In what ways, and to what degree, has the financial system mattered, and what roles has it played, in the Japanese economy since about 1990, in the Korean economy since about 1980, and in the Chinese economy since its reform process began in 1978? These topics are taken up in this extract from How Finance is Shaping the Economies of China, Japan, and Korea. Ultimately, the fact of rapid catch-up growth in each country is the best evidence that financial intermediation has, somehow, been successful. Finance does matter.
Japan, Korea, and China provide outstanding examples of very successful catch-up economic development and growth, major financial development, and gradual financial liberalization of initially highly repressed financial systems. Our book, How Finance is Shaping the Economies of China, Japan, and Korea, provides an analysis of that financial development process, and how it has intertwined with the process of real economic growth in complex and nuanced, as well as obvious, ways. This essay extracts some of the more important points of the book.
Three general implications for financial development can be derived from the experiences of the three countries.
First, financial development improves a country’s resource allocation, but financial liberalization and increased financial intermediation do not necessarily result in a highly efficient allocation of financial resources. Japan’s ongoing “lost decade” illustrates this.