The Korean economy did an important role in the remarkable economic growth, which was so called ¡°East Asia¡¯s miracle¡±. At the end of 1997, however, the Korean economy fell into a crisis of default and finally received IMF¡¯s relief aid. After that, Korea has been struggling not only to reform its monetary system but also to promote drastic reforms in its economic structure in order to improve the productivity of the Korean industry.
Given this context, understanding what truly caused the Korean economic crisis is very important. Without identifying and remedying the fundamental problems, nobody can be sure that Korea will not have the similar kind of economic crisis never again. So, we need to identify what caused the crisis in 1997 and what the Korean government has to do. Therefore, this paper will examine the root cause of Korea's economic crisis in 1997 and present solutions for the stable growth of the Korean economy in the future.
2. Causes of the Korean economic crisis
On November 21, 1997, the Korean government formally asked the International Monetary Fund for stand-by loans. With this request, the Korean government admitted its inability to meet international debt payments with its own means.
The followings are three popular views about the cause of the Korean economic crisis in 1997(Cho, 1999): First, the currency crisis in Southeast Asian countries mainly Thailand and Indonesia in the summer of 1997 made Korea vulnerable to the attacks of currency speculators. So, the currency speculators turned their attention to Korea after having devoured the Southeast Asian countries. Second, the root cause of the problem was the lack of competitiveness in the domestic financial sector; the commercial banks, merchant banks, leasing companies etc. The domestic financial institutions overexposed themselves to the junk bonds issued by Southeast Asian countries, Latin America and Russia, rather than supplying scarce credit to the domestic economy. Third, corporate business strategy focused on increasing market share and diversification rather than profitability and specialization. Business practices were based on excessive borrowing of foreign capital and poor management of that debt. This created debt-laden bloated business empires with little competitiveness.
However, Woo Jin Yang (2002), professor of Hanshin University in Korea, contended that roots of the Korea¡¯s economic crisis were in post-democratization. He pointed out that the introduction of political democracy after years of military rule was a concession to the student movement, labor movement, and other resistances that fought to! gether against the previous government regime. Therefore economic reforms lagged far behind the political ones. In Yang's view the real key issues that needed to be addressed were the "deepening conflicts of capital-labor relations, the aftermath of rapid economic development like environmental disaster, and challenges from outside like globalization." The government bureaucrats became more and more helpless and the chaebol were mesmerized by the prospect of unlimited growth in the old pattern. Most of these aimed at cutting Korea off from the outside world. Under their slogan of an "authentic national economy" the left of the 1970s and 1980s called for an economy that "was not to rely on foreign capital, resources! , raw materials, and market." The chaebol were denounced as compradors and the strategy of export-led production characterized as a sellout to Western imperialism. The problematic of nationalism held stubbornly in the mind of the people kept them from considering actual problems of the economy. Instead the active forces of the country drifted along with the economic successes of the 1990s and ignored the need to rationalize the chaebol, the need to reform the state and official sector, the need to heal the chasm (between workers and employers) that resulted from rapid modernization (Yang, 2002).
Peter Underwood (1998) in his article ¡°Korea¡¯s current economic crisis¡± tried to find out the root of the economic crisis from the Korea¡¯s unique historical origin and current environment. He claimed that Korea's economy had been on a steady growth path for the past 30 years. However, the economic miracle had generated structural contradictions, which were causing the Korean economic crisis. He maintained that in 1997 Korea also suffered from excessive debt, corporate bankruptcies (more than 10% of listed companies), Stock market slump (50% off the summer peak), currency devaluation (half the value of ! January 1997, down grading of credit ratings by major credit rating agencies causing inability to borrow on international capital markets.
As the above-mentioned researchers pointed out (Underwood 1998; Cho 1999; Yang 2002), the cause of the Korean economic crisis in 1997 was very complicated. In fact, Koreans have long been a very nationalistic people. They have struggled for hundreds of years for their independence from China and Japan. After the war, Koreans viewed the United States as an ideal model to emulate, and hoped to make their country such a westernized, democratic, and affluent na! tion.
In fact, the government in the decade before the crash was working to divest itself of control over the banking system and basic industries, and to break the chaebol, Korea's giant cartels, into smaller units. It had entered the 1980s with government ownership of not only the state bank but also of the commercial banks, which had been confiscated from the chaebol. During the 1980s the commercial banks were finally privatized, but they were also saddled with enormous debts from loans the government had insisted they make to the chaebol and this prevented any true banking independence until after the IMF intervention to resolve the crisis of 1997-98.
Therefore, I think that the ultimate cause of the economic crisis in Korea can be found in the failure of the political system that has undergone the process of democratization as many researchers believe(Ha 1998; Mo 1996; 1998; 2001; Moon 1998; Yang 2002). While Korea has struggled to adjust itself to the new democratic environment, the forces of globalization have shaken its fragile economic system. The rapid pace of technological innovation and the emergence of low- cost competitors made obsolete the model of Korean development that had served so well in the past(Yang 2002). Korea might have needed more time to learn to work with democracy, but the forces of globalization did n! ot wait for Koreans to sort out their differences under democracy (Jongryon Mo & Chung-in Moon, 1998).
