Development Banks – Dispensable Relics of the Past? a Comparative Analysis of Korea and Germany

The role of public development banks in the process of economic development in a number of capitalist countries in the ‘Golden Age of capitalism’, during which interventionist approach to economic management prevailed, has been well documented in the literature on the political economy of late development. However, the role of public development banks in the post-70s neo-liberal period remains understudied.

In order to explore the changing role of development banks during the neo-liberal period, we propose a comparative historical study of the German Kreditanstalt für Wiederaufbau (KfW) and the Korean Development Bank (KDB). Germany and Korea are widely considered to be two of the world’s most successful ‘coordinated market economies’ and these two development banks played crucial role in their countries’ respective economic ‘miracles’. The KfW played an important role in German post-war reconstruction between the late 1950s and 1960s, and the reunification in the 1990s. Similarly, the KDB played an important role in Korea’s ‘catch-up’ during the rapid development phase between the 1950s and 1980s, through providing subsidized long term finance for industrialization. However, their roles have significantly diverged since the 1980s. While the KfW has continued to provide real economy lending, especially to the German green energies program, the KDB has moved towards promoting financial market expansion supporting ambitions to create a Korean financial hub in East Asia.

 

Through a comparative case study, utilizing company archives, firm level financial data, and analyses of government planning documents, this paper investigates the political economy reasons for this divergence and how the divergence relates to the overall policy priorities and financial environments of the two countries. Aside from its obvious implications for developing countries, this study also shows how public development banks can remain relevant even in advanced economies, many of which have been suffering, since the 2008 financial crisis, from the lack of long-term productive investments amidst excess credits flowing into unproductive areas such as financial market speculation, real estate, and consumer loans.