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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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This chapter was published in:

  • 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, October.
    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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    1. Susan M. Collins & Won-Am Park, 1989. "External Debt and Macroeconomic Performance in South Korea," NBER Chapters, in: Developing Country Debt and the World Economy, pages 121-140 National Bureau of Economic Research, Inc.
    2. Marcus Noland, 1996. "Restructuring Korea's Financial Sector for Greater Competitiveness," Working Paper Series WP96-14, Peterson Institute for International Economics.
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    8. Marcus Noland & Howard Pack, 2003. "Industrial Policy in an Era of Globalization: Lessons from Asia," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 358.
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    10. Marcus Noland, 1996. "Some Unpleasant Arithmetic Concerning Unification," Working Paper Series WP96-13, Peterson Institute for International Economics.
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    Cited by:
    1. Obstfeld, Maurice, 2006. "The Renminbi's Dollar Peg at the Crossroads," CEPR Discussion Papers 5771, C.E.P.R. Discussion Papers.
    2. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
    3. 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.
    4. Joshua Aizenman, 2005. "Financial Liberalization in Latin-America in the 1990s: A Reassessment," NBER Working Papers 11145, National Bureau of Economic Research, Inc.
    5. Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc.
    6. Benmelech, Efraim & Dvir, Eyal, 2013. "Does Short-Term Debt Increase Vulnerability to Crisis? Evidence from the East Asian Financial Crisis," Journal of International Economics, Elsevier, vol. 89(2), pages 485-494.
    7. 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.
    8. 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.

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