Financing Export-Oriented Catching-Up in Korea: Credit-Rationing, Sustained High Growth and Financial Chaos

Abstract

In the 1960s and 1970s, bank credits were rationed essentially on the basis of firm's export-performance in Korea. Financial institutions did not have the ability to properly evaluate prospective entrepreneurs and potentially high return projects. It was cost-quality competition at the international export market that screened firms for efficiency, and this natural selection process of the fiercely competitive international market compensated for the backwardness of the Korean financial sector, thereby enabling Korea's sustained high growth. Credit-rationing on the basis of firm's export performance very much overcame the adverse selection problems in credit markets. Since the early 1980s, however, bank credit has been rationed less and less in proportion to export performance, while the nominal financial liberalization has failed to develop the Korean financial sector. This may explain the financial chaos in the 1990s.