[KS] KSR 2002-01: _The Bank of Korea: A History of Fifty Years_, ed. by Chung Myung-Chang

Stephen Epstein Stephen.Epstein at vuw.ac.nz
Fri Feb 22 19:41:43 EST 2002

_The Bank of Korea: A History of Fifty Years_, ed. by Chung Myung-Chang.
Seoul: Bank of Korea. 2000. 301 pages.  No ISBN number available.

Reviewed by Bernhard Seliger
Hanguk 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
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, Ch™n Ch™l-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_, edd. by Chung
Myung-Chang (2000)
Korean Studies Review_ 2002, no. 1
Electronic file: http://www.koreaweb.ws/ks/ksr/ksr02-01.htm

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