The effects of financial liberalization on   the development of the financial market and the allocation   of credit to corporate sectors : the Korean case

Yoon Je Cho

The effects of financial liberalization on the development of the financial market and the allocation of credit to corporate sectors : the Korean case

Yoon Je Cho

This paper investigates the effects of financial liberalization on the financial sector development and the allocative aspects of credit in Korea. The paper finds that since 1980, the financial sector has grown very rapidly. This growth is largely due to an explosive expansion of non-banking financial institutions and a direct credit market, which have been much less regulated than the banking sector since the government's gradual liberalization policy. As a result, the proportion of the corporate sector's external funds which are controlled by the government has shrunk, while the proportion of funds based on market forces has greatly expanded. The distortive effect of the controlled sector's (banks) credit also was reduced through various reforms such as abolition of preferential lending reforms while experiencing some degree of liberalization, e.g. abolition of preferential lending rates. This reduced the distortive effects of bank credit. These reforms in Korea's financial sector have led to more equal access to, and cost of, credit among different sectors of the economy. This implies that since liberalization, the financial market has become more integrated with a consequent large improvement in the allocative efficiency of credit.

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