
 19 8 l 
system of allegi
a
of wealth an
d 
35 tion 
, the conce
ntra
1979). At the same 
time
ndful of royal
 families, 
 a ha
business opport
unities in
l merchants,
 the inevitable
 
na
aux riches a
nd traditio
.E_ouve t, g an to 
 drive for 
developmen be
by-product of a 
ruthless
oligarchic  
nd social p
roblems, inducing
a
Produce pol
itical 
 rate and direc
tion 
 Kingdom to
 re-think the
rulers of the ; Winder 19
79:14-
 May 1980
ernization d
rive (MERIP
of its mod
l 
 regional a
nd sectora
) . The deepeni
ng
l 5 Halliday 19
81
icy makers of pol
attract the 
attention 6 
egan to 
3
imbalances 
b
urces. 
eir allocati
on of reso
the th
responsible 
for 
: the Rise of ral Choice
Strategies 
and Bilate
State tion 
rabian- Kore
an Connec
the Saudi A
trategies 
ussed the dev
elopment s
disc
Thus far, we 
have 
he patterns of
 
well as t 
a and Saud
i Arabia as
of Kore neral 
ising theref
rom in ge
ts ar
s and const
rain
opportunitie e view that
 he 
 th
t
this discuss
ion is
terms. Implicit
 in 
(i.e., pure ec
onomic 
tegies 
rns of devel
opment stra
Patte  and constr
aints 
s of opport
unities
ariables ) a
nd the type
V reveal a set 
of 
do 
variables
)~~ 
(i.e., ecologi
cal 
 bilateral ti
e 
might neces
siate the
ty which two 
complement
ari
 Arabia's f
irst 
audi Arabia.
 Saudi
 S
between Kor
ea and
rn of goods 
and 
d related d
emand patte
 an
development
 plans
s of dev
elopment 
e
nicely with 
the stag
services ma
tched 
187 
its 
particularly those related to 
taking place in Korea, 
industrial sectors. 
of infrastructural and light 
mastery e q ue nc 1 ng, 
mid-1970s owing to its development s ? 
BY the 
in a position to provide goods and services on a 
Korea was In 
basis which the Kingdom badly needed. 
competitive 
opport au fn fi et cie tis n g 
c o ns t rain ts and 
same vein, the rather than 
Saudi Arabia were complementary 
Korea and 1 ab or-capita 1 
because of the difference in the 
competitive its economic 
to diversify necessity 
ratio and the 
partners. these mutually complementary 
the ex is t e nc e of 
However, and st age of pattern 
from the 
factors which dramatic 
alone does not fullY account for the 
de v e 1 op men t As was 
the Saudi Arabian-Korean connection. 
growth of 
discussed in Chapter Two, there were a number of countries 
which satisfied such complementary factors. Southern 
Turke EY a, stern 
European 
Israel, 
European countries, and even Egypt 
such as Yugoslavia and Rumania, 
countries of development st a
a g es  imilar 
L me ab ia nn to an in ed and of constraints and opportunities as in 
facing a similar set they had a more In fact , 
that ti me ? 
the case of Korea at over Korea in terms of geographic 
apparent advantage the pattern and stage of economic 
proximity. anTdh uas,s sociated environmental factors may offer 
this 
development conditions for 
but not sufficient, Saudi-Korean 
necessary, of the 
A fuller explantion dynami c 
phe nome non. of mor e 
con nee ti on depends 
188 
, at s, the level of complementarity in specific 
elements th i 
foreign economic strategies pursued and in the decision and 
authority structure responsible for such strategies. 
vu 1 ne r ab
s  i l i
d
 t y i a e ds i , c ystemic  
Korea: Faced 
and the resulting inter-South competition 
dependence , 
Korea was obliged to adopt 
domestic economic difficulties, 
with them. 
To reduce 
of strategies to cope
v  a ariety 
attempted to attract foreign capital 
v u 1 ne r ab i 1 i t y , Kore a a stable 
manner as well as to secure 
in a diversified 
i nc l ud i ng tho i 1 r, ough 
supply of strategic raw materials, and 
Efforts to diversify export items 
multiple channels. to avoiding 
actively pursued with a view 
Partners we re improving 
And as 
a way of 
dyadic sensitivities? with 
competitiveness and of coming to terms 
international 
growing horizontal competition, the government initiated in 
restructuring and 
industrial 
massive
the m
 
id-1970s As shall b de i scussed 
and Moon 1983) . 
dee pe ni ng (Haggard partner 
choice of Saudi Arabia as a bilateral 
below , the 
was a conscious strategic decision which grew out of Korean 
ti me. 
policies at the 
foreign economic Korea suffered 
following the oil crisis, 
Immediate discussed il nY   
from severe balance of payments deficits as 
Most of these deficits in 1974-1975 
the previous section? 
In 1970, 
resulted from trade imbalances with Saudi Arabia
K , ingdom was a 
trade deficit with the 
Korea's bilateral 
modest $38 million, aut in 1974, it jumped to $639 dmeiaccount f
lliicoint ,?  
half of current 
accounting for 
almost 
189 
T h o u g h r e du ce d thro ug h a sh ar p cut in o il Lmp o rt s , the 
sa me probl e m p e rsisted i n 197 5 $ 494. l mill ion). 
Following the pr inc i pl e o f recipro c ity , th e Kor ea n 
g ov e r nme nt attemp t ed t o co rr ect thi s tr ade Lmbal a n ,:e by 
J 7 
a gg r e s s ive ma rke t penet ration in the Kin g d om . 1\ 10 th e r 
ma jor r e a s on for act iv ely p ursuin g bil a t e ral t i c s with 
S audi Arabi a was the growing n e cessity to sec u r e a s t a bl e 
oil s upply. As ind i c a te d i n t ab 1 e 4 -b , i n th e pre -oil 
c ri s is p e riod, Korea's major o il suppli e r was Kuw a it wh ic h 
provided 50. 4 % of Korea's import ed oi l wa s ori gin a t e d i n 
38 
1972. T he portion of Saudi Arabi a n oil was 42 % that ye a r. 
Ironically, this import compo s it ion c hange d a ft e r t he oil 
c risis. Since 19 7 4, more than ha lf of Kore a n imp o rt e d oil 
ca me f rom Saudi Arabia. 
