An earlier version of this article was presented at the 2005 KDI/KAEA Conference on Korea's Corporate Environment and Sustainable Development Strategy and at the Gyeongsang National University Institute of Social Sciences. We wish to thank Shigeyuki Abe, Charles Goodhart, Stephan Haggard, Joon-Ho Hahm, Sang Moon Hahm, Kyung Soo Kim, and two anonymous referees for their helpful comments and suggestions. Research for the study was partly funded by the Center for Korean Studies at the University of Hawaii and the Center for Research Initiative and Development at Doshisha University.Google Scholar

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8. In this article, we choose to use the term institutional interdependency instead of institutional complementarity. Institutional complementarity is a subset of institutional interdependency, which includes both a situation where a particular institution does not function effectively because of the presence of incompatible institutions and a situation where it does not function effectively because of the absence of complementary institutions. We should also note that Aoki defines institution as a “self-sustaining system of shared beliefs about a salient way in which the game is repeatedly played.” See Aoki, , Toward a Comparative Institutional Analysis , p. 10. His definition is much narrower than and differs from the commonly used and more general definition of institutions as humanly devised constraints on behavior, such as constitution, statutes, laws, custom, conventions, and social norms.Google Scholar

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21. World Bank, “Financial Sector Assessment Korea,” pp. 6–7 (emphasis in the original). The Securities and Futures Commission (SFC), which appears in this quotation, is a subcommittee under FSC and has five members. The FSC vice-chairman presides over SFC, which is responsible for oversight of securities and futures markets. In this article, we make no distinction between FSC and SFC since the former includes the latter organizationally.Google Scholar

22. Among such informal institutions are “strict order-obedience” and “exclusive cohesion,” which underlie the bureaucratic culture of government officials in general, and “deep-rooted elitism,” which is instilled in MOFE officialdom in particular. These three characteristics have their roots in Confucianism, which is oriented toward preserving order and hierarchy across people and across social institutions. For a discussion on these characteristics, see Kim, Hong-Bum, “Financial Stability and the Public Agencies Concerned: The Case for Supervisory Cooperation and Checks and Balances” (in Korean), Quarterly Economic Analysis (of the Institute for Monetary and Economic Research of the Bank of Korea) 10, no. 2 (2004): 58–107; also published (in English) in Economic Papers (of the Bank of Korea) 7, no. 2 (2004): 20–60.Google Scholar

23. This section draws heavily from Kim, Hong-Bum and Lee, Chung H., “Financial Reform and Supervisory Failure: A Critical Appraisal of Post-Crisis Reform in Korea,” Working Paper 2004–02, Korea Development Institute, Seoul, December 2004.Google Scholar

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25. As regards individual consumers, a credit defaulter is by definition a person who has loans in arrears in excess of KRW 300,000 (US $261 at the exchange rate of US $1 = KRW 1,150) for over three consecutive months. For the definition, see Ministry of Finance and Economy, “Credit Defaulters: Current Situations and the Direction of Policy Responses” (in Korean), news release, March 10, 2004. Individual consumers who were on the list of credit defaulters totaled over 3.7 million at the end of 2003. The default by 2.4 million (64.4 percent of these credit defaulters) was related to credit card uses. Compared with the situation at the end of 2002, the year 2003 saw a dramatic increase both in the number of credit defaulters (1.1 million) and in the number of credit card-related credit defaulters (0.9 million). The ratio of the latter to the former also increased from 56.7 percent to 64.4 percent in 2003. Since Korea had about 22.9 million economically active people at the end of 2003, we can surmise that roughly one person out of six was a credit defaulter and one out of nine or ten a credit card-related credit defaulter. For relevant statistics, see Ministry of Finance and Economy, “Credit Defaulters,” Bank of Korea, Monthly Bulletin (in Korean) 58, no. 8 (November 2004). The register system of credit defaulters was abolished on April 28, 2005, when the Act for the Use and Protection of Credit Information was revised. Now efforts are being made to build up the infrastructure for managing credit information, such as credit bureaus.Google Scholar

26. See Bank of Korea, Monthly Bulletin. An exchange rate of US $1 = KRW 1,150 is used for conversion throughout this article.Google Scholar

27. Financial Supervisory Service, “Policymakers to Push for New Policy Initiatives Aimed at Credit Card Businesses,” Weekly Newsletter 3, no. 19 (June 1, 2002).Google Scholar

28. Most of these practices became widely used by early 2001 and rapidly popularized by street solicitors who were under contract with credit card companies. At the end of 2000, there were 31,000 credit card solicitors nationwide, and they contributed to 58 percent of the total of 18.3 million credit cards newly issued during 2000. For details, see Financial Supervisory Service, “New Measures to Prevent Excess Competition in Solicitation for Credit-Card Membership and to Strengthen Financial Supervision” (in Korean), news release, February 27, 2001.Google Scholar

