Regulatory institutions and policy choice : explaining financial fragility in South Korea before the 1997 crisis
The question raised in this thesis is "In the context of the developmental state, what is the explanation for Korea's financial regulatory failure, which contributed to the 1997 crisis." There have been two dominant explanations, i.e. exogenous and endogenous. The first one cites the exogenous breakdown of the developmental state. Wade (1998, 2000) argues that the Korean government was forced by the US government to remove capital controls. He claims that such financial regulatory liberalization was not consistent with the developmental state model. The second one focuses on endogenous forces, especially the growing influence of business over government (Haggard 2000). The thesis argues that the latter explanation is the more convincing. Three financial liberalization issues, i.e. US pressure on the Korean foreign exchange rate. Financial Policy Talks between the US and Korean governments and multilateral talks surrounding Korea's entry to the OECD, and key prudential regulatory measures before the crisis are investigated. It shows that the exogenous explanation is basically irrelevant in explaining regulatory outcomes. The outcomes are consistent with the preference of the private sector, in particular, chaebol. This thesis differs, however, from the Haggard argument, in arguing that the regulatory capture was facilitated by Korea's regulatory institutional centralization within the Finance Ministry. Due to the historical proximity of the Ministry to the business sector, regulatory centralization left the state more exposed to policy capture. Institutional centralization had been a principal requirement for the developmental state in the literature. However, the thesis argues that such centralization in the financial regulatory area proved to be a weakness rather than a strength in the period when financial liberalization was occurring. The thesis has also investigated in much more detail the different regulatory policies applied to different financial sectors. The difference resulted from different business-government balance of power by sector.