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Contrasting the political responses to financial globalization in Japan and South Korea Wood, Jennifer

Abstract

State responsiveness to globalization depends on flexible and adaptive institutions. States can oversee and plan economic activity in an era of financial deregulation so long as they have this adaptable institutional framework. Japan's response to pressures for administrative reform throughout the 1990s illustrates that state capacity can be been preserved, even when faced with domestic political constraint. As a counterexample, I will highlight how South Korea's (henceforth Korea) responses initially diminished the state's traditional institutional capacity, but that the most recent course of reforms (post 1997 crisis) has revived the state's role, though under a different set of goals. The initial stimulus to change is global constraint, by which I mean international pressure in the form of increased foreign investment—capital and portfolio flows—to open financial markets and increase industrial competition and transparency. Another stimulus falls with domestic political factors, which can be characterized by the vested conservative coalitions that maintain control in Japan's Diet, and the political changes under Korea's democratic transition. The policies that came forth from each case reveals out two contrasting responses. In Japan, we see that administrative and financial reforms have taken place in response to globalization. Nevertheless, these substantial changes have been continuously blocked by deeply entrenched domestic political interests. This in turn, has rendered the developmental state stagnant. In Korea, we will examine how globalization, combined with simultaneous democratization, forced the state down a rapid path of liberalization. The emergence of a region-wide financial crisis however, required state-led responses and thus resulted in a new role for the state—where it plays a central role in enforcing market-oriented policies. From these different responses we discover that global pressures were managed or mediated differently in each case. This paper concludes that globalization has had different effects in Japan and Korea—namely that the developmental state has been preserved in the former but dismantled in the latter. In this respect, Japan continues to muddle along, stifled by the inability to pass significant reform measures, but that change is ultimately occurring, notably in the practices of big business. In Korea, the state has turned towards marke-tbased reforms, but has continued to play a significant role formulating industrial policy.

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