The Governance of Financialization in Latin America and East Asia [1 ed.] 1032540370, 9781032540375

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“Have the governments of subordinated national capitalisms simply obeyed the structural forces powering global financialization? Using a well-calibrated set of nested comparisons, Nagel masterfully explains why Chile and South Korea regulated international financial flows while Argentina and Japan did not. At the core of this variation in divergence lies the political economy of domestic expertise on financialization, whereby state apparatuses find in financial expertise a source of agency for dodging convergence pressures and charting alternative policy pathways that have been obscured by the literature. In turn, this empowering expertise interacted with contextual factors to shape the final outcomes of financialization governance. By unpacking the mechanisms that shaped divergence in the articulation of this agency in the realm of financial governance, this superb book gives us a well-deserved break from decades of political economy scholarship theorizing the mechanisms of convergence under globalized financialization. Nagel’s book is an extraordinary achievement that revalues high-quality qualitative work and takes forward the august cross-regional comparative tradition comparing Latin America and East Asia that gave us the classics of development scholarship penned by Peter Evans or Atul Kohli.” Cornel Ban, Copenhagen Business School, Denmark “Few issues have attracted as much scholarly and public attention as the autonomy of states under conditions of financial globalisation. Yet Nagel sheds new light on the thorny relationship between states and markets by pointing to the role of expertise and its strategic use by domestic governments. This book will certainly be of interest to all those who care about the changing role of state capacity and, importantly, outside the Western world.” Manuela Moschella, Scuola Normale Superiore, Italy “How to explain the continued divergence of national financial policies in the face of waves of financialization? Pointing to the agency of experts and the power of ideas as crucial differentiating variables, this book offers a succinct and fascinating account of the different fates of Argentina, Chile, Japan, and South Korea following the initial liberalization of the 1970s. Well researched and carefully argued, this book is a major contribution by an up-and-coming scholar.” Matthias Thiemann, Sciences Po, France “This thought-provoking book sheds novel light on how countries frame financialisation. It highlights a key factor — expertise — that enables governments to exert domestic agency in resisting convergence in the global economy. This work is theoretically sophisticated and empirically rich – it is a required reading for anyone interested in the governance of finance and, more broadly, comparative and international political economy.” Lucia Quaglia, University of Bologna, Italy

The Governance of Financialization in Latin America and East Asia

The Governance of Financialization in Latin America and East Asia analyses how states in these areas have adopted different monetary, financial, and foreign exchange policies to govern financialization, which have induced varying levels of state control over financial markets. The book analyzes the puzzling observation of policy divergence by investigating how countries have reacted differently to major financial crises since the 1970s. It shows how Argentina and Japan selected a governance approach to financialization that followed Western prescriptions by propelling unregulated financialization; but also how Chile and South Korea, by contrast, crafted policies to reduce the negative effects of financialization on economic development and financial stability. The book identifies variegated expertise in central banks, ministries of finance, expert commissions, and research institutions that has informed policymaking across Argentina, Chile, Japan, and South Korea since the 1970s. It then demonstrates how governments have used experts to achieve diverse political objectives and explains how governments can use experts to enhance state agency to counter globalization pressures. This book will appeal to scholars of International Political Economy, comparative politics, economics, sociology, development studies, and Latin American and East Asian history. It will also be of interest to economists and policymakers who want to safeguard financial stability and promote economic growth. Max Nagel is a Postdoctoral Researcher at the IAW Institute for Labour and Economy at the University of Bremen, Germany.

RIPE SERIES IN GLOBAL POLITICAL ECONOMY Series Editors: Susanne Soederberg (Queen’s University, Canada), Adrienne Roberts (The University of Manchester, UK), Samuel Knafo (University of Sussex, UK) and Naná de Graaff (Vrije Universiteit Amsterdam, the Netherlands).

For almost two decades now, the RIPE Series in Global Political Economy published by Routledge has been an essential forum for cutting-​edge scholarship in International Political Economy, which we understand to be a broadly defined area of research that may cut across other disciplines. The series brings together new and established scholars working in critical, cultural and constructivist political economy. Books in the RIPE Series typically combine an innovative contribution to theoretical debates with rigorous empirical analysis. The RIPE Series seeks to cultivate:

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The Governance of Financialization in Latin America and East Asia Empowering Expertise Max Nagel

First published 2024 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2024 Max Nagel The right of Max Nagel to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-​in-​Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Nagel, Max, author. Title: The governance of financialization in Latin America and East Asia : empowering expertise / Max Nagel. Description: Abingdon, Oxon ; New York, NY : Routledge, 2024. | Series: RIPE series in global political economy | Includes bibliographical references and index. Identifiers: LCCN 2023023316 (print) | LCCN 2023023317 (ebook) | ISBN 9781032540375 (hardback) | ISBN 9781032540399 (paperback) | ISBN 9781003414858 (ebook) Subjects: LCSH: Financialization–Government policy–Latin America. | Financialization–Government policy–East Asia. Classification: LCC HG173 .N243 2024 (print) | LCC HG173 (ebook) | DDC 332–dc23/eng/20230706 LC record available at https://lccn.loc.gov/2023023316 LC ebook record available at https://lccn.loc.gov/2023023317 ISBN: 978-​1-​032-​54037-​5 (hbk) ISBN: 978-​1-​032-​54039-​9 (pbk) ISBN: 978-​1-​003-​41485-​8 (ebk) DOI: 10.4324/​9781003414858 Typeset in Times New Roman by Newgen Publishing UK

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Contents

List of figures List of tables Acknowledgments List of abbreviations and acronyms 1 State agency in times of globalization

xii xiv xv xvii 1

1.1 Central banks as depoliticized policy institutions  3 1.2 Financialization after the fall of Bretton Woods: comparing the four cases  4 1.3 Political agency and expert agency  6 1.4 Structure of the book  9

2 Explaining policy divergence and policy change

14

2.1 Dissecting policy change under globalization: essential theories  14 2.2 Empowering expertise to govern financialization  20

3 Chile: Preserving dictatorships and democracies through financial stability 3.1 Chile under developmentalism and Pinochet’s turn to the Chicago Boys in 1973  27 3.2 Pinochet under pressure: undogmatic policy change under Hernán Büchi  29 3.3 Concertación’s rejection of developmentalism and unexpected alignment with Pinochet’s policies  32 3.4 Developing policies for maintaining financial stability  38 3.4.1 Monetary policy  39 3.4.2 Financial policy  41 3.4.3 Foreign exchange policy  51 3.5 Conclusion  53

25

x  Contents

4 Argentina: Ideologies and failed policy experiments

59

4.1 Developmentalism and financialization during the Proceso  60 4.2 Cavallo’s Convertibilidad experiment  62 4.2.1 Monetary policy and foreign exchange policy  65 4.2.2 Financial policy  65 4.3 Néstor Kirchner: forging compromise  69 4.3.1 Monetary policy  74 4.3.2 Financial policy  75 4.3.3 Foreign exchange policy  75 4.4 Fernández de Kirchner’s return to developmental policies  77 4.4.1 Monetary policy  79 4.4.2 Financial policy  80 4.4.3 Foreign exchange policy  81 4.5 Macri: reinstating neoliberalism  81 4.5.1 Monetary policy  83 4.5.2 Financial policy  83 4.5.3 Foreign exchange policy  85 4.6 Conclusion  85

Intermediary section

91

5 South Korea: Overcoming authoritarian developmentalism, safeguarding financial stability

93

5.1 South Korean developmentalism (1945–​93) and financialization under Kim Young-​sam (1993–​98)  94 5.2 Developing a financial stability policy framework: post-​1998  100 5.2.1 Monetary policy  106 5.2.2 Financial policy  108 5.2.3 Foreign exchange policy  112 5.3 Lee Myung-​bak’s turn  113 5.3.1 Monetary policy  118 5.3.2 Financial policy  118 5.3.3 Foreign exchange policy  119 5.4 Conclusion  119

6 Japan: Government control through institutional reforms 6.1 Japanese developmentalism (1945–​82) and initial financial liberalization in the 1980s  127 6.2 Hashimoto and Koizumi’s neoliberal reforms  132 6.2.1 Monetary policy  137 6.2.2 Financial policy  138 6.3 Expert agency under the compromise governor Shirakawa  141 6.3.1 Monetary policy  143 6.3.2 Financial policy  146

125

Contents  xi 6.4 Abe’s monetarism  147 6.4.1 Monetary policy  149 6.4.2 Financial policy  150 6.4.3 Foreign exchange policy  151 6.5 Conclusion  152

7 How government–​expert relations produce state agency and propel divergence 7.1 7.2 7.3 7.4 7.5

158

Discussion of the findings from the comparative analysis  159 Empirical and theoretical contributions  160 Alternative and complementary explanations  166 Policy implications  170 A new era? COVID-​19, Ukraine, China, and the return of inflation  173

Bibliography Index

176 204

Figures

3.1 Dissents by board members of Chile’s central bank concerning decisions made by the board (in percent) 3.2 Frequency of word occurrence in speeches of policy board members of Chile’s central bank, divided into governor tenures (in percent) 3.3 Chilean sovereign debt securities, local and external (USD million) 3.4 Chile’s private pension fund investments (CLP million) 3.5 Chilean government bonds held by pension funds, foreigners, and others (CLP billion) 3.6 Composition of Chile’s private pension fund investments: securities of the public sector, financial corporations, non-​financial corporations, and foreign investments (in percent) 3.7 Net derivatives positions of Chilean pension funds and insurance companies in the local market (domestic currency against foreign currency, USD million) 3.8 Development of Chile’s corporate bonds outstanding (CLP billion) 3.9 Chilean central bank reserves and government reserves (USD million) 4.1 Current account of Argentina (USD million) 4.2 Foreign debt securities on liability side of non-​financial corporations, financial corporations, and the government in Argentina (USD million) 4.3 Lending by national private banks to public and private sectors in Argentina, in percent of total assets 4.4 Foreign exchange reserves of Argentina’s central bank (USD million) 5.1 South Korean banks’ short-​term net-​external debt (USD million)

37 39 45 47 48

48 49 50 52 64 68 76 76 97

Figures  xiii 5.2 Frequency of word occurrence in speeches of policy board members of South Korea’s central bank, divided into governor tenures (in percent) 5.3 Financial assets of private national banks, public financial institutions, and domestic branches of foreign banks (KRW billion) 5.4 Size of South Korean bond markets (KRW billion) 5.5 Frequency of word occurrence in speeches of policy board members of South Korea’s central bank, divided into governor tenures (in percent) 6.1 Total assets, national commercial banks and non-​banks in Japan (JPY 100 million) 6.2 External liabilities of domestic banks in Japan (JPY 100 million) 6.3 Net external financing by domestic non-​financial sector (JPY 100 million) 6.4 Japanese current account (JPY 100 million) 6.5 Frequency of word occurrence in speeches of policy board members of Japan’s central bank, divided into governor tenures (in percent) 6.6 Investments of the financial assets of Japan’s total pension system (JPY 100 million) 6.7 Frequency of word occurrence in speeches of policy board members of Japan’s central bank, divided into governor tenures (in percent) 6.8 Investors of Japan’s central government securities and FILP bonds (JPY 100 million)

106 111 112 117 129 129 130 130 135 140 143 154

Tables

2.1 3.1 3.2 3.3 3.4 3.5 4.1 4.2 5.1 5.2 5.3 6.1 6.2 6.3 6.4 7.1 7.2

Overview of theories explaining policy change Background of Chile’s central bank governors since 1989 Policies adopted by Chile’s central bank since the 1990s Selected regulations of Chile’s 1986 General Banking Law Chile’s new regulatory instruments adopted since the late 1990s Chile’s central bank foreign exchange interventions Background of Argentina’s central bank governors since 1989 Regulatory changes in Argentina’s financial system under President Macri Background of South Korea’s central bank governors since 1998 Use of South Korean public financial institutions to stabilize the financial system South Korea’s new financial regulations adopted after a spike in international financial inflows following the 2007 financial crisis Typology of ideas informing policymaking in Japan Background of Japan’s central bank governors after 1998 Japan’s policy responses to the 2007 crisis International swap lines of the Bank of Japan Core features of monetary, financial, and foreign exchange policies in Chile, Argentina, South Korea, and Japan Moments of agency in the case studies

24 35 42 44 46 52 70 84 103 110 119 126 141 144 145 161 171

Acknowledgments

Many encounters have shaped the process of this work, which began in 2017 with the start of my PhD at the Faculty of Political and Social Sciences, Scuola Normale Superiore. Without the conversations I had with academics and practitioners in Asia, Europe, and Latin America, this book would have been different and certainly less pertinent. First and foremost, I want to express my gratitude to my supervisors, Manuela Moschella and Matthias Thiemann, who have helped me to strengthen the theoretical framework. I benefited a lot from the insights of Lucia Quaglia and Cornel Ban, whose generous and encouraging comments helped to finalize my book. Special thanks to the two referees, whose critical and stimulating comments gave the book the final touch. Sam Knafo and the other editors of the RIPE Series in Global Political Economy provided me with encouragement and numerous remarks that helped guide me through the publication process. The conversations I had and the seminars I attended at Scuola Normale with Laszlo Bruszt, Donatella della Porta, Klaus Eder, Philipp Genschel (EUI), Manuela Moschella, David Natali, Mario Pianta, Andrea Pritoni, and Philippe Schmitter have helped me to reconsider various theoretical and methodological aspects. Continuous debates with my peers at SNS further enriched my academic and personal experience in Florence, particularly with Alper Almaz, Derin Atiskan, Christian Buhl-​Madsen, Giorgia Concetti, Aleksei Gridnev, Mila Kodogo, Karlo Kralj, Måns Lundstedt, Angelo Panaro, Pálma Polyák, Martín Portos, Tobias Reinhardt, and Nikolas Vieira. Philippe Schmitter and Mario Pianta have supported me in gaining access for my field work in Argentina and Chile. I particularly thank Carlos Acuña for his hospitality and assistance in Buenos Aires. Unfortunately, a research stay at UNECLAC in Santiago and at IIEP UBA CONICET in Buenos Aires did not work out because of the COVID pandemic. Nevertheless, I would like to thank José Gabriel Porcile Meirelles, Andrés López, and Mario Pianta for coordinating a trip that never happened. During my stints at the Center for European Studies at Sciences Po, encounters with Matthias Thiemann, Cornelia Woll, Oliver Levingston, Mattia Lupi, and other scholars have further enriched my empirical analysis. I also

xvi  Acknowledgments highly appreciate the encouraging feedback I received from Martino Comelli, Nils Öllerich, and other members of the Political Economy Research Group during my stay at CEU in Budapest, as well as from Timo Seidl, Alexandra Zeitz, and other colleagues from the European University Institute’s Political Economy Working Group. Exchanges with Leon Wansleben and Lupe Moreno (Max Planck Institute) in Cologne gave me further inspiration. Comments by Ilja Viktorov and Ville-​Pekka Sorsa further helped me refine my analysis of central banking. Moreover, I met excellent scholars and great people at events of INET’s Young Scholar Initiative. Ongoing conversations with them were of high value to me, particularly with Christiano Duarte, Andreas Lichtenberger, Nathalie Marins, and Cecilia del Barrio. A special thanks is due to Jared Sonnicksen, who gave me valuable advice at critical junctures. I am deeply grateful for the time my interview partners devoted to sharing with me their experience and insights into political and policymaking processes. During my research stays in Argentina and Chile (fall 2018) as well as Brazil, Japan, and South Korea (spring 2019), I could gather valuable insights into relevant processes and background conditions. This thesis would not have been possible without the generous time of my 27 interview partners. I am grateful for the generous PhD stipend that I received from the Scuola Normale. Lastly, I would like to thank my partner Ulrike and my friends. Their unwavering support in my homes in Köln and Vienna as well as during my trips in Europe, Asia, and Latin America gave me the energy and confidence to write this book. I dedicate the Japan chapter to Marius Birk, a fabulous person and excellent scholar who passed away in February 2021. Finally, thank you, Ulrike, for being such a wonderful and supportive companion in my life –​ I love you! For their permission to use part of the material that was previously published in the form of articles, I thank Taylor & Francis and Oxford University Press. Chapter 5 is derived in part from the article Nagel, Max., “Advancing policy frameworks to safeguard financial stability in developing and emerging economies: the case of South Korea’s management of international financial flows after 1998,” Cambridge Journal of Economics, 2022, 46:5, pp.1141–​1160, by permission of Oxford University Press, DOI: 10.1093/​cje/​beac003 Chapters 5 and 6 are derived in part from the article “Tilting the playing field: Government strategies to bolster control over policy paths in Japan and South Korea” published in The Pacific Review on 1 December 2022, copyright Taylor & Francis, available online: www.tand​fonl​ine.com/​10.1080/​09512​ 748.2022.21516​41

Ab​brev​iati​ons and acronyms

ABCP asset-​backed commercial paper AFP Administradoras de Fondos de Pensiones ARS Argentine peso ASEAN Association of Southeast Asian Nations BCBS Basel Committee on Banking Supervision BICE Bank for Investment and Foreign Trade BIS Bank for International Settlements CEDIN Certificado de Depósito para Inversión CEFP Council on Economic and Fiscal Policy CEMA Centro de Estudios Macroeconómicos de Argentina CEPAL Comisión Económica para América Latina y el Caribe CEO chief executive officer CIEPLAN Corporación de Investigaciones Económicas para Latinoamérica CLACSO Latin American Council of Social Sciences CLP Chilean peso CMF Financial Market Commission CNV Comisión Nacional de Valores CONICET National Scientific and Technical Research Council CODELCO Corporación Nacional del Cobre de Chile CORFO Corporación de Fomento de la Producción de Chile CP commercial paper DIC Deposit Insurance Corporation DTI debt-​to-​income ECLAC Economic Commission for Latin America and the Caribbean EMEAP Executives’ Meeting of Asia-​Pacific Central Banks ESSF Economic and Social Stabilization Fund ETF exchange-​traded fund FGS Fondo de Garantía de Sustentabilidad FSA Financial Services Agency

xviii  Abbreviations and acronyms FSB FSC FSS G20

Financial Stability Board Financial Services Commission Financial Supervisory Service Forum of 20 large economies for international economic cooperation GDP gross domestic product IADB Inter-​American Development Bank IDES Institute of Economic and Social Development IEERAL Instituto de Estudios Económicos sobre la Realidad Argentina y Latinoamericana IMF International Monetary Fund FIDE Development Research Foundation FILP Fiscal Investment and Loan Program J-​REITS Japanese real estate investment trust JGS Japanese government securities JPY Japanese yen KAMCO Korea Asset Management Corporation KDI Korea Development Institute KDIC Korea Deposit Insurance Corporation KOFEX Korea Futures Exchange KRW South Korean won LEBAC Argentina central bank securities (Letras del Banco Central) LELIQ short-​term Argentina central bank securities (Letras de Liquidez) LTV loan-​to-​value NOBAC Argentine Central Bank Notes (Notas del Banco Central) ODEPLAN Oficina de Planificación Nacional OECD Organisation for Economic Co-​operation and Development PFI public financial institution PFPB Bicentennial Productive Financing Program PhD Doctor of Philosophy PRF Pension Reserve Fund PRO Republican Proposal (Propuesta Republicana) SBIF Superintendencia de Bancos e Instituciones Financieras SEACEN South East Asian Central Banks SEDESA Seguro de Depósitos S.A SEFyC Superintendencia de Entidades Financieras y Cambiarias SIPA Sistema Integral Previsional Argentino SMEs small and mid-​size enterprises SP Superintendence of Pensions SVS Superintendency of Securities and Insurance

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Abbreviations and acronyms  xix UCLA UF URR U.S. UK USD UVA UVI WTO YPF

University of California Unidad de Fomento unremunerated reserve requirements United States United Kingdom United States dollar Unidad de Valor Adquisitivo Unidad de Vivienda World Trade Organization Yacimientos Petrolíferos Fiscales

1 State agency in times of globalization

Since the end of World War II, the world has experienced strong waves of financialization, understood as the growing size of the financial system and the increasingly dominant role it plays in the economy and society (Epstein, 2005, p. 3; Clift, 2014, pp. 241–​242; van der Zwan, 2014; Wansleben, 2020). The collapse of the Bretton Woods system in the early 1970s ushered in a surge of international financial flows combined with the ascent of the shadow banking system (Helleiner, 1996). Financialization processes have been promoted by powerful countries, international organizations such as the IMF, and large global investors that have sought profitable investment opportunities across the globe. Transnational epistemic communities such as the BIS have provided the epistemic norms that served as the ideational underpinnings of a liberal global financial governance regime. These actors driving the processes of financialization are primarily located in the Global North. Less powerful countries, by contrast, have been considered to be in a subordinate position in a global financial system where it is more difficult to maintain control over financialization, as illustrated in the financial crises that occurred in Latin America and Asia in the 1980s and 1990s (Rethel, 2010; Alami et al., 2022). This story ascribes a largely passive role to emerging market and less-​developed economies that are conceived as rule-​takers dependent on powerful core countries and volatile international financial flows. This book offers an alternative account that finds much more agency for the presumably subordinated countries. It finds that they have crafted a myriad of policies to govern financialization processes. For example, it demonstrates how Chile in the early 1980s and South Korea in the late 1990s introduced policies that have served as a bulwark against volatile international financial flows and other unwanted effects of financialization. These have also helped protect them against the 2007 financial crisis that primarily engulfed countries in Europe and North America. This book seeks to analyze this less-​scrutinized part of the recent history of financialization, namely how presumably subordinated countries deploy policies, with varying degrees of success, to offset negative effects of financialization driven by powerful countries in the Western world. DOI: 10.4324/9781003414858-1

2  State agency in times of globalization In pursuing this objective, this book contributes to a prominent question in the fields of international political economy and policy change: To what extent can governments exert domestic agency over policymaking in a globalized and globalizing world? Mechanisms exerting convergence pressure have been extensively researched, leaving observed divergence somewhat understudied (see Clift, 2014, pp. 242–​243; Maxfield et al., 2017). This is astounding, as the empirical data has continuously shown the presence and continuity of policy divergence. Examples include different approaches concerning not only monetary policy, fiscal policy, and financial regulation but also the governance of pandemics and migration. By specifying one mechanism through which policy divergence occurs and convergence mechanisms are at least partially offset, this book seeks to complement theories that cannot fully explain observed policy changes, such as those in Chile and South Korea. This book presents and evaluates a factor that has curiously been largely absent in explanations of policy divergence: expertise. It argues that states can use expertise to enhance domestic agency in managing globalization pressures, namely in molding the governance of financialization. This lack of attention to this function of expertise is surprising in that expertise, by contrast, has been identified as a mechanism for generating policy convergence through transnational epistemic communities and international organizations, which translate dominant Western ideas to replace domestic ones (Pauly, 1998; Wade, 2002; Stiglitz, 2004; Preet, 2009; Babb, 2009; Johnson, 2016). Therefore, the literature implicitly assumes that this mechanism works toward convergence and is, at best, domestically adjusted (see Ban and Blyth, 2013; Ban, 2016). While some scholars found that expertise has helped explain policy divergence, they find that differences are rooted in predetermining, historical legacies (see Campbell and Pedersen, 2014). Conversely, conceiving expertise as a source of agency for inducing policy divergence and creating novel policy paths has largely been absent from the existing literature. The contribution of this book thus lies in analyzing how states use expertise to enhance domestic agency for circumventing convergence pressures. In doing so, it investigates how governments, defined as cabinets composed of the heads of the executive (i.e., ministers), empower different types of expertise at specific times to engender policy change and modify the domestic governance of financialization. By identifying empowering expertise as a source of state agency, this study adds to research contributions that have demonstrated how states have the capacity to shape policymaking to counter globalization pressures and maintain domestic control over policymaking (Weiss, 1998; Thurbon, 2016). Based on the established argument that domestic public policies matter in the governance of financialization, this book seeks to enhance it by assessing the role of empowering expertise as a resource for crafting policies and, thereby, producing agency. The book furthermore draws from the literature on policy ideas to illustrate how ideas shape policymaking, whether in a functional or constructivist

State agency in times of globalization  3 manner. Depending on the type of expertise selected, we should expect policies to diverge. What this strand of literature is missing to a certain extent is that by adopting a bottom-​up approach for tracing the translation of ideas into policies (e.g., Johnson, 2016; Thiemann, 2019), political factors that work from the top down are largely left aside. Investigating the empowerment of expertise by governments via their appointment of experts to key policymaking positions, this book complements this theoretical approach as it analyzes in-​depth the conditions under which expertise becomes consequential. Therefore, we expect that, fundamentally, it is the government’s prerogative to employ expertise that is most suitable for achieving its objectives. To assess the role of ideas in shaping the domestic governance of financialization, this book identifies and investigates, first, the empowerment of specific expertise by governments and, second, the observed policy change. By covering four East Asian and Latin American countries over a long period of time extending from the end of the Bretton Woods system in the early 1970s until 2019, it allows for a better understanding of how and an explanation of why domestic governance of financialization varies across time and space. This book, thereby, contributes to the relatively few but excellent works that bridge the Pacific gap to compare the developmental legacies of Asia and Latin America (Haggard, 1990; Kohli, 2004, 2012; Bresser-​Pereira, 2016). 1.1  Central banks as depoliticized policy institutions This book analyzes multiple institutions that are responsible for governing financialization, including finance ministries, financial regulators, and public financial institutions such as development banks. Nevertheless, central banks are the primary analytical focal point for identifying and analyzing how empowering expertise operates and influences policymaking. Two reasons buttress this choice. First, they are responsible for a range of policies that are central to the governance of financialization, encompassing monetary policy, financial regulation, foreign exchange policy, the regulation of public financial institutions, and the development of financial markets. Central bank policies are thus closely interlinked with the evolution of financial systems (Braun, 2015; Wansleben, 2018; Braun, 2020; Walter and Wansleben, 2020). Second, central banks serve as a prime example of the delegation of policymaking from politicians to experts. The reasoning behind this delegation is rooted in the assumption that central bankers, as neutral experts, will adopt optimal policies. According to this perspective, political influence must be curtailed to a minimum as it would result in policies that are considered suboptimal (e.g., debt monetization, inflation, and financial crises). Given their relatively direct control over policymaking, central banks provide a compelling case for examining the influence of expertise on policies (e.g., see Wansleben, 2022). By studying the empowerment of new expertise, this book assesses the extent to which governments hold sway over central banks despite them being formally autonomous from political influence.

4  State agency in times of globalization 1.2  Financialization after the fall of Bretton Woods: comparing the four cases The unraveling of the Bretton Woods system in 1971 serves as the starting point of the analysis. This system incorporated the Keynesian premise that states should control international trade and financial flows to promote domestic development. It received heavy criticism from right-​wing politicians and neoclassical economists when it was not capable of resolving the fallout from the oil crisis in the 1970s and the resulting stagflation (Hall, 1993). In August 1971, the Bretton Woods system collapsed as a result of President Richard Nixon’s decision to revoke the dollar’s convertibility into gold. At this critical juncture, neoliberal ideas offered a convenient, readymade alternative to the Keynesian paradigm and informed the policy choices of newly-​elected, right-​wing governments, particularly in the United Kingdom and the United States (Helleiner, 1996). Consequently, the state’s control over the economic and financial system, including the ability to restrict international trade and financial flows, was weakened. A new era of financialization has commenced (see Helleiner, 1996; Ruggie, 1982). Thus, 1971 can be considered the starting point of contemporary globalization through financial liberalization.1 The governance of financialization in advanced Western economies between the end of the Bretton Woods system and, at least, the 2007 financial crisis is rather well explained by theoretical approaches underlining the convergence with neoliberal policy norms (e.g., Helleiner, 1996; McNamara, 1999).2 However, these approaches cannot explain the divergence in policymaking observed in other countries such as Argentina, Chile, Japan, and South Korea. All four countries share common historical trajectories of pursuing two different types of developmentalism after the end of World War II: Export-​ oriented industrialization in Japan and South Korea and import-​substituting industrialization in Argentina and Chile. In Japan and South Korea, the state played an essential role in fostering economic growth. Prior to the 1980s/​90s, it orchestrated the production of goods that were of increasingly higher quality, adhering to the idea of catch-​up industrialization (Amsden, 1989; Johnson, 1982; Rodrik, 2015). Whereas the governments had been comparatively weak, it was primarily experts in powerful bureaucracies who guided this process in close coordination with financial institutions and big conglomerates (keiretsu in Japan, chaebols in South Korea). The financial system was tightly regulated and subordinated to political guidance. In Chile and Argentina, the state aimed to promote economic development following the idea of import-​substituting industrialization. Following military coup d’états in the 1970s, right-​ wing dictatorships backed by the United States introduced neoliberal reforms to open the economy and the financial system (Sikkink, 1988). Presidents and dictators as government heads have been powerful and controlled relatively weak bureaucracies. In both countries, numerous research institutions that have been closely interlinked with politicians have supported either left-​or right-​wing policies.

State agency in times of globalization  5 All four countries responded to elevated international pressure to liberalize their financial systems after the end of the Bretton Woods system. Subsequent to an initial process of financial liberalization that lacked policies to protect the domestic system from new sources of financial risk, all of them experienced severe financial crises: Argentina and Chile in 1982, Japan throughout the 1990s, and South Korea in 1997. This book aims to distill how these countries have governed financialization after this period of initial financial liberalization and the subsequent financial crises. This is a crucial task, as their common pathways ended thereafter and the countries embraced different approaches to govern financialization processes, encompassing novel types of monetary, financial, and foreign exchange policies. Governments altered their policies in response to the crisis experience in order to overcome the crisis and protect the country from similar future events. Argentina and Japan followed Western norms and adopted policies that accelerated financialization, involving a further opening of their financial systems to global finance; a curtailing of financial regulations; the adoption of flexible exchange rate regimes; and the privatization of public financial institutions. By contrast, Chile and South Korea introduced policies aimed at regulating international financial flows. These financial stability-​ directed policies incorporated monetary policy that stands ready to inject liquidity in domestic and foreign currency while countercyclically setting the policy rate; financial regulation to reduce risks attached to international financial flows and enhance transparency for minimizing credit risk; flexible exchange rate management for averting destabilizing movements of currency, particularly by countering appreciation pressure; public financial institutions for improving foreign exchange management, developing domestic capital markets, and injecting liquidity in times of crisis; and the development of domestic capital markets to enhance independence from global finance and liquidate bad assets that clog the balance sheets of private companies. As a result of the diverse structural conditions across the four cases, governments pursued different strategies to instigate this policy change. In order for the governments of Japan and South Korea to overcome the resistance of the powerful bureaucracies, institutional change to strengthen their control over policymaking was required. Expert commissions established by the governments facilitated the empowerment of new expertise needed to inform policy change. In Latin America, relatively weak bureaucracies reduced the complexity of government-​driven policy change. The establishment of new and close ties with existing research institutions by government leaders was conducive to the development of expertise that buttressed policy change. Through nested comparisons of the two pairs (Argentina/​ Chile and Japan/​ South Korea), this book seeks to explain why countries adopted the type of governance of financialization that they did. It argues that the empowered expertise plays a crucial role in explaining the diverging policy paths. Furthermore, the comparative design allows for studying how empowering expertise interacts with other, interest-​based and institutional,

6  State agency in times of globalization factors in different contexts to shape the governance of financialization. In doing so, this book makes theoretical and empirical contributions. First, it complements existing explanations of policy divergence by advancing the concept of empowering expertise. Second, the systematic comparison of the four countries broadens our understanding of the various strategies and policies that states can deploy to shape the governance of financialization. As the adopted approaches to govern financialization among the four countries differ not only from each other but also from the norms propelled by Western countries, the book emphasizes that it is possible for countries to choose among different governance strategies. This underlines the lack of a one-​size-​ fits-​all solution that suits all (semi-​)peripheral countries alike in promoting economic development and financial stability. Instead, similar policies may have different results given the specificity of conditions across countries. It is therefore crucial for countries seeking to preserve financial stability and boost their growth prospects that they incorporate their distinctive domestic circumstances as well as their positionality in the international economic and financial system into the governance of financialization. By analyzing the role of central banks in the governance of financialization, this book critically evaluates the plausibility of the claim that the evolution of central banking is a prime example of how globalization has led to policy convergence across the globe. As the book will demonstrate, in each of the four cases, the governments’ decision to increase central bank independence was part of a wider set of institutional changes aimed at transforming the political landscape as a whole. Moreover, they have deployed various policies that did not conform to Western norms for central banking. This includes the use of central bank independence by governments to weaken domestic veto players and strengthen policy control in Japan and South Korea; to safeguard the transition from dictatorship to democracy in Chile; and to conceal constant and immediate influence by the government on the central bank in Argentina. These varied government objectives related to the central bank are reflected in diverse policies, including the monetization of public debt in Japan and Argentina, the promotion of the development of capital markets in Japan and South Korea, and the adoption of stringent regulations for global finance in South Korea and Chile. 1.3  Political agency and expert agency In analyzing changes in the domestic governance of financialization, this book scrutinizes domestic agency in two dimensions. First, political agency is found with governments that can induce policy change by selecting from various types of expertise. The analytical chapters demonstrate how the diverse motivations of governments for the empowerment of specific expertise delineate the conditions under which ideas become consequential. In most cases, convenience rather than ideology or purely technocratic considerations was the primary reason for empowering specific expertise, such as when Chile’s dictator,

State agency in times of globalization  7 Pinochet, replaced the neoliberal Chicago Boys in the early 1980s to stabilize his oppressive regime. Second, expert agency is found with experts who were appointed to key policymaking positions. Once empowered, these policymakers deployed expert agency as their development and adjustment of policies could not be entirely anticipated by the government given the technical complexity inherent in the governance of financialization. This occurred, for example, when South Korea’s presidential advisor Shin Hyun-​song and central bank governor Kim Choong-​soo introduced a range of novel, macroprudential policies after the 2007 financial crisis. The development of policies varies with the different types of expertise that were empowered. Noteworthily, experience-​based knowledge primarily deployed in Chile and South Korea as opposed to academic expertise predominantly adopted in Argentina and Japan has fared better in developing policies that have assisted countries in exercising agency to manage challenges posed by globalization. As a precondition for establishing this form of political agency, the governments in Japan and South Korea launched institutional reforms in the late 1990s to strengthen their control over policymaking vis-​à-​vis powerful bureaucracies. Only when institutional reforms were adopted after financial crises in the late 1990s were they able to cement their control over policy change by constituting their power over the appointment of experts to key policymaking positions. Expert commissions played a crucial role in the run-​up to these reforms because they allowed governments to develop blueprints while sidelining key veto players: the bureaucracy and interest groups. This was different in Argentina and Chile, both presidential democracies with comparatively weak bureaucracies but considerably strong interest groups. In both countries, although less consequential in Argentina due to its federal structure, the president could empower expertise comparatively well without having to account much for the bureaucracy and interest groups. Research institutions were key factors that Argentine and Chilean politicians used to produce expertise to challenge the established ones and translate it into policies once these politicians were elected into office. Consequently, a critical insight of the analysis is that governments strategically empower expertise to outplay institutions and interests in order to advance their preferences. In most instances, therefore, empowered expertise was not structurally predetermined, as suggested by the literature on epistemic communities and knowledge regimes. Instead, it is found that learning from crisis experiences, the appointment of outsiders, and the establishment of research institutions served as means for producing new expertise that allowed the government to select alternative, novel policy paths. The findings, first, bolster the perspective that even (semi-​)peripheral countries can offset convergence processes of globalization led by powerful Western countries. Second, they suggest that the constant adoption and adjustment of domestic policies contribute to safeguarding financial stability, given the countries’ subordinated integration in an inherently volatile global financial system. Third, the findings stipulate that expertise can serve as a resource for

8  State agency in times of globalization policymaking through which governments can exert agency. Thus, targeted investments in the production and diversification of expertise may enhance the ability of states to deploy agency in response to globalization pressures. Instead of relying on foreign knowledge production and adopting universal expertise, public investments in education and research can offer a way to augment the domestic capacity for developing policies that are tailored to country-​specific conditions. In this case, policies can aid in mitigating the adverse effects of globalization, such as a heightened risk of financial crises due to volatile flows of global finance, and achieving domestic objectives. Accountability and domestic evaluation mechanisms may further enhance the quality of policymaking. Methodologically, key policymakers serve as the indicator for assessing and analyzing the type and content of expertise used to craft policies. The analysis is based on qualitative and quantitative analyses of 1,568 speeches of central bank policymakers, their academic contributions (journal articles, books, interviews), and their CVs. These are supplemented by central bank documents, which include 101 annual reports, 124 financial stability reports, 809 minutes from policy-​setting committees, 26 reports to the parliament, and 240 monthly bulletins.3 Data from 27 semi-​structured interviews with former politicians and policymakers further substantiate the findings. To study empowerment strategies of governments, interview data, official government documents, government speeches, bibliographical accounts of relevant politicians, changes in laws and regulations, secondary literature, and newspaper articles were analyzed. In addition, the analysis of laws, regulations, and policy instruments is used to determine whether expertise was in fact translated into monetary, financial, and foreign exchange policies, and how these evolved over time. Further official documents from central banks, finance ministries, and financial regulators (annual reports, financial stability reports, minutes of policy board meetings, and reports to the parliament) as well as descriptive statistics are used to triangulate the findings. The effect of the policies on the governance of financialization is approximated through the analysis of descriptive statistics (e.g., changes in stocks and flows of financial assets). This book adheres to established definitions to avoid misunderstandings regarding the relationship between financialization and other concepts, such as financial integration and financial globalization. Financial integration means the reduction of barriers to international financial flows and the augmentation of international links in the domestic financial system. While financial integration pertains to individual countries, financial globalization encompasses the increase of global financial flows and interconnections on an aggregate level (Prasad et al., 2007). By contrast, financialization denotes the growing role of finance in the economy (Epstein, 2005). Financial integration exacerbates financialization as it results in the expansion of financial flows and the size of financial markets. However, it is unclear what form and effects financial integration and financialization processes will take once a country liberalizes its financial system. This book investigates how states can shape the form and effects of financial integration (e.g., by regulating international financial

State agency in times of globalization  9 flows). In addition, it scrutinizes how states have shaped the development of the domestic financial system and, consequently, the role of finance in the economy (e.g., through the regulation of public financial institutions, central bank instruments, and capital markets). Undoubtedly, the role of finance has expanded in all cases, and government objectives have increasingly revolved around the issue of financial stability, which has come at the cost of demoting economic development as the primary function that monetary, financial, and foreign exchange policies should fulfill. With this caveat in mind, the governance of their respective financial system varied, resulting in diverse features and, therefore, effects of it on the economy. A second caveat is in order. The timeframe of this book overlaps with the decline of “Western neoliberalism” since the financial crisis in 2007. The erosion of “Western neoliberalism” and the rise of alternative models (such as China’s state capitalism) diminishes its usefulness as a benchmark for identifying patterns of convergence and divergence. However, the majority of the analyzed time period falls within the peak of Western neoliberalism (1970–​ 2007). This important issue will be discussed further in the Conclusion. 1.4  Structure of the book The remainder of this book is organized as follows. Chapter 2 briefly discusses the key theories dealing with the impact of globalization on policy change. The review shows how the two major strands either focus on the convergence of policies with Western norms or on their structurally predetermined divergence. As these strands fall short of explaining the observed variety of policies to govern financialization in the four countries, the concept of empowering expertise is introduced. This book seeks to capture the various types of expertise that inform policymaking, as well as the government strategies to empower them, through the lens of empowering expertise. The argument is brought forward that these moments of expert agency and political agency allow states to retain control over the governance of financialization, even in times of globalization. The subsequent analytical chapters follow the comparative design structure: Chile (Chapter 3), Argentina (Chapter 4), South Korea (Chapter 5), and Japan (Chapter 6). Each of the four chapters begins with a short introduction to the case, encompassing a presentation of institutional conditions and an overview of the pre-​liberalization period during the Bretton Woods era, the financial liberalization that followed, and the subsequent financial crises of the 1980s and 1990s. Next, the analytical core sections of each chapter identify the empowerment and substance of expertise before linking it with the adopted policies to govern financialization. The chapters conclude with a brief summary and a discussion of complementary and alternative explanations. Comparisons to the other cases are provided throughout the chapters and are addressed more systematically in the concluding Chapter 7. In Chile (Chapter 3), the variegated government objectives are identified that informed the appointment of experts, ranging from maintaining the

10  State agency in times of globalization stability of the dictatorship under General Pinochet after the 1982 financial crisis to protecting societal cohesion during the transition to democracy under President Aylwin in the early 1990s. The section subdivides the policies deployed by Chile’s policymakers to govern financialization into two distinct phases. The first phase was characterized by the dismantling of developmental structures and the absence of policies for managing the newly liberalized financial system following Pinochet’s coup d’état (1973–​82). The second phase is marked by the policymakers’ introduction of new monetary, financial, and foreign exchange policies and their adjustment to safeguard financial and economic stability (1982–​2020). Expert agency was exerted in the latter phase through the development and adjustment of policies based on the experience of the 1982 crisis. While the policies converged with Western neoliberal norms in the first phase, the financial stability-​oriented policies adopted in the second phase diverged significantly. In three instances, governments exerted political agency by appointing experts to key policymaking positions in order to induce policy change and policy continuity. The first instance occurred when Pinochet nominated the neoliberal Chicago Boys to implement far-​reaching policy reforms for the liberalization of the financial system in the mid-​and late-​1970s. To calm the situation and stabilize the dictatorship following the devastating 1982 financial crisis, Pinochet decided to replace key policymakers, substituting the neoliberal Chicago Boys with experts who had a less fundamentalist perspective on financialization and who had been influenced by the experience of financial instability (second instance). The third occasion where the government deployed political agency did not result in policy change but in the unexpected continuity of Pinochet’s governance of financialization. In 1990, the incoming democratic government led by President Aylwin (1990–​94), which replaced the dictatorship in a peaceful transition of power, unexpectedly decided against returning to developmental policies because it believed that policy continuity was necessary to stabilize the democratization process. Also in Argentina (Chapter 4), a right-​wing neoliberal dictatorship (1976–​ 83) initially liberalized the financial system, resulting in the financial crisis of 1982. Compared with the other cases, policy change in Argentina has been amplified by frequent and disruptive breaks between left-​and right-​ wing governments. Governments have induced policy change to either weaken or strengthen control over the financial system. Lacking a policy consensus like the one forged in Chile, government changes have prompted the recurring replacement of experts. Governments have relied on two established types of expertise to inform policy change: a traditional, developmental one linked to left-​wing governments in Latin America and an academic, neoliberal one for right-​wing governments that is promoted by Western countries. Only during the brief administration of Néstor Kirchner was an outsider (Martín Redrado) tasked with informing policy change who went beyond these established types. Similar to Chile, expertise was promoted in Argentina through research institutions often founded or directed by key policymakers and linked with the president in power. These investments in the production of expertise have

State agency in times of globalization  11 served as a resource for producing political agency. The presidents’ motivations for selecting key policymakers have been based in part on strategic considerations (Carlos Menem, 1989–​99; Néstor Kirchner, 2003–​08) and partly on either developmental (Cristina Fernández de Kirchner, 2008–​15) or neoliberal (Mauricio Macri, 2015–​19) ideologies to which the presidents were committed. Peronist President Menem deployed political agency when he decided against continuing the developmental policies that traditionally characterized Peronism and instead nominated the neoliberal Domingo Cavallo as finance minister in 1991. Cavallo introduced the Convertibilidad policy experiment, which shaped policymaking throughout the 1990s and resulted in 2001 in the largest sovereign debt default in history at that time. In response to the crisis, Néstor Kirchner decided to adopt a consensus-​driven approach to policymaking to overcome political divisions between the political left and right. Policies were introduced that strengthened the regulation of the financial system (linked to left-​wing governments) while curtailing developmental state interventions (associated with right-​wing governments). A short intermediary section serves to introduce the second pair of case studies. The key difference between the two pairs is the role of the big conglomerates and the bureaucracy, which was a powerful actor in policymaking during Japan and South Korea’s developmental era (1945–​90s). In contrast to the relative direct impact of prime ministers on policy output in Argentina and Chile, the governments of Japan and South Korea faced resistance from these actors. Thus, they developed strategies to shift the balance of power in their favor, using expert commissions to develop blueprints for reforms while executing institutional and policy change in times of crisis in the late 1990s. The governments strengthened their policy control after they modified the (developmental) institutional structures. In South Korea (Chapter 5), governments have attempted to change these developmental structures since the 1980s with differing degrees of intensity. But it was only President Kim Dae-​jung (1998–​2003) who enacted institutional reforms that significantly reformed South Korea’s developmental structures and induced policy change. Similarly to Argentina and Chile, a financial crisis (1997) following initial financial liberalization triggered policy and institutional change. Subsequent governance of financialization in South Korea is divided into two periods: an era of unregulated international financial flows (1993–​97) followed by one of financial stability-​directed policies (since 1998). President Kim Young-​sam (1993–​98) opened South Korea’s financial system to large-​scale international financial flows that were –​similar to Argentina and Chile in the 1970s –​not accompanied by the adoption of new policies to regulate them. As a result, financial risks built up that unraveled in a financial crisis in 1997. The government of Kim Dae-​jung (1998–​2003) used this crisis and exerted political agency, taking advantage of pressure from the IMF, not only to induce changes of monetary, financial, and foreign exchange policies but also to implement institutional change that buttressed the power of the government over these policies vis-​à-​vis the bureaucracy. Expert commissions were key for

12  State agency in times of globalization Kim Young-​sam and Kim Dae-​jung to marginalize domestic opposition and inform institutional and policy change in the late 1990s. Given that the bureaucracy was responsible for policy change during the developmental era, these expert commissions became instrumental in developing blueprints for reforms favored by the government. Institutional reforms were resumed by President Lee Myung-​bak (2008–​13). Lee appointed prominent outsiders (Shin Hyun-​ song and Kim Choong-​soo) to key policymaking positions. These outsiders strengthened policies to regulate international financial flows and informed South Korea’s attempt to reform global financial governance in the G20. Given that the adopted policies were highly innovative and sophisticated in safeguarding financial stability, policymakers exerted expert agency based on their experience-​grounded expertise. In Japan (Chapter 6), the governance of financialization exhibits similarities with the trajectory of institutional change in South Korea but diverges with regard to observed policies. Also in Japan, the initial financial liberalization under Prime Minister Nakasone Yasuhiro (1982–​87) contributed to a prolonged financial crisis that started in 1991. The government of Hashimoto Ryutaro (1996–​98) used this crisis and deployed political agency to instigate institutional reforms that cemented the government’s power vis-​à-​vis the bureaucracy, which was the engine and coordinator of economic development during the developmental era (1945–​ 97). Subsequent governments under Koizumi Junichiro (2001–​06) and particularly Abe Shinzo (2012–​20) used their reinforced power to appoint their preferred experts to key policymaking positions and induce policy change. For their appointments, governments drew on two traditions of expertise in Japan: structuralism and monetarism. Only when the government of Fukuda Yasuo (2007–​08) lacked sufficient support in the Diet to push through their desired monetarist candidate was a compromise candidate (Shirakawa Masaaki) selected to become governor from 2008 to 2013. Shirakawa exerted expert agency to strengthen financial stability-​oriented policies, going beyond monetarist and structuralist policy approaches. Compared with South Korea, Japan’s policymakers pursued a more comprehensive dismantling of developmental monetary and financial policies, a process initiated by Hashimoto and deepened under Koizumi. As the desired effect of this reform –​the return of economic growth –​did not materialize, Prime Minister Abe used the power acquired by the government after the institutional reforms of the late 1990s to pursue a monetarist policy path. Whereas policies until that moment had been converging toward Western neoliberal ideals, the subordination of the central bank under the government and the adopted monetarist policies under Abe’s “Abenomics” departed from them. The concluding Chapter 7 discusses the book’s theoretical and empirical contributions. A comparison of the four cases serves to distill the diverse government objectives, the different functions of ideas, and the observed policy changes. Furthermore, possible implications for the analyses of other cases, particularly in North America and Europe, are presented. Moreover, the discussion of competing and alternative explanations from the empirical chapter

State agency in times of globalization  13 is systematically revisited, emphasizing the links between different explanatory factors in the literature. Whereas the study focuses on the causal role of empowering expertise in driving policy change, the analytical chapters emphasize how this relationship is mediated by other variables, particularly institutions and interests. Differences in the political and legal systems (e.g., the degree of fractions within the parliament and the strength of the bureaucracy) as well as interest groups (e.g., large conglomerates in East Asia, the agriculture sector in Argentina, and the mining industry in Chile) across the four cases have influenced how these interlinked factors brought about and buttressed policy change. Despite the constraints posed by institutions and interests for inducing policy change, the four cases demonstrate how governments could nevertheless often strategically outplay them. Expert commissions and research institutions were key factors deployed by governments to overcome structural constraints in the development of blueprints and their translation into institutional and policy change. The most striking examples are the institutional reforms in Japan and South Korea in the late 1990s, where the governments used financial crises as windows of opportunity to reinforce their power over determining policy change vis-​à-​vis the bureaucracy. Notes 1 This was not the first occurrence of financial liberalization-​ cum-​ globalization. Already in the nineteenth and early twentieth centuries, global trade in goods and finance took place (Bordo et al., 2003). 2 Western monetary policy norms have entailed a focus on price stability, minimal central bank interventions via countercyclical control of short-​term interest rates in the inter-​banking market, transparent policymaking, and inflation targeting (see Goodfriend, 2007); financial policy norms have incorporated micro-​prudential regulation, self-​regulation of banks, and the promotion of market-​based finance (see Goodhart, 2005) all advocated by Western states (Katz, 2002, p. 22; Bernanke, 1999). Furthermore, the government and central bank should abstain from interventions in the foreign exchange market (floating exchange rate system). 3 Coinciding with the beginning of Macri’s presidency, Argentina’s new central bank website was launched in December 2015. Central bank speeches from previous presidencies were removed and, for the most part, could not be recovered. Therefore, alternative sources were used, including speeches published in reports to the parliament and other publications by former policymakers, such as journal articles, newspaper articles, and books.

