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South Korea's Experience with International Capital Flows

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  • Marcus Noland

    ()
    (Peterson Institute for International Economics)

Abstract

South Korea's 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's lending culture and its authorities' 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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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP05-4.

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Date of creation: Jun 2005
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Handle: RePEc:iie:wpaper:wp05-4

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Keywords: Korea; capital controls; financial crises; financial liberalization;

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References

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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.
  3. 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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  5. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
  6. 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.
  7. Jeffrey A. Frankel, 1992. "Liberalization of Korea's foreign exchange markets," Pacific Basin Working Paper Series 92-08, Federal Reserve Bank of San Francisco.
  8. Marcus Noland, 2000. "Avoiding the Apocalypse: The Future of the Two Koreas," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 94.
  9. Yung Chu Park & Chi-Young Song, 1996. "Managing Foreign Capital Flows: The Experience of Korea, Thailand, Malaysia, and Indonesia," Economics Working Paper Archive wp_163, Levy Economics Institute, The.
  10. Marcus Noland, 1996. "Some Unpleasant Arithmetic Concerning Unification," Working Paper Series WP96-13, Peterson Institute for International Economics.
  11. 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.
  12. Kang, David C., 2002. "Bad Loans to Good Friends: Money Politics and the Developmental State in South Korea," International Organization, Cambridge University Press, vol. 56(01), pages 177-207, December.
  13. Kenneth Kang & Hong Liang & Henry Ma & Anthony J. Richards & Ajai Chopra & Meral Karasulu, 2001. "From Crisis to Recovery in Korea: Strategy, Achievements, and Lessons," IMF Working Papers 01/154, International Monetary Fund.
  14. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373.
  15. Jong­Wha Lee & Changyong Rhee, 2000. "Macroeconomic Impacts of the Korean Financial Crisis: Comparison with the Cross­country Patterns," RCER Working Papers 471, University of Rochester - Center for Economic Research (RCER).
  16. Anusha Chari & Paige P. Ouimet & Linda L. Tesar, 2004. "Acquiring Control in Emerging Markets: Evidence from the Stock Market," NBER Working Papers 10872, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Aizenman, Joshua, 2005. "Financial Liberalizations in Latin-America in the 1990s: A Reassessment," Santa Cruz Department of Economics, Working Paper Series qt6cb8b11h, Department of Economics, UC Santa Cruz.
  2. Maurice Obstfeld, 2007. "The Renminbifs Dollar Peg at the Crossroads," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 29-56, December.
  3. Joshua Aizenman & Jaewoo Lee, 2008. "Financial versus Monetary Mercantilism: Long-run View of Large International Reserves Hoarding," The World Economy, Wiley Blackwell, vol. 31(5), pages 593-611, 05.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  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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