Japan and Korea have long been associated with extensive, generally successful government intervention in the financial system. The authors survey the literature available in English on the operation and effectiveness of credit policies in these two countries. They divide the literature on the Japanese experience into three groups. Papers in the first group argue that government intervention facilitated the financing of industry and promoted rapid industrialization during the period of reconstruction and high growth. The second group includes papers that accept that government intervention influenced financial flows, but maintain that its impact was not as great as the first group implied. The third group attributes a negative effect to government policy and maintains that economic growth would have been even higher if the financial markets were not subject to extensive regulation. Criticism of Korean credit policy focuses on the experience in the late 1970s when the drive for heavy industrialization was under way. In general the relative success of credit policies in Japan and Korea is attributed to their well-functioning bureaucracies, effective monitoring, and financial discipline. These have limited the diversion of subsidized credit funds into speculative assets, ensuring that credit policies in these two countries have not suffered from the problems of adverse selection and moral hazard that have bedeviled directed credit programs in other countries.
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