2 Explaining policy divergence and policy change

2.1  Dissecting policy change under globalization: essential theories Various theoretical approaches have been taken to the issue of policy change in the context of globalization. These significantly advanced our understanding of not only how globalization has altered domestic policymaking but also of factors that have preserved states’ sovereignty. Influential accounts have analyzed in depth the mechanisms constraining states in the policies they can deploy to shape economic and financial outcomes. The ensuing, concise review of these contributions serves two purposes: first, it situates the book’s argument within the scholarly debates surrounding the effects of globalization on domestic policymaking; and second, it demonstrates why the focus on the relationship between governments and experts enhances those debates. According to the prevailing body of literature, economic and financial globalization restrict the ability of governments to intervene in the economic and financial system. Preferences of dominant states, private interests from the financial and non-​financial corporate sectors, technological innovations, and the rise of neoliberal ideas were all found to promote policy convergence directed toward liberalizing financial systems worldwide (Holzinger and Knill, 2005; Henisz et al., 2005; Dobbin et al., 2007; Dobbin and Garrett, 2010). Globalization brought about the integration of the domestic economic and financial system, fostering adjustment processes of domestic regulations (Drezner, 2007) and economic structures (Pirie, 2005b; Yeung, 2014) to these changes in the environment (Simmons and Elkins, 2004). Some scholars even find a race to the bottom, in which countries are forced to reduce taxes in order to stimulate private investment (Clausing, 2007; Abbas and Klemm, 2013). Private financial and non-​financial companies, in turn, favor a deepening of global integration as it opens up new markets for conducting investments, acquiring resources, and selling goods. Helleiner (1996) illustrates how these corporate preferences for economic and financial globalization are intertwined with political interests and neoliberal ideas in dominant states (particularly in the United States). After the collapse of the Bretton Woods system in the early 1970s, less powerful states have thus had to adjust policies to promote financialization in response to DOI: 10.4324/9781003414858-2

Explaining policy divergence and policy change  15 the structural power of dominant countries (Strange, 1988). International organizations, such as the International Monetary Fund (IMF), World Trade Organization (WTO), and Bank for International Settlements (BIS), have not only served powerful countries to defend their interests (Bhagwati, 1998; Wade and Veneroso, 1998). The function of international organizations as platforms on which policymakers form close network ties has further accelerated the diffusion of policies promoted by dominant countries (Slaughter, 1997; Finnemore and Sikkink, 1998; Bach and Newman, 2010; Babb, 2013; Nelson, 2014). They have not only served to promote and translate neoliberal ideas globally but also to induce ideational convergence through the establishment and support of transnational policy networks, epistemic communities, or advocacy networks (Stone, 2004; Elkins and Simmons, 2005; Levi-​Faur, 2005; Fourcade, 2006; Chwieroth, 2009; Moschella, 2010; Ball, 2012; Johnson, 2016). In this manner, the diffusion of policy norms engenders a convergence of policies across various issues (Tews et al., 2003; Drezner, 2007). The evolution of central banking is a prominent example used to illustrate the relevance of policy convergence. Scholars have found central bankers to form a particularly close transnational epistemic community that has shaped policymaking by domestically translating the dominant neoliberal ideas they share (Haas, 1992; Marcussen, 2006; Johnson, 2016). Polillo and Guillen (2005) demonstrate how various economic, political, and cultural mechanisms have contributed to the global convergence of central banking. The analysis of Maxfield (1997) lends further support to this convergence view. She shows how the adoption of central bank independence by non-​Western states has served as a signaling device to attract international financial inflows. Financialization has been another eminent research topic for tracing the impact of globalization on domestic policymaking. Large global investors based primarily in the United States and Europe can exert an increasing influence over domestic policymaking as a result of the domestic expansion and global integration of capital markets. Particularly the threat to withdraw their capital when a government introduces policies that they perceive to be detrimental to their future profits is regarded as crucial (Campello, 2015; Rommerskirchen, 2019). This leverage of global investors over domestic policymaking is accentuated in countries that are less economically developed. These subordinated countries are susceptible to the repercussions of an inherently asymmetric and unstable global financial system. As this system is based on only a small number of core currencies issued by dominant countries, other countries’ restricted access to these currencies places them in a situation of dependency (Mehrling, 2013; Kaltenbrunner and Painceira, 2017; Alami et al., 2022). By exploiting this structural dependence, dominant countries like the United States can exert pressure on them (Cohen, 2018). During financial crises, this relational aspect of the financial system becomes particularly apparent. As core currencies such as the U.S. dollar are a vital funding source in subordinated countries, their access to international liquidity is restricted. Since domestic currencies lose value at that time, the burden of debt denominated in

16  Explaining policy divergence and policy change foreign currency increases even further. In this manner, a temporary liquidity problem can escalate into a full-​blown financial and economic crisis. Faced with this constraint, governments have resorted to international organizations such as the IMF for assistance in overcoming liquidity problems, which can in turn exert pressure on the recipient countries to induce policy adjustments. That changes linked to globalization are primarily shaped by countries of the Global North has broadly been understood to be rooted in their superior mode of governing the financial and economic system (see Katz, 2002; Alami, 2020, p. 80). From this vantage point, it is natural to assume that the lack of policy convergence is the result of domestic frictions that slow down the adjustment process. And indeed, a certain degree of convergence in the governance of financialization is evident in each of the four case studies, in some more (Argentina) than in others (Chile, Japan, South Korea). But if convergence is a matter of time, why do we observe the adoption of novel and distinctive paths to govern financialization, such as the incorporation of financial stability as a main policy objective in South Korea and Chile or the monetarist turn under Abe in Japan? The literature on state capacity and comparative political economy provides possible explanations for why national diversity in the governance of financialization persists in times of globalization. Prominently, the branch of comparative political economy and the varieties of capitalism present a theoretical framework to explain policy divergence. Different institutional configurations generate comparative economic advantages that self-​stabilize via path dependency, which is the main argument for the optimality of institutional variation across countries (Bohle and Greskovits, 2007; Jackson and Deeg, 2008; Streeck, 2010). However, due to the focus on equilibria and structures, the role of politics and agency in the dynamics of policy change remains sidelined.1 That domestic political considerations are crucial for explaining the governance structure of financial regulation is shown by Moschella and Pinto (2022) in the case of the delegation of financial regulation. Furthermore, Quaglia (2007) stresses that national and regional differences in socio-​economic and political conditions influence the governance of central banks. Related contributions that investigate institutional reforms show how entrenched interests and institutions impede policy convergence and policy change. They have found that legal changes may not correspond with adjustments in practice (Culpepper, 2007; Walter, 2008). Walter (2008) examines policy reforms in East Asia after the 1997 crisis. He traces how states were compelled to rely on international institutions for financial support and were consequently required to commit to policy reforms that adhere to Western neoliberal norms. However, Walter finds that public and private interests as well as institutions in these countries resisted these imposed reform commitments, thereby limiting the degree to which policy actually changed. In addition, Rudra (2008) demonstrates that policy convergence results less from global pressures and more from domestic interest groups in favor of this

Explaining policy divergence and policy change  17 type of policy change. Furthermore, it was uncovered that ideas, too, exert counterpressure in the process of change induced by globalization. Domestic differences in civic epistemologies (Jasanoff, 2007), knowledge regimes (Campbell and Pedersen, 2014), and mindsets (Thurbon, 2016) all emphasize that expertise is not something external and objective but rather something that is intersubjectively constructed. In her seminal contribution, Marion Fourcade (2009) documents how economic expertise differs from country to country based on varying forms of professionalization. The central insight is that what counts as expertise differs across time and space and is an outcome of entrenched domestic and regional structures. Likewise, state capacity scholars have stressed the role of path dependence in shaping policy change. Recent contributions have focused on the variegated ways in which structurally subordinated countries can produce policy divergence by concentrating on the state capacity rooted in historically grown state structures. These scholars have devoted much attention to the question of why East Asian countries have not switched from their developmental to a neoliberal policy path, despite considerable convergence pressure following massive financial crises in the 1990s. With a focus on states’ capacity to develop policies independently from external factors, Linda Weiss (1998) attempts to generalize the conceptualization of state agency in times of globalization. She criticizes the logic of the argument that suggests that there is no alternative for subordinated countries to policy convergence, dubbing it “the political construction of helplessness” (ibid., 193), which renders state agency irrelevant (see also Hay, 2007). Instead, she argues that it is the government’s choice to adopt policies that follow the convergence path; the empirical observation that a state pursues a path of convergence is insufficient to substantiate the claim that governments could not select another alternative. These scholars have thus highlighted the development of new policies as a means to preserve national autonomy in an era of globalization (Evans, 1995; Vogel, 1996; Weiss, 2004). Governments have maintained tight control over the financial and economic system by developing new policy instruments and modifying existing ones (Thurbon, 2016; Rethel and Thurbon, 2019). Similar empirical evidence that governments have continued to employ distinct policy tools was found not only for other less advanced economies (Chibber, 2006; Gallagher, 2014; Nölke et al., 2014; Petry, 2020), but also in formally neoliberal countries in the Western world that have retained state interventions in the financial system (Mazzucato, 2013; Mertens et al., 2021; Mertens and Thiemann, 2022). Mosley (2006) illustrates this point by using the example of capital market liberalization, through which global investors induce convergence pressure. The convergence view posits that global investors can coerce countries, particularly less powerful ones, to conform their policies to neoliberal norms, as global investors would otherwise withdraw their financial investments. This, in turn, would impair economic growth and potentially lead to a financial crisis. Mosley did not conclude her analysis at this point where policy convergence was discovered (the opening of domestic capital markets). Instead, she then

18  Explaining policy divergence and policy change examines how newly adopted policies complemented the opening of capital markets by either curtailing the leverage of global investors over the states (e.g., by establishing inflation-​indexed bonds or introducing central bank independence) or by improving state capacity to reduce the power of global investors (e.g., the introduction of capital controls). An ideational explanation that identifies agency for determining domestic policies was presented by Ban (2016), who demonstrates how Western neoliberal ideas have been translated into local hybrids by combining them with local expertise. This form of national translation, bricolage (Carstensen, 2011), or constitutive localization (Acharya, 2009) offers a persuasive way to think about how policy divergence results from domestic actors in interaction with local and international institutions. Nevertheless, these explanations focus more on either the interactions between national and international structures, such as those between national and transnational norms (Acharya, 2009), or focus on experts (Carstensen, 2011), thereby largely sidelining the crucial role of governments and their strategies in the empowerment of expertise. Whereas the policy convergence literature does not envision agency that goes beyond the slowing down of the convergence process and thus cannot explain the observed variation, this is different for the divergence literature. Nevertheless, the varieties of capitalism and state capacity scholarship stresses the prevalence of path dependence, thereby restricting the scope of state agency in shaping new policy paths. Due to their emphasis on institutional stability, these contributions shed more light on the frictions engendered by the convergence process. Considering that the country pairs Argentina/​Chile and Japan/​ South Korea share relatively similar economic, political, ideational, and institutional conditions in themselves, it remains to be explained why the governance of financialization has differed substantially among them. In Argentina and Chile, governments in a presidential system, as well as military juntas prior to the democratic transitions, have been in a powerful position to guide policy change, despite opposition from private companies and, in the case of Argentina, conflicts between the central, provincial, and local governments. These tensions have amplified the variation in policymaking, especially in the case of Argentina, where there has been no stability in the governance of financialization. Instead, partisan politics has shaped policymaking in Argentina. This helps explain why President Fernández de Kirchner (2007–​15) introduced policies that strengthened her key clientele. However, given that they belong to the same party and share a common historical legacy, it remains unclear why her predecessor, N. Kirchner (2003–​07), introduced new financial regulations to curtail state expenditure and financial speculation. These regulations are neither supported by his voter base nor do they stem from ideas of the domestic knowledge regime. Similarly, in the case of Chile, it is unclear why the country opted for an entirely different strategy to respond to the 1982 crisis than Argentina did. Policymakers swiftly resolved bad assets and introduced novel financial regulations, foreign exchange policies, and monetary policy instruments. The substance of this policy change cannot be linked as

Explaining policy divergence and policy change  19 clearly as in Argentina to the presence of particular interests, domestic knowledge regimes, and institutional legacies. In particular, these factors cannot explain why the military junta introduced a range of policies that curtailed their access to global finance in the first place. Given the similarities in the preceding developmental strategies, the experience of similar crises experiences, and the presence of institutional conditions and interests, it remains puzzling why the governance of financialization has evolved so differently in the two countries. Japan and South Korea, too, have both exhibited a similar emergence of novel and unexpected policy paths. Despite the fact that the government is weaker in Japan’s parliamentary system with a bicameral legislature than in South Korea’s presidential system with a unicameral legislature, in both countries the bureaucracy and conglomerates resisted reform efforts with vigor. Strikingly, the relatively weaker position of Japan’s government did not prevent it from substantially changing the governance of financialization and strengthening its position vis-​à-​vis the bureaucracy in the policymaking process. Institutional differences, private interests, and domestic knowledge regimes can partially explain policy change, but they have trouble explaining the emergence of novel policy paths. For instance, these factors can accurately explain South Korea’s regulation of international financial flows in the 1990s. But they do not help us understand the adoption of new financial stability-​ directed policies after the 1997 crisis. In addition, it is unclear why South Korea adopted a vastly different strategy to resolve the bad debt resulting from the financial crisis in 1997 than Japan did, which pursued a protracted refinancing of bad debt. The presence of structural legacies can rationalize the lack of quick crisis responses in Japan but not the swift changes in South Korea. Here, the government quickly liquidated bad assets after its financial crisis in 1997 and introduced a myriad of macro-​prudential regulations. Particularly in South Korea but also in Japan, observed policy changes contradict the neoliberal norms propelled by Western countries. Differences in these political, economic, and institutional conditions help explain why we can observe variation of policy change in some cases but not in others. The same holds true for the presence of domestic knowledge regimes. These help to explain why ideas differ across countries but not the timing of when they become policy-​relevant, and, crucially, why in some instances the expertise empowered by the government differs from ideas generated by domestic knowledge regimes (such as in the case of the adoption of financial stability-​focused expertise in Chile and South Korea). In sum, the divergence literature helps to comprehend how change is delineated by historical legacies and structures but lacks explanations of the timing and substance of novel policy paths. Seeking to explain the observed differences in the governance of financialization, this book builds on the state capacity literature, especially the potential of domestic ideas to shape how globalization affects policies. Going beyond the constraining role of structures that limit the extent to which states can develop and adopt domestic expertise, this book analyzes how governments

20  Explaining policy divergence and policy change can affect the translation process and empower expertise that serves as a source of agency to inform novel policy paths. This agency may result in policy divergence or convergence, depending on the type of expertise selected. Focusing on the agency that politicians and experts wield to induce policy change, this book links to contributions that stress the impact of key policymakers in shaping institutional and policy change (Stiller, 2010; Kingdon, 2013). The interest of this book lies, therefore, in the role that two factors play in shaping policy change: the variegated types of expertise as well as their empowerment by the government. 2.2  Empowering expertise to govern financialization This book introduces the concept of empowering expertise to capture both of these factors and their interactions. This concept entails a moment of political agency and a moment of expert agency. Through this separation in the analysis, variation in the power relation between governments and experts in the policymaking process and its impact on the observed policy divergence are captured. It is self-​evident that governments can wield political agency over policymaking, most fundamentally by appointing and replacing key policymakers such as central bank presidents, financial regulators, or state secretaries in the ministries. However, this shall not insinuate that there is no agency of experts, which would imply a reversal of ideas as a causal factor to one that is merely instrumental (see Blyth, 1997). Given the complexity inherent in the development of policies to govern financialization, it is unlikely to assume that governments, ex ante, possess the knowledge to maintain full control over the substance of policies and their evolution, despite the fact that the degree of financial expertise of politicians varies. Instead, governments delegate to economic experts the task of addressing complex technical policy problems related to financialization. Notwithstanding, they develop the broad direction of political agendas that delimit the space within which policymakers can exert agency. It is here that expert agency is at play: While governments set the boundaries of what kinds of policies are possible, the particular features of monetary, financial, and foreign exchange policies are contingent upon the specific, appointed policymakers and their specific expertise. While we expect political agency to be more closely linked to comprehensive institutional change affecting the overall direction of financialization governance, experts are likely to at least exert some degree of agency over determining the substance of policies underpinning the present type of governance. The causal chain therefore flows from political agency to expert agency, as the former creates conditions and delineates the space in which experts can exert the latter. Independence that is ascribed to policymaking by experts, which is reflected in concepts such as central bank independence, is thus limited to the extent that it does not inconvenience the government. As long as they remain within the boundaries of the government’s political agenda, experts are able to develop their policies relatively independently. If experts in policymaking

Explaining policy divergence and policy change  21 positions become bothersome because they deviate from the political agenda and, potentially, the government’s objective to change the governance of financialization, they will be replaced. Whether this occurs immediately or by the end of the policymaker’s tenure is shaped by institutional factors and social norms. Therefore, this book critically evaluates the privileged role ascribed to central bankers and other experts in inducing policy change in accordance with their preferences (e.g., see Johnson, 2016). Empowering expertise situates this differentiated, asymmetric relation between politicians and experts within the domestic institutional context as policymakers aim to bring about policy change. The moment of political agency raises the question of the government’s objectives, which lead it to replace existing experts and empower new ones to inform policy. Why do governments appoint one expert over the other? Motivations may be influenced by the interests of certain economic sectors, international pressure, or the purely ideological predispositions of political leaders. However, less intentionally and more pragmatically, they may be merely convenient choices at particular moments in time that serve other political objectives. It is particularly during times of crisis, when the previous policies are believed to have led to failure, that the projected need for policy change and, potentially, altering the governance of financialization becomes apparent and consequential (Kingdon, 2013). The paradigm change from Keynesianism to Monetarism following the stagflation of the 1970s may be the most prominent example (Hall, 1993). Key policymakers are often, but not always, central bank governors. During the time when central banks lacked statutory independence, the key policymaker was primarily the finance minister. Although contemporary central banks are largely shielded from day-​to-​day political interference, governments can still exert influence over policymaking by wielding their power to replace the central bank governor and policy board members. Although this appointment process faces certain legal hurdles (e.g., the confirmation process in the parliament), it is a mechanism through which the government’s preferences can be translated into policies to govern financialization. This book thus contributes to the literature on central bank independence by demonstrating how governments can influence central banks even when they are formally independent. Beyond accounting for government objectives, this book scrutinizes the resources that allow governments to exert agency by empowering expertise to inform policy change and, potentially, the governance of financialization at large. It is expected that the supply of expertise from which governments can draw will exceed the policy networks established between politicians, domestic knowledge regimes, and transnational epistemic communities. For instance, crises can result in the production of pragmatic, experience-​based knowledge. Governments can also appoint outsiders to influential policymaking positions. Political strategies to render different types of knowledge consequential vary according to case-​specific structural impediments, such as constraining laws, powerful bureaucracies, and private sector actors. The government empowers

22  Explaining policy divergence and policy change expertise through the appointment of key policymakers, encompassing primarily central bank governors and finance ministers but also presidential advisors. Although these appointments follow different legal proceedings in the four cases, the government head (prime minister, president, or dictator) makes the final decision. These moments of change in which novel policy paths were selected are of particular interest in this study because they serve as an indication of the exerted domestic agency by governments that appoint experts who do not ascribe to neoliberal ideas spreading from the Global North and instead stem from either within or outside of the domestic knowledge regime. The second moment considers that variation in the empowered expertise shapes the substance of policies. Given their exposure to the knowledge transmitted through education and the workplace, the appointed policymakers acquired a broad range of expertise. This expertise becomes consequential as it provides tools for interpreting how financialization processes operate and guidance on which policies are required to safeguard financial stability and promote economic development. Thus, opposing types of empowered expertise can result in the adoption of different policies. Examples of ideal types with opposing policy implications include neoliberal and developmental expertise. The latter emphasizes the state’s role in controlling financial flows to promote economic development (Hirschman, 1968; Johnson, 1982; Bresser-​Pereira, 2011; Thurbon, 2016). By contrast, neoliberal knowledge underscores the benefits of free markets in allocating financial flows to achieve these objectives (Friedman, 1972; Valdes, 2003; Mirowski, 2015). Both approaches present theoretically sound frameworks that identify causal mechanisms, serving as justification for the adoption of specific policies. While both frameworks emphasize that their policies would enhance financial stability and economic development, the actual substance of the introduced policies varies according to the projected causal mechanisms offered by the respective theories. Developmental and neoliberal expertise are, of course, merely idealizations that evolve over time. For example, new developments after 2007 entailed the adoption of financial frictions in neoclassical economics (Nagel and Thiemann, 2019) and the modified use of developmental finance in neo-​developmentalism (Ban, 2013). An alternative type of expertise relies less on theory and deduction and more on experience and induction (Grabel, 2018). While the former provides clear guidance based on a consistent theoretical framework, the latter has the advantage of being more adaptable to changing circumstances. This book examines three distinct but interconnected policy dimensions in order to assess the evolution of policies governing financialization:

• Monetary policy entails the policy rate (or monetary targets) to steer financing conditions, liquidity policies to stabilize the financial system (including the lender-​of-​last-​resort function), and credit policy to allocate financial resources to specific economic sectors. • Financial policy encompasses, first, policies shaping the organization and development of the financial system, including the establishment of new

Explaining policy divergence and policy change  23 capital and financial markets as well as the regulation of public financial institutions (development banks, public funds, public pension funds, sovereign wealth funds) and institutional investors (private pension funds, insurance companies, asset managers). Second, it entails financial regulation and supervision, including both micro-​prudential (financial risks of individual financial institutions) and macro-​ prudential approaches (financial risks concerning the whole system). • Foreign exchange policy covers the design of the exchange rate regime (floating, managed, fixed), interventions on foreign exchange markets, and accumulation of foreign exchange reserves. These policy dimensions are interconnected and interdependent. For example, monetary policy has only limited control over domestic financing conditions when foreign exchange policy does not manage destabilizing international financial flows. Another example of interdependency is that an insufficiently developed domestic capital market impedes central banks in shaping interest rates in the financial system. Essentially, this book seeks to explain why certain policies were selected to govern financialization by advancing the concept of empowering expertise, which consists of two moments of agency: First, government strategies to empower varying types of expertise (political agency); and second, experts who are equipped with varying types of ideas to inform the substance of policies (expert agency). These two forms of agency serve to explain why we can observe novel forms to govern financialization that are puzzling from the perspective of existing studies. The concept of empowering expertise builds on the role of ideas for policymaking (Hall, 1989; Goldstein and Keohane, 1993; Finnemore and Sikkink, 1998; Schmidt, 2008; Beland and Cox, 2010; Blyth, 2012a; Carstensen and Schmidt, 2015). At the same time, it adopts a slightly more critical stance by shedding more light on the limitations of the performativity of ideas. This implies that whether ideas play a performative (McNamara, 1999; Blyth, 2012a) or an instrumental (Goldstein and Keohane, 1993) role depends on the relationship between experts equipped with their ideas and governments with their objectives. This book supplements existing explanations of policy change by advancing the argument that empowering expertise shapes policy change by rendering certain ideas consequential and replacing competing ones. Given that different types of experts and ideas exist not only within but also outside of pre-​determining structures such as knowledge regimes, the government’s empowerment of expertise to inform policymaking can serve as a source of agency. This book argues that the governance of financialization is the very capacity of states to actively shape globalization processes, as opposed to being the passive outcome of external forces (convergence literature) or the outcome of historical legacies (divergence literature). Analyzing expertise as a source of agency that governments can deploy to shape the governance of

24  Explaining policy divergence and policy change Table 2.1 Overview of theories explaining policy change

Interests Institutions Ideas

Convergence literature

Divergence literature

dominant states, global investors policy diffusion, structural dependencies transnational epistemic communities, empowering expertise

domestic interests, strategic instrumentalization structural resistance, path dependency domestic knowledge regimes, domestic translation, empowering expertise

financialization serves as a reminder that globalization is a contested process in which even (semi-​)peripheral countries can maintain a substantial degree of policy independence to shape domestic development. While the role of empowering expertise as a form of state agency is the focus of this book’s analysis, it is viewed in close interaction with other previously identified factors (see Table 2.1). Governments and experts do not operate in solitude. As institutionalist contributions point out, they face institutional constraints and competing interests in appointing experts to policymaking positions and in shaping policy decisions. These include the presence of a parliamentary majority in the appointment processes of experts or the resistance of other state actors and the private sector to policy change. This study is thus about the politics of expertise, namely, how governments deal with these forms of constraint and resistance. Within this tension between interests, institutions, and ideas, empowering expertise to inform the governance of financialization is situated. Note 1 Note that there are two levels of stability and change involved in the varieties of capitalism literature. First, it makes institutional and policy divergence optimal due to comparative advantage. Second, path dependence reduces the likelihood of divergence within a chosen optimal path.

3 Chile Preserving dictatorships and democracies through financial stability

Government agency in inducing policy change and continuity, as well as the multifaceted role that expertise can play in informing these processes, becomes palpable in the case of Chile. The government’s selection of experts for key policymaking positions has been crucial in elucidating Chile’s policies adopted to govern financialization. The motivations of government leaders for appointing key policymakers varied and were strategic, ranging from maintaining the stability of Pinochet’s dictatorship after the 1982 financial crisis to protecting political and societal cohesion during the transition to democracy under President Aylwin in the early 1990s. Existing structural constraints have made some political options more convenient than others, but these, as this chapter will show, cannot fully explain the substance of observed policy change. The policies deployed by Chile’s policymakers to govern financialization are subdivided into two distinct phases. The first phase is characterized by the dictatorship’s dismantling of developmental structures and the absence of policies to manage the newly liberalized financial system following Pinochet’s coup d’état (1973–​82). In the second phase, policymakers introduced and adjusted monetary, financial, and foreign exchange policies to safeguard financial and economic stability after the 1982 financial crisis (1982–​2020). In this phase, policymakers wielded expert agency by developing policies to safeguard financial stability in response to the 1982 crisis experience. Notably, this entailed the adoption of the 1986 General Banking Law and the 1989 Constitutional Central Bank Act, which have hitherto remained core to Chile’s financial stability-​ directed governance of financialization. While policies converged with Western neoliberal norms in the first phase, financial stability-​oriented policies adopted in the second phase diverged from them. In three instances, governments exerted political agency by selecting experts for key policymaking positions in order to induce policy change and policy continuity. The first instance occurred when Pinochet appointed the neoliberal Chicago Boys to implement far-​reaching policy reforms to liberalize the financial system in the mid-​and late-​1970s. Similar to the other three cases, the lack of policies to complement this financialization process resulted in a massive buildup of financial imbalances, particularly in foreign debt, which DOI: 10.4324/9781003414858-3

26  Chile: Preserving dictatorships and democracies eventually led to the devastating debt crisis of 1982. Although Pinochet’s dictatorship was relatively robust compared to Argentina’s equivalent, the Proceso de Reorganización Nacional (1976–​ 83), the impact of this crisis resulted in widespread public unrest across the country that posed a threat to the regime’s stability. Under these conditions, the second instance of agency materialized: Pinochet decided to change key policymakers in order to calm the situation and stabilize the dictatorship, replacing the neoliberal Chicago Boys with experts who had a less fundamentalist perspective on financialization. The experience of financial instability during the 1982 crisis shaped the policymaking of these more pragmatic experts around Hernán Büchi, who became finance minister in 1985 and introduced policies that imposed strict regulations on the financial system, particularly on international financial flows. The objective of financial stability became the focal point in the governance of financialization. The third occasion where the government wielded political agency did not result in policy change but rather in the unexpected continuity of Büchi’s policies. In 1990, the incoming government under President Aylwin (1990–​94) replaced the dictatorship in a peaceful transition of power. The new government decided against returning to developmental policies and appointing developmental experts to influential policymaking positions, as previously envisioned in their blueprints for reform. Adopting the expertise inserted by Pinochet after 1982, President Aylwin exerted agency as he perceived that policy continuity was necessary to prevent Chile from falling back into a state of instability and crisis. Subsequent governments have retained the consensus among politicians and policymakers around the policies introduced under Büchi, making only incremental changes to them without changing the objective of safeguarding financial stability in Chile’s financialization governance. The close ties between governments and experts, who formed policy networks that reproduced this consensus, have been institutionalized in research institutions such as the Corporación de Estudios para Latinoamérica (CIEPLAN).1 The case of Chile is thus illustrative of how its developmental tradition has become largely irrelevant to Chile’s policymaking. Instead of using monetary, financial, and foreign exchange policies to maximize economic development, the consensus rendered the preservation of financial stability as the primary policy objective in Chile’s highly open, financialized economy. The following section (3.1) analyzes how Pinochet appointed Chicago Boys to key policymaking positions for inducing policy change, resulting in rapid liberalization of the financial system in the 1970s. Next, Pinochet’s break with the Chicago Boys and the appointment of undogmatic policymakers for stabilizing Chile after the devastating 1982 crisis are examined (Section 3.2). These policies, unexpectedly, have been upheld by the democratic governments following the transition in 1990 (Section 3.3). Section 3.4 analyzes in greater detail the monetary, financial, and foreign exchange policies adopted to govern financialization in Chile. Section 3.5 concludes and discusses the role of other explanatory factors.

Chile: Preserving dictatorships and democracies  27 3.1  Chile under developmentalism and Pinochet’s turn to the Chicago Boys in 1973 Political and economic instability characterized Chile in the three decades after the end of World War II. The Cold War heightened tensions between the political left and right, resulting in frequent strikes and protests, the imprisonment of political opponents, and a fractured political landscape (see Collier, 2004). Recurrent inflationary crises and an omnipresent, powerful army further complicated the political landscape. This instability culminated in a large-​scale attempt to radically reform the country by General Augusto Pinochet, who led a military coup to overthrow and assassinate left-​wing President Salvador Allende in 1973. To achieve the objective of economic development, governments in this era intervened heavily in the financial system. The Economic Commission for Latin America and the Caribbean (ECLAC or CEPAL), established in Santiago in 1948 by the influential Argentine Raúl Prebisch, provided Chile and other countries across the continent with the expertise to inform their strategy of import-​ substituting industrialization (see Sikkink, 2012). The Economic Development Agency (Corporación de Fomento de la Producción de Chile, CORFO), founded in 1939 following the devastating Chillán earthquake, coordinated the developmental policies. Moreover, CORFO created various public companies to promote industrialization by improving infrastructure and exploiting natural resources. The Chilean central bank (Bank) was subservient to this strategy, which, by decree from 1953, was to encourage the orderly and progressive development of the national economy through credit and monetary policy, avoiding any inflationary or depressive tendencies, and thus permitting the maximum use of the country’s productive resources. (BCC, 2019, p. 6) However, in contrast to the cases of Japan and South Korea, state interventions and public investments did not result in stable economic development. Instead, the misallocation of public money, illustrated by a strong expansion of a relatively inefficient bureaucracy and disproportionate investments in the production of basic consumer goods, resulted in high inflation and recurring debt crises (see Collier, 2004, pp. 271–​278). Attempts to reduce fiscal deficits and enhance tax revenues, such as under Jorge Alessandri’s tenure as finance minister (1946–​52) and president (1958–​64), and President Ibáñez’s (1952–​58) invitation of the U.S. consulting firm Klein-​Saks to devise policy reforms in 1955, had only temporary effects. To further complicate the matter, there was opposition to reform from the parliament and the public. Political and social polarization increased under the left-​leaning policies introduced by President Eduardo Frei (1964–​70)2 and further intensified under the presidency of Salvador Allende (1970–​73). Allende, who won the popular

28  Chile: Preserving dictatorships and democracies vote with a slim majority of 36.2 percent, lacked strong backing. Moreover, President Nixon imposed sanctions against Allende’s government because he viewed him as a foe in the war against communism in Latin America (Schmitz, 2006, pp. 94–​111). Allende’s adoption of socialist policies in the early 1970s, entailing strong restrictions on capital account movements, land reforms, and increases in public expenditures, resulted in a rapid buildup of debt, a large current account deficit, and ultimately in hyperinflation. Furthermore, Allende nationalized strategic companies, including manufacturing companies but, more importantly, the copper mines, which have been responsible for the biggest share of total exports and a key source of income for the government. In this fragile situation, growing public dissatisfaction and widespread protests over economic problems provided the military with an opportunity to intervene and overthrow the government in September 1973. After this military coup, Pinochet established a brutal dictatorship that aimed at transforming the Chilean financial and economic system and society at large. In search of economic experts that could inform this transformation, Pinochet appointed several Chicago Boys to key policymaking positions. These were right-​wing economists who studied under Milton Friedman at the Department of Economics at Chicago University or the locally affiliated Catholic University in Santiago (gremialistas). The Chicago Boys used their far-​reaching freedom granted by Pinochet to translate their neoliberal academic ideas into policies, resulting in a heavy reduction of state expenses, privatizations, and deregulation of the financial and economic system (Huneeus, 2000; Valdes, 2003). Notably, this did not concern the status of the copper mines. Instead, Pinochet reinforced government control over the sector by establishing the Corporación Nacional del Cobre (CODELCO), which hitherto controlled the mining industry. Importantly, Pinochet did not empower the Chicago Boys because he firmly believed in the benefits of neoliberal policies. Instead, these experts presented a clear, coherent blueprint for reforms that Pinochet could draw on to replace the policies of his predecessor. As Milton Friedman recalled: Pinochet and the military in Chile were led to adopt free-​market principles after they took over only because they did not have any other choice. […] By accident, the only group of economists in Chile who were not tainted by a connection with the Allende socialists were the so-​called Chicago boys […] So in desperation Pinochet turned to them. (Friedman, 1991; see also Taylor, 2006, 53–​6; Letelier, 1976) Given the Chicago Boys’ utopian belief in the benefits and stability of free markets, the liberalization of the financial system in the 1970s was not accompanied by policies to regulate the risks arising from new options for domestic banks, companies, and households to finance themselves on international financial markets. In addition to this pull factor, the high international interest rate differentials in the late 1970s encouraged even more speculative financial

Chile: Preserving dictatorships and democracies  29 inflows to Chile. To combat growing inflation pressure, Finance Minister Sergio de Castro (1976–​82) pegged the peso to the U.S. dollar, which was initially successful. However, similar to what later transpired under Cavallo’s Convertibilidad in Argentina (Section 4.2), the peg led to an overvalued currency that further fueled the accumulation of cheap foreign debt and weakened the export sector. Consequently, the current account deteriorated, and the financial imbalances continued to grow. Chile’s fragile financial and economic system collapsed when Paul Volcker’s Federal Reserve raised the policy rate to combat high inflation in the United States. This reduction in the interest rate differential caused global investors to return their investments from Latin America back to the United States. In April 1982, Pinochet forced de Castro to resign from his position. After the massive financial outflows rendered it impossible to defend the peg, his successor Sergio de la Cuadra, decided to unpeg the currency in June 1982. The floating of the peso resulted in its swift devaluation and a rapid rise of the relative foreign debt burden, which led to the failure of significant portions of the financial system. The ensuing economic crisis destabilized the entire country, putting Pinochet under pressure to resolve the dire situation. Facing country-​wide public unrest, including several union-​led mass protests, Pinochet was compelled to implement policy change to alleviate the situation. At this critical juncture, he turned away from the academic Chicago Boys and appointed experts with an undogmatic, experience-​based approach to govern financialization (see Silva, 1991; Ffrench-​Davis, 2010; Caputo and Saravia, 2018). 3.2  Pinochet under pressure: undogmatic policy change under Hernán Büchi Some parts of the literature analyzing Chile’s transition to neoliberalism do not clearly differentiate between Pinochet’s policies before and after 1982 (for example, see Fischer, 2009). However, this would overlook how Pinochet’s replacement of the Chicago Boys with undogmatic experts contributed to a change of the financialization governance after the 1982 crisis experience. Pinochet appointed Luis Escobar as finance minister in 1984 to counter political pressure and address financial and economic problems. Escobar removed most Chicago Boys from their positions in the ministry of finance and expanded public expenditure (Bridges, 1987). Having served as a minister under the Alessandri government and equipped with a graduate degree in public administration from Harvard University, his appointment marked a clear break with the policy approach of the Chicago Boys. After a reshuffling of his cabinet in February 1985, Pinochet selected Hernán Büchi to become finance minister. Although Büchi was associated with the Chicago Boys, he carried the hopes that the dire financial and economic situation could be turned around (País, 1985).3 Büchi obtained degrees in mining from the University of Chile and business administration from Columbia University.4 He experienced the 1982 crisis while being chair of the National Planning Agency (Spanish: Oficina de Planificación

30  Chile: Preserving dictatorships and democracies Nacional or ODEPLAN) and the Superintendency of Banks and Financial Institutions (Spanish: Superintendencia de Bancos e Instituciones Financieras or SBIF), which shaped his policymaking as finance minister. Büchi’s policies turned decisively away from Chicago Boys’ neoliberalism, as it was evident to him that unregulated financial markets are prone to financial instability. His critical stance toward abstract economic theories represented by the Chicago Boys illustrates his different type of expertise.5 In contrast to them, Büchi emphasized the benefits of experience-​based expertise, which specifically accounts for country-​specific differences.6 According to this pragmatic approach to the governance of financialization, the ideal of “free markets” can only be approximated through the development of locally specific policies that restrict the investment behavior of private actors. Büchi adopted an undogmatic policy approach that underscored the importance of state interventions for a swift recovery from the crisis, the need for regulating a financial system that tends toward instability, and the promotion of economic development. Addressing the problem of the accumulation of financial imbalances prior to the 1982 crisis, Büchi criticized state inaction and stressed that unregulated private actors were incapable of coping with a situation of heightened uncertainty: The main diagnostic error was to think that it would be possible to keep the state out of the problem that was developing. Private parties were unable to make the changes that the situation demanded, because they were not equipped to do so and because there were no laws or regulations stipulating how to cope with this contingency. (Büchi, 2010, p. 177) Following Keynesian reasoning, he emphasized that the state needs to act countercyclically to smooth economic developments and regulate international financial flows to safeguard financial stability: [A]‌lthough the direct responsibility also lies with private initiative, government policy can make an important contribution [to promote investments]. In the first place, it must maintain a farsighted macroeconomic policy that smoothes out cycles of accelerated expansion and pronounced contraction in economic activity. In an economy such as Chile’s, such cycles often originate in a balance of payments imbalance […] relatively small variations in international interest rates can have a strong impact on the domestic economy. (Büchi, 1988b, p. 18) Büchi translated these ideas into the 1986 General Banking Law and 1989 Constitutional Central Bank Act, which shaped the core of Chile’s governance of financialization until the present day. Moreover, he bolstered the role of the countercyclical Copper Fund, expanded public investments, and supported

Chile: Preserving dictatorships and democracies  31 the export sector. As initial responses to alleviate the crisis situation, the military regime introduced demand and time deposit insurance schemes to reduce the likelihood of bank runs, devalued the peso continuously, and adopted an exchange rate band (Büchi, 1985b; Büchi, 1985c, p. 3186). In addition, the regime subsidized purchases of Chilean equity and debt by foreign investors to ease liquidity problems (see Ffrench-​Davis, 2010, pp. 117–​121). The objective of this set of policies was to quickly resolve the crisis (Büchi, 1985c, 3182). He considered the repayment of foreign debt at full price to be vital, based on the acknowledgement of the importance of maintaining a harmonious relation with the international financial community so as to take full advantage of the benefits of foreign trade. (BCC, 1988, p. 18) Facing an illiquid financial system, the government nationalized private debt that reached 86 percent in 1987 (Ffrench-​Davis, 2010, p. 117). The Bank issued long-​term bonds (promissory notes) to purchase non-​performing loans and restore liquidity (see Larrain, 1989). To generate the income needed to pay back the debt, the government developed a strategy “to make exports the driving force of economic growth.” The public export promotion agency ProChile coordinated this process (Büchi, 1986c, p. 3098; Büchi, 1985a, p. 846). Büchi considered that [t] maintain a high real exchange rate, which, together with moderate and even tariffs, constitutes one of the main tools to promote exports [and] is one of the bases to transform our productive structure towards an export economy. (Büchi, 1986a, p. 2464) In addition to devaluing the peso and imposing tariffs on imports that “harm national production” (Büchi, 1986a, p. 2465) ranging from 10 percent in 1982 up to 35 percent in September 1984, the government lowered policy rates and increased public investments (BCC, 1987, p. 16; Büchi, 1986a, p. 2464). The government supported companies with high growth potential, especially SMEs, with tax breaks. Furthermore, it introduced other subsidies with the Law for the Reimbursement of Non-​Traditional Exports (Law 18480) and the General Banking Law in 1986 (Büchi, 1985d, a,1986b, a, 1985c, p. 3185). This export-​led growth strategy underpinned the “realistic debt policy” (BCC, 1987, p. 16), which aimed at meeting obligations to foreign creditors while supporting economic development through active state interventions. Chile’s regime continued some neoliberal policies in the Chicago Boys tradition, such as the privatization of important companies like Endesa (today: ENEL) in 1989, the country’s largest energy producer. Nevertheless, Pinochet’s appointment of Büchi marked a significant change of the governance of financialization. The government deployed monetary, financial, and

32  Chile: Preserving dictatorships and democracies exchange rate policies to recover from the crisis and regulate Chile’s financial system to prevent the buildup of unsustainable financial imbalances (see Section 3.4). The recovery process was considered successful in achieving the objectives of paying back foreign debt and regaining financial stability (see Teichman, 2001, pp. 63, 80). As former Bank Governor Carlos Massad (2001a) recounts, “[after the 1982 crisis] there was a clear change in philosophy as the regulation and supervision of the banking system was profoundly reformed” (Massad, 2001a). Interview partners, regardless of which end of the political spectrum, referred to the 1982 crisis as the constitutional moment that has shaped the mindset of experts and policymakers. The crisis experience has legitimized strong state interventions, which are considered necessary to ensure financial stability. Interview partners expressed their conviction that the change of financialization governance was crucial for the protection of Chile from subsequent crises, including the 2007 financial crisis (Interview with former Bank policymaker A, Santiago, 5 October 2018; interview with former Bank policymaker B, Santiago, 4 October 2018; interview with Chile expert, Santiago, 9 October 2018). 3.3  Concertación’s rejection of developmentalism and unexpected alignment with Pinochet’s policies In October 1988, the Concertación, a coalition consisting of more than a dozen democratic parties, won a plebiscite concerning the question of whether the country would return to democratic ruling or whether Pinochet’s regime would be extended until 1996. The plebiscite initiated a transition to democracy that ended in March 1990 with the inauguration of Patricio Aylwin, the leading opposition figure, to become president. While the coalition received solid backing (55 percent of the votes), it was relatively uncertain what this return to democracy would look like in terms of policies. The Concertación’s policy proposals from the late 1980s envisaged a return to developmental policies. However, this policy reversal entailed the risk that political and social conflicts might be rekindled. Faced with this dilemma, Aylwin chose a path of moderation. His government carefully navigated between stability and change to prevent new policies from undermining fragile social relations and economic recovery while accommodating voters’ desire to reduce massive social inequalities that had built up during the dictatorship. This compromise approach was not a foregone conclusion, given that Aylwin’s Christian Democratic Party, which won the most votes in the general election, had previously expressed its preference for developmental state interventions in the economic and financial system. Alywin gave key policymaking positions to members of the Corporación de Investigaciones Económicas para Latinoamérica (CIEPLAN), which spearheaded the academic resistance to Pinochet’s neoliberal policies.7 CIEPLAN produced blueprints of developmental policy alternatives that informed the Concertación’s policy agenda in the late 1980s. The most prominent of the CIEPLAN experts was

Chile: Preserving dictatorships and democracies  33 Alejandro Foxley, who established the institution in 1973. Foxley was an outspoken critic of the neoliberal policies of Pinochet’s Chicago Boys, advocating for a strong state to implement strategic, export-​oriented economic planning in line with Japan and South Korea’s policy approach (Foxley, 1987a, pp. 79–​ 84; Foxley, 1987b, pp. 224–​225; Foxley, 1982, ch. 4). When Aylwin appointed Foxley to become finance minister, a return to state-​led policies comparable to those prevalent before 1973 seemed to be likely. However, Aylwin and Foxley were aware of the need for restoring stability in a divided society and thus sought to build a broad consensus across the political spectrum (Silva, 1991; Puryear, 1994, p. 93; Boylan, 2001, p. 133). Foxley perceived that the most important problem of economic policy in Chile was not of a technical nature but the lack of consensus in society (Foxley, 1982, p. 167). Moreover, the new government was conscious of the fact that the relative success of economic recovery in the late 1980s made it more challenging to legitimize significant policy change, particularly in the direction of import-​substituting developmentalism that accompanied decades of instability. Weighing his options, Foxley retreated from his earlier criticisms of Pinochet’s policies. He rejected the policy blueprint prepared by his own party committee that contained developmental policy proposals and instead announced that the government would continue Pinochet’s policies (Foxley, 1990; Boylan, 2001, p. 105). Foxley legitimized this continuity of the post-​1982 policy reforms under Büchi, as these were successful in stabilizing Chile’s economic and financial system: The opposition economists, who were very critical of the economic management of the military regime, especially in the first ten years [1973–​1982], have also learned the positive lessons that this management throws, fundamentally in its most recent phase [1983–​1989]. (Foxley, 1990, p. 564) Similarly, Aylwin stated that [w]‌e may not like the Government that came before us, but they did many things right. We have inherited an economy that is an asset. (NYT, 1991b) Aylwin and Foxley, faced with a trade-​off between the conviction of their expertise and the necessity of compromise to stabilize the country, decided to abandon the former.8 The strategic outcome was dubbed “growth with equity”: continuity of financial and economic policies and change in terms of social policies to alleviate growing economic disparities (Ffrench-​Davis, 2010). As a surprising but rational outcome, policy continuity has defined Chile’s governance of financialization after Pinochet’s gruesome dictatorship ended. A prime example is the preservation of central bank independence. In one of his final acts as dictator in October 1989, Pinochet introduced the Constitutional

34  Chile: Preserving dictatorships and democracies Central Bank Act (Law 18, 840) in an open attempt to tie the hands of the Concertación for inducing policy change (Boylan, 2001). Unexpectedly, Pinochet offered concessions concerning a rule for appointing members to the Bank’s policy board: two members were to be selected by Pinochet, two by the Concertación, and one candidate jointly nominated who was considered to be neutral.9 In December 1989, Pinochet appointed the compromise candidate Andrés Bianchi as central bank governor (NYT, 1989; LT, 2019), who was succeeded by Roberto Zahler, Aylwin’s candidate, in December 1991. Many observers expected Ricardo Ffrench-​Davis, who was more sympathetic to a developmental turn of monetary and financial policy, to become the new governor. However, he lost political support when he rejected becoming a board member in 1988, as he refused to work for Pinochet (see Boylan, 2001, p. 200). Zahler was thus a less divisive choice. He followed the policy agenda devised by Aylwin and Foxley, even though he had previously been receptive to greater state interventions (Zahler, 1989). To the present day, governments and policymakers have maintained the stabilization of the policy consensus forged by the Concertación (see Nagel, 2020). Only relatively minor scandals and tensions have emerged among politicians and policymakers regarding monetary, financial, and foreign exchange policies since the transition to democracy. When Eduardo Aninat (finance minister, 1994–​99) put Zahler under pressure to lower policy rates, the latter decided to leave office in 1996 over a scandal revolving around Banco de Chile’s debt repayments (Boylan, 2001, p. 130). Similar to Zahler, his successor Carlos Massad had been a proponent of a more interventionist role for the central bank (Massad, 1989), but restrained himself from pursuing monetary easing. In May 2003, Massad had to leave office over a scandal concerning his secretary, who illegally disclosed confidential information to a financial company (Inverlink). Aside from relatively minor scandals such as these and tensions over low economic growth between Finance Minister Valdés and Governor Vergara in the 2010s (Vergara, 2017; Mostrador, 2017), there were no attempts to induce a comprehensive transformation of the country’s governance of financialization, such as repeatedly occurred in Argentina or in Japan under Prime Minister Abe. Changes of the president, such as between socialist Michelle Bachelet (2006–​10, 2014–​18) and the conservative multi-​billionaire Sebastián Piñera (2010–​14), did not affect the policy consensus that the governance of financialization should maintain financial stability as its primary objective. This shared understanding of politicians and experts is illustrated by the fact that Pinochet’s 1989 deal concerning the balance of central bank appointees has been maintained, too. Despite the absence of formal institutional guidelines prohibiting the president from making partisan appointments, there has been no change to this symbol of compromise and continuity. Presidents select the Bank’s governor from among the policy board members that the president appoints upon confirmation by the parliament. Table 3.1 provides additional support for the preserved stability of the policy consensus, showing

Chile: Preserving dictatorships and democracies  35 Table 3.1 Background of Chile’s central bank governors since 1989 Governor

Academia

Work experience

Andrés Bianchi Ph.D. at Yale University; CEPAL, World Bank and IADB; 1989–​91 professor at University of ambassador to the United Chile and Pontifical Catholic States; president of financial University of Chile; published committee responsible for several academic articles determining investment policies of sovereign wealth funds Roberto Zahler Ph.D. at Chicago University; World Bank, IMF, BIS, IADB, 1991–​96 professor at several Chilean and CEPAL universities; published dozens of academic articles and books Carlos Massad Ph.D. candidate at Chicago IMF, UN, World Bank, CEPAL; 1996–​2003 University; professor health minister under at University of Chile; President Frei published multiple academic contributions Vittorio Corbo Ph.D. at Massachusetts Institute World Bank, IMF, and IADB 2003–​07 of Technology; professor at universities in Chile, the United States and Canada; published multiple academic contributions José de Ph.D. at Massachusetts Institute BIS, Financial Stability Board, Gregorio of Technology; Dean of the IMF, World Bank, IADB, 2007–​11 Faculty of Economics and UN, and others; minister Business, University of Chile; of economy, mining, and various academic publications energy under President Lagos; president of financial committee responsible for determining investment policies of sovereign wealth funds Rodrigo Ph.D. at Harvard University; IADB, World Bank, IMF, and Vergara professor at Pontifical UN; manager of Sebastián 2011–​16 Catholic University of Chile Piñera’s successful campaign and Harvard University; to become president in 2018 published dozens of academic contributions Mario Marcel Ph.D. in Cambridge University; World Bank, OECD, IADB; 2016–​22 professor at Cambridge ministry of finance, chair of University and several commission for the reform of universities in Chile; published the pension system in 2006 dozens of contributions

36  Chile: Preserving dictatorships and democracies how central bank governors since Andrés Bianchi have similar backgrounds in education, job experience, and academic achievements. All governors share characteristics in that they received graduate degrees from prestigious U.S. universities, as well as strengthened their profile and expertise during stints at international organizations, domestic research institutions, and universities. Furthermore, governors gained standing in the economic science through academic publications. In this manner, legitimacy was conferred upon Bank governors based on their academic credentials and close ties to international organizations and the United States. The policy network among policymakers and government representatives was further propelled by institutional affiliations via organizations such as CIEPLAN, CEPAL, and the Monetary Club of Finis Terrae University,10 but also by frequently rotating positions in academia, politics, and the Bank.11 Board members also changed positions between the government and the Bank, such as Manuel Marfán, who was a board member (2003–​13), minister of finance (1999–​2000), and undersecretary at the minister of finance (1994–​99). Academic collaborations within this network strengthened ties and shaped the academic discourse. Joint academic contributions were conducted, for example, by Governor Carlos Massad and Finance Minister Nicolás Eyzaguirre (see Massad and Eyzaguirre, 1990), Bachelet’s finance minister Andrés Velasco and President Sebastián Piñera’s finance minister Felipe Larraín (see Larrain and Velasco, 2002; Larraín and Vergara, 2000; Velasco and Larraín, 1990), Finance Ministers Eduardo Aninat and Alejandro Foxley with Budget Director José Pablo Arellano (Alejandro Foxley, 1980), and Governor Vergara with Finance Minister Larraín (see Larraín and Vergara, 1992; Larraín and Vergara, 2000). After a 2020 plebiscite determined the replacement of Pinochet’s constitution by 2022 (which was rejected by the voters in September 2022), former finance minister Rodrigo Valdés and Vergara published a book to promote the translation of the policy consensus into the new constitution (see Valdés and Vergara, 2020). These collaborations have crossed party lines and have occurred prior to, during, and subsequent to their public service. This continuity of expertise and policymaking over time indicates how the Concertación had been successfully establishing a consensus around a set of financial stability-​directed policies that worked sufficiently well to safeguard the stability of Chile’s financial system. Ex-​Governor Roberto Zahler recalls how thinking about policymaking was aligned: In the [Bank’s policy board] there are no people who think A and [the] other Z. Almost all of us went to the same university, we studied the same books and the great advantage is that we reached similar conclusions about how the macroeconomy works and how inflation is generated. (LT, 2018) This alignment is also illustrated by the low degree of dissent within the policy board since 2000 (see Figure 3.1). Only a minor disagreement occurred between

Chile: Preserving dictatorships and democracies  37

Figure 3.1 Dissents by board members of Chile’s central bank concerning decisions made by the board (in percent).

board members Pablo García and Joaquín Vial during Marcel’s tenure over a reduction of the policy rate by 25 basis points. Interview partners repeatedly pointed out that institutional stability was valued higher than partisan politics and personal interests when discussing the policy network (Interview with Chile expert, Santiago, 9 October 2018; Interview with former finance ministry policymaker A, Santiago, 16 October 2018; Interview with former Bank policymaker C, Santiago, 5 October 2018; Interview with former Bank policymaker B, Santiago, 4 October 2018). Illustrative examples include Roberto Zahler and Carlos Massad’s resignations from their positions to prevent harm to the Bank’s institutional integrity and the absence of attempts by presidents to nominate partisan policymakers to the Bank’s policy board. This subsection identified three instances (1973, 1982, 1990) in which Chilean governments exerted agency to induce policy change and stability by selecting experts for key policymaking positions. The subsequent section

38  Chile: Preserving dictatorships and democracies analyzes in greater depth which policies governments and policymakers introduced. It investigates how policies have been adjusted to govern financialization in Chile since the 1982 crisis and points to the relevance of expertise in shaping policy substance. 3.4  Developing policies for maintaining financial stability The preceding section demonstrated how the political appointment of experts to key policymaking positions resulted in significant policy change after the 1973 coup d’état and the 1982 crisis, as well as the maintenance of the financial stability-​directed governance of financialization under Aylwin’s presidency, which continues to this day. This section traces, firstly, how finance minister Büchi induced policy change in the 1980s and, secondly, how this laid the groundwork for the formation of a consensus, which materialized around the substance of monetary, financial, and foreign exchange policies. In addition, it demonstrates how the 1982 crisis experience is embedded in this policy consensus, underpinning Chile’s governance of financialization that rendered the need for strict regulations to counter the risks and volatilities inherent to the global financial system as its primary tasks. Policymakers across time and the political spectrum have constantly been concerned about the financial system’s propensity for instability, repeatedly citing the 1982 crisis experience. Identified sources of risks stem particularly from international financial flows but also from new financial innovations and international financial linkages (Marcel, 2018; Claro, 2017; Zahler, 2016, pp. 34–​35; Marshall, 2014; Vergara, 2013a; De Gregorio, 2011; De Gregorio, 2010b; De Gregorio, 2009a; Corbo, 2005; Corbo, 2004a; De Gregorio, 2002; Massad, 2001b; Marshall, 2001; Massad, 1997b, p. 1184; Zahler, 1995a, p. 579; Zahler, 1995b, p. 2060; Büchi, 1985c, p. 3192; former Bank policymaker A, Santiago, 10 October 2018). Figure 3.2 shows how the Bank’s policy board members have prioritized financial stability over price stability, including a continuous focus on the financial cycle. Inflation has remained a prominent issue as it has remained at the core of the central bank’s identity, which has been shaped by periods of high inflation before the 1970s (see below).12 The alignment of expertise around the need to safeguard financial stability informed monetary policy, financial policy, and exchange rate policy. Monetary policy has fulfilled the function of safeguarding liquidity in the financial system and promoting the development of domestic financial markets, which are needed to enhance independence from global finance. Financial policy aimed to control domestic financial institutions’ risk-​taking behavior, develop deep domestic capital markets, and deploy public financial institutions to promote financial stability. Exchange rate policies sought to further stabilize financial markets by intervening in the foreign exchange market while countering exchange rate appreciation to support the export sector and discourage the accumulation of foreign debt. This set of policies departed substantially from

Chile: Preserving dictatorships and democracies  39

Figure 3.2 Frequency of word occurrence in speeches of policy board members of Chile’s central bank, divided into governor tenures (in percent).

