Rethinking economic development and the financial crisis in south Korea and the state in an era of globalization.

Choi, Ji Young

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. According to the fundamentalist view, which was strongly supported by many neo-liberal economists and the IMF, the primary cause of the Crisis lay in fundamental macroeconomic imbalances in East Asian countries produced by domestic structural and policy distortions such as collusion between business and politics, state interventions, moral hazard, corruption, and weak domestic financial systems. (1) On the other hand, some economists that are critical of the fundamentalist view have argued that the Asian Crisis was triggered mainly by speculative attacks by international investors and their contagion effects, namely, the intrinsic volatility of a rapidly globalizing financial market. (2) Among political approaches to the Crisis, two have been salient: the domestic politics approach and the end of the Cold War approach. While the former focuses mainly on the role of domestic political factors such as the lack of credibility and decisiveness of political institutions in explaining the cause of the Crisis, (3) the latter sees the end of the Cold War and the change of US policy toward the region as the most critical political factor that contributed to the occurrence of the Crisis. (4)

I agree with the fundamentalist view that there were structural problems in the Korean economy. Especially, a moral hazard problem is worth mentioning. Large conglomerates--Chaebols--in Korea usually carry very high debt-to-equity ratios with the government standing ready to help them when there are economic or financial shocks. When bankruptcy takes place, the government often cannot help bailing them out, due to its serious possible effects on the whole national economy. (5) This moral hazard problem contributed to overinvestment by Chaebols and this overinvestment along with weak financial institutions and inadequate bank regulations is considered as one of the crucial causes of the Korean financial crisis. (6)

But this view's most serious weakness lies in that it does not explain well why these structural problems produced a financial meltdown in Korea in the late 1990s, not before. As will be examined in the next segment, the Korean economy enjoyed phenomenal economic growth for as long as three decades and achieved industrialization based upon the above-mentioned financial structure. In fact, the Korean financial crisis was largely unexpected and the crisis occurred after the Southeast Asian currency crisis and due to its contagious effects. The contagious effects were not confined to Asia and the Asian Financial Crisis spread to Russia and Brazil in 1998 and had a negative effect even on the US economy, generating the 'globalization of the crisis.' (7) Therefore, focusing only on domestic structural problems in explaining the Korean crisis or the Asian Financial Crisis in general is insufficient.

The self-fulfilling view emphasizes a rapid inflow of short-term foreign capital into weak financial systems in Korea and helps us understand the timing of the financial meltdown in Korea. Before the mid-1980s, the official aid and capital--largely predictable and controllable--had flown into East Asia. As East Asian economies became emerging markets, however, a huge sum of private capital including speculative hot money based upon short-term investments--unpredictable and potentially volatile--flooded in the region since the mid-1980s. This phenomenon made East Asian economies, including the Korean one, vulnerable to the vagaries of private capital flows. (8) Especially, in the early 1990s advanced economies--in particular, the U.S. and Japan--began to produce a huge amount of excessive capital and private capital flows to emerging markets nearly doubled from $170 billion in 1994 to $328 billion in 1996. Moreover, after the Mexican crisis in 1994/5 a large amount of private capital pulled out of Latin America and moved to East Asia. (9)

According to the self-fulfilling view, there was no insolvency in Korea but an illiquidity problem, that is, the shortage of cash to pay short-term debt. Then, it argues, abrupt capital withdrawals produced by a panic situation in the financial market and its spread from Southeast Asia resulted in the costly and 'fundamentally unnecessary' financial crash in Korea. (10) The self-fulfilling model stresses that when an economy is within the 'critical zone,' a situation where foreign reserves are too low or foreign debt relative to international reserves is high, whether a financial crisis happens or not depends mainly upon investors' expectations rather than upon economic fundamentals. (11) The panic itself is 'rational' from the viewpoint of individual investors, each of whom wants to run away ahead of other investors, and it is driven by an 'escape psychology'--'once this process starts, it does not matter if the danger is real or perceived.' (12)

The self-fulfilling view better explains the timing of the Korean crisis than the fundamentalist view. Although the latter emphasizes the Korean economy's macroeconomic imbalances produced by domestic structural problems, according to economic indicators, except increasing current account deficit caused mainly by trade deficit, its overall macroeconomic performance was sound--for example, between 1990 and 1997 GDP growth rate was over 7% and the unemployment rate was under 2.8%, and on the eve of the crisis gross savings rate was as high as 35.5%, inflation was as low as 4.9%, and fiscal balance was positive. (13) The trade deficit in Korea, which was the main cause of deteriorating current account balance in the mid-1990s, was triggered by a 'new global glut' in some manufacturing sectors particularly in semiconductors and the rise of China as a formidable exporting competitor. (14) However, Korea's current account deficit was just over 3 % of GDP in 1996 and it was much lower than that of Thailand and Mexico (8 %) on the eve of theft crises and 9% in 1980 when Korea was in severe economic downturns. (15) Korea like other countries experienced cyclical economic downturns--for example, 1972, 1979-80, and 1986-88--and even though its macroeconomic indicators at the times were much worse than those on the eve of the financial meltdown in 1997, Korea experienced just economic recessions, not any financial crisis. (16) This reveals that although there had been structural problems in Korea, they were arguably not the direct cause of the financial crisis, which is defined here massive capital flight. If Korea had not been exposed to the intrinsic volatility of footloose short-term private capital, it might have staved off at least the worst situations such as massive capital flight, asking for IMF bail-out fund, and unbearable economic costs and human suffering exacerbated by IMF's notorious austere conditionality policies. It is however important to understand that although the self-fulfilling view better explains the timing of the Korean crisis than the fundamentalist one, there should be more explanations why Korea came to be exposed to the volatility of unbridled flows of private capital first. In other words, we need to investigate closely the nature and sources of international pressures and how the Korean state reacted to those pressures.

