2018年-PIIE彼得森国际经济研究所_South_Koreas_Experience_with_International_Capital_Flows_51页_797kb

South Korea's Experience with International Capital Flows Summary

Core Content

South Korea's economic experience over the last four decades is notable for its combination of sustained growth, capital controls, and a financial crisis. Despite maintaining extensive capital controls, the country achieved rapid economic development, with real per capita income growth averaging over 6% annually from 1963 to 1997. This growth was enabled by a state-led development strategy that included financial repression and capital controls, which helped insulate the domestic financial system from international markets.

Main Points

• Sustained Growth with Capital Controls: South Korea managed to achieve significant economic growth for several decades while maintaining capital controls. These controls were integral to its development model, which emphasized state intervention and financial repression.

• Financial Repression and Bureaucratic System: The financial system was heavily bureaucratized and dominated by state-controlled institutions. This created a system where financial services were largely managed by the government, leading to a lack of market dynamism and a lending culture that favored large, politically connected firms.

• Technological Catch-Up and Transition Challenges: As South Korea approached the international technological frontier, the need for more sophisticated corporate and financial decision-making increased. However, the entrenched interests of the state and its financial institutions made the transition to a more market-oriented system difficult.

• 1997 Financial Crisis: The liberalization of the capital account in the 1990s, driven more by political considerations than economic theory, contributed to the 1997 financial crisis. The crisis was exacerbated by the highly leveraged economy, currency mismatches, and excessive reliance on foreign debt.

• Post-Crisis Reforms and Lingering Concerns: Although South Korea managed to recover from the crisis, concerns remain about the persistence of a bureaucratic lending culture and the capacity of regulators to manage a more complex financial system effectively.

Key Information

• Historical Context: South Korea's financial repression began during the Japanese colonial period and continued through the postwar era, with the state playing a central role in directing capital flows and managing financial institutions.

• Capital Controls: These were used to limit foreign participation in the financial system and to control the flow of capital into and out of the country. Inward FDI and stock market investment by nonresidents were heavily restricted, while the won was nonconvertible and offshore markets were discouraged.

• Financial Liberalization: The 1990s saw a gradual and politically motivated liberalization of the financial sector. This included the introduction of new financial institutions, such as merchant banks, which were often linked to the chaebol and were associated with corruption and financial instability.

• Exchange Rate Policies: South Korea's exchange rate regime evolved from a strict dollar peg to a basket peg and then to a managed float. The US pressured South Korea to revalue the won, which contributed to the financial crisis of 1997.

• Outcome of Crisis: The 1997 crisis had significant economic consequences, with net cleanup costs amounting to 16% of 2001 GDP. The crisis highlighted the risks of financial repression and the challenges of transitioning to a more market-oriented financial system.

Conclusion

The main lesson from South Korea's experience is that while the state-led model can lead to impressive initial growth, transitioning out of it presents a complex political and economic challenge. The liberalization process in the 1990s was not driven by economic analysis but by domestic political dynamics, and it ultimately contributed to the 1997 financial crisis. Post-crisis reforms have improved the financial system, but concerns about the persistence of bureaucratic practices and the effectiveness of regulatory oversight remain.