Western neoliberal norms that informed Chile’s policy approach prior to the 1982 crisis experience. Core legislation that has shaped Chile’s governance of financialization up until the present day has been the 1986 General Banking Law and the 1989 Central Bank Act, as well as the pension reform of 1981. Finance Minister Büchi was the key official in enacting the former two. In the latter case, he contributed to it as undersecretary in the ministry of the economy (1979–​80) and ministry of health (1980–​83) (Roberts and Araujo, 1997, p. 32; González-​ Rossetti et al., 2000, pp. 46, 68). 3.4.1  Monetary policy

Two principles characterized monetary policy after 1982: (1) strict abstinence from state financing and targeted credit allocation, and (2) readiness to safeguard financial stability by providing liquidity. Principle 1 was a clear break with Chile’s developmental era before Pinochet’s coup d’état. At that time, the Bank was the government’s arm to shape economic development by allocating credit to targeted economic sectors. As a key lesson from Chile’s developmental era, the policy consensus has deeply incorporated the experienced link

40  Chile: Preserving dictatorships and democracies from targeted credit allocation to recurrent inflation and debt crises. Principle 2 has been a consequence of the 1982 crisis experience, which led to the realization that unregulated markets tend to amplify speculation and instability. In order to prevent the collapse of the financial system, monetary policy must be prepared to inject liquidity during times of market volatility. (1) Chile’s constitution, adopted by Pinochet in 1981, forbids all forms of debt monetization (Art. 98). Nevertheless, it was not until the 1989 Basic Constitutional Act (Law 18,840, October 1989), which Büchi had drafted, that several safeguards were enacted to protect the Bank from government interference. Independence is not absolute, however, as the Bank is required to account for “the general orientation of the government’s economic policy” (Bank Act, Art. 6(2)). Furthermore, the finance minister is permitted to attend and speak at policy board meetings, delay policy decisions for up to 15 days, and convene extraordinary meetings (Art. 19).13 Moreover, as stated previously, Chile’s president has the authority to appoint the five members of the policy board and select the governor from among them, subject to parliamentary approval. (2) Principle 2 is anchored in Article 3 of the 1989 Bank Act, which established financial stability as the Bank’s primary objective alongside price stability. For safeguarding financial stability, policymakers have access to different tools for regulating the liquidity conditions of both domestic and foreign currencies:

• domestic liquidity: lender of last resort (Art. 36) and control over interest rates in the banking sector and capital markets (Art. 35)

• global liquidity: repatriation and liquidation of foreign exchange stemming from exports of goods (Art. 42.1) and services (Art. 42.2); imposition of reserve requirements to foreign investments of up to 40 percent (Art. 49.2); limitation of foreign currency holdings or investments denominated in foreign currency (Art. 49.5) In the 1980s, the Bank provided liquidity to the domestic system by repurchasing foreign debts from the private sector (Chapter XVII, Compendium of Rules for International Exchange) and allowing foreigners to invest in Chilean equity at a subsidized price (Chapter XIX, Compendium of Rules for International Exchange) (Ffrench-​Davis, 1990). Furthermore, it issued central bank debt and provided exchange rate subsidies to commercial banks that enabled them to repay their foreign debt (Barandiarán and Hernández, 1999, pp. 23–​25). These policies, following Principle 2, aimed at stabilizing financial institutions that required state support to service their foreign debt. After regaining stability in the financial system, Chile became the second country after New Zealand to adopt an inflation target regime in 1990. In May 1995, the Bank shifted to the daily interbank rate as the policy rate to increase its policy effectiveness and liquidity control in the financial system (BCC, 1996, p. 23). Bank policymakers viewed this as “an additional step in the process of giving a more important role to the market in the determination

Chile: Preserving dictatorships and democracies  41 of a macroeconomic price as fundamental as the rate of interest” (BCC, 1996, Section D1), underlining the continued commitment to free markets by the Concertación. To improve its capacity to manage domestic and foreign liquidity in the financial system, the Bank has introduced various facilities and open market operations since the 1990s (see Table 3.2). Accounting for the need to provide liquidity not only to banks but also to non-​banks, the Bank incorporated the latter in open market operations: pension and unemployment funds, securities companies, mutual funds, as well as stockbrokers and securities brokers (Compendium of Monetary and Financial Regulation, Chapter 1.3, Annex 1). To reduce the risk that liquidity provision may result in state financing and violate Principle 1, the Bank has not included government bonds in open market operations and has generally not accepted them as collateral to access central bank liquidity (Bank Act, Art. 27). Eligible collateral has been generally restricted to Bank securities but was complemented to accommodate the emergence of new financial risks, including the integration of bank mortgages and credit bills (2006), peso-​ denominated promissory notes, term deposit certificates, and other bank-​issued fixed income securities (October 2008), government bonds and bank time deposits (January 2009), mortgage bonds (April 2013), and government debt securities (December 2017). Additionally, stockbrokers and securities dealers became eligible counterparties in early 2009. Despite the fact that the Bank has occasionally accepted government bonds as collateral, it is prohibited by law from purchasing government bonds or securities issued by public institutions. When the 2007 crisis struck insufficiently regulated financial markets in advanced Western economies, less advanced economies like Chile suffered from volatile financial outflows by panicking global investors. However, direct effects on financial stability were subdued, as policymakers had tools ready to provide domestic and foreign currency (see below). Several policies were adopted by Governor de Gregorio (2007–​11) to counter destabilizing international financial flows and smooth liquidity conditions (Table 3.2). In 2009–​10, when the situation in financial markets calmed down, the Bank discontinued many of these instruments. When new volatilities emerged, policymakers acted flexibly to safeguard financial stability. This included the introduction of a special liquidity program to facilitate the financial system’s liquidity management in pesos to reduce potential risks from the Eurozone crisis (November 2012) and establishing programs for the increased provision of U.S. dollars and pesos (December 2017). As nationwide protests emerged in late 2019, the Bank widened eligible collateral to include bank deposits and bonds and established a dollar liquidity facility via swaps, the spot market, and the derivatives market. 3.4.2  Financial policy

Parallel to changes of monetary policy, the 1982 crisis led to three significant financial stability-​oriented changes of financial policymaking: (1) strict

42  Chile: Preserving dictatorships and democracies Table 3.2 Policies adopted by Chile’s central bank since the 1990s April 1998

March 2000 July & August 2001 October 2001 August 2002 October 2002 February 2004 January 2005 January 2005

March 2006 January 2007 September 2008 October 2008 October 2008 Late 2008 July 2009 December 2008 –​August 2009 September 2012 September 2013 May 2015

Issuance of Promissory Notes Indexed to USD (securities are denominated in USD but payable in pesos); establishment of repurchase agreements in USD to develop longer-​term foreign exchange coverage with a maturity of at least three years Readjustable Coupons in UF and USD (CEROs) were introduced to improve market liquidity and foster the development of derivatives markets Provision of USD-​Denominated Promissory Notes (PRDs) to increase access to USD liquidity against the background of volatilities on global financial markets Foreign exchange swaps with banking and financial institutions were adopted to improve central bank control over liquidity conditions Increased maturity of central bank securities (Central Bank Bonds in UF, pesos, and USD) to promote the development and liquidity of longer-​term domestic capital markets Provision of USD-​Indexed Bonds to improve foreign currency liquidity conditions Introduction of the Intraday Liquidity Facility to improve the provision of short-​term liquidity to financial markets Authorization of repo transactions with credit securities to enhance the market for credit securities Liquidity facilities and repurchase programs were updated; establishment of the Liquidity Facility and Liquidity Credit Line in both domestic and foreign currency, and the “Deposit Liquidity Facility” in peso Acceptance of bank mortgages as collateral Lowering of minimum term deposits Reactivation of foreign exchange swap purchases Introduction of a peso-​denominated repo program Allowing banks as well as savings and loan institutions to meet reserve requirements in foreign currency Acceptance of time deposits and bank mortgage bills as collateral Introducing the new Term Liquidity Facility Reducing the policy rate continuously from 8.25 percent to 0.5 percent to offset pressure from global financial volatilities Announcement of development of a mortgage bond market to increase funding sources for banks and to create investment alternatives for institutional investors Accepting mortgage bonds as collateral for open market operations, thereby increasing control over the market Establishment of swap line with Chinese central bank, extended in 2018 and expanded in July 2020

Chile: Preserving dictatorships and democracies  43 financial regulation and supervision to prevent the buildup of financial risks; (2) the development of domestic capital and financial markets to decrease dependence on volatile global finance; and (3) the establishment of public financial institutions and institutional investors that provide stable long-​term investments. Policymakers perceived that these three pillars needed to be in place to prevent financial crises in a liberalized financial system. Financial regulation: turning away from the Chicago Boys ideology after 1982, Finance Minister Büchi noted that strict regulation was necessary for a stable development of the financial system, including strengthened supervision of financial activities, more transparency, higher reserve requirements, and improved insolvency mechanisms (Büchi, 1985c, pp. 3188–​3189). After the “improvised and hasty” (Zahler, 1993) liberalization of the financialization processes in the 1970s that led to the 1982 crisis, Chilean policymakers since then have shared the conviction that this process needs to be ”prudential and gradual,” accompanied by new financial regulations (Zahler, 1992b, p. 2919; Zahler, 1992a, p. 2324; Massad, 2001a; Massad, 2001b; De Gregorio, 2002; Corbo, 2004b; Corbo, 2005; Vergara, 2013b; Zahler, 2016, p. 40; Marcel, 2018). As former Governor Massad put it: In Chile, we have been able to learn important lessons from the past, so we have been carrying out a gradual and orderly transition process in the direction of learning to coexist with volatilities, a process that began some years ago. (Massad, 2000, p. 1794) The following quote of Governor Zahler reflects the generally conservative, experience-​based attitude of policymakers in the governance of financialization: It is essential to understand that financial capital movements have been, are, and will be pro-​cyclical. This means that the Central Bank’s essential role is to reduce the impact of such movements on certain key macroeconomic variables. This is one of the main reasons for the nature of the restrictions in force and for their gradual relaxation. The simplistic assumption that total and immediate financial openness favors economic growth and the achievement of macroeconomic equilibrium ignores the experience of Chile in the not too distant past, that of other Latin American countries and even that of Southeast Asian countries. (Zahler, 1992c, p. 3189) Governor Vergara, a neoliberal, echoed this conservative perspective when he discussed lessons from the 2007 crisis in Western countries: The costs of a crisis of this nature are high and long-​lasting, so even at the risk of being mistaken, we’ll rather be safe than sorry. (Vergara, 2011)

44  Chile: Preserving dictatorships and democracies Since 1982, this shared conviction of governments and policymakers has informed laws and regulations. With the passage of the 1989 Basic Constitutional Act, the Bank became the macro supervisor and regulator with specific microprudential tasks. Policies to fulfill these functions are established in the Bank’s Compendium of Financial Regulations14 and its Compendium of Monetary and Financial Regulations.15 Further regulators and supervisors are the Superintendency of Banks and Financial Institutions (SBIF) and the Superintendency of Securities and Insurance (SVS), which the government integrated into the Financial Market Commission (CMF) in 2019, as well as the Superintendency of Pensions (SP) for the regulation of pension funds. In 2011, the government established the Financial Stability Council to coordinate the management of financial stability across these institutions and the ministry of finance. The second core piece of legislation next to the Bank Act is the General Banking Law of 1986 (Law 18,576, November 1986). It established a stringent regulation of the financial system based on the experience of the consequences of financial liberalization under the Chicago Boys. This law tightly regulated bank lending behavior and reduced interconnections within the banking sector as well as between the banking sector and other financial sectors (see Table 3.3 for an overview of regulations). The regulation of international financial flows was central to it, emphasizing the regulation of

Table 3.3 Selected regulations of Chile’s 1986 General Banking Law Article 69

Article 84 Article 84 Article 84

Article 65 Article 80 Article 83

Article 13 Title XV

Compartmentalization of the financial system, listing explicitly which services financial institutions can offer; for example, banks are prohibited from engaging in risky activities such as derivatives trading or equity investments 5 percent limit to loans to the same borrower (10 percent if it concerns foreign currency loans for export financing, up to 30 percent if they are secured by tangible assets) Loan classifications further regulate the investment portfolio of banks, and interbank loans are restricted to 30 percent of capital and reserves of the lending bank Intra-​bank lending is strictly regulated, including limiting loans to own employees of up to 1.5 percent of capital, prohibiting lending to any person owning more than 1 percent of the bank, and banning any loans to bank managers and their relatives 10 percent limit on ownership of a bank Liquidity ratios of banks Maximum limit of foreign investments is 100 percent of capital and reserves, including 25 percent of capital and reserves invested in foreign banks; foreign banks may only invest up to 25 percent of their capital in Chile: investments in foreign banks need the approval of the financial regulator (SBIF) and the central bank Loan classifications regulating the investment portfolios of banks Insolvency mechanisms

Chile: Preserving dictatorships and democracies  45 currency mismatches and limits to foreign debt for companies in the non-​ tradable sectors (Interview with former Bank policymaker A, Santiago, 5 October 2018). When financial inflows returned to Chile in the early 1990s, policymakers prioritized the reduction of short-​term financial inflows that harm the export sector and exacerbate financial instability (Massad, 1997a, p. 2089) and “systematic risk” (BCC, 1994, p. 32). One interview partner noted: In the 1990s, I would say in the economic themes of Concertación, it was very present the big crisis of 82. […] Too much inflows. They pushed the change rate to appreciation, they put imports up, they deterred exports. (Interview with former Bank policymaker B, Santiago, 4 October 2018) Introduced in June 1991 under Roberto Zahler, the unremunerated reserve requirement (URR) was the Bank’s flagship tool used to manage the inflow of short-​term capital, which required up to 30 percent of it to be deposited with the Bank for one year with no interest. When the risk of massive capital inflows from abroad diminished, Massad discontinued them in September 1998 (Massad, 2003). While the Bank has not used direct capital controls since then, more indirect forms were adopted to regulate financial inflows, such as a 35 percent capital gains tax on foreign investment in domestic bond markets, which had remained in effect until May 2014 (Figure 3.3; OECD, 2011, p. 41; IMF, 2014). Since then, foreign debt has steadily risen. In response to the currency speculation surrounding the Asia crisis in 1997, policymakers introduced a floating exchange rate, conducted capital

Figure 3.3 Chilean sovereign debt securities, local and external (USD million). Source: Banco Central de Chile Statistics Database, Debt Stock by Instrument, Central Government (millions of USD).

46  Chile: Preserving dictatorships and democracies account liberalization, and promoted the development of derivatives markets in order to allow corporations to hedge foreign exchange risks. Furthermore, policymakers maintained a range of safeguards to regulate the risk-​taking of financial institutions (Marshall, 2001; see also Marshall, 2002). To accommodate changes of the global financial system, policymakers have adopted a number of new regulatory instruments since the late 1990s (see Table 3.4). According to former Governor Marcel, it is important to minimize financial exposure to [exchange rate] risk. This involves curtailing currency mismatches in government, business, and bank balance sheets through regulation and the use of market hedging mechanisms, like [foreign exchange] derivatives. (Marcel, 2018) Several interviewees highlighted the crucial role of stringent financial regulation in the governance of financialization. One emphasized that “the banking regulation is super tight” with a low degree of complexity of banks, adding that the “financial sector, the banking system, in particular, is very strongly supervised, strongly regulated, especially in terms of liquidity” (Interview with former finance ministry policymaker A, Santiago, 16 October 2018). Another interview partner added: We [policymakers] had made the homework from the point of view of building a very, a very strong system of regulation, supervision of the financial system. After the crisis of the early 80s, we had not had any major crisis in the financial system, including during the great financial crisis of the last the year in 2007/​08. We didn’t have any problems with the Chilean financial system because banks are well capitalized, well-​regulated. We monitor very closely open positions in the foreign exchange, they had to report by Chilean law, they had to report in the financial statement, and that has to be audited that they don’t have open positions. Or they have to report the size of the open position. (Interview with former Bank policymaker A, Santiago, 5 October 2018) Public financial institutions, institutional investors, and the development of domestic capital markets: The government established institutional investors Table 3.4 Chile’s new regulatory instruments adopted since the late 1990s Late 1990s October 2003 February 2006 January 2015 January 2016 January 2019

Adoption of Macroprudential tools to counter rising financial risks stemming from a rise in household debt Introduction of regulations on maturity mismatches Introduction of regulations on non-​bank credit cards Introduction of regulations on liquidity risks following Basel III Introduction of mortgage provisions New capital requirements and bank resolution following Basel III

Chile: Preserving dictatorships and democracies  47 and public financial institutions and has used them since the 1980s to safeguard the financial system’s stability. These actors have accumulated and managed foreign exchange reserves, and promoted the development of domestic financial markets. Bank policymakers viewed these functions as crucial to achieving the objective of reducing Chile’s reliance on foreign finance (Büchi, 1985d, p. 3175; Büchi, 1985b; Zahler, 1995a, p. 579; Marshall, 2000, pp. 69–​70; Marcel, 2019b). With the 1981 pension reform, the government established private pension funds (Spanish: Administradoras de Fondos de Pensiones, or AFP) that since then have grown to become central vehicles for promoting Chile’s capital markets (Interview with former Bank policymaker E, Santiago, 10 October 2018; see also Büchi, 1986c, p. 3107). By the end of 2019, their total assets under management reached 80 percent of Chile’s GDP (Figure 3.4). Institutional investors hold around 85 percent of all outstanding corporate bonds (Marcel, 2019b), and they remain major holders of public debt, thus stabilizing financing conditions in the private and public sectors (Figure 3.5). In addition to this task of mobilizing domestic savings, AFPs have become important accumulators of foreign assets since 1990, when regulators began gradually lifting limits on foreign investments from 1.5 percent in 1992 to 80 percent in November 2010 (Figure 3.6). Furthermore, the Bank increased the limit on insurance companies’ foreign investments to 30 percent in March 2017. In times of volatility in international financial markets, such as in 2007/​08, the policymakers induced institutional investors to respond countercyclically to international financial flows, including by acting as counterparties on local derivatives markets (De Gregorio, 2008, p. 9; Marcel, 2019a; De Gregorio, 2009b; Vergara, 2013c; Vergara, 2014a; Marcel, 2017; Marcel, 2019b; Marcel, 2019b; see also Figure 3.7). Given their strong presence in domestic capital markets, institutional investors were vital to their development. Similar to the case of South Korea

Figure 3.4 Chile’s private pension fund investments (CLP million). Source: Superintendencia de Pensiones.

48  Chile: Preserving dictatorships and democracies

Figure 3.5 Chilean government bonds held by pension funds, foreigners, and others (CLP billion). Source: Banco Central de Chile Statistics Database, Debt securities by counterpart sector, outstanding amounts, reference 2013.

Figure 3.6 Composition of Chile’s private pension fund investments: securities of the public sector, financial corporations, non-​financial corporations, and foreign investments (in percent). Source: Superintendencia de Pensiones.

Chile: Preserving dictatorships and democracies  49

Figure 3.7 Net derivatives positions of Chilean pension funds and insurance companies in the local market (domestic currency against foreign currency, USD million). Source: Banco Central de Chile Statistics Database, Derivatives net amount outstanding with FEM.

after the 1997 crisis (see Section 5.2), the Bank actively promoted this development after the 1982 crisis, as its issuance of long-​term debt securities offered a stable supply of long-​term investment opportunities that institutional investors demanded. In the 1990s and 2000s, the Bank issued new debt securities and widened eligible collateral to sterilize foreign exchange interventions (see below) and to shape the maturity and currency structures of the capital markets (see Table 3.2). Notably, the Bank has promoted the use of inflation-​indexed securities (Unidad de Fomento) to boost investment confidence since the 1980s (see Jadresic, 2005).16 By issuing this range of securities, the Bank provided safe liquidity access to financial institutions, thereby reducing their risk. Tax and legal reforms enacted in 2001 (MKI), 2007 (MKII), and 2010 (MKIII) to loosen regulations accelerated the expansion of capital markets (Figure 3.8). Beyond institutional investors, public financial institutions have become central pillars as foreign reserve accumulators. The establishment of Chile’s sovereign wealth funds is intricately intertwined with tight restrictions on public expenditures that have characterized Chile’s policymaking since the 1980s against the background of the experience of public debt crises during Chile’s developmental past. Referring to a “culture of sound fiscal policy” that has been established, a former Bank policymaker stated: Why is Chile so strict with fiscal policy? […] We have a long history of irresponsible fiscal policy in the 60s, 70s, etc. […] We need to have a sound

50  Chile: Preserving dictatorships and democracies

Figure 3.8 Development of Chile’s corporate bonds outstanding (CLP billion). Source: Banco Central de Chile Statistics Database, Monetary aggregates and their components–​averages.

macro environment, and that includes both solid fiscal policy, sound fiscal policy, and also sound monetary policy. (Interview with former Bank policymaker E, Santiago, 10 October 2018) In 2001, the government institutionalized this mindset by enacting a fiscal policy rule.17 The Fiscal Responsibility Law (Law 20,128), introduced in September 2006, strengthened the legal standing of the fiscal policy rule and, since then, has mandated that governments present their budget annually.18 The Fiscal Responsibility Law created the Economic and Social Stabilization Fund (ESSF) and the Pension Reserve Fund (PRF). Their investment policies are determined by various key officials in the Sovereign Funds Investment Committee (est. 2007), including its former director and Governor, de Gregorio. The government charged the ESSF with providing countercyclical stability to the economy, such as during the 2007 crisis (Vergara, 2014b). All of its assets are external and have oscillated around USD 14 billion. The ESSF replaced the Copper Stabilization Fund in March 2007, which was founded under Büchi in 1985 to accumulate foreign exchange reserves, reduce dependency on copper exports, and stabilize the foreign exchange rate and the fiscal balance (Büchi, 1985c, p. 1385; Büchi, 1988a, p. 1203; Carrasco, 2009, pp. 199–​200; IMF, 1992; World Bank, 1985). Next to the ESSF, the government established the PRF in December 2006, whose assets increased from USD 1.5 billion in 2007 to USD 10.2 billion in 2019.

Chile: Preserving dictatorships and democracies  51 3.4.3  Foreign exchange policy

Given the focus on the risks attached to international financial flows and the 1982 crisis experience, Bank policymakers paid specific attention to foreign exchange policy for countering destabilizing international financial flows, particularly those linked to currency appreciation and liquidity shortages. This concern was institutionalized not only in General Banking Law (see above), but also prominently in the mandate established in Article 3 of the Bank Act: The Bank shall have as its purposes to look after the stability of the currency and the normal functioning of internal and external payment systems. (emphasis added) Art. 49 of the Bank Act equips the Bank with a range of options to actively counter international capital flows that undermine its financial stability objective. The Bank’s Compendium of International Exchange Regulations has established the corresponding policy tools. As stated previously, the Bank gradually loosened regulations throughout the 1990s, culminating in the adoption of a floating exchange rate in 1999 and the further opening of the financial account in 2001. With the consequences of the fixed exchange rate in mind, which fueled the buildup of foreign debt in the run-​up to the 1982 crisis, policymakers aimed to liberalize the exchange rate only gradually. The government adopted a floating exchange rate band of 2 percent in 1983, which it expanded to 3 percent in 1988, 5 percent in June 1989, and 10 percent in January 1992 (see Ffrench-​Davis, 2010, p. 123). Nevertheless, the Bank determined in March 1992 that it could also intervene within the band “when it considers that by doing so it can avoid undesirably sharp exchange-​rate fluctuations” (BCC, 1993, p. 62). This way, the exchange rate was controlled and devalued continuously (see Zahler, 2016, p. 38 and Figure 3.9). The Bank responded to strong financial inflows in the 1990s, 2000s, and 2010s by intervening in the foreign exchange market, resulting in the buildup of foreign exchange reserves. These reserves, in turn, were perceived as self-​insurance against volatilities linked to international financial flows, such as those experienced during the Mexican peso crisis in the mid-​1990s (BCC, 2006, p. 5; Zahler, 1995a, p. 579; De Gregorio, 2010c; De Gregorio, 2010a; Marcel, 2018). As the Bank Annual Report of 1994 stated: All the evidence seems to indicate that the abundant capital flows to Latin America during this decade will not continue […] and a plentiful stock of reserves is the best possible shield against a coming period of relatively short supply of external financing. (BCC, 1995, pp. 27–​28) The accumulated reserves then helped the Bank inject foreign liquidity when the exchange rate was under pressure and shortages of foreign liquidity

52  Chile: Preserving dictatorships and democracies Table 3.5 Chile’s central bank foreign exchange interventions August 2001 October 2002 April 2008 January 2011 November 2019

Sale of up to USD 2 billion Sale of up to USD 2 billion due to market overreaction Purchase of USD 8 billion USD –​this program was prematurely ended in September 2008 (with USD 5.75 billion purchased) given market volatilities following the Lehman Brothers failure Purchase of USD 12 billion to accumulate reserves Sale of USD 10 billion following market volatilities due to nationwide protests

Figure 3.9 Chilean central bank reserves and government reserves (USD million). Source: Banco Central de Chile Statistics Database, Reserve assets by currencies, and Liquidity in foreign currency of CBCh and central government.

endangered the stability of domestic markets. Since the official adoption of a floating exchange rate regime in 1999, the Bank has periodically intervened in the foreign exchange market (Table 3.5). The Bank did not link these interventions to Chile’s preference concerning export competitiveness. Furthermore, while the Bank has not used capital controls since 2001, it has maintained the capacity to deploy them if deemed necessary. Figure 3.9 depicts the buildup of reserves over the 1990s and again following the 2007 financial crisis. From the 1980s until the mid-​1990s, the competitiveness of Chile’s export sector was mentioned as a core concern of Bank policymakers (Zahler, 1995a, p. 579; Massad, 1997b, p. 1184). Former Governor Zahler remarked that the Bank adopted a middle way between fixed and floating exchange rate regimes

Chile: Preserving dictatorships and democracies  53 as “it was deemed convenient to give some guidance or signal to the market” for protecting the domestic export industry (Zahler, 2016, pp. 36–​37). While the stated objective of foreign exchange policy has shifted from export competitiveness to financial stability, it is difficult to disentangle the two given that the prevention of currency appreciation not only discourages the buildup of foreign debt but also supports the export industry by making exports cheaper for the rest of the world. As Western countries, particularly the United States, increasingly sanctioned currency interventions, this shift in the stated objective helped policymakers in non-​Western countries like Chile and South Korea (Section 5.2) circumvent this problem. Beyond this, the government found other instruments to affect the exchange rate. It intervened in the early and late 2000s to stabilize the peso against volatile international financial flows (Figure 3.9). Midway through the 2000s, when the Bank sought to reduce the costs of its net foreign currency position, the Treasury deposited foreign currency holdings with the Bank to offset a negative effect on the overall reserves (BCC, 2007, pp. 14–​15). Furthermore, as stated above, public financial institutions and institutional investors have amassed a substantial amount of foreign reserves, thus further spreading the cost related to foreign exchange reserves. Policymakers developed a sophisticated approach in order to use foreign exchange policy as an essential piece in Chile’s governance of financialization. Similar to monetary and financial policy, the 1982 crisis was the watershed moment leading to a significant policy change that has shaped foreign exchange policy until today. In an interview, one former policymaker stated: we did have a very bad experience during the debt crisis of the early 1980s. We learned it the hard way that macro-​financial policy has to be well designed […] and one of the main lessons of that crisis was that the current account matters, the external debt matters. So there was a huge concern about, you know, the current account, the exchange rate, because you didn’t want to have a very appreciated exchange rate because that would produce a huge current account deficit, etc. (Interview with former Bank policymaker E, Santiago, 10 October 2018) 3.5 Conclusion This chapter sought to demonstrate how governments exerted political agency by appointing experts to key policy positions at three critical junctures (1973, 1982, 1990). In the first two instances, they deployed this agency to induce change, and in the third instance, to ensure continuity. Furthermore, the chapter demonstrated how experience-​based expertise deployed by policymakers after the 1982 crisis resulted in divergence from Western standards. Policymakers adopted financial stability-​oriented policies that have tightly regulated the financial system, particularly international financial flows. This experience-​based

54  Chile: Preserving dictatorships and democracies expertise has thus served as a resource of agency for Chilean policymakers in the governance of financialization. The findings complement existing theories that emphasize the role of structural constraints in shaping policy output. Structuralist explanations help understand why specific expertise was available at critical junctures. However, they only insufficiently explain why governments selected one type of expertise over the other to inform policies. That Pinochet replaced the Chicago Boys after the 1982 crisis and that Aylwin decided not to replace Büchi’s policies with the anticipated developmental policies in the early 1990s point to the role of agency that government leaders can deploy in critical junctures. Government nominations of experts such as the Chicago Boys in the 1970s, Hernán Büchi in the 1980s, and Alejandro Foxley in the early 1990s demonstrate how this political agency translates into policy change and policy continuity. The political motivations of government leaders arose less from their liking of specific policy output or their ideological predispositions but were based more on the need to fulfill other political objectives. These entailed the convenient supply of an alternative economic and social paradigm after Pinochet’s coup d’état in 1973, an opportunity to induce policy reforms after the 1982 debt crisis to stabilize the dictatorship, or the Concertación’s continuity of previous policies given its preference for political and social stability over partisan politics in 1990. All three choices were supported or, at least, accepted by interest groups, such as during their resistance to Allende’s policies in the early 1970s or to the return to developmental policies envisioned by the Concertación in the late 1980s. Although Büchi put new regulations in place that restricted market actors, he also made sure to pacify foreign interests by committing to the full repayment of external debt and domestic interests by intensifying the privatization of public companies. Nevertheless, these do not account for the possibility that governments could have made different choices and could have satisfied other existing interests at critical junctures. For example, Pinochet was not an ideological market-​believer. His appointment of ardent neoliberals to influential policy positions after 1973 was instead a convenient option on the table to induce policy change in a devastated country. When the tables turned in 1982, Pinochet faced the difficult challenge of making concessions to a dissatisfied public without alienating key support from the political right and the private sector. It was thus a strategic decision by Pinochet to replace the Chicago Boys with pragmatic policymakers. Büchi, a key actor among them, was well-​respected in right-​wing circles while at the same time offering a decisively different policy approach to recover from the crisis and implement new policies to enhance the governance of financialization. His undogmatic policy change contributed to Chile’s economic recovery in the 1980s. Moreover, Aylwin’s decision to reject policies the opposition envisioned during the resistance against Pinochet to prevent a tense social and political situation from spiraling out of control points to the strategic considerations in appointing experts to key policymaking positions. While Aylwin induced

Chile: Preserving dictatorships and democracies  55 significant change to social policy to satisfy the left electorate, monetary and financial policies did not turn developmental. However, it is improbable to assume that this policy continuity would have occurred if the undogmatic policies of the 1980s had not been successful in recovering from the 1982 crisis and safeguarding financial stability. Based on this stability, Chile’s governments were also in a better position to counter pressure from Western countries to discontinue their tight regulations, particularly on international financial flows in the 1990s. The choice by Aylwin and the Concertación to adopt a compromise strategy gradually evolved into a policy consensus over time. Today, there is a wide consensus among politicians and experts in Chile that emphasizes the 1982 debt crisis as a historical juncture and critical turning point for the adjustment of monetary, financial, and foreign exchange policy. The interviewees emphasized that this moment continues to influence expertise today. The policy consensus solidified over time and materialized in a tightly knit policy network of experts and politicians, within which key positions have been revolving. Even though the left-​leaning Gabriel Boric was elected president in 2022 based on the promise of “breaking with the past” (NYT, 2021), he maintained continuity by making former Bank Governor Mario Marcel the new finance minister. This consensus does not question the overall benefits of free markets, and puts the policy focus on the stability of financial markets rather than on intervening actively in markets to shape economic development. Policymakers do, however, use monetary, financial, and foreign exchange policies to regulate financial institutions tightly. Interviewees highlighted the coordination of different policies for safeguarding stability (Interview with former Bank policymaker E, Santiago, 10 October 2018). As one former minister put it: “there is a general political acceptance that a stable management of the economy without ups and downs is the main objective of any government” (Interview with former finance ministry policymaker B, Santiago, 13 October 2018). This policy consensus also encompasses the private sector, giving the government further acceptance from a possible veto player. There is a significant overlap between interests and the policy network that dates back to the Chicago Boys era in the 1970s (Teichman, 2001). As shown by Boylan (2001), private sector interests also contributed to the adoption of central bank independence in 1989 as a protection against left-​wing partisan politics. Many Chicago Boys themselves became heads of big conglomerates in Chile. Several members of the policy network have strong linkages to the private sector. Büchi, Larraín, Corbo, Desormeaux, Vergara, and de Gregorio, among others, have held various positions in the management or directorate of private companies, such as pension funds. The interplay between ideas, interests, and institutions reflects how governments use political agency to induce policy stability. Pinochet was the head of a relatively powerful dictatorship (in comparison to Argentina’s Proceso) and could thus affect institutional change, which has served as the foundation of today’s governance of financialization, without much resistance.

56  Chile: Preserving dictatorships and democracies Compared to other countries on the continent, Chile distinguished itself by maintaining a strong commitment to institutional stability, which the policy network has promoted since the transition to democracy. Initially, however, it was not sure that the Concertación would accept institutions established under Pinochet, such as the 1981 constitution, a far-​reaching amnesty for military officials, or the Bank Act of 1989. Even informal institutions have been honored after 1990, including the appointment of board members and governors of the Bank. That no president has chosen to disregard this informal rule of making partisan appointments, such as in Japan under Abe or Argentina since Menem, points to the strength of the policy consensus across the political spectrum. Notes 1 CIEPLAN was founded in 1976 and is currently led by Alejandro Foxley, the finance minister of Aylwin. 2 Among others, Frei strengthened unions, conducted land reforms, and established the National Planning Agency (ODEPLAN) in 1965, which was transformed into the Ministry of Planning and Cooperation in 1990 and the Ministry of Social Development in 2011. 3 Büchi was undersecretary at the ministry of economy (1979–​80) under Sergio de Castro and undersecretary of the ministry of health (1980–​83), where he collaborated with Jose Piñera on the 1981 pension reform (Roberts and Araujo, 1997, p. 32). During the crisis, he headed ODEPLAN (1983–​84) before becoming Superintendent of Banks and Financial Institutions (1984–​85) and subsequently finance minister (1985–​89). 4 Columbia University was at that time home to heterodox and developmental economists, including Albert O. Hirschman, Ragnar Nurkse, and Karl Polanyi. These scholars endorsed theories that emphasize shortcomings of unregulated markets and accounted for problems of economic development in (semi-​)peripheral countries. 5 “I[Büchi] consider it a challenge befitting sensible politicians and reasonable experts –​public servants with keen insights not necessarily acquired from books, but from experience, and who can apply those insights to their work. In this area, unyielding commitment to consistency, unbounded doctrinal zeal, and dogged ideological determination often cause more harm than good” (Büchi, 2010, p. 26). 6 “Knowledge is essential regarding theory and practice, the broad lines and the detail, the historical background of problems and of the current situation. It is a thorough knowledge of things […] that makes it possible to move the discussion from the ideological sphere to the practical one and find in-​depth solutions, using creativity and common sense […] Every country must determine a strategy and draw up a schedule to suit its needs” (Büchi, 2010, p. 38). 7 Among other CIEPLAN members taking public positions, René Cortázar became labor minister, José Pablo Arellano budget director, Mario Marcel budget sub-​ director (later Bank governor and finance minister), Manuel Marfán coordinator of macroeconomic policies in the finance minister (later finance minister, CEPAL director, and Bank board member) (CIEPLAN, 2016).

Chile: Preserving dictatorships and democracies  57 8 Several other political decisions followed this compromise strategy: Although Aylwin established a Truth and Reconciliation Commission to investigate crimes that occurred during the dictatorship, the government largely abstained from prosecuting offenses of military officials. Moreover, the 1980 constitution granted Pinochet a senate seat for life and made him army chief until 1998. Furthermore, it entailed several mechanisms that have skewed the parliament to favor right-​wing parties (Valenzuela, 1992). 9 Interviewees remarked that this appointment logic had been continued until today, with two members representing the center-​left, two the center-​right, and one who is considered independent (Interview with former Bank policymaker E, Santiago, 10 October 2018; Interview with former Bank policymaker C, Santiago, 5 October 2018; Interview with former Bank policymaker D, Santiago, 5 October 2018). 10 Finis Terrae University was founded by Pablo Baraona, who was a Chicago Boy, minister of the economy under Pinochet in the late 1970s, and campaign manager of Büchi’s bid for the presidential race in 1989. 11 Networks among politicians and Bank policymakers were also nurtured in other contexts. When later president Michelle Bachelet temporarily worked at different international organizations in Washington D.C. in 1998, she met Mario Marcel and Nicolás Eyzaguirre. Marcel has adopted several responsibilities in different governments since 1990, including as budget director (2000–​06) and as the main person responsible for reforming the pension system in 2006. Later, Bachelet appointed him as Bank governor (2015–​22). President Boric appointed him to become finance minister in 2022. Eyzaguirre was a research assistant of Carlos Massad in the 1980s at Chile University, finance minister (2000–​06 and 2017–​18), and principal advisor to Bachelet from 2015 to 2017 (Cosas, 2007; LT, 2016). 12 Although “inflation” was more frequently mentioned than “financial stability,” its frequency of appearance has gradually decreased since Corbo’s tenure. This is independent of the average inflation rate during the specific tenures (Massad: 4.3 percent; Corbo: 2.9 percent; de Gregorio: 3.6 percent; Vergara: 3.5 percent; Marcel: 2.7 percent). 13 In all but six policy-​setting committee meetings since 2000, either the finance minister or one of his aides participated. 14 This compendium entails regulation of capital markets and financial markets concerning mortgage operations; ratios between assets and liabilities of banks; bank liquidity management; foreign investments by banks as well as pension funds; insurance companies and the unemployment fund; and derivatives in local markets. 15 This compendium entails regulations of banks’ access to central bank liquidity and bank liquidity regulation. 16 Large parts of Chile’s financial system and policy tools are indexed to the Unidad de Fomento, offering increased stability in asset values. As Bank policymaker Jadresic stated, “the executive, legislative and judicial powers have always respected [the Unidad de Fomento] religiously” (Jadresic, 2005). 17 The Lagos government enacted this rule with the Maastricht criteria as the model in mind to reduce fiscal discretion (Marcel, 2013, pp. 3–​4). Several key officials developed it, such as Mario Marcel (budget director at that time), Vittorio Corbo, and Rodrigo Valdés, with support from other policymakers like Joaquín Vial and Manuel Marfán as well as financial regulator Guillermo Larraín and Minister of Finance Alberto Arenas (Hacienda, 2001; Marcel, 2013).

58  Chile: Preserving dictatorships and democracies 18 The Advisory Committee for the Copper Reference Price estimates the price development of copper that is used to inform the current fiscal policy rule, thereby setting boundaries for state expenditure. Various key policymakers took positions in this committee, including former Bank Vice-​Governor Joaquín Vial, Mario Marcel, and current Bank Governor and former Budget Director Rosanna Costa. In 2013, the government founded the Fiscal Advisory Council to advise it on budgetary issues. Among its members have been former conservative Bank employees such as Klaus Schmidt-​Hebbel. It was replaced in February 2019 by the Autonomous Fiscal Council, currently headed by the conservative former Bank official Jorge Desormeaux.

4 Argentina Ideologies and failed policy experiments

This chapter analyzes the impact of the selection of expertise on policy change in Argentina after 1976. Similar to Chile, the selection of experts for key policymaking positions has had a significant effect on the management of its financial system. Similar to Chile, a right-​wing neoliberal dictatorship (1976–​83) initially liberalized the financial system, resulting in a financial crisis in 1982. Compared with the other three cases, frequent and disruptive breaks between left-​and right-​wing governments have amplified policy change in Argentina. Governments have induced policy change to weaken or strengthen control over the financial system. Lacking a policy consensus like the one forged by Chilean President Aylwin in the early 1990s, government changes induced a frequent replacement of experts. Governments drew on well-​established types of expertise for informing policy change: one developmental type traditionally associated with left-​wing governments, the other one an academic neoliberal type favored by right-​wing governments and dispersed in Western countries. Only under the brief government of Néstor Kirchner was an outsider (Martín Redrado) appointed to head the Argentine central bank (Bank) in order to inform policy change that went beyond these established types. Thus, the study of the Argentine case demonstrates that political and academic resistance to policy convergence prevails and that political agency in shaping policies through the use of expertise remains possible. The motivations of the presidents in the selection of key policymakers have been partly strategic (Carlos Menem, 1989–​99; Néstor Kirchner, 2003–​07), and partly based on either developmental (Cristina Fernández de Kirchner, 2008–​ 15) or neoliberal (Mauricio Macri, 2015–​19) ideologies to which the presidents committed. Close ties between politicians and experts formed policy networks that had a strong impact on policymaking under Fernández de Kirchner and Macri. Both relied on well-​established developmental and neoliberal policy networks, respectively. However, these historically grown structures cannot explain two instances where presidents appointed experts who did not originate from the respective policy network: First, when Peronist President Menem decided against continuing the traditional developmental policies that had characterized Peronism and instead appointed Domingo Cavallo, an DOI: 10.4324/9781003414858-4

60  Argentina: Ideologies and failed policy experiments expert from the opposing neoliberal policy network, to become finance minister in 1991. Cavallo introduced a policy experiment, the Convertibilidad, which shaped policymaking throughout the 1990s and ultimately led to the largest sovereign debt default in history. Second, when Kirchner decided to adopt a consensus-​driven approach to policymaking that aimed at bridging left-​right political divides. Kirchner appointed Martín Redrado, who is neither part of the neoliberal nor the developmental policy network, as the head of the Bank (2004–​10). Redrado introduced policies that strengthened regulation of the financial system (linked to left-​wing governments) while curtailing developmental state interventions and limiting state expenditure (linked to right-​ wing governments). By appointing experts from opposing policy networks or outsiders who do not come from established policy networks, these two instances provide additional evidence that governments exert political agency to shape policymaking. Similar to the case of Chile, research institutions have promoted expertise that has provided ready-​made blueprints for policy change. These were often founded or directed by key policymakers and linked with the president in power. Investments in the production of expertise have served as a resource to produce political agency. This chapter is organized as follows. After a concise historical overview of the developmental era in Argentina and the neoliberal turn under the military dictatorship between 1976 and 1983 (Section 4.1), the subsequent sections analyze four episodes in which presidents appointed experts to key policymaking positions for inducing policy change: Menem’s appointment of Finance Minister Cavallo, who introduced the Convertibilidad experiment in 1991 (Section 4.2); Kirchner’s selection of Bank governor Redrado for the adoption of financial stability-​oriented policies in 2004 (Section 4.3); Fernández de Kirchner’s nomination of Mercedes Marcó del Pont to head the Bank and bring about a return of developmental policies in 2010 (Section 4.4); and Macri’s appointment of Frederico Sturzenegger as Bank governor in 2015 to return to neoliberal policies (Section 4.5). Section 4.6 concludes and discusses alternative and complementary explanations. 4.1  Developmentalism and financialization during the Proceso In the second half of the twentieth century, policymaking in Latin American countries, such as Argentina, was informed by developmental expertise. This type of expertise dates back to the Economic Commission for Latin America and the Caribbean (CEPAL), which the Argentine Raúl Prebisch co-​founded (Sikkink, 1988, 2012). In the three decades following the end of World War II, the state used monetary, financial, and foreign exchange policies to propel economic development using the strategy of import-​substituting industrialization. The financial system was under the direct control of the state, which determined the allocation of credit to targeted sectors of the economy. To establish this control over the financial system, President Juan Perón nationalized both the Argentine central bank, which Prebisch co-​founded and directed

Argentina: Ideologies and failed policy experiments  61 (1935–​43), and bank deposits in 1946 (Cavallo and Cavallo, 2017, pp. 118–​ 119).1 However, unlike in the cases of Japan and South Korea, state-​led policies failed to induce economic development. Instead, similar to Chile in this period, public investments were relatively unproductive, resulting in recurrent over-​expenditure, inflation, and debt crises (see Rapoport, 2010). The country was further destabilized by frequent changes of government, violent conflicts between communist and fascist groups, interest politics by the United States in the context of the Cold War, and military coups in 1955, 1962, and 1966. Following another coup d’état in 1976, a military junta led by General Jorge Videla replaced the unstable government of Isabel Martínez de Perón,2 which had been weakened by a financial crisis (Rodrigazo) in the mid-​1970s (Romero, 2002, pp. 213–​214). Videla established a dictatorship (Proceso de Reorganización Nacional) that, in search of experts to inform financial and economic policy change, recruited neoliberal experts who stood ready to translate their ideas into policies. Similar to the case of Chile, they were educated at neoliberal economics faculties in the United States. The cooperation between the University of Chicago and the Catholic University of Chile since 1955 served as a blueprint for establishing a similar partnership program, the Programa Cuyo, between the University of Chicago and the National University of Cuyo (Fernández, 2019, p. 1). In Argentina, however, the process of replacing developmental with neoliberal knowledge was not as comprehensive as in Chile, and important universities such as the University of Buenos Aires did not fully subscribe to neoliberalism like Chilean universities did (see Undurraga, 2015). Nevertheless, Videla’s appointments of Martínez de Hoz to become the economy minister (1976–​81) and Adolfo Diz to head the Bank (1976–​81), both of whom had ties to the Chicago Boys, were pivotal for liberalizing the financial system (Calvo, 1986; Undurraga, 2015; Romero, 2002, pp. 222–​223). In 1977, the regime enacted two major laws that institutionalized neoliberal expertise, which have shaped the country’s governance of financialization to this day. First, deposits were denationalized, thereby delegating the task of credit allocation from the Bank to private financial institutions (Law 21,495). Second, the Law on Financial Institutions (Law 21,526) deregulated the financial system, established reserve requirements, and ended the compartmentalization of the financial system. It eliminated the distinction between the types of financial institutions and the services they could provide. The Bank was the designated regulator for the enactment of this law and used the Superintendence of Financial and Exchange Institutions (Spanish: Superintendencia de Entidades Financieras y Cambiarias, or SEFyC) for the supervision of banks.3 The National Securities Commission (Spanish: Comisión Nacional de Valores, or CNV) has been the institution responsible for the supervision of the capital markets. In 1979, the government introduced a crawling peg (tablita) to limit the depreciation of the peso. This resulted in an implicit overvaluation of the currency, which led to a buildup of cheap foreign debt while impairing the competitiveness of the domestic industry (see Calvo, 1986). Once the U.S. Federal

62  Argentina: Ideologies and failed policy experiments Reserve increased the policy rate in the early 1980s (Volcker Shock), financial flows to Argentina, Chile, and other Latin American countries stopped, the currency depreciated, and financial institutions could not finance their foreign debt anymore. Similar to Chile, the government aimed to overcome the resulting crisis in 1982 by transferring foreign debt from the private to the public sector.4 However, unlike their Chilean colleagues, Argentinian policymakers were unsuccessful in resolving the bad foreign debt. Moreover, they did not introduce new laws and policies based on this experience to avert similar crises from occurring in the future. Until today, the nationalized foreign debt has remained in the form of non-​marketable securities, a major position on the Bank’s balance sheet.5 Another consequence of the failed crisis resolution and lack of stability has been a high level of mistrust in the national currency among the population that further weakens economic and financial stability (Interview with former Bank policymaker, Buenos Aires, 19 September 2018). While Chile used this nationalized debt to promote the development of domestic capital markets by providing investment possibilities for growing institutional investors, Argentina’s policymakers did not follow this strategy. Furthermore, Argentina’s policymakers did not adopt significant changes to modify monetary, financial, and foreign exchange policies to protect the country from a repetition of a similar crisis. The Bank Charter and the Financial Institutions Law were not changed to incorporate the 1982 crisis experience. One factor that amplified problems in response to the crisis was the unstable political situation. While Chile’s Pinochet maintained his grip on power by inducing policy change, the comparatively weak Argentine military junta could not sustain its position after the 1982 crisis. Its demise was hastened by a crushing military defeat against Great Britain in the Malvinas War the same year. Thus, the transition to democracy did not occur under the condition of relative financial and economic stability but at the height of a financial and economic crisis. The government of President Raúl Alfonsín (1983–​89) conducted several unsuccessful, short-​lived policy experiments to resolve the crisis. In 1985, Finance Minister Sourouille introduced a new currency (austral) and established price and wage controls to break the high inflation record (Romero, 2002, p. 270). In 1988, the Plano Primavera made another attempt to break high inflation expectations. However, these reforms were only of temporary help to stabilize the financial system and economy. Inflation spiked again, and Argentina went into another debt default in 1988. Against this background of constant crisis, the Peronist Carlos Menem won the elections in 1989. While the public expected he would pursue state-​led financial and economic policies traditionally linked to Peronism, Menem surprised many observers by turning to neoliberal policies instead. 4.2 Cavallo’s Convertibilidad experiment Carlos Menem was elected in 1989 to succeed Alfonsín as president. Belonging to the Justicialist Party, Argentina’s largest Peronist party, the public expected

Argentina: Ideologies and failed policy experiments  63 Menem to maintain strong state control over the economy and financial system. It was thus surprising to many observers that he instead initiated neoliberal reforms (see Strikes, 2001, pp. 71–​72; NYT, 1991a). Rather than acting as a committed neoliberal ideologist, Menem appointed neoliberal experts to key policymaking positions in a strategic decision to overcome opposition from within the Peronist movement and bolster his power position (Romero, 2002, pp. 292, 298; Bambaci et al., 2002, p. 78). Initial and unsuccessful attempts to stabilize the financial and economic system were conducted by Ministers of the Economy Miguel Ángel Roig (1989) and Néstor Mario Rapanelli (1989), both former managers of the Argentine transnational company Bunge & Born. After also Antonio Erman González (1989–​91) failed to resolve the prolonged crisis, Menem decided in February 1991 to transfer the neoliberal Domingo Cavallo from his position as minister of foreign affairs to head the Ministry of Economy (see Cavallo and Cavallo, 2017, pp. 193–​194). To grant Cavallo the necessary power to implement his envisioned far-​reaching policy changes, Menem bestowed on him a super ministry by transferring the responsibility for trade, agriculture, industry, mining, energy, transportation, and communications. Cavallo introduced a range of policies to reduce state interventions, including restrictions on fiscal expenditure, privatizations of public companies, trade liberalization, and the end of price controls. Going beyond the adoption of these typical neoliberal reforms, it was the combination of the Convertibilidad, a 1:1 peg of the peso to the U.S. dollar, and deepened financialization that characterized Cavallo’s financial and economic policy. Introduced in April 1991, Cavallo’s Convertibility Law strictly limited the use of monetary and foreign exchange policies to the objective of maintaining the dollar peg, while financial policy was to be used to liberalize and promote the development of the financial system. Initially, this change generated the desired effects of lowering the inflation rate and increasing economic growth rates. However, the reliance on this policy mix inhibited the same financial risks as the Chilean peg-​and-​liberalize strategy of the late 1970s: implicit currency appreciation, the buildup of foreign debt, weakened competitiveness, and sustained current account deficits (Figure 4.1). As policymakers became aware of this precarious situation when facing an economic slowdown in the late 1990s, it was difficult to reverse it. Argentina was at the mercy of international organizations and global investors to roll over its ever-​increasing foreign debt. When financial markets forced the Bank to unpeg the peso in January 2002, the relative foreign debt burden exploded, resulting in the largest sovereign debt default in history at that time. Voters’ profound mistrust in the government’s ability to govern financialization is the impetus behind this policy experiment that severely constrained policymaking options by removing political control over the monetary and economic system. Cavallo’s Convertibilidad promised to solve the problem of state inefficiency, which according to him was at the core of the recurrent financial crises of the twentieth century, by tying the hands of

64  Argentina: Ideologies and failed policy experiments

Figure 4.1 Current account of Argentina (USD million). Source: IMF Database, Balance of Payments and International Investment Position Statistics (BOP/​IIP).

politicians while empowering the private sector. Cavallo believed that if all government debt needs to be entirely backed by the U.S. dollar, liberalized financial markets will discipline state behavior and propel economic development by extending credit to profitable investments (Cavallo, 1997; Cavallo, 2004, p. 3; Cavallo, 1996, p. 176; Interview economist, Buenos Aires, 20 September 2018). State interventions are to be limited to the establishment of “clear, simple and self-​applying rules of the game” (Cavallo, 1991, p. 6). No less than “a complete reorganization of the economy” was envisioned by him (Cavallo and Cavallo, 2017, p. 179). This prompted Cavallo to pursue policies that were in stark contrast to Chile’s governance of financialization at the time. To Menem, the empowerment of Cavallo’s ideological expertise was a convenient option in a difficult situation, serving as clear guidance for the governance of financialization that was attractive to disappointed voters. After completing his Ph.D. at Harvard University, Cavallo founded the research institution Instituto de Estudios Económicos sobre la Realidad Argentina y Latinoamericana (IEERAL) in 1977 to develop his policy agenda. In the 1980s, Cavallo published several books, including Volver a Crecer (Back to Growth), La Argentina que pudo ser (The Argentina that Could Be), and Economía en Tiempos de Crisis (Economy in Times of Crisis), to establish policy proposals ready to be translated into policies once he was appointed to become super minister under Menem. With Menem’s appointment of a Chicago Boy, Roque Fernández, to head the Bank (1991–​96), Cavallo could rely on a committed neoliberal partner. When the strategic partnership between Menem and Cavallo became strained in the mid-​ 1990s due to disagreements over policy reforms, Cavallo was forced to leave office in July 1996. He subsequently founded his own political party (Action for the Republic) and received 10 percent of the votes in the

Argentina: Ideologies and failed policy experiments  65 1999 presidential elections. As Menem selected Fernández to replace Cavallo as minister of the economy, policy continuity was ensured. In addition, the newly appointed Bank governor Pedro Pou (1996–​2001) supported Cavallo’s neoliberal policy agenda, praising the Convertibilidad for forcing Argentina to generate a “budgetary” or “fiscal culture” (Pou, 1998a; Pou, 1999d). Having jointly established the neoliberal research institute Centro de Estudios Macroeconómicos de Argentina (CEMA) in 1978, Fernández and Pou were key figures in the rise of neoliberal expertise in Argentina (see Fernández, 2019). 4.2.1  Monetary policy and foreign exchange policy

During the Convertibilidad, the government abandoned the use of monetary and foreign exchange policy to shape financial and economic conditions. With the 1:1 peg of the peso to the U.S. dollar, the sole objective was to keep the exchange rate fixed, for which the Bank maintained at all times dollar reserves at least as high as the monetary base. In addition, with the passage of Law 24,144 in September 1992, the government amended the Bank Charter, establishing its independence from the government. Furthermore, price stability became the sole objective of the Bank, supplanting the mandate for economic development. Limits to independence were established in Article 12 of the Bank Charter by granting the Minister of the Economy the right to attend board meetings (without vote). Moreover, Articles 20 and 33 give the Bank the possibility to finance the public deficit by purchasing up to one-​third of freely available foreign exchange reserves. Appointments to the Bank’s policy board, which was previously filled with representatives of public financial institutions and the government, were now required to be experts in monetary, banking, or legal issues in finance (Art. 6). While the new Charter signaled a bold turn away from the role of the Bank as the financier of the state, the government continued to use the Bank to hold massive amounts of non-​marketable government debt from the 1982 crisis on its balance sheet. The creation of the 1990 National Treasury Consolidated Bond in February 1991 further consolidated government debt with the Bank. While the Bank was thus used to help finance existing public debt, it stopped additional financing of public debt in the 1990s. 4.2.2  Financial policy

Cavallo’s Convertibilidad fully embraced financialization. His central idea was that the liberalization of the financial system would establish market discipline that, in turn, was expected to generate economic and financial stability while constraining public expenditure. In 1989, Menem introduced the State Reform Law and the Economic Emergency Law, which terminated developmental policies, restricted public financing, and promoted the equal treatment of foreign capital for productive investments. Crucially, the government removed deposit insurance and discontinued the Bank’s liquidity provision. In January 1994,

66  Argentina: Ideologies and failed policy experiments financial inflows were further propelled by the privatization of public banks and the establishment of equal treatment for domestic and foreign financial institutions as well as of banks and non-​banks. In contrast to Chile, whose financialization governance carefully managed international financial flows after the 1982 debt crisis, this approach did not ascribe any need to these kinds of policies, as the free flow of global finance was not conceived as a problem for stability but its guarantor. Financial regulations: There was an adoption of relatively tight financial regulations to accompany the financialization process. The 1992 adjustment to the Bank Charter put the regulatory focus on the microprudential level. The Bank introduced capital adequacy ratios, credit risk ratios, loan classifications, and provisions, as well as limits to financial interconnections, and maintained high reserve requirements (BCRA, 1995). The financial system was adequately capitalized and met liquidity requirements from a regulatory standpoint. Instead of aiming to increase independence from foreign finance as Chile did after 1982, Governor Pou emphasized that the inflow of global finance is needed to propel both the development of domestic capital markets and economic growth (Pou, 1998b). He denounced measures to control inflows, such as Chile’s unremunerated reserve requirements of the 1990s, as these would prevent the “disciplining effect” of global financial flows (Pou, 1999c). The Bank did not see the constant current account deficit (Figure 4.1) as a source of risk, as policymakers in Chile would have done, but instead as having a positive effect on economic development: The current account deficit is the result of an investment rate higher than our domestic savings rate […] These investments will improve the country’s competitiveness and will be a source for increasing exports, which will lead to a balanced current account balance. (Pou, 1998b) Moreover, Cavallo did not account for the risks attached to an appreciated currency. He instead denounced the use of foreign exchange policy, declaring that it was an “illusion” to think that the government could increase competitiveness via “monetary tricks” (Cavallo, 1997). The different policy implications derived from Cavallo’s neoliberal expertise, in contrast to Büchi’s pragmatic one, are striking, as the same phenomenon (financial inflows, current account imbalances, foreign debt) was interpreted completely differently, resulting in diverging policy responses to it. Public financial institutions and institutional investors: Another critical aspect of financial policy in the 1990s was the dismantling of public financial institutions. This concerned particularly public banks, which were an important funding source for public expenditure during the developmental era (see D’Amato and Molinari, 1998). In 1992, the government liquidated the public development bank Banco Nacional de Desarrollo and ordered the public Banco Nación to absorb it. The latter played a central role in the

Argentina: Ideologies and failed policy experiments  67 developmental era, but Menem drastically scaled it back in the 1990s, alongside failed attempts to privatize it. By 1998, the government had privatized most public banks. To offset some of the adverse effects of development financing, Menem established the Bank for Investment and Foreign Trade (BICE) in 1992 to support export financing. The 1982 pension reform in Chile served as the blueprint for establishing the Integrated Retirement and Pension System in 1993. However, in contrast to Chile, Argentinian pension funds’ investments remained with around 50 percent of their assets heavily invested in public securities (see Rofman, 2000, Statistical Appendix Table VII). Half of these public securities were non-​ marketable, thus circumventing market pricing (Vittas, 1997, pp. 22–​23). In comparison to Cavallo’s strong rhetoric, Argentine policymakers continued to draw on financial resources from public financial institutions and institutional investors to finance public debt. Unlike their peers in the other three cases, they did not use them for the anti-​cyclical stabilization of the financial and economic system or the promotion of the development of domestic capital markets to increase independence from global finance. Notably, the 1994/​95 Mexican peso crisis prompted policymakers to reconsider their strategy, as the weaknesses of the Convertibilidad became evident when the domestic financial system experienced market volatilities. Subsequently, the government improved the supervisory framework, tightened the regulation of maturity and currency mismatches, increased capital requirements, and introduced a deposit insurance scheme (Spanish: Seguro de Depósitos S.A., or SEDESA). The Financial Institutions Law was adjusted to increase the capacity for liquidity provision and restructure distressed institutions. Furthermore, Menem used the crisis to propel the privatization process of the public provincial banks. Trust funds were established in cooperation with the World Bank and Inter-​American Development Bank to manage the bad assets of commercial and public banks (BCRA, 1999, p. 150). Following the crisis, the number of banks decreased from 205 to 166 through mergers and acquisitions, and nine went bankrupt (Rozenwurcel and Bleger, 1998). Monetary policy remained constrained to support the dollar peg. However, the Bank’s use of liquidity policies was partly reinstated. This included the introduction of liquidity operations with repurchase agreements, establishing a liquidity network with 14 international banks, lowering reserve requirements, and conducting interventions in the foreign exchange market. The Bank Charter institutionalized this policy adjustment, allowing more space for rediscounts and advances during systemic crises (Art. 17, Law 24.485 from April 1995). Following the crisis, Argentina’s policymakers grew increasingly wary of the potential impact of international financial flows on financial stability, particularly when the U.S. Federal Reserve increased its policy rate as it did in 1994 (Pou, 1998e, cf, d). Given the reduced access to global finance in the late 1990s, policymakers saw themselves as increasingly dependent on advanced economies, particularly the U.S. and international organizations like the IMF.