A domestic politics view also has some relevance in explaining the Korean crisis. As we examined previously, the direct cause of the Korean crisis was the loss of the confidence of international investors and resultant massive withdrawals of capital from Korea. Especially high profile bankruptcies of two Chaebols, Hanbo and Kia, and the Korean government's mismanagement of them--triggered mainly by political instability including the lame duck of President Kim Young Sam and a contested presidential race--played a critical role in the loss of international investors' confidence in the Korean economy. (17) Notwithstanding that this view provides us with some insight, its weakness is that its focus is too narrow and loses sight of some deeper causes at different levels. Especially, to explain why a series of bankruptcies of Chaebols occurred, we need to first figure out what developments provided Chaebols with a favorable environment for the reckless expansion of their investment. As will be explored later, the overinvestment of Chaebols was made possible by the rapid dismantling of investment coordination by the state and fast-track financial liberalization in the context of financial globalization.

Lastly, the end of the Cold War view offers us some insight into the cause of the Korean crisis. While the other three views focus mainly on a relatively short time span in explaining the crisis, this view is based on a longer time span. As this view argues, the end of the Cold War and the withdrawal of favorable US policies to Korea clearly made an influence on the economic downturns of Korea. But as will be examined later on, even before the end of the Cold War the Korean state began to open its market even though gradually and the more drastic financial opening in the early 1990s was made in part by the initiative of the Korean state as well as by international pressures. Moreover, as I mentioned previously, the economic downturn alone cannot explain why the financial crisis, not an economic recession, occurred. Hence, there should be more nuanced and detailed explanations on the cause of the Korean crisis.

In short, each existing explanation has some relevance in explaining why the Korean financial crisis occurred. However, there should be more explanations on why Korea came to be exposed to the volatility or whims of private capital flows. To find out the deeper cause of the crisis, we need to investigate closely the nature and sources of international pressures and how the state in Korea reacted to them. Before doing that, the role of the state in economic development in Korea in a pre-crisis era should be discussed as it helps us understand the special status of the state in Korea and its changing role in economic outcomes in historical perspective.

THE ROLE OF THE STATE 1N ECONOMIC DEVELOPMENT IN KOREA

After a period of political turmoil that had lasted since the end of the Korean War, Park Chung Hee seized political power through a military coup in 1961. Park's authoritarian regime (1961-1979) adopted economic development as a top policy goal and pursued rapid industrialization under state leadership. In the early 1960s, Korea was one of the poorest countries in the world--its per capita income was only $82 in 1961 (18)--and economic development was desperately needed. Park realized the success of his regime depended upon economic success and created the Economic Planning Board (EPB) in June 1961. This pilot agency managed by well-educated and highly-skilled economic technocrats, wielded enormous power over overall economic, industrial, and financial policies. (19) With substantial power and autonomy granted by the executive they could engage in relatively consistent planning and implementation of economic and industrial policies without being swayed by the pressures and short-term interests of private groups. In other words, the relative autonomy and solid institutionalization of the state bureaucracy in Korea enabled development policies to be designed and carried out in a relatively consistent manner. (20)

The Korean economic development model is well characterized by accumulation of capital, selective allocation of credit, and industrial upgrading policies. The Korean state encouraged and mobilized private and public savings by using sometimes interventionist tools such as the imposition of high interest rates on loans for consumer goods and high taxes on luxury consumption. (21) The state was also very active in borrowing foreign capital and could accumulate a substantial amount of capital. The accumulation of abundant capital was a solid foundation for carrying out industrial policies as well as public policies such as expanding education and establishing social infrastructures. (22) Furthermore, the financial structure was thoroughly governed by the state in Korea during the period of state-led development. As the state controlled capital flows from international markets to domestic ones, the Korean economy was insulated from the volatility of global finance during this period, but remained open selectively to a global market for export expansion. Financial institutions and foreign capital flows were in the strict control of the state and the state controlled interest rates and made major decisions on bank loans. The Korean state used this credit-rationing or credit-allocation system as a primary instrument of industrial policies. In accordance with Five-Year Economic Development Plans, the state directed credit to exporting sectors and strategic industries set in each Five-Year Plan--for example, export-drive in labor-intensive industry in the second Plan (1967-71 ), concentration on heavy and chemical industries in the third (1972-76), and emphasis on high-tech industries from the fourth (1977-81). Especially, it allowed major exporting businesses--Chaebols--to have very easy access to finance. (23) Thus Chaebols were dependent upon the state financially and could prosper under the protection of the state.

[FIGURE 2 OMITTED]

It is worth emphasizing, however, that intervention in the market by the strong state did not bring about industrialization and sustainable economic growth in Korea mechanically. Some significant characteristics of late industrialization in Korea have to be explained in more detail. To catch up with developed economies or to speed up its industrialization, the Korean state created a new 'competitive advantage' according to changing domestic conditions and international opportunities rather than relying on an existing 'comparative advantage.' To put it differently, Korea adopted a Kaldorian development strategy, not a Ricardian development strategy. (24) Modem economic history shows that developing countries that promoted the exportation of agricultural or primary products based upon comparative advantage failed to create self-sustaining growth mainly because their exports were subject to the fluctuation of the price and constant or decreasing returns. In contrast, late developers (25) who applied a Kaldorian strategy successfully (which is characterized by the export promotion of manufacturing goods based upon phase-in industrial upgrading policies), could achieve industrialization and sustainable economic growth. (26)

It is then worth pointing out that the Kaldorian intervention in the market by the Korean state was strategic, proactive, selective, and performance-based. The credit-allocation mechanism in Korea had been operated on the basis of performance and directed at industries that possessed 'high potential for technological spillovers.' (27) In this mechanism, the planning and orchestration of the state had played a pivotal role. The Korean state used the credit or subsidy 'to decide what, when, and how much to produce' (28) and provided priority or strategic industries and firms with subsidies and protection 'to offset the disadvantages faced by international competition and to move the present industrial structure toward one with higher value-added, more technologically dynamic activities.' (29) When there was no positive return to subsidies, the state withdrew its support. Furthermore, the state demanded performance standards from companies in return for subsidies. Under state leadership, the Korean economy experienced several structural transformations, from agriculture to labor-intensive light industry, to heavy and chemical industry, to advanced high-tech industry. To be sure, the industrial upgrading policies adopted by the Korean state did not produce positive economic outcomes all the time. For example, in the period of the drive for heavy and chemical industries, large external debts were incurred and labor-intensive industries were short of credit. (30) It is safe to say, however, that relatively consistent industrial upgrading policies led by the Korean state with a Kaldorian development strategy generally worked at least until the early 1990s. This is evidenced by the fact that today several sectors (e.g., shipbuilding, steel, and semiconductors) that were created by the state are among the most competitive ones in the world.

