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Restrictions on the flow of international capital remain a legitimate policy instrument in the arsenal of economic policymaking in 21st-century South Korea. The next section seeks to explain why this is the case. There seem to be invisible barriers or cultural templates in South Korea that limit foreign investment in general and international capital inflows in particular, despite a rather conducive legal environment. In my earlier work on capital account policy in Latin America Leiteritz , I have tried to combine theoretical elements from various epistemological traditions across the conventional rationalism-constructivism divide in International Relations and International Political Economy Checkel , whereby economic policymaking is the result of both material interests and domestic informal institutions, encapsulated in the term national economic identity.

In this case, capital account liberalization is bound to be sustainable in a country if the material interests of specific economic sectors and the ideational context for legitimate economic policies favor international capital mobility. More specifically, if the financial sector enjoys privileged access to the political decision-making process and if domestic informal institutions emphasize international market integration over the goal of maintaining domestic stability as the fundamental social purpose of economic policy, an open capital account will be a long-term policy choice.

Conversely, if the export sector dominates the financial sector in terms of political access and the informal institutional context is shaped by concerns over domestic economic stability, an open capital account over the long term is unlikely Leiteritz I have employed the same metric when analyzing the case of South Korea's capital account policy. First, I discuss the informal institutional context, i.

The Political Economy of Capital Market Reforms in Southeast Asia

Here I emphasize the role of economic rationalism as a crucial domestic informal institution that acts as filter for economic policy-making. Given the indelible mark that economic nationalism as a legacy of the developmental state has left on the domestic political economy, capital account liberalization faces significant obstacles in order to become an entrenched policy in South Korea.

Second, the interests of the export-oriented sector continue to dominate economic decision-making processes in the country. Given the preference of exporters for a competitive exchange rate, and especially their fear of exchange-rate appreciation, policy-makers utilize the full set of tools in order to achieve this goal, including the regulation of international capital flows.

In other words, maintaining domestic macroeconomic stability and export competitiveness are the overriding objectives of economic policy-making, thus privileging the interests of exporters over those of the financial industry. As a result, capital account openness has not become "hard-wired" into South Korea's political economy. The concept of economic nationalism refers to the expression of a constructed social identity or a set of policies that result from a shared national identity Abdelal ; Helleiner and Pickel ; Abdelal; Herrera, Johnston, and McDermott Economic nationalism is best defined by its nationalist ontology rather than specific policy prescriptions, e.

It can thus be used to justify both protectionist or free-market reforms in a particular domestic setting. There are variations in both content and contestation, whereby the content of a national identity specifies a direction and a fundamental social purpose of economic policy for the country.

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A shared national identity lengthens the time horizon of a society and the political will necessary for economic sacrifice. On the other hand, the concept of e conomic patriotism refers to "economic choices, which seek to discriminate in favour of particular social groups, firms or sectors understood by the decision-makers as insiders because of their territorial status" Clift and Woll , As in the case of economic nationalism, economic patriotism can be defensive protectionist or mercantilist or liberal pursuing market opening or international integration.

Rather than delving into an elaborate semantic discussion about the differences between nationalism and patriotism, I treat both terms as synonymous and will henceforth use the term economic nationalism in order to describe the domestic ideational context for economic policy-making in South Korea. Economic nationalism combines a constructivist approach from International Relations with arguments from historical institutionalism in Comparative Politics in order to explain the economic policy choices of specific countries.

Whereas the varieties-of-capitalism literature, as an important part of contemporary historical institutionalism, tries to account for the formation and evolution of different economic regimes using the concepts of historical embeddedness and the path dependency of formal institutions Hall and Soskice , a constructivist approach provides an ideas-based account of the formation of national economic institutions, both formal and informal Blyth In the case of South Korea, national identity emphasizes a type of defensive, pure-blood nationalism Shin ; Moon and Suh Given the country's long history of defending itself against various foreign invasions and occupations, usually from Japan, an "Us" versus "Them" mentality developed during the Japanese colonial period in the early 20th century, which later morphed into an ethnic nationalism.

This type of nationalism was actively utilized by President Park Chung Hee to foster a sense of unity and pride in the country in order to encourage economic development and thereby transcend Korea's tragic history Rhyu Most visibly in the recent past, the Korean national identity manifested itself in reaction to the financial crisis. Both the public and the private sector appealed to people's sense of nationalism and collective identity in order to make sacrifices, e.

On the other hand, a "super-committee" was formed, made up of trade unions, chaebol leaders, and the government, that produced a grand bargain over chaebol reform and labor policy reforms in just twenty days. These examples demonstrate that economic nationalism is i not only tied to protectionist measures, and ii demonstrates its main social purpose as a "highly effective social glue that can be used whenever the family heirloom starts to crack" Tudor , Similarly to other countries in East Asia where economic nationalism and a developmental mindset emerged in the aftermath of the Second World War, informal barriers to international capital mobility continue to exist in South Korea.