T a ble 4-6 
Besides these balance o f p a ym e nt s a n d o il Ls ; u e s , 
the re we re a number of other fa c tor s pr ess Ln g KD r e a n 
policy-makers to strengthen th e S a u di Ara bi a n co nn -~c t i on. 
One of these was the s u r pl us p e t r O -d o 1 1 a r s Ii e L d b y th e 
Kingdom. By 1974, Korean overs e a s' d e b t a pp r oa c li e d t o S J 
billion, yet it needed more for e i g n b o r r o wi n 0 Lo f i na nce 
its h e avy industrialization initi a t e d j u st b efo r e t h e o ns e t 
of the oil crisis. I rn mediat e l y a f t e r t h e o i L c r is Ls , th e 
period i n w hi c h s u r p 1 us p e t r o -d o 11 a r s h ad n o t y c t r e c1 c h e d 
Kore a via the Eurodollar mark e t, int e r n a ti o n a l L n a 11c i a l 
19 0 
4-6: Korean Oil Im
ports by Country 
Table 
1975 19
77 1978 
Country 1972 
) 
Saudi 1(57
.6
2 5,84 83,895 (57. 6) 9
Ara bia 38,867(42.0) 51
,861(44.0)
658(32.1) 50,789(3
0.5) 
37(45.5) 49,
Kuwait 46,628(50 . 4) 
53,6
 16, 361(10. 9) 
12,912(7.8) 
2(0.7)
Iran 2,824(3.1) 
88
4(2.3) 
Neutral 912(0.5) 
3,85
Zone 5,542(6.0) 
10,194(8.6) 
 22(2.3) 3,13
6(1.8) 
Other 3) 0(0. 8) 1,221
(1.2) 4,2
countries 72
centage, 3) Indone
sia and other 
d barrels, 2) in p
er
l) in thousan
sources. 
n, Petroleum Relat
ed 
: Korean Oil Devel
opment Corporatio
Source l: KODC, 1979) 
Research Materials
 (Seou
e al 
th many bidde
rs for scarc capit
markets 
i
were swamped 
w
terest rates we re 
d onsequently i
n
to pay oil bills, a
n c
ional capital 
g domestic ne
ed for addit
high. This growin
 Korea to 
l capital mar
ket drove
and the tight int
ernationa
ts of capital f
rom OPEC 
pt for bilateral 
inducemen
O
e erfect 
d, Saudi Arab
ia was th p
countries. In 
this regar
e capacity w
as low 
roach since i
ts absorptiv
candidate to 
app
(22.9 billion
 in 
as high 
evel of surpl
us capital w
and the l
 14.l billion
 in 1975). 
1974 and an urgent 
inducement, 
the re was 
is 
Apart from th
ket penetratio
n in 
 aggressiv
e mar
do mes tic need to
 pursue
the 
 of the Vietn
am boom and 
e end
ket. With th
the Saudi ma
r
once burgeoni
ng Korean 
ative mar
ket, 
l OS s of this lucr Since 
were placed i
n a panic. 
ruction firms
 
st
overseas con he 
arket boom 
ended with t
 tr uc ti on 
m
the sdo mes tic con hich emphasize
d 
w
 and 2nd 
pl ans 
completion of 
the ls t
here was no r
oom to 
t
ructure, 
hysical and so
cial infrast
P
bout-to-be un
employed 
fir ms and 
the a
ac c omod ate thes
e 
cture, the 
tnam. A
t this jun
ie
orkers re turning
 from V
w  new 
was conc
eived as a
tion boom
 
ruc 39 
Middle East co
nst
Vietnam era. -
ortunity mark
ing the post
Opp a post -
e Middle East
 market as 
ion o
f th
The concept new positive
 
with a 
ity coin
cided 
Vietnam oppor
tun e 
rnment and 
th
bilities by b
oth the gove
capa
ass es s me nt 
of 
ies reached a
 
r
 1975, some K
orean indust
By , 
Private secto
r. 
Cement, pl
ywood
oduct cycle. 
ge of maturi
ty in the pr
sta aluminum, and 
other 
tion equ i pme 
nt , 
transporta
Copper-plate,
 
l 9 l 
been substant
h ia ad l ly stam na dt ae rr dizbu ial
e
s d  ilding 
massive import-substituting peri
d ou dr th  ing e 
of the 1960s. 
ems t at were n great d
A en md a ni dt   fw roa ms  t Sh ae us de i  it h i 
Arabia T hin u s,p  articular and the Middle East in general. 
in t
K heo  re sa en ns s e began to have optimistic expectations 
that they could compete with western firms by utilizing the 
labor). M( oL ree o. v, er, 
changing compa
a
r da vti av ne t age 
advant in the 
fir ms hadc  
other ages 
Korean onstruction 
participation in the previous 
Middle East market. 
