What had happened to Korea, and why did the nation have to face the IMF crisis in 1997 all of a sudden? To see what the causes for the crisis were, analyses from six essays of scholars and experts in the field of economics will be introduced and compared. While they have similar and different views for the causes at the same time, their views can be grouped into two categories: internal factors and external factors. When the Korean currency crisis broke out, the IMF and many scholars focused the whole crisis on Korea’s internal problems. However, there are many other scholars who attribute the causes not only to internal but also to external problems. The experts who see the causes as internal problems think the crisis originated from internal factors of Korea such as policy mistakes, highly leveraged corporate sectors, and banking system. The external factors refer to the external shocks such as contagion effect from South-east financial crisis and appreciation of Japanese yen. Although all the causes for the crisis are closely related with each other, addressing the causes separately would give people better understanding of the context.
On Nov. 1997, Korea faced the IMF crisis, or also known as the financial crisis, which caused severe damage to the Korean economy. The new OECD member was reduced from being the world’s eleventh largest economy to an economy surviving on overnight loans from the international money markets. The won, the Korean currency, fell by more than 50 percent against the US dollar. Also, KOSPI (the Korea Composite Stock Price Index) fell by thirty percent, and the short-term interest rate shot up to forty percent per year. Consequently, on Dec. 1997, Korea called the IMF for rescue, owing $58.3 billion of financial aid. As shown in table 1 and 2 in the appendix 1, Korea had performed continual rapid GDP growth at the rate of 7.8 percent per year in average from 1960 to 1997.
Table of Contents
Introduction
I. Internal Factors
A. Korean Banks’ Structurally Unsound Method of Lending Money
B. The Government-Bank Relationship
C. A Highly Leveraged Corporate Sector
D. The Development of the High-Cost and Low-profit Economy
E. Macroeconomic Developments before the Crisis
F. Policy Mistakes
II. External Factors
A. An Unfriendly International Environment
B. Contagion Effects from Southeast Asia
C. The Appreciation of Japanese Yen
Conclusion
Objectives and Key Themes
This paper investigates the multifaceted origins of the 1997 South Korean financial crisis by analyzing and comparing the perspectives of various economic scholars. The primary research question centers on identifying whether the crisis was primarily a result of domestic structural failures or exogenous international shocks.
- The role of the banking system and government intervention in lending practices.
- Structural vulnerabilities within the highly leveraged corporate sector.
- Macroeconomic policies, including exchange rate management and policy errors.
- The impact of external shocks, specifically regional contagion and currency fluctuations.
Excerpt from the Book
A. Korean Banks’ Structurally Unsound Method of Lending Money
Kim, the author of The New Korea an Inside Look at South Korea’s Economic Rise [6], expresses the Korean banks’ method of lending money as, “THEY DON’T EVALUATE, THEY JUST LEND.” According to Kim, one must understand the scope of the economic growth that occurred in Korea for the previous thirty years in order to understand why such a method was dominant. Since the early 1960s, Korea had averaged between 6 and 8 percent annual growth. To support such rapid growth, the country had settled on a system of low-interest loans from banks to the industrial sector. The banks could give low-interest loans to companies on a permanent basis because of guarantees provided by the government. The government used loan guarantees to control and direct the manufacturing industry.
A few years before the crisis, primarily in 1995 and 1996, the government raised interest rates to avoid massive foreign capital inflow. At that time, Korea was in the process of joining the OECD (Organization for Economic Cooperation and Development). It was an honor and a grand symbol for the country that was once too poor to enter into such a group. The government wanted to achieve the honor without facing any problem. However, there was one problem. One of the requirements of entry into the OECD was to relax the rules against foreign capital inflows, meaning that the government had to allow foreign money to come into Korea in a massive form. The government had no choice but to allow foreign money to flow into Korea. But it didn’t want to go all the way, letting foreign investors to invest in Korean companies without any obstacle. Therefore, it figured out a way: it would reduce the regulations against short-term capital flows, but at the same time it would raise long-term interest rates to ensure that Korean banks could lend to Korean companies and still make a good profit.
Summary of Chapters
Introduction: Provides an overview of the 1997 Korean financial crisis and outlines the paper's goal to categorize the causes into internal and external factors.
I. Internal Factors: Examines domestic issues including lending practices, government-bank relations, corporate leverage, and policy failures.
II. External Factors: Discusses international influences such as trade environment, contagion from regional crises, and the appreciation of the Japanese yen.
Conclusion: Summarizes the interconnectedness of internal and external factors that led to the collapse of the Korean economy.
Keywords
IMF crisis, South Korea, financial crisis, internal factors, external factors, banking system, corporate leverage, policy mistakes, exchange rate, contagion effect, OECD, government guarantees, chaebol, economic growth, structural weakness
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines the causes of the 1997 IMF financial crisis in South Korea by analyzing various expert opinions and economic data.
How does the author categorize the causes of the crisis?
The causes are grouped into two distinct categories: internal factors, such as banking and corporate policy, and external factors, such as international market shocks.
What is the central goal of this study?
The goal is to provide a comprehensive understanding of why the Korean economy collapsed by addressing the different perspectives on both internal and external contributing elements.
Which scientific methodology is employed in this work?
The work utilizes a comparative analysis of six different academic essays and economic studies, supported by historical data and statistical tables.
What topics are covered in the main body of the text?
The body covers banking lending methods, government intervention, corporate debt-to-equity ratios, macroeconomic policy errors, and the impact of the Southeast Asian financial contagion.
Which keywords best characterize this research?
Key terms include IMF crisis, chaebol, financial contagion, policy mistakes, structural weakness, and the Korean banking system.
What role did government loan guarantees play in the crisis?
These guarantees led to reckless lending and borrowing practices, as banks did not evaluate creditworthiness and corporations expanded without considering market risks.
How did the Korean government's decision to join the OECD affect the crisis?
The requirement to relax regulations on foreign capital inflows allowed short-term capital to flood into Korea, which later created severe liquidity problems when foreign banks cut credit lines.
Why was the "strong won" policy considered a mistake?
By overvaluing the currency, the government harmed export competitiveness and depleted foreign reserves while attempting to maintain a fixed exchange rate during the economic downturn.
- Citar trabajo
- Juhyuk Park (Autor), 2011, The causes of the IMF crisis in South Korea. What Experts Say, Múnich, GRIN Verlag, https://www.grin.com/document/985466
