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An Evaluative Analysis of Korean Legislative Development in Relation with Economic growth

An Evaluative Analysis of Korean Legislative Development in Relation with Economic growth
Establishment of the Capital Market
Cho Hye Shin
Publication Year
capital market; financial policy; economic development; developing countries; the Securities and Exchange Act
Research Report
비교법제 연구, 12-21-2-1
Ⅰ. Background and Purpose
□ In Korea, the role played by the financial ministry in the course of the government-led economic development from the 1960s through the 1980s was called “government-led financial operation” or “policy financing.” Such expressions point to the close partnership between the government and private businesses. The government had such a powerful political and economic influence that it could close businesses outright or rejuvenate failing ones, so businesses earnestly cooperated with the government. The government helped businesses grow based on diligence and adventurism, while trying to control them in a way it found appropriate. Such a firm relationship between the government and businesses formed through financial policy.
□ As a country with an extremely limited capital base, Korea used such a method effectively, and the experience has formed the basis of the achievement made by the country. Thus, the method adopted by the country during its process of development is worth noting. The process of development in the country’s capital market and the relevant legal system, in which the government played a definite role, can provide developing countries with many lessons to learn from.
□ This study will check to see how the legal system regulating the capital market has changed, what institutions have been adopted, and how the policy objective of capital market development has been achieved in detail. It will be difficult to generalize the path of the country’s economic development in a few words, but efforts made in this study will help those interested get a better grasp through this model of the capital market-related legal system required for different stages of a national economy’s development. The results of this study will be a useful, basic material for developing countries wishing to benchmark Korea’s economic development with similar efforts.

Ⅱ. Main Contents
□ It can be said that the formative stage of Korea’s capital market-related legal system was from 1956, when the stock market was first opened, to 1976, when the law was revised wholly. The formative stage of the country’s capital market-related legal system can be divided into three periods, depending on the overall changes in the government’s policy concerning the capital market. The first period was the period in which the stock market first opened, the Securities and Exchange Act was enacted, and the law was revised to deal with the causes behind the stock market crisis that occurred. The second period was the period in which the government took a series of measures, such as the enactment of the Act on the Furtherance of Capital Market and the Act on Promotion of the Initial Public Offering, to promote the capital market. That period can be called the capital market promotion period. Finally, the third period was the period in which measures for protection and development of investors were taken in step with the growth of the capital (stock) market.
□ During the formative stage of the capital market-related legal system, the country achieved the desired goal of rapid growth of the capital market, but experienced a devastating failure due to various deficiencies in the system and the market participants’ immaturity. Following the enactment of the Securities and Exchange Act in January 1962, trade volume increased in the stock market and businesses started issuing stocks briskly. Four months later, the stock market faced a crisis and legislative steps were taken to get the stock market out of the difficulties it faced.
□ In Korea, the financial sector focused for a long time on the role of providing support for the growth of manufacturing, under the government’s regulation and influence, in connection with a need to attach importance to manufacturing and exports in order to overcome the limitations of the small domestic market in the course of economic development and earn foreign currencies because the country needed to import technologies and capital goods. The country’s capital market displayed the characteristics of an economic system that selected an export-oriented path of development.
□ At that time, the country’s capital market was under the strict control of the Ministry of Finance and thus the country could cope efficiently with difficulties that occurred in the course of the formation of the capital market, including the stock market crisis in 1962. In this respect, it can be said that the government-led development policy exerted its merits in the capital market as in other economic policies.

Ⅲ. Expected Effect
□ In connection with Korea’s experience of the formation and development of its capital market-related legal system, items that developing countries may want to benchmark in their effort to design and operate their capital market-related legal system are as follows:
□ First, in the case of a developing country’s capital market-related legal system, when it is in a formative stage, it is proper to impose regulations on the securities industry from an industrial perspective in addition to regulations on information disclosure and unfair trade designed for the protection of investors, as Korea did. Especially, it is necessary to operate a legal system regulating detailed behavioral norms in a way that will train financial market participants to adopt desirable market behaviors, as it is feared that market participants, such as securities business operators, stock exchanges, stock investors, and listed firms, are likely to experience trials and errors due to an insufficient understanding of the capital market or will try to seek private interest by taking advantage of loopholes in the system.
□ Second, it appears desirable to confine the scope of products traded in a financial market (i.e. the scope of products regulated under a capital market-related law) to stocks in the formative stage of a capital market-related legal system that does not yet have a variety of institutional apparatuses that can minimize volatility and risk, which are unavoidable features of a capital market. Transactions of products like derivatives, which entail complexity and risk, must be preceded by the formation of the relevant infrastructure, including human resources.
□ Third, following the stock market crisis in 1962, just a few months after the opening of the market and the enactment of the Securities and Exchange Act, the first step taken by the Korean government was to revamp regulations on the securities industry. The experience showed that it was highly likely that financial market participants would abuse securities business operators or the securities exchange where they had an insufficient understanding of the market and their market behavior remained immature.
□ Fourth, in a common law-model of a capital market-related legal system, which is regarded as a global standard, private enforcement tends to be emphasized. Such a method of enforcement appears to not be proper for developing a country’s capital market-related legal system when it remains in the formative stage. This is due to the lack of a proper judicial system for private enforcement and because people have low trust in the judiciary branch of the government. Thus, it is thought that it is better to leave the enforcement to regulatory agencies that can enforce the law on capital market powerfully and efficiently.
□ Finally, it is Korea’s capital market fostering policy (i.e. the policy of encouraging listing on the stock market) that was the most successful item in the country’s capital market-related legal system and it will serve as an important lesson for later starting countries. Measures encouraging businesses’ IPOs can be made on a diverse level ranging from inactive support to positive incentives.
Table Of Contents
Chapter 1. Foreword 11

Chapter 2. Economic Development and the Capital Market-related Legal System 15

Chapter 3. Korea’s Capital Market-related Legal System?Its Formative Stage and an Evaluation on It 25

Chapter 4. Lessons to be Learned from Korea’s Experience Concerning a Capital Market-related Legal System in the Formative Stage 79

Chapter 5. Conclusion 99

Reference 107
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