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The Korean Economy Beyond the Crisis

Edited by Duck-Koo Chung and Barry Eichengreen

Providing an integrated analysis of the event and its consequences, the chapters in the book consider the causes of the crisis, the response of the US government and International Monetary Fund, adjustments in the Korean monetary and fiscal policies, and the success of financial and corporate restructuring. The concluding chapters bring the story up-to-date, describing the aftermath of the crisis and assessing whether there has been sufficient reform to facilitate the country’s recovery and growth.
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Chapter 2: The Korean economy before and after the crisis

Un-Chan Chung


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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