Macroeconomic Issues in Korea's Post-OECD financial liberalization

Abstract

In October 1996, Korea gained admission into the Organization for Economic Cooperation and Development (OECD), joining Mexico and Turkey as its third developing country member. During the course of negotiations between the government of Korea and the OECD which led up to Korea's admission, the Korean government committed itself to a blueprint for liberalizing the financial sector. The first section of this paper reviews the main elements of that liberalization program and provide a brief evaluation. The second section deals with the macroeconomic issues involved in Korea's move toward an open capital account. In particular, we analyze the extent to which Korea satisfies the standard pre-conditions for capital account liberalization, in addition to assessing the potential consequences of liberalization both quantitatively and qualitatively. The third section examines the various policy options available to Korean policymakers to counteract the undesirable side-effects of liberalization. More specifically, we look into fiscal policy, sterilization and exchange rate policy. In the conclusion, we provide an overall assessment of Korea's OECD-related financial liberalization efforts in the context of its broader efforts to develop a less regulated, more competitive financial sector. The strongest argument in favor of liberalization is that it would provide Korean manufacturing firms with access to the less costly funds available in international financial markets and those funds will facilitate their restructuring away from labor-intensive production techniques toward more capital-intensive ones.