The Informational Requirement on Financial Systems at Different Stages of Economic Development: The Case of South Korea

In this paper, I review the evolution and characteristics of South Korea’s financial system since the early 1960s. The South Korean experiences are then used to argue that the distribution of the knowledge about valuable businesses varies with the stage of economic development. This has implications for the design of financial system. In the early development stage when low labor cost is the main competitive advantage, it is easy for everyone to see what businesses will create value. A centralized financial system is not likely to significantly misallocate resources. Government-directed credit allocation can be justified in some cases. In the more advanced development stage when the labor cost advantage disappears and the knowledge about the technologically advanced products becomes widely dispersed, a financial system that promotes security trading is more likely to guide efficient resource allocation. * I am grateful to the comments from John Boyd, Andy Winton, and especially, Ross Levine. Xin Chen provided excellent research assistance.