Foreign Exchange Market Liberalization Policies in Korea: Past Assessment and Future Options

Abstract

This paper assesses the policy mistakes during the process of the financial and exchange market liberalization in Korea and searches for the future options. In retrospect, the Korean government seemed to be only vaguely aware of the risk of the financial liberalization, because it put the financial liberalization plan in action cautiously. But believing that, it could still manage its economy in the increasingly integrated world, government stuck to the rigid exchange rate policies, and arbitrarily deregulated and regulated the inflow of the foreign capital. The mismanagement of economic policies is the real cause of the crisis, not the financial liberalization itself. Confronted with the crisis, government implemented the drastic liberalization measure in a very short period of time, adopting the free-floating exchange rate system and lifting the restrictions on the capital account transactions. But this is clearly not the permanent solution. In the world of financial globalization, Korea will become more and more vulnerable to the capital flows, and the financial crises will continue to occur. Against large capital movements, one strategy to the small country like Korea can rely on is to join the regional monetary bloc. When it come to the regional monetary cooperation, it seems that the target zone system with flexible emergency loan facility and regional lender of last resort is most desirable.