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Chung Myung-Chang (ed.): The Bank of Korea: A History of Fifty Years. Seoul: Bank of Korea, 2000. 301 pages.
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Reviewed by Bernhard Seliger
Korea University of Foreign Studies
Monetary policy and the role of the Bank of Korea (BOK) were among the most contested and hotly debated issues in the financial and economic crisis of Korea in 1997 and 1998. The problems that surfaced led to a complete institutional reform of monetary policy in Korea, which was one of the first actions to counter the crisis by the Kim Dae Jung administration, in close co-operation with the International Monetary Fund (IMF) on December, 31st, 1997. In the year 2000, when the Bank of Korea (BOK) commemorated its fiftieth anniversary, it not only looked back on its history of struggle and conflict with authoritarian governments in the past, but also on the recent crisis, one of the greatest challenges for the BOK. The Bank of Korea: A History of Fifty Years, edited by Chung Myung-Chang, director-general of the research department of the BOK, is therefore especially interesting and timely. An immediate caveat: since it is an official publication, it is not a critical history of the BOK; nonetheless, it reveals very well how this institution perceives itself. In six chapters the historical background of the foundation of the BOK, the historical development of the Bank of Korea Act (central bank law), organization and management and economic operations in the monetary and financial markets are discussed as well as the role of the BOK in Korea's economic development and outlook for the 21st century.
The history of modern central banking in Korea is closely related to the growing Japanese influence in Korea in the early 20th century. In 1909 the Japanese Resident General and the Korean Empire (Daehan Cheguk) signed an agreement on the establishment of a Korean Central Bank, which would take over the issue of banknotes and coins and the management of the National Treasury. Previously all this had been handled by Daiichi Bank, a private Japanese bank. But only two years later, after Korea became a Japanese colony, the Bank of Chosun was founded, which not only performed the tasks of a central bank, but also was an instrument of domination of the Korean peninsula, and later of Manchuria. After liberation from Japanese domination, the Bank of Chosun continued to act as a central bank during a period characterized by chronic high inflation and fiscal deficits. For three years, the Korean government discussed a new central bank law and in 1949 invited two US experts, Arthur I. Bloomfield and John P. Jensen of the Federal Reserve Bank of New York, to advise on the new law.
The outcome was a modern central bank law stipulating the creation of a new institution, independent from political pressure; the new Bank of Korea (BOK) came into being in 1950, shortly before the Korean War. The war (1950-1953) and the reconstruction period brought great challenges for the monetary and financial system; nonetheless conflicts over the independence of the BOK increased. The BOK tried to refuse to cover up financial scandals in the Rhee Syngman administration, but was disciplined by the dismissal of the BOK governor. Neither did the conflicts did end under the short democratic government of Chang Myong (1960-1961). Soon thereafter Park Chung-Hee became ruler after a military coup, and in 1962 the Bank of Korea Act was completely amended. The highest decision-making body, the Monetary Policy Committee, became dominated by government officials and was restricted from the formulation of monetary, credit and foreign exchange policy to the implementation of monetary and credit policies. The financial minister, as head of the Monetary Policy Committee, had a veto right for decisions on monetary policy. During the phase of high growth that began in the mid-1960s, the BOK was responsible for accomodating growth policy, to the detriment of price stability: from 1961 to 1991 the consumer price index rose at an annual average rate of 12.2 percent. In the transition to democracy in the late 1980s, the issue of central bank independence again came on the agenda, but was dropped because of opposition from the Ministry of Finance. At various times the regime dismissed governors of the central bank to resolve policy conflicts. Democratisation put even more pressure on politicians to do so, when they perceived re-election to be endangered by weak economic growth and tried to accelerate growth in the short run by soft monetary policy. The liberalisation of the capital and financial markets in Korea in the 1990s led again to a discussion of the status of the BOK. But it was only the financial crisis and the conditions of the IMF credits that overcame strong bureaucratic opposition: since 1998 the BOK has again been a legally independent central bank.
The first two chapters of The Bank of Korea: A History of Fifty Years describe in detail the emergence and changes in the Bank of Korea Act, followed by two equally detailed chapters on the organisation and management of the BOK and its operations. The amendments in the BOK act not only reflect the political conflicts of the times, but also are related to prevailing economic thought: the mere supportive role of monetary policy in times of high growth, neglecting price stability, reflects the strong position of government and the weak position of consumers. But this role also is in line with the prevailing economic thought on development economics, which assigned dominance to the government. The independent and strong central bank instituted after the crisis in 1997, on the other hand, not only reflects the end of the state-led development model, but also the prevailing economic thought of today, which favours largely independent agencies over government-controlled institutions, especially in the field of monetary policy. The book is a good starting point to trace these developments. The chapters on organisation and management (chapter 3) and on the operations of the BOK (chapter 4) reveal that the BOK has developed into a modern central bank with organisational features and using a scope of instruments similar to central banks in other OECD countries.
Chapter 5, entitled "Economic Development and the Bank of Korea," which relates the history of the BOK to the economic development of South Korea, is as long as the four previous chapters together. An interesting discrepancy, and one that clearly demonstrates how the BOK views itself. As the governor of the BOK, Chôn Chôl-Hwan, writes in his preface, "the Bank has endeavoured to help the Korean people shake off the vestiges of colonialism and recover from the disaster of war, and it has made every effort to lay the cornerstone of sustainable growth for the nation's process of economic development." This is not only a good description of how the BOK understood itself in the past, but today as well. Even if the BOK Act now stipulates in its first article that price stability should be the dominant goal of the BOK and enables the BOK to pursue this goal independently from the government, conflicts over monetary policy have not yet ended. Since 1998, numerous conflicts over monetary policy have broken out between the Ministry of Finance and the Economy (MOFE) and the BOK, and in March 2001 the BOK even published a report on violations of its independence by the government. The book's last chapter recognises the challenge to the BOK's independence and a outlook for the 21st century and stresses the importance of building a central bank with strong market credibility. It remains questionable if the BOK really can achieve all this, given the still strong growth-oriented bureaucracy of the ministries and the short-term orientation of politicians, neither group of which is interested in price stability to the detriment of growth.
As noted above, The Bank of Korea: A History of Fifty Years is an official publication and therefore not free from political declarations and apologetic tendencies. Nonetheless, it is a good starting point for understanding Korean monetary history during the last fifty years and also includes a compilation of interesting related statistical data and personnel lists as well as a translation of the Bank of Korea Act in the appendix. As such, it is a valuable addition to English language literature on the Korean economy.
Seliger, Bernhard 2002
Review of The Bank of Korea: A History of Fifty Years, ed. by Chung
Korean Studies Review_2002, no. 1
Electronic file: http://www.koreanstudies.com/ks/ksr/ksr02-01.htm
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