Financial liberalization or state capitalism? The developmental state and the special purpose bond market in South Korea

ABSTRACT

South Korea's state-guaranteed bond market was nearly half the size of its sovereign bond market in 2022, and in the early 2000s, it was nearly twice the size of the latter. What explains the overwhelming prominence of this fixed-income market? This paper finds that the prominence of this market is a path-dependent consequence of developmental legacies and the Asian Financial Crisis. State-guaranteed bonds allowed the state to circumvent conditionalities that limited the state's ability to access domestic savings for policy objectives and helped shield the newly established sovereign bond market from premature supply pressure. This finding demonstrates that the state not only supports or creates markets but also uses markets to maintain its influence against external pressure. It also explains how the South Korean state was able to maintain its developmental policies after market liberalisation by tracking the post-crisis flow of domestic savings.

KEYWORDS:

• Developmental state
• financial crisis
• sovereign bond
• state guarantee
• South Korea

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This is not to say, as Panizza and Presbitero (2013) also denote, that debt increases cause or deter growth. Rather, this is to point out that advanced economies tend to be in larger piles of debt due to thicker social protection and cheaper access to capital, as figure 3 shows.

2 Data suggests that Korea spends far below the OECD average on social spending. See OECD (2023)

3 Korea spends at around 14.8% of its GDP for social spending as of 2022, while that for low-income economies remains at 1.1% as of 2021. (OECD, 2023; ILO, 2023)

4 These numbers are calculated from separate data sets that show the total size of the special purpose bond market and the NPS’s investments in the years observed. (NPS, 2005; MOEF, 2012b)

5 The Korean Development Bank (KDB) and the Export-Import Bank of Korea (KEXIM) were already independently issuing debt prior to the reforms that followed the AFC. However, just like the numerous types of sovereign debt that were issued prior to the crisis, they were forcefully consumed by financial institutions and had non-market yields. (MOEF, 2012b)

6 The difference between the two figures comes from the fact that figure 4 counts only publicly traded debt for public financial institutions while figure 2 counts both traded and non-traded (i.e. transfers from the government) that the institutions have.

7 Japan’s FILP related agencies now issue their own bonds in the market, resembling that of Korea’ special purpose bonds, but they are small in number and still the bulk of their finances come directly from sovereign bond revenues. (Ministry of Finance Japan, 2023)

8 See footnote 5 and the related paragraph for evidence.

Additional information

Notes on contributors

Yaechan Lee

Yaechan Lee is Associate Professor at Ritsumeikan Asia Pacific University, Japan. Contact [email protected] for the paper.