Government policy and the development of financial markets : the case of Korea
Virmani, Arvind
Direction and control of the financial system has had a significant role in the government's development strategy. The paper shows how this influenced the evolution of the Korean financial system, and how the latter responded to shocks during the 1980's. Review of the Korean experience also suggests two important hypotheses: that subsidy policies (not interest ceilings) directed solely at promoting market and economic efficiency are more likely to be successful, and that forced lending policies (often combined with interest ceilings) directed at social, political and other non-economic goals are likely to weaken the financial system and be much less likely to succeed. Given the nature of this study, however, its conclusions, like that of other similar studies, should be considered only tentative in the absence of rigorous empirical testing.
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