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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'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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Suggested Citation

  • Marcus Noland, 2007. "South Korea's Experience with International Capital Flows," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 481-528, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:0155
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    References listed on IDEAS

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    1. Joshua Aizenman, 2005. "Financial Liberalisations in Latin America in the 1990s: A Reassessment," The World Economy, Wiley Blackwell, vol. 28(7), pages 959-983, July.
    2. 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.
    3. Maurice Obstfeld, 2007. "The Renminbi's 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.
    4. Hille, Erik & Shahbaz, Muhammad & Moosa, Imad, 2019. "The impact of FDI on regional air pollution in the Republic of Korea: A way ahead to achieve the green growth strategy?," Energy Economics, Elsevier, vol. 81(C), pages 308-326.
    5. Wan-Soon Kim & You-Il Lee, 2007. "Challenges of Korea's Foreign Direct Investment-Led Globalization: Multinational Corporations' Perceptions," Asia Pacific Business Review, Taylor & Francis Journals, vol. 13(2), pages 163-181, April.
    6. 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, May.
    7. Basak, Gopal K. & Das, Pranab Kumar & Rohit, Allena, 2017. "Capital inflow-terms of trade ‘nexus’: Does it lead to financial crisis?," Economic Modelling, Elsevier, vol. 65(C), pages 18-29.
    8. 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.
    9. 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.
    10. Mario Cimoli & Jose Antonio Ocampo & Gabriel Porcile & Nunzia Saporito, 2020. "Choosing sides in the trilemma: international financial cycles and structural change in developing economies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 29(7), pages 740-761, October.
    11. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
    12. 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.
    13. Lim Sijeong, 2015. "Financial structures, firms, and the welfare states in South Korea and Singapore," Business and Politics, De Gruyter, vol. 17(2), pages 327-354, August.
    14. Basak, Gopal K. & Das, Pranab Kumar & Rohit, Allena, 2019. "Coupled dynamics with an external system and application to international finance," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 520(C), pages 409-432.
    15. Hille, Erik, 2016. "The impact of foreign direct investments on regional air pollution in the Republic of Korea: A way ahead to achieve the green growth strategy?," VfS Annual Conference 2016 (Augsburg): Demographic Change 145517, Verein für Socialpolitik / German Economic Association.
    16. Gopal K. Basak & Pranab Kumar Das & Allena Rohit, 2016. "A Mathematical Model of Foreign Capital Inflow," Papers 1603.02438, arXiv.org, revised May 2017.

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