Chapter 8: The Legacy of Korea’s Credit Rationing System
1. A REPRESSED FINANCIAL REGIME In Korea, commercial banks were the principal intermediary between savers and borrowers, and yet bank credits were provided at below market rates, which made credit rationing unavoidable. Indeed, credit rationing served as one of the most important policy tools to carrying out exportoriented growth strategy in Korea (see Hong 1986a, 1986b). According to the McKinnon-Shaw models, the growth-maximizing real deposit rate of interest is the competitive free-market equilibrium rate (see the summary by Fry, 1993: 8–11). The policy implications of these models for the ﬁnancially repressed economy are that growth can be increased by abolishing interest rate ceilings, by reducing the rate of inﬂation, by abandoning credit rationing, by eliminating the reserve requirement tax (for example, by paying the competitive interest rate on required reserves), and by ensuring that the ﬁnancial system operates competitively under conditions of free entry. Higher real deposit interest rates not only increase ﬁnancial deepening but also raise national savings, increase the supply of available investment resources, accelerate the rate of physical capital accumulation, and hence raise the equilibrium rate of national investment. The ﬁnancial liberalization undertaken in Korea in the 1980s was rather moderate. Interest rates as well as the asset management of ﬁnancial institutions continued to be controlled, and the government still heavily intervened in money and capital markets. However, since it is a fact that Korea could achieve sustained high growth with ever-rising savings propensity under a repressed ﬁnancial regime, and since Japan also to some...
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