The Korean Economy Beyond the Crisis
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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 6: The fiscal policy response to the crisis

Joosung Jun

Extract

6. The fiscal policy response to the crisis Joosung Jun INTRODUCTION Fiscal conservatism has long been a touchstone of Korean macroeconomic policy. From this point of view the 1997–98 crisis was a major shock. When the crisis hit, the International Monetary Fund called on Korea to maintain its traditional conservative fiscal stance. A tighter fiscal policy, it argued, would facilitate macroeconomic adjustment, allow for the financing of restructuring, and help to restore investor confidence. Once the magnitude of the crisis became known, however, fiscal conservatism was abandoned in favor of a more activist stance with the goal of boosting economic activity and strengthening the social safety net. In 1998, the budget deficit reached 4.2 percent of GDP, reflecting declining tax revenue and the expansion of spending during the post-crisis recession. At the time, doubts about the speed and vigor of recovery led the authorities to conclude that an expansionary fiscal policy would have to be maintained for some years. Since late 1998, however, Korea has staged an impressive comeback, with macroeconomic fundamentals improving markedly. With recovery well underway, in 2000 the fiscal authorities shifted toward medium-term consolidation with the goal of restoring fiscal balance by 2003. Their efforts were even more successful than they imagined, as by 2000 the country had already achieved a surplus of 1.3 percent of GDP. This chapter examines these developments and reflects on the appropriateness of the fiscal policy during and after the crisis. No discussion of the fiscal response...

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