Flashback: Financial Liberalization in Mexico and South Korea

Abstract

This paper investigates financial liberalization in Mexico and South Korea from a comparative international political economy perspective. Though the two countries have a different political economy background, their experiences with financial repression and liberalization were similar, as was the manner in which they handled the subsequent huge inflow of capital. During the process of financial liberalization, both governments had their policy autonomy undermined by strong domestic interest groups as well as by influential international actors. Similar situational effects also prevailed during these two countries’ financial crises: both experienced surges of international financial capital, had presidential elections during the crisis, and joined the OECD around that time. This paper sheds light on how the two countries experienced macroeconomic imbalances and financial crisis as a result of financial liberalization. The experience suggests meaningful lessons for other developing countries regarding the policy dilemmas that can arise from financial liberalization.

Keywords:

• financial crisis
• financial governance
• financial liberalization
• Korea
• Mexico

Notes

See World Bank's country classification. For example, we can refer such countries as Brazil, Chile, Colombia, Malaysia, Turkey, Uruguay, Venezuela, etc., http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS (accessed May 10, 2010).

See Adam Przeworski and Henry J. Teune, The Logic of Comparative Social Inquiry (Malabar, FL.: Krieger Publishing Company, 1970), 32–5.

Stephan Haggard, Chung H. Lee, Sylvia Maxfield, The Politics of Finance in Developing Countries (Ithaca, NY: Cornell University Press, 1993); Stephan Haggard and Sylvia Maxfield, “The Political Economy of Financial Internationalization in the Developing World,” International Organization 50, no. 1 (Winter 1996), 35–68; Michael Loriaux et. al., Capital Ungoverned (Ithaca, NY: Cornell University Press, 1997).

Haggard and Maxfield, “The Political Economy of Financial Internationalization,” 35–68.

Nora Hamilton and Eun Mee Kim, “Economic and Political Liberalisation in South Korea and Mexico,” Third World Quarterly 14, no. 1 (1993), 109–36.

Nancy N. Auerbach, States, Banks, and Markets: Mexico's Path to Financial Liberalization in Comparative Perspective (Boulder, CO: Westview Press, 2001).

Arvid Lukauskas and Susan Minushkin, “Explaining Styles of Financial Market Opening in Chile, Mexico, South Korea, and Turkey,” International Studies Quarterly 44, no. 4 (December, 2000), 695–723.

See Lukauskas and Minushkin, “Explaining Styles of Financial Market Opening,” 710 and 713.

See Jeffrey Sachs, Harry Huizinga, and John B. Shoven, “U.S. Commercial Banks and the Developing-Country Debt Crisis,” Brookings Papers on Economic Activity 1987, no. 2 (1987), 555–606.

William R. Cline, “Mexico's Crisis, The World's Peril,” Foreign Policy 49 (Winter 1982–3), 107–8.

William C. Gruben and Robert McComb, “Liberalization, Privatization, and Crash: Mexico's Banking System in the 1990s,” Economic Review of the Federal Reserve Bank of Dallas (First Quarter 1997), 22.

Osvaldo S. Quiroz, The Political Economy of Mexico's Financial Reform (Burlington, VT: Ashgate, 2001), 93.

Gruben and McComb, “Liberalization, Privatization, and Crash,” 22.

The IMF would suspend loan disbursements to Mexico if its public debt reaches 10% of the GDP.

Judith Teichman, “The Mexican State and the Political Implications of Economic Restructuring,” Latin American Perspectives 19, no.2 (Spring 1992), 94–5.

Chiristine A. Bogdanowicz-Bindert, “World Debt: The United States Reconsiders,” Foreign Affairs 64, no. 2 (Winter 1985/86), 265; Jeffrey Sachs, “Making the Brady Plan Work,” Foreign Affairs 68, no.3 (Summer 1989), 103.

Quiroz, The Political Economy of Mexico, 98; Auerbach, States, Banks, and Markets, 41.

Teichman, “The Mexican State,” 95.

Under the guidance of several stages of the economic development plan of the EPB, two other agencies oversee and support financial assistance to areas targeted by the HCIs.

Policy loans carried an exceedingly low interest rate with a longer maturity in order to support the HCIs with the strong support of the Korean government.

See the annual Gross Domestic Economic Growth in the World Bank Data, http://data.worldbank.org/country/korea-republic (accessed November 15, 2010).

Timothy P. Kessler, “Political Capital: Mexican Financial Policy under Salinas,” World Politics 51, no. 1 (October 1998), 42–5.

Sebastian Edwards and Miguel A. Savastano, “The Morning After: The Mexican Peso in the Aftermath of the 1994 Currency Crisis,” NBER Working Paper, no. 6516 (1998), 4.

Pero Aspe earned a doctorate from MIT under Professor Rudiger Dornbusch, while Guillermo Otritz earned a doctorate from Stanford under Professor Roland I. McKinnon. Considering that their advisors are strong proponents of financial liberalization and proposed a theoretical foundation for neoliberalism, their favoring of liberalization is not surprising. See Quiroz, The Political Economy of Mexico, 102.

The liquidity coefficient was a requirement for the commercial banks to hold a pre-specified amount of their assets in government securities.

Shalendra Sharma, “The Missed Lessons of the Mexico Peso Crisis,” Challenge 44, no.1 (January–February 2001), 74.

