Financial Liberalization and Economic Development in Korea, 1980–2020

Park, Yung Chul / Kim, Joon Kyung / Park, Hail(Author)

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Since the early 1980s, Korea’s financial development has been a tale of liberalization and opening. After the 1997 financial crisis, great strides were made in building a market-oriented financial system through sweeping reforms for deregulation and the opening of financial markets. However, the new system failed to steer the country away from a credit card boom and bust in 2003, a liquidity crisis in 2008, and a run on its savings banks in 2011, and has been severely tested again by the ongoing COVID-19 pandemic crisis. Financial liberalization, clearly, has been no panacea.

This study analyzes the deepening of and structural changes in Korea’s financial system since the early 1980s and presents the empirical results of the effects of financial development on economic growth, stability, and the distribution of income. It finds that, contrary to conventional wisdom, financial liberalization has contributed little to fostering the growth and stability of the Korean economy and has exacerbated income distribution problems. Are there any merits in financial liberalization? The authors answer this query through empirical examinations of the theories of finance and growth. They point to a clear need to further improve the efficiency, soundness, and stability of Korean financial institutions and markets.

Issue Date
Harvard University Asia Center
Finance; General; Asia; Korea; Economic History
Tables and Figures
Introduction and Overview of Development
1. Growth and Structural Changes in the Financial System
2. Financial Liberalization and Structural Changes in Financial Institutions and Markets
3. Financial Behavior of Households and Non-financial Firms
4. Financial Liberalization and Transformation of the Banking Industry
5. Opening of Financial Intermediation Industries
6. Effects of Financial Liberalization on the Growth and Efficiency of the Financial Sector
7. Financial Development and the Growth and Stability of the Industrial Sector
8. Assessment of the Empirical Results on the Finance–Industrial Growth Nexus: Why Has the Effect of Financial Deepening Been So Weak or Vanished?
9. Effects of Financial Deepening on Income Distribution
10. Consolidation of Financial Regulatory Authorities: Evolution of Korea’s Financial Regulatory System
11. Role of the Financial Supervisory System in Safeguarding Financial Stability: Effectiveness of Macroprudential Policy
12. Moral Hazard, Regulatory Forbearance, and Corruption in the Financial Regulatory System
13. The 1997 Financial Crisis
14. The Post-1997 Corporate Governance Reform and
15. The 2008 Liquidity Crisis
16. The COVID-19 Pandemic and the Financial Crisis of 2019–2020
17. Summary and Conclusions
Series Title
Harvard East Asian Monographs 440
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