Impacts, Transmission and Recovery
KDI/EWC series on Economic Policy
Edited by Maurice Obstfeld, Dongchul Cho and Andrew Mason
Chapter 11: Structural Fundamentals of Korean Corporations: This Time Was Different
Kyung-Mook Lim INTRODUCTION The financial crisis of 2008 affected the world economy at the most farreaching level of any crisis since the Great Depression of the 1930s. At the beginning of the crisis, Korea was hit severely, owing in part to high exposure to outside demand, and the won depreciated deeply, reflecting pessimistic views about the Korean economy. Criticism arose in the popular media and from other commentators that Korea had not learned essential lessons from the financial crisis of 1997. In spite of the bleak initial outlook, the Korean economy recovered relatively well. Many factors enabled this robust recovery. Government action, such as an expansionary fiscal and monetary policy, was taken promptly and turned out to be very effective. The early recovery of developing countries including China created ample external demand. Moreover, the fundamentals such as financial soundness of financial institutions and corporations notably improved after the financial crisis in 1997. In particular, the large Korean corporate groups (chaebols in Korean), which had routinely pursued growth and market shares at the expense of profitability and shareholder’s value,1 experienced a full scale restructuring (financial and nonfinancial) and improved their corporate governance after 1997. These fundamental changes were mainly due to the law and regulation reform driven by the outbreak of the crisis and to the market monitoring mechanism that grew out of these policy reforms. The notoriously high debt–equity ratios declined significantly, and corporate liquidity (the cash holding ratios) increased. Thanks to these improved fundamentals, the Korean corporations...
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