Korea

Abstract

Historical control of the financial system by the Korean government was considered by many as one of the most important, if not the most important, instrument employed in the country’s path to economic development (Nam and Lee 1995; Choi 1993). In regulating businesses’ access to credit, the government was able to direct and influence their decisions over resource allocation and thus the pattern of industrial development. However, as the 1990s dawned, the Korean government began to liberalise its financial system. This was motivated in part by its aspiration to accede to the OECD and in part to address the ‘developmental blockage’ that had emerged as a result of the nature of the evolution of the Korean state-business nexus (Weiss 2003). As this process of liberalisation was partial and arguably ill conceived, it rendered the financial system vulnerable to financial turmoil and consequently contributed to Korea falling victim to the financial crisis that spread through East Asia in 1997. The experience of the crisis led to calls to address the perceived weaknesses in Korea’s form of economic governance: the dominant role of the state in the economy, the close state-business nexus, and the inability or absence of market dynamics to rein in poor business practices. A programme of financial reform and restructuring in the period post-crisis was expected to address these issues.