68  Argentina: Ideologies and failed policy experiments Policymakers repeatedly asked them to strengthen global liquidity provision to prevent financial crises in the case of a temporary lack of access to financial markets. Nevertheless, Pou’s requests to the IMF, Basel Committee, and G7 for the establishment of such a mechanism brought no results (Pou, 1998c, f, 1999a, b). In 1999, Pou foresaw the coming crisis given this shortcoming of global financial governance: I have argued that liquidity risk is crucial and that in Argentina we have developed a strong liquidity policy, as well as strong economic fundamentals more generally, unfortunately I am forced to conclude, after recent events, that this may not be sufficient. (Pou, 1999e) Despite the growing awareness of the deficiencies of the Convertibilidad, policymakers refused to give up the peg until the last moment possible. This did not change after President Menem, who was not allowed to run for a third term, was replaced by Fernando de la Rúa from the Radical Party in 1999. Having missed the possibility to accumulate sufficient foreign exchange reserves in the boom period and missing tools to manage exchange rate movements, policymakers lacked the policy instruments necessary to reduce the likelihood of liquidity crises. The crisis moved closer when the economic situation and current account deficit deteriorated in the late 1990s. Both the public and private sectors, which have increasingly financed themselves via international financial markets (Figures 4.2), found it increasingly difficult to roll over growing foreign debt. In March 2000, the government requested

Figure 4.2 Foreign debt securities on liability side of non-​financial corporations, financial corporations, and the government in Argentina (USD million). Source: IMF Database, Balance of Payments and International Investment Position Statistics (BOP/​IIP).

Argentina: Ideologies and failed policy experiments  69 financial support from international organizations. Debt swaps in 2000 and 2001 could not solve the liquidity shortage, and access to global liquidity remained blocked. Stabilization efforts failed, and in late 2001, Cavallo, who briefly returned to become economy minister, declared a sovereign debt default and froze bank accounts (Corralito). The crisis reached its peak with the deaths of dozens of citizens in violent protests throughout the country in December 2001. Eduardo Duhalde, Argentina’s fourth president within two weeks, enacted the Law of Economic Emergency in January 2002. This ended the dollar peg, reinserted a floating exchange rate, and reinstated domestic control over monetary, financial, and exchange rate policies. 4.3 Néstor Kirchner: forging compromise Néstor Kirchner won the election in May 2003 against Menem to become the fifth president within four years. His presidency (2003–​08) coincided with a brief period of recovery and stability.6 Although he was, like Menem, a member of the Justicialist Party and largely supported the Convertibilidad during his tenure as governor of Santa Cruz (1991–​2003), both differed in their approach to governing financialization in Argentina. Under Kirchner, the Bank changed monetary and foreign exchange policies to increase control over international financial flows and safeguard the stability of the domestic financial system. Kirchner changed social policies significantly to reduce the growing poverty of the 1990s. However, he did not revert to developmental policies. Instead, Kirchner pursued a third way beyond the split policy approaches of right-​and left-​wing governments. The choice of experts to inform this policy change was distinctive, as Kirchner did not resort to well-​ established categories of expertise in Argentina, nor did he empower experts that followed Western norms. Instead, an outsider, Martín Redrado, was appointed to head the Bank, who reflected Kirchner’s compromise approach. By not drawing on established neoliberal or developmental expertise prevalent in Argentina’s universities and research institutions, Kirchner exerted agency in reforming Argentina’s governance of financialization. The pick of Redrado to replace Alfonso Prat-​Gay (appointed by Kirchner’s predecessor) as the head of the Bank in September 2004, after disagreements over the strategy of debt repayment to the IMF led to his dismissal, reflects his compromise approach (Clarin, 2004). Redrado partly continued policies introduced under Prat-​Gay, a neoliberal economist and later minister of the economy under President Macri, and partly introduced new changes to monetary, financial, and foreign exchange policy. With six years uninterrupted in office, Redrado held this office the longest in the Bank’s history, trailing only its first governor, Ernesto Bosch (1935–​45) (see Table 4.1). Previous to his appointment, Redrado held a public position as the Secretary of International Economic Relations (2002–​04) and as director of the National Securities Commission (1991–​94). During his time as Secretary, he cited South Korea and Chile as role models of economic development, emphasizing the

70  Argentina: Ideologies and failed policy experiments Table 4.1 Background of Argentina’s central bank governors since 1989 Governor

Academia

Javier Professor at Catholic González Fraga University Argentina; degree 1989 in economics, Catholic University Argentina

Egidio Iannella 1989

Professor at University of Buenos Aires, Catholic University Argentina, Argentine University of Enterprise

Rodolfo Rossi 1989–​90 Enrique Folcini 1990

Ph.D. in economics, University of Buenos Aires Professor at University of Buenos Aires, Catholic University Argentina; undergraduate degree in political economy, University of Buenos Aires Degree in accounting

Antonio Erman Gnzález 1990

Work experience Director of public companies; vice president of stock exchange in Buenos Aires; Director of Instituto Argentino de Mercado de Capitales; agriculture entrepreneur Founder and director of Visa Argentina; president National Development Bank; president National Savings and Insurance Fund; vice president Argentine Federal Bank; director Federal Investment Bank Director Liquid Carbonic Corp. Undersecretary of the Economy and Labor, Secretary of the Treasury

Ministry of Economy, Health, Labor, and Defense; parliamentarian; president of Bank of La Rioja; see above

Javier see above González Fraga 1990–​91 Roque Fernández Professor at University of Minister of Economy and 1991–​96 Southern California, Public Works and Services; University of Chile, Catholic World Bank; IMF; United University Chile; degree Nations; Instituto de and Ph.D. in economics, Matemática y Estadística; National University of Economy Minister of Córdoba; Ph.D. in economics, Córdoba University of Chicago; National University Córdoba; numerous publications Pedro Pou Degree in finance, University of Founder and director of 1996–​2001 Chicago Center for Macroeconomic Studies (CEMA); Minister of Economy in Buenos Aires; agriculture entrepreneur

Argentina: Ideologies and failed policy experiments  71 Table 4.1 (Continued) Governor

Academia

Roque Maccarone ? 2001–​02

Mario Blejer 2002

Aldo Pignanelli 2002

Alfonso Prat-​Gay 2002–​04

Martín Redrado 2004–​10

Work experience Vice president Río de la Plata Bank; president of Association of Argentine Banks; Secretary of Finance, Banks and Insurance; president Banco Nación; advisor Banco Galicia IMF; World Bank; CEMLA

Professor at New York University, Boston University, Hebrew University of Jerusalem; Ph.D. in economics, University of Chicago; undergraduate and graduate degrees in economics, Hebrew University; numerous publications Degree in economics, University Director Banco de la of Buenos Aires Provincia de Buenos Aires; Undersecretary of Municipal Affairs, Buenos Aires; advisor to Banco de la Province of Formosa; Inter-​American Development Bank; Secretary of the Economy, Moreno; various positions in private sector Professor at Catholic University Co-​founder APL Economía; Argentina; graduate degree JPMorgan; JPMorgan in economics, University of Chase Pennsylvania; undergraduate degree, Catholic University Argentina Professor at Catholic University World bank; WTO; BIS; Argentina, Tres de Febrero Secretary of Commerce and University; graduate degree International Economic in administration, Harvard Relations; president University; undergraduate National Securities degree in economics, Commission; IOSCO; University of Buenos Aires founder Fundación Capital; Security Pacific Bank; Salomon Brothers Inc (Continued)

72  Argentina: Ideologies and failed policy experiments Table 4.1 (Continued) Governor

Academia

Mercedes Marcó del Pont 2010–​13

Degree in economics, University of Buenos Aires; Development economics graduate degree, Yale University

Juan Carlos Fábrega 2013–​14

Alejandro Vanoli 2014–​15

Federico Sturzenegger 2015–​18

Luis Caputo 2018 Guido Sandleris 2018–​9

Miguel Ángel Pesce since 2019

Work experience

Parliamentarian; president Banco Nación; director Fundación de Investigaciones para el Desarrollo; Instituto de Desarrollo Económico; Consejo Latinoamericano de Ciencias Sociales; Consejo de Investigaciones Científicas y Técnicas ? President Banco Nación; Director of Visa Argentina; Chilean Banking Association; Chilean-​ Argentine Chamber of Commerce Professor, University of Central bank staff; Ministry Buenos Aires; Economics of Finance; advisor to undergraduate, University Ministry of Economy; of Buenos Aires; several National Securities publications Commission Professor, UCLA; dean Escuela parliamentarian; YPF; de Negocios de Di Tella; secretary of political Economics Ph.D., MIT; economy of Argentina; degree, National University president Banco Ciudad La Plata; numerous de Buenos Aires; IBD; publications IMF; World Bank; United Nations; BIS Economics degree, University of Secretary of Finance; Buenos Aires JPMorgan; Deutsche Bank, Professor, Johns Hopkins Secretary of Economic Policy; University; dean Torcuato di Undersecretary of Finance, Tella University; Economics Buenos Aires; World Bank; Ph.D., Columbia University; IBD graduate degree LSE; undergraduate University of Buenos Aires; numerous publications Economics undergraduate, President of Banco de la University of Buenos Aires Provincia de Tierra del Fuego; YPF; chair Trust Fund for Reconstruction of Companies; Ministry of Economy; Trustee for the Nation; Secretary of the Treasury and Finance; advisor to the parliament

Argentina: Ideologies and failed policy experiments  73 need for a strong state for coordinating monetary, financial, and foreign exchange policies (Redrado and Lacunza, 2004, pp. 9, 12). He also highlighted the benefits of Chile’s regulation of short-​term capital flows following the 1982 debt crisis (ibid.). Redrado was an unusual pick for this key policy position, given that he neither belonged to any of the established camps of expertise nor pursued an academic career. Instead, his background is based on practical experience in financial regulation and as an investment banker. Redrado did not receive a Ph.D. but earned a diploma in economics from the University of Buenos Aires and a graduate degree in public administration from Harvard University. Although he had written several nonacademic books, he did not publish academic papers in peer-​reviewed journals. Redrado is the founder of Fundación Capital, a research institution he used to provide policy analyses and recommendations after Menem forced him to resign as president of the CNV in 1994. Given his background as an investment banker, he could draw on a positive reputation within the “international financial community” that made resistance to the new policies less likely (see Redrado 2010, p. 170). Breaking with the rigid policies of the Convertibilidad, Redrado embraced “flexibility and gradualism” in the design and implementation of policies in the pursuit of safeguarding financial stability (Redrado, 2010, p. 111). He criticized, similar to Chile’s Büchi, overly academic approaches to policymaking (such as those underpinning the Convertibilidad), stating that “[w]‌e have reached a point in which economic theory is having a hard time keeping up with praxis” (Redrado, 2009a, p. 4). Based on the experience of past financial crises, he called for a tightening of control over international financial flows and the exchange rate, as countries with less developed capital and financial markets like Argentina were particularly exposed to market volatilities (Redrado, 2009a, p. 2). By focusing on the risks attached to both financialization and excessive state expenditure, Redrado’s policy approach contrasts with established expertise in Argentina’s developmental and neoliberal policy networks and their focus on the benefits of either states or free markets. Redrado’s new policies mirror the government’s adoption of a new policy path that has been coined neo-​ developmentalism, describing the emergence of a third way between neoliberal and developmental policies (Bresser-​Pereira, 2011; Gezmis, 2017). Policies aimed at curtailing risks to financial stability from both sides, financial markets and the state. On the one hand, policymakers saw the necessity to implement a new policy mix entailing the management of the exchange rate, accumulation of foreign exchange reserves, maintaining a tight regulatory and supervisory framework, and a countercyclical, liquidity-​focused monetary policy for protecting the country against volatile international financial flows (Interview with former Bank policymaker, Buenos Aires, 19 September 2018; Redrado, 2012; see also BCRA, 2007, p. 3; BCRA, 2009, p. 3). On the other hand, state expenditure was curtailed by the introduction of the Fiscal Responsibility Law in August 2004 and the adoption of exposure limits for financial institutions to public debt. Nevertheless, the government pressured the central bank to

74  Argentina: Ideologies and failed policy experiments increase transfers to the government and to supply foreign exchange reserves for paying back foreign debt (see next section). Policy change under Kirchner and Redrado could build on favorable external conditions to stabilize Argentina’s financial and economic system and thus contribute to generating a sustained current account surplus for the first time in more than 30 years (Figure 4.1). Similar to Chile, policies aimed at curtailing the risks of international financial flows and public indebtedness helped both countries weather the 2007 financial crisis without experiencing heavy market volatilities. Redrado’s policy approach is also reflected in his stance on the question of global financial governance. Given their role as main drivers of international financial flows, Redrado called on advanced economies to intensify coordination to prevent international financial crises (Redrado, 2009a, p. 5; Redrado, 2009b, pp. 3–​4). In contrast to his predecessors, he also emphasized the need for reducing dependence on global finance by promoting the development of domestic financial markets (Redrado, 2009a, b, 2007). The new policy approach was successful to the extent that it helped prevent the emergence of new financial volatilities. A case in point is Argentina’s handling of the 2007 crisis: It is unlikely to assume that without the newly adopted policies to control international financial flows and curtail public indebtedness, there would not have been a renewed appreciation of the peso, an increase in cheap foreign debt, and new current account deficits, as frequently occurred in previous decades. Instead, the Bank countered peso appreciation and increases in foreign debt. When the 2007 crisis hit advanced Western economies and panicked global investors escaped from less developed countries in the 2007 crisis, Argentina weathered the crisis similarly well as Chile did (see Redrado, 2010, p. 125). 4.3.1  Monetary policy

Redrado’s change to monetary policy focused on managing liquidity conditions and shaping economic conditions countercyclically by setting the policy rate, which were both tasks largely lost during the Convertibilidad and was only reinstated by President Duhalde in February 2002. The Bank issued central bank securities (LEBAC and NOBAC) as policy instruments. Notably, it loosened restrictions that forbade transfers from the Bank to the government. In September 2003, a new law expanded the Bank’s capacity to make advances to the government of up to 12 percent of the monetary base (in addition to the previous 10 percent of cash reserves), which weakened Redrado’s position against debt monetization. A further objective of Kirchner and Redrado was to reduce the influence of the IMF in domestic policymaking, for which debt repayment to Argentina’s public and private creditors was necessary (Redrado, 2010, p. 63). An important step was the conduct of debt swaps in January 2005, which were completed with an acceptance rate of 75 percent. The remaining 25 percent were mainly vulture funds that bought defaulted debt after the 2001 crisis and insisted on full repayment. In December 2005, Kirchner issued a decree by which freely available reserves (international reserves in excess of stock required to fully

Argentina: Ideologies and failed policy experiments  75 back the monetary base at the existing exchange rate) became eligible to be used to pay back its debt to the IMF, which the government completed the same year. A non-​transferable security with a maturity of ten years was transferred from the government to the Bank to finance the debt repayment. A test for the liquidity-​focused monetary policy was the 2007 financial crisis, which Argentina overcame without severe repercussions on the financial and economic system. Facing periodic liquidity shortages during the 2007 crisis, the Bank combined foreign exchange interventions with the provision of domestic and foreign liquidity. It expanded open market operations, accepted government securities and bank loans as collateral, and lowered the minimum reserve requirements in foreign currency. Additionally, it introduced swap lines to the central banks in China and Brazil in April 2009.7 Furthermore, the Bank determined that LEBAC and NOBAC can only be traded on domestic markets by domestic entities, thus limiting the risk of domestic market volatilities due to speculative flows by global investors. 4.3.2  Financial policy

After the 2001 crisis, the Bank updated financial regulations with a focus on two central aspects. First, it determined that lending in foreign currency was possible only when covered by income in the same foreign currency. Furthermore, it imposed capital requirements on currency mismatches. This change was due to the experience that two-​thirds of bank loans to the private sector were extended to debtors not active in the export sector, materializing in a massive currency mismatch once the Convertibilidad ended (BCRA, 2008, p. 32). In combination with new regulations on lending in foreign currency (2002) and adjustments to the foreign currency net global position (2003), the Bank further reduced the risks attached to international financial flows. When Argentina faced increased financial inflows in the mid-​2000s (see Figure 4.1), the Bank established unremunerated reserve requirements for financial inflows (30 percent) as an additional measure in June 2005. Second, the Bank implemented restrictions on lending to the public sector in April 2003, including minimum capital requirements for government jurisdictions and limits on the share of public sector securities in total assets. In 2006, the Bank introduced a 40 percent limit on bank exposure to public sector risk, which was lowered to 35 percent in July 2007 (BCRA, 2006, p. 48). While monetary policy continued to play a role in financing the objectives of the government, the restrictions on monetizing public debt were curtailed in the area of financial regulation. Figure 4.3 illustrates how lending to the public sector slowed down during Kirchner’s presidency. 4.3.3  Foreign exchange policy

Foreign exchange policy, such as monetary policy, returned to the hands of domestic policymakers with the end of the Convertibilidad. Redrado

76  Argentina: Ideologies and failed policy experiments

Figure 4.3 Lending by national private banks to public and private sectors in Argentina, in percent of total assets. Source: Banco Central de la República Argentina, Cuadro 8.12 Indicadores financieros.

Figure 4.4 Foreign exchange reserves of Argentina’s central bank (USD million). Source: Banco Central de la República Argentina, Reservas Internacionales del Banco (en millones de dólares–​cifras provisorias sujetas a cambio de valuación).

implemented a dual strategy for containing risks related to international financial flows: Firstly, the Bank countered appreciation pressure to promote growth in the export sector by pursuing a “stable and competitive exchange rate regime” (Damill et al., 2015). Secondly, foreign exchange interventions helped prevent the buildup of financial risks by maintaining a low exchange

Argentina: Ideologies and failed policy experiments  77 rate that increased the cost of and thus limited the accumulation of foreign debt. The resulting buildup of foreign exchange reserves (see Figure 4.4) was used as a self-​insurance mechanism that the Bank considered necessary given the lack of a global liquidity provider (BCRA, 2007, pp. 11–​12). 4.4 Fernández de Kirchner’s return to developmental policies Cristina Fernández de Kirchner was elected president in December 2007, replacing her husband, who did not run for office again. She was re-​elected in October 2011 by the widest margin since Alfonsín’s election in 1983, staying in office until Mauricio Macri won the presidential election in December 2015. Breaking with her husband’s consensus-​oriented policy approach, Fernández de Kirchner did not shun domestic and international conflicts. New policies put more emphasis on state interventions, linking back to the developmental policy tradition of the post-​World War II period. Her appointments of key policymakers, particularly Mercedes Marcó del Pont to head the Bank (2010–​ 13) and Axel Kicillof to become finance minister (2013–​15), reflect this policy reversal. Both were heavily involved in the developmental policy network. Powerful interest groups rejected several of her reforms, such as an increase of export taxes on grains that resulted in widespread protests by the agrarian sector (2008); the nationalization of private pension funds (2008); the ousting of Martín Redrado over the use of foreign exchange reserves (2010); the re-​ nationalization of YPF (2012); and the adoption of a new central bank charter (2013). Fernández de Kirchner’s policies combined a turn to demand-​led growth with an emphasis on the need for strong state interventions in the financial and economic system to steer investments. The Bank introduced a range of monetary, financial, and foreign exchange policies to promote productive investments as well as encourage private and public spending. It expanded state expenditures, re-​ introduced credit policies, widened subsidies for targeted sectors, established new public funds, limited financial speculation, implemented tighter financial regulation, and enacted capital controls. Following well-​established ideas of import-​substituting industrialization, the government furthermore sought to protect the domestic industry against international competition and export taxes, which is reflected in her 2020 Strategic Industrial Plan from March 2011. Its objective was to protect the domestic market and promote exports in preselected economic sectors. In addition to the developmental expertise, Keynesian ideas about demand-​led growth were adopted, which assume that increased demand will lead to higher investments (see Marcó del Pont, 2011, p. 43). In contrast to Kirchner, Fernández de Kirchner was inclined to appoint experts from the established developmental camp in Argentina. Among those, the Grupo Fénix stands out. It was founded in the early 2000s at the University of Buenos Aires to develop and promote alternatives to Menem’s neoliberal policies (see Vanoli, 2019).8 Redrado initially continued to be Bank governor

78  Argentina: Ideologies and failed policy experiments when Fernández de Kirchner took over the presidency. However, the president decided to oust Redrado in December 2009 when he refused, after a tense back and forth, to transfer the Bank’s foreign exchange reserves for the payment of debt held by private investors (see WSJ, 2010). In his memoirs, Redrado lamented that the central bank “became the victim of [the government’s] abusive and improvised attitudes” (Redrado, 2010, p. 10). In February 2010, Fernández de Kirchner appointed Mercedes Marcó del Pont to replace Redrado. Marcó del Pont received a graduate degree in development economics from Yale University. She was a founding member of Grupo Fénix and a director of the developmental Development Research Foundation (FIDE) since 1991, as well as a former member of several research institutions (Institute of Economic and Social Development (IDES), Latin American Council of Social Sciences (CLACSO), National Scientific and Technical Research Council (CONICET)). Fernández de Kirchner previously appointed Marcó del Pont to head the Banco Nacional (2008–​10), where she implemented new credit policies (Nación, 2008).9 She was also a congresswoman in the Cámara de Diputados between 2005 and 2008, where she already proposed a reform of the new Bank Charter to strengthen coordination with the government (see Cámara, 2007). When she was appointed to head the Bank, Marcó del Pont could translate her initial proposal into the central bank charter that was enacted in 2012. She was in office until November 2013, when Fernández de Kirchner reshuffled her cabinet in a move to strengthen the Keynesian wing around Finance Minister Kiciloff10 against the more inflation-​averse wing of Marcó del Pont (Mundo, 2013; País, 2013). Marcó del Pont’s new central bank charter reflected the return of developmental policies by linking the Bank’s mandate back to the time before the neoliberal change in 1976 (BCRA, 2013, p. 18). Article 3 of the 2012 Charter states that beyond price stability, “financial stability, employment, and economic development with social equality” are the Bank’s objectives. Marcó del Pont thought that this change was necessary to promote economic development in Argentina, as advanced economies, too, followed the same interventionist central bank policies for promoting their economic development in the past (BCRA, 2012b; see also Marcó del Pont, 2010, p. 2). Referring to Raúl Prebisch’s approach to the management of international financial flows, she considered state interventions to be necessary to prevent financial instability and promote economic development (Marcó del Pont, 2010, p. 1). Reflecting the more confrontational stance compared to N. Kirchner’s presidency, Fernández de Kirchner and Marcó del Pont saw themselves in a clash with neoliberal economists. These, according to their perspective, legitimized this unequal treatment of less advanced economies by referring to imaginary “ ‘natural’ and immutable laws of the market” that politicians cannot alter (Marcó del Pont, 2011, p. 45). In contrast to Redrado and Kirchner, Fernández de Kirchner and Marcó del Pont took a more decisive step against developed countries like the United States. They saw these powerful countries using their power position to promote their own interests in an asymmetric global financial

Argentina: Ideologies and failed policy experiments  79 system instead of providing less developed countries with guidelines based on how they themselves had achieved economic development when they had been in a similar position in the past (Marcó del Pont, 2010, pp. 1–​2). Particularly international financial flows would reproduce the dependence of less economically advanced countries that benefit advanced economies according to their perspective (Marcó del Pont, 2018, pp. 39–​40). When the economy slowed down in the early 2010s, old problems like high inflation rates, volatile financial flows, exchange rate volatilities, and current account deficits reappeared. The Bank initially countered these adverse developments by deploying capital controls in November 2011. However, this further propelled capital flight and the expansion of black markets. In this dire situation, U.S. Judge Thomas P. Griesa issued the questionable ruling in 2014 of forcing Argentina to pay in full all bondholders, even those that agreed to previous rounds of debt restructuring. The subsequent debt default by Argentina was inevitable, further destabilized the financial and economic system, and strained relations between Fernández de Kirchner and global investors. 4.4.1  Monetary policy

The Bank’s monetary policy objective shifted in comparison to Kirchner’s presidency. It engaged more actively in shaping the allocation of credit to targeted sectors of the economy. Moreover, the Bank used its foreign exchange reserves to finance the government as well as conduct debt payments to private creditors. Firstly, the Bank reintroduced its credit policy for the first time since the 1980s. Credit policy was established in the 2012 Charter (Art. 4b and 17f) with the stated objective to channel financial flows to productive investments (BCRA, 2013, p. 19). A new credit facility (Credit Line for Productive Investments) ordered the 20 largest banks to allocate 5 percent of their loan portfolios to productive companies, of which 50 percent needed to reach SMEs (July 2012). Furthermore, the Bank introduced a reduction of reserve requirements for banks that allocate more than 30 percent of their loan portfolio to SMEs (December 2012). These instruments complemented the Bicentennial Productive Financing Program (PFPB), which the government established in October 2010 for extending long-​term financing via commercial banks to selected development projects (see BCRA, 2011, p. 41). Secondly, the government used monetary policy to smooth government financing (Art. 20, Bank Charter) and finance debt payments to private creditors. Temporary advances to the government, the transfer of foreign exchange reserves from the Bank to the government, and that of non-​marketable public debt securities the other way around became tools to enhance the financing of the government. This government financing jumped from 0.5 percent of GDP in 2007 to 5.3 percent of GDP in 2014 (BCRA, 2018, p. 10). In November 2008, an adjustment to the Bank Charter allowed for the use of temporary

80  Argentina: Ideologies and failed policy experiments advances to pay foreign debt. In December 2009, the government ordered the Bank to use its foreign exchange reserves to cancel public and private debt, resulting in Redrado’s dismissal in early 2010. Between 2010 and 2015, the government continuously issued non-​marketable securities and transferred them to the Bank. 4.4.2  Financial policy

Financial regulation: Financial regulation had been consistent with the regulatory tightening under Kirchner. However, it was partly adjusted to support Fernández de Kirchner’s developmental governance of financialization. This encompassed the promotion of productive lending and tightening regulations on short-​term global financial flows. The Bank aimed to use macroprudential regulations on international financial flows to promote productive investments and facilitate foreign debt repayments (BCRA, 2014, p. 17). Given increased capital flows due to currency depreciation and inflation pressure, the Bank adopted capital controls in November 2011. In addition, the Bank issued the Certificado de Depósito para Inversión (CEDIN) in 2013 to catch U.S. dollar-​ denominated assets held by the private sector to promote productive public investments. The government adjusted the Capital Market Law in November 2012 to end the self-​regulation of market actors and enhance the access of SMEs to capital markets. In February 2014, the Bank reintroduced limits to the net global position of foreign currency that it had discontinued in May 2005. It introduced a Liquidity Coverage Ratio in January 2015 to accommodate the new Basel III standards. In general, capital regulations were tight and in line with the Basel standards (BCRA, 2012a). Public financial institutions and institutional investors: Fernández de Kirchner established a number of public funds to promote her developmental policies of propelling investment and private consumption. Furthermore, she reversed Menem and Cavallo’s pension reform of 1993 to finance rising public expenditures by tapping the assets of pension funds. In December 2008, the Argentine Integrated Pension System (Spanish: Sistema Integral Previsional Argentino, or SIPA) replaced the private pension funds (AFPs), transferring their funds to the Sustainability Guarantee Fund (Spanish: Fondo de Garantía de Sustentabilidad, or FGS). The government mandated the FGS with the objective of promoting both economic development and domestic capital markets, investing up to 50 percent of its assets in productive projects (in effect, it was only around 11 to 12 percent between 2009 and 2012). Foreign investments, such as those conducted by Chile’s public funds to enhance the country’s capacity to counter global financial volatilities, were forbidden. The major position of the FGS was investments in public debt (62 percent in 2009), thus serving to stabilize public expenditure. In addition to pension assets, per the regulatory change in October 2012, insurance companies, too, had to shift their assets to productive investments.

Argentina: Ideologies and failed policy experiments  81 Furthermore, the government introduced several other public funds to promote the developmental strategy. These entailed funds to improve financing conditions for SMEs, the development of real estate, and the smoothing of access to consumer credits: Argentine Bicentenary Credit for Single Family Housing Programme (2012), National Fund for the Development and Strengthening of Micro, Small, and Medium Enterprises (2012), Car Credit Program (2014), National Bank for Technological and Social Development Projects (2014), Fund for the Argentine Economic Development (2014), and Program for the Promotion of the Consumption and Production of Goods and Services (2014). 4.4.3  Foreign exchange policy

Foreign exchange policy followed the objective of supporting debt payments, thus rendering financial stability and the promotion of the export industry secondary concerns. In conjunction with market interventions to stabilize the peso, this ultimately led to a significant depletion of foreign exchange reserves after Marcó del Pont took over in early 2010 (see Figure 4.4). Shifting away from financial stability as the primary objective of financialization governance, Fernández de Kirchner’s combination of developmental and Keynesian expertise to inform policy change induced more robust state interventions to shape conditions in the financial and economic system than her predecessor. When the economy slowed down during her second tenure, problems re-​emerged that characterized Argentina before Kirchner’s tenure. Although the size of foreign debt was contained, capital flight, black markets, and current account deficits reappeared. 4.5  Macri: reinstating neoliberalism Having served two consecutive terms as president, Fernández de Kirchner had to leave office in December 2015. Against the background of financial and economic instability, the candidate of the Peronist camp (Daniel Scioli) lost narrowly against the neoliberal Mauricio Macri from the Republican Proposal (PRO), a party he co-​founded in 2005. For the third time since Menem’s neoliberal turn, a significant change in the governance of financialization occurred, encompassing the adoption of a range of neoliberal policies (reducing fiscal expenditure taxes, tariffs, subsidies, privatizations, financial liberalization). Although they resembled the approach of experts during the Convertibilidad and the policymakers shared their belief in the benefits of liberalized financial markets, the neoliberal experts appointed by Macri did not go so far as to give up monetary and foreign exchange policies entirely. Instead of adopting a peg, Macri opted for a floating exchange rate regime, believing that this would preempt speculative financial flows. Financial markets remained regulated but were opened again to international financial flows. In December 2015, Macri established his new policy approach with the appointment of Frederico Sturzenegger to head the Bank after his predecessor

82  Argentina: Ideologies and failed policy experiments Alejandro Vanoli resigned following Scioli’s electoral defeat. The selection of Sturzenegger to inform policy change induced the translation of neoliberal expertise into policies. This expertise was strongly influenced by Western monetary, financial, and foreign exchange policy norms. Following these norms, Sturzenegger believed in the efficient credit allocation of free financial markets and in the necessity of limiting the objective of monetary policy to price stability. According to him, economic growth will return when inflation is curtailed (Sturzenegger, 2016d, c, 2017b). He thereby follows a monetarist understanding of monetary policy, which implies that inflation is simply a result of too much money in the system (Sturzenegger, 2016d). The Bank thus needs to reduce the circulating money, discontinue credit policy, stop financing the government, and liberalize the financial system to foster economic growth (Sturzenegger, 2017e, d). Although he has an academic background, Sturzenegger previously gained experience in the political sector as he worked under Cavallo in the ministry of the economy in 2001 and as a parliamentarian for Macri’s PRO in the Chamber of Deputies (2013–​15). He was in direct opposition to Marcó del Pont in his emphasis that monetary, financial, and foreign exchange policies are not a political but merely a technical exercise that needs to be conducted by (neoliberal) economists (see Sturzenegger, 2017c). He gained a Ph.D. from the Massachusetts Institute of Technology, was an economics professor (UCLA and Harvard in the United States, as well as Torcuato Di Tella University in Argentina), and made several academic publications. According to him, “[neoliberal] economics provides a framework for thinking about the real world in a more provocative, challenging and ultimately correct way” (Sturzenegger, 2016a, emphasis added). Sturzenegger believed that Argentina merely needed to copy the monetary, financial, and foreign exchange policies that advanced Western economies adopted. Then, economic growth and financial stability would automatically come about. Sturzenegger continuously refers to Western central banks like the Federal Reserve as the standard of reference that should be strived to (and not their monetary policy when they were less advanced as proposed by Marcó del Pont). Asymmetries in the global financial system were, in contrast to his predecessors under Fernández de Kirchner, of no concern to Sturzenegger. According to Sturzenegger, the only challenge is to achieve convergence with global best practices and to become a “normal country”: [I]‌t is just a matter of taking advantage of international experience. To learn from the path already traveled by others. In this way, instead of trying to re-​invent the wheel, instead of replicating mistakes that have already been made throughout international history, instead of thinking that we are going to do everything better, we choose the path of working on what has already been learned in other parts of the world […] We simply have to implement the monetary policies that worked, and dare to face the challenges involved in changing the history of our country. (Sturzenegger, 2016b)

Argentina: Ideologies and failed policy experiments  83 Given his personal background, his new policy approach, and the repayment of the last vulture funds in early 2016, Macri could significantly improve relations with the international finance community. For the first time since 2001, the government could again access the international capital markets. However, similar to the 1990s, foreign debt increased rapidly for both the public and private sectors (Figure 4.2). Households used the chance to exchange peso-​ denominated assets for USD-​denominated ones, thus undermining the stability of the peso. Yet another time, increases in policy rates by the Federal Reserve in 2017 and 2018 triggered market volatilities and liquidity problems in Argentina. Again, the country could not roll over its foreign debt. Like in the late 1990s/​early 2000s, the IMF was called to provide financial support in June 2018, when the biggest ever Stand-​by Arrangement by the IMF (USD 50 billion) was approved. The agreement contained demands for structural reforms, including the need to update the Bank Charter to increase its independence and discontinue transfers to the government.11 When financial markets deteriorated further in 2018, Macri dismissed Governor Sturzenegger after their relationship grew tense (Clarín, 2018). He was replaced by Luis Caputo, also a member of Macri’s PRO, who was transferred from the finance ministry to take the job. To regain control over a deteriorating financial and economic system, the government announced a price freeze on fuel in August 2019 and conducted a restructuring of government securities. Argentina was, again, not able to place its debt on international markets. 4.5.1  Monetary policy

Sturzenegger aimed to conform to the norms of advanced Western economies in the conduct of monetary policy. This included swapping non-​marketable for marketable securities on the Bank’s balance sheet to reduce the implicit monetization of public debt. Moreover, the government ended credit policy (December 2015) and adopted an inflation target by introducing a short-​term policy rate (transition from the 35-​day LEBAC to the 7-​day LELIQ between January 2017 and January 2018). When financial and economic volatilities emerged, the Bank declared a return to targeting the monetary growth rate in October 2018 to strengthen the Bank’s control over the financial system. Following monetarist norms to stabilize the currency, the Bank increased the policy rate strongly from 27.25 percent in March 2018 to 68 percent in October 2018. This further weakened the economy by making access to credit more expensive. 4.5.2  Financial policy

Similar to the 1990s, the government deepened financialization following the regulatory tightening under the Kirchners, particularly concerning international financial flows (see Table 4.2). This included the liberalization of transactions by foreign exchange bureaus, agencies, and offices; the

84  Argentina: Ideologies and failed policy experiments Table 4.2 Regulatory changes in Argentina’s financial system under President Macri December 2015 January 2016 April 2016 April 2016 June 2016 November 2016 & April 2017 December 2016 & April 2017 January 2017 April 2017 January 2018 May 2018 November 2018

Reduction of foreign currency reserve requirements Establishment of a capital buffer for global systemically important banks Easing of capital requirements Establishment of a countercyclical capital buffer Lifting of Net Foreign Currency Position Allowing the use of foreign currency deposits for lending purposes Easing foreign exchange operations by financial institutions Allowing banks to pay interest on deposits in current accounts Increasing limits to financial transactions in both domestic and foreign currency Introduction of Net Stable Funding Ratio (Basel III) Net Foreign Currency Position was reintroduced Adjusting the regulatory frameworks for financial markets (Law 27.440): adjusting derivatives regulations, lowering taxes for productive investments by mutual funds, promoting access to new funding sources for SMEs

deregulation of outward direct investments by Argentine companies; the elimination of unremunerated reserve requirements; the liberalization of international derivatives transactions; and the elimination of requirements concerning the duration of financial inflows. In July 2017, the Bank imposed stricter regulations on the public debt holdings of financial institutions. Moreover, it adjusted financial regulations to Basel III norms, including the adoption of regulations of systematically important banks (January 2016), a countercyclical capital buffer (April 2016), and Leverage and Net Stable Funding Ratios (January 2018). In 2018, the government of Argentine President Mauricio Macri was compelled to implement a renewed regulatory tightening of international financial flows due to the resurgence of financial volatility. With the Bank’s reintroduction of the Net Foreign Currency Position in May 2018 (it had been lifted in June 2016), regulations of international financial flows returned. The Bank reintroduced capital controls and reinstated limits on the purchases of foreign assets for no specific use. In October 2019, dollar purchases were limited to USD 200 per month for individuals, down from the previous USD 10,000 per month. These regulations were complemented in September 2019 when export companies were again obliged to sell their foreign currency incomes in the domestic market. The Bank partly loosened control over financial flows via public financial institutions and institutional investors, such as by ending the requirement for institutional investors to invest in productive projects (January 2016). Notably, Macri continued to use the FSG, which had lost 17 percent of its value since 2015, for financing public debt (see also Página12, 2019; Infobae, 2020). The government restructured other public financial institutions, such as the

Argentina: Ideologies and failed policy experiments  85 National Fund for the Development and Strengthening of Micro, Small, and Medium Enterprises, or discontinued them, like the Argentine Bicentenary Credit for Single Family Housing Programme (Government, 2020). In an attempt to spur the growth of domestic capital markets, Sturzenegger copied Chile’s idea of the Unidad de Fomento: Unidades de Vivienda (UVI) and Unidades de Valor Adquisitivo (UVA) were introduced as indexed measures of account (Sturzenegger, 2017a). However, during Macri’s presidency, capital and financial markets did not experience significant growth. 4.5.3  Foreign exchange policy

In December 2015, Macri and Sturzenegger announced, in one of the first decisions of the new government, the removal of restrictions on the foreign exchange market and the end of foreign exchange interventions to let the price of the peso float freely. They believed that combining a floating exchange rate with free international financial flows would induce discipline in public and private investments. Similar to the 1990s, this liberalization of the foreign exchange market resulted in heavy financial outflows, a buildup of foreign debt, a rapid devaluation of the peso, and a strong current account deficit. Figure 4.2 depicts how foreign debt of the government and non-​financial corporations jumped under the liberalization policies of Macri. Simultaneously, there was a renewed accumulation of foreign exchange reserves following strong financial inflows between 2015 and 2018 (Figure 4.4). Due to market volatilities, the Bank reintroduced a managed exchange rate regime with upper and lower limits of non-​intervention under Sturzenegger’s successor, Luis Caputo, in 2018. Throughout the second half of 2018 and 2019, Caputo deployed foreign exchange interventions to stabilize the foreign exchange market. The IMF criticized these interventions, fundamentally resulting in the replacement of Caputo with Guido Sandleris, an economist with close linkages to the IMF (FT, 2018).12 4.6 Conclusion The appointment of experts to key policymaking positions was consequential in affecting policy change throughout the four observed time periods. While several structural factors, including differences in the political system, help explain policy divergence in Argentina like in Chile, this chapter showed that the appointment of experts at critical junctures enhances existing explanations of the observed policy change. Fernández de Kirchner and Macri’s policy choices fit well into structural explanations about policy change. They appointed experts from established developmental and neoliberal policy networks and were concerned about satisfying their key voter base. This was different from Menem and Kirchner, whose strategic consideration in the appointment of experts induced policy change that structuralist theories can only insufficiently explain. While the former turned away from the key Peronist

86  Argentina: Ideologies and failed policy experiments electorate and supported privileged groups in society, the latter pursued a conciliatory approach, forging compromises between opposing groups in society. They exerted political agency by selecting Cavallo and Redrado as outsiders to their respective policy networks for the purpose of informing policy change. It seems unlikely to assume that similar policies would have been adopted if they had selected experts as previously expected. Generally, Argentina’s governance of financialization has remained unstable and experienced vast changes when a new government took power. Other factors have shaped the observed policy output and affect the comparability to policy change in Chile. Although both countries are presidential democracies where the president can use decrees to force policy change, government initiatives like Macri’s attempt to reform the Bank Charter failed due to a lack of majorities in the bicameral Congress (Interview with former Bank policymaker, Buenos Aires, 19 September 2018). These majorities are more difficult to obtain than in Chile, given the more fractured party landscape and stronger divisions across the provinces as well as between the federal capital and the rest of the country. In Argentina, a coordination of parties similar to the Concertación in Chile, which resulted in a unified policy network, did not occur. Moreover, the incoming democratic government under Raúl Alfonsín was more confrontational with the military dictatorships than Chile’s Concertación. This included the sentencing of Dictator Vidal to jail for life, a decision that was overturned under Menem but was reinstated under Fernández de Kirchner in 2007 (see Huser, 2002). The two opposing policy networks have continued to exist, including tight interlinkages between politicians, experts, and private interests. This lack of convergence around one type of expertise made policy continuity in Argentina less likely to occur. The reversal of Kirchner’s relatively successful policies by Fernández de Kirchner after 2007 is a case in point. Lack of continuity is also expressed in the frequent replacement of key policymakers before the official end of tenures, often due to strategic concerns by government leaders or conflicts between them and key policymakers. The high turnover rate of governors occurred even though the Argentine central bank gained independence in 1991 (see Table 4.1). Presidents have recurrently replaced central bank governors not only when governments changed but also when it was convenient to do so for the president (scapegoating). Even the neoliberal Macri, who condemned populist policies and emphasized the need for central bank independence, dismissed two central bank governors when it was convenient for him to do so. Unlike in Chile and with the exception of Kirchner, presidents did not pursue compromises to bridge cleavages in the internally divided country that suffered frequent military coups as well as political, economic, and financial instability (see also Nagel, 2020). Whereas the Concertación propelled stability by political choice to adopt policies from the dictatorship, instability and division characterized the return to democracy in Argentina under President Raúl Alfonsin (1983–​89), which have remained unresolved until today. Despite Argentina’s fragmented political system with strong provincial leaders and multiple veto points, changes to the governance of financialization

Argentina: Ideologies and failed policy experiments  87 were considerable. The appointment of experts with strong, often ideological beliefs regarding the necessary policies to overcome Argentina’s problems further propelled change. For example, it would be unlikely to assume that Menem would have induced the dogmatic Convertibilidad experiment without the appointment of Domingo Cavallo or that Kirchner would have pursued similar pragmatic policies if he appointed an expert from the developmental policy network. That structures continue to have a substantial effect on policy change can be seen with Fernández de Kirchner and Macri, who appointed experts to induce policy change who belong to well-​established expert groups: In the case of Sturzenegger, he even belonged to the same party as Macri; in the case of Marcó del Pont, she was a founding member of Grupo Fénix and affiliated with developmental research institutions. Another factor that played into policy change in Argentina was the IMF. While Chile was successful in increasing its independence from it after its successful recovery in the 1980s, Argentina had to continuously consult the IMF on policymaking as it frequently relied on its liquidity support in the 1980s, early 2000s, and late 2010s. Only during the temporary stability of the Convertibilidad did the IMF not intervene in Argentine policymaking, despite the buildup of financial risks. Argentine policymakers criticized this lack of IMF intervention after the 2001 crisis. After the 1982 crisis, too, did President Alfonsín adopt a more confrontational approach to the IMF compared to Pinochet and Büchi in Chile (see NYT, 1987). This changed with the presidency of Kirchner, who could smooth the relationship with the IMF as he was eager to quickly repay the debt to the IMF to regain sovereignty over domestic policymaking. The relationship with the IMF and the international financial community deteriorated significantly again under Fernández de Kirchner, who drew criticism for the nationalization of YPF in the international financial community and, among others, criticized the IMF openly in the UN General Assembly in September 2012. In a tit-​for-​tat, the IMF censured Argentina after 2013 due to statistical manipulation (see Fernández de Kirchner, 2012; Bloomberg, 2013; NYT, 2012). The relationship with the IMF improved under Macri before it worsened again under current president Alberto Fernández (see Reuters, 2016; WSJ, 2019). Except for Kirchner’s presidency, governments did not hesitate to induce partisan politics to satisfy their voters. While the IMF’s critical stance toward left-​wing governments in Argentina may come with disadvantages, such as during negotiations of emergency funding, this did not have a strong effect on the governments’ policy paths, most notably under Fernández de Kirchner. Private interests, politics, and experts have often been closely interrelated, more pronounced with the neoliberal policy network than the developmental one. Examples include Luis Caputo, who worked for several financial institutions like Deutsche Bank and was briefly governor of the Bank in 2018 after heading the ministry of finance for one and a half years, and his successor, Guido Sandleris, who was an economics professor, worked for an investment company, and the finance ministry under Macri before becoming

88  Argentina: Ideologies and failed policy experiments the central bank governor in September 2018. Governor Sturzenegger was not only a party member of Macri’s PRO but also a Congressman before taking office. Governor Prat-​Gay (2002–​04) was Congressman for Civic Coalition ARI (2009–​13), which would later enter a coalition with Macri’s PRO, under which he was finance minister (2015–​16). He also founded a consulting firm and worked in private banking, including for JPMorgan (1994–​2001) during the 2001 crisis, thus having a direct interest in the debt repayment of Argentina. Moreover, presidents were frequently charged with corruption crimes after leaving office, including Menem, Fernández de Kirchner, and Macri. While the role of interests often serves well to explain the adopted policy changes, this is less the case with Menem’s surprise nomination of Cavallo and the adoption of financial stability-​directed policies under Redrado. Monetary, financial, and foreign exchange policies played only one factor in explaining Argentina’s continuous dire financial and economic situation. Nevertheless, one interview partner noted that Argentine policymakers have often failed to “put sand in the wheels” of the financial system and instead nurtured boom cycles (Interview with former Bank policymaker, online, 23 January 2019). It is notable how the experience of similar crises in 1982 induced governments and policymakers to pursue highly dissimilar forms of governing financialization. This became most evident with Cavallo’s Convertibilidad, which propelled a renewed buildup of international financial imbalances over the 1990s. Another striking difference with Chile has been the use of public financial institutions and institutional investors, which have often served as a funding source for governments instead of propelling domestic capital markets and accumulating foreign reserves to promote independence from global finance and help safeguard financial stability. Moreover, governments’ decision to consolidate debt via non-​marketable securities on the Bank balance sheet since the 1980s instead of swiftly liquidating them via newly created domestic capital markets, as in Chile, did not support stability. Notes 1 Perón’s influence on post-​World War II political, financial, and economic history in Argentina has been strong. Peronism has been the most important political movement in Argentina that encompasses multiple parties from the developmental to the neoliberal spectrum. Perón drew on nationalist and developmental ideas that were inspired by European fascism of the 1930s and 1940s (Huser, 2002, pp. 34–​35; Romero, 2002, p. 108; Loveman, 1997, p. 58). 2 Martínez de Perón was the wife of Juan Perón, who returned from exile in 1973 and replaced him when he died the following year. 3 The National Securities Commission (CNV), which is linked to the finance ministry, supervises capital markets. 4 While Bank governor Domingo Cavallo introduced exchange rate guarantees in 1982, his successor Julio García Del Solar transformed the guarantees into an actual nationalization of foreign debt in 1983 (Cavallo and Cavallo, 2017, p. 163).

