Academic journal article Asian Perspective

Democratization and the Transformation Process in East Asian Developmental States: Financial Reform in Korea and Taiwan

Academic journal article Asian Perspective

Democratization and the Transformation Process in East Asian Developmental States: Financial Reform in Korea and Taiwan

Article excerpt

This study explores the impact of democratization on financial reform in Korea and Taiwan. In Korea, democratization decreased the autonomy and efficiency of bureaucrats and increased the power of business groups, which led to unregulated financial liberalization. Crisis contributed to the urgency of reform, coalitional support, and burden sharing among people. After the crisis, the re-strengthened bureaucracy and weakened veto power of business and labor sectors resulted in "path-breaking" reform in Korea. In Taiwan, the historically conservative financial system remained stable, allowing Taiwan to escape the Asian crisis but later becoming obstacles to reform. Democratization decreased the autonomy of bureaucrats and increased money politics: Lack of consensus among parties, divided government, and opposition within vested interest groups led to "lagged and stalemated" financial reform in Taiwan.

Key words: democracy, developmental states - East Asia, financial reform, Korea, Taiwan

Introduction

This study explores the effects of democratization on the transformation process of East Asian developmental states, focusing on financial reform in Korea and Taiwan after the Asian financial crisis of the late 1990s.

The relationship between democracy and economic development has been a perennial question for policy makers as well as scholars. Is democratization a panacea or a problem for reform? Are democratization and economic reform mutually supportive processes or in tension with each other? Both Korea and Taiwan face the daunting task of accomplishing democratic consolidation with economic growth. The introduction of democracy, however, can sometimes present obstacles for economic and political reform, and many new democracies tend to be fragile. This study explores whether democratization in Korea and Taiwan has led to economic reform, focusing on the financial sector. The sustainable development of an economy can only be achieved through economic reform. Thus, examining whether or not democratization is compatible with economic reform is worthwhile.

Another very important point of interest is that the transformation process in Korea and Taiwan is considerably different. Why does the effect of democratization on transformation process vary across countries and sectors within a country? How can we explain why the changes in developmental states sometimes follow the pattern of continuity and sometimes not? According to Przeworski, it may be because political institutions do matter for development.1 Focusing, however, on regimes does not seem to capture the relevant differences among developmental states. The paths taken by countries with various levels of political-economic development vary across countries. East Asian developmental states have undergone substantial democratization largely as a consequence of rapid economic development. However, the path of democratization in one country is different from that in another country, and what democratization brings varies across countries. Therefore, the second objective of this study is to explain why the reform process takes the pattern of "path-breaking" in some and that of "path-dependent" and "non-reform" in others.

This study focuses on the financial sector for two reasons. One is that significant reform in both countries' financial sectors has happened only recently, that is, since the Asian financial crisis. Thus, it provides a good case study of how those new democratic systems respond, post-crisis, to external pressure on reform. The other reason is that the financial sector is the most rapidly expanding service sector. Transformation of the manufacturing and information technology (IT) sectors-which were then the most rapidly expanding sectors-has already been explored.2 This article extends the analysis to the recent development of the reform process in the newly expanding financial sector.

The following section provides a theoretical framework to tackle both objectives of this study. …

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