Their 
gigantic physical and social infrastructure projects during 
the 1st and 2nd plans such as the Seoul-Pusan Highway, had 
m skills and 
to ac
a
c nu agm eu ml ea nt te   
allowed them 
improve manpower 
and 
to 
technolo eg xic pa el r tise 
and 
essential to both of which were 
equipment mobilization, 
their success in ch ? saudi and ch ? Middle East market ?? In 
addition, over???? market experience ? in Southeast Asia and 
of ac  heap and qualified manpower gave 
the availability 
confidence co Kor??? fir ?? in uncertain and high 
sense of 
risk market. how
p ee vr ec re , 
the 
ption, 
optimistic 
Despite this mac ro n to 
ke
d t  uc iv e 
of policies 
overall formulactiho? n Middle Ea ? t not and Saudi Arabia did 
pe net ration in private The optimistic projection of 
i mm e d i a t e l y folloW? countered by 
their patrons in government was 
fir ms and other e c onomic 
r the e 
Pa rt of 
se
skepticism an
r
d v ation on minister for 
the 
then vice 
Du c k -
c j i i r nc  le C s h. a ng , goveth rne m ent's 
Board, 
Ee anomic Planning 
position at the time as follows: 
reat panic for us 
especially 
e oil crisis creat
ed a g
Th evere recession, 
because we were i
n the throes of a s
and unemployment 
even 
current account 
deficits, we 
 of oil crisis. I
n this context, 
before the onset  as a valuable 
w the Middle E
ast economic boom
sa sign to 
owever, we did not 
have any grand de
chance. H us 
portunity nor was 
there any consens
exploit this op ard in 
olicy-makers. Ou
r firms were backw
among our p ability, poor in 
anagement and te
chnological cap
m eas 
urces, and inexpe
rienced in overs
financial reso t for the 
Given this, it was
 quite difficul
markets. to a set of 
rnment to commit
 itself fully 
gove dle East market. (
Interview 
Mid
policies aimed at 
the 
l / 20 / 8 J) 40 
esponse to the 
e governme
nt's initial r
In fact, th
 of 
Representing the i
nterests
Middle East boom w
as mixed. 
ion and of 
 Ministries 
of Contruct
e
private firms 
th
mediate 
strongly advocated
 an im
stry 
Commerce and Ind
u
ntial policy 
 comprehensive and
 prefere
a
formulation of 
ncial, tax, and 
rative, fi
na
ackage composed of
 administ
p
Korean firms h
ad 
. S
ince a number of 
diplomatic suppor
ts
the 
in the Sau
di market, 
perating 
already begun 
o
ver nme n t should 
argued that the 
g o
41 
Cons tr uc ti on M
inistry 
various bonds ?
 
i nv ol vi ng 
 he bank g
uarantees 
back t was 
ther economi
c agencies 
o
er, the respons
e from 
Howev the 
nance conc
erned with 
Fi
e. The Minis
try of 
negativ
 position t
hat the 
the
mercial ban
ks took 
interests of c
om
in any bank 
guarantee 
implicated 
government should
 not be 
cause of the hi
gh 
firms be
equested by constr
uctions 
issues r
42 nal Taxa
tion also 
ce of Natio
ved. The 
Offi
risks invol fir ms 
? tax holidays to
 Korean 
sed the idea 
of granting 
oppo claiming that such
 a 
lved in the Middle
 East markets, 
invo which might 
fairness, 
violated the princ
iple of 
policy 
193 
43 
cause political opposition from other business sectors. 
The Office of Labor raised the question of wage disparity 
between domestic labor and labor employed in the Middle 
East market and the difficulty of adjustments in the 
44 
domestic arena. 
This bureaucratic battle continued until President 
Park personally intervened in late 1975. When the Economic 
Ministers C ou nc i l failed to produce a consensus, the 
stalemate paved once again for Park's personal involvement. 
Park took the side of the Construction Minister and 
resolved the conflict in such a manner that the g over nme n t 
produced a comprehensive policy package to promote economic 
advance in the Middle East in general and in Saudi Arabia 
45 
in particular. It is said that Park's decision was 
motivated by three major factors: his personal relationship 
with the Construction Minister, his usual emphasis on 
e xport promotion(i.e., foreign exchange earnings) and oil 
security, and finally his positive assessment of the 
46 
private sector's capa b ility . 
Once the decisio n was made, the g over nme n t took 
immediate steps. In December 1975, it announced three major 
policy guidelines on the economc relations with the Middl e 
East: l) the maximum foreign exchange earning from the 
Middle East market by promoting construction, services, and 
manpower exports with the assumption that the Middle East 
boom would last at least five years; 2) s t re ng t he n i ng 
administrative supports by establishing an integral body of 
194 
policy networks encompassing all the ministries; J) in the 
recognition of various internal as well as external risks, 
barriers, and potential negative effects , the government 
would pursue its supportive policies with a low profile 
(IMES 19 7 6: 2) ? These guidelines signalled the direct 
involvement of the Korean government in enhancing economic 
cooperation with the Middle Eastern countries, and it 
provided for its coordinative, regulative, and facilitative 
functions of the government vis-a-vis the private sector. 
To implement these policy guidelines, a comprehensive 
organizational structure was formed. On the administrative 
side, the Committee for Economic Cooperation with the 
Middle East whose chairman was the prime minister was set 
up in Jan. 1976 as the supreme policy organ to coordinate 
and supervise all public and private activities related to 
the Middle East. This supreme council was aided by a 
working committee composed of vice ministers from each 
ministry and by a Middle East task force team newly formed 
at each ministry. At the same ti me, information and 
infrastructural support me ch an is ms had been 
institutionalized. The Institute for Middle East Economics 
was established by the government for the purpose of 
providing information and other necessary services for the 
private sector in Sept. 1976. An ins tit u t e for Arabic 
la ng u age training exclusively for the business sector was 
established by joint cooperation between the government 
and private firms in the following year (KIEI 1982: 32-38). 
195 
In addition, the Kore a Overseas Trade Promotion 
Agency(KOTRA) expanded its branches in the Middle East 
countries, and the number of economic, co mme r c i a 1, and 
construction attaches to Korean embassies in the region 
increased more than 10 fold. 
In sum, the Korean approach to Saudi Arabia in 
particular and the Middle East in general 
was chiefly 
motivated by the acute perception of
 new market 
opportunities on the part of the political lea
dership and 
: 
the private sector as it related to state obj
ectives the 
diversification of export markets, the inducement of petro-
dollars, a stable supply of oil, and the 
enhancement of 
export earnings. Despite bureaucratic 
struggles, its 
deision was prompt and the follow-ups 
we re orchestrated 
immediately and comprehensively. Korea'
s strategic choice 
of Saudi Arabia and the effective and timely 
provision of 
policy tools provided for the strengthening of the 
Saudi -
Korean connection. 