Argentina: Ideologies and failed policy experiments  89 5 In combination with the debt accumulated in the 2001 crisis, this amounts to ARS 3.4 trillion (USD 57 billion) by late 2019. The 1990 Argentine Treasury Consolidated Bond was issued to finance the government debt to deal with the fallout of the 1982 debt crisis. It is to be amortized in 90 annual installments over 99 years (later changed to 80 annual installments). 6 The relatively successful presidency of Kirchner benefitted from favorable external conditions, including an increase in global liquidity and higher commodity prices. See Weisbrot et al. (2011) for a discussion of the view that the commodity price boom caused economic recovery in Argentina. 7 The Bank renewed the swap line with the Chinese central bank in 2014, amended it in 2015, and again renewed it in 2017. 8 Among the group members were also Alejandro Vanoli, Marcó del Pont’s successor as Bank governor (October 2014 to December 2015). Vanoli was president of CNV before taking this position. In December 2019, President Alberto Fernández appointed him to head the National Social Security Administration. Further members of the group were Eduardo Hecker (president of Banco Nación since December 2019; president of CNV 2006-​09), Arturo O’Connell (worked at Bank from 1959-​2015 in various positions), Aldo Ferrer, and Julio Olivera. 9 Juan Carlos Fabrega (2010–​13) followed her at the Banco Nación and was also Marcó del Pont’s successor as the Bank’s governor. 10 Axel Kicillof, Fernández de Kirchner’s secretary of the economy (2011–​13) and finance minister (2013–​15), was a firm Keynesian-​Marxian academic. He was a professor at several Argentine universities and contributed to the developmental policy change. Kicillof was also a central actor in the renationalization of YPF in 2012 and tensions around U.S. Judge Griesa’s questionable ruling in 2014 that Argentina needs to fully pay back vulture funds. 11 In March 2019, the government sent a bill to Congress to change the Bank Charter. It entailed an increase in independence, the return of price stability as the sole objective, and reduced transfers to the government. Due to a lack of support, this bill did not pass during the remaining months of Macri’s tenure. 12 Although a strong supporter of central bank independence, this episode indicates that the IMF would intervene in the policies of independent central banks if the governor acted in an undesired way.

Intermediary section

In Japan and South Korea, empowering expertise has been as consequential in shaping policy change as it has been in Argentina and Chile. A crucial difference between the two pairs is the role of the bureaucracy, which has been a powerful actor in policymaking during Japan and South Korea’s developmental era (1945–​90s), and the big conglomerates (keiretsu in Japan, chaebols in South Korea). In contrast to the relative direct impact of the Argentine and Chilean presidents on the governance of financialization, governments in Japan and South Korea faced resistance from these actors in their pursuit of inducing policy change. Thus, governments developed strategies to shift the power balance in their favor. Expert commissions played an instrumental function for governments that aimed at sidelining the bureaucracy in the development of blueprints for institutional and policy change. The governments executed the plans when times of crisis weakened the resistance of the domestic veto players. This modification of developmental institutional structures strengthened government control over policymaking. Both political agency (to conduct institutional change and change the governance of financialization) and expert agency (to determine policy substance) are identified in both cases. While in some periods, particularly in Japan under Prime Ministers Hashimoto and Koizumi, policy converged with Western norms, this was different in other periods, such as during Prime Minister Abe’s monetarist turn. In South Korea, this has been the case, too: policy substance underpinned a governance of financialization that revolved around financial stability after the 1997 crisis.

DOI: 10.4324/9781003414858-5

5 South Korea Overcoming authoritarian developmentalism, safeguarding financial stability

This chapter demonstrates how governments’ selection of experts for key ­policymaking positions has informed policy change in South Korea. Additionally, experts have been instrumental in helping governments induce institutional change. To empower new expertise to shape policy change, governments had to surmount the domestic resistance of two actors that were at the center of South Korea’s developmental era (1945–​93): the bureaucracy (particularly the ministry of finance) and the large conglomerates (chaebols). While the former aimed to defend its central position in the policymaking process, the latter wanted to make sure that it maintained a privileged position compared to their domestic and international competitors. Since the 1980s, governments have endeavored to transform these developmental structures with varying degrees of vigor. It was only President Kim Dae-​jung (1998–​2003) who could enact institutional reforms that profoundly reformed Korea’s developmental structures and induced change to the governance of financialization. Similar to Argentina and Chile, following initial financial liberalization, a financial crisis in 1997 triggered these changes. South Korea’s governance of financialization is divided into two periods: A period of unregulated international financial flows (1993–​97) was followed by an era of financial stability-​oriented policies (since 1998). Similar to the Latin American cases in the 1970s, South Korea faced international pressure, particularly from the United States, to open its financial system in the 1980s. However, financialization under the presidencies of Chun Doo-​hwan (1980–​ 88) and Roh Tae-​woo (1988–​93) occurred slowly and gradually. Only under President Kim Young-​sam (1993–​98), Korea’s financial system was opened to large-​scale international financial flows that, similar to Argentina and Chile in the 1970s, were not accompanied by the adoption of new policies to regulate them. As a result, financial risks built up that unraveled in a financial crisis in 1997 when panicking global investors pulled out their financial investments after a currency crisis in Thailand in July 1997 spread over the continent. The government of Kim Dae-​jung used this crisis, taking advantage of pressure from the IMF, not only to induce change to monetary, financial, and foreign exchange policies but also to implement institutional change that strengthened the control of the government over these policies vis-​à-​vis the bureaucracy. DOI: 10.4324/9781003414858-6

94  South Korea: Overcoming authoritarian developmentalism Two instances are identified where governments exerted political agency through the appointment of experts to key policymaking positions that subsequently informed policy change. Firstly, Presidents Kim Young-​sam and Kim Dae-​jung established expert commissions to sideline domestic opposition and inform institutional and policy change in the 1990s. Given that responsibility for policy change during the developmental era was located primarily within the bureaucracy, these expert commissions became instrumental in developing blueprints for reforms the government favored. When the 1997 financial crisis temporarily weakened the power of the ministry of finance and the chaebols, the government used this window of opportunity to execute these blueprints. These institutional reforms weakened the bureaucracy and strengthened the president’s leverage over controlling monetary, financial, and foreign exchange policies. The second instance of agency occurred when President Lee Myung-​ bak (2008–​13) took the strategic decision to give up his neoliberal policy agenda based on which he was elected. Instead, he appointed prominent outsiders to key policymaking positions and deepened the institutional reforms of his predecessors. These outsiders strengthened policies to regulate international financial flows and supported South Korea’s attempt to reform global financial governance in the G20. Given that adopted policies were highly innovative and sophisticated in safeguarding financial stability, expert agency was conducted based on experience-​based knowledge. The subsequent section gives a brief overview of the developmental era in South Korea (Section 5.1). Next, the governance of financialization under Kim Young-​sam and institutional reforms under Kim Dae-​jung in the 1990s are analyzed (Section 5.2). Section 5.3 investigates Lee Myung-​bak’s selection of experts to inform policy change. Section 5.4 concludes and discusses competing and complementary explanations. 5.1  South Korean developmentalism (1945–​93) and financialization under Kim Young-​sam (1993–​98) During Japan’s brutal colonization of South Korea (1910–​45), Japanese developmental ideas were translated into South Korean institutions in a more or less sustainable way (see Thurbon, 2016, ch. 3 and 4; Amsden, 1989, pp. 32–​35, 47; Clifford, 1994, pp. 26–​28; Eckert, 2014; Cumings, 1984; Kohli, 2004; Kohli, 1994; Woo, 1991; McNamara, 1990; Kim, 1992).1 In the following four to five decades, authoritarian military regimes maintained and strengthened developmental policies in South Korea. Particularly linked to this era is the regime of General Park Chung-​hee (1961–​79), who previously served in the Japanese army. The policies were aimed at promoting export-​oriented economic growth, which helped to lift the country from being one of the world’s economically poorest to one of the most successful emerging market economies (Kim and Vogel, 2011; Kohli, 2004, ch. 3). The production focus was gradually upgraded, moving from primary products (1950s) to light industry (1960s) and heavy industry (1970s) (see Kim, 2004).2

South Korea: Overcoming authoritarian developmentalism  95 Economic development was coordinated and controlled by the bureaucracy. The ministries established their own research institutes for informing policymaking (Mo and Lee, 2014, p. 100). The Ministry of Finance, the Economic Planning Board, and the Ministry of Commerce deployed firm state control over monetary, financial, and foreign exchange policies (Yoon and Kim, 1995; Vittas and Cho, 1996; Amsden, 1989). The Bank of Korea (Bank) was subordinated to the finance ministry, and commercial banks were nationalized, resulting in strong state control over credit allocation. Although not a dictatorship, South Korea remained an authoritarian state until massive countrywide protests emerged in 1987 that resulted in the establishment of democracy in the same year. Unlike in Argentina and Chile, there was no translation of Western neoliberal expertise into policies during the authoritarian regime. Instead, the authoritarian governments remained closely linked to developmental policies and the chaebols. The call for market-​friendly reforms has thus been deeply associated with South Korea’s democratization movement and helped gather support for the democratic candidates Kim Young-​sam and Kim Dae-​jung, both leading opposition figures under the military regimes. The geopolitical position of South Korea at that time is crucial to understanding why there was no such direct translation of neoliberal expertise propelled by the dominating United States in its war against communism. In contrast to Argentina and Chile, South Korea was strongly opposed to communism during the Cold War. The United States was less likely to undermine South Korea’s political stability and intervene in domestic policymaking as it did with its support of right-​wing dictatorships in Latin America that served as a bulwark against the rise of communism. Given the constant threat from communist North Korea, the United States had offered political and economic aid to South Korea. When U.S. support became more uncertain under the Nixon doctrine (1969), General Park further promoted economic development by guiding production toward heavy industry, which he saw as the basis of South Korea’s “national power” (Park, 1970, p. 124; see also Woo, 1991; Kohli, 2004, ch. 2). Thus, politicians and the bureaucracy were less inclined to institutionalize neoliberal expertise. Instead, the ministries could draw on expertise from their research institutions and maintain a relatively tight grip on policy change. Against this absence of neoliberal ideas, South Korean politicians and policymakers were hesitant to liberalize the financial system as abruptly as their peers in Latin America did. Rather, they committed to a gradual approach to increase benefits from international financial and economic flows without jeopardizing their control over the development of the financial system (see Lindner, 1994; Amsden and Euh, 1993, p. 379; Kong, 2000, p. 75). The active role of the state in guiding economic development, including by shaping credit allocation, was largely maintained (Woo, 1991, ch. 7; Okabe, 2014, Kong, 2000, p. 80). In contrast to the Latin American cases, international influence was less consequential, and policymakers could exert more control over financialization processes and thus adopt a more gradual approach.

96  South Korea: Overcoming authoritarian developmentalism General Chun Doo-​hwan (1980–​88), who followed as president after the assassination of Park Chung-​hee in a coup d’état in 1979, initiated a tentative liberalization of the financial system. Like in Japan, growing pressure from the United States to open its financial system for rebalancing the global economic system and expand profitable investment opportunities for global investors fueled this process (see Woo, 1991, p. 183). However, the country’s position as an important ally against communist enemies, impressive economic growth, the lack of disastrous crises similar to the 1982 crises in Argentina and Chile, and the presence of sophisticated expertise produced by the bureaucracy made an extreme policy change towards Western neoliberalism less likely. More serious efforts to liberalize international financial flows and the domestic financial system were conducted under President General Roh Tae-​woo (1988–​93), but economic instabilities in the late 1980s led him to postpone further liberalization (Bedeski, 1994, pp. 86–​87; Thurbon, 2016, p. 81; Shin, 2003, 116). Kim Young-​sam’s financialization and the 1997 financial crisis: It was only under the presidency of Kim Young-​sam (1993–​97), a leading figure in the democratic opposition during the military regimes and the first non-​military head of the government since 1962, that international financial flows were substantially liberalized (KIIEP, 1993; Kim and Yang, 2010). This coincided with the weakening of state capacity to conduct developmental policies. The power of the financialization-​skeptical finance ministry (Ministry) was reduced vis-​à-​vis the government by its emblematic merger with the neoliberal Economic Planning Board in 1994 to form the Ministry of Finance and Economy (Chang, 1998). Moreover, the government abolished the Ministry’s influential International Finance Bureau in 1994 (Lee and Hong, 2019, p. 90). This gradual change in the bureaucracy allowed Kim to support his segyehwa (globalization) agenda, which encompassed policies to promote financialization (Thurbon, 2003). A facilitating factor to this institutional reform was the gradual inflow of neoliberal expertise in the Economic Planning Board and the Bank. Under the guidance of Nam Duck-​woo (Economic Planning Board Minister, 1969–​ 78), the Economic Planning Board and its affiliated Korea Development Institute (KDI) increasingly hired neoliberal, U.S.-​educated economists in the 1970s as well as in the 1980s (Amsden, 1994; CIA, 1983). In 1971, General Park established the government-​sponsored KDI to promote the production of domestic expertise to inform policymaking, including by supporting the Economic Planning Board in creating the five-​year economic development plans. It has continuously published research and articles about monetary and financial policy, thus allowing the government to strengthen its position relative to the bureaucracy (Chosun, 2001a). Albeit to a lesser extent, the Bank, too, began to hire neoliberal economists in the 1970s and 1980s (see CIA, 1983; Kim, 2011a, p. 207; Kim, 2004; Clifford, 1994; Kim, 1999; Hwang, 1996, p. 312; Interview with former Bank policymaker A, Seoul, 6 March 2019). This influx of neoliberal knowledge resulted in a gradual change of expertise within the state that, nevertheless, remained dominated by the Ministry’s developmental ideas.

South Korea: Overcoming authoritarian developmentalism  97

Figure 5.1 South Korean banks’ short-​term net-​external debt (USD million). Source: BoK ECOS (8.7.3 Net External Assets).

The governance of financialization under Kim Young-​sam resulted in a boom in financial inflows. However, the government did not introduce new regulations to control the risks attached to them. Therefore, the spike in unregulated international financial inflows in the mid-​ 1990s resulted in a rapid buildup of foreign debt, as it did in Argentina and Chile (Figure 5.1). Financial risks were further propelled by non-​banks established by chaebols to bypass financial regulations (Chang et al., 1998; Kim, 2018; Amsden and Euh, 1993, p. 383). The chaebols could thereby tap new, cheap sources of finance. Since, at the same time, incoming foreign direct investments remained tightly regulated, this strengthening of financial independence from the regulated domestic financial system did not come with the cost of having to fear foreign takeovers. Given that in the preceding decades the state was able to prevent any financial institution from going bankrupt, South Korean policymakers did not expect that this would change once they liberalized international financial flows (see Lee and Hong, 2019, p. 67; Woo, 1991, p. 13). Similar to their peers in Argentina and Chile, they did not account for the risks attached to international financial flows. Against this background, South Korean policymakers lacked the instruments to respond to financial outflows caused by panicking global investors after massive pressure from global investors forced Thailand to give up its dollar peg in July 1997. Considering that the degree of transparency over credit risk was low, the substantial amount of non-​performing loans in the domestic financial system was only revealed when global liquidity dried out. As debt-​to-​equity ratios came close to 400 percent in 1997, bankruptcies in the private sector accumulated to KRW 45 trillion (USD 37 billion) in bad loans by late 1999 (Park, 2002b). As their colleagues in Latin America in 1982, South Korea’s policymakers were confronted with a collapsing financial and economic system that was triggered by the abrupt stop of international financial inflows.

98  South Korea: Overcoming authoritarian developmentalism Similar to Chile under Büchi in the mid-​1980s, South Korean policymakers focused on restoring liquidity and making accumulated debt marketable as quickly as possible. The government used public funds to stabilize illiquid financial institutions and dispose of non-​performing loans. The public Korea Asset Management Corporation (KAMCO) purchased them, transformed them into asset-​backed securities, and sold them in newly created capital markets (see Section 5.2.2). Institutions that policymakers considered insolvent were resolved. To promote the inflow of much-​needed foreign finance, the government promoted financial inflows by guaranteeing all foreign debt (August 1997), introducing the Financial Market Stabilization Plan (October 1997), and establishing a full deposit guarantee (November 1997). In January 1998, the government negotiated a maturity extension of short-​term foreign debt. With the support of these policies, South Korea could quickly re-​access international capital markets in April 1998, stabilizing the financial system. Debt-​ to-​equity ratios constantly shrank, reaching 104 percent by 2004. The path to institutional reform: As in Argentina and Chile, governments regarded financialization as a means for political transformation. It was convenient for military dictatorships in Argentina and Chile to draw on neoliberal experts educated in the United States to inform their attempts to transform the country. South Korean politicians, too, perceived financialization as a convenient choice. Rather than an objective in itself, Presidents Kim Young-​sam and Kim Dae-​jung considered financialization a useful means to strengthen the new democracy since it helped overcome developmental structures that were built on a close relationship between military regimes, bureaucracies, and chaebols. Kim Dae-​jung was elected president in 1998 based on the promise to consolidate democracy in Korea. In his inaugural address, he emphasized that [d]‌emocracy and the market economy are like two sides of a coin or two wheels of a cart. If they were separated, we could never succeed […] I firmly believe that we can overcome today’s crisis by practicing democracy and a market economy in parallel. (Kim, 1998) The government thus expected international financial flows to promote changes in the economy and democratize the country by reducing the power of the bureaucracy and chaebols (see MoF, 1999, for Kim Dae-​jung’s official policy agenda). At the same time, the 1997 crisis experience strengthened the new government’s conviction that monetary, financial, and foreign exchange policies had to be changed to regain control over the crisis-​ridden liberalized financial system. However, the government required institutional reforms in order to enable it to translate its preferences into the conduct of policy change. This form of institutional change was already envisioned under Kim Young-​ sam’s predecessors, but although the 1994 reforms weakened the Ministry, it could retain control over the governance of financialization. To overcome domestic resistance and establish control over policy change, Kim Young-​sam

South Korea: Overcoming authoritarian developmentalism  99 and Kim Dae-​jung drew on expert commissions as a key mechanism (see Choi, 2001; Rhee Baum, 2007; Kim, 2000). These expert commissions were tasked with developing blueprints for institutional change, entailing the Segyehwa Committee (established January 1995) and particularly the Presidential Committee on Financial Reform (established January 1997) (see Rhee Baum, 2007). Out of the latter’s 31 members, half were full-​time economists, and the remaining were from business and finance (Hahm, 1998, p. 1). The Committee designed a set of reforms that entailed changes to financial regulation, monetary policy, and corporate governance (see PCFR, 1997). In August 1997, Kim Young-​sam integrated various expert commissions to establish the presidential Regulatory Reform Committee under the Basic Act on Administrative Regulations to strengthen the political impact of its policy recommendations (MoF, 2011, p. 71). The Committee’s mandate was powerful, as it entailed, among other things, the responsibility for deliberating, reviewing, and coordinating the “basic direction of regulation policy as well as research and development of regulatory institutions” (Act No. 5368, Art. 24). With the blueprints for institutional and policy change in place, only a critical juncture that sufficiently weakened resistance from the bureaucracy and chaebols was missing. This window of opportunity opened with the 1997 financial crisis, for which both veto players served as scapegoats (ruthless financing by the cheabols, regulatory failure by the Ministry). South Korea required temporary liquidity support from the IMF, which implied the need for committing to IMF-​supported neoliberal institutional and policy change. South Korean policymakers were eager to reassure global investors by stating their commitment to the IMF agenda to liberalize financial inflows. Some corresponding policies followed the government’s open commitment to Western neoliberal institutional and policy change, indicating a causal function of international pressure. However, the evidence rather points to the role of the IMF as a facilitator for the reforms already previously envisioned by Kim Young-​sam and Kim Dae-​jung. Evidence indicates that IMF pressure catalyzed their goal to overcome domestic opposition to institutional and policy reforms prepared under expert commissions established by Kim Young-​sam in the mid-​ 1990s. Most of the IMF’s demanded reforms of monetary, financial, and foreign exchange policies were previously developed in these commissions (see Hahm, 1998, p. 30; Lee and Hong, 2019, pp. 214–​215). Interviewees supported this facilitating role of the IMF, stating that similar reforms would have been adopted eventually, calling the 1997 crisis a “disguised blessing” (Interview with former Bank policymaker B, Seoul, 8 March 2019; also interview with former Ministry policymaker A, Seoul, 25 February 2019; interview with former Bank policymaker C, Seoul, 7 March 2019). One former policymaker noted: In the sense we were very lucky because we have prepared our reform plans voluntarily. But then the IMF, you know, was actually instrumental in terms of realizing this reform plan to be accepted. (Interview with former Bank policymaker D, Seoul, 27 February 2019)

100  South Korea: Overcoming authoritarian developmentalism Kang Bong-​kyun, presidential advisor to Kim Dae-​jung, added that major reforms were about reforming the sectors that we had thought should be restructured, so it was not that we were dragged along by the IMF, but rather we took advantage of the IMF agreement. (As quoted in Lee and Hong, 2019, p. 220) This instrumental function of international pressure is further supported by the fact that South Korean policymakers disagreed with the IMF’s crisis analysis and policy prescriptions. While the IMF interpreted this crisis as one driven by economic fundamentals, Korean policymakers viewed it rather as a case of panicking global investors and temporary liquidity problems. In its report from 2003 (“The IMF and Recent Capital Account Crises”), the IMF later admitted that the perspective of their South Korean colleagues was correct and that it failed to see financial risks until “virtually the last minute” (IMF, 2003, p. 2). Without causing tensions with the IMF and global investors to prevent a return of financial volatilities (such as Fernández de Kirchner did in the early 2010s), the government carefully carved out domestic agency to propel institutional and policy change. As the next section shows, this domestic control over reforms also pertains to the change in monetary, financial, and foreign exchange policies. These policy changes were guided by policymakers’ experience of the 1997 crisis as one driven by unregulated global liquidity, putting financial stability at the core of South Korea’s new governance of financialization. 5.2  Developing a financial stability policy framework: post-​1998 The previous section indicated how experts and international pressure were instrumental for South Korean politicians in informing institutional reforms. While this is a case of political agency deployed by the government, this section analyzes the content of these reforms and their implications for policy change. Moreover, it demonstrates how expert agency informed the substance of novel policies that buttressed the new governance of financialization. Like the 1982 financial crisis, which prompted subsequent policy change by Chilean policymakers, the 1997 crisis experience was a watershed moment for their South Korean colleagues. This experience shaped policymakers’ understanding of the financial system, which they translated into policy change directed at financial stability. The pragmatic, swift policy response by policymakers helped to recover quickly from the crisis, pay back its IMF debt ahead of schedule in August 2001, and return to a path of economic growth. Having interpreted the 1997 crisis, unlike the IMF, as a primarily liquidity-​driven crisis, Korean policymakers used liquidity injections to resolve the crisis quickly and subsequently changed domestic policies to account for risks posed by global finance. Furthermore, monetary, financial, and foreign exchange policies were continuously adjusted following minor financial crises in 2003 (credit card crisis), 2007

South Korea: Overcoming authoritarian developmentalism  101 (financial crisis in advanced Western economies), and 2011 (mutual savings bank crisis). As indicated in the previous section, Kim Dae-​jung enacted far-​reaching institutional reforms that allowed for replacing previous developmental expertise in the bureaucracy with novel, experience-​driven expertise to inform policy change, using the 1997 crisis to overcome the opposition of the bureaucracy and the chaebols (Rhee Baum, 2007; Kalinowski, 2009). The reforms curtailed the Ministry’s responsibilities, which had to give up complete control over financial policy and delegate monetary policy to the newly independent Bank (December 1997). This way, the Ministry’s power to steer credit allocation was reduced. The government integrated the previously dispersed responsibility for financial supervision (which was under the overarching guidance of the Ministry) in the newly created Financial Supervisory Service (FSS) (January 1999). Furthermore, it delegated financial regulation to the new Financial Supervisory Commission (FSC) (April 1998), and both became subordinate to the prime minister. The newly independent FSC took over powerful instruments from the Ministry, including its influence over the appointment of directors of commercial banks (Lee and Kim, 2018; Chosun, 2000b; KJAD, 2018b). Additionally, the newly founded Ministry of Planning and Budget took over the Ministry’s budgetary competence in May 1999. At first glance, the new independence seemed to strengthen the Bank. However, it also lost powerful tools to control financial flows, it was tasked with the more technical than political responsibility of setting the policy rate and injecting liquidity in times of market volatility (Interview with former Bank policymaker E, Seoul, 6 March 2019; Interview with former Ministry policymaker A, Seoul, 25 February 2019; see also BoK, 2010a). As one interview partner remarked, ”the government […] want[s]‌to get [its] financial supervisory power. They wanted to deprive it of the power from the Bank of Korea” (Interview with former Bank policymaker E, Seoul, 6 March 2019). As emphasized in the previous section, this is a hard cut given that the Bank had exerted a high degree of control over the interest rates in the financial system, thereby determining who gets credit at what price (Interview with former Ministry policymaker A, Seoul, 25 February 2019). Furthermore, the Bank could not achieve one of its key objectives: to independently appoint its policymakers (Interview with former Ministry policymaker A, Seoul, 25 February 2019). Since the reform, the policy board has been headed by the Bank governor, whom the president appoints. Moreover, the board has remained filled with external members: the Ministry, Bank, FSC, Korea Chamber of Commerce and Industry, National Banks Federation, and Korea Securities Dealers Association can recommend one board member each.3 The government used informal channels, too, as it exerted pressure on these organizations through the recommendation of board members (Lim, 2012, p. 688). Whereas particularly institutionalist scholars have emphasized the convergence of institutions with Western neoliberal norms (Jayasuriya, 2001; Pirie, 2005a, 2012; Kalinowski, 2008; Kim and Lee, 2006), this would miss

102  South Korea: Overcoming authoritarian developmentalism the domestic political considerations and the government’s agency in shaping these institutional reforms. To the government, the institutional reforms served to strengthen its control over the development of the financial system by curtailing the power of the Ministry and Bank and dispersing it among newly created institutions. As one interview partner stated, [the Bank’s policymaking after 1997] is more limited to those monetary policy issues only […] if [the] Bank is so powerful, then nobody likes the independence. Especially politicians want to control it because it’s so powerful […] Why should [politicians] delegate it to somebody else? No, it’s nonsense. So now [the] Bank is less powerful. (Interview with former Ministry policymaker A, Seoul, 25 February 2019) Institutional reforms resulted in a significant change of institutions. The remaining parts of this section analyze their substance in terms of policies to determine whether they converge with Western norms. The content of the 1997 Bank Act gives a first indication that policies may not fully converge with Western norms. It instead entails several elements that exhibit a stronger position of the government vis-​à-​vis the Bank and reflect some continuity with developmental practices. This pertains to the maintenance of credit policy as a policy instrument (Art. 1), close coordination of the Bank’s policies with the government (Art. 4, 6, and 91), and the possibility of loan extensions to the government (Art. 75, 76, and 77). A further deviation from Western standards is the role of non-​economists and non-​central bankers in the policy board, as denoted in Article 13. Under its seven members, four are proposed by other institutions (see above). Only the Governor and the Deputy Governor represent the Bank, but the president appoints both of them (Art. 32 and Art. 36). President Kim Dae-​jung’s appointment of Chon Chol-​hwan to become the Bank’s governor in March 1998 mirrored the new policy direction after the 1997 crisis (see Table 5.1). As a former employee of the neoliberal Economic Planning Board and with a firm belief in the benefits of financialization, Chon perceived that the Bank needed to promote the development of the financial system (Chon, 1998e). Aligned with his president, Chon stated that “[w]‌e all recognize that rebuilding the economy on market principles is the one and the only way to achieve a lasting recovery from the crisis” (Chon, 1998a), perceiving the 1997 crisis as an “impetus for further and sweeping reform” (Chon, 1999a). Chon emphasized that by deepening financialization, the inefficient allocation of loans to unprofitable companies (particularly chaebols) would cease (Chon, 1998d). Chon conceived that by promoting the development of domestic public and private capital markets, market discipline would limit bad investments (Chon, 2000a). He expected that curtailing “the hegemony of majority shareholders” (elite families that control chaebols), improving transparency mechanisms, and promoting the inflow of foreign direct investments would enhance corporate control mechanisms (Chon, 1998c).

South Korea: Overcoming authoritarian developmentalism  103 Table 5.1 Background of South Korea’s central bank governors since 1998 Governor

Academia

Work experience

Chon Chol-​ hwan 1998–​2002

Professor at the Department Economic Planning Board; IMF; of Economics at Chungnam Bank (1983–​2002); chairman of National University; the Public Fund Management degrees from Seoul National Committee University and Manchester University; published several academic books and papers Park Seung Professor of economics at Chief presidential secretary for 2002–​06 Chung-​Ang University; economic policy; Bank Ph.D. from the State (1961–​76,1986–​88); Five-​Year University of New York; Plan Coordination Committee degree from Seoul National 1986; worked in ministries University; published several under Chun, Roh Tae-​woo, Kim academic contributions Young-​sam, Kim Dae-​jung, Roh Moo-​hyun Lee Seong-​tae Degree from Seoul National Worked for the bank since 1968, 2006–​10 University Vice Minister of Finance in 1991 Kim Choong-​ Professor at various Ambassador to OECD; secretary soo 2010–​14 universities; Ph.D. from the for economic affairs to President University of Pennsylvania; Lee Myung-​bak; KDI 1985–​91, degree from Seoul National 1993–​95; 2005–​07; Assistant University Minister and Special Adviser to MoFin 1997 Lee Ju-​yeol Professor Yonsei University; Bank (1977–​2012, since 2014) since 2014 degrees from Yonsei University and Pennsylvania State University

While Chon’s perspective seems very much aligned with Western neoliberal norms, it was nevertheless clear to the governor that financialization requires the Bank to develop new tools to control the financial system. According to Chon, these were necessary to conduct liquidity management and induce regulatory reforms to promote a quick economic recovery and protect the Korean financial system against a repetition of the 1997 crisis (Chon, 1998b; Chon, 1999a; Chon, 1998c; Chon, 2000a; Chon, 1999d; Chon, 1999c). This entailed the need for the Bank to help financial institutions dispose of non-​performing loans and accompany the adjustment processes of non-​financial companies (Chon, 1999a). In continuity with developmental traditions, he further clarified that “we[the Bank] will do all we can, to encourage banks to expand their lending to small and medium enterprises by strengthening incentives” (Chon, 1998b; also Chon, 1999a). Chon pressured commercial banks to extend loans to SMEs and made loan extensions to the real economy a pre-​requirement for accessing the Bank’s liquidity support (KJAD, 2003a, d), thus deferring from Western

104  South Korea: Overcoming authoritarian developmentalism ideals of non-​interference in the investment decisions of financial institutions. Regarding foreign exchange policy, Chon articulated that the 1997 crisis made foreign exchange policies and the accumulation of foreign exchange reserves a “crucial concern” for the Bank (Chon, 1999b; see also Chosun, 2001c). While the official government discourse proclaimed a turn to Western neoliberal standards, even seemingly neoliberal policymakers like Chon were convinced of the need for monetary, financial, and foreign exchange policies to protect domestic financial stability. Chon’s interventionist position was shared by other key policymakers, such as Lee Kyu-​sung, the finance minister at that time (see Lee and Hong, 2019, p. 143). Furthermore, FSC chair Lee Heon-​jae (1998–​ 2000) clarified that the institutional reforms did not imply a fundamentalist turn to free markets. Instead, he emphasized that “the absolute logic of the market or metaphysical economics does not work at all in the marketplace. There is no such thing as absolute principles in the face of economic reality” (as quoted in Lee and Hong, 2019, p. 514). Policymakers conducted policy change based on the 1997 crisis experience, for which “previous experience and received wisdom provide little guidance” (Chon, 1998b; see also Chon, 1999e; Lee and Hong, 2019, pp. 419, 530). For Chon, as for FSC chair Lee, it was evident that neoliberal economic knowledge from Western countries is insufficient for informing policymaking in South Korea. Instead, they perceived that multiple approaches and combinations of academic disciplines were required to buttress policymaking (Chon, 2000b; Chon, 1999e). The production of new economic knowledge and the establishment of a “new economic policy paradigm” (“새로운경제정책패러 다임”) to guide South Korean policies were perceived as necessary for enhancing “national competitiveness” (“國家競爭力”) and improving Korea’s international standing (Chon, 1999e; Chon, 2001; Chon, 2000c; Chon, 2000b; Chon, 1999f). Whereas the substance of adopted policies (see next section) was influenced by Chon, it is unlikely that they could contradict the government’s preferences without a backlash. Although Chon emphasized the ideal of the Bank’s independence from the influence of the government (Chosun, 1999, 2000a, 2001b,a), in line with Western norms, the government soon clarified the limits to its independence. When tensions arose between Chon and the government, such as over the lowering of policy rates in 1998 (Chon was against it as he perceived that this would undermine economic restructuring), the government flexed its muscles. The Ministry’s vice minister, Chung Duck-​koo, recalled how he made this position clear in a conversation with the Bank’s vice governor: It is true that central bank independence is necessary when it comes to monetary and credit policy. However, what good is the central bank when the Republic of Korea goes broke? If you do not agree with the government on its policy, all I can do is to fire […] you. (As quoted in Lee and Hong, 2019, p. 120) Chon’s successor, Park Seung, appointed by Kim Dae-​jung in April 2002, took office when Korea’s financial and economic system was already stabilized. Park

South Korea: Overcoming authoritarian developmentalism  105 consolidated the Bank’s formal independence, including the discontinuation of the Bank governor’s attendance at coordination meetings with the government (KJAD, 2003e) and the 2003 revision of the Bank Act that replaced the policy board’s nominee of the Securities Dealers Association with an ex officio position. Park, who was involved in the bank restructuring after the 1997 crisis, deepened the strengthened financial stability-​oriented policies. The governor was worried as inflows of global finance accelerated again, which, in combination with financial innovations and cheap financing across the globe, caused a buildup of household debt and a spike in asset prices (Park, 2002a; Park, 2003a; Park, 2003c). Years before the subprime market crashed in the United States, Park demanded from his colleagues in Western central banks that they “must […] pay greater attention to the possibility of housing market bubbles bringing about financial and macroeconomic unstability(sic)” (Park, 2003a; also Park, 2002a). Park perceived that the Bank should control for asset price inflation and liquidity conditions (Park, 2002a). To counter these new risks, Park advanced regulatory measures to tackle the asset price bubble by increasing taxation of house ownership, conducting moral suasion of banks to reduce loan-​to-​value ratios, and promoting housing supply (Park, 2003b; Park, 2004c). Park also emphasized the importance of the Bank’s knowledge production to strengthen the “entirely new paradigm” (Park, 2002a) based on the 1997 crisis experience. Park emphasized that there is no “one-​size-​fits-​all supervisory system that is the optimal for every country,” making the production of knowledge tailored to South Korea’s conditions necessary (Park, 2004a). The promotion of domestic research capacities was perceived as crucial to being capable of reacting to new financial risks that develop in the South Korean financial system (Park, 2004c; see also Lee, 2006c). Although constant policy adjustments are necessary to manage the evolution of the financial system (Park, 2003a), Park acknowledged that it is nevertheless difficult to be fully secured as “the historical experience is that crises will always break out” (Park, 2004b). Unlike his central bank peers from advanced Western economies at that time, Park interpreted the financial system as intrinsically unstable, which required the constant adoption of new policies and modification of existing ones to safeguard financial stability. President Roh Moo-​hyun’s (2003–​08) appointment of Lee Seong-​tae, a Bank careerist and former classmate of Roh (KJAD, 2006; Hankyoreh, 2006), to head the Bank in April 2006 further stabilized South Korea’s new governance of financialization. Like his predecessors, Lee emphasized that policymakers need to be constantly ready for financial instability to arise given that “the financial sector is intrinsically unstable,” particularly due to international financial flows (Lee, 2006a; see also Lee, 2006b; Lee, 2007; Lee, 2009b; Lee, 2008b; Lee, 2009d). Therefore, policies needed to be adopted that aimed at reducing risks from international financial flows and increasing independence from them by promoting the development of domestic capital markets (Lee, 2009c). Since the crisis, financial stability has remained a central concern for the Bank, as

106  South Korea: Overcoming authoritarian developmentalism

Figure 5.2 Frequency of word occurrence in speeches of policy board members of South Korea’s central bank, divided into governor tenures (in percent).

reflected in the frequent appearance of “financial stability” compared to “price stability” or “inflation” in central bank governors’ speeches (see Figure 5.2). In the 1990s, governments exerted political agency to induce institutional change, increasing government control over policies that the Ministry had previously coordinated. The governments used the appointment of experts to key policymaking positions as a central mechanism to wield this control. With the 1997 crisis experience in mind, the government’s agenda was to facilitate the transformation of developmental structures while maintaining control over the developments in the financial system. The following subsections analyze the substance of policies that point to expert agency in greater detail. 5.2.1  Monetary policy

After the 1997 crisis, the Bank institutionalized financial stability as a key policy objective. Moreover, it strengthened its leverage over liquidity conditions in the financial system by shifting the operating target of monetary policy from a monetary growth target to the overnight interbank rate. The provision of both national and foreign currency has moved to the core of the Bank’s objective of safeguarding financial stability, next to stabilizing the economy through the countercyclical use of the policy rate. The 1997 revision of the Bank Act established new instruments for achieving this objective: the Bank can extend

South Korea: Overcoming authoritarian developmentalism  107 liquidity and loans to companies and financial institutions in times of a credit crunch or liquidity crisis (Art. 80), deploy special loan facilities for financial institutions, and widen eligible collateral to access Bank liquidity (Art. 64 and 65). Furthermore, the decision of the Bank’s policy rate was influenced by rising household debt and increases in asset prices, strengthening preferences for rate increases when asset prices rise rapidly (Interview with former Bank policymaker D, Seoul, 27 February 2019). Given these policy adjustments, the Bank was in a better position to safeguard the stability of the financial system when panicking global investors withdrew their investments after the 2007 crisis spread in advanced Western economies. Between then and March 2009, the Bank provided liquidity via open market operations (KRW 18.5 trillion), lending facilities (KRW 2.6 trillion), raised the ceiling of the Aggregate Credit Ceiling (from KRW 6.5 trillion to KRW 10 trillion), and introduced interest payments on reserves (KRW 500 billion). Moreover, the Korean government introduced guarantees for foreign debt held by domestic banks in October 2008 (Kim, 2009, p. 278). Furthermore, the Liquidity Adjustment Loans and Deposits Facility was introduced in March 2008 (replacing the Liquidity Adjustment Loans facility) to strengthen liquidity management and allow banks to park their money. Not being constrained by the IMF in setting the interest rate as it was during the 1997 crisis, the Bank immediately sought to stabilize the economy as it pushed the policy rate to an all-​time low of 2 percent in February 2009. Since financial conditions grew tighter due to panicking investors, this was a critical component for the stabilization of the domestic economy. In addition, the Bank increased access to central bank liquidity by broadening the scope of acceptable collateral and counterparties. Government bonds and government-​guaranteed bonds were accepted as collateral for open market operations, along with Bank-​issued Monetary Stabilization Bonds (MSBs) for repurchase agreements. In addition, when liquidity dried up again in November 2008, the Bank broadened the list of eligible counterparties to include more securities firms and asset management firms. Bonds of public financial institutions and bank debentures became acceptable as security. Additionally, eligible collateral for accessing liquidity facilities was significantly expanded to include credit securities acquired by financial institutions through loans; government and public bonds; MSBs; debentures issued by the Korea Development Bank, the Industrial Bank of Korea, and the Export-​Import Bank of Korea; mortgage-​backed securities issued by the Korea Housing Finance Corporation; bonds issued by nine additional public institutions; and bank debentures. In contrast to the 1997 crisis, the Bank could take advantage of its accumulated foreign exchange reserves by injecting foreign liquidity (USD 22.4 billion) to stabilize the financial system. Additionally, it could draw on newly established swap lines to the U.S. Federal Reserve (October 2008) and the People’s Bank of China (December 2008) and an expanded swap line to the Bank of Japan (December 2008). In 2000, South Korea created, with the other

108  South Korea: Overcoming authoritarian developmentalism ASEAN+​3 states, a multilateral swap network: the Chiang Mai Initiative. With the launch of the Chiang Mai Initiative Multilateralization (CMIM) in December 2009 and the CMIM Precautionary Line in July 2014, this network was expanded. A further noteworthy tool that the Bank deployed to control not only liquidity conditions but also influence economic development has been a developmental credit policy tool: the Aggregate Credit Ceiling. Although the Bank formally ceased allocating policy loans in the 1990s, it created the Aggregate Credit Ceiling in 1994 (renamed to in 2013). In addition to offering cheap loans to specific economic sectors (Chon, 1998b; Chon, 2000a), the Bank employed this instrument to provide liquidity to small-​and medium-​sized enterprises (SMEs) during unstable times, such as the 1997 and 2007 financial crises. 5.2.2  Financial policy

Financial regulation: Following the 1997 crisis experience, the regulatory regime was fundamentally reformed. In April 1998, the government adopted fundamental legislation by establishing the Regulation on Supervision of Banking Operations. In the crisis’s immediate aftermath, financial inflows were promoted by adopting a negative list to regulate foreign exchange transactions. The Foreign Investment Promotion Act, enacted in September 1998, encouraged financial inflows by removing restrictions on foreign stock ownership and allowing foreigners to trade real estate. The Foreign Exchange Transactions Act was established in April 1999. Simultaneously, the FSA implemented a number of regulations to reduce the accumulation of financial risks: a Foreign Currency Liquidity Ratio (July 1997), a Foreign-​Currency-​Denominated Asset-​Liability Maturity Gap Ratio (January 1999), and a Domestic Currency Liquidity Ratio (January 1999). In October 1998, the government updated the accounting and disclosure systems to improve transparency for investments, assess the market value, and identify non-​performing loans. The FSA introduced a forward-​ looking criterion of loan classification and mark-​to-​market valuation on marketable securities in 1998 and 1999 (Lee, 2011, pp. 269–​272). Moreover, the government established the Foreign Exchange Information System and the Korea Center for International Finance to improve control over exchange rate developments (April 1999 and September 2000). Additional data and expertise have been produced by the Korea Accounting Institute, which was established in September 1999. Since then, policymakers have constantly adjusted financial regulation to account for new risks stemming from the global financial system. As stated previously, Korean authorities thought that financial inflows in the mid-​2000s endangered financial stability as they resulted in the appreciation of the won and increases in credit and housing prices. To combat these inflows, the FSA adopted new regulations: Limits to Foreign Exchange Positions in August 2002, a Loan-​to-​Value (LTV) ratio in September 2002, and a Debt-​to-​Income (DTI) ratio in August 2005. Simultaneously, policymakers liberalized financial

South Korea: Overcoming authoritarian developmentalism  109 outflows in 2005 and 2006 by increasing limits on financial investments and real estate held abroad by South Koreans. Public financial institutions: Public financial institutions have performed two crucial roles in Korea’s governance of financialization policy framework: foreign exchange management and liquidity provision to non-​banks that central bank facilities did not cover. Before the 1997 crisis, public financial institutions like the National Pension Fund and Korea Post were used to channel their deposits via the Public Capital Management Fund to the government, serving as a second, not tax-​based fiscal budget that enhanced developmental policies (Kim and Stewart, 2011; Jung and Walker, 2009). Following the crisis, state control became less direct, public loans to the government were curtailed, and their objectives shifted. An important issue with the Bank’s policy of building foreign exchange reserves was its expenses, given that liquid and low-​yielding foreign assets needed to be financed by domestic assets with higher yields. One strategy to cope with this was that the Bank began purchasing riskier assets such as asset-​ backed securities, mortgage-​ backed securities, and corporate bonds (Rhee, 2007). A more problematic issue concerned international politics: the buildup of foreign reserves was criticized by advanced economies such as the United States, which considered South Korea to be a “currency manipulator” (Treasury, 2020). Thus, President Roh decided in 2005, against the resistance of Park Seung, who was more concerned about liquidity than profitability, to transfer part of the Bank’s foreign exchange reserves to public funds, which were more flexible in their investment strategies.4 For this purpose, the government established the Korea Investment Corporation (2019: USD 157.3 billion, all invested in foreign assets) in 2005 (Kim, 2012g). Furthermore, the National Pension Fund (2020: USD 637 billion, 35 percent invested abroad) and, to a lesser extent, the Korea Post, the Korea Teacher’s Pension Fund, and the Military Mutual Aid Association have increasingly invested in foreign assets. Public financial institutions thus serve as a strategic resource in the governance of financialization by providing patient capital and thus longer-​term stability  of the financial system and by promoting the export industry via the limitation of appreciation pressure on the won. Second, public financial institutions were used to provide liquidity to capital markets, non-​financial corporations, banks, and non-​banks, all institutions that the Bank does not cover in times of market volatilities, particularly during the 1997 and 2007 crises (see Table 5.2). The Bank contributed capital to these public funds. Thirdly, public financial institutions are natural counterparties in foreign exchange transactions with domestic exporters, hence improving liquidity conditions. Fourthly, governments have used public financial institutions to channel credit to selected economic sectors and affect corporate decision-​making by exerting voting rights as major shareholders. South Korea’s development banks, in contrast to Argentina and Chile, continue to be numerous and have grown constantly and proportionally to commercial banks since the end of the crisis (see Figure 5.3).

110  South Korea: Overcoming authoritarian developmentalism Table 5.2 Use of South Korean public financial institutions to stabilize the financial system 1997 crisis

2007 crisis

mid-​2013 2016

Korea Securities Finance Corporation offers liquidity to non-​banks Korea Non-​Bank Deposit Insurance Corporation offers liquidity to non-​banks Bond Market Stabilization Fund alleviates liquidity shortages in the bond market following problems at Daewoo Korea Land Corporation purchases real estate from struggling corporations Korean Asset Management Corporation promotes debt restructuring by purchasing non-​performing loans Korea Land Corporation purchases real estate Bond Market Stabilization Fund stabilizes capital markets Korea Credit Guarantee Fund (KODIT) and Kibo Technology Fund (KIBO) support SMEs by offering loan guarantees Korea Development Bank channels funds to Bank Recapitalization Fund and Korea Credit Guarantee Fund Korean Asset Management Corporation establishes the Corporate Restructuring Fund to underwrite bonds of distressed corporations The Korea Policy Banking Corporation launches the Financial Stability Fund to provide liquidity to non-​bank financial institutions. Korea Housing Guarantee Corporation uses repurchase agreements to purchase unsold houses from construction companies Korea Credit Guarantee Fund is used to stabilize funding conditions as the United States increases policy rates Bank co-​finances a KRW 10 trillion recapitalization of Korea Development Bank and Korea Exim Bank

Developing domestic capital markets: The development of domestic capital markets was a key policy objective. It was perceived to increase independence from international financial flows while improving efficiency in the conduct of monetary policy (see Lee, 2018). First, the government encouraged the development of sovereign bond markets by establishing Korean Treasury Bonds (KTBs) as a safe asset and financial system benchmark. Against the background of a low amount of public debt (8 percent of GDP in 1996) and the subscription of government bonds by financial institutions before 1997, a meaningful government bond market did not exist prior to the 1997 crisis. This changed with the crisis, as the state’s financing needs increased (Figure 5.4). In January 1999, the government introduced competitive bidding for public debt with the regularization of government bond issuance and set up the Primary Dealer System in July 1999. Second, the establishment of asset-​backed securities markets assisted in the liquidation of non-​performing loans left over from the financial crisis, while concurrently supporting the growth of domestic bond markets. The Asset-​ Backed Securitization Act was enacted in September 1998 to create a market

South Korea: Overcoming authoritarian developmentalism  111

Figure 5.3 Financial assets of private national banks, public financial institutions, and domestic branches of foreign banks (KRW billion). Note: Public financial institutions: Industrial Bank of Korea, Korea Development Bank, NongHyup Bank, Suhyup Bank, The Export-​ Import Bank of Korea, Korea Livestock Cooperation Federation [closed in 2000], National Agricultural Cooperative Federation [closed in 2011], National Federation of Fisheries Cooperatives [closed in 2016]. Source: Financial Supervisory Service FSIS (Summarized Balance Statement (Assets-​Banking Account) 199903 202006).

that did not yet exist (see He, 2004). Again, public financial institutions were crucial to this process (Park, 2002c). The Korea Deposit Insurance Corporation (KDIC) oversaw the resolution of failing financial institutions, while the Korea Asset Management Corporation (KAMCO) acquired their non-​performing loans. KAMCO later disposed of them, among other methods, by transforming them into asset-​backed securities. Additionally, the public Small and Medium Industry Promotion Corporation improved SMEs’ corporate bond financing possibilities by underwriting KRW 72 billion for 32 SMEs, issuing asset-​backed securities, and selling them to private investors. Credit guarantees offered by the public Korea Credit Guarantee Fund and the Korea Technology Credit Guarantee Fund supported this (see Oh and Rhee, 2002, pp. 245–​246). Third, the government developed foreign exchange and derivatives markets to enhance hedging possibilities for the domestic private sector, including establishing the non-​ deliverable forward market and the Korea Futures Exchange (KOFEX) in February 1999. Fourth, the Asian Bond Markets Initiative (established in December 2002 by the ASEAN+​3 countries) and the Asian Bond Fund (established in June 2003 by the members of the Executives’ Meeting of East Asia and Pacific Central Banks; expanded in May 2005 and July 2011) were employed to promote the development of domestic capital markets in the region.

112  South Korea: Overcoming authoritarian developmentalism

Figure 5.4 Size of South Korean bond markets (KRW billion). Source: BoK ECOS (1.6.2 (Liquidity Aggregates), End of).

5.2.3  Foreign exchange policy

Following the 1997 crisis, South Korea adopted a floating exchange rate regime in December 1997 and further opened its financial system. While this points to the convergence with Western policy norms, policymakers stood ready to intervene when considered necessary, for example, in times of disruptive volatilities in the foreign exchange market (Rhee and Lee, 2005, p. 197). For developing the capacity to intervene in this market, the accumulation of foreign exchange reserves is necessary: the possibility to draw on these reserves enhances the Bank’s control over exchange rate movements and provides access to foreign currency liquidity in times of market volatility (see Park, 2004b; Chon, 1999a). As the accumulation reduces the appreciation pressure on the won, it additionally enhances the Bank’s capacity to control the buildup of foreign debt (Interview with former Ministry policymaker A, Seoul, 25 February 2019). Beyond this financial stability objective, the accumulation additionally served as a competitiveness objective, since a depreciated currency benefits the competitiveness of the domestic export sector. This, in turn, resulted in the U.S. government calling South Korea a currency manipulator (see Treasury, 2020, pp. 24–​26), which led the Korean government to delegate parts of this task to public financial institutions (see above) and to disclose currency interventions from March 2019 onward. The Bank and the Ministry cooperated in the conduct of foreign exchange interventions by either communicating with financial institutions in the markets or by directly ordering major banks to execute trades (Lee and Hong, 2019, pp. 105–​106; Ryoo et al., 2013, p. 210; Chosun, 2001c). The Ministry also oversees the Foreign Exchange Stabilization Fund (established in 1967), which

South Korea: Overcoming authoritarian developmentalism  113 serves to stabilize foreign exchange markets, sterilize interventions, and accumulate foreign exchange reserves (Rhee and Lee, 2005). 5.3  Lee Myung-​bak’s turn The preceding section analyzed how the government deployed agency that led to the transformation of the country’s developmental governance of financialization into one that revolves around the stability of the financial system. The second moment of political agency occurred after Lee Myung-​bak became president in February 2008. Lee, a millionaire and former CEO, was elected on a political agenda that promised neoliberal reforms following the principle of “small government, big market.” This included the privatization of public companies, public spending cuts, pro-​business policies, and deepened financial liberalization (Lee, 2008a; see also Moon, 2009; WSJ, 2008; KT, 2007; NYT, 2007, GC, 2011; WSJ, 2008; FT, 2008b; FT, 2008a; NYT, 2008a; KT, 2008). At the same time, the 2007 financial crisis in advanced Western economies resulted in a questioning of the benefits of neoliberalism, which rendered further financial liberalization unpopular.5 Furthermore, opposition from parliament and bureaucracies, as well as widespread public protests against Lee’s decision to end a ban on beef imports from the United States, which the government introduced after mad-​cow disease emerged in 2003, made Lee’s reform attempts more difficult to achieve. It was thus initially uncertain to what extent this context would result in changes to monetary, financial, and foreign exchange policies. Lee opted not to undermine the governance of financialization that emerged in the late 1990s but attempted to deepen institutional reforms that enhanced policy control by the government. Although the reforms of the late 1990s tilted the power balance toward the government and general control over policy change has shifted from the Ministry to the government, tensions did not disappear. Institutional frictions between the government, Ministry, Bank, and FSC have continued under Presidents Kim Dae-​jung and Roh Moo-​hyun. Even though they were not as far-​reaching as the reforms of the late 1990s, Lee propelled relatively minor but significant changes. These included the further weakening of the Ministry by delegating its responsibility for financial policy to the FSC. In February 2008, the governance of the FSC was changed by splitting its management, further strengthening presidential control over financial policy (Lee and Kim, 2018, pp. 363–​365). Furthermore, Lee implemented revisions to the Bank Act in September 2011 and March 2012 to equip the Bank with a financial stability mandate (Art. 1), which has increased the government’s capacity to interfere in monetary policy. Moreover, the designated governor is now required to be confirmed by the parliament. The government expanded the Bank’s tools to provide emergency liquidity (Articles 65 and 80), widened eligible collateral (Art. 64), and established new open market operations (Art. 68). In addition, the Bank’s capacity to receive information from financial institutions and conduct joint examinations with the FSS was established (Art.

