Plan for study on financial system and economic development (ver. 0.10)
Kang-kook Lee
Study on the financial systems, capital account liberalization and growth
1. Introduction
Is the open and market-based financial system is helpful to economic growth in
developing countries? This is a question that has attracted lots of economists and a
number of theoretical and empirical studies are pouring out. However the answer is not
yet clear and it’s still an open question. Most mainstreams argue that capital account
liberalization can contribute to faster economic development significantly to make the
market work better. Meanwhile, recently interests in the financial structure, i.e. marketbased vs. bank-based system has gained a great momentum. Neoclassicals seem to
support the market-based system better at encouraging development with better
information flows, while the bank-based system could lead to a crony-capitalism like in
the East Asian countries. Thus, their policy recommendation for developing countries is
almost always to develop a stock market and open the financial system. In fact, there
have been lots of cross section studies to test this argument. On capital account
liberalization, some support that it is helpful to development, while others refute it (IMF,
2001; Edwards, 2001; Rodrik, 1998). On the financial structure, both of the banks and
stock market seem to be important in development and the structure itself seems not
relevant at all for growth (Levine 2000a; Levine and Zervos, 1998). However, it is so
well known that the current data for capital account liberalization are so bad that we
badly need to develop a better and extensive index to see the effect of financial opening
(Brune et al., 2001; Martin et al., 2001). Considering the financial structure, at least in
developing countries the bank-based system could be more desirable in development,
shown in the East Asian experience (Stiglitz and Uy, 1996; Tadesse, 2001). It calls on us
to study the benefit of open the financial market based on better data and considering the
level of development.
We introduce recent far-reaching index of capital market opening constructed based
on the IMF report in this study, and study if the importance of banks or the stock market
is different according to the level of economic or financial development. First, we pose a
question if the capital account liberalization is really good for development based on the
better extensive opening index. Next, we will divide countries into bank-based and
market-based countries and see which system is better in the initial level of development.
Lastly, we further question if the impact of financial opening has a different effect on the
bank-based and market-based financial system based on our extensive data.
2. Financial system, opening, and economic growth
- Theoretical arguments and maybe models? : role of the financial system, bank-based
vs. market-based, capital account liberalization and growth, (maybe I should do an
independent paper (?) about some models how the bank-based system could be good and
capital account liberalization is bad, leading to more instability and crisis)
- Former studies : ambiguous result of impact of financial opening, due to
measurement of opening, bank-based vs. market-based is not relevant for growth at all
empirically. However, no good data for opening, especially in the 90’s, and the bankbased system looks better in financially underdeveloped countries. Many studies on
capital account liberalization not leading to economic growth when institutions are not
good, but just leading to more instability and crises
- Bank-based system is essential in economic development, i.e. in developing
countries : better monitoring, promoting long-term stable investment and even solving
coordination problems (it is necessary for early industrialization, and in the bank-based
system financial opening could be bad) Rajan and Zingales, 1999; Stultz, 2000; Allen and
Gale, 2000, Financial opening may lead to a speculation-led development and
overaccumulation, leading to crises.
- Hypothesis :
Bank-based is better in growth in the low level of development, capital account
opening is not helpful to economic development, specially for developing countries, and
financial opening would be worse in the bank-based system (?)
- developing former studies considering financial systems
3. Empirical test : data and models
= Relevant Data
- financial development, and system data : Demirguc-Kunt and Levine, 1999
- maybe industry data : Tadesse, 2001 not sure
- extensive financial opening data : we can construct extensive sets following
extensive Quinn dataset (Quinn, 1997), new CACAO data (Martin, 2001), or other
dataset (Brune, 2001), if available
- others for cross section study : Pennworld table, IFS, WDI et al.
= possible models
1) capital account liberalization and growth
* growth and financial opening using the extensive dataset, first of all to construct the
dataset is essential for that
* check out if the impact is really different according to the level of economic or
financial development : using interaction term between them
* check out if the sequencing is important : using interaction with trade opening and
macroeconomic distortion (Artera et al., 2001)
2) dividing countries into low and high financial development
* growth and financial system : bank-based better or banks are more important in low
financial development
* growth and financial opening (?) : opening might be worse in low financial
development
3) dividing countries into bank-based and market-based
* growth and financial opening : opening is worse in bank-based system?
or, with pooled data and financial system index variable * financial opening
(if we use a change of variables or.. level..?)
4. Result and discussion
- let’s see, my point is against the mainstream argument. Considering developing
countries, we should not open the financial market and take bank-based system???
5. Concluding Remarks
<References>
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Economic growth and income distribution in Korea : growth regime and financial
system
1. Introduction
Economic growth and income distribution are the most important topics in economics
that cannot be understood separately. When capitalist accumulation is based on
investment it is essential to explain what determines investment and how income
distribution is related to it. Recent post-Keynesian arguments shed important light on this
question following the tradition of Marx, Keynes and Kalecki. They state that investment
is determined by expected profitability, hence by the profit share and capacity utilization.
