The success story of Korean economic development is intimately linked with the so-called developmental state, and education policy, as part of centrally orchestrated industrial policy, played a critical role in the country's rapid industrialisation, which allowed for high employment rates, relatively modest social inequality and remarkable social mobility. However, the Korean success story has started to show ‘cracks’ – with labour market dualisation, rising inequality and ‘over-education’. While acknowledging the importance of the East Asian financial crisis as external shock for the Korean political economy, we suggest more fundamental problems in the socio-economic and socio-political underpinnings of the developmental state and its education and skills formation system for understanding how Korea's economic and education miracle turned into ‘education inflation’, skills mismatch and social polarisation.