1
REBIRTH OF THE DEVELOPMENTAL STATE
[For Chalmers Johnson] … Industrial policy is first of all an attitude, an orientation, and only after that a matter of technique, shifting with the changing needs of the time.
—Meredith Woo-Cumings, The Developmental State
I begin this book with an empirical puzzle: How can we explain the striking revival of financial activism in Korea since the 1997–98 financial crisis, and since the mid-2000s in particular? How has it come to pass that state-owned policy banks now account for 25 percent of all loans in the Korean financial system and routinely make low-interest loans to local firms in strategic industries, often on a performance-linked basis?1 The role of the state in the Korean financial system since the late 1990s is not just remarkable in comparative terms: today, policy banks (or “policy finance institutions” as they are sometimes known) play a much larger role in the Korean economy than in other developed countries, with the exception of Germany.2 It is also remarkable because it contradicts the conventional view about the direction of financial reform in Korea since the 1997–98 financial crisis. Indeed, Korea’s embrace of financial liberalization since that time is widely cited as evidence of the state’s retreat from the economy and its convergence on a more “liberal” or “regulatory” mode of governance. Financial liberalization, we have been repeatedly told, signals the end of Korea’s developmental state.3
My primary empirical aim in this book is to document and explain the hitherto unremarked phenomenon of the revival of financial activism in Korea. In doing so, my broader analytical aim is to bring back to the study of developmentalism a key ingredient that has been increasingly marginalized and often completely ignored in the literature. That missing ingredient, the subject of this book, is the ensemble of ideas that inform the mindset and shape the goals of state actors, including a country’s political leadership. I use the Korean experience not so much to catalogue the misconceptions that arise from this neglect (although these are significant), but more importantly to demonstrate the analytical advantage of returning ideas to the center of developmental state discussion. My explanation of the revival of financial activism in Korea thus centers on the developmental mindset and the ways it has historically shaped—and continues to shape—Korean policymakers’ approach to financial governance.
By developmental mindset, I mean a worldview that is focused on a desire for national techno-industrial catch-up and export competitiveness via strategic interventions by the state in economic life to promote national strength in a hostile and competitive world. A developmental mindset thus entails a particular way of thinking about finance: the principal purpose of finance is to support the productive economy, and thus the pursuit of broader developmental goals.
My key contention is that since the 1997–98 crisis, the emergence of new structural pressures, including the rise of China, financialization, and energy insecurity, have helped to revive and strengthen a quintessentially developmental view of finance in Korea. Despite the country’s significant shift toward liberalization, the idea that the primary purpose of the financial sector is to serve the productive economy continues to resonate strongly among key segments of the policymaking elite. In striking contrast to most accounts of the Korean experience of financial reform since the late 1990s, I contend that new modes of financial activism have returned the state to the center of the nation’s financial system. This trend has become particularly evident since the onset of the 2008 global financial crisis (GFC). Since that time, state-owned policy finance institutions (PFIs) have taken center stage in the domestic financial system, emerging as key backers of Korea’s nonconglomerate manufacturing firms and their quest for techno-industrial competitiveness and export expansion. As in Korea’s earlier developmental experience, PFIs, including the Korea Development Bank and the Korea Export Import Bank, are pumping large volumes of low-interest loans into local firms in industries deemed nationally significant by the state, with funds typically tied to technological performance and export targets. Since 1998, successive Korean governments have also experimented with and expanded new forms of financial activism, including the development of state-backed venture funds aimed at nurturing new strategic industries.
The Korean state’s continuing efforts to strengthen the link between the nation’s financial and productive sectors may go some way toward explaining how this country has managed to buck the trend toward deindustrialization evident in many developed economies.4 Indeed, Korea stands out as the only developed nation in which the share of manufacturing in GDP has actually increased since the early 1990s. Korea’s recent experience of financial regulation and reform thus promises new insights into debates over the inevitability of industrial ‘hollowing out’ in more advanced economies, and the possibilities for financial activism in an area of globalization, which is widely believed to constrain states and their policy room to move. The analytical framework I develop herein—which extends classical developmental state theorizing—helps to explain why the Korean state continues to approach financial policy so strategically, and what factors have helped to sustain this approach, despite significant domestic and international pressures for liberal reform.
