ion, developing countries can still gain access to capital, and are tempted to do so while retaining a degree of leverage over their internal financial structures. Such a financial system has been characterized as a repressed one. "In a 'repressed' financial system, the government maintains artificially low interest rates. Because this induces an excess demand for credit, the government is drawn into the process of rationing financial resources among competing uses" (Haggard and Lee, 1993, p. 5).
"Repressed" financial systems violate the theory of market liberalization, but in a world awash in capital, such policies do not make foreign capital unavailable in practice. Indeed, particularly in the 1980s, the successful performance of East and Southeast Asian countries that followed such policies argued in their favor: the "Asian strategy" appeared to produce both more rapid national development and a better return on capital invested in those economies.
However, the "Asian strategy" was founded on some important hidden assumptions:
Advocates of intervention in financial markets implicitly assumed a competent, informed, and "strong" government whose motives were to maximize social welfare by offsetting and correcting market imperfections.
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