[FIGURE 3 OMITTED]

Korea, which is a resource-poor country, adopted the Kaldorian development strategy that promotes the export expansion of manufacturing goods and benefited heavily from an expanding global trade market under the circumstance of the Cold War. Between the 1950s and the late 1980s, along with the development of an international trade regime, GATT (today WTO), tariffs on industrial goods around the world decreased by 15 to 25 percent and the volume of international trade increased six times between the early 1950s and the late 1990s. (31) Moreover, the U.S. opened up its market to the inflow of East Asian products with security calculations in the context of the Cold War. The US has been the most significant market for Korea and the ratio of Korean exporting goods to the U.S. accounted for 46.8% of total Korean exportation in 1970, 26.3% in 1980, and 29.8% in 1990 respectively. (32) Under this favorable international situation, the volume of export in Korea rose dramatically from $0.03 billions in 1960 to $129.72 billions in 1996 and its total trade also rose from $0.37 billions in 1960 to $280.06 billions in 1996. (33) The Korean state promoted export growth aggressively by providing exporters with subsidies, tax incentives, and other preferential financing. (34) It is however worth pointing out that tariff and non-tariff barriers in Korea remained high (35) and until the mid-1980s Korea relied upon selective protection of target industries (e.g. heavy and chemical industries in the mid- and late 1970s). (36) This neo-mercantilist strategy had been allowed at least until the late 1970s by the U.S. in the context of the Cold War. (37)

According to Alexander Gerschenkron, (38) considerable obstacles exist against the rise of modem industry in backward economies within the world market and late industrialization may be difficult unless states facilitate industrial promotion. Although the Korean case supports this Gerschenkron's argument, we cannot say that state intervention brought about economic development in Korea automatically. Two significant points should be made clear here. First, what counts are how to secure state capacity--particularly, the relatively autonomous state bureaucracy equipped with well-trained and highly-skilled technocrats who can engage in consistent industrial and economic policies--rather than the strong state itself. Second, the quality of intervention--strategic, selective, and incentive-oriented--based upon the Kaldorian strategy--which promotes export expansion emphasizing industrial upgrading--is more important than the mere degree of intervention. It is worth noting that the Korean state's intervention in the allocation of credit and selective and preferential industrial policies were clearly in conflict with neoclassical or neoliberal free market principles. The Korean case shows that achieving an acceptable level of economic welfare graduating from underdevelopment is one of the toughest tasks facing many developing economies. It however also exhibits that economic development is not totally impossible so far as two conditions are met: the state is strong and capable enough to engage in massive economic or industrial transformations and a generous international environment for economic development is allowed.

EXTERNAL PRESSURES AND THE POLITICS OF GLOBAL FINANCIAL RELATIONS

The neo-mercantilist development strategy of the state in Korea began to face external challenges in the early 1980s as the U.S., which had acquiesced in that strategy, began to change its policies. The Reagan administration began to increase its economic protectionism and to put pressures on East Asian allies to open their markets in order to offset the increasing cost of its defense spending triggered by a new armaments race with the Soviet Union. (39) By the early 1980s, riding on the wave of the expansion of a global trading market, Korea became a trading nation and its economic dependence on international trade grew tremendously--in 1975 the ratio of its total trade to GDP was 57.98% and it rose to 65.13% in 1985. (40) As Korea's dependence on international trade increased, its systemic vulnerability to external actors also rose and protectionist retaliation became a serious threat to Korea. During the 1980s, in particular the U.S. took an increasing number of trade actions against Korean firms. For instance, fifty-seven cases were filed against Korean companies between 1980 and 1988. (41) A new Chun Doo Hwan regime that seized power through a military coup in 1980 had to accommodate U.S. pressure in fear of protectionist retaliation. As a result, import restrictions on steel, machinery, petrochemicals, and shipbuilding were removed and tariff rates on Korea's agricultural and fishery products and overall consumer goods had to be lowered. (42)

As a result of import liberalization and rising protectionism in the U.S., Korea's exports to the U.S. fell by 12.4 percent between 1989 and 1992. (43) Along with the progression of the Uruguay Round negotiations (1986-1994) and the launch of the WTO in 1995, external pressures on Korea to open its trade market were enhanced. Trade liberalization, however, was not so devastating to the Korean economy as financial liberalization. External pressures on the opening of the Korean financial market played a considerable role in bringing about premature, hasty, and unprepared financial liberalization in Korea, which was one of the main causes of the financial meltdown in 1997. These external pressures then need to be understood from the perspective of the politics of global financial relations.

While most economists believe that markets are based upon mutually beneficial exchanges among rational and free actors, they miss the fact that the exercise of power plays a significant role in the workings of markets. Power can be defined as one's capacity to achieve one's interests or ends by using a tool of persuasion or coercion. Power also has to do with one's capacity to establish institutions that help one accomplish what one otherwise could not. (44) For instance, as Robert Gilpin (45) posits, in the post WWII era international economic/financial regimes such as the IMF and the World Bank were constructed mainly to serve the interests of major powers, particularly the U.S.

Historically, most countries have controlled their financial markets in one way or another to restrict the outflow of capital and to maintain the stability of their exchange rates. In the 1970s and 1980s, though, along with the rise of neo-liberal ideas advocating free allocation of capital free from state intervention, developed economies expedited their slow financial liberalization processes. In particular, financial liberalization in the U.S., coupled with the revolutionary development of telecommunication technology, fostered global capital flows and financial liberalization in other advanced economies due to its key currency status and the status as the largest financial market in world economy. (46) By 1989, foreign exchange trade alone amounted to $650 billion per day on average, which is 40 times the value of world trade. By the late 1990s, daily volumes exceeded $1 trillion. (47) Since the late 1970s, developing economies also adopted financial liberalization. The problem is then that after adopting financial liberalization policies including opening their markets to commercial loans and portfolio investments based on short-term investments, there have been a series of financial crises in developing economies--the Mexican debt crisis in 1982 and 1994; the Asian Financial Crisis in 1997; Russia and Brazil soon thereafter; Turkey in early 2001; Argentina in late 2001. The private capital flow from developed to developing economies increased dramatically from $174 billion in the 1980s to $1.3 trillion throughout the 1990s (48) at least in part by the push of the U.S. Treasury Department, the IMF, the World Bank, and the OECD on developing economies to open their financial markets.