The broader argument of this book is that the developmental state remains the most powerful conceptual framework available to explain why some countries are so effective at climbing the industrial development ladder and at responding to relentless pressures for techno-industrial upgrading and adaptation. In the Korean case, such pressures currently derive from a diverse set of challenges—including the rise of new economic competitors and intensifying energy insecurity. Since the eruption of the 2008 GFC, however, it has been the challenge of financialization and its impact on industrial investment that has consumed the attention of the Korean policy elite and prompted the expansion of developmental activism.5 Yet, interestingly, the majority of post-GFC analysis has focused on the apparent revival of Keynesianism in response to the crisis. The idea that the GFC might herald a new era of developmentalism barely rates a mention. Silence on this topic is puzzling, for if the financial turmoil gripping the world has revealed anything, it is the havoc wrought when a disconnect emerges between a nation’s financial and industrial sectors, that is, when the financial sector becomes the leech as opposed to lifeblood of the productive economy, and when the pursuit of profits derived from nonproductive activities is privileged over national industrial capacity. Insofar as developmental states are characterized by their principal concern with national industrial capacity, the GFC arguably marks the beginning of a new era of developmental state relevance.
In establishing the heightened relevance of the developmental state idea in the twenty-first century, with its implications for financial activism, I begin with a comprehensive critique of the declinist literature. In chapter 2, I show how claims about developmental state demise, focused largely on Korea, are not just inconsistent with the up-to-date empirical evidence but deeply misleading. That they could arrive at such conclusions—as we shall see—has much to do with the deployment of a flawed methodology. In their modeling of the East Asian developmental state, for example, declinists draw most heavily on the context-specific, highly centralized, and coercive Korean state of the 1970s—and the specific set of industrial policies it pursued in that period. Deviations from this highly specific (time- and space-determined) set of institutional arrangements and policy instruments—of which there were a significant number in the post-1970s period—tend to be offered as prima facie evidence of the “dismantling” of the developmental state model. Methodological problems follow from this modeling error: by framing Korea’s developmental state as a fixed set of institutions and policies and then generalizing the East Asian developmental state model from this historically specific case, declinists end up conflating an empirical case with an ideal type or theoretical model. The result has been to confuse the means of one developmental state at one particular moment in history with the ends or purpose of developmental states more broadly. As well as overspecifying the developmental state, the historical-ideal conflation paints an excessively static view of its capacities. Little scope is then left for understanding how developmental states might evolve and, in particular, how the need to confront new pressures at home and abroad may rekindle developmental ambition, leading policymakers to adopt new modes of strategic activism—like those that I identify in this book.
This modeling problem raises an obvious question: How should a developmental state be conceptualized? Somewhat surprisingly, even though “developmental state” is one of the most widely used concepts in the field of comparative politics, there exists no common understanding of what this term means—no agreed-on “ideal type” with which to examine particular empirical cases.6 More surprising still, for the past thirty years, the absence of broadly accepted definition has failed to frustrate the fruitful application of the concept to the question of Northeast Asia’s industrial development. It is only since the emergence of the declinist debate that this lack of conceptual clarity has become a serious issue. For in their efforts to demonstrate dismantling, many have seized on a definition of developmentalism with which few scholars would agree, with serious consequences for understanding new developments, especially the renewed emphasis on financial activism in Korea.
So, rather than merely countering claims about dismantling, I advance a fresh way of conceptualizing developmental states that is in keeping with the classical intent. My approach, which is grounded in the foundational but oft-neglected developmental state literature, gives primacy to “ideas” (by which I mean orientation or “mindset”) rather than to specific institutional arrangements or policy practices. What principally unites developmental states, I argue, what makes them “developmental,” is the presence of a developmental mindset and the capacity to formulate and execute a developmental strategy.
A developmental mindset refers to a set of shared ambitions on the part of the policy elite, as well as shared understandings about how best to realize those ambitions. Briefly, those ambitions can be summarized as techno-industrial transformation and export competitiveness for the purposes of ensuring national security and building international prestige. Shared understandings about how best to achieve these goals involve the necessity and desirability of strategic interventionism. These shared ambitions and understandings can in turn be traced to the common formative experiences of policy elites, such as Japanese colonialism in the Korean case, and the exposure to a state-directed model of industrial developmental that this involved.
