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Financial Liberalization and Intervention

A New Analysis of Credit Rationing

Santonu Basu

This book seeks to provide a coherent explanation as to why the policies of financial liberalization and financial intervention have been unable to achieve the goal of improving the access of borrowers to the loan market, irrespective of size. This is one of the prime criteria for achieving efficiency in the operation of the loan market and its failure has resulted in increased uncertainty and financial fragility.
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Chapter 5: Intervention I: The South Korean Experience

A New Analysis of Credit Rationing

Santonu Basu


5.1 INTRODUCTION In the last chapter we provided an explanation for why financial liberalization, despite its claims, is unlikely to deliver a higher growth rate or efficiency in the financial sector. This means some form of intervention is required in the operation of the financial sector, especially in developing countries, in order to promote growth. In recent years, there has been a growing body of literature which rightly points out why intervention is necessary and its beneficial effect in promoting growth.1 However, experience suggests that in the past, intervention adversely affected the performance of the financial sector. This means there is a problem, particularly in the form of the intervention that has been introduced, but the existing literature seems to be somewhat limited in its ability to assist in the investigation of the negative aspects of intervention. Thus the purpose of this, and the next, chapter is to investigate what went wrong with the intervention and why. In this chapter we will investigate this issue with reference to South Korea. South Korea is one of the most successful nations, in terms of its economic performance, 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 creep in during the period of intervention, an examination of which will enable us to understand why liberalization simply made the country more vulnerable, leading to the crisis....

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