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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 9: Corporate restructuring

Sung Wook Joh


Sung Wook Joh INTRODUCTION Without question, weaknesses in the corporate sector played a major role in the Korean crisis. The low rates of profitability characteristic of Korean corporations in the decade leading up to the crisis, and the financial problems of the country’s large conglomerates (or chaebols) in particular, are consistent with the argument that problems in the nonfinancial sector were what rendered Korea so susceptible to the contagion from abroad. A weak system of corporate governance had allowed sub-par rates of profitability to persist, uncorrected, for years. Six of the country’s 30 largest conglomerates had failed, their meager profits being insufficient to cover their debt servicing costs, even before the crisis broke out in Thailand and spread to the rest of the East Asian countries (Joh, 2001b). The failure of these large firms weakened the position of Korean financial institutions, saddling them with enormous loads of bad debt. Alarmed by these developments, foreign investors sold off their holdings of Korean equities, and foreign banks demanded repayment of the short-term loans they had extended to Korean financial institutions, bringing the crisis of November–December 1997 to a head. In this chapter, I describe the structural environment that allowed these deep-seated problems to develop. I then examine how Korea’s weak system of corporate governance, along with supportive government policies, allowed poorly performing firms to remain afloat for so long. Finally, I summarize the measures taken since the crisis to reform corporate governance and strengthen the...

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