Effects of Deregulation on the Productivity of Korean Banks

Abstract The Korean economy began a period of rapid economic growth in the early 1960s. Meanwhile, the Korean government nationalized the banking industry and began a policy of allocating resources in the economy through its control over the financial system. By the 1980s, the government decided that greater development of the financial system under private control was essential for continued economic growth. Banks were subsequently privatized, and some of the regulations on the financial system were lifted. We used Malmquist indexes of productivity change to investigate the effects of privatization and deregulation on the productivity of Korean banks over the period of privatization and deregulation. These indexes were also decomposed into changes in technology and efficiency. We found that Korean banks responded to privatization and deregulation by substantially altering their mix of inputs and outputs, yielding large changes in productivity.

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