I do not wish to suggest that the search for domestic economic stability and the subsequent application of capital controls is only possible in countries with a long history of economic nationalism. Certainly, a culture of pragmatism within the country's economic elites, the specter of past crises looming in the public's mind, and the wiggle-room conceded by international actors and trade agreements shape the ability and legitimacy of domestic policy-makers to apply regulations on cross-border financial transactions Gallagher b. However, I argue that economic nationalism provides the informal institutional foundation on which an autonomous capital account policy can be pursued.

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In other words, economic nationalism makes specific policies possible, though it does not cause them in any direct way Wendt ; Helleiner and Pickel To put it more generally, a state's strength of national identity shapes its foreign economic policies Abdelal ; Tsygankov The stronger the identity, the more likely it is that a specific developing country will regulate international capital flows in order to preserve domestic economic stability. In order words, economic nationalism is not an indispensable factor for the application of capital controls in the first place.

However, the depth and longevity of these measures depend on the strength of national identity.

As a vignette for the heuristic value of my argument about the role of economic nationalism for foreign economic policies, I briefly discuss the Lone Star case. While the general attitude towards foreign investors and private equity funds was positive in the context of the "fire-sale period" during the late s, the mood turned dramatically as the Korean economy recovered its strength in the early s.

As revealed later by deliberations in a judicial court, KEB was not insolvent, as was claimed by its management when the bank's shares were offered for sale. In addition, due to the chaebol 's control over mass media, especially newspapers, criticisms of foreign investors in general and Lone Star in particular found prominent outlets. Economic nationalism reared its head and regained its strength among the public outcry over the "treacherous" foreign investors that use corruption and manipulation in order to acquire national assets.

As a result, the public sentiment turned sour on foreign investors, especially private equity funds. To top it off, the U. The traditional social cleavage of "Us" versus "Them" with reference to economic nationalism and anti-foreign capital sentiment deeply rooted in Korean society made a partial comeback in the context of the Lone Star scandal. In turn, re-regulating short-term capital flows has received social approval as a means to defend the "national interest" against foreign interests.

As I mentioned earlier, since the s economic policy-making in South Korea has been profoundly shaped by the complex relationship between the state and the large conglomerates known as chaebol. The latter were propped up by the state as vanguards for fast economic growth during the military dictatorships and their democratic successor regimes from the early s to the mids Kim This symbiotic relationship unraveled in the context of the Asian financial crisis when the chaebol 's reckless borrowing behavior, fostered by the process of asymmetric financial liberalization under the Kim Young Sam government, led the country to the brink of economic collapse in The chaebol fell into public disrepute, being the principal target of blame for causing the crisis.

Almost all major Korean banks are now foreign-controlled.

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At any rate, state-business relations during the second half of the s until the present day look different from the heydays of the Asian crisis. The chaebol have recuperated at least some of their traditional standing in the Korean economy during the last decade. In fact, their economic power began to grow back after the immediate crisis period had passed.

As in the years before the crisis, the chaebol have become "too big to fail". Their market power and thus their economic interests are simply too overwhelming for the government to ignore. Despite attempts to reign in their dominant position via the political agenda of "economic democratization", some analysts speak of a "second chaebol republic" when describing South Korea's contemporary political economy Kalinowski At the same time, the financial sector's domestic expansion has stalled.

However, since the mids, the ratio has remained unchanged Korea Joong Ang Daily b.

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Naturally, capital account policy is affected by this development, especially in terms of the different interests of the export-oriented and the financial industry in terms of maintaining international competitiveness Frieden Exporters are concerned about a competitive, i. However, as the unfettered flow of international capital undermines the goal of exchange-rate stability, the two sectors end up on different sides when it comes to capital account policy. While exporters certainly do not argue in favor of a closed capital account and want to preserve access to foreign financing needs, they fear that massive capital inflows lead to exchange-rate appreciation and thus to declining export revenues.

Exporters thus support government control of capital inflows for the sake of preventing exchange-rate appreciation and thus maintaining export competitiveness. The chaebol 's entry into the financial or banking sector is officially restricted. As explained earlier, traditionally banks were controlled by the state for the provision of directed credit to the private sector. The privatization wave of the banking sector after the Asian financial crisis led to an influx of foreign investors, foreign private equity funds and commercial banks such as Citibank, taking over bankrupt domestic banks in fire sale deals.

However, the overwhelming majority of the chaebol 's revenues stems from their involvement in manufacturing, not the financial industry. To be clear, the chaebol 's support for the regulation of cross-border financial transactions somewhat softened after the financial crisis during the late s.