While the Korean choice of the Saudi Saudi Arabia: 
bia s mainly motivated by a
 set of external Ara wa
rea 
in ts , the Saudi approach to 
Ko stemmed from 
cons tra
vious 
internal ne c es s it i es ? As discussed i
n the pre
section, Saudi Arabia's immediate dilemmas were how to curb 
aling inflation, to secure stable
 manpower, and to 
spir
accelerate infrastructure creation with low
 costs. Since a 
large portion of inflationary pressures 
originated from 
fir ms, the Saudi 
excessive dyadic dependence on western 
196 
policy-makers were obliged to diversify their import 
sources. Securing the optimal level of manpower was quite 
a difficult task because of the latent political risks 
deriving from heavy reliance on other Arab manpower. Hence, 
the choice was to diversify the sources of the expatriate 
labor force. Accelerating infrastructure creation without 
risks of inflationary fall-out demanded more conscious 
selection of foreign contractors. 
To the Saudi elites, Kore an firms we re ideal 
candidates to satisfy their needs. First, Korean fir ms 
were cheap and competitive. Atef Sultan, a i<een observer 
of the Saudi market, described South Korea as being 
"almost the only country able to provide both advanced 
technology and a ( c he a p) s k i 11 e d 1 ab or f or c e ? " He further 
added " While Western and Japanese firms can provide the 
technology, their labor costs are prohibitive ????? South 
Ko re an fir ms have now established a reputation for 
producing high quality work on time, giving them an even 
finer competitive edge." (MEED 1976:3) His observation was 
shared by many technocrats and policy-make rs in the 
Kingdom. When the Hyundai won the contract for the Jubail 
commercial port in 1976, the price difference between the 
Hyundai and a Dutch company , the second lowest bidder, was 
47 
more than $300 million. The Korean bid was conceived 
to be the only alternative to Western firms who had been 
widely accused of price -rig g i ng ? In fact, in the midst of 
price-rigging scandals by western firms, Al -Q us ai bi, th e n 
Minister of Industry and Electricity set off on a tour of 
19 7 
Korea and other Asian countries, announcing that he would 
favor placing contracts with competitive and friendly 
nations rather than the now-discredited western industrial 
nations (MEED March 4 1977: 4) . 
Price was not the only factor that th e Saudi elites 
considered i n c ho o s i ng Kore an fir ms ? Efficiency, hard -
work, and the discipline of the Kore an labor force 
constituted important elements. To explain this point more 
vividly, we cite one episode . Early in 1975 while 
returning from Medina to Jeddah at night, King Faisal 
noticed a sea of torches in the desert. The curious King 
went to investigate and found a group of Korean workers 
building a highway under the light of the torches. The King 
was very pleased, it was said, and from that moment, wrote 
personal me mos ins tr uc ting t Ii at Kore an fir ms be awared 
48 
contracts with special preference. Dr ? De r h al y , a high 
ranking official in P 1 an n i ng Mins try, echoed the same 
sentiment: " In the beginning of our 2nd plan, Korea was a 
unknown partner. We we re suspicious of Ko re an fir ms ' 
capabilities. Hut later we found that Korea is the most 
reliable partner. Their prices are less than others, yet 
they are more expeditious and deliever high quality 
products. Furthermore, Koreans never make complaints and 
work like soldiers." (Interveiew: 3/11/83) 
Apart from the Saudi elites' favorable image of Koreans 
in terms of prices and 1 ab or, there was a more compelling 
internal reason for choosing Korea as an economic partner . 
198 
This was the political calculation related to internal and 
external security conditions. Externally Saudi Arabia 
shared a vast border with hostile neighbors. The Ba' at his t 
regime in Iraq, Marxist South Ye me n ( P VR Y ) , Iranian 
hegemonic expansion and insecurity in the Gulf under the 
reign of Shah, and the presence of Israelis on the Northern 
border we re in one way or another perceived a s acute 
49 
threats to the security of the Kingdom. It was 
particularly so given the fact that the Kingdom maintained 
less than 50,000 men as security forces which were composed 
of the regular army, the National Guard, regular and secret 
polices. Furthermore, security meas ure s to protect the hu 6 h 
oil facilities were not fully operational. It was not easy 
to oversee 14 oil fields, 775 wells, J refineries, 11 
loading facilities and 2800 miles of pipeline, all spread 
over an area of 70,000 miles (Dawisha 1978; Ta ht i ne n 1 9 7 8 ; 
McLaurin 1981; Quandt 1981: Bloomfield 1981: Mansur 1980 
Schuler 1982; Kuniholm). 
In addition to this external vulnerability, various 
do mes tic threats to regime st a bility e merging as the 
development process took shape. Opposition from s UC h 
traditional actors as the Islamic fund amen ta 1 is ts and 
newly western educated elites, rapid urbanization and the 
erosion of royalty system, and the widening gap between the 
rich and the poor posed new threats to the Saud regime. 
However, a more pressing dilemma was the problem of 
expatriate labor. Since the days of King Abdul Aziz, 
Lev anti ne s , Egyptians , Yemenis and Omanis had immigrated 
199 
into the Kingdom and filled the gap left by the shortage of 
the endogenous manpower. The massive influx of Arab 
manpower enc our aged under the laissez-faire migration 
policy before the oil crisis increased the number of Arab 
workers in the Kingdom to 1.5 million in 1975, almost 
double their number in the 1960s. The dominanc e and th e 
permanance, as opposed to temporary immigrant workers, of 
Arab male manpower, the inevitabl e outcome of th e Saudi's 
need for modernization, caused considerable anxiety to 
Saudi rulers because of the potential politicization of 
this labor force (Abir 1983; Shaw and Long 1982; Birks and 
S i nc l a i r l 9 8 l ) ? 
