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LEGEND OF THE FALL -

THE KOREAN CRISIS OF 1997

-Anand Dube

-Darshna Chande

-Mrinal Kaul

-Subrato Das

-Sudhish Warrier

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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

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POLICY MISTAKES Unstructured growth.

Unstructured debt.

Pressure Of USA.

High Interest and Exchange rate.

Labour Laws.

Lack of Political will.

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CRISIS IN SOUTH KOREA 1997 Financial crisis

y Credit rating downgraded

y Exchange rate of won

y

Stock markety Poor Structure of Lone

Economic crisis

y Economic growth rate and GNP per capita

y Unemployment rate

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THE BAILOUT $58 billion bailout by IMF

y Bridging finance to current account deficits which hadrose to $110 billion or 1/3rd of the GDP

y

Keeping inflation in check by restricting domesticdemands

Conditions laid down by IMF

y austere fiscal and financial policies

y introduction of a floating exchange rate system

y complete liberalization of the capital markety abolition of the import source diversification system

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IMF BAILOUT FINANCIAL SECTOR REFORMS Establishment of an independent central bank

Creation of consolidated supervisory body withjurisdiction 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 bydomestic firms

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IMF BAILOUT CHAEBOLS REFORMS Focus on their own specialties

Subject to stricter disclosure rules and financialmarket discipline

Ownership shared by public and accountable toshareholders

Have more flexible labor market

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IMFS STABILIZATION PACKAGE RAISE

INTEREST RATES Elevation of interest rate from pre-crisis rate of 12%

to 27% in December, 1997 and subsequently to30%

y

Induce the investors to keep their savings in domesticcurrency

y Attract foreign investors in hope of stabilizing Koreanwon

y Attract capital inflow, curtail domestic demand andreduce trade deficit in return.

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IMFS STABILIZATION PACKAGE WAS IT

SUCCESSFUL? Succeeded to certain extent in stabilizing currency

market by preventing capital outflow

Koreas 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 Koreas macroeconomy, triggered astagflation

Industrial output and Retail sales fell rapidly while pricescontinued to rise.

Consumer spending fell by 12%, investment fell by 40%and real GDP contracted by 5.3%

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ROLE OF GOVERNMENT IN ECONOMIC

REVIVAL Newly elected President Daejung Kim in 1998

began the task of leading the country out of the IMFtrusteeship

Went for Keynsian stance and formulated a newmacroeconomic policy to stimulate domesticdemand

Central bank was allowed to increase the moneysupply to lower interest rates

Swift and active role in financial-sector restructuring

Took a risk by assuming responsibility for a portionof the bank debts and used public funds to rescuefinancial institutions

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ROLE OF GOVERNMENT IN ECONOMIC

REVIVALAs chaebols played a vital role, government

prioritized the reform of industrial structure.

Pushed chaebols into mergers andassetswaps to

try to increase specialization and reap the benefitsof consolidation and economies of scale

Came up with alternative framework for a flexiblelabor market

Determined political will and consistency of policyhad a vital role to play in restoring investorconfidence.

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LESSONS LEARNED The process of liberalization should thus be gradual

and prudential, proceeding only as the domesticfinancial system is strengthened

Economic imperative of proper state governance inmarket reforms

Korean reform model has shown that less of thestate is needed in certain areas but more of it inothers

Shows the need to build institutions for complexdemocratic politics that can ensure fair competitionto all participants, since market reform cannot beachieved without the rule of law and support basedon democratic institutions

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