The IMF and the World Bank were founded in 1944 to keep the world from future economic depressions and to finance the rebuilding of Europe after WWII. Originally these institutions were ideologically based upon Keynesianism--expansionary economic ideas such as raising expenditures, lowering taxes or reducing interest rates. It is in the 1980s however that massive changes took place in these institutions along with the upsurge of the free market mantra in the U.S. and the U.K. The IMF and the World Bank became 'the new missionary institutions,' through which neo-liberal policies were imposed on the reluctant developing economies. (49) Especially, it is worth noting that the U.S. is the biggest financial contributor to the IMF--voting is financially weighted--and the only country that has a veto power among its members. It is not a secret any more among policy makers and scholars in and outside the U.S. that the IMF is an efficient tool of U.S. financial diplomacy in many developing countries. (50) The IMF began to make medium-term loans to financially-stricken developing economies asking fundamental structural changes in return for providing loans. The World Bank also joined the structural adjustment policy crusade beyond lending for social projects such as establishing social infrastructure. The policy of structural adjustment was promoted by U.S. Secretary of the Treasury James Baker in response to the international debt problem that started in the Mexican crisis in 1982 and spread to other developing countries. (51) This doctrine, based upon the 'Washington Consensus'--broad agreement between the U.S. Treasury, Wall Street, the IMF, and the World Bank on neo-liberal programs in developing countries, (52) prescribed fundamental structural changes in developing economies such as minimization of the role of the state in the market, public sector reforms, fiscal discipline including balanced budgets, and deregulation and opening of trade and financial markets.

Korea was, of course, not exempted from these pressures to open up its financial markets. During the Chun Do Hwan (1980-1987) and Roh Tae Woo (1988-1992) regimes, Korean financial markets were liberalized and internationalized gradually in response to external pressures, particularly to those of the U.S. For instance, commercial banks were privatized between 1981 and 1983; banks' preferential policy loan rates were abolished in 1982; foreign security companies were allowed to open their offices in Korea; the restrictions on foreign direct investment and the activities of foreign banks was eased in 1984 and 1985 respectively; the interest rates of banks were deregulated in 1988. (53) American banks lobbied for further financial deregulation and equal treatments for their operations in Korea and the Reagan administration put pressures on the Korean government to carry them out. The U.S. pressure was enhanced in the late 1980s, leveraging Section 301 of the U.S. Trade Act to open the insurance market in Korea. Korea had to open its life insurance market to foreign companies in 1987 and began to loosen the foreign exchange control in 1988. (54) Under the U.S. pressures, Korea liberalized its financial market on a gradual basis throughout the 1980s, but it was during the Kim Young Sam administration (1993-1997) that financial liberalization was accelerated not only under external pressures, but on its own initiatives.

MISGUIDED COPING STRATEGIES WITH GLOBALIZATION AND FINANCIAL LIBERALIZATION IN KOREA

During the period of rapid economic expansion in Korea, the state controlled financial flows and engaged in export promotion and industrial upgrading policies, insulating its financial market from the global financial one to a substantial degree. However, external pressures in the context of financial globalization made it really difficult for Korea to continue to engage in the state-led development strategy under financial controls. Moreover, democratization in the late 1980s made the structural power of the state weak and the state began to lose its relative autonomy in planning and implementing economic and industrial policies. In a transition to democracy, strong labor unions emerged and Chaebols began to demand more autonomy. (55) The state-led development in Korea reached its limits as the Korean economy matured. At the early stages of industrialization, the state had to play a leading role in massive economic changes. But a civil society arose along with the increase of economic and educational levels and people began to demand more economic and political freedoms. (56)

In response to internal and external challenges, in the early 1990s President Kim Young Sam, who was democratically elected as the first civilian leader after three decades of military and authoritarian rule, pushed forward with a segyehwa (globalization) strategy. We can classify coping strategies with globalization on the part of an individual state into three categories: challenge or defiance, cautious and gradual adaptation, and fast-track embracement. (57) The segyehwa strategy then can be classified as fast-track embracement and the adoption of it had to do with the changes of ideas, interests, and institutions in Korean political economy.

First, throughout the 1980s, old Korean economic technocrats who supported state-led development had been replaced by new ones who were educated in the U.S. and influenced heavily by neo-liberal economic ideas)s Since then, neo-liberalism that strongly supports economic globalization has been a dominant ideology among economic technocrats in Korea. Since the early 1980s, there had been internal debates in Korea on how to cope with external pressures and the challenges of globalization, but finally a proglobalization strategy was embraced under the strong support of neo-liberal technocrats in the early 1990s.

Second, Chaebols that are one of the strongest economic interest groups in Korea supported the segyehwa strategy, particularly financial liberalization policies. During the era of state-led development, the activities of Chaebols were guided by the state under financial controls. After democratization, yet, they began to demand more autonomy and lobbied for financial liberalization to diversify their financial sources to the non-banking financial institutions (NBFIs) and international financial markets. (59)

Third, the state-Chaebols alliance that had been the institutional basis of Korean development began to split as Chaebols sought to secure more independence from state guidance. By the early 1990s, indeed, the Economic Planning Board that directed Korea's overall industrialization process had been dismantled and the five-year planning strategy was officially abandoned in 1993 right after the inauguration of Kim Young Sam. All of these developments meant the unraveling of the institutional structure of the state- led development system in Korea.

