plays an active role in the allocation of economic resources. The developmental state
model is destined to fall down because its own success must generate crony capitalism and
moral hazards. On the other hand, the developmental statists argue that too hasty and
excessive financial liberalization makes the emerging markets too vulnerable to volatile
capital flows which were the key cause of the crisis. Instead of this controversy this part
delves into the process of financial liberalization in Korea.
The Process of Financial Liberalization
7
Before the Financial Crisis
Until the early 1980s, the developmental state model in which the state mobilizes and
allocates economic resources to designated ends for fulfilling national economic growth
was still intact. The state preferred foreign debts to investment and FDI played a very
limited role in the Korean economy. Therefore, foreign participation in the domestic
banking market was beyond imagination at that time. But financial liberalization in the
domestic market was carried out to cope with economic downturns and international
pressure, especially the U.S (Woo, 1997). The government privatized the commercial
banks, abolished various restrictions on bank management, and loosened the control of
credit and interest rates. It also permitted the establishment of non banking financial
institution to promote the competition among financial institutions and to satisfy increasing
demand for capitals.
8
The financial liberalization has accelerated in the late 1990s. There was the
announcement of the third-stage blueprint for the liberalization and opening financial sector
and the five-year plan for the liberalization of foreign direct investment in 1993, and the
five-year plan for the reform of the foreign exchange system in 1994. This hasty and
unprepared drive for financial liberalization was politically motivated. The government
should measure up OECD’s expectation in order to join the OECD, which was expected to
be a major achievement for the President Kim Young Sam. After Korea joined the OECD
7
See Kwon (2004), Cho (2002), and Park and Choi (2002) for details.
8
KorAm Bank was the only commercial bank with foreign investor’s interest. It was established by
a joint venture between Korean Chaebols and Bank of America in 1983.
8
Convention