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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


Fiscal policy was transformed by the crisis that erupted in 1997, as Korea’s long-standing fiscal conservativism gave way to a more activist approach in response to economic weakness and soaring unemployment. This section reviews major developments in this period. Shifts in the Fiscal Stance Korea has long pursued a conservative fiscal policy. Spending commitments have typically been limited to anticipated revenues. Consequently, budget deficits were not a major problem in the period leading up to the crisis. The consolidated central government budget had remained more or less in balance throughout the period 1990–97 (Figure 6.1).2 Because fiscal policy was not used as an instrument of demand management, the cyclically adjusted fiscal balance did not deviate much from the financial measure.3 The gap between the primary and conventional balances was slight because the public debt was small and interest payments accounted for only a small share of the budget. The government’s strong financial position reflected fiscal consolidation efforts undertaken in the 1980s. The government had run deficits in the 1970s, reflecting its active support for investment in the heavy and chemical industries and transfers to the agricultural sector. In the early 1980s it then 116 The Korean economy beyond the crisis 3 2 Share of GDP 1 0 –1 –2 –3 –4 –5 Financial balance Structural balance Primary balance 78 79 8081 828384 858687 888990 919293 949596 979899 00 Year Note: The structural balance is estimated according to IMF methodology. Source: Author’s calculation based on...

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