Introduction

The second oil shock in the late 1970s exposed the extreme weakness of the Korean economy. Inflation accelerated, and many heavy and chemical industrial projects suffered from weak export competitiveness, overcapacity, and large operating losses. These economic difficulties were, to a large extent, attributable to extensive government intervention in resource allocation and the ensuing rapid monetary expansion. Against this background, the 1980s saw a series of liberalization programs in many sectors of the economy. Industry-specific incentives were mostly phased out, import restrictions were significantly eased, and substantial progress was made in financial liberalization.

Financial liberalization efforts included the elimination of many administrative controls on banking, privatization of nationwide commercial banks, reduction of entry barriers, and diversification of financial services. Because of these measures, along with the efforts to curb inflation and improve the industrial incentive system, interest rates have been less repressed, financial development has accelerated, and the efficiency of credit allocation has increased. In this course, the Korean financial market did not experience any major instabilities such as bankruptcy of financial intermediaries, undesirable shifts in bank portfolios, a large jump in real interest rates, or destabilizing capital flows. Absence of these side effects often accompanying financial deregulation in other countries, however, does not necessarily mean that Korea's financial liberalization was a success. Financial liberalization in Korea is a very cautious, slow, and still ongoing process. Despite the slow pace of deregulation, rapid growth of non-bank financial institutions has contributed to making Korea's overall financial market much more liberal.