Credit Rationing Case Study

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CREDIT RATIONING
How the strategy was financed

In the 1960s and 1970s, bank credits were rationed depending on the performance of companies based on their exports.
In fact, in a country like South Korea, credit rationing served as one of the most important policies to carry out the strategy of promoting exports.
The government could enjoy the power to ration credit among entrepreneurs and determine the sector for investment funds.
Credit rationing were justified for the promotion of infant industries (for export). Entrepreneurs had to accept that the government was the fundamental unit of monopolistic control on the financial market. Only some chosen entrepreneurs were able to enjoy the capital at very low cost. These ones were able to became …show more content…

With this, the credit allocation system according to the export performance of the companies exceeded by far the adverse problems caused by financial repression.

In the Korean system of rationing credit in proportion to firm’s export performance, the prospective entrepreneurs were evaluated not by the financial system but by the natural selection process of cost-quality competition at international export markets (cf. King and Levine, 1993).
THE SUCCESS OF CHAEBOLS AND ITS CORRELATION BETWEEN THE FINANCIAL SYSTEM AND GOVERMENT
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This system increased the profitability of the activities that improved productivity and also improved the chance of successful innovation in export sectors. The system played a key role in economic activity and contributed to high growth.
Banks were essentially institutions to support exporters. Seeking export opportunities induced the innovations, and banks financed entrepreneurs in the beginning of innovative activity and the introduction of new products for the export

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