Silviase/jgov_v1.4_full_ann huggingface dataset:
financed by heavy external borrowing, which accumulated of external debt. Also heavy governmental intervention in trade, finance, and pricing impeded flexibility and competitiveness of the economy. The need for structural adjustment was recognized among the authorities, but it was difficult to implement during the period of faith in high growth (II Sakong 1993). The inaction resulted in excess capacity among the main industries, which made the Korean economy difficult to adjust in the 1980's.

After the second oil shock, the Korean economy faced extreme difficulties in 1979 and 1980, triggered by the assassination of President Park and the decline of agriculture production. The underlying problems were, heavy accumulation of external debt, and balance of payments problems caused by high oil prices and slow growth of exports. To cope with the deterioration of the current account balance, Korean government initiated stabilization and structural adjustment policies in April 1979, and accelerated them after the crisis due to the assassination. The economic reform program started in 1980 first focused on restoring the current account imbalance. This stabilization program can be evaluated as a very strong program. According to Dailami (1992), deterioration of current account balance by exogenous shock, including rise of oil price was 9.4% of GDP. However, the stabilization efforts recovered 7.3% of GDP, of which 4.2% was achieved by restricting the volume of imports. Devaluation of the Won rate by 17% in 1980, and changing to the managed floating exchange rate system contributed to restore the balance of payments, and these adjustments which prevented further deterioration of the economy.

The important feature of the macroeconomic policy in this period was the effort to contain inflation. Also, the policy mix was the stringent fiscal policy and rather easy monetary policy. After the devaluation in 1980, the exchange rate was kept overvalued to keep the inflationary pressure low.

The Korean economy started to recover in 1986, when the real GDP growth rate exceeded 12%. Favorable external conditions of low dollar exchange rate, low prices or dollar, and low levels of interest rates contributed the recovery, as well as the fast growth of the U.S. economy in the late 1980's. The most outstanding characteristics of the Korean economic development in the late 1980's, was conversion of the current account into a surplus in 1986, which continued until 1989. Furthermore, we should note that this fast economic growth was accompanied low inflation.

## (2) Characteristics of the Korean Financial Structure

The Korean financial structure has four segments; (1) official commercial banking institutions, (2) non-bank financial institutions, (3) unorganized financial institutions, and (4) governmental financial institutions, the relative dominance of which changed from time
to time.

Before the 1980's, financial policy was an important component of industrial policy, and monetary policy was merely the tool of macroeconomic policy. In the 1960's, the Korean government nationalized all commercial banks and initiated direct control of the financial system to accomplish this policy objective. The basic structure of the system was formulated in the 1970's to provide funds for investment in heavy industries whose growth the government was promoting. To maintain consistency with the industrial policy, the budget and financial sectors were under the sole administration of the Ministry of Finance. An interesting aspect is that whenever the government launched a new economic plan in the 1960's and 1970's, new governmental financial institutions were established and others were remodeled. Also financial markets were developed by the initiative of the authorities to contribute to economic growth. Therefore, strong government intervention and control, and the existence of unofficial financial markets were the basic characteristics of the Korean financial system.

Governmental intervention to keep the lending interest rates low affected the funding activities of banks. Accordingly, interest rates on the deposits had to be kept at low levels, and commercial banks consequently were not able to collect sufficient funds to meet the heavy demands. The repression of this financial system stimulated the development of an unofficial financial market, and commercial banks had to depend heavily on the credits provided by the Bank of Korea, the central bank.

The official banking sector was under strict control of the government. One unique aspect of the Korean system was that determination of the interest rates was not in the hands of the Bank of Korea, but was determined by the Ministry of Finance. This control generally kept lending rate under the market rate, creating excess demand for funds in the banking sector, and the government allocated the credits to the preferred sectors.

In the 1960's, the availability of funds from official sources was limited, and funds from unofficial financial market were an essential source for investment. In the mid-1960's, the government started to attract bank deposits by raising real interest rates, stimulating significant increase of time deposits in the late 1960's. But the government reversed the policy and again strengthened direct control accompanied by the low interest deposit rate in the 1970's. As a result, unofficial financial institutions proliferated again and the growth of the banking sector slowed down. Not until 1982 do we see financial liberalization and the real development of the commercial banking sector.

