Manifesting the Embedded Developmental State: The Role of South Korea’s National Pension Service in Managing Financial Crisis

Financial liberalization has noticeably reduced the role of the state in effectively influencing the economy in post-developmental states, yet many studies have found that the legacies of the developmental model continue to influence the policies, institutions and socioeconomic challenges that are faced by the states that previously adopted the model. These studies, however, do not clearly identify when and how such legacies may be manifested in state behavior.

Studies on the East Asian developmental state model have focused on identifying the reasons behind the emergence of the model and whether it still persists. While some argue that developmental states have lost their defining characteristics as the state significantly lost its control over capital, others identify clear imprints of the developmental legacies in policies and challenges that post-developmental states face. Both arguments seek to make sense of a situation in which the state’s policy instruments are now relatively more limited, significantly constraining the extent of the legacy’s impact. The political economy of South Korea has been of particular interest to scholars in this debate.

A new journal article in the Review of International Political Economy by Yaechan Lee and William W. Grimes argues that financial crises can serve as a trigger to reveal the legacy of the developmental model in institutions that were previously established and utilized for developmental objectives. The authors conduct a rigorous case analysis using historical and market data on the crisis responses of South Korea’s public pension fund.

The article finds that South Korea’s developmental legacy remains passively embedded in the governance structure of the pension fund in non-crisis times but manifests during financial crises. The authors identify the enduring strong control of the Korean state over the governance structure of the National Pension Service (NPS) as evidence of the developmental legacy. They also contend that the legacy is not manifested in non-crisis times due to the market constraints that prevent extensive state intervention. However, by analyzing the NPS’s crisis response, they find that such limitations have been substantially lifted, as the NPS proactively participated in the state’s anti-crisis response as a significant countercyclical investor. This contrast indicates that the developmental legacy did not wane, but rather remains embedded in the institutions of post-developmental states.