LEGEND OF THE FALL -

THE KOREAN CRISIS OF 1997

-Anand Dube
-Darshna Chande
-Mrinal Kaul
-Subrato Das
-Sudhish Warrier
LEAD UP TO CRISIS
 Was one of the Fastest growing Economy
 Had a trade surplus from 1985 to 1990

 The Korean Based Companies were dominating the

world market.
 Had a interest rate of 12 % (7-8%)

 Had a per capita income of $10,000.

 S & P rating of A1
POLICY MISTAKES
 Unstructured growth.
 Unstructured debt.

 Pressure Of USA.

 High Interest and Exchange rate.

 Labour Laws.

 Lack of Political will.

CRISIS IN SOUTH KOREA 1997
 Financial crisis
 Creditrating downgraded
 Exchange rate of won
 Stock market
 Poor Structure of Lone

 Economic crisis
 Economicgrowth rate and GNP per capita
 Unemployment rate
THE BAILOUT
 $58 billion bailout by IMF
 Bridging finance to current account deficits which had rose to
$110 billion or 1/3rd of the GDP
 Keeping inflation in check by restricting domestic demands

 Conditions laid down by IMF

 austere fiscal and financial policies
 introduction of a floating exchange rate system
 complete liberalization of the capital market
 abolition of the import source diversification system
IMF BAILOUT – FINANCIAL SECTOR
REFORMS
 Establishment of an independent central bank
 Creation of consolidated supervisory body with jurisdiction
over all financial and corporate operations
 Firms report audited and consolidated financial statements
 Closing down or recapitalizing troubled financial institutions
 Elimination of government initiated loans
 Enhancement of transparency in banking transactions
 Removal of all restrictions on foreign borrowings by domestic
firms
IMF BAILOUT – CHAEBOLS REFORMS
 Focus on their own specialties
 Subject to stricter disclosure rules and financial market
discipline
 Ownership shared by public and accountable to
shareholders
 Have more flexible labor market
IMF’S STABILIZATION PACKAGE – RAISE
INTEREST RATES
 Elevation of interest rate from pre-crisis rate of 12% to
27% in December, 1997 and subsequently to 30%
 Induce the investors to keep their savings in domestic
currency
 Attract foreign investors in hope of stabilizing Korean won
 Attract capital inflow, curtail domestic demand and reduce
trade deficit in return.
IMF’S STABILIZATION PACKAGE – WAS
IT SUCCESSFUL?
 Succeeded to certain extent in stabilizing currency market by
preventing capital outflow
 Korea’s trade balance showed some improvements
 Social cost was high as it widened income gap between a few
rich and the remaining impoverished population
 Enriched domestic capitalist class and adversely affected rest
of the working population.
 Adverse impact on Korea’s macroeconomy, triggered a
stagflation
 Industrial output and Retail sales fell rapidly while prices
continued to rise.
 Consumer spending fell by 12%, investment fell by 40% and
real GDP contracted by 5.3%
ROLE OF GOVERNMENT IN ECONOMIC
REVIVAL
 Newly elected President Daejung Kim in 1998 began the
task of leading the country out of the IMF ‘trusteeship’
 Went for Keynsian stance and formulated a new
macroeconomic policy to stimulate domestic demand
 Central bank was allowed to increase the money supply
to lower interest rates
 Swift and active role in financial-sector restructuring
 Took a risk by assuming responsibility for a portion of
the bank debts and used public funds to rescue financial
institutions
ROLE OF GOVERNMENT IN ECONOMIC
REVIVAL
 As chaebols played a vital role, government prioritized
the reform of industrial structure.
 Pushed chaebols into mergers and asset swaps to try to
increase specialization and reap the benefits of
consolidation and economies of scale
 Came up with alternative framework for a flexible labor
market
 Determined political will and consistency of policy had a
vital role to play in restoring investor confidence.
LESSONS LEARNED
 The process of liberalization should thus be gradual and
prudential, proceeding only as the domestic financial
system is strengthened
 Economic imperative of proper state governance in
market reforms
 Korean reform model has shown that less of the state is
needed in certain areas but more of it in others
 Shows the need to build institutions for complex
democratic politics that can ensure fair competition to all
participants, since market reform cannot be achieved
without the rule of law and support based on democratic
institutions