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South Korea's Experience with International Capital Flows

In: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences

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  • Marcus Noland

Abstract

South Korea%u2019s experience is unparalleled in its combination of sustained prosperity, capital controls, and financial crisis. Over several decades, South Korea experienced rapid sustained growth in the presence of capital controls. These controls and the de-linking of domestic and international financial markets were an essential component of the country's state-led development strategy. As the country developed, opportunities for easy technological catch-up eroded, requiring more sophisticated corporate and financial sector decision-making, but decades of financial repression had bequeathed a bureaucratized financial system and a formidable constellation of incumbent stakeholders opposed to transition to a more market-oriented development model. Liberalization undertaken in the 1990s was less a product of textbook economic analysis than of parochial politicking. Capital account liberalization program affected the timing, magnitude, and particulars of the 1997-98 crisis. Despite considerable reforms undertaken since the crisis, concerns remain about both South Korea%u2019s lending culture and its authorities%u2019 capacity to successfully regulate the more complex financial system. The main lesson of the South Korean case appear to be that while the state-led model may deliver impressive initial gains, transitioning out of this approach presents an exceedingly complex challenge of political-economy.

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  • Sebastian Edwards, 2007. "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences," NBER Books, National Bureau of Economic Research, Inc, number edwa06-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0155.

    Handle: RePEc:nbr:nberch:0155

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    2. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
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    7. Marcus Noland, 1996. "Some Unpleasant Arithmetic Concerning Unification," Working Paper Series WP96-13, Peterson Institute for International Economics.
    8. Stephan Haggard, 2000. "Political Economy of the Asian Financial Crisis, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 107, July.
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    11. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, July.
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    14. Susan M. Collins & Won-Am Park, 1989. "External Debt and Macroeconomic Performance in South Korea," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 3: Country Studies - Indonesia, Korea, Philippines, Turkey, pages 151-152 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Jonathan A. Batten & Peter G. Szilagyi, 2006. "Developing Foreign Bond Markets: The Arirang Bond Experience in Korea," The Institute for International Integration Studies Discussion Paper Series iiisdp138, IIIS.
    2. Obstfeld, Maurice, 2006. "The Renminbi's Dollar Peg at the Crossroads," CEPR Discussion Papers 5771, C.E.P.R. Discussion Papers.
    3. Efraim Benmelech & Eyal Dvir, 2011. "Does Short-Term Debt Increase Vulnerability to Crisis? Evidence from the East Asian Financial Crisis," NBER Working Papers 17468, National Bureau of Economic Research, Inc.
    4. Aizenman, Joshua, 2005. "Financial Liberalizations in Latin-America in the 1990s: A Reassessment," Santa Cruz Department of Economics, Working Paper Series qt8g77c9dh, Department of Economics, UC Santa Cruz.
    5. Aizenman, Joshua & Lee, Jaewoo, 2007. "Financial versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," Santa Cruz Department of Economics, Working Paper Series qt5r95t1xf, Department of Economics, UC Santa Cruz.
    6. Marjit, Sugata & Das, Pranab Kumar & Bardhan, Samaresh, 2007. "A portfolio based theory of excessive foreign borrowing and capital control in a small open economy," Research in International Business and Finance, Elsevier, vol. 21(2), pages 175-187, June.
    7. Bauer, Christian & Herz, Bernhard, 2009. "Monetary and exchange rate stability in South and East Asia," Pacific-Basin Finance Journal, Elsevier, vol. 17(3), pages 352-371, June.
    8. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.

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