ABSTRACT
This chapter discusses the political economy of the credit allocation process in Korea and the advantages of alternative institutional arrangements for the allocation of credit. It examines the ability of Korean financial institutions to adjust to changes in the global competitive environment in finance. The chapter explains the theory of financial development and the criteria for a successful and efficient financial system. Financial regulation and especially interest rate ceilings have meant that the real rate of return to household savers in Korea has been low or at times negative–and hence substantially below the rate of growth of real income. The objective of institutional reform in the Korean financial system is to develop a set of banks and related financial institutions that will lead to a more efficient allocation of credit and to do so at a significantly lower cost.
