DIFFERENCES BETWEEN FINANCIAL REPRESSION AND FINANCIAL LIBERALIZATION. A CASE STUDY OF KOREA

Introduction

Financial Liberalization

Auerbach and Siddiki (2004: 231) define financial liberalization as the removal of a series of barriers in the financial sector in order to bring it in line with that of developed economies. There are three different types of financial liberalization. To begin, this term can be used to describe domestic financial system reforms such as privatization and greater private sector credit. For example, Gelos and Werner (2002: 1) examine how local manufacturing firms in Mexico have responded to such reforms. Second, the term “financial liberalization” could relate to stock market liberalization. When a government opens its stock markets to international investors while also allowing domestic enterprises access to international financial markets, this is known as stock market liberalization (Bekaert and Harvey, 2003: 5). Finally, capital account liberalization may be linked to financial liberalization. This is a situation in which capital account transactions are subject to special exchange rates (Loots, 2003: 237), domestic firms are allowed to borrow funds from abroad (Schmukler and Vesperoni, 2006: 183), and reserve requirements are decreased (Loots, 2003: 237). (Kaminsky and Schmukler, 2008: 259).

Financial repression

Financial repression is a collection of actions that allow a government to borrow money at low interest rates from financial firms. This essay focuses on one of the most important aspects of financial repression: pushing banks and other financial intermediaries to hold more government bonds than they otherwise would. We believe that such financial repression tactics should be used only when two requirements are met: The government has a pressing need to issue debt, but it is having difficulty doing so due to concerns about its ability to repay its loans, i.e., financial credibility problems.

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