Edited by Yung Chul Park, Takatoshi Ito and Yunjong Wang
Chapter 2: Finance and Economic Development in East Asia
Yung Chul Park, Wonho Song and Yunjong Wang 1. INTRODUCTION Financial systems and their evolutionary development have been a fundamental component of the overall economic development process in East Asia. This process has been driven by real economic growth and the attendant growth and changes in demand for various types of ﬁnancial services, by institutional development within the ﬁnancial system, and by changes in government policies concerning ﬁnance. Before the ﬁnancial crisis broke out in 1997, East Asia’s systems, which are often known as bank-based systems, had been characterized as ‘repressive’ in the sense that loan allocation was controlled and the interest rates on deposits and loans were set – often below market clearing rates – by the government. In many East Asian countries, ﬁnancial repression was predicated on a development strategy that used ﬁnance as an instrument of industrial policy to achieve multiple objectives with considerable success: to promote exports; to build physical infrastructure; and to supply longterm ﬁnance at a low cost to ﬁrms in manufacturing. In the early 1980s, many East Asian governments began to relax their control over the interest rates and lending policies of banks and other non-bank ﬁnancial intermediaries, toward fostering capital markets, and gradually opening ﬁnancial markets to foreign competition. The process of ﬁnancial liberalization had been accelerated as the liberal ideology of the Washington consensus swept through the region before the crisis broke out in 1997. Since then, a large number of recent studies on the 1997–98 East Asian crisis have blamed the...
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