Instead of allowing the market to g

Instead of allowing the market to guide the economy, over the past thirty years the Korean government has manipulated endogenous variables in order to facilitate rapid growth. For example, a steep rise in property prices caused by a surge in demand has not been uncommon in Korea over the past there decades. One key cause of the rise was a legal ceiling on interest rates in the face of recurrent high inflation. Inflation in general erodes the real value of any nominal assets, especially if there is a limit to the compensation one can demand for high inflation (l.e., inflation premium in nominal interest rates) and thus real assets such as land and buildings are quite desirable alternatives. The Korean government has typically adopted special regulatory measures to control prices (or set official prices) to curb rising land prices and also has tried to discourage speculation by appealing on moral and ethical grounds. Instead of fixing the endogenous variable – that is, prices – the government could have perhaps removed the ceiling on interest rates and more fundamentally should have adopted anti inflationary monetary policies. In another example of direct intervention, the government used to place the blame on the chaebols for peculiar behavioral patterns, characterized by over diversification, overconcentration of economic power, non-separation of ownership and management, and inheritance of managerial power. These are, however, endogenous variables. It was the interventionist mode of thinking that led to policies relying completely upon the direct regulation of the chaebols, endogenous behaviors, without addressing the causes of or institutional environment for such behaviors. As a result, chaebols policy was unsuccessful. As we will illustrate further in later chapters, government policy should concentrate on fixing exogenous variables such as institutions or an incentive structure.