International Financial Governance under Stress: Global Structures versus National Imperatives

By Geoffrey R.D Underhill; Xiaoke Zhang | Go to book overview

7

South Korea and the Asian crisis:
the impact of the democratic
deficit and OECD accession

STEPHEN L. HARRIS

The purpose of this chapter is to explore the consequences for South Korea of both its democratic deficit and its accession to membership of the Organisation for Economic Co-operation and Development (OECD) in late 1996. It is argued that the interaction of weak governance and imprudent liberalisation was a material contributor to the financial crisis that occurred in late 1997.

This chapter attempts to put governance at the centre of the policy quandary faced by this important Asian country. Thus this analysis of the events leading up to the 1997 financial calamity will go beyond the calculus of economists. That calculus portrays such concepts as ‘crony capitalism’, imbalances in the trade account, exchange rate disequilibria, moral hazard, the herd instinct in the market and systemic contagion as the major causes of the country’s financial problems.1 It is argued in this chapter that these factors were manifestations of the shortcomings in the country’s governance structures.

The chapter will show that ‘authoritarian capitalism’ in South Korea – its hybridity – was not compatible with the state’s desire for the economy to engage as a fully competitive participant in international finance and commerce. Korean society generally, and the business and political elites in particular, did not share the important values of democratic capitalism. Indeed, there was a ‘democratic deficit’ because of the absence of purposeful beliefs in business values such as transparency, legitimate oversight, a strong sense of ethical (honest) conduct and fairness, a statutory responsibility of corporate directors for governance and accountability to shareholders, and ultimately the absence of legitimate democratic political accountability in the conduct of private and public transactions. The absence of these important democratic governance values created incentives in the South Korean economy that would not work satisfactorily and indeed were inconsistent with practices elsewhere in the industrialised community.

This chapter will also show that both the South Koreans and the other industrial democracies should be held jointly responsible for the unfortunate events in autumn 1997. First, the public policy wishes of the political and bureaucratic

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