114  South Korea: Overcoming authoritarian developmentalism 87). These minor institutional reforms strengthened policy control by the government while enhancing tools to buttress South Korea’s financial stability-​ directed policies. Lee wanted to reform the old Bank structure and modernize it while increasing his control over policymaking. As his approach to monetary, financial, and foreign exchange policies differed from his predecessor’s, tensions arose between him and the Bank’s governor, Lee Seong-​tae (KJAD, 2010a; Chosun, 2008). When Lee Seong-​tae’s term ended in March 2010, Kim Choong-​soo replaced him. Kim was a close affiliate as well as the former economic secretary and ambassador to the OECD of Lee Myung-​bak, who was more receptive to coordinating with the new government (KJAD, 2010c; Reuters, 2010). Kim aimed to break the cohesive bureaucratic structures within the Bank by appointing outsiders and staff from the Ministry (see Kim, 2014b). Weekly meetings with the president and finance minister occurred throughout the year (Reuters, 2012b). One of Kim’s first acts was a joint meeting between Kim Choong-​soo and Finance Minister Yoon Jeung-​hyun in April 2010, in which close coordination between the Bank and the government was emphasized, also in order to coordinate the challenge at the G20 meeting in November 2010 (BoK, 2010b). For the first time since June 1999, a government representative (Vice Finance Minister Hur Kyung-​wook) attended a Bank’s policy board meeting in January 2010. Since then, Hur and his successors, Yim Jong-​ ryong and Shin Je-​yoon, participated in the policy committee until February 2013 (except for two meetings in September 2011 and July 2012), when Lee Myung-​bak’s presidency ended. Hur emphasized the independence of the Bank while stating that “it is time for the government and the central bank to undertake constructive policy cooperation” (BoK, 2010c). The new measures Kim introduced included the increase of joint research projects with external institutions from 1 in 2010 to 65 in 2014 and the appointment of Suh Young-​ kyung, the first woman to become a board member (KJAD, 2014b). Kim Choong-​soo’s attempts to reform the bureaucratic structures were met with resistance from staff members, particularly attempts to appoint externals and promote new expertise (KJAD, 2011, 2014b). Among the governors appointed after 1997, Kim has served as the best example of the political push to break traditional Bank structures and promote alternative knowledge production (see also WSJ, 2012). Criticizing old academic models and theories of the past that were promoted by Western advanced economies and that contributed to policy failures leading to the 2007 financial crisis, Kim emphasized the need for constant production of new expertise in the Bank to “flexibly deal with changes in the external and domestic environments” (Kim, 2011f; see also Kim, 2010g; Kim, 2010d; Kim, 2011g; Kim, 2011c; Kim, 2011e; Kim, 2012d; Kim, 2010a). This new knowledge needs to be adjusted to the specific situation that South Korea is facing so that it can prevent the occurrence of financial crises (Kim, 2011d; Kim, 2011b; Kim, 2013g; Kim, 2012b). Copying expertise and policies from Western advanced economies would not help South Korea achieve continued economic

South Korea: Overcoming authoritarian developmentalism  115 growth (Kim, 2012a; Kim, 2013e; Kim, 2013f; Kim, 2014b; Kim, 2014a; Kim, 2013g; Kim, 2011e; Kim, 2010e; Kim, 2010g). Concerning the direction of monetary, financial, and foreign exchange policy, there were no significant deviations from his predecessors concerning the primary importance of safeguarding South Korea’s financial stability from unregulated international financial flows. Kim Choong-​soo pointed out risks attached to “speculative capital” (Kim, 2013g), financial interlinkages and innovations (Kim, 2010f; Kim, 2011h), and the need for constantly adjusting regulations to counter risks from international financial flows (Kim, 2012a; Kim, 2013f; Kim, 2013a; Kim, 2010d; Kim, 2010c; Kim, 2013c). Beyond these institutional reforms with a domestic scope, Lee used the 2007 crisis to strengthen South Korea’s position on global financial governance platforms and to push for reforms that would benefit domestic financial stability. Under his presidency, South Korea became a member of the BCBS and FSB in March 2009, co-​chaired the FSB’s Regional Consultative Group for Asia, and engaged in international central bank platforms such as EMEAP, BIS, ASEAN, and SEACEN. In a Wall Street Journal contribution from March 2009 as well as in his speech at the Davos Forum in January 2010, months before the G20 meeting in Seoul, Lee Myung-​bak anticipated his push for changing global financial governance. Lee called for the adoption of a “global financial safety net,” a mechanism that was constantly advocated for by less advanced economies, including Argentina and Chile (see Lee, 2009a; Lee, 2010). While the outcome in terms of changes in global financial governance remained dissatisfactory, South Korea significantly enhanced its presence on the global stage. Structuralist explanations help make sense of Lee’s strategy. For example, explanations advanced by scholars of international relations and international political economy rationalize why countries aim to increase their power in the international system. Also, it was rational for Lee to reverse his original agenda, given the challenging domestic political context. However, structuralist accounts do not suffice to explain Lee’s appointment of two outsiders to key policymaking positions and their role in informing institutional and policy change. Lee appointed Kim Choong-​soo to become the Bank’s governor (April 2010) and Shin Hyun-​song to become the presidential advisor (December 2009). Both experts are prominent representatives, and Lee valued their high credentials on the international level based on their political and academic achievements (see KJAD, 2010d). In 1995, Kim worked as the South Korean ambassador to the OECD to navigate the country’s access to the organization. Furthermore, he acted as the Senior Secretary to the President for Economic Affairs (2008) and Korean Ambassador to the OECD (2008–10) before his tenure at the Bank. Furthermore, Kim worked for the KDI (1983–​89, 1991–​95) and was its president from 2002–​05. Similar to his predecessors, Kim reinforced the need for producing expertise at the Bank, which serves to underpin Lee’s push on the international level. In contrast to them, he emphasized the need to develop knowledge for “leading[ing] international society in the directions that

116  South Korea: Overcoming authoritarian developmentalism we[South Korea] desire, rather than remaining at the level only of understanding the words that others speak” (Kim, 2012e) and undergirding a ”transition to a new paradigm to be explored in international forums like the G20” (Kim, 2011d; also Kim, 2013d; Kim, 2010b; Kim, 2012e; Kim, 2013g). It was Kim’s explicit objective “to develop and persuade others of the value of ideas that can produce outcomes coinciding with our own national interest” (Kim, 2012b; Kim, 2013g). In line with Lee Myung-​bak’s aspirations, Kim stated that [t]‌he key is that emerging economies must take the initiative and devote concerted efforts to convincing various international fora of these proposals and to seeing them through […] I believe that Korea, too, has reached the point where it must take the lead in contributing to the creation of such an environment in the international arena and that the Bank of Korea is also not free from this responsibility. (Kim, 2012e) Thus, South Korean policymakers urged advanced economies to accept responsibility for the effects of their policies on other countries and adjust them accordingly (Kim, 2011e; Kim, 2012c). The rise of macroprudential ideas and the concept of the “financial cycle” were instrumental in strengthening South Korea’s position on international platforms. Both were frequently mentioned in Kim’s speeches as governor (see Figure 5.5). Shin Hyun-​song, a prominent academic at Princeton at that time and current Head of Research at the BIS, was named chief advisor by Lee Myung-​ bak to translate this macroprudential thinking into new policies and to formulate South Korea’s agenda for global financial governance reforms negotiated at the G20. Furthermore, Shin’s appointment followed the rationale that Lee wanted a prominent and capable person as his aide to host the G20 summit in Seoul in November 2010. As one interview partner put it, Lee wanted a “very prominent and capable person as his aide to host the G 20 summit” (Interview with former Ministry policymaker B, Seoul, 4 March 2019).6 South Korea successfully inserted some of its ideas in the final G20 communiqué and the Seoul Action plan, including the commitment of advanced economies to account for their policy effects on other countries and the intention to improve global financial governance. But concrete reforms have remained scarce. One interview partner mentioned that G20 was mainly about “talking and not walking,” especially after the attention of policymakers shifted to the eurozone crisis after 2011, questioning “the necessity and the usefulness of G 20” (Interview with former Ministry policymaker B, Seoul, 4 March 2019). Furthermore, South Korea’s push to unify non-​advanced economies in the G20 to overcome the resistance of advanced economies to substantial global governance reforms failed. As one interview partner lamented, “if you are a lonely voice, then just everyone will disregard these voices” (Interview with former Bank policymaker C, Seoul, 7 March 2019). The most tangible outcome was that less advanced economies were

South Korea: Overcoming authoritarian developmentalism  117

Figure 5.5 Frequency of word occurrence in speeches of policy board members of South Korea’s central bank, divided into governor tenures (in percent).

allowed to deploy capital controls when global market volatilities threatened financial stability. Lee Myung-​bak’s use of experts to induce changes in the Bank and to enhance South Korea’s position on the world stage were the two most notable indicators for his political agency. Both aspects were reversed again by his successor. In the face of an economic slowdown, Park Geun-​hye, from the right-​ wing Saenuri Party and daughter of Park Chung-​ hee, became South Korean President in February 2013 with the premise of establishing a “disciplined market economy” (Park, 2013). Park’s finance minister Choi Kyung-​hwan introduced Choinomics (2014–​6): This entailed the loosening of LTV and DTI ratios, a 10 percent tax on companies that hold too much cash, a lowering of the policy rate to enhance demand-​led economic growth, and an increase in fiscal expenditure. Park Geun-hye did not extend Kim Choong-​ soo’s appointment after his tenure ended in March 2014 and appointed Lee Ju-​yeol, a Bank of Korea traditionalist (1977–​2012), to head the Bank. Lee, the deputy governor under Kim Choong-​soo, criticized and reversed Kim Choong-​soo’s reform course (KJAD, 2014c,d; WSJ, 2014). He dismissed senior officials that Lee Myung-​bak appointed, including deputy governor Park Won-​ shik, which was the first time this had occurred since the 2003 revision of the Bank Act (KJAD, 2014a). Although the government liberalized domestic real

118  South Korea: Overcoming authoritarian developmentalism estate transactions that propelled household debt, policies remained focused on regulating the financial system. Lee took a similar stance concerning the need for policies to regulate volatilities of international financial flows, criticizing the role played by Western advanced economies in triggering such and the need for producing domestic knowledge to protect the domestic financial system (Lee, 2015; Lee, 2016a; Lee, 2016b; Lee, 2017). As Lee stated, the Bank “should consistently work to improve ourselves in order not to be left behind by change” (Lee, 2019). Furthermore, Park Geun-​hye articulated more clearly than her predecessors that the government will adjust foreign exchange policy to support the domestic economy (KJAD, 2013). In sum, changes to the governance of financialization remained limited under President Park Geun-​hye. 5.3.1  Monetary policy

After the Bank used liquidity-​oriented monetary policy instruments in the 2007 crisis, the situation calmed down. To improve the Bank’s management of liquidity conditions, the 2011 revision of the Bank Act relaxed pre-​conditions for extending special loans and broadened eligible collateral to any banking asset. These operations aim to avert the liquidity shortage of banks and improve liquidity in bond markets. Furthermore, the Bank established new central bank swap lines with Australia (2014), Canada (2017), and Switzerland (2018), enhancing access to liquidity in foreign currencies. Moreover, the Bank continued to deploy and expand credit policies, particularly through the Bank Intermediated Lending Support Facility (KRW 15 trillion by late 2019), to support SMEs under Lee Myung-​bak and his successors. The Bank has facilitated financial institutions’ access to cheap central bank loans conditioned on their extension of loans to productive investments, thus contributing to achieving economic development (Kim, 2013b). The historical continuity of developmental policies is explicitly noted by Kim Choong-​soo (Kim, 2013f).7 This has aimed to prevent situations like those in advanced Western economies, where cheap liquidity does not result in productive investments and instead circulates within the financial system, pushing up the prices of unproductive financial assets instead (Kim, 2013b). 5.3.2  Financial policy

Financial regulation: In general, the post-​ 1997 regulatory framework contributed to protecting the financial system from severe volatilities. However, one major regulatory gap threatened the stability of South Korea’s financial system in 2008, when global investors panicked and returned the investments to their home countries. This gap pertained to domestic banks’ short-​term funding abroad (see Figure 5.1).8 As domestic banks could not roll over their short-​term foreign debt in 2008, the central bank was forced to intervene to ease the liquidity shortage. While policymakers had failed to prevent this buildup of risks, they enacted new regulations to prevent a reoccurrence of a similar

South Korea: Overcoming authoritarian developmentalism  119 Table 5.3 South Korea’s new financial regulations adopted after a spike in international financial inflows following the 2007 financial crisis March 2010 June 2010 October 2010 November 2010 July 2011

August 2011

Loan-​to-​deposit ratio to improve liquidity of banks Cap on Foreign Exchange Derivatives Positions for domestic banks and local branches of foreign banks Leverage Caps on Banks’ Foreign Exchange Position Withholding tax of 14 percent was reinstated as appropriate to reduce upward pressure on bond prices Prohibition for financial institutions to buy foreign exchange bonds issued domestically by Korean firms if the issuer intends to convert the proceeds into won for local use To mitigate currency and maturity mismatches, a macroprudential stability levy was implemented that imposes a tax on non-​deposit foreign currency obligations with maturities of less than one year

situation. The Regulation on Supervision of Banking Business was revised in December 2009 and 2010 to handle local branches of foreign banks similarly to domestic banks regarding regulations of currency and maturity mismatches. The need for further adjusting regulatory instruments became urgent when international financial inflows picked up again after central banks in advanced economies loosened their policy rates in the late 2000s and early 2010s. Several new macroprudential policies were introduced in a joint move by the Bank, government, and FSS (FSS, 2010; see Table 5.3 for an overview). The 2011 reform of the Bank Act institutionalized the central role of financial stability in the conduct of monetary policy (Article 1(2)), which increased the Bank’s ability to provide emergency liquidity and placed greater emphasis on financial stability in the setting of the policy rate (Interview with former Bank policymaker D, Seoul, 27 February 2019). The FSA under President Moon Jae-​in (since May 2017) from the centrist Democratic Party tightened housing regulations again, albeit policy rates have remained low. In October 2018, the FSC introduced the debt service ratio, which imposes stricter regulations on high-​risk loans to households. 5.3.3  Foreign exchange policy

Foreign exchange policy did not experience significant changes and remained focused on managing the foreign exchange rate by intervening in the foreign exchange markets. The accumulation of foreign reserves continued. 5.4 Conclusion The case of South Korea lends further evidence to the relevance of experts for government strategies to induce institutional and policy change. While experts

120  South Korea: Overcoming authoritarian developmentalism were mainly instrumental in the governments’ pursuit of institutional change, they also exerted agency in the development of sophisticated macroprudential policy tools. Institutional change was prepared under Kim Young-​sam, propelled by Kim Dae-​jung, and deepened under Lee Myung-​bak. Prior to the institutional reforms of the late 1990s, the South Korean government prepared the transformation by inserting experts with alternative expertise into the bureaucracy and by creating expert commissions that developed blueprints to challenge dominant expertise. When the 1997 crisis weakened powerful veto players (Ministry and chaebols), the government could act quickly, using the already assembled blueprints. The IMF served as an additional factor in driving these reforms. The blueprints, as well as the IMF intervention, were more valuable as they served as leverage for the governments of Kim Young-​sam and Kim Dae-​jung to overcome domestic resistance than because they foretold subsequent policy change.9 Subsequent institutional changes have followed the governments’ objective to curtail the power of the bureaucracy and strengthen their control over policymaking. This allowed for the continuation of the financial stability-​directed policies preferred by the governments, which could use their newly gained power to appoint their preferred experts to key policymaking positions that used to be occupied by Bank and Ministry careerists. For example, when President Lee Myung-​bak disliked the policymaking of Bank Governor Lee Seong-​tae, he simply replaced him with his preferred candidate, Kim Choong-​soo. Political agency can be identified in the fact that the selection of experts for key policymaking positions was not predetermined. Kim Dae-​jung’s selection of key policymakers, who resisted the preferences of the bureaucracy, chaebols, and the IMF while adopting novel liquidity-​directed policies, is notable in this regard. Another case in point are the appointments made by Lee Myung-​bak, who reversed his original neoliberal policy agenda after the political context changed with the 2007 financial crisis. He did not appoint neoliberal scholars, as could have been expected. Instead, he selected the outsiders Shin Hyun-​song and Kim Choong-​soo, mainly based on their international reputations, who advanced macroprudential policies that supported the president’s objective to enhance South Korea’s position on the international level. Expert agency was identified in the analysis of the substance of policies. Due to their technical complexity, they are shaped by experts in key policymaking positions beyond the direct control of the government. Furthermore, the analysis indicates that South Korean expertise did not copy Western expertise. With a strong focus on producing expertise that accounts for the specificities of the South Korean financial and economic system, it served as a resource to enhance policymakers’ capacity to protect financial stability (see also Nagel, 2022a). The undogmatic expertise of policymakers like Chon Chol-​ hwan or Shin Hyun-​song mirrors this experience-​based expertise, contrary to academic expertise that claims universal validity as propelled by Sturzenegger or Cavallo in Argentina, the Chicago Boys in Chile, or Kuroda in Japan.10 Just because key policymakers like Chon Chol-​hwan were fierce advocates of the

South Korea: Overcoming authoritarian developmentalism  121 1997 institutional change, particularly concerning central bank independence, this did not mean they would follow Western norms concerning policymaking. Like his successors, he was convinced that South Korea’s liberalized financial system required strong state interventions to prevent speculative international flows from undermining domestic stability. South Korean policymakers internalized the 1997 crisis experience similar to how their Chilean colleagues were influenced by the 1982 crisis, leading them to account for the inherent instability attached to financial flows largely omitted in Western economic theories and models (at least before 2007).11 For South Korean policymakers, the development of new policy tools, such as macroprudential policies and international liquidity following the 2007 crisis, is considered a ”dynamic and continuous process” to protect the domestic financial system (Interview with former Bank policymaker D, Seoul, 27 February 2019). Policies were focused, similar to Chile, on the management of global liquidity, entailing measures such as the accumulation of foreign exchange reserves, currency interventions, financial policy, and liquidity-​focused monetary policy that also maintained credit policy from the developmental period. Similar to Chile, the government securitized the nationalized debt of the 1997 crisis and used it to promote the development of domestic capital markets. Their development, in turn, increased their independence from global finance. Hitherto, the introduction of financial stability-​directed policies in the late 1990s heralded the emergence of a new form of financialization governance that replaced “economic growth” with “financial stability” as primary objective. The case of South Korea illustrates how the production of expertise can strengthen domestic agency to manage globalization by developing domestic policy frameworks and challenging dominant global financial governance that favors developed economies, particularly those emitting reserve currencies. It symbolizes a transformation from a country financially dependent on Western countries and the IMF to one that openly criticizes the policies of advanced economies and aims to shape global financial governance according to its preferences. In any case, South Korean governments have maintained the support to produce expertise adjusted to the specific South Korean situation, perceiving it as a requirement to navigate a globalized world. The Bank reform in 1998 propelled this openness and promotion of new ideas, strengthening the role of research in the Bank (Interview with former Ministry policymaker A, Seoul, 25 February 2019). Interview evidence strengthens this awareness that (Western) economic theories cannot be universally applied and instead have unintended effects that differ across countries (Interview with former Ministry policymaker A, Seoul, 25 February 2019). While institutionalist scholars perceived the institutional reforms as evidence of policy convergence with Western norms (Jayasuriya, 2001; Pirie, 2005a, 2012; Kalinowski, 2008; Kim and Lee, 2006), this would ignore the fact that policies did, in fact, not adjust to Western norms.12 The adopted, novel policies cannot be explained by Western expertise. Instead, they focused on safeguarding the stability of the Korean financial system while continuing

122  South Korea: Overcoming authoritarian developmentalism developmental policies from the past. The case of South Korea thus illustrates the importance of distinguishing institutional change from policy change, as they follow different logics that may coincide (like in the Latin American cases) but do not necessarily do so. Institutionalist scholars, thus, are at risk of omitting crucial information for explaining policy output and the success of countries’ governance of financialization. Therefore, gathered empirical evidence lies at odds with contributions in the literature which argue that the 1997 crisis strengthened policy convergence to the Western neoliberal model (Pirie, 2005a, 2012; Kalinowski, 2008; Kim and Lee, 2006) and supports findings from scholars who show how the Korean state did not give up its control over the financial and economic system but instead transformed its instruments to do so (Thurbon, 2016; Mikheeva, 2019; Park, 2011; Hundt, 2014; Kong, 2012; Kim, 2012f; Chu, 2009; Wong, 2004; Thurbon, 2016; Lim, 2010; Kim, 2005; Thurbon, 2016; Cherry, 2005; Kim and Kwon, 2017; Thurbon and Weiss, 2006; Weiss, 2003; Lee and Kim, 2018). As for the cases of Argentina and Chile, the analytical focus on the role of expertise in interaction with institutions does not imply that other factors, including interests, do not matter. A further role is played by the strong unions that have continuously raised their voices over issues of central bank independence and appointments to key positions within the Bank, FSC, and FSS, as well as commercial banks (Maxfield, 1997, pp. 66, 118; Lee and Hong, 2019, pp. 28, 376–​377; Cargill, 2001; KJAD, 2003c, 2003b, 2004, 2010f, 2016a; KT, 2018). As indicated above, the bureaucracy but also chaebols nurtured close relations with presidents like Lee Myung-​bak and Park Geun-​hye and are still important actors that can influence policymaking. Turf wars between the Ministry, Bank, FSC, and FSS over jurisdiction over monetary and financial policy have also continued after the 1997 reforms (Harald, 2021; KJAD, 2018a, 2016b, 2010e, b, 2008; Chosun, 2003). However, their ability to do so diminished as a result of institutional reforms in the late 1990s, which primarily benefited the government. In addition, private interests cannot explain the development of sophisticated financial regulations that curtail cheap funding from global finance. Rather, government preferences and expert agency seem more likely factors to explain the development of South Korea’s governance of financialization after 1998. Scholars interested in central bank independence may object that the government’s attempt to influence central bank policymaking remained limited, as illustrated by the fact that it did not ouster any central bank governor since 1997. Authors like Jayasuriya (2001) take the case of central bank independence in Korea to show how the state gave up control over monetary policymaking. However, this perspective omits the fact that the power of the Bank was severely diminished after 1997 as it lost financial regulatory powers. Moreover, the government appointed central bank governors to head the policy board, thus continuing the implicit influence of the president. Furthermore, and this would contradict the assumption that the 1997 institutional change increased the de facto independence of the Bank and the financial regulators, the government did recurrently replace key

South Korea: Overcoming authoritarian developmentalism  123 policymakers: Instead of targeting the already weakened Bank, this interference occurred more in the FSC and FSS, which gained strong control over financial policy in South Korea. Both agencies came more frequently under government pressure, with a high frequency of changes of their directors (15 for FSC and 13 for FSS). Thus, the transfer of financial policy from the powerful Bank to the newly established FSC and FSS did not imply a loosening of state control over the financial system. The implication could be that observed increases in central bank independence also in other cases may be more because political influence shifted away from less relevant central banks to more important financial regulators.13 Notes 1 In addition to the developmental ideas of the Japanese bureaucracy, policymaking was influenced by the ideas of Friedrich List and John Maynard Keynes (see Kim, 1992; Thurbon, 2016). 2 Strategic planning also continued after Park, with a focus that shifted from the knowledge industry (1990s) to inclusive, sustainable, and green growth (2000/​2010s). 3 Since the revision of the Bank Act in September 2003, the vice governor of the Bank has replaced the representative from the Securities Dealers Association. 4 In 2020, the amount of these foreign assets held by these public financial institutions was nearly equivalent to the official reserves held by the Bank. 5 Similar to Argentina and Chile, South Korea was only marginally hit directly by the 2007 financial crisis and instead suffered from a lack of foreign demand. 6 Although Shin was initially skeptical of leaving his academic position at Princeton University to take the job, he decided to take it due to patriotic motivation (Interview with former Ministry policymaker B, Seoul, 4 March 2019). Shin said in an interview that “I want to help Korea play a leading role in the G-​20 meeting to build a new order” (KJAD, 2009; also Pulse, 2010). 7 According to interview evidence, also more informal mechanisms have been maintained from the developmental era. One interviewee stated that guidance on credit allocation is still occurring, although to a lesser degree than during South Korea’s developmental era, in the form of “some degree of unwritten 'coercion' to the private sector” even though “not as strong as 3, 4, 5 decades ago” (Interview with former Bank policymaker B, Seoul, 8 March 2019). Another interviewee noted unofficial ways for the state to shape credit allocation (Interview with former Bank policymaker E, Seoul, 6 March 2019). 8 As the export sector sought to hedge its foreign currency risk, local branches of foreign banks were providing foreign currency loans to domestic banks, which acted as counterparties to the export sector. According to the Ministry, these transactions accounted for half of the foreign debt inflows in 2006 and 2007. (FSS, 2010). 9 Only with the 1997 institutional reforms could the government increase its leverage over monetary, financial, and foreign exchange policies. It is thus important to distinguish between Bank staff and the governors who take policy decisions, between whom frictions have continuously occurred (see, for example, Park, 2004c; Lee, 2006c). This is a gap in the sociology of knowledge literature, which focuses on the role of economists in policymaking while largely sidelining the dimensions of politics and power.

124  South Korea: Overcoming authoritarian developmentalism 10 Figure 5.2 shows how “financial stability” was an ongoing issue for South Korean policymakers, particularly relative to the focus on price stability and inflation, which are core tasks for central banks in advanced Western economies. Figure 5.5 furthermore shows the rise of the keyword “macroprudential” in governors’ speeches by Lee Seong-​tae and a strong increase in Kim Choong-​soo’s speeches. 11 One former policymaker questioned the contribution that “[i]‌n the financial market, you just make bubble[s], it’s [a] very dangerous in thing” (Interview with former Ministry policymaker B, Seoul, 4 March 2019). 12 One former policymaker remarked that although central banking seemed to have converged across the globe, country-​ specific circumstances differences result in diverging policy output (Interview with former Ministry policymaker A, Seoul, 25 February 2019). 13 An interview partner remarked that the government still views banks and financial institutions as public institutions. Thus, they are continued to be controlled by the government, the Bank, and the FSC (Interview with former Bank policymaker E, Seoul, 6 March 2019).

6 Japan Government control through institutional reforms

The case of Japan’s governance of financialization shares similarities with the trajectory of institutional change in South Korea, but the observed policy path differs. As in the other three cases, initial financial liberalization, conducted by Prime Minister Nakasone Yasuhiro (1982–​87), precipitated a protracted financial crisis that began in 1991. Pursuing a similar strategy as South Korea’s government, Prime Minister Hashimoto Ryutaro (1996–​98) used this crisis to enact institutional reforms that strengthened the government’s power vis-​à-​vis the bureaucracy, which was the engine and coordinator of economic development during the developmental era (1945–​97). More consequentially than in South Korea, subsequent governments under Koizumi Junichiro (2001–​06) and particularly Abe Shinzo (2012–​20) used their reinforced power to induce policy change according to their preferences. Expertise was instrumental for institutional and policy change. Already Prime Minister Nakasone used expert commissions to sideline bureaucracies for propelling policy change. However, the attempt by Hashimoto was more far-​reaching, as he could take advantage of the financial crisis in the 1990s and corruption scandals revolving around the bureaucracy as a window of opportunity to push through reforms envisioned by his expert commissions. Following these institutional reforms, governments could exert stronger control over policymaking, including by deploying their power to appoint the governor of the Bank of Japan (Bank). In their appointments, governments drew from two traditions of expertise in Japan: structuralism and monetarism.1 A compromise candidate (Shirakawa Masaaki) was selected to become governor from 2008 to 2013 only after the fragile government of Fukuda Yasuo failed to garner sufficient support in the parliament (Diet) to push through their preferred monetarist candidate. Shirakawa exerted some degree of expert agency to strengthen financial stability-​oriented policies, going beyond monetarist and structuralist policy approaches that have buttressed Japan’s governance of financialization. Unlike the similarities in government strategies to achieve institutional change, the substance of subsequent policies diverged sharply in the two countries. This followed from the significant differences between the empowered DOI: 10.4324/9781003414858-7

126  Japan: Government control through institutional reforms Table 6.1 Typology of ideas informing policymaking in Japan

Dominance Political support Policy objective

Structuralism

Financial stability

Monetarism

1997–​2008 Hashimoto, Koizumi structural reforms, free markets

2008–​2013 since 2013 compromise Abe financial stability monetary easing, inflation

expertise. Following structuralist prescriptions, which share similarities with Western neoliberal ones, Japan’s governments and policymakers pursued a more comprehensive dismantling of developmental monetary and financial policies in a process initiated under Hashimoto and deepened under Koizumi. As the desired economic growth did not materialize, Prime Minister Abe Shinzo (2012–​20) used the power acquired by the government after the institutional reforms in the late 1990s to induce significant policy change, following monetarist ideas. While policies until that moment were converging with Western neoliberal ideals, the subordination of the Bank under the government and the adopted monetarist policies under Abenomics departed from them. This chapter analyzes two moments of political agency and one moment of expert agency (see Table 6.1). Firstly, Hashimoto (1996–​98) propelled institutional reforms when the Ministry of Finance was temporarily weakened, and Koizumi (2001–​06) deepened them. These reforms strengthened government control, including by handing it power over determining the governor of the Bank. Subsequently, Hashimoto and Koizumi’s governments introduced neoliberal policies. The second moment of political agency occurred under Prime Minister Abe (2013–​20), when he appointed the monetarist Kuroda Haruhiko to become Bank governor and reshaped the policy board against resistance from the Bank to become governor in 2013. Kuroda conducted massive monetary easing based on the idea that this would increase inflation and, thus, economic growth. Thirdly, a moment of expert agency occurred when the compromise candidate Shirakawa became Bank governor and strengthened the Bank’s financial stability-​oriented policies based on his experience-​based expertise. Following this introduction, Section 6.1 reviews Japan’s developmental era and its initial financial liberalization in the 1980s, which contributed to the financial crises of the 1990s. Next, Section 6.2 analyzes the first moment of political agency, when the neoliberal governments of Hashimoto and Koizumi induced institutional and policy change. Subsequently, the appointment of Shirakawa and his adoption of financial stability-​oriented policies are analyzed (Section 6.3). Section 6.4 analyzes how President Abe changed the direction of policies by strengthening the government’s grip over the Bank. Section 6.5 concludes and discusses alternative explanations.

Japan: Government control through institutional reforms  127 6.1  Japanese developmentalism (1945–​82) and initial financial liberalization in the 1980s Similar to South Korea, the bureaucracy was an influential driver in Japan’s developmental era (1945–​97). Particularly the Ministry of Finance (Ministry), but also the Ministry of International Trade and Industry and the Ministry of Planning, were identified as central actors in studies about Japan’s rapid economic development (Johnson, 1982; Zysman, 1984). The Bank, which was subordinated to the Ministry, complemented developmental policies by allocating cheap credit to targeted sectors in the economy. The financial system served as a vehicle for providing credit to the real economy and propelling economic development. Therefore, the Ministry asserted strict control over the financial system, entailing guidance of credit allocation, limits to the entry of new institutions and branches, the compartmentalization of the financial system that limited competition, and heavy restrictions on financial innovations, international capital flows, and interest rates (Teranishi, 1994, p. 31; Vogel, 1996, pp. 170–​171; Aoki and Patrick, 1995). Financial institutions had close links to the large conglomerates (keiretsu) through the main bank system, in which lending was based on tight relationships. Bankruptcies did not occur, as the Ministry prevented financial institutions from failing under the so-​called convoy system (Hoshi and Kashyap, 2001, ch. 3; Lee, 2002, pp. 148–​149; Spiegel, 1999). Although the general direction was set around developmental policies, tensions between the Ministry and the Bank regarding the direction of policymaking were present. After the 1942 Bank Act revision subordinated the Bank to the Ministry, the former tried to strengthen its independence from the latter. The Bank favored pursuing policies according to its structuralist expertise, opposing strong state interventions in the financial system (Funabashi, 1989; Werner, 2015; Heckel, 2014; Interview with former Ministry policymaker A, Tokyo, 11 March 2019). Tensions between the Bank and the Ministry were aimed to be reduced by tasukigake jinji, the rotating right to appoint the governor. This power asymmetry between Ministry and Bank changed gradually from the 1980s until the mid-​1990s, culminating in institutional reforms in the late 1990s. The government, which had been relatively weak until then, was the new key figure in pushing this reform. However, more than strengthening the Bank, its goal was to get rid of the Ministry as a strong veto player in controlling policymaking and inducing financial liberalization that motivated the government. In the 1980s, Prime Minister Nakasone (1982–​87) aimed to promote financial liberalization and induce institutional change, following in the footsteps of Ronald Reagan and Margaret Thatcher (Funabashi, 1989; Hirashima, 2004). The United States was yet again a facilitating factor for Nakasone’s reform attempts, although Japan was subject to more U.S. pressure than South Korea due to the larger size of its economy (Strange, 1988, 2016; Helleiner, 1996). The United States criticized Japan’s foreign exchange policy, which

128  Japan: Government control through institutional reforms aimed at protecting a weak yen and limiting flows of global liquidity. This policy benefited its export sector, while simultaneously closing its borders to prevent global investors from entering the country. Domestic veto players in the form of the bureaucracy and keiretsu opposed a swift opening of Japan’s markets that the government supported. To foster a more stable equilibrium in the world economy, the world’s leading economies2 finally agreed in the Plaza Accord (1985) to induce a depreciation of the U.S. dollar relative to the yen and the deutsche mark. The Ministry and the Bank were at odds over which policies to adopt to meet the objective of international economic rebalancing. The former advocated fiscal austerity and low policy rates to offset foreign exchange imbalances and opposed financialization (see Funabashi, 1989; Brown, 1999). The Bank, in turn, opposed monetary easing and pushed for structural reforms and financialization. The market-​friendly Bank was thus a natural ally to Nakasone, who took advantage of this when he established the Maekawa Commission in 1986 (Funabashi, 1989). Through this commission, Nakasone could sideline the Ministry to generate policy recommendations. Maekawa Haruo, the chair of the Commission, had just resigned as Bank governor when Nakasone contacted him to translate the Bank’s structuralist ideas into policy recommendations for the government.3 The Maekawa report served as a blueprint for policy reforms that committed the country to converge to Western neoliberal policy standards (see also Higashi and Lauter, 1987).4 Backed by international pressure and his expert commissions, Nakasone advanced financial liberalization (see Hoshi and Kashyap, 2001, ch. 7 for an overview). In 1984, the government repealed a ruling that restricted the firms’ engagement in foreign exchange markets to real transactions of goods. Increased competition among financial institutions further promoted financial activity. Commercial banks were allowed to trade government bonds (1984), the uncollateralized call market and long-​term government bonds futures market were established (1985), an offshore market (1986), and a commercial paper market (1987) were created. Trading of Euroyen interest rate futures (1989), government bonds futures options (1990), and Euroyen futures options (1991) followed. Furthermore, the Bank’s window guidance, its most important tool for credit allocation, was gradually scaled back over the 1980s until its official abolition in 1991 (Vittas and Cho, 1996; Vittas and Kawaura, 1995; Kato et al., 1994). In the second half of the 1980s, financial inflows spiked following these liberalization efforts. The financial system expanded with a rise in bank lending, market-​based financing, and external financing of non-​financial corporates (Figures 6.1, 6.2, and 6.3). Financial and non-​financial corporations took advantage of new cheap financing possibilities that did not subordinate them to the regulations of the Ministry-​controlled domestic financial system. Due to the Plaza Accord, the appreciated yen (endaka) fueled cheap foreign debt inflows that fostered asset price bubbles while hampering the competitiveness of the export sector, as reflected in a deterioration of the current account

Japan: Government control through institutional reforms  129

Figure 6.1 Total assets, national commercial banks and non-​banks in Japan (JPY 100 million). Source: Bank of Japan, Flow of Funds (2008 SNA).

Figure 6.2 External liabilities of domestic banks in Japan (JPY 100 million). Source: Bank of Japan Statistics ((Discontinued)BOP (Data Based on the BPM5 [through 2013])/​ External Assets and Liabilities of Banks, etc.; Balance of Payments (Data Based on the BPM6)).

130  Japan: Government control through institutional reforms

Figure 6.3 Net external financing by domestic non-​financial sector (JPY 100 million). Source: Bank of Japan Statistics.

Figure 6.4 Japanese current account (JPY 100 million). Source: Bank of Japan Statistics ((Discontinued)Current Account (Through Dec. 2001, Provisional); Current account/​Net balance).

balance (Figure 6.4). To compensate for the increased uncertainty of financial institutions during this unrestrained financial expansion, they requested borrowers to post collateral (Okina et al., 2001, p. 447). That land was the primary collateral type proved to be devastating, as it allowed the expansion of credit during times of price increases of land while worsening the balance

Japan: Government control through institutional reforms  131 sheets in the economy once land prices were revalued in the early 1990s. Thus, in the late 1980s, private over-​indebtedness and the asset price bubble grew in tandem. It was not until 1991 that the imbalances unraveled, the asset price bubble burst, and a protracted financial crisis broke out. Unlike in the other cases, where panicking global investors triggered the crises, a domestic actor was the culprit in Japan: the Bank. Under the leadership of Governor and former Ministry bureaucrat Sumita Satoshi, the Bank fueled the bubble since the Ministry ordered it to keep interest rates low. When the Bank careerist Mieno Yasushi (governor from 1989 to 1994) took over the position, he decided to increase the policy rate from 3.25 percent in 1989 to 6 percent in 1991.5 This climb triggered the bursting of the asset price bubble. The subsequent revaluation of asset prices impaired the balance sheets of financial and non-​financial companies as well as households, resulting in an increase in bad loans and a reduction in investments. Together, these factors pushed down economic growth and ushered in Japan’s Great Stagnation (see also Koo, 2013). Similar to South Korea in the 1990s, Japan’s policymakers failed to adopt new regulations to control the effects of Nakasone’s initial financial liberalization. Relationship-​based financial regulation lost its capacity to control financial investments since companies, particularly keiretsu, could finance themselves directly on newly liberalized financial markets (Brown, 1999). With international pressure to sustain this policy and an economy that performed well, the government was not worried about financial expansion. Additionally, a lack of experience among Japanese policymakers with financialization contributed to this benign neglect (Interview Japan expert A, online, 8 May 2020). Unlike in the cases of South Korea and Chile, the government was not eager to quickly restructure the debt. Instead, the Ministry sought to prevent any failures (the convoy system). It provided the liquidity needed by the financial institutions, expecting that the situation would resolve itself once the economic situation improved again (Metzler, 2008). When Mieno’s successor, Matsushita Yasuo, became governor (1994–​98), a careerist from the Ministry, the policy rate reached a historic low of 0.5 percent by September 1995. Simultaneously, Japanese policymakers deepened financial liberalization, such as with the loosening of the compartmentalization of the financial system by the Financial System Reform Law in 1992. But it was particularly the government of Hashimoto (1996–​98) that intensified financialization, including through the establishment of asset-​backed securities in 1996 and the liberalization of securities derivatives and investment trusts in 1997 (see FSA, 2000b). Although the Ministry’s convoy system strategy had previously been successful when financial problems occurred, the revaluations following the burst of the asset price bubble were too fundamental. Instead of resolving the debt problem, the extent of non-​performing loans became increasingly evident over the 1990s, growing from JPY 13 trillion (1992) to JPY 43 trillion (2002). Against the backdrop of this prolonged crisis, public dissatisfaction

132  Japan: Government control through institutional reforms built up that the government could use to overcome domestic opposition to institutional and policy change. Like Kim Young-​sam in South Korea, Prime Minister Hashimoto (1996–​98) established new expert commissions to develop blueprints that the government could use to propel change. Structuralist ideas within the Bank, which emphasized the need to discontinue developmental policies and strengthen financialization, served as an important source of expertise required to inform these blueprints. 6.2  Hashimoto and Koizumi’s neoliberal reforms Prime Ministers Hashimoto (1996–​98) and Koizumi (2001–​06), both members of the conservative Liberal Democratic Party, which has governed Japan continuously since 1955 (except for brief periods in 1993–​94 and 2009–​12), were committed to dismantling developmental policies and replacing them with structuralist ones. Hashimoto’s “Japanese Big Bang” plan, which outlined a schedule of liberalization measures in November 1996 and was inspired by Thatcher and Reagan’s neoliberal reforms, was emblematic (see MoF, 1997a; FSA, 2000a). After a period of expansionary fiscal policies under the brief and unstable governments of Obuchi Keizo (1998–​2000) and Mori Yoshiro (2000–​2001), both from the Liberal Democratic Party as well, financialization measures were deepened under the Koizumi cabinet. Turning away from the manufacturing-​centered developmental era and going beyond the scope of the reforms in South Korea, he announced the objective of achieving a “nation founded on financial services” (Koizumi, 2005). A key obstacle to achieving this objective was the powerful Ministry and the main bank system, both core institutions of Japanese developmentalism. After the beginning of his tenure as prime minister in January 1996, Hashimoto initiated the development of reform plans to change institutions and policies. He saw the crisis of the 1990s as caused by outdated institutions and structures that required immediate revision. Hashimoto proclaimed that [r]‌esolving the problem posed by the financial institutions’ bad debts is an indispensable prerequisite to rebuilding and restructuring the Japanese economy, and I will make every effort to resolve this issue as quickly as possible. (Hashimoto, 1996) Instead of continuing to rely on the convoy system, Hashimoto urged financial institutions to accept their “unquestionable self-​responsibility” in a “high-​ transparency financial system” (ibid.). He considered this as stepping stone for establishing a market system in Japan that, in turn, would result in renewed economic development. To induce this change, Hashimoto saw the need to shift the power balance between the bureaucracy and the government. According to Hashimoto, the bureaucracy must be subordinated to the “political will” of the government:

Japan: Government control through institutional reforms  133 I do not see politics and the bureaucracy as being in conflict. Rather, I see them as cooperative, politicians exercising determined will and leadership for sweeping reforms and the bureaucracy providing the specialist expertise needed to complement this political will. (Hashimoto, 1996) Conducive to the preparation of institutional change to establish this new power balance were expert commissions, through which the government could sideline the bureaucracy’s control over the reform agenda. First, in November 1996, Hashimoto established the Administrative Reform Council to develop blueprints for administrative reforms that were adopted in January 2001 (see Bevacqua, 1997; Masujima, 2005; Kaneko, 1999; Mulgan, 2013, pp. 73–​74). This council consisted entirely of academics and businesspeople, with no bureaucrats present. The purpose of these reforms was “to strengthen the administrative leadership of the Cabinet and Prime Minister” (Government, 2001). Second, the Financial System Reform Consultative Committee was established in 1996 to develop institutional and policy reforms across multiple policy fields. Through the adoption of “bold deregulation measures,” it aimed to “create […] a system where the market mechanism functions to its full extent and optimal allocation of resources is achieved” (MoF, 1997a). This Commission combined the efforts of the Ministry’s Financial System Research Council, which detailed a list of policy reforms in its final report in June 1997 (see MoF, 1997b), and three other commissions. Third, in 1996, Hashimoto established the Central Bank Study Group, comprised of academics and businesspeople, to develop plans for accelerating institutional and policy change at the Bank. The group’s report was then sent to the Financial System Research Council in November 1996, with the goal of revising the Bank Act in April 1998.6 The output of these expert commissions supported the government’s goal of a “free, fair, and global” financial system while weakening the power of the Ministry in line with Western neoliberal norms. Of symbolic value was one of the first decisions taken under this new neoliberal system: the decision to let financial institutions Yamaichi Securities, Sanyo Securities, and Hokkaido Takushoku Bank go bankrupt in October and November 1997. Hashimoto declared concerning this decision that in the past, we had this strong desire to avoid, as much as possible, any failures of financial institutions, securities houses included […] We have already made up our mind to reconcile standards with international standards and open up the Japanese market. Therefore, we will not allow the rescue of Yamaichi […] If we had maintained the past policy, we may have attempted somehow to retain Yamaichi’s survival. But, we can no longer do that under the present system. (Hashimoto, 1997, emphasis added)

134  Japan: Government control through institutional reforms As in the case of South Korea, the government used a crisis as a convenient moment to overcome domestic resistance to institutional and policy change. When a number of corruption scandals involving the use of public money to support financial institutions specialized in housing loans (jusen) went public in the mid-​and late-​1990s, the Ministry’s resistance to institutional and policy change envisioned by the government became fragile (see Amyx, 2013; WP, 1996; NYT, 1996; Times, 1996; NYT 1998). Bank Governor Matsushita and Vice Governor (and later Governor) Fukui Toshihiko were forced to resign due to these scandals in 1998. This crisis at the Ministry and the negative impact of the financial crisis on its reputation were used by the Hashimoto government in order to expedite the translation of blueprints developed by the expert commissions to change the governance of financialization. A central tenet of Hashimoto’s reforms was institutional reforms that weakened the Ministry’s power over monetary and financial policies, in analogy to the changes identified in South Korea. Firstly, the revised Bank Act from April 1998 established central bank independence, discontinuing the Bank’s subordination to the Ministry in line with Western norms. Nevertheless, two elements of the Act point to a divergence from Western neoliberal norms: the government retained levers of control over the Bank and the Bank maintained tools that allowed it to inject liquidity readily when financial stability was endangered. Ministers were not allowed to be board members anymore; only “persons with relevant knowledge and experience including experts on the economy or finance” could be appointed (Bank Act, Art. 23; see also Han, 2016, pp. 131–​132). However, the government kept its grip on Bank policies by having the right to appoint the governor, two deputy governors, and six further members to the board with consent from the Diet (Bank Act, Art. 23). In addition, the finance minister appoints the Bank’s executive directors based on the policy board’s recommendation (Bank Act, Art. 23). Furthermore, the finance minister or economy minister may attend policy board meetings without having a voting right (Bank Act, Art. 19). This change is noteworthy as it discontinues the right of the Ministry to appoint an insider to head the Bank every other time (tasukigake jinji). Furthermore, Article 4 stipulates that the Bank “shall […] always maintain close contact with the government and exchange views sufficiently,” going beyond the coordination mechanisms of Western central banks. Concerning policy tools, liquidity policies to safeguard financial stability were maintained. Special loans (Articles 38 and 33) permit the Bank to inject liquidity when financial stability is threatened. Secondly, the government delegated financial policy to the newly founded Financial Supervisory Agency in June 1998 (see also Hori, 2005, ch. 7).7 With the merger with the Ministry of Finance’s Financial System Planning Bureau in July 2000 and the Financial Reconstruction Commission in January 2001, it was renamed to Financial Services Agency (FSA). The FSA was established as an external organ of the Prime Minister’s Office. As a result of these reforms, the government could thus increase its influence over policymaking by taking away central tasks from the Ministry and establishing new channels of influence.

Japan: Government control through institutional reforms  135 In March 1998, Hashimoto used his new power over the appointment of Bank governors to select Bank traditionalist Hayami Masaru, a staunch advocate for structural reforms and central bank independence who was criticized by politicians and the public for his unyielding positions (see Dwyer, 2012; Hayami, 2003; JT, 2003a; WSJ, 1999a; WSJ, 1999b). Hayami worked for the Bank from 1947 to 1981 before moving to the private sector and serving as chair of the Japan Association of Corporate Executives. He emphasized the need to propel reforms in the corporate sector and deepen them when obstacles arise. Hayami believed that “the most effective and credible prescription to alleviate the pain accompanying structural reforms is to steadily implement reform measures” (Hayami, 2002). This viewpoint contrasts sharply with that of his predecessor, Ministry careerist Matsushita, who stated that the Bank’s task was to support existing firms until their situation improved (Matsushita, 1997). Hayami’s structuralist approach is reflected in the frequent mentions of “structure” in his speeches during his tenure (Figure 6.5). Koizumi (2001–​06): Prime Minister Koizumi deepened institutional and policy change initiated by Hashimoto, particularly concerning the development of capital markets and the dismantling of developmental public financial institutions. Koizumi used two expert commissions to propel policy change further. In April 2001, the Council for Regulatory Reform, consisting of 15 academics, businesspeople, and consultants, was used by Koizumi to prepare deregulations and deepen financialization. It was a potent tool for change as it could directly negotiate with the ministries. The First Report Regarding

Figure 6.5 Frequency of word occurrence in speeches of policy board members of Japan’s central bank, divided into governor tenures (in percent).

136  Japan: Government control through institutional reforms Promotion of Regulatory Reform from December 2001 recommended further financial deregulation: We think it will be of critical importance for the development of the national economy to further promote the abolition or relaxation of regulations […] and through this, to build the bases for the development of the financial services industry, which we think should be one of the future growth industries. (CRF, 2001) The second (December 2002) and third (December 2003) reports listed further policy recommendations to promote market-​based financing, such as the demand to increase the attractiveness of bond issuance that was introduced in 1999 (CRF, 2002). Secondly, Koizumi utilized the Council on Economic and Fiscal Policy (CEFP) to strengthen the government’s control over policy change, guide the government budget, and produce recommendations for economic and fiscal policies as well as regulatory reforms. The Council, headed by Takenaka Heizo, was made up of the prime minister, four ministers, the Bank governor, two businessmen, and two academics.8 The CEFP emphasized that its objective was to strengthen the control of the prime minister over policymaking, sidelining the Ministry to ”fully demonstrat[e]‌the leadership of the Prime Minister while reflecting the opinions of private sector experts in policy formation” (CEFP, 2020). Takenaka described the CEFP as a “machine for Koizumi’s leadership,” considering his own role as “steering the Council to make sure that the Council underpin[s] the prime minister’s leadership” (Takenaka, 2002). Koizumi used the government’s right to appoint the governor in order to shift the Bank away from Hayami’s structuralism toward more monetary easing, as both he and Takenaka thought this was necessary to support economic recovery. With Koizumi’s appointment of Fukui Toshihiko to succeed Hayami in March 2003 and the subsequent turn away from the Bank’s structuralism, the increased leverage of the government over the Bank became more apparent (see Dwyer, 2012; JT, 2003b). Aside from the incremental change of monetary policy, Fukui, like his predecessor, was a proponent of promoting financial market development. This included propelling financial innovations, reducing regulations of financial institutions, and relying on their own risk management techniques (Fukui, 2004; Fukui, 2007). Fukui envisioned a “seamless credit provision system, in which customers can obtain any type of credit” and where risks were self-​managed by internal risk management systems (Fukui, 2004). With the institutional reforms of the late 1990s, the government gained the power to induce consequential policy changes by dismantling the bureaucracy as a key veto player. As the following sections show, the Bank subsequently

Japan: Government control through institutional reforms  137 deployed monetary and financial policies to foster the role of the financial system in Japan.9 Monetary policy accompanied the structural adjustment process by providing liquidity to safeguard financial stability. Financial policy included dissolving the main bank system, strengthening market-​based financing, and dismantling the public financial institutions. 6.2.1  Monetary policy

While the Bank ceased credit policies in 1991 and replaced the discount window with the setting of the overnight interbank rate as the policy instrument, the main change brought about by Hayami was the use of liquidity policies. With the end of the Ministry’s convoy system, Hayami altered the use of liquidity policies from supporting any financial institution that is at risk of failing toward its use as an instrument for maintaining the stability of the financial system as a whole. This way, the restructuring of the financial system was to be supported without jeopardizing its stability. In November 1997, this new era of monetary policy was foreshadowed by the political decision to let the securities firm Yamaichi go bankrupt, a notable break with the old Ministry’s convoy system. The nationalizations of the Long-​ Term Credit Bank of Japan in October 1998 and the Nippon Credit Bank in December 1998 followed. To reduce the fallout on the stability of the financial system, the Bank used special loans to inject domestic and foreign liquidity into the financial system. In February 2001, monetary easing was intensified by expanding purchases of government securities, while the Bank’s liquidity management was further enhanced by the adoption of the Lombard-​Style Lending Facility. When stock market volatilities in the early 2000s threatened the stability of banks, the Bank began purchasing their stocks. Furthermore, it continued to purchase bills issued by financial institutions, a program that was created in 1998 and transformed in 2006, being renamed Funds-​Supplying Operations against Pooled Collateral.10 A gradual shift toward more monetary easing to support economic growth occurred after Koizumi appointed Fukui, who was more attentive to government concerns than Hayami, to head the Bank in March 2003. While the Bank under Hayami was opposed to interventions in financial markets by purchasing public and private financial assets (Hayami, 1998; Yamaguchi, 2000; Hayami, 2000; Shinotsuka, 2000), this changed with Fukui’s introduction of asset purchase programs: In June 2003, Fukui established a new purchase program of asset-​backed securities, synthetic-​type securities, and asset-​backed commercial paper. This policy had a dual objective of loosening monetary policy and promoting the development of capital markets (BoJ, 2003). By creating facilities to safeguard the liquidity of these new financial products, the Bank could strengthen its capacity to maintain financial stability, which will later be copied in the form of quantitative easing by policymakers in Western economies during and after the 2007 financial crisis.

