In postwar economic history, South Korea has been regarded as a model case for the developmental state in the Global South. The national government, not the market, assumed the role of allocating resources to underpin the export-oriented economic growth strategy. Accordingly, the financial sector was suppressed merely to mobilize capital for the industrialization undertaken by Chaebols. Then, the 1997 Asian Financial Crisis invalidated the financial repression, giving way to the sweeping reforms introducing market-oriented policies in the financial market. After more than two decades, weathering away the challenges of the 2008 financial crisis and the COVID-19 pandemic, South Korea stands one of the most financialized economies. Financial Liberalization and Economic Development in Korea, 1980–2020 presents a verdict on the period of deregulation. This meticulous empirical study examines the country’s financial liberalization experience, with a specific focus on the post-1997 period, to assess its “effect on growth, efficiency, equity, and financial stability” (p. 274). In doing so, it not only offers a detailed analysis of South Korea’s changing economic structure but also contributes to extensive literature on financial development and economic growth by questioning the validity of the claimed benefits from “the transition to a liberal financial system” and the financial deepening (p. 1).

This vital contribution to the recent history of the Korean economy begins with an extended account of the planned financial liberalization since 1980. It is often mistakenly considered that market-oriented policies such as bank privatization and interest rate deregulation were introduced in the aftermath of the 1997 crisis. Yet, the early liberalization shows interested readers that there had been internal efforts to incorporate liberal creed in the national economic management in the new military government. Authors attribute the failure in the 1980s to the unpreparedness of policy markers “to forsake their penchant for interventionism” (p. 5).

Chapters 2–7 scrutinize the way in which the liberalization changed the financial behaviors of households, nonfinancial firms, the banking industry, and financial intermediation industries. Each chapter exhibits a stylized structure of a review of relevant literature, explanations of data sets, and the results. While the reforms led to the growth of financial markets, authors find little evidence for enhancing allocative efficiency by attracting foreign capital. Still, the oligopolistic structure of the banking industry remains as intact as in the preceding period, with a smaller market share of foreign institutions. In this regard, while South Korea had successfully implemented reforms, the liberalization did not meet the expectation of efficiency and resilience of the economy.

Now authors testify whether the financial deepening benefited the economy by examining its impact on growth, macroeconomic stability, and distributive equity. The empirical results indicate that “there is no reliable evidence” that it met expectations of improvement (p. 105). From the experiences of the crisis in 1997, banks and nonbank financial institutions “deepened the aversion to risk taking and debt financing” to provide “financial support for industrial borrowers” (p. 140). When large corporations migrated to the stock market and increased their reliance on internal savings, they entered the consumer and mortgage loan markets. With the deregulation of consumer lending in the mature economy with the growing weight of the service sector in GDP, the expansion of household borrowing created a housing market bubble. Authors conclude that such inefficiency gave rise to a sustained decline in growth and productivity. It is also understood that capital inflows into speculative property booms tend to destabilize the economy. Regarding income distribution, the reform did not bring about changes in financial institutions’ practices to favor high income households to limit “access by disadvantaged borrowers” (p. 156). The discrimination and the continuing rise in housing price enlarged the income gap by allowing the rich to accumulate substantial capital gains. The analysis confirms “what has become conventional wisdom (and a political issue) – that finance benefits only the rich in Korea” (p. 280).

The following section calls for the consolidation of financial regulatory authorities. In a liberalized system of deregulation and market opening after the 1997 crisis, the government introduced a unified regulatory system to safeguard financial stability against financial imbalances. In their review of the credit control measures to mitigate boom-and-bust cycles in the housing and real estate markets from 2002 to 2018, the authors suggest the ineffectiveness of macroprudential policy owing to its lack of coordination with the monetary policy of the central bank. At the same time, they admit the risk of undermining the independence of the central bank.

In chapters 13–16, the authors depict South Korea’s 1997 and 2008 crises as capital account ones, in which the country fell victim of a high degree of volatility of capital flows. In a globalized financial system, the experience implies the vulnerability of small open and emerging economies and the limits in the scope of micro- and macroprudential regulations. The authors extend the study to the economic and financial consequences of the COVID-19 pandemic, whose effects are still too early to evaluate.

Overall, this monograph provides a significant contribution to the recent financial development of South Korea. The empirical study invalidates the conventional wisdom regarding the financial liberalization since 1997, particularly on distributive equality, and shows the limits of policy measures of national governments against financial instability in the globalized financial system. It offers a reference for other emerging economies poised to adopt financial liberalization. Given its quantitative focus, it leaves a task to shed light on qualitative aspects. A close look at the debate and contestation among various interest groups in the policymaking process of the government would facilitate our understanding of the political economy of South Korea’s financial liberalization. In this regard, it is also worthwhile to question the assumption of externally imposed financial reforms in the aftermath of the 1997 financial crisis.