Harvard East Asian Monographs 440. Cambridge, MA: Harvard University Press, 2021. xix, 315 pp. (Tables, figures.) US$49.95, cloth. ISBN 978-0-6742-5128-1.
Given that few previous studies have examined the impact of financial liberalization on the economic development in South Korea, Financial Liberalization and Economic Development in Korea addresses a very important topic. Many South Koreans still have vivid memories of how the country endured the IMF’s financial and corporate restructuring during the period from December 1997 to August 2001. Although the IMF bailout paved the way for the opening of the South Korean financial market and a series of structural adjustments, the book suggests that its net effect has not been a positive one—leading to worsening economic stability and income equality. Interestingly, the authors don’t deem the IMF intervention as Korea’s first attempt to liberalize the financial sector, but consider the arrival of military dictator Chun Doo-hwan in August 1980 as the origin of the country’s financial liberalization, which is why the book analyzes financial data starting from 1980.
The book offers many worthwhile things to learn about South Korea. First, the focus on financial liberalization is innovative as previous studies have largely neglected to examine its consequences. Previous studies instead have looked at how economic development, not financial liberalization, have impacted political liberalization. Previous studies have responded to public curiosity over whether the so-called economic Miracle on the Han River is positively associated with the emergence of Korean democracy. Since most agree on the beneficial effects of economic development on Korean democracy, it is time to move on to more specialized topics. The book attempts to solve one of the most interesting and timely of puzzles: has South Korea’s financial liberalization contributed to industrial efficiency or improved economic equity? The authors come to a pessimistic conclusion after solving this puzzle. The book asserts that although existing literature states that financial liberalization in other countries may induce economic growth by increasing productivity and improving income distribution, Korea has been unable to harvest the fruits of the transition to a liberal financial system.
Second, the book presents impressive data analyses in its 16 chapters that investigate the impact of Korea’s financial liberalization on various economic outcomes such as savings and investment, consumption smoothing, financial stability, and income distribution. In particular, chapters 6 through 9 are useful for their insights into the question of how the deregulation and opening of financial markets and intermediaries have affected financial stability. Unfortunately, these chapters offer a gloomy economic outlook, as if “Korea is destined to suffer a painful financial crisis every ten years” (262).
Chapter 16 addresses a salient and timely issue concerning the relationship between COVID-19 and the financial system. This chapter predicts that the pandemic is likely to push South Korea toward another financial crisis that may be much more severe than the capital account crisis occurred in 2008–2009. This is yet another unfavorable prediction for Korea’s economic future, and since “data doesn’t lie,” the reader must take these empirical chapters seriously.
As with any book, there are some weaknesses. First, as a political scientist, I wish to see some detailed dynamics between political and economic leaders regarding financial liberalization. It would be interesting to learn how each president from Chun Doo-hwan to current President Moon Jae-in initiated financial and corporate reform and what kinds of business deals the owners of chaebols made with these presidents. How did some chaebols such as Daewoo (that used to be second only to Samsung) and Dong Ah (a leading construction company) evaporate into thin air in the middle of the financial crises while others such as Samsung, Hyundai, and SK Group survived and prospered? Given the careers of the three authors of the book, the reader would have liked to hear about how (un)successful each president, with limited economic knowledge, muddled through the web of complicated financial dealings, especially during a devastating crisis such as the IMF bailout. To my knowledge, it would be impossible to fully understand the performance of the Korean economy without learning what critical role each president played.
Second, the book could provide more persuasive arguments if there were more rigorous statistical analyses. One example is that while the book claims to cover the years 1980 to 2020, chapter 9 is limited to the period 1980–2016, four years shorter than the other chapters. Chapter 9 maintains that South Korea’s financial deepening has worsened distributive equity, benefiting the rich more than the poor, especially in terms of bank loan access. I wonder what would be the analysis if the chapter included four more years—overlapping with the presidency of Moon Jae-in whose economic policy prioritizes income equality and whose recent news release announced a favorable record on income distribution. Since the Gini Index has been improving over the past decade, it may be too early to be pessimistic about the impact of financial deepening on economic equality. Another example is that chapters 7 and 8 conclude that financial deepening is doomed to fail due to various structural changes such as a declining birth rate and rapidly aging population. However, when I examine the empirical analyses of chapters 7 and 8, I do not find that their statistical models account for those structural factors whose data is publicly available. Since the conclusion is not supported by the data, it looks like mere speculation. The reader would like to see data-based evidence for the critical claim made by the authors.
All in all, the book should be a must-read for students of the political economy of South Korea. It provides thoughtful wisdom based on rich data analyses. It also provides antidotes to scholars, policy-makers, and politicians who view financial liberalization to be a panacea for economic diseases and/or underdevelopment. I believe that the authors’ pessimism is beneficial for the future Korean economy since such pessimism is anchored to data-based evidence rather than unfounded negative thinking. At the same time, the reader may wonder whether the authors’ pessimism may be misguided since South Korea’s economy continues to grow despite some bumps on the road. For example, South Korea’s exports in November 2021 were the largest monthly figures on record. The reader may wonder if there is something essential that the authors’ statistical models fail to capture—the power of perseverance among ordinary Koreans to overcome any economic challenges in the twentieth century and beyond.
Seung Whan Choi
University of Illinois, Chicago