The restrictions on the official banking sector channeled funds to the unofficial financial market, attracted by its high interest rates. To the cope with heavy inflationary pressure, authorities tried to abolish the curb market and initiated control of the unofficial
financial markets. After the freeze of the curb market, a large share of the funds collected in the unofficial market shifted to non-banking institutions in the official market. But over-investment in heavy industries and inflationary pressures made it difficult for authorities to control unofficial financial markets completely. In the 1980's, the development of non-banks was promoted, and while unofficial financial markets shrank quickly as a result of a financial scandal in 1982, non-banks grew very rapidly. Regulations imposed on non-banks were not as strict as those on banks, which created a loophole in the monetary policy.

Another important characteristic of the Korean financial structure is the dominance of governmental financial institutions such as the Korean Development Bank. It has been pointed out that 70% of the total financial funds were under the control of the Ministry of Finance. This dominance of governmental financial institutions also hindered the functioning of the monetary policy.

## (3) Financial liberalization in 1980's $ ^{8} $

In the late 1970's, growth of the non-banking financial institutions was so rapid that the funds provided from these institutions exceeded the funds provided from the banking sector (Ito, K. 1991). Since non-banking financial institutions were under the legislation of the Ministry of Finance, not the Bank of Korea, the effectiveness of the monetary policy declined significantly in Korea.

Until the 1980's, Korean commercial banks were obliged to provide low interest finance to targeted industries. On the other hand, the Bank of Korea set ceilings on the interest rate for deposits in private banks (Euh and Amsden 1990), a typical example of financial repression. In 1982, the government officially abolished all preferential credits, although they persisted until 1988.

A basic feature of the Korean financial policy was control of the unofficial financial markets with simultaneous intervention in the official financial sector. Using this stratagem, the government was able to provide low interest rate credit to preferential sectors by credit rationing. Scarcity of funds in the banking system caused heavy dependence by firms on the curb market to procure sufficient funds for fixed investment requirements. Therefore, the basic objective of the regulation by the Korean authorities shifted to control the curb market. In 1972, when authorities froze the curb market and attempted to develop the corporate bond market, numerous investment companies were established and an attempt to regulate the
Figure 1-4 Ratio of M2/GNP (%) : Korea
unofficial market was initiated.

In the early 1980's, financial liberalization was initiated, an undertaking which finally achieved its goal in the late 1980's to early 1990's. One important point of the financial liberalization, was that it was part of the comprehensive adjustment policy of the Korean government to create money market instruments. In the 1970's, over investment caused inflationary pressure and tight monetary policy led to stringent bank credits. Heavy credit demand and shortage of bank credit stimulated development of the unofficial curb market. The Bank of Korea was not able to control the monetary aggregates because of the underdeveloped securities and money market, and only policy that monetary authority could implement to cope with the inflationary pressure was direct guidance of commercial bank lending. This reform introduced reestablishment of the commercial paper (CP) market and other short-term instruments. Following this liberalization, in 1984, the interest rates of bank deposits were liberalized. In 1989, the money market interest rates were basically liberalized (Sudo 1991).

When we look at the development of the financial sector by quantitative measurement, M1/GNP held steady at a level close to 10% during the 1970's and 1980's, which might indicate that monetary policy was tight (Figure 1-3). The ratio of M2/GNP grew very fast from the mid-1970's. After slight decline in the early 1980's, it reached the level of 40% at the beginning of the 1990's. This rather low level of the M2/GNP ratio was the product of the policy of the Korean authorities which encouraged the development of non-bank financial institutions as we have explained before (Figure 1-4). $ ^{9} $

### 1.4 INDONESIA

(1) Macroeconomic developments of the Indonesian economy $ ^{10} $

After the hike of oil prices in 1973, Indonesia adopted a high-growth policy supported by the favorable international economic environment. The real economic growth rate in the 1970's was almost 8%, nearly double the growth rate in of the 1960's. Although Indonesia benefited from another rise in oil prices during the second oil shock, the country's heavy dependence on the oil industry caused difficulties during the plummet of oil prices in the early 1980's. Anxiety about the possible exhaustion of oil resources was another concern.
of the government. $ ^{11} $

The Indonesian government initiated “import substitution” industrialization depending on imported capital goods and intermediate goods, financed by oil revenues and external borrowing. These industries were heavily protected from foreign competition. Foreign direct investment did not play an essential role in the industrialization process as in Thailand or Malaysia until late 1980's.