After his inauguration, Kim Young Sam announced the comprehensive five year (1993-1997) four-stage financial market restructuring plan in May 1993. Along with accelerated interest rate deregulation, under this plan, the administration deregulated the short-term based commercial paper (CP) market. This measure encouraged financial institutions and corporate firms tO seek short-term-based investments or financing. (60) Between 1994 and 1996, the government allowed the reorganization of 24 investment and finance companies (IFCs) into merchant banks and permitted them to engage in foreign exchange activities. For high-profits, they expanded their foreign borrowing, particularly short-term loans from foreign lenders. (61) The Kim administration also pushed forward with the entry of Korea to the OECD, a club of rich countries, in spite of opposition from many scholars and NGOs such as Citizens' Coalition for Economic Justice. Opposition groups argued that Korea would lose its favored status as a developing country and had to open its economic and financial markets to meet the levels of other advanced countries in the organization. As they argued, after the entry in February 1996, in accordance with the regulations of the Codes of Liberalization of Capital Movements and Codes of Liberalization of Current Invisible Operations, Korea had to lower the restrictions of capital movements including foreign direct investment and foreign portfolio investment. (62) This step also made it easier for domestic corporate firms to borrow foreign capital. In addition, the ceiling of the foreign ownership of listed companies in the stock market was raised subsequently from 10% in 1992 to 12% in January, 1995, 15% in July, 1995, and 18% in April, 1996. (63)

Along with this accelerated financial liberalization process, oversees borrowing from Korean banks and firms rose dramatically and as a result Korea's debt from foreign banks doubled from $52 billion to $108 billion between 1994 and 1996. (64) Moreover, rapid financial liberalization was not accompanied by proper governmental supervision and monitoring mechanisms. For example, merchant banks that lacked experience of foreign exchange activities were allowed to engage in risky short-term financial intermediations without a proper monitoring system of capital flows. As a result, the short-term borrowing of merchant banks increased nearly four times from $3.6 billion in 1993 to $12.6 billion in 1996. (65) Along with the deregulation of CP market, the expansion of short-term borrowing by merchant banks led to the rapid increase of corporate short-term financing. In 1985, short-term debts constituted only 23 percent of total foreign debts. Since the launch of accelerated financial liberalization, however, its share increased to 53.4 percent in 1994, 57.8 percent in 1995, and 58.3 percent in 1996 respectively. (66)

As state control on foreign capital flows had been unraveled rapidly, Chaebols that began to enjoy relative autonomy expanded their investment recklessly. The problem is then that this overexpansion of corporate investment was coupled with negative domestic and international economic factors. First, labor productivity growth diminished as real wages were raised rapidly because of the strengthened power of labor unions in the process of democratization. (67) Second, export growth also slowed due to a glut of several sectors in the global market that Korea has strength (e.g., semiconductors and ship-building) (68) and because of the Japanese yen's sharp depreciation. In short, Korean became exposed to the potential danger of capital flight as overinvestment of Chaebols reached the point of diminishing returns coupled with rapidly increasing shortterm liabilities. Eventually, overinvestment and overcapacity of Chaebols triggered a series of bankruptcies of them. Particularly high profile bankruptcies of Hanbo and Kia, two mid-sized Chaebols, played a critical role in the loss of international investors' confidence in the Korean market and the currency crisis triggered by asset bubbles in Southeast Asia spread to Korea, resulting in massive capital flight in Korea in mid-November 1997.

After the Korean government drained its foreign reserves in a desperate attempt to defend the Korean currency, on November 21 it officially asked for the IMF's rescue fund. On December 3, IMF announced that it will provide Korea with an IMF-organized rescue package totaling $57 billion to bail it out from the financial turmoil. In return for the rescue fund, the IMF demanded Korea to adopt austerity economic policies--higher taxes, less public spending, and higher interest rates--that had been applied to Latin America and other developing countries before and radical restructuring reforms including standardization of banking activities in accordance with an Anglo-American model, lifting limits on foreign investment in Korean companies, allowance for foreign mergers and acquisitions, and reforming labor laws that make layoffs much easier. (69) During the negotiations between the IMF and the Korean government, IMF officials did consult with U.S. officials--for example, David Lipton, a senior official at the U.S. Treasury Department who was in Seoul during the negotiations--to fine-tune IMF's negotiating positions. (70)

The combination of higher taxes and less public spending was intended to reduce the current account deficit and put aside money for restructuring reforms and higher interest rates were intended to make the Korean currency more attractive for foreign investors. But unlike Latin America, which suffered a public debt problem, the government budget was in surplus in Korea and the current account deficit was not seriously large. Moreover, high interest rates--over 20 percent--produced adverse effects such as the bankruptcies of even strong businesses and banks because of high casts of borrowing, which in turn resulted in increasing the unemployment rate that was already in a sharp rise. (71) The IMF admitted later that the recommended policies were too stringent. (72)

Rather than rescheduling Korea's short-term debts, the IMF focused on Korea's structural problems and demanded the fundamental changes of the Korean economic system. But critics of the IMF (73) point out that what IMF demanded includes politically sensitive issues and the IMF has no right to deprive a sovereign nation of its freedom to determine its economic structure and institutional arrangements, taking advantage of its shortage of short-term debts. The IMF of course can recommend some policies and provide client countries with technical assistance to help them overcome their financial turmoil. But the problem is that the IMF compels client countries to adopt only specific policies (neo-liberal ones) regardless of different domestic social and economic conditions by taking full advantage of the unequal power relations between the client countries that are desperate for bail-out funds and itself that can dominate negotiations with them. (74) It is especially worth noting that reforms of labor law that had made layoffs much easier destroyed the social fabric of the Korean society based on the social contract of Korean people. According to a recent study, involuntary unemployment rates increased ten times from 3 % to 31.1% between the October 1995-September 1996 period and the October 2000-September 2001 period. (75) In addition to outright layoffs, Korean companies introduced early or honorary retirement programs to reduce the financial burden on pay rolls. (76) Along with the abrupt increase of job insecurity, according to one survey, the number of people who fear their layoffs rose drastically (77) and people became more self-centered to survive the layoffs. Lifetime employment and family-like work environments, which had been characteristics of the Korean corporate culture for a long time, were totally demolished.

The Kim administration's segyehwa strategy turned out to be a total failure. Neo-liberal technocrats in Korea had naive optimism about fast-track globalization and did not realize the potential risks of the deep incorporation of the Korean economy into global financial markets. They were indoctrinated with the idea that free trade and financial liberalization benefit all and were ignorant of the potential pitfalls of that idea. In retrospect, hurried financial liberalization in Korea under the segyehwa strategy was premature and furthermore was carried out in an unprepared way. A transition from a state-led development system to a market-oriented one is surely not an easy task and requires a much longer period of time and learning. The Kim Young Sam administration was however too hasty and pressed ahead with financial liberalization to achieve its policy goals within its shortened presidential term after democratization. Without reforming domestic financial institutions that were inefficient and inexperienced with international financial transactions, the state opened the financial market widely and moreover it was not equipped with a relevant monitoring mechanism of capital flows. Chaebols took full advantage of the dismantling of investment coordination by the state and expanded its investment recklessly. The state ultimately lost its control of financial flows and Korea became vulnerable to the potential volatility of global finance as overinvestment began to trigger a series of corporate bankruptcies in the condition of the build-up of a large amount of short-term liabilities.