Political opposition movements in Saudi Arabia have 
lon6 been characterized by the persistent participation of 
expatriate workers, mostly from other Arab countries. 
Lev anti ne workers organized the ARAMCO strikes in 1953 and 
1956, and created the first politically motivated labor 
movement s i nee t he I kw ha n re vol t i n t h e Ki ng d om (Lackner 
1978:89-109). The spread of Nasserism fueled political 
opposition movements founded by Egyptian and Yemeni workers 
employed in the Kingdom. In some cases, even Saudi natives 
joined the Nasserist Arab nation a list movement as 
demonstrated by the attempted coup by Royal Air Force 
officers in 1969 (Desso uk i 19 8 2: 57; Shaw and Long 19 8 2: 
98 -100; Dawisha 1979: J2). More importantly, these Arab 
expatriate workers were linked to their home g ov e rnments or 
to politically active regional organizations as th e 
200 
rist 
 in Ir a q and Syria, 
manistream Nasse
Ba' at his t parties
radical and Islamic 
fund a me n ta 1 is t 
movements, and othe
r 
groups. 
inated by two major
 
dom
Saudi security has 
always been 
tional border, the o 
i 1 and other 
concerns ; protecting
 na
ly in case of 
rial and public faci
lities simultaneous
indust
 reducing 
flicts with a limited
 defense forces and
major con
ating 
or internal politica
l instability eman
the potential f
ower or insulating t
he workers 
from expatriate Ar
ab manp
ed from 
cal and ideological. 
influences exercis
from politi
ical 
ntries or pan-Ara
b regional polit
their home cou
5Ll  this 
 The re was no
 easy way out of
organizations.
k 
lutions was to see
security dilemma. But
 one of the so
ome non-Arab countr
ies. In this 
manpower from less med
dles
the 
ce. I n d e s c r i b i ng 
context, Korea was the 
perfect sour
orkers, an official
 
Saudi preference for
 Korean firms and w
Interior Affairs 
made the 
at the Saudi Ministry o
f 
following statement: 
ment looked 
I believe that th
e Saudi govern ms 
upon Korean labor a
nJ construction fir
favorably many of our 
because Korean sat
isfied then  
 is far away from Sa
udi Arabia, so there
needs: Korea dling; it 
no question of polit
ical influence ped
is fied our 
anti-communist and 
therefore satis
is 
s. The Korean lab
or force is 
ideological. need er the 
ed and efficient or
 at least it is und
disciplin hus, it is 
 control of the Kore
an government. T
firm anized 
other expatriate lab
or forces,-- unorg
not like  only 
ciplined, and polit
ically volatile. The
less dis hey are not Musli
ms. 
quality absent is 
that t
(Interview Jan. 18 1
982) 51 
security objectiv
es, 
omic and 
Viewed from Saud
i econ
choose. Koreans
 
was therefore an ide
al partner to 
Kore a 
20 l 
were competitive, efficient, and hard - working, which helped 
the Kingdom to reduce waste, i ne ff i c i enc y, and price-
rigging practices, (partly responsible for inflation), and 
to expedite infrastructure creation . The non-political 
Korean labor force also eased security concerns of Saudi 
52 
Arabia. This increasing utility of Koreans in the 
Kingdom in both the political and economic context and the 
gradual emergence of a favorable perception of the Koreans 
on the part of the Saudi ruling elite have in fact produced 
a number of pro-Korean elites. Western educated officals 
of the Ministries of Planning, Commerce, and Industry and 
Electricity etc. beg an to show a strong preference for 
Korean firms. In particular, Hisham ::-Jazer, the Planning 
Minister, known to be the most strong supporter of 
Koreans, even remarked to a Western journalist, " If we had 
known Koreans a little bit earlier, our de v e 1 op men t 
experience would have been far better-off."(Washington Post 
March 5 1980). At the same time, members of royal family 
following the le ad of King Fa is al also recognized the 
act u a 1 and potential contributions by th2 Koreans. By 
mid-1976, it could be safely argued, major decision-makers 
in the Kingdom were greatly in favor of the Korean entry 
into the Kingdom and were already using Korean firms as a 
bargaining leverage with western firms. 
Although the King is the final decision-maker and while 
members and intimates of the royal family and upper -1 eve 1 
technocrats are influential agents in the making of final 
2U 2 
decisions, th e overal decision-ma~ing structure in the 
Kingdom is not as autocratic as in other monarchical 
regimes. It is rather a widely based oligarchical 
structure, operating on the principle of cons u 1 t at ion 
(shura) and consensus(ijma) (Koury 19 7 8; Mc Laurin 19 8 2; 
Shaw and Long 1982; Stevens 1981, l 9 8 2; Qua nd t l 9 8 1 ; Mor an 
53 
19 81 ; Dwais ha 1979). Thus, no matter what priority 
the forei g n economic policy toward Korea is, it is quite 
misleading to reason that the perceptions of ruling elites 
are translated e as i 1 y and automatically into final 
de c is ions ( i ? e ? , pro-Korean policies or attitudes). Uthe r 
societal actors such as the merchant class, the ulama, and 
the military elites are also in a position to affect s UC h 
dee is ions or policy outcomes through the Kingdom's unique 
political network called th e halaqa'at(clan) mec ha nis m 
(Niblock 54 1981:75-105; Koury 1978: 8 5 -9 2) ? 