3. Suggested Solutions
I don¡¯t think that the process of democratic transition and consolidation is inherently less favorable to Korean economic performance. Instead, I believe that the problem in Korea was not democracy, but the way in which it was practiced. If the previous government could have succeeded in ensuring transparency, openness, fair competition, and the rule of law as dictated by democratic reform mandates, unruly corporate expansion, corruption of banking practices, and some of the government failures such as ineffective monitoring, might well had been prevented(Mo, 1998). The economic crisis of Korea might be a powerful lesson for Korean society because democracy requires responsible behavior and respect for the rule of law. That may sometimes involve! compromise and the sacrifice of short-term for long-term gains. So, Korea paid the high price under the name of the Korean economic crisis.
Jongryn Mo (2001) argued that the political gridlock in Korea was responsible for the defeat of many economic reform efforts before the economic crisis. Successful and timely economic reforms would have made the Korean economy less vulnerable to the economic crisis. The persistence of political gridlock could be attributed to the immature or unconsolidated nature of Korean democracy, including weak democratic institutions and tradi! tional political values and practices
Therefore, if successful economic restructuring or reform to take place, a competent leader and an effective government should understand the nature of restructuring and the right sequence in its implementation. Because the success of restructuring and economic success would depend on minimizing the amount of government intervention (Cho, 1999), the new role of the government should be to make suggestions and guide the direction of the Korean economy into the 21st century. For successful economic restructuring, the companies should first reorganize their business focus through the sale or spinning off of marginal businesses. Then they should look at improving their financial structure, by securing stable funding sources, reducing debt, and increasing the operating cash flow. Chaebol groups, which the previous governments had histori! cally been so supportive, need to be changed (Cho, 1998). Peter (1998) also suggested that the financial industry, substitute debt for equity, change of government attitudes, close managerial and technology gap, and public attitudes must change.
The followings are suggested specific solutions for the Korean economic crisis (Peter, 1998):
¡¤ Genuine financial reform is the only vehicle for bringing about a recovery of Korea's economy. Transparency of transactions and all financial information is essential. Chaebol groups must prepare and publish consolidated financial statements that accurately reflect reality.
¡¤ The government must abandon Five Year Economic and Social Development Plans and allow the market to determine investments and direction of the economy.
¡¤ Bankruptcies must be permitted and assets sold at market prices.
¡¤ Costly bureaucratic procedures must be eliminated. The government must continue to liberalize its regulations, in particular, foreign investment restrictions. Foreign investment must be welcome and incentives created to attract foreign firms to infuse capital.
¡¤ Professional management must be developed, encouraged and rewarded eliminating nepotism and cronyism.
Two years after signing the international rescue package agreement with the IMF, the President of Korea declared at the International Conference on ¡°Economic Crisis and Restructuring in Korea¡± on Dec. 3, 1999 that the Korea¡¯s financial crisis was over although he could not rest in the sense of relief.
He contended that the fundamental cause of the crisis was that Korean banks and companies had been made weak and unsound by the absence of genuine democracy. The failure to firmly establish market rules was another reason. Thus, he declared the parallel development of democracy and market economy as its guiding philosophy.
As the President of Korea pointed out, the Korean economic crisis had political origins in that the Korean political system failed to undertake long-needed economic reforms. Many Koreans seem to be frustrated because of slow pace of financial, labor, and corporate reforms even after the IMF bailout. Although the Korean government continues to promote economic reforms to fulfill its commitments to the IMF, policy gridlock will return unless fundamental changes take place in the balance of power among stakeholders, the payoff structures of reform, and political culture (Mo, 2001).
Even though Korea has agreed to economic reform, it has a long way to go and will need to sustain the reform for the foreseeable future. The Korean government must accept reform as a condition of the IMF bailout(Underwood, 1998). For the stable growth of the Korean economy, the government must find new ways to reinvigorate the coordinating and regulatory mechanisms of previous governments without the negative features of the old system, such as corruption, nepotism and excessive bureaucratic rigidity.
Koreans must think through and put into action the lessons they have learned from the causes of the crisis and the ensuing pain and hardship. I agree with Peter (1998) in his opinion. Peter concluded in his article ¡°Korea¡¯s current economic crisis¡± that ¡°The Korean people are resilient, determined and obstinate. Korea has muddled through each crisis in the past. Even if the economy collapses, Korea declares a moratorium on paying back loans and becomes technically insolvent; Koreans will pick themselves up, shake off the dust and charge headlong into rebuilding the economy. The Koreans cannot be kept down and regardless of what happ! ens in 1998, the Koreans will be back, stronger, tougher and wiser than before¡±.
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