Recent financial crises in Asia have renewed debates over the appropriate degree and scope of government intervention in financial markets. Governments in two countries affected by financial crises, Japan and South Korea, have historically implemented extensive controls over the financial system. Here, the author asks: What motivated government officials in these countries to implement financial restriction and to keep it so long? Why did Japan and South Korea apparently succeed unlike other countries? It is argued that East Asian officials designed financial policy in part to appease powerful social groups, like banks and industry, and to advance their own political goals. Their intervention produced better results than elsewhere because political and security imperatives to promote rapid industrialization and growth restricted the degree of inefficiency introduced into financial regulation. This study's findings thus highlight the importance of a nation's political institutions and security context in shaping incentives facing public officials.
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