138  Japan: Government control through institutional reforms 6.2.2  Financial policy

Financial regulation: The growing amount of non-​performing loans from the 1990s illustrates the failure of the Ministry’s traditional convoy system to bring about economic recovery (see Hoshi and Kashyap, 2001, p. 268). The Bank’s structuralist position was in direct opposition to the rationale of the convoy system. According to the Bank’s perspective, the developmental economic and financial system should be dismantled and market discipline embraced instead of injecting more and more liquidity to cover bad assets. Hayami thus pushed for the swift resolution of bad assets, with the introduction of the disclosure requirement for non-​performing loans in April 1999 as a cornerstone. In October 1998, the Financial Function Early Strengthening Law and the Financial Revitalization Law, both shaped by experts of the Industrial Competitiveness Council, were enacted to enhance mechanisms for supporting and resolving troubled banks by injecting public funds. They further established the Financial Reconstruction Commission to manage non-​performing loans. The Deposit Insurance Corporation (DIC) Act of 2001 strengthened the resolution framework. The DIC (established in 1971) purchased non-​performing loans with the help of public funds and central bank loans. To improve liquidity management, the safety net for banks was complemented by ones for securities companies (Japan Investor Protection Fund, established in December 1998) and insurance companies (Life Insurance Policyholders Protection Corporation and Non-​Life Insurance Policyholders Protection Corporation, both established in December 1998). In May 2003, the government founded the Industrial Revitalization Corporation to support companies in the restructuring process (discontinued in March 2007). These changes entailed structuralist expertise while developing a range of tools to manage liquidity conditions in the financial system. With the updated liquidity management in place, the FSA, headed by Takenaka Heizo, presented several programs to promote the development of capital markets and support SMEs: Program for Structural Reform of Securities Markets (August 2001), Program for Promoting Securities Markets Reform (August 2002), Program for Financial Revival (October 2002), Action Program Concerning Enhancement of Relationship Banking Functions (March 2004), Program for Further Financial Reform –​Japan’s Challenge: Moving toward a Financial Services Nation (December 2004), and New Action Program (March 2005). These regulatory reforms followed recommendations developed by expert commissions, particularly those of the Council for Regulatory Reform, the Industrial Competitiveness Council, and the CEFP (see Tiberghien, 2007, pp. 133–​ 136). Similar to the case of South Korea, the government sought to attract financial inflows in order to propel structural change. It further liberalized the financial system through modifications of the Foreign Exchange Law in April 1998 and the Financial System Reform Law in December 1998, with the objective of breaking close ties between banks and large companies (main bank system). The compartmentalization of the financial system was weakened by allowing banks to offer insurance products and trade securities via the establishment of financial

Japan: Government control through institutional reforms  139 holding companies (October 1999). In 2001, over-​the-​counter sales of investment trusts, including exchange-​traded funds and real estate investment trusts, were established, and the securities settlement systems were enhanced in 2002. Public financial institutions and institutional investors: Both Hashimoto and Koizumi were supporters of structural reforms and pursued a similar policy approach. Koizumi’s tenure as prime minister was distinct, given his increased pressure on the Bank over monetary policy and a flagship reform that was left untouched by Hashimoto: the privatization of public financial institutions. During Japan’s developmental era, the state used these key instruments to extend loans to targeted economic sectors and development projects. Following the Bank’s structuralist expertise that Hashimoto and Koizumi used to shape reforms, they saw their privatization as necessary, since otherwise “the market mechanism may not work properly” (Hayami, 2002; Hayami, 2003; Fukui, 2004). Their dismantling went beyond what the South Korean policymakers did, who transformed their purpose but did not want to give up on this efficient tool to control financial markets and steer credit allocation. The dismantling of the postal savings system over the 2000s was the most important of them. With deposits of USD 2.4 trillion in 2001 (more than half of Japan’s GDP), it was the largest financial institution globally. Its deposits had been channeled to the Ministry, which then extended them to the Fiscal Investment and Loan Program (FILP) and the Development Bank of Japan. These, in turn, had invested the funds in different areas, including public corporations and infrastructure projects, according to political preferences. This massive source of finance offered an important instrument to the preceding governments. With Koizumi’s reforms, the FILP needed to finance itself via financial markets. The Postal Savings Service was discontinued in October 2007, followed by the privatization of the Development Bank of Japan in October 2008. This reform also had implications for the pension system. The structure of Japan’s pension system is complex and includes several different entities in a multi-​tier system. The financial assets are massive (total of JPY 376 trillion), including those of the largest pension fund in the world (Government Pension Investment Fund, JPY 151 trillion). A glance at the investment structure of its assets under management (Figure 6.6) illustrates the transformation from developmental structures since Koizumi’s tenure as prime minister. Until the early 2000s, about half of all pension system assets were allocated to the Fiscal Loan Fund, with other large positions being public and private debt securities and equity. The phasing out of the FILP over the 2000s was managed by increased purchases of public debt securities that have been gradually reduced since the mid-​2000s. Simultaneously, foreign investments and equity gained significance following the low yields on debt securities in Japan. Similar developments occurred for insurance companies, the most important institutional investors alongside pension funds (end-​2019: JPY 504 trillion or USD 4.9 trillion). Their investments are balanced –​almost half of them consist of Japanese public debt securities.

140  Japan: Government control through institutional reforms

Figure 6.6 Investments of the financial assets of Japan’s total pension system (JPY 100 million). Source: International Monetary Fund, Balance of Payments and International Investment Position Statistics.

Domestic capital markets: The development of domestic capital markets was a key objective for strengthening the role of domestic financial markets and overcoming the old main bank system. The Bank contributed to the development of domestic capital markets by using two mechanisms. Firstly, Hayami introduced new collateral policies that established asset-​backed securities and asset-​backed commercial papers as eligible collateral with the explicit objective of fostering market-​based financing of corporations (see Hayami, 2003). The Basic Policy on the Eligibility as Collateral of Asset-​Backed Securities and Debt Obligations Issued by Financial Institutions that Maintain Current Accounts with the Bank in September 1999 and the Guidelines on Eligible Collateral in October 2000 established the Bank’s new collateral policy. Continuing the financial policies of his predecessors, the Bank under Fukui emphasized its role in “fixing an impaired financial system and initiating financial market reform” (Hirano, 2006). Governor Fukui perceived that “[asset-​ backed securities] will be the best candidate to build a bridge from the current bank-​centered system to next-​generation financial and capital markets” (Fukui, 2003a). Fukui furthermore encouraged financial institutions to adopt financial innovations like collateralized debt obligations, risky derivatives that were at the core of the financial crisis of 2007 (see Fukui, 2003c). Secondly, the Bank began purchasing private securities, including asset-​backed securities, in June 2003 and expanded its purchases in May 2004, thus directly contributing to market development by increasing demand (BoJ, 2004, see also above). Fukui emphasized that “[t]‌he Bank hopes that the Bank’s purchase of securities will contribute to the autonomous development of the market” (Fukui, 2003b).

Japan: Government control through institutional reforms  141 6.3  Expert agency under the compromise governor Shirakawa In the brief period between 2008 and 2013, against the backdrop of the 2007 financial crisis in Western countries, policymaking shifted from structuralist policies under Hayami and Fukui toward policies directed at safeguarding financial stability. In April 2008, Shirakawa Masaaki, an advocate of financial stability-​oriented policies, was appointed by Prime Minister Fukuda Yasuo (2007–​8, Liberal Democratic Party) to become the Bank’s governor. However, his selection resulted from a compromise and not from a direct translation of government preferences for expanding government influence over Bank policies. Fukudo, a key ally and former Cabinet Chief for Koizumi, faced opposition from the Democratic Party of Japan, which became the strongest party of the Diet’s upper house in July 2007 and used its power to block unwanted candidates. Fukudo’s preferred candidates, Muto Toshiro, Koji Tanami, and Watanabe Hiroshi (for deputy governor), were blocked as the opposition criticized that they all worked in high positions in the Ministry before and thus threatened central bank independence (see NYT, 2008b; JT, 2008a; JT, 2008b). After three weeks of vacancy, Shirakawa, a Bank careerist and academic with international experience, became the new governor (see Table 6.2). Unlike in the case of South Korea, Japan’s government leader has only limited power to appoint the governor and requires the consent of the Diet. Table 6.2 Background of Japan’s central bank governors after 1998 Governor

Academia

Hayami Masaru 1998–​2003

Undergraduate degree, Hitotsubashi Bank (1947–​81); Nissho University Iwai Corporation; Head of Japan Association of Corporate Executives; chairman of Board of Trustees, Tokyo Women’s Christian University Law undergraduate, University of Bank (1957–​98); Tokyo Fujitsu Research Institute); Japan Association of Corporate Executives Professor, School of Government, Bank (1972–​2006) Kyoto University; graduate degree in economics, University of Chicago; undergraduate degree in economics, University of Tokyo; dozens of academic publications Professor, Hitotsubashi University; Ministry of Finance (1976–​ graduate degree in economics, 2003) special advisor University of Oxford; to Koizumi (2003–​ undergraduate degree in law, 05); president, Asian University of Tokyo Development Bank

Fukui Toshihiko 2003–​08 Shirakawa Masaaki 2008–​13

Kuroda Haruhiko since 2013

Work

142  Japan: Government control through institutional reforms The structure of Japan’s political system thus limited the political agency to induce policy change by appointing the preferred expert to key policymaking positions. Not being constrained by a strong political will exerted by the government, Shirakawa could translate his expertise into policymaking relatively independently. Shirakawa’s expert agency was relevant given the specific policy problem at hand, namely financial instability triggered by panicking investors following the 2007 financial crisis in advanced economies. The specific expertise of Shirakawa went beyond the Bank’s structuralist and the Ministry’s monetarist traditions. He criticized monetarist policy approaches, questioning that monetary easing will result in more lending and investment, and pointing to the risk that this will result in debt monetization (see Shirakawa, 2001, p. 475; Shirakawa, 2012c; Nippon, 2019). On the other hand, he rejected the strict structuralist focus on price stability, emphasizing that financial stability needs to be established as a key policy objective next to it (see Shirakawa, 2010b; Shirakawa, 2009a; Shirakawa, 2010d). Shirakawa was influenced by the crises experiences of the 1990s and the Asian financial crisis in 1997, which led him to focus on the risks attached to a liberalized financial system and the need to develop new policies to accommodate these changes that go beyond Western standards of policymaking (see Shirakawa, 2010b; Shirakawa, 2010c; Shirakawa, 2011b; 2011a, Shirakawa). Shirakawa spent most of his career at the Bank, where he began working in 1972, and focused on issues related to financial stability, asset prices, and bank resolution. In the late 1980s, he wrote a report warning about the rapid increase in asset prices (Interview with former Bank policymaker A, Tokyo, 27 March 2019). After the bursting of the asset price bubble in the early 1990s, Shirakawa was involved in the resolution of failing financial institutions and in the development of a resolution framework (Shirakawa, 2009c). In the time of the 1997 Asian financial crisis, Shirakawa stayed at the Bank for International Settlements, which at that time began investing heavily in producing expertise concerning issues of financial stability. Furthermore, Shirakawa has published extensively on monetary policy and the financial system, especially on the asset price bubble and risks to financial stability linked to financialization and easy monetary policy. Before becoming governor, he focused on academic work during his stay as a university professor at the Kyoto University School of Government (2006–​08). Compared to the structuralist and monetarist governors before and after him, Shirakawa’s tenure was shaped by his concerns about financial stability. Shirakawa considered his formation, particularly the experience of the financial crisis in Japan and Asia in 1997, as central to his policymaking in the 2007 crisis: I[Shirakawa] believe the knowledge and intuition that I gained through this experience has been extremely valuable in making policy decisions in the face of the recent [2007] crisis. Such personal experience has led me to emphasize the importance for people involved in the world of financial

Japan: Government control through institutional reforms  143 stability to have as broad a perspective as possible, rather than confining themselves in a silo. (Shirakawa, 2009c) He stressed that policy changes after the crises of the 1990s and the adoption of liquidity policies in the late 1990s and early 2000s helped to protect the country against the effects of the 2007 crisis (see Shirakawa, 2008a; Shirakawa, 2010b). Similar to South Korean policymakers after 1997, Shirakawa emphasized that policies need to be deployed and continuously updated to prevent financial risks from building up against the background of a volatile and dynamic global financial system, thus contrasting with Hayami and Fukui’s positive outlook on the financial system (see Shirakawa, 2008b; Shirakawa, 2009c; Shirakawa, 2009b; Shirakawa, 2009d; Shirakawa, 2009f; Shirakawa, 2010d; Shirakawa, 2010b; Shirakawa, 2011b; Shirakawa, 2012a; Shirakawa, 2013). The increase in the frequency of mentions of “financial stability” in speeches by members of the policy-​setting committee illustrates the growing relevance of financial stability during Shirakawa’s tenure (Figure 6.7). The following subsections analyze how Shirakawa’s distinct expertise shaped monetary and financial policymaking, temporarily putting financial stability concerns at the core of Japan’s financialization governance. 6.3.1  Monetary policy

Japan’s economy contracted in 2008/​9 due to a fall in demand for Japanese products by crisis-​ struck Western countries. The stability of the financial

Figure 6.7 Frequency of word occurrence in speeches of policy board members of Japan’s central bank, divided into governor tenures (in percent).

144  Japan: Government control through institutional reforms Table 6.3 Japan’s policy responses to the 2007 crisis Countercyclical monetary policy Liquidity policies

Corporate finance policy

Reductions in the policy rate (February 2007, October 2008, December 2008) Expansion of securities lending facility (October 2008, February 2009) Introduction and expansion of U.S. dollar funds-​supplying operations; expansion of purchases of Japanese government bonds (September 2008, October 2008, January 2010; expired in February 2010 and re-​established in May 2010) Introduction of complementary deposit facility (October 2008) Expansion of purchases of JGSs (October 2008) Liquidity provision for year-​end and fiscal year-​end (October 2008) Increases and expansions of outright purchases of Japanese Government Bonds (December 2008, March 2009) Inclusion of Development Bank of Japan as counterparty (December 2008) Widening of eligible collateral to include securities of real estate investment corporations (January 2009), government-​ guaranteed dematerialized commercial paper (February 2009), loans on deeds to public sector (April 2009), government bonds of USA, UK, Germany, and France (May 2009) Suspension of bank stock selling program held by Bank Resumption of stock purchases held by financial institutions (until April 2010) Widening of accepted collateral to include ABCPs and CPs (October 2008) Increases in commercial paper repurchase agreement transactions (October 2008) Introduction (December 2008) and expansion (February 2009, October 2009) of special funds-​supplying operations to facilitate corporate financing (expired March 2010) Expansion of eligible corporate debt collateral (December 2008 until end-​2010) Introduction (December 2008) and expansion (January 2009, February 2009, October 2009) of outright purchases of commercial paper, corporate bonds, and asset-​backed securities (expired end-​2009)

system was not directly impaired, but Japan experienced volatilities due to panicking global investors. Policy responses entailed the reduction of the policy rate, liquidity policies, and corporate financing facilities (Table 6.3). While the former aimed at stabilizing the economy, the latter two safeguarded financial stability (see also Mainichi, 2018). The policy rate was countercyclically used by Shirakawa, lowering it from 0.75 percent in September 2008 to 0.3 percent in December 2018. Following the economic downturn, Shirakawa introduced further monetary easing in October 2010 (Comprehensive Monetary Easing) that entailed more purchases of private

Japan: Government control through institutional reforms  145 assets, including corporate bonds, real estate investment trusts (J-​REITs), and exchange-​traded funds (ETFs). However, Shirakawa was wary of the potential negative effects of this program and recurrently pointed out the risks that purchases of financial assets by the Bank could pose to the financial system (Shirakawa, 2009e; Shirakawa, 2009f; Shirakawa, 2011b; Shirakawa, 2012b). The Bank provided liquidity to the financial system in both domestic and foreign currency to preserve financial stability and ease financing conditions for the corporate sector. Based on the adopted liquidity policies by Hayami and Fukui, the Bank could stabilize the financial system when market volatilities impaired global finance after the failure of Lehman Brothers in September 2008. Having already previously accepted a wide set of financial institutions as counterparties (beyond banks, also securities companies, securities finance companies, tanshi companies, the Development Bank of Japan, and central counterparties), the Bank could draw on a readymade infrastructure to extend liquidity. Furthermore, the Bank established and expanded a number of international swap lines with other central banks (see Table 6.4). A noteworthy policy change occurred with Shirakawa’s introduction of the Loan Support Program. This credit policy-​like instrument resembles South Korea’s Aggregate Credit Ceiling and links back to Japan’s developmental Table 6.4 International swap lines of the Bank of Japan Australia Canada Chiang Mai Initiative

England Eurozone India Switzerland United States

March 2016: establishment of currency swap line; March 2019: extension of swap line December 2011: establishment of currency swap line October 2013: establishment of standing swap line May 2000: establishment of a network of bilateral currency swap lines by ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam), China, Japan, and South Korea December 2009: establishment of a multilateralized swap network between the founding countries and Hong Kong July 2014: expansion of multilateralized swap network December 2011: establishment of currency swap line October 2013: establishment of standing swap line December 2011: establishment of currency swap line October 2013: establishment of standing swap line June 2008: establishment of currency swap line December 2011: establishment of currency swap line October 2013: establishment of standing swap line April 2009: establishment of currency swap line June 2009: extension of swap line January 2010: expiration of swap line May 2010, June 2011, November 2011, December 2012: re-​establishment and extension of swap line October 2013: establishment of standing swap line

146  Japan: Government control through institutional reforms history. Under the program, the Bank introduced the Fund-​Provisioning Measure to Support Strengthening the Foundations for Economic Growth in June 2010 “as a temporary measure to make the effect of monetary easing permeate the entire economy” (BoJ, 2010b).11 The introduction followed Shirakawa’s perception, similar to his South Korean colleague Kim Choong-​soo’s, that financial institutions do not extend cheap financing rates to real investments and instead fuel asset price inflation. In June 2012, an instrument denominated in U.S. dollar complemented this program (Special Rules for the U.S. Dollar Lending Arrangement to Enhance the Fund-​Provisioning Measure to Support Strengthening the Foundations for Economic Growth Conducted through the Loan Support Program). By the end of Shirakawa’s tenure (May 2013), the amount of loans provided was substantial, reaching JPY 3.4 trillion for the yen-​ denominated program and USD 3.5 billion for the dollar-​denominated one. In response to the Great East Japan Earthquake in March 2011, the newly introduced Funds-​ Supplying Operation to Support Financial Institutions in Disaster Areas provided further liquidity (up to JPY 1 trillion at 0.1 percent interest) for “maintaining the functioning of financial and settlement systems, ensuring the stability of financial markets, and supporting economic activity.” With these credit policy programs, the Bank enhanced liquidity management while strengthening control over credit allocation to discourage speculative investments in the financial system. 6.3.2  Financial policy

Financial regulation: Japanese financial institutions were not directly exposed to the financial crisis, as the conservative regulatory framework that the government implemented in the late 1990s and early 2000s disincentivized excessive financial speculation as it occurred in the United States. It furthermore limited exposure to toxic financial assets that circulated in financial systems in Western countries (see Harada et al., 2015). Although Hashimoto and Koizumi aimed at deepening financial markets, including the promotion of financial innovations, there was no market for risky assets like collateralized debt obligations, which were at the core of the 2007 financial crisis in Western countries. Under Shirakawa, the role of global liquidity risk-​informed policymaking, and Japan was quick to adopt the new Basel III regulatory standards (see Harada et al., 2015). Sharing a similar background to his colleague Kim Choong-​ Soo at the Bank of Korea, Shirakawa emphasized the need for strengthening macroprudential policies and was open to the paradigm change envisioned under Lee Myung-​bak’s G20 meeting in 2010 (see Shirakawa, 2010d; Shirakawa, 2010a). Policy changes in the realm of domestic financial markets and public financial institutions remained subdued. Furthermore, foreign exchange policy was left untouched, with the Bank only warning speculators on foreign exchange markets, stating that the Bank “will

Japan: Government control through institutional reforms  147 immediately work with comprehensive countermeasures against the yen appreciation” (Government, 2011). 6.4  Abe’s monetarism While Shirakawa’s tenure as governor was successful in preventing financial instability in times of global market volatilities, the 2011 eurozone crisis pushed down international demand again, thereby limiting Japan’s growth prospects. Against this background, the Liberal Democratic Party under the leadership of Abe Shinzo won the general election in December 2012, replacing the government of the Democratic Party of Japan that had led the country since 2009. Abe continued the policies that he pursued during his first brief term as prime minister from September 2006 to September 2008. During his first tenure, he presented the Economic and Fiscal Reform 2007 Plan that proposed several reforms, including the Plan for Enhancing Competitiveness of Financial and Capital Markets from December 2007, with the objective of promoting financial markets development by strengthening decompartmentalization and diversification of exchange-​traded funds. However, Abe stressed that economic problems were primarily caused by the Bank’s policy mistakes, as they fail to lift the country from the deflationary tendencies that have persisted since the early 1990s. Abe particularly criticized the Bank’s structuralist resistance to monetary easing, considering it a capital error. In Abe’s first speech of his second tenure, he explains why low inflation rates are the most pressing problem for Japan’s economy, stating that deflation is a “terrible demon that absconds with people’s desire for change” (Abe, 2014). For his second term in office, Abe proposed a more ambitious program: Abenomics. In January 2013, the government presented the Emergency Economic Measures for The Revitalization of the Japanese Economy, which served as a blueprint for subsequent policy measures of Abenomics: easy monetary policy to overcome deflation, reduction of public debt, and the implementation of a growth strategy to boost productivity. Furthermore, the objective to promote market development was reinstated, including the “revitalization” of the markets for real estate investment trusts and SME financing. In the same month, a document with the title Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth presented how these policies are to be coordinated. It served as the blueprint for their division of labor and is reviewed annually by the Council on Economic and Fiscal Policy (BoJ, 2013). Japan’s financialization governance turned away from the primary objectives of promoting structural reforms and financial stability, making the increase of the inflation rate the main objective. The selection of Kuroda Haruhiko to become Bank governor personified Abe’s forceful approach. As close allies (Abe served as cabinet secretary to Koizumi, Kuroda as an advisor to Koizumi), they followed Koizumi’s path of propelling financialization. Koizumi, too, favored monetary easing, but Abe went far beyond his gradual policy approach to monetary easing. Even though

148  Japan: Government control through institutional reforms Abenomics envisioned a balanced coordination of economic policies, monetary policy took the most burden, while other policy areas did not experience much change.12 To overcome resistance to his envisioned policy changes, Abe exerted strong political agency to weaken the Ministry’s influence further and subordinate the Bank under the political will of the government–​an objective that neither Koizumi nor he could achieve during his first tenure as prime minister. With the fight against low inflation rates as a prime policy objective, Abe stated clearly what the role of the Bank and the bureaucracy during his new government would be: We had been unable to root out deflation because Japan had been lacking strong political will. But that is what I have brought to the national leadership: strong political will. What I would like you to take home from my address today boils down to this single thought: that my economic policies are backed in all respects by my political will. (Abe, 2013, emphasis added) Abe turned to monetarist experts to inform his policy approach, thus departing from Hashimoto and Koizumi as well as opposing the Bank’s structuralism. Unlike structuralists, Abe believed that economic problems could be overcome by substantially expanding monetary easing. According to him, policies that were introduced under preceding governments, such as asset price purchases, went in the right direction but did not go far enough. Already during his first tenure (2006–​07), Abe was frustrated with the Bank’s reluctance to loosen monetary policy (Interview with former Bank policymaker B, Tokyo, 20 March 2019). What he lacked was a stable majority in the Diet to push through his preferred monetarist candidate. When he achieved this majority in the 2012 election, Abe could finally reshape the Bank according to his preferences. To induce this policy change and establish government control over the Bank, Abe appointed Kuroda Haruhiko, a Ministry careerist whose positions are diametrically opposed to the Bank’s traditional structuralism, to become Bank governor.13 Kuroda worked between 1967 and 2003 at the Ministry, where he spent the last four years as the Vice Minister of Finance for International Affairs (see Table 6.2). For the first time since Matsushita, a Ministry bureaucrat headed the Bank. This appointment was highly symbolic, as it evoked memories of the old rotating principle (tasukigake jinji) for the governor’s appointment. Kuroda focused on the monetarist idea that low inflation rates, which were caused by the Bank’s policy errors, cause economic problems. The implementation of monetarist theory was necessary to overcome this problem (see Kuroda, 2014). According to his expertise, “whatever the reason might be, it has been my view that the Bank […] is responsible for overcoming deflation and achieving price stability” (Kuroda, 2013a; see also Kuroda, 2013c). Instead of adopting an ”incremental approach” like his predecessors did, Kuroda called for ”all-​out efforts to utilize every possible resource bestowed upon the

Japan: Government control through institutional reforms  149 Bank,” including the management of inflation expectations and expansionary monetary policy (Kuroda, 2013b).14 While monetarists have been present on the Bank’s policy board previously (such as Nakahara Nobuyuki, a monetarist Bank board member from 1998 to 2001 and a close ally of later prime minister Abe Shinzo (JT, 2017), they had been in a minority position in the years after institutional changes of the late 1990s. Abe used his eight years in office15 and his supermajority in the Diet to entirely exchange the policy board, replacing structuralist with monetarist board members that were more open to coordination with the government: Nakaso Hiroshi (2013), Iwata Kikuo (2013), Harada Yasushi (2015), Nuno Yukitoshi (2015), Sakurai Makoto (2016), Masai Takako (2016), Kataoka Goshi (2017), and Suzuki Hitsoshi (2017). This decision to appoint Kuroda to head the Bank indicates that the suggested increased independence of the Bank in 1997 lasted only so long as the government supported it and was constrained by a lack of parliamentary majorities. The stacking of the Bank’s policy board with his allies enhanced Abe’s control over Bank policies significantly. With the government’s increased leverage over the Bank and the turn towards monetarism, policy diverged significantly from Western norms. Similar to the case of South Korea, the adoption of institutional reforms that strengthened central bank independence and weakened bureaucracies in the late 1990s did not fulfill expectations of policy convergence. The tenure of Abe serves as a case in point for analyzing how the institutional reform increased the power of the government over policy change. 6.4.1  Monetary policy

Changes to monetary policy swiftly followed after Kuroda assumed office, and their effects on the financial system were considerable. While Shirakawa directed monetary policies at safeguarding financial stability, Kuroda shifted their use to achieving inflation and promoting economic growth. In April 2013, Kuroda introduced his Quantitative and Qualitative Monetary Easing, declaring that the Bank would do “whatever is necessary to overcome deflation, which has been causing a deterioration in Japan’s economy for nearly 15 years” (Kuroda, 2013b). Its three pillars were the establishment of a price stability target and forward guidance to anchor inflation expectations; the changing of the operating target from overnight call rates to the monetary base; and the purchase of Japanese government bonds of all maturities, exchange-​traded funds (ETFs), and real estate investment trusts (J-​REITS). In doing so, the Bank circumvented a norm from March 2001 that prohibited the Bank from holding more government debt than the number of banknotes in circulation. Between December 2012 and December 2019, the government debt stock held by the Bank increased by more than 300 percent (from JPY 113.7 trillion to JPY 481.4 trillion), stocks of ETFs shot up 1,700 percent (from JPY 1.5 trillion to JPY 28.3 trillion), and J-​REITS grew by 400 percent (from JPY 110.7 billion to JPY 552.8 billion). Credit policy was adjusted in December

150  Japan: Government control through institutional reforms 2012, resulting in a continuous expansion of the Fund-​Provisioning Measure to Support Strengthening the Foundations for Economic Growth over time. The provision of loans in yen doubled from JPY 3.4 trillion in February 2013 to JPY 6.5 trillion in November 2019, while the one in U.S. dollar grew massively from USD 3.5 billion to USD 24.0 billion over the same time period. Kuroda introduced a related policy instrument (Fund-​Provisioning Measure to Stimulate Bank Lending) that reduced the pre-​requirements for banks’ lending behavior. This new measure expanded rapidly from the initial JPY 3.2 trillion (June 2013) to JPY 41.0 trillion (December 2019). The Principal Terms and Conditions of this facility outline that long-​term funds will be provided at low interest rates (0.1 percent) to promote “their aggressive action and [help] increase proactive credit demand of firms and households.” The only limit to funding by banks is that it cannot exceed twice the increase in their lending. While the effect of his monetary policy on financial markets was considerable, economic indicators did not show a strong reaction. This includes the development of consumer prices, which, with the exception of 2014 (2.8 percent), remained substantially below the targeted 2 percent. This did not change after the Bank intensified monetary easing in gradual steps. In January 2016, the Bank introduced Quantitative and Qualitative Monetary Easing with a Negative Interest Rate. With a slight 5–​4 majority on the policy board (all four board members who were appointed before Abe took office dissented), negative policy rates were introduced, existing programs expanded, and the Bank declared its commitment to overshooting inflation (to exceed the 2 percent goal and stay above the target in a stable manner). In response to the Kumamoto earthquake in April 2016, the Bank announced the Funds-​ Supplying Operation to Support Financial Institutions in Disaster Areas of the 2016 Kumamoto Earthquake, which provided further liquidity (JPY 300 billion at 0 percent interest) for “maintaining the functioning of financial and settlement systems, ensuring the stability of financial markets, and supporting economic activity.” This was followed by the introduction of Quantitative and Qualitative Monetary Easing with Yield Curve Control in September 2016, which entailed committing to overshoot the inflation target and extending control from short-​term to long-​term interest rates. Additionally, the Bank expanded credit policies in February 2014 and January 2015 and boosted asset purchases in October 2014, December 2015, July 2016, and July 2018. 6.4.2  Financial policy

Financial regulation: Although Abe, like Hashimoto and Koizumi, aimed at promoting financial markets, deregulation remained incremental. There was no “big bang” like in Argentina and Chile in the 1970s. Financial regulation remained relatively tight, with the financial system’s compartmentalization continuing to be comparatively strong and the market for securitized markets small. This slow development has been partly contrasted by the stark emphasis in the political discourse of the governments. The issue of decompartmentalization is

Japan: Government control through institutional reforms  151 a case in point. Although the government introduced some reforms regarding the decompartmentalization of the financial system, regulations have remained comparatively strict (see Articles 10, 11, 12, 13, 16.2, and 16.3 of the Banking Act). Foreign banks have not played an important role in the Japanese financial system since 1990, with their total assets hovering between a minimum of 3.0 percent in 2012 and a maximum of 7.4 percent in 2006, just before the outbreak of the financial crisis in 2007. Financial stability concerns became more central during Shirakawa’s tenure and remained so under his successor. This reflects a paradigm shift in monetary and policymaking after the financial crisis of 2007, which put financial stability, including the rise of macroprudential ideas, in a prominent place in debates among central bankers and politicians. The coordination of macroprudential policies between the FSA and the Bank was supported by the establishment of the Council for Cooperation on Financial Stability in June 2014. Public financial institutions and institutional investors: After the substantial dismantling of public financial institutions under Koizumi, no further significant changes occurred under Abe. Institutional investors have maintained their strong influence on domestic capital markets by providing steady demand for debt securities, particularly from the government. Foreign holders of Japan’s debt securities amount only to 8.4 percent by end-​2019. Thus, Japan has remained largely independent from international financial flows, benefiting its control over the stability of the financial system. Domestic capital markets: In November 2013, the FSA established the Panel for Vitalizing Financial and Capital Markets, consisting of representatives from academia, business, and finance, which it tasked with developing policy recommendations for promoting the development of domestic financial markets. The Council presented its first report in December 2013 and, subsequently, its Follow-​up and Further Recommendations for Vitalizing Financial and Capital Markets (June 2014), which focused on mechanisms to increase the attractiveness of investments in companies. However, in comparison with bank lending, the relevance of market-​based financing for non-​financial corporates has remained low. The loan-​to-​bond funding ratio for private non-​financial corporations has oscillated around 6 to 1 since 1998. 6.4.3  Foreign exchange policy

Between January 2012 and June 2021, the Bank did not conduct foreign exchange interventions, and the amount of foreign exchange reserves remained constant. The Bank sidestepped issues revolving around foreign exchange policy and questioned the benefits of exchange rate management. The Bank’s previous foreign exchange interventions remained relatively minor and occurred in times of financial volatility. Since the official reporting of interventions in 1991, the Bank purchased JPY 787 billion in exchange for U.S. dollar from 1991 to 1992 and from December 1997 to June 1998. From 1992 to 2003, the Bank purchased U.S. dollars amounting to JPY 67 trillion and another JPY

152  Japan: Government control through institutional reforms 16 trillion in 2010 and 2011. The Bank legitimized these interventions on the basis of concerns about financial stability. They did not target the value of the yen to promote the domestic export sector. Interventions had the side effect of contributing to a steady increase of foreign exchange reserves over the 2000s, reaching more than USD 1.3 trillion in 2011, which has stagnated since then. The massive amounts of foreign exchange reserves (around 25 percent of GDP), combined with low dependency on foreign finance (particularly the distribution of government securities domestically), and relatively conservative financial regulation have limited the exposure of Japan to international financial crises. 6.5 Conclusion The case of Japan shows how Prime Minister Hashimoto, like Presidents Kim Young-​sam and Kim Dae-​jung in South Korea, used a window of opportunity in the late 1990s to enact institutional reforms that strengthened government control over determining policy change vis-​à-​vis the bureaucracy. Subsequent governments could use their new capacity to exert political agency and induce changes to Japan’s governance of financialization. They all considered this a necessary step to overcome old developmental structures that, according to them, hindered economic growth. Similar to South Korea, the role of expert commissions was instrumental for governments in inducing institutional and policy change (see also Nagel, 2022b). Given the presence of a powerful bureaucracy, governments relied extensively on expert commissions (such as Nakasone’s Maekawa Commission, Hashimoto’s Central Bank Study Group, and Koizumi’s Council on Economic and Fiscal Policy) to sideline the Ministry and enact change according to their preferences. The blueprints for change prepared by the commissions were, like in the case of South Korea, executed by the government at a convenient time in the late 1990s, when the Ministry’s reputation suffered as the government blamed it for the prolonged financial crisis and related corruption scandals. This chapter demonstrated how governments, following these reforms, exerted increasing pressure on the Bank to accommodate their preference for monetary easing, climaxing in Prime Minister Abe’s appointment of Bank Governor Kuroda. Following Abe’s monetarist preference, Kuroda conducted massive monetary easing that made the Bank the main holder of government debt and the largest investor in Japan’s stock market by the late 2010s.16 This episode gives strong evidence of how the institutional reforms of the late 1990s strengthened government power over controlling policy change by giving it the right to appoint experts to key policymaking positions. Not only was the appointment of a Ministry bureaucrat to become governor a provocation to the Bank staff. In addition, the subsequent monetarist policy change directly opposed the Bank’s traditional structuralism. Abe could further sustain his control over the Bank as he completely reshaped the policy board by replacing structuralists with monetarists during his three terms in office (2012–​20). Bank

Japan: Government control through institutional reforms  153 staff were not appointed to board positions anymore except for Amamiya Masayoshi (since March 2018), who was a main figure in the development of monetary easing policies (Reuters, 2012a). The appointment of the governor and the policy board members has helped Abe shape central bank policies according to his monetarist preferences. Apart from the instrumental role of experts, they periodically exerted agency in their own right, given the complexity of conducting monetary and financial policy. In the time of a split Diet, when political agency was constrained, the government could not exert its power to appoint the preferred governor. Instead, Shirakawa Masaaki was appointed as a compromise candidate. He navigated carefully between government pressure and his own expertise, which transcended both monetarism and structuralism. Based on his experience of the financial crises in the 1990s, Shirakawa propelled policies geared toward financial stability while incrementally loosening monetary policy. With his experience-​driven expertise, Shirakawa introduced a range of new policy tools that helped safeguard financial stability during the financial crisis of 2007, which went beyond the prescriptions of both structuralist and monetarist policy approaches. Similar to South Korea, the institutional changes of the late 1990s indicated convergence with Western standards. But unlike in South Korea, this trend of convergence to Western norms was also detected in policy change in the first half of the 2000s. Prime Ministers Hashimoto and Koizumi propelled neoliberal reforms that were closely aligned with the Bank’s structuralist expertise, entailing price stability-​oriented monetary policy, the promotion of capital markets, the dismantling of public financial institutions, and the rejection of interventions in the foreign exchange markets. However, policy divergence occurred when Shirakawa exerted expert agency and became more pronounced when Kuroda translated monetarist expertise into policies. This divergence followed the governments’ preference for monetary easing, which they considered a key hindrance to economic growth. Monetary easing correlated with the objective of promoting the development of capital markets. Governments expected that together these would help enhance Japan’s economic growth. Instead, two major beneficiaries emerged: financial institutions and the government itself. Under Abe’s very loose monetary policy, private bank assets grew by more than 40 percent to JPY 1,262,323 billion (two and a half times the size of GDP). Private banks have used their funds increasingly to deposit their money with the Bank instead of lending it to the non-​financial sector. Excess reserves increased by more than 2,000 percent from JPY 18.1 trillion in early 2012 to JPY 418.9 trillion in early 2021 (about 75 percent of Japan’s GDP). Particularly stock investment trusts, such as hedge funds, experienced strong growth (150 percent from 2012 to 2020). This expansion of the financial system did not correlate with a similar increase in private investments. Instead, gross fixed capital formation has stagnated around 25 percent of GDP since 2013, which corresponds to the values before the financial crisis of 2007.

154  Japan: Government control through institutional reforms

Figure 6.8 Investors of Japan’s central government securities and FILP bonds (JPY 100 million). Source: Bank of Japan Statistics, Flow of Funds (2008 SNA).

The government was the second main beneficiary. It could stabilize its financing capacities through the Bank’s intensified purchase of government debt. Diametrical to Western standards, this expansion is quasi-​equivalent to the financing of the government’s deficit. The Bank’s balance sheet tripled between 2012 and 2019, when it reached the size of Japan’s GDP. More than half of all government securities outstanding are owned by the Bank by the end of 2019 (Figure 6.8). Additionally, the Bank transfers a large share of its net income to the government (Article 53, Bank Act). Due to the increased intensity of asset purchases, the Bank’s income has grown continuously since the early 2000s, although with some volatilities. The Bank’s financial statement for the fiscal year 2019 declared an all-​time high income of JPY 1,295 billion, of which JPY 1,230 billion was transferred to the government. Like in the other three cases, expertise was an important factor in shaping institutional and policy change, ranging from instrumental to substantial. Expertise was instrumental in enacting institutional change through expert commissions and substantial when Shirakawa deployed a range of financial stability-​directed policies. At the same time, the effect of ideas is shaped by their interaction with institutions and interests. Several points illustrate this. Firstly, the Japanese political system is a bicameral parliamentary representative democracy, in contrast to the presidential systems of the other three cases. This power of the Japanese government is thus comparatively weak, even though the party landscape is heavily skewed toward the conservative Liberal Democratic Party, which has only been in the opposition twice since the end of World War II (1993–​94 and 2009–​12). This has implications for the

Japan: Government control through institutional reforms  155 appointment process of Bank governors, which requires approval from both houses of the Diet. Abe’s unsuccessful attempt to induce the Bank to conduct more monetary easing during his first cabinet was only successful when his Liberal Democratic Party gained a majority in both houses in 2012. As the government was fragile under the split Diet in the late 2000s, the appointed Governor Shirakawa could use this to exert more control over monetary policy. Secondly, the bureaucracy was weakened by the institutional reforms of the late 1990s, although it continues to be a relevant factor. For instance, the government transferred the Bank’s responsibility for financial regulation to the newly constituted Financial Supervisory Agency. However, the Ministry was able to reassert its influence on financial policy by equipping the new organization with its own staff (Amyx, 2013, pp. 198–​200; Ruback, 1998, p. 220). Furthermore, prime ministers have continued to rely on the support of the bureaucracy to push through policies (see Mulgan, 2013, pp. 101–​103, 142–​144). Nevertheless, the power relationship between the government and the Ministry has tilted toward the former since the late 1990s. The Bank policies under former Ministry careerist Kuroda illustrate this. While the Ministry’s preference for fiscal austerity was part of the Joint Statement of the Government and the Bank from 2013, Abe largely sidelined this issue during his government and instead pressured the Bank to conduct more and more monetary easing. Thirdly, the interests of the private sector have played a role in the conduct of institutional and policy change. Private interests were generally represented in expert commissions that developed blueprints for reforms. Furthermore, they are present on the Bank’s policy board. Several board members have had backgrounds in keiretsu (Funo Yukitoshi, Nakamura Toyoaki, Morimoto Yoshihisa, Nakamura Kiyoji, Kamezaki Hidetoshi) and finance/​ banking (Masai Takako, Suzuki Hitoshi, Adachi Seiji, Sato Takehiro, Ishida Koji, Noda Tadao, Mizuno Atsushi), with an increasing tendency under Abe. Moreover, the keiretsu could resist stringent corporate reforms as enacted in South Korea (Tiberghien, 2007), while financial institutions at large benefited from the post-​1997 changes, especially under Kuroda’s loose monetary policy. However, private interests are insufficient to explain the institutional change of the late 1990s (see Heckel, 2014, pp. 48–​49) and cannot explain the substance of the policies adopted by key policymakers, such as Shirakawa’s financial stability-​directed policies. Fourthly, like in South Korea, international power was more of a facilitating than a consequential factor. Aspects of Western neoliberal norms, such as central bank independence, were incorporated by the government when they suited its own interests. Only in the case of Japan’s rejection of interventions in foreign exchange markets was international power consequential in tying the hands of Japan’s policymakers. Since tensions with the United States in the 1980s, they have restricted interventions to protect the domestic financial system. The general transformation of Japan’s financialization governance from one centering on developmental objectives to one that revolves around structuralist (Hashimoto, Koizumi) and monetarist

156  Japan: Government control through institutional reforms (Abe) goals has instead primarily been shaped by government preferences in combination with monetarist and structuralist types of expertise that have been traditional to Japan’s historical legacy. Notes 1 Japanese monetarism shares similarities with the monetarism advanced by the famous Chicago School, which implies that the quantity of money determines the inflation rate. Japan’s monetarist tradition has been embedded in the finance ministry and reaches back to Finance Minister Takahashi Korekiyo (1931–​36), who initiated purchases of government debt to induce inflation. By contrast, structuralist ideas have been deeply embedded in the Bank, entailing the belief that developmental structures of the economy pose hindrances to economic growth as they block the market-​driven evolution of the economy (see Katada et al., 2018). 2 France, Germany, United Kingdom, Japan, and the United States. 3 The 17 members were Maekawa Haruo, Ohrai Saburo, Tabuchi Setsuya, Akazawa Shinichi, Oyama Hato, Nagaoka Minoru, Ishihara Shun, Kato Hiroshi, Hosomi Taku, Isoda Ichiro, Kosai Yasushi, Miyazaki Isamu, Usami Tadanori, Koyama Goro, Mukaibo Takashi, Okawara Yoshio, and Sawabe Mamoru. 4 Nakasone also established the Commission for Administrative Reform in 1981 and the Administrative Reform Promotion Council in July 1983 to promote policy reforms and strengthen the government’s control over the bureaucracy (see Bevacqua, 1997; Masujima, 2005). 5 Until today, it remained unclear why Mieno Yasushi decided to increase the policy rate at this moment. Some suggest that this was a natural reaction to international pressure, while others saw it as an independent decision of the Bank (Werner, 2015). 6 See Heckel (2014) for a detailed description of the negotiations leading to the revision of the Bank Act. 7 The Securities and Exchange Surveillance Commission, established in July 1992 within the Ministry to supervise securities markets, was integrated into the FSA. The FSA was subordinated to the newly established Financial Reconstruction Commission in December 1998, which was tasked with restoring the financial system, also by using public funds. 8 Takenaka was a key figure under Koizumi. He adopted several key policymaking positions, including becoming Minister of State (2001), Minister of Postal Privatization (2005), and Director of the FSA (2002). 9 Since the conflict with the United States in the 1980s, foreign exchange policy has not been actively used beyond the objective of protecting domestic financial stability. As a former advisor to Prime Minister Abe stated, the United States has remained highly critical of exchange rate interventions and even threatened to stop negotiations of the Trans-​Pacific Partnership free trade agreement over it (see Hamada, 2016). 10 See Olivei (2002) for a detailed description of the Bank’s liquidity instruments at that time. 11 Under this program, the Bank evaluates proposals by financial institutions on how they will lend their received funding to projects in pre-​selected areas such as “Medical & nursing care business,” “Environment & energy business” or ”Science & technology research” that aim at strengthening economic growth (see BoJ, 2010a).

Japan: Government control through institutional reforms  157 Eligible are all financial institutions according to Article 37(1) of the Bank Act, which entails banks but also central counterparties, domestic and foreign securities companies, securities finance companies, counterparties for financial instrument transactions as well as intermediaries in money markets. The Bank subsequently decided on who is eligible for central bank funding, which was at 0.1 percent interest by the end of 2020. 12 One major policy proposal, the introduction of tax increases as promised by Abe and preferred by Kuroda, was not implemented, lending further evidence to the subordination of the Bank to Abe (see NYT, 2014). 13 Shirakawa resigned in March 2013, one month before his tenure ended, to make space for Abe’s nominee. 14 The embrace of monetarists can be traced in the shift of keywords used in the speeches of Bank governors since Matsushita. While “inflationary expectations” remained a relatively unimportant keyword during his predecessors’ tenures, this changed during Kuroda’s tenure (see Figure 6.5). This is even more the case with the frequent appearance of the word “inflation” (see Figure 6.7). 15 Abe retained strong public support and was re-​elected two more times in 2014 and 2017. He secured Kuroda a second term in April 2018. 16 Unlike the Ministry’s monetarism envisioned, the Bank’s purchases of government debt undermined its preference for fiscal restraint.

7 How government–​expert relations produce state agency and propel divergence

This book has introduced the concept of empowering expertise to complement existing theories that aim to explain policy change. It investigated variation of states’ governance of financialization and how this affected the capacity of (semi-​)peripheral countries to manage adverse effects of globalization. By demonstrating how distinct forms of expertise across countries have resulted in the development of different monetary, financial, and foreign exchange policies, it adds to the literature on ideational explanations of policymaking. This corresponds to the substantial function of expertise, which empowers countries to develop sophisticated and novel policies that help them counter adverse effects of globalization. Going beyond its substantial function (what), this book investigated why and how specific variants of expertise were empowered by governments, which corresponds to the instrumental function of expertise. This book demonstrated how governments often pursued other, higher political objectives when selecting specific variants of expertise (why). Convenience was an important feature of expertise when governments empowered it at specific points in time, guiding their actions in times of crises and heightened political instability but also in attempts to strengthen their control over policymaking vis-​à-​vis opponents such as the bureaucracy. Convenient expertise helped governments achieve their objectives, fulfilling an instrumental function. Only in a few instances were governments ideologically committed to specific expertise that they empowered, believing that only this type of expertise will help them achieve financial stability and economic development. Regarding the how question, the appointment of experts by governments to key policymaking positions required governments to devise different strategies in order to overcome domestic and international constraints. Expert commissions and research institutions played an important role in the attempts of governments to increase their power over the nomination of key policymakers and, thereby, over subsequent policymaking. By combining both substantial and instrumental aspects of expertise in the investigation of domestic variation in the governance of financialization, this book scrutinizes government–​expert relations, which are at the core of the politics of expertise. To assess the functioning and impact of empowering DOI: 10.4324/9781003414858-8

How government–expert relations produce state agency  159 expertise, the study drew on a nested most-​different in most-​similar comparative design. The results of the empirical chapters, which examine and compare the cases of Argentina, Chile, Japan, and South Korea, provide evidence supporting the expected dual function of expertise in shaping monetary, financial, and foreign exchange policy. Therefore, the findings support the book’s claim that the concept of empowering expertise enhances explanations for the observed variation in the governance of financialization. Simultaneously, the findings stress that empowering expertise operates in interaction with other variables that have been identified by existing studies on policy divergence, particularly institutionalist and interest-​based accounts. The remainder of this concluding chapter discusses the theoretical and empirical value added by this study as well as policy implications. 7.1  Discussion of the findings from the comparative analysis The selection of non-​Western countries to study policy change served as a test of the explanatory power of theories scrutinizing policy convergence, as they tend to assert that Western policy norms spread across the globe. Moreover, the comparative design served as an additional control for the validity of the expected impact of expertise on policy change across the different conditions. Although all four cases liberalized their financial systems, thereby increasing their susceptibility to convergence mechanisms, this study has observed substantial variation in observed policy change. Even though the country pairs of Argentina and Chile on the one hand, as well as Japan and South Korea on the other, do not share a high degree of similarity in contextual variables, such as the political system or economic structure, in all cases an effect of empowering expertise on the evolution of the governance of financialization was observed. In the case of Argentina and Chile, both countries pursued import-​substituting industrialization until the early 1970s. Their policy paths diverged after their initial financial liberalization in the second half of the 1970s caused massive financial crises in 1982. While Chile adopted new policies and legislation that sought to counter volatilities posed by international financial flows, Argentina liberalized its financial system even further. This resulted in Argentina’s 2001 financial crisis and multiple modifications to its governance of financialization. By contrast, Japan and South Korea had pursued a similar strategy of export-​ oriented industrialization in the post-​World War II decades. Japan initiated financial liberalization in the 1980s, and South Korea followed suit in the 1990s. After the liberalization, Japan endured a protracted financial crisis following the 1991 bursting of the asset price bubble, whereas South Korea suffered a global liquidity crisis in 1997. Changes to the governance of financialization varied. South Korea’s policymakers introduced novel policies that aimed at preserving financial stability while modifying and transforming developmental policies from the past. Japan, by contrast, pursued additional financial liberalization and went further than South Korea in dismantling developmental institutions and policies.

160  How government–expert relations produce state agency The empirical chapters demonstrated how the previously stable features of expertise and policies discontinued following the respective crisis experiences. The governments used occurrences of this new, global liquidity-​related type of crisis as critical junctures (Thelen, 1999) to induce policy change. Empowering expertise was a crucial factor in shaping policy responses and the development of new variations in the governance of financialization. These crises were interpreted differently depending on the respective empowered expertise, resulting in varying policy responses.1 Thus, the most-​ similar comparison demonstrated how the adoption of different types of expertise brought about diverging policy paths of countries that, prior to the experience of disruptive financial crises, had previously shared similar expertise and a common approach to the governance of financialization. Furthermore, the most-​different analysis revealed how related types of expertise are causally linked with similar types of policies, even in cases that did not share commonalities in other relevant factors. After the experience of initial financial crises, the governments of both Argentina (during the presidencies of Menem and Macri) and Japan empowered expertise that resulted in a strengthened commitment to policies promoting the further liberalization of financial markets. Liberalization efforts under the Convertibilidad in Argentina went beyond Japan’s, even though reforms such as the privatization of the postal savings system and the Development Bank of Japan in the 2000s were watershed moments in ending Japan’s developmental policy era. By contrast, governments in Chile and South Korea empowered expertise that, based on the crises experiences, incorporated a critical perspective on the functioning and benefits of a liberalized financial system. Both countries adopted and continuously adjusted various policies to counter financial risks stemming from financialization, especially tools for safeguarding liquidity conditions that had become increasingly fragile through the exposure to volatile international financial flows. These empirical observations from the most-​different comparison provide additional support for the argument presented in this book by demonstrating how the adoption of similar types of expertise is associated with the adoption of functionally equivalent policies, despite the presence of different conditions. 7.2  Empirical and theoretical contributions A relevant empirical contribution is the detailed analysis of the substance of policies adopted and adjusted by the four countries to inform and modify the domestic governance of financialization over a period of five decades (see Table 7.1 for an overview). The analysis of policies suggest that (semi-​)peripheral countries can develop tools that help them prevent or mitigate the adverse effects of financialization. Specifically in the cases of Chile and South Korea, the experience of financial crises resulted in the empowerment of expertise with a focus on financial stability. A central premise of this type of expertise is that their (semi-​)peripheral financial system requires a variety of interlinked

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Table 7.1 Core features of monetary, financial, and foreign exchange policies in Chile, Argentina, South Korea, and Japan Period

1975–​1982 1982–​1990

2007–​2013

procyclical countercyclical, liquidity policies countercyclical, liquidity policies procyclical exchange rate anchor countercyclical, liquidity policies credit policy, debt monetization

2013–​2019

procyclical

1993–​1998 1998–​2003

countercyclical, credit policy countercyclical, liquidity policies, credit policy

since 1990 Argentina

South Korea

1976–​1983 1991–​2001 2003–​2007

2007–​2019 Japan

1982–​1990 1996–​1998 2001–​2006 2007–​2008 2012–​2020

Note: x =​no clear feature.