The financial crisis brought about the change of the regimes in Korea. Kim Dae Jung, who had been a long-time pro-democracy and pro-market opposition leader, was elected as a new president in December, 1997. The Kim Dae Jung administration made every effort to regain the confidence of international investors and to restructure economic and financial systems under the direction of the IMF. The Korean state regained its legitimacy and structural power in a relatively short time after the occurrence of the financial turmoil. (78) Although the social and economic costs of the financial crisis were still being felt, the Korean government completed the repayment of IMF loan packages in September 2001 three years ahead of schedule. (79) While taking advantage of the support of domestic actors (e.g., anti-Chaebols sentiment among people after the crisis) and international ones (the IMF and foreign investors), the state undertook industrial realignment policies or 'Big Deals' that were designed for mergers and asset swaps of Chaebols and general reforms of them. (80) The irony is that full-fledged neo-liberal reforms in the postcrisis era have been led and coordinated by the state rather than by the market in Korea. The state indeed has played a leading role in economic and financial restructuring as well as the recovery of international investors' confidence in Korea.

It is true that (financial) globalization exerted considerable pressures on Korea and narrowed the range of options on the part of the Korean state. We cannot say however that it brought about the financial crisis in Korea directly or mechanically. To be sure, Korea might not be able to defy globalization given increasing external pressures, but as we explored previously the Korean state chose fast-track globalization instead of cautious and gradual adaptation to it in part on its own initiatives. It is therefore viewed that the Korean financial crisis was the product of combined effects of external pressures in the context of globalization and the misguided coping strategies of the Korean state with globalization. After the financial turmoil, however, the Korean state regained its legitimacy and structural power in a relatively short time, showing its striking resiliency and has played a leading role in regaining the confidence of international investors and the realignments of Chaebols. It seems to be clear that the state-led development model has considerably been dismantled in Korea. But the striking resilience of the Korean state in a postcrisis era reveals that the institutional legacy of the state-led development model still exists and neo-liberal convergence, that is, the rise of a minimal state just like that of the Anglo-American model, is not happening in Korea. (81)

CONCLUSION: DEVELOPMENT, THE STATE, AND GLOBALIZATION

The case of Korean economic development strongly supports the idea that the state may have to play a leading role in breaking the shackles of underdevelopment and generating massive economic changes. To be sure, strong state and state intervention do not bring about economic development automatically. The Korean case shows that what counts is state capacity and the quality of intervention rather than the strong state itself or the mere degree of intervention. The Korean case also demonstrates that international factors play a significant role in economic development. The Korean state played a double game relatively efficiently between domestic conditions and international opportunities taking advantage of the expansion of a global trading market under the Cold War structure.

It is however worth emphasizing that state-led development is time-limited. As the Korean economy matured and its society became democratized, the state had to unravel its state-led development paradigm. Moreover, the inexorable advance of globalization has put a considerable pressure on the Korean state to open its trade and financial markets. Since the early 1980s, there had been internal debates on how to cope with globalization within Korea. Finally, under the strong support of neo-liberal economic technocrats in the Korean bureaucracy, a fast-track globalization strategy rather than gradual adaptation to it was adopted as a coping strategy with globalization in the early 1990s. The state's coordination mechanism had been rapidly dismantled and unprepared and ill-sequenced financial liberalization was carried out. Korea failed in a soft landing in its transition to a more market-oriented system and the end result was the financial meltdown that produced unbearable economic costs and human suffering in Korea. One of the significant future research agendas may be to investigate how an emerging economy can reach a soft landing instead of a financial crash in a period of its transition to a more market-oriented system under the constraints of globalization.

Another crucial point of this paper is that the state still matters in this era of globalization. According to hyper-globalists, (82) the inexorable advance of globalization is irreversible and ultimately the state will become obsolete or hollow. It is true that the unfolding of economic and financial globalization has considerably constrained the scope of actions of individual states in terms of planning and implementing economic and financial policies. We cannot say however that economic and financial globalization compels individual states to adopt nearly the same policies in a mechanical way. It is better viewed that globalization forces are mediated or refracted through individual states that are assumed to be differently structured by somewhat different ideas, interests, and institutions. (83) States are not static thing-like entities, but relational and continuously changing ones, while reacting differently to the changes of domestic and external environments. As the Korean case displays, globalization is a double-edged sword and can be either benign or destructive depending at least in part upon what reaction and strategy an individual state takes in response to the challenges of globalization.

NOTES

(1.) The examples of macroeconomic imbalances are current account deficits, foreign debts, real exchange rates and overvaluation, excessive bank lending, financial fragility, debt-equity ratios, etc. See Giancarlo Corsetti et al., What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview, Working Paper 6833, National Bureau of Economic Research, 1998, available at http://www.nber.org/papers/ww6833; Stanley Fisher, The Asian Crisis: A View form the IMF, 1998, available at http://www.imf.org/ external/np/speeches/1998/012298.htm.

(2.) See for example Steven Radelet and Jeffrey Sachs, The East Asian Financial Crisis: Diagnosis, Remedies, Prospects, Brookings Papers on Economic Activity, Vol. 1, 1998, pp. 1-90.

(3.) Stephan Haggard and Andrew MacIntyre, 'The political economy of the Asian economic crisis,' Review of International Political Economy, 5(3), 1998, pp. 381-92; Stephan Haggard, The Political Economy of the Asian Financial Crisis, (Washington D.C.: Institute for International Economics, 2000.)

(4.) Bruce Cumings, 'The Asian Crisis, Democracy, and the End of "Late" Development,' in T.J. Pempel, (ed.), The Politics of the Asian Financial Crisis, Ithaca, NY: Cornell University Press, 1999, pp. 1744; see also Chalmers Johnson, 'Economic crisis in East Asia: the clash of capitalisms,' Cambridge Journal of Economics, 22(6), 1998, pp. 653-61.