In this setting, the wage has a multiple role of a cut of the share for capitalists, a source of
aggregate demand and even a mechanism to work harder. This theory provides us with a
useful tool to explain the various regimes of accumulation and its change. Several studies
attempted to understand the history of capitalist development in this respect theoretically
and empirically (Marglin and Bhaduri, 1990; Bhaskar and Glyn, 1995). While most of
them are mainly focused on the experience of developed countries, recently researchers
try to study developing countries with this framework.
However, the model should incorporate various institutional difference and
government policies to enrich the analysis. And still we have only few studies about the
experience of developing countries that may be different from the profit squeeze
experience of developed countries. In particular on Korea, there are conflicting
arguments that support the profit-led and wage-led growth respectively (Jang, 1998;
Seguino, 2000). In this paper, we develop the model considering the character of the
financial system, like opening and the financial structure, and apply it to the Korean
experience. Since Korea went through very rapid economic growth and industrialization,
we may well think more of capital productivity to explain investment unlike former
studies. As well known, after the miraculous economic development for several decades,
the Korean government introduced a careless financial liberalization and opening with a
retreat of industrial policies. This broke up the old well-working Korean developmental
state model and led to the crisis. We will show what kind of accumulation regime existed
and how it changed with the government policy like financial liberalization extensively.
In so doing, we can find the breakup of old institutions led to a kind of overaccumulation,
excessive investment despite falling profitability, and finally the crisis.
2. Growth, distribution and financial system
- Former models including Marglin and Shor (1990), Bhaskar and Glyn (1995), Boyer
and Bowles (1995) etc.
- Empirical studies and studies about developing countries, Korea, Turkey..
- International dimension and other institutions : growth regime and financial system,
and capital market opening etc.
- Constructing the PK model considering financial opening, financial structure and
industrial policies, the question is how to incorporate the bank-based system, financial
opening and investment coordination into the model : upward sloping IS curve and
different PE curves??
- Probably with more opening, more profit-led, while with bank-based and closed
system stable long-term growth possible, and without investment coordination excessive
investment possible, but not sure about the wage-led?
3. Macroeconomic accumulation regime in Korea : From miracle to crisis
- Theoretical and empirical model based on former studies
- I/K = f ( profit share, capacity utilization, capital productivity etc.), well-known time
series model of investment using aggregate data, maybe complemented by
microeconomic data?
- Growth regime and its change, role of institutions and policies related to it :
financial system, opening and maybe industrial policy
- Specially, impact of financial liberalization and the end of investment coordination
in the early 90’s on excessive investment or breakup of the linkage b/w profit rate and
investment, speculation-led investment? : test on a structural break like Chow test in the
early 90’s
- Empirical test with data (from the 60s to 2000 : need to collect data)
4. Summary and conclusion
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The Political Economy of the Change of Korean Financial System : From Miracle to
Debacle (developing)
1. Introduction
The Korean economy has attracted economists’ interest for so long for miraculous
economic development since the 60’s. Lots of studies examined the Korean case with a
hot debate, between mainstream economists vs. revisionists, presenting the market or the
state as a key to economic success. A recent financial crisis triggered the debate again,
this time on the cause of the crisis. Mainstream economists who believe development was
mainly thanks to the free market, though with some market-friendly intervention, argue
that that the inherent problems of the old state-guided model caused the crisis. However,
revisionists who argue that the Korean miracle was led by the government point out what
brought about the crisis is not the model itself but the demise of the old model.
Meanwhile, after the crisis, the Korean government implemented extensive neoliberal
economic restructuring in an attempt to break up the old system. On restructuring, most
support and applaud the market-oriented reform (IMF, 2000; OECD, 1999), but we
present a serious concern about its problem (Crotty and Lee, 2001)
In this paper, we examine the dramatic experience of the Korean economy including
the economic miracle, financial crisis and restructuring, focusing on the financial system
from the institutional or political economy perspective. We will show that the financial
system, led by the state, mostly bank-based and closed, was the most essential institution
for economic success. But mismanaged financial liberalization and opening, that, of
course, reflected the change of power-relationship between the government and domestic
and international capital, resulted in the economic crisis. We argue that current neoliberal
financial restructuring after the crisis toward a market-based and open system after the
crisis aggravated the economic crisis causing a ‘credit crunch’. In the long run, it must do
more harm to the Korean economy, with lower long-term investment and more
instability. In section 2, we show how the former financial system was crucial for fast
economic development in section 2, and analyze financial liberalization and current
financial restructuring in next sections. In so doing, we argue that what is necessary is not
neoliberal restructuring but reconstruction the financial system based on the proper role
of the state.
- Institutional or political economy approach to a rise and fall of the Korean economy
focusing on the financial system
2. Financial system : key to the miracle
- State-led, bank-based, closed financial system as a base for economic miracle
- Government policies of the financial control and the roles of the financial system for
development
- A specific government-business relationship and developmental state with
embedded autonomy and capacity
3. Demise of the system and crisis
- Change of the financial market structure and power relationship between the
government and domestic and international capital in the late 80’s
- Partially chaebol dominated and distorted system emerged
- Financial liberalization and capital decontrols in the early 90’s leading to excessive
investment and crisis
4. Toward a market-based and open system
- Neoliberal restructuring and its bad results
- Breakup of the old system toward a totally open and market-based one dominated
by chaebol and foreigners together, and no role of the state
5. Conclusion
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