Two paths to financial liberalization: South Korea and Taiwan

Abstract

The financial crisis that erupted in East Asia in mid-1997 has renewed the long-standing debate concerning the relationship between financial liberalization and financial crises, effectively dividing this debate into two opposing camps. On one side stand those who view the crisis as the result of insufficient financial liberalization and the legacies of an economic model in which the state plays an active role in the allocation of economic resources to strategically designated ends. On the other side stand those who identify excessive financial liberalization and increased exposure to volatile capital flows as the primary cause of the crisis. This paper argues that the question around which the current debate centres - of whether too little or too much financial liberalization was to blame for the crisis - is particularly unfruitful, as it overlooks the fact that there is more than one path to liberalization . A more fruitful question to pose is what kind of liberalization can deliver the benefits of access to the opportunities of the ‘global’ marketplace whilst still maintaining the domestic foundations for economic growth and stability? The paper seeks to shed some preliminary light on this question through a comparative analysis of financial liberalization in Korea and Taiwan, and the way in which variations in their approaches determined their relative resiliency during the recent turmoil.