The presence of this mindset is what leads policy elites in developmental states to devise and execute long-term developmental strategies—the practical means by which developmentally minded policymakers go about pursuing their goals. A key contention of this book is that while all developmental states pursue developmental strategies, those strategies are likely to differ both between states, and within states over time, reflecting diverse historical experiences and ever-changing political and economic exigencies. Nationally distinctive and temporally contingent developmental strategies necessarily imply the existence of varied, and variable, institutional arrangements and policy practices that are nonetheless directed toward achieving the same end goal.7
In refocusing attention on the ideational foundations of developmentalism, I am not suggesting that the institutional features also identified by Johnson (and thereafter extensively elaborated, refined, and extended by others) are unimportant. These include a meritocratic bureaucracy; a pilot agency responsible for planning and coordinating industrial transformation; relative insulation of the economic bureaucracy from political pressures that might compromise long-term planning capacities; regularized, cooperative relationships with business that facilitate the effective design and execution of developmental plans; and a degree of control over key resources such as finance.8 Without an appreciation of such features it is impossible to explain why East Asia’s developmental states have historically been so effective in pursuing their substantive goals. The developmental significance of these particular institutions has been extensively canvassed in the literature, being the subject of numerous single-country and comparative studies.9 I have no wish to question their importance here.
The point I wish to make is the danger of reducing the developmental state idea to a fixed set of common institutional arrangements (such as an autonomous, meritocratic bureaucracy) and limiting our analysis to these, as the developmental state literature has tended to do.10 The risk is that it blinds us to the significance of institutional arrangements that might be unique to a particular country, but which are nonetheless central to the routine functioning of its developmental state. The Presidential Office in Korea is just such a case, as I show in chapter 3. Indeed a key argument of this book is that it is impossible to explain the dynamics of developmental policy making in Korea since the 1960s without reference to the Presidential Office—and indeed to the role played by particular presidents who have sought to maximize the influence afforded them by their institutional home.11 This brings us to a further limitation of an exclusively institutions-focused conceptualization of developmentalism—it blinds us to the role of agency, and more specifically to the role of leadership, in shaping the direction of developmental state evolution in Korea.12
To avoid such pitfalls, I draw on recent innovations in historical institutionalist theorizing and take as my analytical starting point institutionally situated, interpretive agents (i.e., developmentally minded Korean policymakers).13 Then, to explain the recent revival of financial activism in Korea, I examine the ways in which these policymakers have, since the 1960s, navigated the ideational, institutional, political, and structural terrains confronting them in pursuit of their developmental ambitions (cf. Bell 2005).14 I am not suggesting that the developmental mindset itself is fixed and impervious to change. Rather, I am proposing that if the goal is to understand developmental state evolution, we might begin more fruitfully by asking what conditions (structural, political, etc.) gave rise to a developmental mindset in Korea and shaped its first developmental strategy? And which institutional arrangements enabled the country’s first developmentally minded policymakers to translate their strategy into action? Equipped with an understanding of the origins of a developmental mindset and the institutional underpinnings of the state’s capacity for strategic activism, we can then ask: What factors have strengthened or weakened the developmental consensus over time, and facilitated or frustrated the pursuit of a developmental strategy? Thus, while I take developmentally minded policymakers as my analytical starting point, my approach is to focus on the dialectical interplay between these agents and their institutional, structural, and political environments. This approach allows me to bring ideas back in to developmental state analysis without ejecting institutions. The payoff is an account that can illuminate the dynamics and direction of developmental state evolution while avoiding certain pitfalls of a conceptualization of developmentalism focused primarily on institutions.
My argument is that originally (in the 1960s), there was a far-reaching consensus among the policy and political elite around a developmental worldview, and thus around the necessity and desirability of financial activism. But that consensus began to fracture in the 1970s and 1980s. Since that time, a developmental mindset has been an enduring constant among some segments of the policy and political elite (especially within key industry ministries, the Bank of Korea, and segments of the Finance Ministry)—but the resonance of developmental ideas among the wider elite and broader population has waxed and waned, depending on the nation’s economic and political circumstances. I further argue that it is possible to explain the waning and waxing of financial activism over the 1990s and 2000s in terms of shifts in power from more liberally oriented to more developmentally oriented ministries, but more fundamentally, the orientation of the president is a key factor behind these power (and policy) shifts.
To develop this argument, I begin in chapter 2 highlighting weaknesses in the declinist case, and by developing an ideas-enriched conceptualization of developmentalism and a framework for analyzing developmental state emergence and evolution. I then set out in chapter 3 to apply this framework, discussing as a first step the formation of a developmental mindset in Korea. I pay particular...