However, the Koreans we re we 11 received by these 
second-tier political actors as well. The merchants 
we l c o me d t he Kore a n e n t r y more for political than economic 
reasons. By the mid-1970s, there was growing discontent 
from a large segment of the newly emerging middle class 
me re ha nt s ? Their grievances we re legitimate and 
politically important since they accused the big 
me re ha nt s , both traditional and new, of monopolizing th e 
oil wealths. 1 n fact, traditional Hejaz and Nejd merch a nt 
families s UC h as Alirza's, Sulaiman's, Alrajih's, and 
Jamjum's did control the major sales de a lerships in the 
Kingdom. At the same ti me, n e w young tycoons s U C h a s 
20 3 
Khashoggi, Pharaon, and Ojjeh swept away contract 
agentship. It was quite a natural phenomenon because they 
we re politically we 11 connected, thereby attracting 
western fir ms' attention on the basis of their influence 
and experience. T hes e f i r ms we re well aware of the fact 
that having a business tie with middle class me re ha nt s 
would produce nothing. But the entry of Korean firms easeJ 
this problem drastically. Although big Korean firms made 
contacts with these influential merchants, middle-sized 
Korean fir ms, desperate to find local sponsors, allied 
the ms e 1 v es with these somewhat alienated middle c 1 ass 
me re hants. Thus, Korean firms in a sense satisfied both 
groups of Saudi merchants by being competitive partners 
for big business groups and by providing new opportunities 
to Saudi middle level me re ha nt s ( Salo me h 1980: 18; 
55 
Thompson 1982: 12). 
Me a nwhi 1 e, Saudi religious leaders also favored the 
Kore ans despite the xenophobic attitude of the Saudi 
f u nd a me n t a 1 is t ulama who dichotomize the world into two 
o p p o s i ng f o r c e s , Dar al Islam (the world of Islam) and Dar 
56 
al Harb ( the world of war). To the ulama, Koreans are not 
the children of Holy Books, and thus belong to Dar~ Harb. 
This being the case, Koreans theoretically cannot be allowed 
on Saudi soi 1. However, this author's interview with two 
leading Saudi religious leaders revealed very i n t e re s t i ng 
reasons why they made an exception for the Koreans. Sheikh 
Hassan Kutbi, former Minister of Haji and Awgaf( Religious 
204 
Affairs ) , who visited Korea as a special envoy of King 
Faisal in the early 1970s and who was instrumental in 
promoting political ties between two countries, noted two 
major reasons why he recommended pro-Korean policy to King 
Faisal. The first was ideological. Korea's anti-communist 
ideology persuaded him to believe that there is a high degree 
57 
of ideological homogeneity between the two countries. The 
second reason was cultural. II The rapid rate of 
de v el o p me n t in the Kingdom, II he argued, II has been 
accompanied by cultural evils from the West. II But II by 
ha v i ng t he Ko r e a n s , we do not have to worry about cultural 
contamination. Koreans are disciplined and their culture 
is not yet corrupt as that of the West," he added 
(Interview Feb. 20 19 8 2) ? Sheikh Abdul Aziz Bin Baz, the 
supreme leader of ulama as well as minsiter of Darul Iftah 
58 
(Islamic Research and Propag ation), made a different 
point in approving the influx of Koreans. His view was 
that: II I know Koreans are Kafir (non-believers) and live 
in the age of Jaihiliyah (ignorance). But for that fact 
al one we cannot reject them. We should not forget that it 
is our divine duty to convert ignorant Kafir into true l y 
good Muslims. Having more Koreans here, we are given a 
great chance to preach Islam." (Interview May 8 1978) 
Various other religious leaders in the Kingdom interviewed 
59 
by this author echoed these sentiments. 
While the me re ha nt c 1 ass and ulama have shown a 
moderate to strong preference for the Koreans, other major 
social actors such as military and univerity students, also 
20 5 
interviewed by the writer, revealed a fee 1 i ng of 
60 
indifference towards the Koreans. On balance, therefore, 
it can be asserted that the overall domestic political 
structure was favorable to Koreans. The Saudi leadership's 
perception about and consequent choice of Kore a as a 
reliable partner attracted no significant socio-political 
opposition. Although Saudi Arabia, unlike Korea, did not 
pursue a comprehensive policy to promote bilateral ties 
with Korea, certain pro-Korean gestures had their intended 
effect. During 1974-1978, the immigration 1 aw was 
liberalized to allow non - Arab expatriate workers with the 
Kingdom and the Saudi authorities showed a specially 
lenient attitude toward the Koreans in issuing entry visas. 
Various administrative barriers such as counter-guarantee 
provisions on placing bonds by Korean Eirms were lifted. 
The freq ue nc y and relative weight of Saudis' visits to 
Kore a inc re as ed substantially from 1974 to 1979. In 
particular, economic ministers, bus i ne s s me n, and other 
government officials in the economic and planning agencies 
rushed to Korea to promote economic cooperation. Most 
importantly, Saudi receptivity of Koreans was revealed in 
their agreemnt to set up a joint committee on economic and 
technical coo pe rat ion ? This committee was set up before 
61 
with the US and other Western European countries. 
In sum, two major conclusions can be drawn from the 
above discussion in relation to the hypothesis asserted 
earlier in this chapter. The first is that the high level 
2ll6 
r i t y in development str
ategies and in the 
of c om pl e me n ta
for 
traints and opportunit
ies was responsible 
nature of cons
s as in the case of 
the rise of inter-South 
bilateral tie
connection. Nonethe
less, s UC h 
the Saudi-Korean 
lanation for 
lementarity can provid
e only a partial exp
comp
to be 
enon. In order for
 the explanation 
the phenom
re of foreign 
omplete, it is essentia
l to examine the natu
c
omestic determinants e and its d
economic policy as a who
l
omestic 
ate objectives, leade
rship perceptions, d
such as, st
 the pattern of 
dynamic 
d
political structures, 
an
e of the Saudi-Kor
ean 
 In the cas
interactions among the
m.
ntarity 
, what might be called
 strategic compleme
connection
ries, was a decisive fac
tor in initiating 
between two count
s. 
and promoting their b
ilateral tie
used 
this chapter, our dis
cussion has foc
So far in 
the 
e initial pre-conditio
ns responsible for 
chiefly on th
s argued earlier, 
birth of the Saudi-Ko
rean connection. A
lain why 
 e nc e of s uc h pre c o nd i
t ions does not exp
the e xis t
expand. The 
h bilateral ties en
dure as we 11 as 
s UC 
a 
of bilateralism is lar
gely 
sustainability and 
expansion 
major agents , priva
te entrepreneurs 
function of how two 
lly manipulate transac
tions. Chapters 
and the state , mut
ua
and 
examine the nature of 
these private 
Five and Six will 
s which are crucial to
 the 
activitie
state entrepreneuri
al 
ics of the Saudi 
-
 rs t and i ng of the
 process-level dynam
u nd e
Korean connection. 
