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Neo-Liberal Economic Policy

Critical Essays

Edited by Philip Arestis and Malcolm Sawyer

Over the past two decades there has been a prevailing shift in economic policy in many countries. This reflects the continuing rise of neo-liberalism – the doctrine that economic policy should ‘leave it to the market’ and that governments should retreat from market intervention. This book provides a balanced and comprehensive appraisal of these important policy developments. The authors examine the most notable trends in neo-liberal economic policy such as the withdrawal from the use of fiscal measures and the reliance on monetary policy. They discuss the neo-liberal view that the causes of unemployment lie in the operation of the labour market, in particular its inflexibility. They also assess the increasing inclination towards the liberalisation and deregulation of markets, most notably financial markets.
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Chapter 3: Financial fragility: is it rooted in the development process? An examination with special reference to the South Korean experience

Santonu Basu


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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