The Government's Role in Japanese and Korean Credit Markets: A New Institutional Economic Perspective

This paper discusses the effectiveness of credit policies during the early stage of economic development in Japan and Korea. We examine 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 allocation. We argue that. in early economic development. such a participatory approach may have helped overcome pervasive market imperfections. But there were also significant dangers-problems 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 with economic growth.