29. Hong points out that the absence of a credit rating system and appropriate bankruptcy laws is accountable for the problems relating to credit card companies in Korea. The United States experienced a similar expansion in credit card uses after deregulation but did not suffer as severe consequences as Korea did, since it had a well-developed credit rating system and bankruptcy laws. See Hong, Jong Hak, “A Comparative Study of Credit-Card Problems in Korea and the United States” (in Korean), mimeo, Department of Economics, Kyungwon University, 2004.Google Scholar

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31. Of the three deregulatory measures, the first two were based on the Credit-Specialized Financial Business Act initiated by MOFE and introduced in July 1997, four months before the financial crisis broke out in November 1997. The last measure was introduced by MOFE's revising the enforcement ordinances in April 1999. This revision provided MOFE with the regulatory basis for the ensuing revision in the enforcement rules in May 1999—that is, the removal of the monthly credit limit on cash advances. See Financial Supervisory Service, “Prudential Problems of Credit-Card Companies: Causes and Countermeasures” (in Korean), a report prepared by the Office of Credit-Specialized Financial Business Supervision and submitted to the Board of Audit and Inspection, December 2003.Google Scholar

32. In addition to acting as a booster of domestic demand, the tax break measures had a salutary effect of enhancing transparency in business transactions, thwarting tax evasions, and generating additional tax revenues. For this fact, see Board of Audit and Inspection, “Requisition of Measures on the Basis of the Audit Report on the Realities of Supervision of Financial Institutions” (in Korean), July 2004. According to an anonymous referee, this tax revenue aspect was a factor in MOFE's delay in heeding the potential problem of an increasing number of credit defaulters.Google Scholar

33. Of these five deregulatory measures, the first one was introduced by MOFE's revising the enforcement rules in May 1999. This single measure, among others, proved to have had explosive impacts on credit card holders' use of cash advances for years. Cash advances in 2002 amounted to about US $311 billion, approximately eleven times as large as that in 1998, which was about $28 billion. The second measure, a tax break offer, was introduced in August 1999, the third in January 2000, the fourth in October 2000, and the fifth in August 2001. For details, see Financial Supervisory Service, “Prudential Problems of Credit-Card Companies.” Google Scholar

34. Although no documentary evidence, such as a public document from MOFE, is available in support of this proposition, indirect evidence is readily available. An example is an article written by Byong Won Bahk, in his capacity as director of the Economic Policy Bureau of MOFE, for the JoongAng Ilbo and posted on the official website of MOFE (www.mofe.go.kr). Byong Won Bahk, “The Policy of Boosting Domestic Demand Was an Unavoidable Option That Was Chosen to Stimulate the Economy” (in Korean), JoongAng Ilbo , November 11, 2002. As the title clearly reveals, his writing attempts to justify MOFE's policy stance of boosting domestic demand, which was strongly maintained in 2001 and up until the end of the first half of 2002. In light of Bahk's own admission, together with the fact that all those deregulatory measures that had been introduced in the aftermath of the 1997 economic crisis were kept unblemished all along during that period, it is reasonable to conclude that those deregulatory measures, including credit card promotion policy measures, were actively promoted as a means for boosting domestic demand during that period. In addition, a recent audit report from the Board of Audit and Inspection (BAI) makes the point very clearly by beginning its general comments as follows: “In response to the occurrence of the 1997 economic crisis, the government removed, in its pursuit of the credit card promotion policy, part of the existing limits and regulations that related to credit card companies and credit card uses. The policy was intended to revive the economy through boosting domestic demand and to secure the tax base through enhancing transparency in commercial transactions.” See BAI, “The Audit Report on the Realities of Supervision of Financial Institutions” (in Korean), news release, July 16, 2004, p. 2. Finally, in his interview with Chosun Ilbo , Yoon, Jeung-Hyun, current FSC chairman since August 2004, commented that “prudential problems of credit card companies originated in the process of boosting private consumption that had been undertaken during the previous [Kim Dae Jung] administration.” See Chosun Ilbo, “Supervisory Powers of MOFE Will Be Transferred to FSC” (in Korean), an interview with Jeung-Hyun Yoon (Section B2), August 5, 2004.Google Scholar

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36. The Financial Policy Coordination Committee, an ad hoc organization without any legal basis, usually meets eight times a year to discuss financial and/or macroeconomic policies. For years the committee has allegedly been known as the only channel of communication between the public agencies concerned. The Financial Policy Coordination Committee served not as a channel for interagency cooperation and coordination but as a means for justifying MOFE's policy dominance over FSC/FSS and BOK. For this critical point of view, see Kim, , “Financial Stability and the Public Agencies Concerned.” Google Scholar

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45. The BOK Monetary Policy Committee (MPC) consists of seven members: BOK governor and vice-governor and five members recommended by five institutions and appointed by the president of the Republic of Korea. The five institutions are BOK, MOFE, FSC, the Korea Chamber of Commerce and Industry, and the Korea Federation of Banks, each recommending one prospective member. With its ability to influence most of those institutions, MOFE has a strong voice in the selection of the members of MPC.Google Scholar

46. The belated turnaround in policy as well as the abrupt implementation of strict measures led, according to an anonymous referee, to a hard landing. Better policies would have softened the impact of the credit card problem but would not have stopped it, which was a consequence of poor financial supervision.Google Scholar

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