(5.) Meredith Woo-Cumings, 'Introduction: Chalmers Johnson and the Politics of Nationalism and Development,' in Meredith Woo-Cumings (ed.), The Development State, (Ithaca and London: Cornell University Press, 1999), p. 12; Wade, 'Introduction to the 20.03 Paperback Edition,' pp. xxvi-xxvii.

(6.) Stephan Haggard and Jongryn Mo, 'The political economy of the Korean financial crisis,' Review of International Political Economy, 7(2), 2000, p. 200.

(7.) Robert Gilpin, Global Political Economy: Understanding The International Economic Order, (Princeton and Oxford: Princeton University Press, 2001), pp. 268-9; see also Joseph E. Stiglitz, Globalization and Its Discontents, (NY and London: W.W. Norton, 2003), p. 6; William I. Robinson, A Theory of Global Capitalism: Production, Class, and State in a Transitional World, (Baltimore and London: The Johns Hopkins University Press, 2004), p. 150.

(8.) Jeffrey A. Winters, 'The Financial Crisis in Southeast Asia,' in Richard Robinson et al., Politics and Markets in the Wake of the Asian Crisis, (London and NY: Routledge, 2000), p. 36.

(9.) Wade, 'Introduction to the 2003 Paperback Edition,' p. xxviii.

(10.) Radelet and Sachs, The East Asian Financial Crisis, pp. 4-5.

(11.) Panicos O. Demetriades and Bassam A. Fattouh, 'The South Korean Financial Crisis: Competing Explanations and Policy Lessons for Financial Liberalization,' International Affairs, 75(4), 1999, pp. 7845; See also Maurice Obsfeld, 'Models of currency crisis with self-fulfilling features,' European Economic Review, 40, 1996, pp. 103747.

(12.) Radelet and Sachs, The East Asian Financial Crisis, p. 2; Winters, 'The Financial Crisis in Southeast Asia,' pp. 38-9.

(13.) Macroeconomic indicators from the Bank of Korea, available at http://www.bok.or.kr/eng/index.jsp.

(14.) Radelet and Sachs, The East Asian Financial Crisis, pp. 18-20.

(15.) Ha-Joon Chang, 'Korea: The Misunderstood Crisis,' Worm Development, 26(8), 1998, p. 1555.

(16.) Linda Weiss, 'Developmental states in transition: adapting, dismantling, innovating, not 'normalizing,' The Pacific Review, 13 (1), 2000, pp. 38-9; Eundak Kwon, 'Financial Liberalization in South Korea', Journal of Contemporary Asia, 34(1), 2004, p. 80.

(17.) See Haggard and Mo, 'The political economy of the Korean financial crisis,' pp. 210-12; Chang, 'Korea: The Misunder-stood Crisis,' pp. 1556-7.

(18.) John Kie-chiang Oh, Korean Politics, (Ithaca and London: Cornell University Press, 1999), p. 56.

(19.) Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, (Ithaca and London: Cornell University Press, 1990), pp. 64-5.

(20.) Wade, 'East Asia's Economic Success,' p. 304.

(21.) The World Bank, The East Asian Miracle: Economic Growth and Public Policy, (Oxford: Oxford University Press, 1993), p. 16.

(22.) Albert Fishlow and Catherine Gwin, 'Lessons from the East Asian Experience,' in Albert Fishlow et al., Miracle or Design?: Lessons from the East Asian Experience, (Washington DC: Overseas Development Council, 1994), p. 8.

(23.) The World Bank, The East Asian Miracle, p. 20.

(24.) About differences between two development strategies, see Herman M. Schwartz, States versus Markets: The Emergence of a Global Economy, 2nd ed., (NY: St. Martin's Press, 2000), pp. 59-62.

(25.) For example, the U.S. and Germany ('early' late developers) in the late 19th century and Japan, Korea, and Taiwan ('late' late developers) in the post-WWII era.

(26.) See Schwartz, States versus Markets; Chang, Kicking Away the Ladder; Joan Edelman Spero and Jeffrey A. Hart, 'Trade and Development Strategies,' in The Politics of International Economic Relations, (NY: Routledge, 1997).

(27.) The World Bank, The East Asian Miracle, pp. 20-21.

(28.) Alice Amsden 1989. Asia's Next Giant: South Korea and Late Industrialization. (NY: Oxford University Press. 1989), pp. 143-4.

(29.) Wade, 'East Asia's Economic Success,' p. 286.

(30.) The World Bank, The East Asian Miracle, pp. 5-7, p. 129.

(31.) G. John Ikenberry, 'Globalization: Patterns, Sources, and Implications,' in Chung-in Moon and Jongryn Mo, (eds.), Democratization and Globalization in Korea: Assessments and Prospects, (Seoul: Yonsei University, 1999), p. 138; Chung-in Moon, 'In the shadow of broken cheers: The dynamics of globalization in South Korea,' in Aseem Prakash and Jeffrey A. Hart, (eds.), Responding to Globalization, (London and NY: Routledge, 2000), p. 67.

(32.) C.S. Eliot Kang, 'Segyehwa Reform of the South Korean Developmental State,' in Samuel S. Kim, (ed.), Korea's Globalization, Cambridge, (UK: Cambridge University Press, 2000), pp. 80-81.

(33.) Moon, 'In the shadow of broken cheers,' Table 2.1.

(34.) Wade, 'East Asia's Economic Success,' p. 287; The World Bank, The East Asian Miracle, pp. 128-9.

(35.) Haggard, Pathways from the Periphery, p. 66.

(36.) Moon, 'In the shadow of broken cheers,' pp. 70-71; Gordon White and Robert Wade, 'Developmental States and Markets in East Asia: An Introduction,' in Gordon White, ed., Developmental States in East Asia, (NY: St. Martin's, 1988), p. 7.

(37.) See Cumings, 'The Asian Crisis, Democracy, and the End of "Late" Development,' pp. 19-21.

(38.) Alexander Gerschenkron, Economic Backwardness in Historical Perspective, (Cambridge, MA: Harvard University Press, 1962).

(39.) Kang, 'Segyehwa Reform of the South Korean Developmental State,' p. 82.

(40.) See Moon, 'In the shadow of broken cheers,' Table 2.1.

