Government Intervention in Credit Markets in Japan and Korea: An Alternative Interpretation from the New Institutional Economics Perspective

Abstract

This paper discusses the effectiveness of credit policies during the early stage of economic development in Japan and Korea. We examinre the importance of institutional arrangements for managing credit policies in these two countries. We emphasize participatory government intervention, where credit policies could be viewed as part of an internal allocation mechanism: government, banks and large industrial firms may be said to have formed what we call a ''government-led internal organization(GLIO)''.

We examine the theoretical foundations of this view and discuss the implications for the efficiency of credit allocations. We argue that, in early economic development, such a participatory approach may have helped overcome pervasive market imperfections. But there were also significant dangers of entrenched interests and institutional inertia. In both countries, the relative importance of GLIO gradually diminished as competitive capital markets and large conglomerates(''privately-led internal organizations'' or PLIO) expanded.