This is due to the fact that they began to get involved in the carry trade for their own profit, as the interest rate differential was so lucrative. Thus, government regulations of international capital flows caused them serious material damage. As a result, one of the post financial crisis regulations included caps on forward contracts between banks and exporters relative to their export receipts Gallagher b. In sum, while exporters benefit from regulating cross-border finance in terms of curbing exchange-rate volatility, these measures can also limit their access to finance.

As a result, their support for capital controls is not unambiguous. At any rate, the primary engine of economic growth in South Korea remains the export-oriented manufacturing industry. This situation contrasts with the finance- or services-based development strategy of other East Asian "tiger" or "miracle" countries such as Singapore and Hong Kong.


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In the latter case, government intervention in international capital flows is anathema to the success of the chosen development model. Conversely, for the economic growth model of South Korea, a stable and competitive exchange rate is an essential policy goal of the government Interview with Choong-Yong Ahn. This can perhaps best be illustrated by the government's strategy to convert South Korea into an East Asian financial hub.

The initiative was launched during the Roh Moo Hyun administration in January as part of the so-called East Asian business hub strategy. However, converting Seoul into another Hong Kong is incompatible with a bank-based financial system. The financial hub strategy was thus doomed to fail, as no substantial movement away from a bank-based to a market-based financial system was undertaken; therefore, the essential prerequisite for being a financial hub was missing in the first place.

In addition, a deep-seated skepticism continues to surround the opening of the domestic financial sector to foreign investors. Later on that same day, the head of a large Korean bank stated that limits should be placed on foreign investment in his institution The Wall Street Journal , July 26, The aforementioned case of Lone Star's acquisition of KEB and the subsequent trial over manipulated share prices led the state regulator, the Financial Services Commission, to prevent the U.

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Unsurprisingly, the chairman of KB Financial Group referred to an imbalance in growth of the financial sector as compared to the trade sector and a lack of development in nonbanking and capital markets as major challenges for the financial industry in Asia Korea Joong Ang Daily a. In this paper, I set out to understand the political dynamics of contemporary capital account policy in South Korea.

In particular, I sought to explain why capital account liberalization, in spite of substantial advances towards opening over the course of the last twenty years or so, has not been complete and sustained over time. The recent reintroduction of controls on capital inflows in the context of the global financial crisis of the late s is just the latest reminder of the uneven trend of capital account policy in South Korea after the alleged end of the state-led development model upon the ashes of the Asian financial crisis in I have argued that domestic informal institutions stand in the way of a complete and sustained capital account opening process.

Two factors constitute what I call national economic identity in South Korea's political economy in general, and capital account policy in particular. Economic nationalism as the ideational legacy of the developmental state model considers foreign capital, especially short-term capital flows, as inherently suspicious and potentially detrimental to national development purposes.

The crucial role of large conglomerates, the chaebol , in South Korea's contemporary political economy is the material remnant of the developmental state impacting economic policy in general, and capital account policy in particular. Constituting the bulk of the country's export-oriented sector, the chaebol are keenly interested in exchange-rate stability. Despite attempts by the current Park Geun-hye administration to reign in their power under the slogan of "economic democratization" and efforts by the domestic and international financial industry to assert itself, the country's economic wellbeing is inextricably linked to the success of the chaebol 's business strategy.

As a result, capital account policy will need to continue to serve the main interests of these companies, while preserving a degree of autonomy for the government to entertain measures for the sake of macroeconomic stability that do not correspond to the particular interests of the export-oriented sector.

Many observers have claimed that the developmental state model disappeared with the Asian financial crisis of the late s. Indeed, South Korea's political economy has undergone dramatic changes at the formal institutional level towards increased opening since , which, in turn, form the basis for the claim that the developmental state has disappeared.

However, I have emphasized the need to focus on the informal institutional level, where the legacies of the developmental state are still visible today. Looking only at formal changes in order to postulate the end of the developmental state risks ignoring its informal yet powerful residues in contemporary South Korea.

As a result, the reports of the death of the developmental state are, at best, short-sighted and, at worst, greatly exaggerated. Export-oriented developing countries, better known as emerging markets, continue to have the ability to preserve significant room to manoeuvre in terms of economic policy despite global trends and pressure towards liberalization.

Yet, in order to unearth this considerable policy space, the academic literature in international political economy needs to look beyond formal domestic institutions. This paper has shown that the crucial factors for explaining the divergence from global monetary norms lie at the informal level of domestic policy-making in various parts of the developing world Leiteritz ; Gallagher a. However, additional empirical, comparative studies involving a wider range of emerging economies are needed in order to corroborate the findings from this single case study.

Haggard , Abdelal, Rawi.

follow url National Purpose in the World Economy. Post-Soviet States in Comparative Perspective. Ithaca: Cornell University Press. Abdelal, Rawi, Yoshiko M.