20 7 
Footnote 
1. There is a vast literature on the economic development 
in Korea. For a general overview, consult Hassan and Rao 
(1978), Mason (1980), Westphal (1979) and Adelman (1977). 
On foreign trade and exchange regime, refer to Frank, Kim, 
and Wesphal ( 1975), Krueger (1978), and Balassa(l9dl). For 
a brief overview of industrial policy, Westphal (1982) is a 
good source to look into. 
2. "Big spurt" thesis is derived from Gershenkron's 
hypothesis that " the more delayed the industrial 
development of a country, the more explosive was the great 
spurt of its industrialization, if and when it came" 
(1962:44). For a related literature, refer to Hirschman 
(196d: 2-32), Gourvitch (1977), and Cummings (1984). 
3. "Growth first and distribution later" was a political 
slogan of 1 ate president Park in his 1971 election 
campaign. 
4. For this topic, refer to KTA (1980; 1981). 
5. On the Haji economy, consult Long (1979) and King (1972). 
6. However, this linkage was limited to al Hassa reg ion. 
Other regions such as Hejaz, Nejd, and Asir did not benefit 
from the ARAMCO. 
7. In the late 1950s and 1960s, there were three major 
events affecting international oil price structure: 1) the 
entry of the independent consumer owned petroleum company 
( Ente Nazionali Idrocarburi of Italy); 2) the entry of new 
independent oil producers such as Phillips, Sun, and 
Atlantic Richfields; J) the emergence of Soviet Union as 
a new oil exporter. For thi topic, refer to Tanzer (1969: 
70-77). 
8. The suggestions made by the World Bank included: l) 
financial reform such as cutting the allowances of royal 
family; 2) institutional reform with specific focus on 
planning and statistical agencies ( Adam 1965; MEERI 1978; 
Mallakh 1982: 141; Lackner 1978). 
9. The most salient example was the birth of the free 
princes movement led by prince Talal, then finance 
minister. This free princes movement was influenced by 
progressive Nasserite Arab nationalist sentiment and 
advocated for constitutional monarch ( Lackner 1978: 90-93; 
208 
Lacey 1981: 340-342). 
10. For Ten Point programs, refer to Gauvy (1966: 147-
151 ) ? 
11. The Ford Foundation was instrumental in drafting this 
first five year plan. 
12. For a good discussion on political dilemma of the 
Kingdom emerging from clashes between the modernization 
drive and the conservative Wahabbi ideology, Lenczowski 
(1967: 98-104), Edens ( 1974: 50-64), Koury (1978), Lackner 
( 19 7 8), and Sh aw and Long ( 19 8 2) ? 
lJ. The slower pace of growth in the oil sector was 
motivated by the Saudi government's efforts to reduce 
dependence on the oil sector and thereby to avoid 
vulnerabilities ste mmin g from roller-coast effects of 
international oil price. 
14. For the overview of the 3rd plan, consult Wells (1976), 
Cleron (1978), Erb (1980), Looney (1982), Farsy (1982), 
Mallakh (1982), and Mallakh and Mallakh (1982). 
15. For a brief overview of the Jubail and Yanbu projects, 
re f e r t o S haw and Lo ng ( l 9 8 2 : l 3 - 2 2 ) ? 
16. The importance of the private sector was revealed in a 
conference organized by the Saudi Cha mb er of Commerce on 
the role of the private sector in the economic development 
in the Kingdom. For details of the conf e rence, consult 
Saudi Gazette (March 12, 1983) and Saudi Business ( March 
19-25, 1983). 
17. A flat J% import tariff was imposed. The most 
noticeable non-tariff barrier was a boycott against Israel. 
18. It may be difficult to conceive that Saudi Arabia had 
pursued import substituting industrialization in its 
authentic sense. Though protective, the Saudi government 
did not manipulate foreign exchange regime, for example. 
19. In principle, foreign f i r ms are allowed to have up to 
50% of equity share. But in reality, that is seldom the 
case. 
20. For this, refer to Haggard and Moon (1983) and Moon 
(1984). 
21. The Vietnam boom generated a huge foreign e xchange 
through increased commodity and service exports and workers 
and s o 1 d i e rs ' re mi t t a nc e ? 
22. For the Saudi's neg o t i at i o n w i t h the ARAMCO, cons ult 
Lenczowski ( 19 6 L)) and Mosley (1973). 
209 
2J. This was particular so be c ause of declining US dollar 
value, which was the means of oil payment. 
24. Systemic vulnerability is defined as " costs or 
constraints imposed by the tran~mission of external shocks 
or turbulence originating in the international economic 
system . " For this, refer to chapter two. 
25. The same phenomenon could be found in Japan. 
26. Dyadic sensitivity is defined as " the costs or 
constraints imposed by a pattern of extern a l reliance in 
terms of specific actors and issue areas." For this r e fer 
to chapter two. 
27. Trade imbalances with Japan have been the most 
persistent foreign policy issue between Japan and Korea. 
Korea has never enjoyed trade surplus vis-a-vis Japan. 
28. The troop withdrawal by Korea as well as US led to such 
a collapse. 
29. Due to this reason, the Saudi government actively 
pursues economic diversification by reducing dependence on 
the oil sector. 
JO. There have been at least four major US organizations 
which monopolized planning and consulting works: the COE, 
ARAMCO, the Saudi Arabian-US Joint Economic Commission, and 
the private industries. 
