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Chen, "Political economy of financial liberalization in emerging markets: A comparative study of South Korea and Taiwan in the 1990s," 2002

USC Dissertation in Economics.
August 24, 2009

Tsaubin Chen, Ph.D.

Abstract (Summary)
This research explains how diversity in domestic politics and liberalization policies differentiated the results of financial liberalization in South Korea and Taiwan in the 1990s. Thus far, there has been no consensus among economists and political scientists regarding the consequences of financial convergence to international markets or how emerging markets will manage these transitions. Most studies have analyzed these transitions and their results as consequences of market-driven forces or hegemonic policies. Assuming a similar international context, the theoretical and empirical focus of this comparative study is based on the view that each country has unique internal political and economic structures that differentiate its transition. Identifying linkages between liberalization and economic growth and crisis, this work finds that the influence of diverse domestic structures and financial policies may be as important as or even more important than international factors.

This study created a comprehensive framework of analysis combining both qualitative assessments and empirical econometric measurements to understand transitions. This analysis resulted in three major conclusions. First, South Korea and Taiwan experienced different patterns of transition during the 1990s. Second, South Korea's liberalization resulted in more influential effects on economic growth than in Taiwan, finding a fluctuating pattern of growth in South Korea compared to more gradual growth in Taiwan. Third, different patterns of corporate borrowing led to differences explain why Taiwan weathered the 1997-98 currency crisis more successfully than South Korea. These conclusions give rise to several policy implications for avoiding crisis. The sequence of introducing liberalizing reforms is vital; market-led liberalizations will not avoid financial crisis if competitive industrial, bank and political structures do not exist simultaneously. Most importantly, adequate prudential regulation and supervision must be implemented before liberalization in order to eliminate rent-seeking behaviors between banks and business conglomerates, common in emerging markets after liberalization. This research thus suggests a new model for examining processes of financial liberalization, finding that the internal structures of states can be analyzed to explain subsequent economic growth and crisis. This is information that can potentially be used for crisis avoidance.

Advisor: Dekle, Robert