Financial restraints in the South Korean miracle

Abstract

W e pr ovi de novel em pi r i cal evi dence on t he eff ect s of fi nanci al rest r ai nt s on Sout h Kor ean fi nanci al devel opm ent . The evi dence i s l i nked t o a si m pl e m odel of t he Kor ean banki ng syst em t hat encapsul at es i t s cart el i sed nat ure, whi ch predi ct s a posi t i ve associ at i on bet w een fi nanci al devel opm ent and (i ) t he degree of st at e cont r ol over t he banki ng syst em , (i i ) m i l d repressi on of l endi ng rat es. The m odel al so predi ct s t hat i n t he presence of l endi ng rat e cont rol s, i ncreases i n t he l evel of t he adm i ni st ered deposi t rat e are unl i kel y t o i nfl uence fi nanci al deepeni ng. W e t est t he m odel em pi r i cal l y by const r uct i ng i ndi vi dual and sum m ar y m easures of f i nanci al r est r ai nt s. Our em pi r i cal f i ndi ngs are consi st ent wi t h our t heoret i cal predi ct i ons but cont rast sharpl y w i t h t he predi ct i ons of earl i er l i t erat ure t hat post ul at es t hat i nt erest r at e cei l i ngs and ot her f i nanci al r est r ai nt s const i t ut e sources of ' f i nanci al r epressi on'.

Financial Deepening and Bank Performance: A Case Study of Selected Commercial Banks in Nigeria

“…[21] found differing effects of banking sector control on financial development in a number of developing countries, such as India, Nepal, the Republic of Korea, the Philippines, and Thailand. In the case of India, [22] estimated a conditional error correction model for financial deepening, against the use of non-financial measures, [23], in his study of the evaluation of performance of conventional banks in Pakistan and found that financial repression indices (interest rate control index, index of other financial sector restrictions in the form of reserve requirements, minimum liquidity requirements, and directed credit programs) exhibited sig-nificant influence of (−0.0465) on financial deepening. The econometric investigation of the effect of individual repression policies shows that interest rate controls as well as other controls have a significant negative effect on financial deepening equal respectively to −0.0154 and −0.0083.…”

Why governments may opt for financial repression policies: selective credits and endogenous growth

“…Subsequent empirical analysis by Arestis and Demetriades (1997) and Demetriades and Luintel (2001) indicated that in South Korea, financial repression policies had played a positive role. The results of Li (2001) also indicated a positive effect of financial repression on growth performance in the case of China.…”

Sources and Effectiveness of Financial Development: What We Know and What We Need to Know

“…While it is quite common to find that the real interest rate has a small positive effect on financial development, there is also evidence to suggest that the direct effects of 'repressive' policies on financial development are sometimes positive and quite large. Demetriades and Luintel (2001) provide time-series evidence from South Korea -one of the fastest growing economies in the world -in which an index of financial repression is found to have a large positive effect on financial development. They explain this finding by arguing that the Korean banking system behaved like a cartel when interest rates were deregulated.…”