Chapter 2: The Korean economy before and after the crisis
Un-Chan Chung INTRODUCTION The Korean economy has undergone many changes since the 1997 crisis. The closure of banks and other ﬁnancial institutions shattered the belief that ‘banks are forever.’ The ‘too big to fail’ doctrine has been at least partially discredited by the placement of large conglomerates like Kia and Daewoo under court-supervised reorganization. The economy has regained some stability, the country having paid back its IMF loan in full ahead of schedule while amassing some foreign $100 billion of reserves. Yet not everyone is optimistic about its future, reﬂecting doubts about the adequacy of the country’s restructuring program. This chapter aims to clarify the nature and historical context of the 1997 crisis. It argues that the crisis was rooted in the Korean economic system’s microeconomic and structural ﬂaws; in other words, it contends that it was more than a temporary liquidity crisis. It then reviews subsequent developments, focusing on progress made in restructuring the economy and laying out the reform agenda. THE ECONOMY BEFORE THE CRISIS From the 1960s through the mid-1990s, the Korean government pursued economic policies heavily oriented toward growth. This approach can be dubbed ‘centrally managed resource allocation’ or ‘structured competition.’ The government told individual ﬁrms what industries were open to them and used the banking system as an instrument of industrial policy. In addition to allowing the authorities to guide the allocation of funding, this approach freed ﬁrms from the pressures of competition and allowed them to concentrate on growth. The Korean economy was...
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