Financial policy

Foreign exchange policy

Financial regulation

PFIs and IIs

Domestic capital markets

liberalization microprud., macroprud.

x promoted

crawling peg/​peg managed float

promoted

managed float

liberalization microprud. microprud., macroprud.

x countercyclical, promote capital markets countercyclical, stabilize capital markets x privatization x

x x x

crawling peg USD peg managed float

microprud., macroprud., debt monetization deregulation

developmental, debt monetization privatization

promoted

debt monetization

x

float

x promoted

crawling peg managed float

promoted

managed float

x promoted promoted x

managed float float float float

promoted

float

microprud., macroprud.

liberalization microprud., macroprud.

developmental countercyclical, developmental, promote capital markets countercyclical, liquidity microprud., macroprud. countercyclical, policies, credit policy developmental procyclical, credit policy gradual liberalization x liquidity policies liberalization x countercyclical, asset purchases microprud., liberalization privatization countercyclical, liquidity microprud., macroprud. x policies, asset purchases countercyclical, debt microprud., macroprud. debt monetization monetization, asset purchases

How government–expert relations produce state agency  161

Chile

Monetary policy

162  How government–expert relations produce state agency policies to reduce the likelihood of financial crises, as it otherwise tends to destabilize itself. Policies that reflect this approach entail liquidity-​providing and countercyclical monetary policy; financial regulation that constrains risks attached to international financial flows; flexible exchange rate management for preventing overvaluations and volatile exchange rate movements; public financial institutions that provide liquidity and act as countercyclical policy instruments; and the development of domestic capital markets that increase the independence of volatile international financial flows. These policies were core to Chile and South Korea’s financial stability-​directed governance of financialization. They contrast with policies instated by governments in Japan and Argentina, whose empowered expertise brought about a deepening of under-​regulated financial systems. The crises were interpreted differently, not as primarily driven by “too much market” but instead as “too much state.” Financial stability was of secondary concern to these policymakers. The analysis of policy substance helped to demonstrate how ideas are effective insofar as they inform the development and modification of policies and underpin changes to the governance of financialization. It is unlikely to assume that governments would have adopted similar policies if they had empowered different expertise. The idea that policies are essential for safeguarding financial stability is nothing new. Notably, the collected evidence indicates that the translation of abstract academic expertise into policies (Argentina and Japan) has not fared as well as specific experience-​ based expertise (Chile and South Korea) in crafting and adjusting policies to protect the country from financial crises. The refusal of South Korean policymakers to adopt universal, academic theories promoted by the IMF in the late 1990s is illustrative. Instead, they sought to develop experience-​based expertise suitable for specific South Korean circumstances. This ranges from Kim Dae-​jung’s rejection of Western theory-​driven interpretations of the 1997 financial crisis by the IMF to Lee Myung-​bak’s appointment of Shin Hyun-​song and Kim Choong-​soo as outsiders to advance a macroprudential paradigm change after the 2007 crisis. South Korean policymakers believed that Western expertise would be of little assistance in guiding their domestic governance of financialization. In the Chilean case, Pinochet’s replacement of the academic Chicago Boys with pragmatists around Hernán Büchi after the 1982 crisis led to the adoption of a range of policies aimed at controlling international financial flows. Although policies have been adjusted over time, the general framework of Chile’s financial stability-​directed governance of financialization has remained in place to the present day. Similarly, during the governments of Néstor Kirchner and Martin Redrado, Argentina adopted a range of experience-​driven policies that did not conform to established academic theories. These policies helped Argentina stabilize its financial system and stimulate economic growth following the 2001 crisis. In addition, the policies implemented by Governor Shirakawa in Japan, such as the strengthening of liquidity policies and the establishment of the Fund-​Provisioning Measure to Facilitate Strengthening

How government–expert relations produce state agency  163 of the Foundations for Economic Growth, indicate how experience-​based expertise can assist countries in developing policy instruments for overcoming problems in the financial infrastructure. All of these policies went beyond the norms promoted by Western neoliberalism and originated in country-​specific, experience-​based expertise. Importantly, the purpose of this book was to emphasize that varying types of financial governance can be observed across time and space. Within these types, policy instruments can and do evolve over time. Nonetheless, isolated changes of single policy instruments had no effect on the overall approach to the governance of the financial system. In the empirical chapters, significant change of this governance of financialization occurred at critical junctures and affected numerous interlinked policies. In South Korea, for instance, many new policy instruments were adopted after 1997, while others were modified. What these new and modified policies had in common was that they shared the common objective of safeguarding financial stability. This objective had only been marginally present prior to the crisis but informed the country’s governance of financialization thereafter. A similar observation is made in the case of Chile after its 1982 crisis. By comparison, Japan’s governments after the crises of the 1990s viewed the expansion of financial markets and the loosening of monetary policy as key to bolstering economic growth. After gaining strength as a result of the reforms in the late 1990s, they were able to adopt a range of new policies to support their preferred governance approach. Abe Shinzo’s government continued this trend by overcoming the central bank’s resistance to monetary easing. Argentina is a special case because neither its policies nor its governance approaches have been stable over time. This is largely due to ideologically captured governments that sought to completely reverse the theory-​driven policies that were put in place by the previous government. A lack of pragmatism and an instrumental approach to expertise that would permit maintaining successful policies and the governance approach of the previous government, such as in the case of the Concertación in the democratic transition in Chile, helps to explain these constant changes in Argentina. In the other three cases, governments have a more distant relationship with experts and are more inclined to continue with previous policies if they worked. Thus, the case of Argentina is valuable for stressing the challenge posed by ideology-​ driven government–​ expert relations to the stability of the governance of financialization. Focusing on how the empowering expertise serves as a source of state agency in times of globalization, this book’s main argument goes –​to a certain degree –​beyond structuralist accounts that encompass interest-​based, institutionalist, and ideational explanations. Whereas the focus of the study was on the politics of expertise in driving policy change, the analytical chapters emphasized how this causal relationship is intermediated by other variables, particularly institutions and interests. Variations in the political and legal systems (e.g., the degree of fractions within the parliament and the strength of the bureaucracy) as well as interest groups (e.g., large conglomerates in East

164  How government–expert relations produce state agency Asia, the agriculture sector in Argentina, and the mining industry in Chile) across the four cases have impacted how these interlinked factors resulted in policy change. In the presidential democracies of Argentina, Chile, and South Korea, the government has more direct control over the appointment of key policymakers than it does in the parliamentary democracy of Japan. Furthermore, the bicameral legislatures of Argentina, Chile, and Japan offer more veto options than the unicameral legislature of South Korea. Shirakawa Masaaki, for instance, would not have been appointed Governor of the Bank of Japan if the Diet was not divided. Despite these constraining factors imposed by institutions and interests to induce policy change, the four cases demonstrate how governments could nevertheless often strategically outmaneuver them. In Japan and South Korea, governments relied on expert commissions to sideline the bureaucracy in the development of blueprints and the translation of challenging expertise into institutions and policies. The most striking examples are the institutional reforms in Japan and South Korea in the late 1990s, where the governments took advantage of financial crises as windows of opportunity to strengthen their power to determine policy change vis-​à-​vis the bureaucracy and the conglomerates.2 This included a higher degree of control over appointing key policymakers in the central bank and newly established financial regulatory agencies. Therefore, even in the presence of strong veto players, governments could strategically use institutional reforms to increase their capacity to empower expertise, thereby strengthening government control over the governance of financialization. Given the substantially weaker bureaucracies in the presidential systems of Argentina and Chile, the power of the government to prompt policy change was more immediate here. Research institutions have played a crucial role in the formulation of presidential policy agendas. After transitioning to democracy in 1990, Chile pursued policies that aimed to balance the preferences of various interest groups. Argentine presidents, by contrast, frequently engaged in partisan politics that benefited core voter groups. Although these contextual factors have affected how governments have been able to induce policy change, governments in all four cases have frequently empowered expertise to prompt change. Furthermore, the empirical chapters demonstrated how the replacement of central bank governors and policy board members has helped governments sidestep institutional constraints, both legal and organizational. Central bank laws are relatively constraining as to which objectives the banks should pursue and by what means. However, they leave sufficient leeway for different interpretations by incoming appointees, allowing for substantial policy change. Even the robust institutional structures and organizational norms of the Bank of Japan and the Bank of Korea could be overcome by this top-​down change enforced by the government.3 Policy changes under Abe Shinzo and Kuroda Haruhiko are illustrative. Despite gaining independence with the 1997 reform of the central bank law, the Bank of Japan’s policies shifted significantly in response to government preferences. Abe gradually replaced the governor and

How government–expert relations produce state agency  165 the entire policy board during his tenure from 2012 to 2020, thereby increasing the government’s direct control over the central bank. Even if they are located within formally independent institutions such as central banks that are presumably highly insulated from day-​to-​day political influence, the empirical evidence indicates that the preferences of central bankers are rather endogenous to government objectives. Their independent impact on policymaking is, therefore, limited. Instead, organizations are infused with government-​preferred expertise via the appointment of key policymakers. Through these critical appointments, the appearance of “central bank independence” can be maintained, even though, as in the case of the Bank of Japan, the government has effectively replaced every member of the policy board who disagreed with Abe’s agenda. The aforementioned findings suggest that research contributions focused on policy diffusion have overlooked variegated government preferences as a crucial factor that explains why governments adopt specific expertise and policies at certain times. Diffusion was accelerated when particular ideas, intermediated by expert commissions and research institutions, helped governments enact the institutional reforms and policy changes they desired against constraints posed by institutions and interest groups. Thus, factors explaining policy translation, such as ideational legacies, critical junctures, domestic institutions, and international coercion (Ban, 2016), are at least partially endogenous to government preferences. Furthermore, governments were found not to rely on the adoption of foreign ideas (Johnson, 2016), instead readily mixing them with domestic ideas (Ban, 2016) or adopting domestically produced ones (Campbell and Pedersen, 2014). Existing explanations for the divergence and convergence of policies are complemented by considering the role of governments in the translation of expertise into domestic policy. Furthermore, the findings have broader implications for the literature on the role of ideas in policymaking because they shed light on the conditions under which ideas matter. Government support was identified as a necessary condition for ideas to become consequential, whereas the aforementioned factors shape how directly the government can empower expertise to induce policy change. In none of the cases did governments accept expertise from the central bank or bureaucracy to guide policy directions if it did not align with their preferences. Depending on the differences in institutional characteristics and political cultures, tensions in government–​expert relations resulted in the immediate replacement of central bank governors (Argentina) or their gradual replacements after the official end of tenures (Japan and South Korea). Chile is a different case, where the policy consensus established by the Concertación resulted in an overlap of preferences among political parties from the left and right. Thus, there has not been a single instance where changing governments empowered new expertise. These findings contrast with empirical evidence regarding central bank independence in Europe and North America. Some scholars have found that central banks could expand their resources and epistemic investments

166  How government–expert relations produce state agency in the last three to four decades, allowing them to gain control over monetary and financial policy issues with respect to the government (Bodea and Higashijima, 2015; Marcussen, 2009; Moran and Williams, 2012; Diessner and Lisi, 2020). However, theoretical insights from that perspective cannot explain the interventions of Latin American and East Asian governments in independent central banks that were identified in this book. One of the possible impediments to studies of cases in Europe and North America is that the observed proliferation of central bank independence could be endogenous to government preferences.4 Tellingly, the gradual change of policy ideas after 2007 –​including the rise of macroprudential ideas –​in central banks in Europe and North America as well as in international organizations (see Baker, 2013; Ban, 2014; Ban and Patenaude, 2019; Thiemann et al., 2020) did not result in a substantial shift of policies as they lack government support (see Johnson et al., 2018; Thiemann, 2019). Governments in Europe and North America are not willing to empower expertise that would risk a politicization of central banking. The findings of this book would imply that a substantial change to monetary, financial, and foreign exchange policy is only to be expected if governments endeavor such a change. Recent studies such as Moschella and Diodati (2019) speak to this view, as they have demonstrated that even in the highly independent ECB, one of the most independent central banks in the world, domestic political interests play an important role in decisions made by the policy-​setting committee. Even though the empirical evidence for Europe and North America provides support for the dominant interpretation that central bank independence prevails and changes are rather incremental (see discussion below), this does not imply that governments would not intervene when policy decisions were inconvenient to them. Instead, governments do not seem to have a strong preference for changing policymaking. Consequently, the motivations of governments to induce policy change are a critical issue: Why do they bring about the observed policy changes at specific times? In each of the four cases, substantial policy change was precipitated by variegated, strong government objectives. For example, initial financial liberalization was motivated by the desire to induce a large-​scale transformation of the economy and society. In the cases of Argentina and Chile, financialization was intensified by dictators to overcome domestic financial and economic difficulties. Governments in Japan and South Korea, by contrast, viewed financialization as a crucial factor for overcoming (authoritarian) developmental structures. In the first pair, substantial public support for financialization did not exist; in the second pair, the opposite is true. The next subsection elaborates further on the relation between government intentions and policy change. 7.3  Alternative and complementary explanations After the initial financial liberalization period, political motivations to induce policy change diverged. Rather than explaining the observed institutional

How government–expert relations produce state agency  167 reforms and policies, structural (institutional, ideational, and interest-​ based) factors that would predict convergence have rather acted as catalysts for change, which in itself is to a certain extent undetermined. This ambiguity of change manifests itself most prominently during times of crises, when different configurations of these explanatory factors lead to diverging outcomes. The purpose of this book was to demonstrate that governments can use these moments of ambiguity to induce change that accommodates their own preferences. Expertise does not only assist governments in offering policy proposals to resolve crises. It is instrumental, too, in achieving objectives that go beyond. The findings suggest that although structural factors can circumscribe available options for governments, they can use structural pressure to overcome domestic resistance to policy change and institutional reforms. Private interests have influenced policy decisions, particularly regarding how initial liberalization has occurred in each country. For example, South Korea’s chaebols were the main beneficiaries of the reforms in the early 1990s that liberalized capital markets but left equity markets closed. This way they could access cheap foreign debt without having to fear foreign takeovers. Similarly, large-​scale privatizations of public financial institutions in Argentina, Chile, and Japan have been supported by private competitors. By comparison, the introduction of new policies and regulations, such as sophisticated macroprudential tools, cannot be easily explained by private interests. From a systematic perspective, private actors would be expected to favor policies that would help safeguard financial stability. On an individual level, financial and non-​financial institutions would prefer access to cheap (and volatile) liquidity and wide investment opportunities that suit their own profit interests but do not necessarily correspond to domestic goals concerning economic development and financial stability. In this situation, the substantial function of expertise to inform policymaking is of the utmost importance, as it aids legitimize political initiatives to introduce policies that do not directly benefit specific interests but help to maintain stability on a systemic level. Moreover, central bank staffers were traditionally strong veto players in the appointment process of key policymakers in Japan and South Korea, as reflected in informal norms such as the rotating principle (tasukigake jinji) in Japan. Appointments such as those made by Abe Shinzo in the case of Kuroda Haruhiko or Lee Myung-​bak in the case of Kim Choong-​soo were a direct attack on these informal norms structuring the inside of central banks. In these two countries, central bank careerists routinely held the top positions. In Latin America, however, the situation was different, and informal norms within central banks were less rigid. In Chile, the policy consensus that emerged in the Concertación was reflected in the biographies of central bank governors, who frequently changed positions between politics, academia, the private sector, and the central bank. There were no substantial frictions between these spheres. In Argentina, only one (Alejandro Vanoli) of the last 20 governors has pursued a career at the central bank, reflecting the frequently partisan appointments of presidents who are not much concerned about informal norms within central banks. Differences in

168  How government–expert relations produce state agency these variables are reflected in the academic background and work experience of key policymakers appointed by governments. Central bank staffers certainly play an important role in the research and analysis of monetary, financial, and foreign exchange policies, but their preferences seem to play only a limited role in policymaking when governments exhibit strong preferences. The comparative analysis found only limited evidence for a direct impact of international organizations and transnational epistemic communities (e.g., the IMF, OECD, and BIS) on policymaking. Although they have provided ready-​ made expertise that presented clear policy paths and institutional reforms to the four countries, only in the instance of Macri and Sturzenegger in Argentina can a clear commitment to the expertise of these communities be identified. Whether it was by Büchi in Chile, Chon Chol-​hwan in South Korea, Cavallo in Argentina, or Hashimoto in Japan, the expertise provided by international organizations and transnational epistemic communities was only partially incorporated into policymaking. Instead, governments used domestically produced expertise or outsiders to inform policy responses. Even if there was an adoption of some policies and institutional reforms to accommodate the norms of transnational epistemic communities, other policies were enacted to mitigate their effects (such as in South Korea in the late 1990s). Rather, timely pressure imposed by international organizations and transnational epistemic communities during crises has been a productive resource for governments to overcome resistance to domestic change. Similarly, international pressure, particularly from the United States, serves only as an insufficient explanation for government choices, even during times of crisis. While this pressure certainly circumscribes governments’ choices in shaping policy change and institutional reforms, it does not prevent them from using this external power as a strategic resource for governments to surmount domestic resistance to their preferred policy change. These moments where governments use international pressure to propel domestic policy reforms lend support to the relevance of the concept of vincolo esterno (Dyson and Featherstone, 1996). This concept unpacks the causal impact of international pressure to demonstrate how it is used as a strategic resource by governments rather than being a cause for reforms in itself. Empirical evidence that strengthens this insight is found in the cases of South Korea, Japan, and Argentina. While policy change in the form of signaling to accommodate Western neoliberal norms can be identified in all cases (consistent with institutionalist arguments such as that of Maxfield, 1997), this would disregard underlying domestic considerations in adopting reforms. South Korean policy change after the country’s 1997 crisis is a case in point, where the government appeased Western demands to access IMF funds. Simultaneously, the government enacted institutional reforms that served to strengthen its power vis-​à-​vis the bureaucracy, as well as reforms that weakened the powerful chaebols. Similarly, international pressure was used by Japanese governments under Nakasone in the 1980s, Hashimoto in the 1990s, and Koizumi in the 2000s to propel institutional reforms and policy change.

How government–expert relations produce state agency  169 Historically, Latin American countries have been subject to relatively more direct forms of U.S. pressure, particularly due to their centrality in the Cold War during the 1970s. Given the relative success of Chile’s policies to protect the country from financial and economic crises after 1982, international pressure on Chile was relatively low. In the 1990s, Chile even deployed capital controls to reduce inflows of short-​term foreign debt. In Argentina, strong anti-​imperialist sentiments reduced the impact of international pressure on domestic policies. The IMF initially criticized even Cavallo’s Convertibilidad in the 1990s, which did not deter him from adopting it anyway. Thus, while international pressure has pushed governments in the general direction of deepening financialization, it has not straight-​jacketed countries. They could develop and adjust policies according to their own preferences. It was also found that governments often empowered new expertise since it conveniently fit their preferences and not because it was structurally determined by national knowledge regimes and transnational epistemic communities. Rather than committing to existing ideologies, governments pursued an instrumental use of ideas, ranging from Pinochet’s appointment of Hernán Büchi to stabilize his dictatorship in times of public unrest; Menem’s promotion of Domingo Cavallo after the failure of preceding policy experiments; Lee Myung-​ bak’s selection of Kim Choong-​ soo after his original policy agenda became infeasible after the 2007 financial crisis; and Abe Shinzo’s appointment of Kuroda Haruhiko after his predecessors opposed his will. Governments’ instrumental approach to expertise is also reflected in the establishment of new research institutions (e.g., Fundación Mediterránea in Argentina or Corporación de Estudios para Latinoamérica in Chile) to prepare policy agendas and the appointment of outsiders (e.g., Büchi in Chile, Redrado in Argentina, and Kim Choong-​soo in South Korea) to key policymaking positions. Contrary to what is suggested by the literature on knowledge regimes and transnational epistemic communities, the empowered expertise is not predefined. In a few instances, however, the empirical chapters identified government leaders who appeared to be ideologically committed to certain ideas and therefore did not use them instrumentally. Cases in point would be Cristina Fernández de Kirchner’s developmentalism and Mauricio Macri’s neoliberalism in Argentina. In other instances, governments prioritized longer-​term political objectives over technocratic considerations. Chile’s Concertación, for example, abandoned its developmental policy blueprints and instead continued Büchi’s financial stability-​directed policies adopted after the 1982 crisis. Although Finance Minister Alejandro Foxley probably believed that developmental policies were superior in promoting economic growth and equality, the government maintained Pinochet’s policies to safeguard the stability of Chile’s political and social system in a period of uncertainty during the democratic transition. In this regard, the longer-​term vision of institutional reforms in Japan and South Korea provide additional insight. The governments of Hashimoto and Koizumi in Japan, as well as Kim Young-​sam and Kim Dae-​jung in South

170  How government–expert relations produce state agency Korea, pursued the common objective of strengthening their policy control vis-​à-​vis the bureaucracy and the conglomerates. Only after they enacted institutional reforms in the late 1990s, for which international pressure was instrumental, were they able to conduct change that transformed developmental structures in the state as well as the economic and financial system. The preceding paragraphs discuss the translation of expertise into policies as well as the strategies and motivations of governments for achieving this objective. Thus, the emphasis was placed on the political agency involved in the process of policy change. While it was found that expertise plays a rather instrumental role for politicians, this does not imply that experts do not exert agency. Indeed, experts play a dual role in this process. On the one hand, their appointment follows certain motivations by the government, and their actions once in office are constrained by the government’s political agenda. On the other hand, governments empower experts to shape the substance of policy adjustments. Given the technical complexity involved in financial and monetary policymaking, experts are found to exert expert agency (or bureaucratic entrepreneurship, as coined by Wansleben, 2022) to the extent that the government cannot fully anticipate the policies they develop at the time of their appointment. This moment of expert agency transcends the question of the conditions under which ideas matter, putting the spotlight on experts and the knowledge they convey to craft policies. Examples of such expert agency are Lee Myung-​bak’s appointment of Shin Hyun-​song to translate his expertise into macroprudential policies in the early 2010s and Pinochet’s appointment of Hernán Büchi to reform the General Banking Law and establish the Central Bank’s Basic Constitutional Act in the 1980s. Table 7.2 presents the moments of agency identified in the analysis. The empirical findings demonstrate how expertise has differed across the four cases. Beyond the descriptive task of mapping the existing knowledge types at a certain time and place, a crucial question remaining open is what the determinants of knowledge production are and under what conditions each type of expertise develops. Consequently, a critical question for a country’s agency in countering globalization pressures concerns the supply side of expertise required by the government to govern financialization. Only when expertise is produced and readily available for its translation into policies does it serve as a convenient resource to governments for inducing policy change. With an increased supply of expertise, more policy options open up. Strategies pursued by governments (and their oppositions) to promote the production of expertise in the four analyzed cases have been the establishment of research institutions (Argentina and Chile) and expert commissions (Japan and South Korea). 7.4  Policy implications Political implications that can be derived from the analysis concern (1) policy substance; (2) the production of expertise; and (3) accountability and feedback mechanisms.

How government–expert relations produce state agency  171 Table 7.2 Moments of agency in the case studies Period

Political agency

Expert agency

Chile

1975–​1982 1982–​1990 Since 1990

financial liberalization financial stability financial stability

Argentina

1976–​1983 1991–​2001 2003–​2007 2007–​2013

transform the country stabilize dictatorship stabilize democratic transition transform the country stabilize government stabilize government pursue developmentalism

2013–​2019 South Korea 1993–​1998 1998–​2003 2007–​2013 Japan

1983–​1987 1996–​1998 2001–​2006 2007–​2008 2012–​2020

pursue neoliberalism strengthen gov’t control transform the country, strengthen gov’t control strengthen gov’t control, expand international influence gradual liberalization

financial liberalization Convertibilidad financial stability demand-​led growth, public investments financial liberalization financial liberalization financial stability financial stability

gradual financial liberalization financial liberalization

transform the country, strengthen gov’ t control transform the country, financial liberalization strengthen gov’ t control x (split parliament) financial stability strengthening gov’ t monetarism control, monetary easing

(1) Although the limited scope of this study did not warrant identifying a definite list of policies that reduce the likelihood of financial crises, it helped demonstrate that policy substance differs based on different types of empowered expertise. Moreover, the development of financial stability-​directed policies is linked more to experience-​based expertise than to academic expertise. As experience-​based expertise is more agile and adaptable than academic types, policymaking processes in central banks could be enhanced by making them more reactive to ongoing changes in the financial system, allowing them to depart from abstract, academic concepts and models as ubiquitous points of reference. For example, the adoption of financial stability-​oriented policies by Chile after 1982 or by South Korea after 1997 was not based on established economic theories and models that ignored financial frictions as in the standard macro models used in Western central banks until 2007; rather, it was directly informed by empirical observations of changes in the financial system. (2) A possible avenue for enhancing state agency in times of globalization is to promote and diversify investments in the production of expertise, thus expanding the supply side of available policy options. The identification of

172  How government–expert relations produce state agency substantial variety in expertise and policies indicates that there is no single, universal approach to financial and monetary policymaking. State support in promoting the production of different types of expertise within domestic knowledge regimes, including different strands of economics, political science, and sociology, could be a crucial enabler for governments, particularly in (semi-​)peripheral countries, to induce the policy change required to deal with a complex, constantly evolving global financial system. Entrusting central banks with developing knowledge could lead to the risk of missing critical developments in the financial system due to the epistemological limitations of dominant economic approaches. For instance, prior to 2007, the central banks’ heavy reliance on macroeconomic (particularly dynamic stochastic general equilibrium) models that excluded the financial system from informing policymaking made them “blind” to the buildup of financial risks fueled by loose monetary policies. Diversifying the production of expertise also assists governments and policymakers in maintaining a menu of policy options and recognizing the associated costs. The Bank of Japan and the Bank of Korea are examples of institutions with a robust, self-​enclosed legacy. Only through government interventions (such as those of Hashimoto and Abe in Japan or Kim Dae-​jung and Lee Myung-​bak in South Korea) could they be made accessible to external types of expertise. The empirical findings revealed how diverse types of expertise contributed to the development and adjustment of policies across Latin America and East Asia. In addition, although the adoption of several financial stability-​oriented policies contributed to safeguarding financial stability in each of the four cases since the 1980s, financial stability only became relevant to central bankers in Europe and North America after the 2007 crisis. If they had paid more attention to expertise outside of their central banks, the crisis might have been less destructive. (3) Finally, review mechanisms for enhancing the accountability of the empowered expertise may help to improve policymaking. Ostensibly “depoliticized,” complex policy fields such as central banking (see Marcussen, 2009) are at risk of lacking feedback channels to make adjustments to the empowered expertise and policies derived from it, as was the case in Western central banks before the 2007 crisis. Although the appointment processes of experts generally encompass parliamentary debate and central bank governors are required to submit reports to the parliament, a disequilibrium in the allocation of expertise makes congressional oversight difficult. Parliaments tend to lack the expertise required for assessing the conduct and outcomes of policies deployed by central bankers. A wider political and social debate about what central banks can and should do in democratic societies, which face massive challenges such as climate change, is direly needed (see Braun and Downey, 2020). Following the experiences of the 1980s and 1990s, non-​Western countries adopted a range of policies to prevent the recurrence of financial crises. As a result, the 2007 financial crisis had little impact on them. They were primarily affected by indirect channels, such as rapid financial outflows from panicking global investors and reduced demand from Western countries.

How government–expert relations produce state agency  173 Prominent policymakers from non-​Western countries directed warnings at their Western counterparts concerning risky developments in their financial systems. This included the former governor of the Indian central bank in 2005 at the critical Jackson Hole Meeting, which the U.S. Federal Reserve organizes annually. Moreover, South Korean governors issued repeated warnings to the United States about the buildup of asset price bubbles on U.S. financial markets from 2002 onward and introduced macroprudential measures to limit asset price increases in South Korea in the mid-​2000s to prevent contagion risks. This renders the failure of central banks, such as the Federal Reserve and the European Central Bank, to identify the massive buildup of risks even more tragic. Evaluation mechanisms could entail international peer-​review processes that account more for the crisis experiences of non-​Western countries and the policies they have adopted to deal with new challenges, such as the fight against climate change and rising inequality. 7.5  A new era? COVID-​19, Ukraine, China, and the return of inflation This book’s time horizon is accompanied by a major caveat. As it does not extend past the year 2019, its empirical chapters do not encompass the numerous social, political, and economic crises that have swept the globe since then. The COVID pandemic, the war in Ukraine, and the growing influence of state-​capitalist China on the global stage have all strongly impacted the global financial and economic system. The disruption of global value chains has increased the scarcity of goods and lifted consumer prices. Over the last 30 years, the rate and intensity of global change have never been faster. In light of these global turbulences, the benchmark of Western neoliberalism seems to be increasingly obsolete. It becomes increasingly evident that neither independent central banks nor a liberalized financial system can solve problems that are inherently political. Countries in the Global North are increasing their interventions in the financial and economic system, such as the massive Inflation Reduction Act in the United States. Even the ECB has shifted away from its narrow focus on fighting inflation, as evidenced by the financing of government debt during the COVID pandemic (Quaglia and Verdun, 2023a) and the adoption of geopolitical considerations in the context of Russia’s war against Ukraine (Quaglia and Verdun, 2023b). Central banks have adopted new tools to safeguard financial stability (Thiemann, 2019; Birk and Thiemann, 2020). The expansion of their control over developments in the financial system is a stark departure from the previous neoliberal norms, repoliticized central banks, and compelled them to redraw state-​ market boundaries (McPhilemy and Moschella, 2019; Coombs and Thiemann, 2022; Thiemann, 2022). Furthermore, international organizations such as the IMF have modified their policy tools (Moschella, 2010; Ban and Gallagher, 2015), and the global regulation of the financial system has evolved (Moschella and Tsingou, 2013; Quaglia, 2017; James and Quaglia, 2022). Since the 2007 financial crisis, policies and their underlying ideas have gradually surpassed the

174  How government–expert relations produce state agency benchmark of “Western neoliberalism,” and there is greater diversity in the management of financialization. Nonetheless, this book used the benchmark of “Western neoliberalism” to illustrate how the four cases diverged from it at a time when it was still uncontested. Even during the heydays of neoliberalism (1970s–​2000s), (semi-​)peripheral countries were able to deviate from it. There was much more variety in expertise to shape domestic policy paths across the globe than was widely appreciated. At least in Asia and Latin America, the limitations of Western neoliberalism to guide the governance of financialization have encouraged the production of alternative expertise since its rise in the 1970s. This diversity of expertise contributed to the development of different approaches to govern financialization and compensate for the deficiencies of the Western model. The recent developments in the governance of financialization observed in Western countries demonstrate that the formerly dominant expertise was incapable of providing solutions to them during times of crisis. The Western countries are the last ones in the world to confront the limitations of their own neoliberal expertise, having been spared the massive crises that have occurred in less economically developed regions of the world in the preceding decades. Furthermore, the failure of Western neoliberalism has contributed to the rise of the Chinese state-​led economic model throughout the world. This book has traced the evolution of a variety of expertise that has shaped the governance of financialization in East Asia and Latin America. From this standpoint, China merely offers another variety. The major difference between China and the four case studies is that China has actually acquired and exercised the global power required to induce a diffusion of Chinese expertise across the world. Thus, the numerous crises that have occurred since 2007 support the main thesis of this book: A constantly evolving financial system can be governed in a variety of ways, shaped by the empowered expertise. A specific type of expertise may dominate at a particular time and place, but a world that is constantly changing will force it to change or give rise to a new dominant model altogether. Even though China will increasingly shape the governance of financialization around the world, we will observe new deviations from this ideal as a result of its interaction with domestically empowered expertise. The use of the concept of empowering expertise, therefore, is expected to go beyond the case of financialization governance in the four countries of the case comparison. Albeit the relevance of government-​expert relations is particularly pronounced in issues of money and finance, it is not exclusive. Governments rely on experts to guide policymaking in other policy areas, too. Further research could cast more light on how the politics of expertise manifests itself other policy areas and different locations. There is an additional important caveat to this book’s main conclusion, which is that (semi-​)peripheral countries have the capacity to exercise agency by crafting policies to mitigate adverse effects of globalization. The issue of whether and how financialization and financial integration can be reversed has been excluded from consideration (see Ban and Bohle, 2021). The policies

How government–expert relations produce state agency  175 analyzed, which were linked to reducing the risks of financial crises, do not reverse financial globalization but rather help countries guard against its adverse effects. By protecting countries, these policies paradoxically stabilize processes of financialization and partly intensify them. Examples include the development of domestic capital markets for increasing independence from global finance and the use of public financial institutions for investing financial resources abroad to safeguard financial stability as opposed to using them for domestic investments to promote economic development. In fact, only in Argentina under Fernández de Kirchner were some elements of “de-​ financialization” identified. In the other instances, the objectives of governments revolved around the management of a financialized economy, not its reversal. Governments took financialization and financial integration for granted and instead sought to control the magnitude, type, and effect of financial flows in the economy. These policies are pragmatic in the sense that they reduce countries’ exposure to the risks attached to financialization. Consequently, they sideline politically more difficult questions regarding the possibility of reversing financialization trends and reducing inequality both within countries as well as between economically rich and poor countries. (Semi-​)peripheral countries continue to face structural disadvantages in the current global financial and economic system. Attempts to reform global financial governance, such as that proposed by South Korea at the G20 meeting in 2010, not only face opposition from powerful Western countries but also lack support from other emerging and developing economies. But, to paraphrase Linda Weiss, despite the fact that we have not witnessed these kinds of changes materialize, these are not beyond the range of possibility. Notes 1 As discussed by Blyth (2012b) and others, crises are not objectively definable events and must be interpreted. 2 While it was certainly correct to place at least some of the blame for the financial crises on the bureaucracies, it is evident that the governments of Kim Dae-​jung and Hashimoto Ryutaro sought to consolidate government power to overcome the political and economic structures that characterized both countries during their developmental eras. 3 This is a gap in some of the ideational literature on policy change. Contributions tend to adopt a micro-​perspective and presume that the ideational change found among experts within central banks will cause policy change while underemphasizing top-​ down political factors. The methodology of this study acknowledges the relevance of knowledge production at lower levels of institutional hierarchies but emphasizes that expertise needs to be empowered by governments. 4 According to European and North American norms, expectations of what central banks should do have been closely tied to their role as “inflation fighters.” While this perception may hold true in Chile, it is less true in other cases. Central banks have also been perceived as development banks (Argentina), government banks (Japan), and protectors of financial stability (South Korea).

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Index

Note: Figures are indicated by italics. Tables are indicated by bold. accountability 8, 170, 172 aggregate credit ceiling 107–​8, 145 agriculture 13, 63, 164 Alessandri, J. 27, 29 Alfonsín, R. 62, 77, 86–​7 Allende, S. 27–​8, 54 Aninat, E. 34, 36 Asian financial crisis of 1997 11, 19, 93–​4, 99–​100; and IMF 162; and Japan 142 asset price bubble 105, 128, 131, 142, 159, 173 asset-​backed securities 98, 109, 110–​11, 131, 147 140 authoritarian regime (South Korea) 94–​5 Aylwin, P. 26, 32–​4; financialization under 38; and policy consensus 55, 59; see also Pinochet Bachelet, M. 34, 36, 57 balance sheets: of central banks 65, 83, 88, 154; of private companies 5, 46, 131 bankruptcy 67, 97, 133, 137 Basel III 46, 80, 84, 146 Bianchi, A. 34–​6 BIS 1, 15, 115, 116, 168 bond market 42, 45, 111, 112, 118 Bretton Woods system 1, 3–​5, 14 Büchi, H. 26, 33; expertise of 29–​31; institutional change under 39–​40, 170; policymaking by 38, 43, 50, 54; and private companies 55; see also Pinochet capital controls 45, 52, 77, 79–​80, 84, 116–17 Caputo, L. 72, 83, 85, 87

Cavallo, D. 11, 59, 63, 69, 88, 120; expertise of 64, 68; replacement of 65; see also Convertibilidad central bank independence 6, 15, 20, 21, 165–​6; in Argentina 86; in Chile 33, 55; in Japan 134–​5, 141, 155; in South Korea 104, 120–1, 123 Centro de Estudios Macroeconómicos de Argentina (CEMA) 65, 70 chaebols 4, 91, 93, 102, 167; and non-​ banks 97; power of 94, relationship with politics 95, 98, 122; resistance by 99, 101, 120 Chiang Mai Initiative 107–8, 145 Chicago Boys: appointment by Pinochet 25, 28, 54; ideology of 120; influence after Pinochet 31, 33; network of 55, 61; policies by 44; replacement of 7, 10, 26, 29–​30, 43, 162 Chile’s financial crisis of 1982 10, 25, 59 China 9, 75, 107, 173–​4 Chon Chol-​hwan 102–​4, 106, 117, 120–1, 168 Chun Doo-​hwan 93, 96 Cold War 27, 61, 95, 169 collateral: policy in Argentina 75; policy in Chile 41–​2, 49; policy in Japan 130, 140; policy in South Korea 107–​8, 114, 118 commercial banks 40, 79, 101, 103, 109, 122, 128; see also nationalization Communism 28, 95 comparative political economy 16, 178, 181 competitiveness 52, 63, 66, 104, 113 Concertación 45, 56, 86; and developmentalism 54; and free markets

Index  205 41; policy agenda of 32; policy consensus of 34, 36, 55, 165, 167, 169; see also Aylwin, P. Conglomerates 55, 163–​4, 170; see also chaebols, keiretsu Convertibilidad 11, 29, 60, 88, 160, 169; and IMF 87; and Kirchner 69; and Macri 81; policy change during 63, 65; weaknesses of 67–​8; see also Cavallo, D.; Menem, C. convoy system 127, 131, 132, 137–​8 copper 28, 30, 50 Corporación de Estudios para Latinoamérica (CIEPLAN) 26, 32, 36 corporate bonds 47, 50, 109, 144, 145 corruption 88, 125, 134, 152 Council for Cooperation on Financial Stability 151 Council for Regulatory Reform 135, 138 Council on Economic and Fiscal Policy (CEFP) 136, 138, 147, 152 coup d’état 10, 25, 38–​9, 54, 61, 96 credit policy 161; in Argentina 79, 82–​3; in Japan 145–​6, 149; in South Korea 102, 104, 108–​9, 121 credit risk 5, 66, 97 critical juncture 29, 53–​4, 85, 160, 163, 165; see also window of opportunity currency manipulator 109, 113 currency mismatch 45–​6, 67, 75 current account: in Argentina 63, 66, 68, 74, 79, 81, 85; in Chile 28–​9, 53; in Japan 128, 130 debt swaps 69, 74 Debt-​to-​Income (DTI) 109, 117 decompartmentalization 147, 150–​1 Deflation 135, 147–​9 delegation of policymaking 3, 16 deposit insurance 31, 65, 67 Deposit Insurance Corporation (DIC) 138 derivatives: in Argentina 84; in Chile 41, 42, 44, 46, 47, 49; in Japan 131, 140; in South Korea 112, 119 Development Bank of Japan 139, 144, 145, 160 dictatorship 4, 10, 95, 98, 169; in Argentina 59–​60, 86; in Chile 6, 25–​6, 28, 32–​3, 54–​5 Diet: split 153, 155, 164; support by 12, 125, 134, 141, 148–​9 diffusion 15, 24, 165, 174

dollar peg 63, 67, 69, 97; see also Convertibilidad dominant states 14, 24; see also United States Duhalde, E. 69, 74 Economic Commission for Latin America and the Caribbean (CEPAL) 27, 36, 60 economic fundamentals 68, 100 epistemic communities 1, 2, 7, 15, 21, 24; influence on policymaking 168–​9; see also international organizations eurozone crisis 41, 116, 147 evaluation mechanism see accountability exchange rate band 31, 51 exchange rate management 5, 151, 162 exchange-​traded funds (ETFs) 145, 149 failure (of financial institutions) 29, 52, 145; see also bankruptcy Federal Reserve 29, 67, 82–​3, 108 Fernández de Kirchner, C. 11, 175; appointments by 78; and corruption 88; and policy networks 59; policies under 18, 77, 80–​1, 85–​7; relationship with global investors 79 financial crisis 17, 100–​1 financial crisis of 2007; 1, 9, 32, 61, 75; and Japan 137, 142, 146, 151, 153; and neoliberalism 113; and South Korea 7, 115, 120, 169 financial cycle 38, 39, 116, 117 financial globalization 8, 14, 175; see also financial integration financial imbalances 25, 29–​30, 32, 88 financial integration 8, 174–​5 financial outflows 29, 41, 85, 97, 108–9, 172; see also speculative investments Financial Reconstruction Commission 134, 138 Financial Services Agency (Japan) 134, 138, 151 Financial Services Agency (South Korea) 108–​9, 119 Financial Supervisory Agency (Japan) 134, 155 Financial Supervisory Commission (South Korea) 101 Financial Supervisory Service (South Korea) 101, 111 Fiscal Investment and Loan Program (FILP) 139, 154

206 Index fiscal policy 49–​50 Fiscal Responsibility Law 50, 73 fixed exchange rate 51 flexible exchange rate 5, 162; see also floating exchange rate floating exchange rate 45, 51–​2, 69, 81, 85, 112 foreign currency 5; debt denominated in 16; holdings by central banks 53; liquidity provision in 41, 106, 113; regulation of 40, 42, 44, 75, 80, 84, 108 foreign exchange interventions 49, 52, 75–​6, 85, 113, 151 Foxley, A. 33–​4, 36, 54, 169 Fukuda Yasuo 12, 125, 141 Fukui Toshihiko 135, 143; central bank governor 136–​7, 140–​1, 145; scandal 134 Fund-​Provisioning Measure to Support Strengthening the Foundations for Economic Growth 146, 150 Fundación Capital 71, 73 G20 12, 94, 114, 115–​17, 146 General Banking Law (Chile) 25, 30–​1, 39, 44, 51, 170 global investors 1, 128; influence of: 15, 17–​18, 24; investment opportunities for 96; panicking 41, 74, 93, 100, 118, 144; relationship with Fernández de Kirchner 79; relationship with South Korea 99–​100; reversal of investments 29, 107, 131, 172; rolling over debt 63; speculating 75; see also financial crisis global liquidity 40, 97, 100; access to 69; provider of 77; regulation of 40, 121, 128, 146; see also Asian financial crisis of 1997 Global North 1, 16, 22, 173 González, A. E. 63 Gregorio, J. de 35, 37, 39, 41, 50, 55 Grupo Fénix 77–​8, 87 Hashimoto Ryutaro 91; dismantling of developmental policies by 12; institutional reforms by 125–​6, 134–​5, 139, 153, 169; policy change under 126, 132, 145; relationship with bureaucracy 132; relationship with expert commissions 133, 152; see also privatization Hayami Masaru 135–​6, 141, 143, 145; policymaking by 137–​40

ideology 6, 43, 164 IMF 1, 15, 35, 67–​8; crisis interpretation 100, 162; critique from 85; dependence from 121; and debt repayments: 69, 75; influence of 74; financial support of 16, 83, 168; pressure from 11, 93, 99, 107, 120; relationship with Argentina 87, 169; see also international organizations inequality 32, 173, 175 inflation target 40, 83, 150 initial financial liberalization 5, 11, 159, 166; in Japan 125–​7; in South Korea 93 insolvency mechanisms 43, 44; see also bankruptcy institutional conditions 9, 18–​9 institutional stability 18, 37, 56 insurance companies 47, 80, 138–​9 Inter-​American Development Bank 35, 67, 71 interbank rate 40, 44, 106, 137 interest groups 7, 13, 163; in Argentina 77; in Chile 54, 164; and policy convergence 16; see also keiretsu, chaebols international liquidity 15, 121, see also global liquidity international organizations: dependence on: 63, 67; and financial assistance 16, 69; and financialization processes 1; legitimization by 36; modification of policy tools 173; M and macro prudential ideas 166; as platforms 15; and policy convergence 2; pressure by 168 international political economy 2, 115 investment trusts 131–​9, 145, 147, 149 Japan Association of Corporate Executives 135, 141 Japan’s financial crisis of the 1990s 12, 125, 131, 159; and the Ministry of Finance 134, 152 Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth 147, 155 Justicialist Party 62, 69 keiretsu 4, 91, 128, 131, 155 Keynes 4, 21; ideas of 77, 81 Kim Choong-​soo 103, 118; appointment of 7, 12, 116, 120–​1, 162, 167;

Index  207 cooperation with government 114; reform attempts by 113, 118 Kim Choong-​soo: dismissal of 118; expertise of 114, 119–20 reform attempts by 113; see also Lee Myung-​bak Kim Dae-​jung 95, 162; appointments by 102, 104; inauguration of 98; institutional reforms under 11–​12, 93–​4, 101, 120; frictions under 113; relationship with expert commissions 94, 99 Kim Young-​sam 95; financialization under 11, 93, 96–​8; and institutional reforms 120; relationship with expert commissions 12, 94, 99 Kirchner, N. 10; appointments by 59–​60; consensus under 11, 69; and lending to public sector 75; policies under 18, 69, 74 knowledge production 8, 105, 170 knowledge regimes 7, 17–​19, 22, 24; networks of 21; as predetermining structures 23; and production of expertise 169, 172 Koizumi Junichiro: appointments by 137; institutional reforms under 12, 135, 139; policy change under 125–​6, 132, 135; relationship with expert commissions 136 Korea Asset Management Corporation (KAMCO) 98, 111–​12 Korea Development Institute (KDI) 96, 103 Larraín, F. 36, 55 LEBAC 74–​5, 83 Lee Ju-​yeol 103, 117 Lee Myung-​bak: appointments by 114, 120, 162, 167, 169; institutional reforms under 12, 120; and the G20 115; policy turn under 113; relationship with bureaucracy 122; relationship with experts 117; see also privatization Lee Seong-​tae 103, 105, 114, 120 legal system 13, 163 Lehman Brothers 52, 145 Liberal Democratic Party 132, 141, 147, 154–​5 Loan Support Program 145–​6 loan-​to-​value ratios 105, 109, 118 Macri, M. 59, 69, 77, 168; and corruption 88; policy turn under 81, 84, 85, 87;

relationship with the central bank 86; relationship with global investors 83 macroprudential: ideas 116, 162, 166–​7; policies in Chile 46, 80; in Japan 146, 151; policies in South Korea 7, 119–​20, 170, 173 Maekawa Commission 128, 152 manufacturing 28, 132 Marcó del Pont, M. 60, 72, 77–​9, 81–​2, 87 market discipline 65, 102, 138 Massad, C. 32, 36, 39, 43; monetary policy under 34, 35, 45; resignation by 37 Matsushita Yasuo 131, 134–​5, 143, 148 Menem, C. 85; agency of 11; appointments by 63–​5; and corruption 88; laws introduced by 65, 86; policy turn by 59, 62, 87; replacement of 68–​ 9; see also privatization Mexican peso crisis 51, 67 microprudential 44, 46 military: in Argentina 19, 60–​2, 86; in Chile 27–​8, 33, 56; in South Korea 94, 96, 98 monetarism 12, 21, 125, 147; 149, 153 monetization of debt 6, 40, 74, 83, 142 mutual funds 41, 84 Nakasone Yasuhiro: financialization under 12, 125, 127; relationship with expert commissions 125, 128 National Securities Commission (CNV) 61, 73 nationalizations 77, 87–​9, 95, 137 Neoclassical economics 4, 22 NOBAC 74–​5 non-​banks 41, 68, 97, 109, 109, 129 non-​financial corporation 85, 109, 128, 151 OECD 35, 103, 114–​15; see also Kim Choong-​soo open market operations 41, 42, 75, 107, 113 paradigm change 21, 54, 104–​5, 116, 146; macro prudential 162 Park Chung-​hee 94–​6, 117 Park Geun-​hye 117, 122 Park Seung 103, 104, 109 parliament: bicameral 18, 86, 154, 164; confirmation by 34, 113, 125;

208 Index opposition from 27, 113; unicameral 19, 164 partisan appointments 34, 56, 167 partisan politics 18, 37, 54–​5, 87, 164 path dependency 16–​18, 24 pension funds 23; in Argentina 67, 77, 80; in Chile 44, 47, 55; in Japan 139 pension reform 39, 47, 67, 80 Perón, I. M. de 61 Perón, J. 60, see also Peronism Peronism 11, 59, 62 Piñera, S. 34, 36 Pinochet 40, 54–​5, 62; radical reforms of 27; and transition to democracy 34, 169; see also Chicago Boys, Chile’s financial crisis of 1982, coup d’état, dictatorship plebiscite 32, 36 policy instruments 8, 17–​18, 162–​3; of central banks 74, 118; lack of 68 policy mix 63, 73 policy networks: in Argentina 59, 60, 77, 86–​7; in Chile 36–​7, 55–​6 policy norms 4, 15, 82, 112, 159 policy paths (novel) 12, 17, 73, 125 policy tools 17, 108, 120–​1, 151, 153, 173; see also policy instruments political agenda 201, 113, 170 political system 85–​6, 142, 154, 159 postal savings system 139, 160 Pou, P. 65–​8, 70 Prat-​Gay, A. 69, 71, 88 Prebisch, R. 27, 60, 78 private investment 85, 163 privatizations 28, 81; in Argentina 63, 66–​7; in Chile 31; in Japan 139, 160; of public financial institutions 5, 167; in South Korea 113 public expenditure 29, 65–​6, 80; see also public debt Proceso de Reorganización Nacional 26, 55, 60–​1 protests: in Argentina 69, 77; in Chile 27–​9, 41, 52; in South Korea 95, 113; see also public unrest public debt 147; crises of 49; financing of 65; holders of 47, 73, 80, 84, 139; market of 111; transfer of 79; see also monetization of debt public dissatisfaction 131; see also protests, public unrest

Public investments 8, 27, 30, 31, 61, 80 public unrest 26, 29, 169; see also protests Quantitative and Qualitative Monetary Easing 149–​50 real estate investment trusts (J-​REITs) 139, 145, 147, 149 Redrado, M. 86; dismissal of 77–​8; policies under 60, 69, 73–​5, 88, 162; see also Fernández de Kirchner, C.; Kirchner, N Republican Proposal (PRO) 82, 83, 88 risk-​taking 38, 46; see also speculative investments Roh Moo-​hyun 105, 109, 113 Roh Tae-​woo 93, 96 securities companies 41, 138, 145 Segyehwa 96, 99 (semi-​)peripheral countries 6, 175; agency of 7, 24, 158, 174; expertise in 160, 172 Shin, Hyun-​song: appointment of 12, 116, 120, 162, 170; and macroprudential policies 7 Shinzo Abe 147; appointments by 148; and central bank 149, 152–​3, 163–​4; policy change under 12, 126, 150–​1, 163; relationship with expert commissions 148 Shirakawa Masaaki: agency of 12, 125–​6, 141, 153; expertise of 142–​3; financial stability concerns of 151; policymaking by 144–​6, 153–​4 SME: in Argentina 79–​81, 84; in Chile 31; in Japan 138, 147; in South Korea 103, 108, 110, 112, 118 South Korea’s financial crisis of 1997 see Asian financial crisis of 1997 sovereignty 14, 87 speculative investments 28, 75, 81, 115, 121, 146 state capacity 16–​19, 96 structuralism 12, 125, 136, 148, 152–​3 Sturzenegger, F. 72, 81, 87–​8; expertise of 82; policy change under 85; relationship with Macri 83; see also Macri, M. subordinated integration 7, 15 Superintendency of Banks and Financial Institutions (SBIF) 30, 44

Index  209 Takenaka Heizo 136, 138 tasukigake jinji 127, 134, 148, 167 tax breaks 31, 77, 105 Technocratic 6, 169 Thatcher, M. 127, 132 Unidad de Fomento 42, 49, 85 United States 29, 36, 105, 109, 113, 146; and Argentina 78; domination by 14–​15, 53, 127, 169; education in 36; 61, 82, 98; and Japan 127; and South Korea 93, 95, 96; support of right-​ wing dictatorships 4 unremunerated reserve requirements (URR) 45, 66, 75, 84

Valdés, R. 34, 36 Vanoli, A. 72, 77, 82, 167 varieties of capitalism 16, 18, 24 Vergara 34–​6, 37, 39, 43, 55 Volcker, P. 29, 62 voters 32, 36, 63–​4, 87 vulture fund 74, 83 Western neoliberalism 9, 96, 113, 163, 171, 174 window of opportunity 94, 99, 125, 152 Yamaichi Securities 133, 137 Zahler, R. 34–​7, 43, 45, 52