The Search for a Framework
ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai and Mario B. Lamberte
Soyoung Kim and Doo Yong Yang INTRODUCTION 11.1 Since 1980 the Republic of Korea (hereafter Korea) has experienced huge capital flows, increasing almost 39 times from $2.3 billion in 1980 to $91.8 billion in 2006.1 In the 1980s and early 1990s, bank loans and transfers were the primary source of capital flows, accounting for more than half of all private capital inflows into the Korean economy. However, the recent huge capital surge into Korea is portfolio investments, making up to 80 per cent of total private capital inflows. The surge in capital inflows into Korea has been induced by both ‘pull’ and ‘push’ factors related to Korea’s new economic environment that emerged following the currency crisis. With low interest rates and dropping asset investment returns due to the economic slowdown in advanced economies, investors’ demand for investment in emerging market portfolios began to soar. To these international investors, Korea is seen as a primary investment point. In recent years, the favorable global liquidity condition has contributed to increased capital inflows into emerging market economies including Korea. At the same time, Korea, like other major East Asian countries, relaxed its regulatory measures on foreign portfolio investment through capital market/account liberalization, further spurring the portfolio inflows. We investigate the effects of capital inflows on the Korean economy, paying particular attention to asset prices. In Section 11.2, we provide a brief summary of capital account liberalization, followed by an analysis of the patterns of capital flows and some explanation of the recent surge...
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