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The Korean government has played a pervasive role in promoting industrialization and economic development. Directed credit was a basic instrument of economic policy. In Korea the government directed more than half of bank credit, directly owned all major banks, and controlled their interest rates. Government intervention was effective in Korea because it was predicted on close consultation with industry, was implemented within the context of a competitive business environment with a very strong export orientation, and was closely monitored and evaluated. Export orientation provided objective and observable criteria of success, while close monitoring and consultation permitted the re-allocation of directed and subsidized credits to successful firms and the flexible adaptation of credit policies to the evoloving needs of the Korean industry and economy. Korea relied extensively on foreign loans to supplement its initially meager domestic savings, but the government played an active part in authorizing and guaranteeing such foreign funds. An important aspect of Korean intervention was the use of effective risk sharing mechanisms whereby firms facing temporary difficulties received government-orchestrated support from the financial system. Despite the overall success of directed credit programs, their use was not cost free. Major costs of the programs were the underdevelopment of the financial system, the overborrowing of large firms, the concentration of economic power and the legacy of substantial amounts of nonperforming loans. The relative importance of credit policies has declined in recent years and their emphasis has been re-directed toward small firms in a belated attempt to rebalance the structure of Korean idustry and of the Korean economy more generally.

Publisher: World Bank

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