Chapter 3: Financial fragility: is it rooted in the development process? An examination with special reference to the South Korean experience
Santonu Basu* INTRODUCTION The purpose of this chapter is twofold. First, it is to examine why ﬁnancial liberalization, despite its claims,1 is unable to deliver a higher growth rate or efﬁciency in the ﬁnancial sector. This means that some form of intervention will be required in the operation of the ﬁnancial sector, specially in developing countries, in order to promote growth. In recent years, there has been a growing body of literature which rightly points out the reasons for intervention and its beneﬁcial effect in promoting growth.2 However, experience suggests that in the past, intervention has adversely affected the performance of the ﬁnancial sector. This means that there is a problem, especially in the form of the intervention that has taken place, but the existing literature may be somewhat limited in its ability to assist in the investigation of the negative aspects of intervention. Thus the second purpose is to investigate what went wrong with the intervention and why. This will be investigated with reference to South Korea. We chose the South Korean economy, as opposed to any other developing nation, for obvious reasons. South Korea is one of the most successful nations in terms of its economic performance, and is where government intervention played a positive role in the process of development. Yet it also followed the path of liberalization. In fact, ﬁnancial liberalization followed by ﬁnancial crisis can be traced back to weaknesses that seemed to have crept in during the period of intervention, which...
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