(41.) Kang, 'Segyehwa Reform of the South Korean Developmental State,' p. 82.

(42.) Woo-Cumings, 'Slouching toward the Market,' p. 76; Kang, 'Segyehwa Reform of the South Korean Developmental State,' pp. 82-3.

(43.) Kang, 'Segyehwa Reform of the South Korean Developmental State,' p. 82.

(44.) James A. Caporaso and David P. Levine, Theories of Political Economy, (Cambridge, UK: Cambridge University Press, 1992), p. 161, p. 163.

(45.) Gilpin, Global Political Economy, p. 305.

(46.) Kwon, 'Financial Liberalization in South Korea,' p. 74. See also Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, (Ithaca, NY: Cornell University Press, 1994).

(47.) Robert J. Holton, Globalization and the Nation-State, (NY: St. Martin's Press, 1998), p. 52.

(48.) Lawrence H. Summers, 'International Financial Crises: Causes, Prevention, and Cures,' The American Economic Review, 90(2), 2000, p. 2.

(49.) Stiglitz, Globalization and Its Discontents, pp. 12-13.

(50.) Jeffrey Sachs, 'The IMF and the Asian Flu,' The American Prospect, 37, 1998, pp. 17-18.

(51.) Gilpin, Global Political Economy, p. 314.

(52.) On the concept of the Washington Consensus, see John Williamson, 'Democracy and the 'Washington Consensus',' World Development, 21(8), 1993, pp. 1329-36.

(53.) Kwon, 'Financial Liberalization in South Korea,' p. 81; Jin-Wook Choi, 'Regulatory Forbearance and Financial Crisis in South Korea, Asian Survey, 42(2), 2002, p. 256.

(54.) Kwon, 'Financial Liberalization in South Korea,' pp. 81-2.

(55.) In the late 1980s and early 1990s, the number of workdays lost because of strikes and lockouts in Korea increased dramatically. See ILO (International Labor Organization), Task Force on Industrial Relations, World Labour Report 1997-98: Industrial Relations, Democracy, and Social Stability, Geneva: ILO, 1997, Table 4.3. Concerning the domestic pressures from Chaebols and the increased autonomy of them, see Kwon, 'Financial Liberalization in Korea,' p. 84.

(56.) On the rise of the civil society and democratization in Korea, see Oh, Korean Politics, pp. 89-95.

(57.) On different coping strategies with globalization, see Moon, 'In the shadow of broken cheers,' p. 69.

(58.) Most new technocrats held Ph.D.'s in economics from the U.S. For example, Jei-ik Kim who served as an economic advisor of Chun Do Hwan held Stanford Ph. D. and all the members of the Korean Development Institute, an economic think tank, held U.S. degrees. See Woo-Cumings, 'Slouching toward the Market,' pp. 78-9.

(59.) Kwon, 'Financial Liberalization in Korea,' pp. 83-4.

(60.) Choi, 'Regulatory Forbearance and Financial Crisis in South Korea,' p. 258.

(61.) Cho, The Financial Crisis in Korea: Causes and Challenges, p. 1011; Choi, 'Regulatory Forbearance and Financial Crisis in South Korea,' p. 260.

(62.) Kwon, 'Financial Liberalization in South Korea,' p. 84.

(63.) E. Han Kim and Vijay Singal, 'Stock Markets Openings: Experience of Emerging Economies,' The Journal of Business, 73(1), 2000, p. 60

(64.) Haggard and Mo, 'The political economy of the Korean financial crisis,' p. 204.

(65.) See Cho, The Financial Crisis in Korea: Causes and Challenges, Table 15.

(66.) See Ibid, Table 14.

(67.) Korea's labor productivity growth diminished from 26.8 percent during 1971-1986 to 13.1 percent during 1987-1995. See Cho, The Financial Crisis in Korea: Causes and Challenges, Table 5.

(68.) For example, Korea's semiconductor chips exports fell from $22.1 billion in 1995 to $17.8 billion in 1996 and $17.4 billion in 1997. See Moon, 'In the shadow of broken cheers,' p. 79.

(69.) See Feldstein, 'Refocusing the IMF,' p.22, p. 25-6; Cumings, 'The Asian Crisis, Democracy, and the End of"Late" Development,' p. 26.

(70.) See 'IMF Rules Have U.S. Fingerprints on Them,' New Straits Times, 19 December 1997, p. 12.

(71.) Feldstein, 'Refocusing the IMF,' p. 23, p. 26.

(72.) Stiglitz, Globalization and Its Discontents, p. 106.

(73.) Sachs, 'The IMF and the Asian Flu'; Feldstein, 'Refocusing the IMF'; Stiglitz, Globalization and Its Discontents.

(74.) On unequal power relations between the IMF and client countries, see Stiglitz, Globalization and Its Discontents, p. 43.

(75.) Andrew Eungi Kim, 'The Social Perils of the Korean Financial Crisis,' Journal of Contemporary Asia, 34(2), 2004, p. 227.

(76.) Ibid.

(77.) Out of 2,791 workers, 70% expressed their fear of layoffs in May 2002. See Ibid., p. 228.

(78.) See David Hundt, 'A Legitimate Paradox: Neoliberal Reform and the Return of the State in Korea,' The Journal of Development Studies, 41(2), 2005, pp. 242-60.

(79.) Kim, 'The Social Perils of the Korean Financial Crisis,' p. 223.

(80.) See Judith Cherry, "Big Deal' or big disappointment? The continuing evolution of the South Korean developmental state,' The Pacific Review, 18(3), 2005, pp. 327-54.

(81.) See Weiss, 'Developmental states in transition.'

(82.) Kenichi Ohmae, The Borderless World, (London: Collins, 1990); Mathew Horseman and Andres Marshall, After the Nation-State, (London: HarperCollins, 1994).

(83.) See Linda Weiss (ed.), States in the Global Economy: Bring Domestic Institutions Back In, 2003, (Cambridge, UK: Cambridge University Press).

By Ji Young Choi, Assistant Professor, Department of Politics and Government, Ohio Wesleyan University, Delaware, OH 43015.

Figure 1: Competing Explanations of the Asian Financial Crisis

            Domestic                International

Economic    The Fundamentalist      The Self-fulling View
            View

Political   The Domestic Politics   The End of the Cold
            View                    War View