Gruben and McComb, “Liberalization, Privatization, and Crash,” 23; Berry Wilson, Anthony Saunders, and Gerard Caprio, Jr., “Mexico's Financial Sector Crisis: Preparative Linkages to Devaluation,” The Economic Journal 110, no. 460 (January 2000), 294.

Susan Minushkin, “Banqueros and Bolseros: Structural Change and Financial Market Liberalisation in Mexico,” Journal of Latin American Studies 34, no. 4 (November 2002), 934.

Lukauskas and Minushkin, “Explaining Styles of Financial Market Opening,” 709; Jaime Ros and Cesar Bouillon, “Mexico: Trade Liberalization, Growth, Inequality and Poverty,” in Rob Vos, Lance Taylor, and Ricardo P. Barros, eds., Economic Liberalization, Distribution, and Poverty: Latin America in the 1990s (Northampton, MA: Edward Elgar, 2002), 351.

Minushkin, “Banqueros and Bolseros,” 928–33.

Ros and Bouillon, “Mexico: Trade Liberalization,” 351.

See C. Fred Bergsten and Jeffrey J. Schott, “A Preliminary Evaluation of NAFTA,” Testimony before the Subcommittee on Trade Ways and Means Committee United States House of Representatives, September 11, 1997, http://www.iie.com/publications/papers/paper.cfm?ResearchID = 288 (accessed February 12, 2010).

Haggard and Maxfield, “The Political Economy of Financial Internationalization,” 55–56.

Jaime Ros, “From the Capital Surge to the Financial Crisis and Beyond: The Mexican Economy in the 1990s,” in Financial Crisis in “Successful” Emerging Economies, ed. Ricardo Ffrench-Davis (Washington D.C.: Brookings Institution Press, 2001), 109.

Peter B. Kenen, The International Financial Architecture: What's New? What's Missing? (Washington, D.C: Institute for International Economics, 2001), 23–4.

Kihwan Kim, “Kim Jae-Ik: His Life and Contributions,” in Liberalization in the Process of Economic Development, ed. Lawrence B. Krause and Kihwan Kim (Berkeley, CA.: University of California Press, 1991), xi∼xxiv; Meredith Woo-Cumings, “Slouching Toward the Market: The Politics of Financial Liberalization in South Korea,” in Capital Ungoverned: Liberalizing Finance in Interventionist States, ed. Maurice Loriaux, Meredith Woo-Cumings, Kent E. Calder, and Sofia A. Ferez (Ithaca, NY: Cornell University Press, 1997), 78.

See Business Korea (June 1984), 35.

OECD, OECD Economic Surveys 1993–1994: Korea (Paris: OECD, 1994), 92–5.

OECD, 92–4.

IMF's Article VIII prohibits the imposition of restrictions on payments and transfers for current account transaction.

OECD, OECD Economic Surveys, 93–4.

Young Chul Park and Chi-Young Song, “Managing Foreign Capital Flows: The Experiences of the Republic of Korea, Thailand, Malaysia and Indonesia,” International Monetary and Financial Issues for the 1990s VIII (Geneva: UNCTAD, 1997), 94.

These limits were continuously raised: December 1994, 12%, July 1995, 15%, April 1996, 18%, October 1996, 20%, May 1997, 23%, and November 1997, 26%.

Bank of Korea, Financial System in Korea (Seoul: The BOK, 1995), 6–7.

Haggard and Maxfield, “The Political Economy of Financial Internationalization,” 59.

Myung-Guk Doh, “Recent Development of Financial Market Liberalization and Its Perspectives in Korea,” Business Korea (June 1996): 55–61.

See Yoon Je Cho, “Financial Reform Experience of Korea,” Working paper 98–04 (Seoul: Sogang Institute of International and Area Studies, 1998).

See Chug H. Lee, Keun Lee, and Kangkook Lee, “Chaebol, Financial Liberalization, and Economic Transformation of Quasi-Internal Organization in Korea,” EIJS Working Paper, no. 101 (August 2000), 13–7.

The initiative of the “Sekeyhwa” (globalization) originated from the “Sydney Idea” of President Kim Young Sam in November 1994.

OECD, Code of Liberalization of Capital Movements (Paris: OECD, 1997); OECD, Code of Liberalization of Current Invisible Operations (Paris: OECD, 1997).

Sebastian Edwards, “The Mexican Peso Crisis: How Much Did We Know? When Did We Know It?” The World Economy 21, no. 1 (January 1998), 9.

Sharma, “The Missed Lessons,” 76–7.

Kenen, The International Financial Architecture, 21–4; Rudiger Dornbusch, et al., “Currency Crises and Collapse,” Brooking Papers on Economic Activity 1995, no. 2 (1995), 237–42.

Kessler, “Political Capital,” 37.

See Jeffrey D. Sachs, Aaron Tornell, and Andres Velasco, “The Mexican Peso Crisis: Sudden Death or Crisis Foretold?” Journal of International Economics 41 (1996), 265–83; Harold L. Cole and Timothy J. Kehoe, “A Self-fulfilling Model of Mexico's 1994–1995 Debt Crisis,” Journal of International Economics 41 (1996), 309–30.

See Eundak Kwon, “Financial Liberalization in South Korea,” Journal of Contemporary Asia 34, no. 1 (2004): 85–6.

Mexico and Korea joined the OECD on May 18, 1994 and December 12, 1996, respectively.

BIS, 68th Annual Report (June 1998), 34.