Macroeconomic management of Indonesia during the 1970's and 1980's can be evaluated as prudent. This can be considered an inheritance from two important episodes in the past, the first being the experience of high inflation at the end of the Sukarno administration caused by the large fiscal deficit, which prompted the government to adopt the “balanced budget principle.” A political commitment which prohibits total expenditures from exceeding total revenue, this rule limits capital expenditures within the surplus of the current budget and external assistance. $ ^{12} $ Second was the management of external debt which the Indonesian government learned from mismanagement of PERTAMINA in 1975, which may have triggered to the country’s debt crisis.

After the first oil shock, the boom caused by the rise of oil prices overheated the economy. The average rate of consumer price inflation was 17.6% in the 1970's, the highest among the four countries that we are studying, so containment of inflation became the major concern of the Indonesian government. However, real GNP accomplished a growth rate of almost 8%, double the level of the rate of growth in the 1960's.

Since 1978, production and export of oil has declined, and anxiety about the exhaustion of oil and becoming a net importer have concerned the Indonesian government.
The Indonesian government maintained a fixed exchange rate since 1971 to block the effects of international inflation on domestic inflation. Accompanied by domestic inflation, the real exchange rate was substantially overvalued and competitiveness was declining. Indonesia was able to maintain this policy because of increasing oil export earnings. The government decided to devalue the exchange rate in 1978 to promote non-oil exports, even during the rise of oil prices. Despite these efforts, after-effects of the second oil shock seriously impaired the Indonesian economy. At the beginning of the 1980's, the current account deficit expanded, it peaked at nearly 7% of GNP in 1982, and the real GNP growth rate declined to 2.2%, the lowest level since 1962.

To cope with the difficulties of this period, the Indonesian government introduced a comprehensive adjustment package comprised of fiscal and monetary measures, and a devaluation of the exchange rate. Tax reform was introduced to restore the decline of oil revenues, deregulation in the financial sector was initiated and the exchange rate was devalued by 33% in 1983. However, an oil glut and decline of oil prices starting in 1986 moved the Indonesian government to undertake further adjustment. These adjustment packages introduced: (1) devaluation of local currency by 45% in September 1986 to further promote non-oil exports; (2) deregulation and liberalization of foreign direct investment; (3) reduction of budget expenditures to correct the budget deficit.

We can characterize the Indonesian economy in the late 1980's as one of the most successful cases of structural adjustment. The country's adjustment policies during 1983 to 1986 were reduction of imports by quantitative restrictions, redefinition of priorities, and control of re-phasing investment projects. $ ^{13} $ The export of non-oil products boosted by an annual growth rate exceeding 20% in the period after 1986. $ ^{14} $ Even with these adjustments, the current account remained in deficit and external debt continued to grow rapidly. Indonesia was able to manage the debt service due to continuous commitment of concession
aid and increasing capital flow in the form of direct investment and portfolio investment. $ ^{15} $ The economic growth rate from 1986 to 1990 exceeded 6%, and even with some difficulties of macroeconomic management, the overall economic performance was positive. $ ^{16} $

## (2) Financial System of Indonesia

Strong control of Bank Indonesia (the central bank), in the form of credit rationing and interest rate control, was the most notable specialty of the finance and banking sector policy in Indonesia. Until the mid-1980's, Bank Indonesia not only acted as a monetary authority, but also as the largest lending institution. In 1982, Bank Indonesia's total assets exceeded the total assets of the five state commercial banks combined, and dominated financial activities in Indonesia. Even after rapid development of the banking sector due to liberalization in the late 1980's, Bank Indonesia played a significant role as a lender.

Until the liberalization in 1983, the major policy instrument of the Indonesian monetary authority was to impose a credit ceiling on lending activities of state-owned commercial banks. On the funding side, state enterprises were obliged since 1967 to deposit their funds to the state-owned commercial banks, and these deposits were guaranteed by the government. In addition, liquidity credits with preferential interest rates were provided by Bank Indonesia to state enterprises.

