Abstract

Taiwan, Japan, and Korea have financial systems far from the liberal type, with tight controls over interest rates, limited choice of financial instruments, limited fundability, controlled foreign financial transactions and a good guidance agency. The fact of high debt-equity ratios propels extensive government control over the financial system, which means that market signals must be supplemented by government signals as to which sectors are to receive priority lending. And the fact of high debt-equity ratios means that private business decision-makers are extremely sensitive to credit policy, which becomes a much more effective tool for steering resources into and out of sectors than in more liberal financial systems. By the same token, it also means that the government can build supportive social coalitions by using monetary controls, which facilitates implementation of industrial policy. So there do seem to be some advantages to financial rigidity which mainstream economics largely ignores.