Cases, Studies, and Stylised Facts

5.2 Case 1: South Korea

The Korean economy, once called “East Asian Miracle,” was intensely challenged by the international economic environment of the early 1980s due to macroeconomic paradigm shift of the major industrialized countries in the late 1970s and early 1980, a situation that extremely restricted South Korea's trade volumes and suppressed its economic growth. So the government had to take necessary measures to bring about economic recovery by concentrating on stabilization and controlling inflation. One of the major reforms was to redirect investment from capital intensive heavy and chemical industries towards labor-intensive light industries that produced consumer goods. Moreover, import restrictions were lifted. As a result, South Korea economies began improving and upturn process in the world economy.

Contrary to neoclassical paradigm, the role of the government had been crucial to the country’s economic growth, characterized by robust industrial policies, financial and capital controls, and trade protection. In early 1990s the government introduced extensive financial deregulation and capital account liberalisation (Lee, 2008). Some degrees of privatization of banks surfaced although to very limited extent, the state also reduced its intervention in credit allocation. The state-led financial system plays a significant role in allocating financial resources to sources of economic growth in line with industrial and investment policies.