In 1974, Bank Indonesia introduced a “credit ceiling” on the lending activities of commercial banks, an important policy through the 1970's and the 1980's, was to control domestic credit. Before its adoption, direct lending from Bank Indonesia was an essential tool of the funding of the commercial banks, public enterprises and private firms. The selective credit ceiling imposed by Bank Indonesia disabled rediscount facility as a tool of monetary policy for macroeconomic adjustment. The target of this policy was to allocate
funds to the specific sectors which the government selected as targeted industries, which were rice and oil. Imposing credit ceilings on the lending activities might have been effective at containing increase of the money supply, however, credit rationing retarded the development of the financial market.

As of December 1982, the share of eight state banks including five state commercial banks exceeded 80% of the total assets of the entire banking sector comprised of 99 banks. As a result, private financial institutions remained very small. In 1982, total assets of private banks were only one eighth of that of Bank Indonesia. In addition, the government strictly prohibited new entry by of private institutions into the financial market.

(3) Financial Liberalization in the 1980's

Financial liberalization in the 1980's came in two segments. First, the deregulation of interest rates was initiated in June 1983, enabling a policy change from direct control by the central bank to indirect control through the financial markets. The second segment, announced in 1988, was the liberalization of establishment of new banks and the opening of new branches by foreign banks.

The background of this financial liberalization was change of the economic structure of the Indonesian economy. Due to the decline of oil prices and the increase of domestic consumption of petroleum products, the government was no longer able to depend on oil export revenues as the major source of economic development. The mobilization of domestic savings was a requisite for collecting funds to meet increasing investment demand. The government attempted to mobilize domestic capital by promotion of competition among financial institutions, and the resultant increase of domestic savings.

The financial reform of 1983 was one part of a comprehensive economic policy comprised of devaluation of the exchange rate, tax reform and budgetary reform. The reform moved to liberalize deposit and lending rates of state commercial banks; abolish the credit ceiling for commercial banks; and abolish subsidized lending of the state banks. As a result, the deposit rate in state commercial banks rose to the level of private banks, and the real interest rate turned from negative to positive. Because the interest rate on 24 months' maturity time deposits was not liberalized, most of the increase of time deposits was in short-term which made it difficult for financial institutions to collect long-term funds. The increase of funds was so rapid, and investment opportunities were lacking, so excess funds accumulated in the banking sector. Bank Indonesia faced difficulties absorbing the funds collected in the banking sector due to the lack of financial instruments.

In 1988, the second stage of financial liberalization was initiated, with the aim of introducing the principle of competition among financial institutions. The important policies
Figure 1-5 Ratio of M1/GNP (\%) : Indonesia

Figure 1-6 Ratio of M2/GNP (%) : Indonesia
of this reform were deregulation of establishment of domestic banks and opening of new branches which have been restricted since 1971. The liberalization enabled foreign banks to enter the market by opening new branches or establishing new joint-ventures. Foreign investors were allowed to hold up to 85% of the share capital of joint-ventures.

Changes in allocation of deposits were another feature of this liberalization. Formerly, state enterprises had been obliged to deposit their funds in state commercial banks, but after the liberalization, they were also allowed to deposit their funds in private banks. The liberalization limited the maximum amounts which public enterprises could deposit in state commercial banks to 50% of their total deposits. At the same time, the reserve requirement ratio of financial institutions was reduced from 15% to 2%. To absorb excess liquidity caused by the reduction of reserve requirements, Bank Indonesia issued Central Bank Bills (SBIs), and was able to absorb the liquidity equivalent to 80% of the reduced reserve requirements.

A remarkable effect of the financial liberalization was the increase of time deposits in financial institutions. Particularly, time deposits in private commercial banks increased rapidly, while the share of state banks declined. At the same time, M2/GNP increased remarkably, which further concentrated domestic funds for investment in the official banking system. Although, it is difficult to explain how the growth of M2 led directly to the increase of national or domestic savings and investments, in spite of the decline of oil exports, national investment did increase after the financial reform, which supported the further growth of Indonesia (Figure 1-5, Figure 1-6).

It has been pointed out that important objectives of the monetary and banking policy in Indonesia are long-term economic development and the maintenance of external balances (Sundarajan and Molho 1988). Since 1971, foreign exchange transactions have been more basically free from any restrictions and Indonesian monetary authorities have focused on avoiding capital flight. To accomplish these two objectives simultaneously, Indonesia's monetary policy has been different from that of other countries, which has made interpretation of the objectives and tools of that policy difficult. $ ^{17} $

### 1.5 Philippines