The politics of financial liberalization in the interventionist economy: A comparative study of South Korea

Jae-Hyun Lyu, Purdue University

Abstract

The purpose of this study is to illuminate the reasons for and the process of financial liberalization in the interventionist economy. The key questions of this study are: Why is the interventionist economy destroying the very basis of past economic success? How is financial liberalization managed in the interventionist economy in which the state has played an extraordinarily powerful role? These questions are answered by investigating the process of financial liberalization in South Korea from a comparative perspective. Based on two general assumptions about economic policy change and the nature of the financial system in interventionist economies, this study develops three research arguments from a new institutionalist perspective. First, it argues that interventionist economies sow the seeds for the destruction of their interventionist financial system. The second argument is that while economic crisis is a fundamental reason for financial liberalization, the presence of liberal economic ideas in policy circles is an important factor determining the timing and strength of financial liberalization in an interventionist economy. Third, this study argues that the consolidation of financial liberalization is conditioned by the state capacity, defined as the coherence of the state institutions, the insulation of the economic policymaking process, and embeddedness. Embeddedness is the most important institutional condition for the successful implementation of financial liberalization. In the South Korean experience, political regime change, along with a change in political leadership and in economic elites, gave impulse to financial liberalization. The study of the Korean case confirms that even if the state initiates financial liberalization in the face of economic distress, the process of financial liberalization is continuously checked by structural problems inherent in the interventionism. The fundamental reason for gradual financial liberalization in South Korea is the decline of the power of the state vis-à-vis business groups and the growing strength of business power. The cases of Japan, France, and Chile confirm the importance of political factors in the initiation and consolidation process of financial liberalization in interventionist economies.

Degree

Ph.D.

Advisors

Tilton, Purdue University.

Subject Area

Political science|Economics

COinS