31. Refer to table 3-3 for this figure. 
32. The pervasiveness of these practices led to the 
revision of the Tender Law in the same year. For a nature 
of 1977 Tender Law, consult Chapter Six. 
JJ. The rationale behind this practice was attributed t o 
the following factors: 1) bureaucratic delays; 2 ) delayed 
payments of project costs; 3) unrelenting a ttitudes 
governing penalties; 4) high overhead costs; 5) overall 
perception that unless you make a fat profit, don't get 
into the Saudi market ( MEED March 4, 1977: 4). 
34. Prince Muhammad ibn Fahd, a son of King Fahd (then 
Crown Prince), lost a $10 0 million commission when his 
father personally cancelled the contract (MEED Dec . 31 , 
1977 ; Lackner 1978: 170). 
35 . This is particularly true given the fact that a large 
influx of bedouin population into urban areas e ntail e d a 
blurred focus of their loyalty and alle g iance, thus 
undermining a system of "hukma" based on trib a l struc tur e . 
36. Espe c i a 11 y al-Hass a are a wh e r e a l a r ge S hi'ite 
2 10 
population reside was the case in point. After a series of 
revolts in the late 1979 and the early 1980, a substantial 
concession was made to this region (Salomeh 1981). 
37. Since these trade imbalances were largely derived from 
oil imports, the Korean government had very limited 
leverage in taking reciprocal measures. 
38. This was largely due to the f a ct that the Korea's major 
channel of oil imports was Gulf, the joint-venture firm 
with the National Oil Corporation, whose primary source of 
oil was Kuwait. 
39. By then, a large of number of Korean workers previously 
employed with American firms such as Vinnel and Be chtel had 
penetrated in the Middle East market through these American 
c on ne c t ions ? 
40. Duck-jin Chang was the key architech of Korea's Middle 
East policy by serving as chairman of the Steering Committe 
on the Economic Cooperation with the Xiddle East. 
41. For a detailed discussion on this issue, refer to 
Chapter Six. 
42. This was mainly due to conservative attitude of Korean 
banking community whose assessment of Korean firms was 
negative at that ti me ? 
43. For the National Tax Agency which was desperate to 
raise additional revenues, a 50% reduction in corporate and 
income tax from major firms was not acceptable. 
44. What the Office of Labor was cone er ned about was 
potential negative repercussions such as a growing wage gap 
between domestic wage and overseas wage. In addition, 
senior officials in the Office raised the question on the 
competence of Korean firms in the labor management on a 
large scale in abroad. 
45. Oecision-making style during the Park regime can be 
characterized by a high concentration of decision authority 
in the executive branch, especially in president. When 
informal economic ministers' meeting could not come up with 
consensus on certain economic policies, president was the 
final authority to resolve such conflicts. For economic 
decision-making under the Park regime, refer to Jones and 
Sako ng ( 1980 ) ? 
46. Among them, Construction Minist e r Kim's personal 
proximity to president was the crucial factor. Kim was one 
of the most trusted proteges of Park until the former 
assassinated the latter in 1979. 
4 7 ? For price c ompetitiveness , ref e r to table 5 -3 in 
211 
Chapter Five. 
48. For this episode, refer to Ilgan Naewae Gyungje Dec. 8, 
19 7 7. 
49. Of course, this security environment has drastically 
ch a n6 e d in the 19 8 0 s. Chapter Six deals with Saudi elites' 
p e r c e pt i on of c hang i ng security environment. 
50. Opposition movements in Saudi Arabia can be 
characterized by three major trends: Islamic fundamentalist 
such as the Ikwhan revolt, Arab nationalist such as Free 
Princes Movement and 1969 Royal Air Force coup, secular 
leftist such as the 1958 ARAMCO strike. For this topic, 
consult Lackner (1978: 89-108), Helms ( 1981: 226-275), 
Buchan (1982: 106-124) , and Bligh (1984:69-74). 
51. This quotation is from an interview with a high ranking 
official of the Ministry of Interior, who wished to remain 
anonymous. 
52. According to a reliable source, at one time in 1977, 
the Saudi government seriously considered requesting the 
dispatch of Korean workers who can perform as paramilitar y 
forces in the case of national emergence. But the idea was 
leaked and the Pakistani force replaced Koreans . 
SJ. Recently there has emerged a handful number of 
literature dealing with various aspects of the Saudi 
decision-making mechanism. For oil policy, Moran (1981 ) 
and Stevens ( 1981 ) ; for ind us trial po 1 i c y, Stevens ( l 9 8 2) ; 
for security and foreign policy, Quandt (1981), 
Dwaisha(l979), and McLaurin (1982); for manpower policy, 
Birks and Sinclaire (1981) and Abir (1983); and for general 
overview, Koury (1978). 
54 . For a detailed discussion of halaqa'at politics, refer 
to Chapter Five. 
55. For this aspect, refer to figures provided in table 5-7 
in Chapter Five. 
5 6. Long (1979) is a good s our c e to u nd e rs ta nd t his 
worldview in the context of the Saudi Arabian foreign 
policy. For a more general and theoretical overview, 
consult Abu Sulayman (1972). 
57. A similar view was echoed by Ambassador Zein Oabbagh, 
the Saudi envoy to Japan and Korea, at an interview 
conducted in Tokyo ( Jan. 22, 1983). 
58. Interview with Sheikh Bin Baz took place before this 
research was initiated. 
5 9 ? The leaders interviewed are those associa t ed with the 
21 2 
World Muslim League, th e World Assembly of Muslim Youth, 
and some other ulama and Saudi merchants who were active in 
Islamic propagation to Korean workers in the Kingdom. 
60. Students interviewed a re mainly from the King Abdulaziz 
University in Jeddah. The author could have very limited 
access to Saudi military personne ls. Some opinions were 
obtained from memb e rs of th e Saudi military d e legation to 
Ko re a. 
61. Chapter Six will discuss this topic in detail. 
2 1 J