Rethinking Economic Development and the Financial Crisis in South Korea and the State in an Era of Globalization

Article excerpt

INTRODUCTION

In the post-World War II era, only a handful of Third-World countries could graduate from underdevelopment in a highly competitive inter-state or global economic system and achieve both industrialization and sustainable economic growth. Especially, South Korea (hereafter, Korea) is conceived of as one of the exemplary cases. Korea was one of the poorest countries in the world in the early 1960s--its per capita GNP was around 805--but its economy began to take off in the mid-1960s and since then had enjoyed phenomenal growth rates until the mid-1990s. Although the Korean economy had been hit hard by the Asian Financial Crisis in 1997/98 because of multilayered factors including the state's mismanagement of globalization, it recovered from it in a relatively short time and as of 2005 it became the 11th largest economy in terms of total economic output or GDP.

This article explores the role of the state in economic development, the financial crisis, and post-crisis reforms in South Korea. Although existing approaches to the cause of the Asian Financial Crisis in 1997/98 have some relevance in explaining why a financial meltdown occurred in Korea, the political aspects of global financial relations and the role of the state in Korea under the constraints of globalization have yet to be further clarified in historical perspective. The case of Korea provides other developing countries with valuable insights--whether positive or negative--into what the role of the state should be in economic outcomes in this age of globalization. In my definition, the state is the composition of governmental and bureaucratic institutions and it is assumed to play either positive or negative roles in producing economic outcomes as a crucial mediating agency between an international or global context and domestic politico-economic conditions.

Korea benefited from globalization when the Korean state modulated globalization well and made it work for its economy, but it was devastated by the destructive forces of globalization when the Korean state lost its structural power too rapidly, relative to international and domestic actors (e.g., foreign investors, and Chaebols--large conglomerates in Korea), in a transitional period to a more democratic and market-oriented system. The paper argues that the deeper cause of the Korean financial crisis lay in the combination of the drastic unraveling of the state coordination capacity and mismanaged financial liberalization, which was co-produced by increasing external pressures in the context of (financial) globalization and the misguided state strategy toward globalization. This paper is aimed at drawing out three significant theory and/or policy implications. First, state capacity and the quality of state intervention are of great significance in late industrialization in conjunction with a favorable international environment. Second, state-led development is time-limited and how to reach a soft landing in a transition to a more market-oriented system has yet to be further studied. Third, globalization is a double-edged sword and whether it will have benign or destructive effects on a domestic economy depends at least partially upon what reaction or strategy each state takes toward it.

In the first section, I examine existing explanations of the Asian Financial Crisis and discuss their limits or weaknesses in explaining the Korean crisis. In the second, the role of the state in Korea in economic development in a pre-Crisis era is explored. In the third and fourth, I attempt to investigate how external pressures on Korea in the context of financial globalization to open its financial market and the Korean state's misguided coping strategy with globalization co-produced the financial crash in Korea. In conclusion, I discuss the theory and/or policy implications of this paper in more detail.

COMPETING EXPLANATIONS OF THE ASIAN FINANCIAL CRISIS AND THE KOREAN CASE

Among many competing explanations of the cause of the Asian Financial Crisis, two views have been dominant in the circle of mainstream economists: the fundamentalist one and the self-fulfilling one. …