Korean financial crisis during 1997–1998 Causes and challenges

This paper analyzes the underlying causes of the Korean financial crisis during 1997–98 period. How the economic growth strategies adopted by Korean government have influenced the current-state financial turbulence is analyzed in a historical manner. Root causes of Chaebol problems are also investigated in relations to government policies and weakened financial sector. Further, the effectiveness of external remedy programs such as IMF bail-out package are critically assessed. Finally, the paper concludes with the observation that, despite the current crisis, the Korean economy still possesses strong fundamentals, therefore, the economic recovery is soon to be obtained with continuous reform efforts.     

Factors contributing to the financial crisis in Korea

Korea's economic development is a well documented fact. The globalization of the Korean economy brought with it a high rate of economic growth. The Korean economy began to experience a financial crisis from late 1997. This paper inquires into the causes that led to such a crisis. It shows that there were economic indicators foretelling the crisis. Among many factors causing the crisis, the current account deficit, the inadequate cash flows of corporations and the banks' weakening finances, and the small amount of international reserves, provided conditions for a successful speculative attack on the Korean won. The government guarantees led to over-investment and excessive borrowing. Thus, the self-fulfilling hypothesis of Flood and Garbers (1984) and Obstfeld (1986) and the hypothesis of Krugman (1998) explain the causes of the Korean crisis to a great extent. This paper addresses banks' performance and the weak financial condition of corporations and concludes that to get back on the path of stable economic growth, export diversification and productivity growth, together with a sound financial system, is necessary.     

Restructuring of financial institutions and the corporate sector in Korea

This paper explores causes of the Korean currency crisis which started in November 1997. This paper also presents restructuring proposals and introduces the progress made so far. The urgency for quick restructuring and the necessity of the injection of money from both the government and foreign investors are emphasized. Restructuring of financial and corporate sectors should be pursued simultaneously. In the financial sector, the restructuring of banks should take precedence over other financial institutions. The key task in terms of bank restructuring involves the resolution of bad loans, recapitalization and the expedited reorganization of nonviable banks. Corporate reform is also important. Banks should play a central role in corporate workouts, especially in lowering excessive corporate debt and triggering corporate restructuring based on core competence. Transparency of corporate management, internationally accepted accounting practices, fuller disclosure requirements and stronger monitoring by minority shareholders are prerequisites for effective market discipline. Reform of ownership and governance structure are also important in enhancing managerial accountability of corporates as well as financial institutions.     

Bank Indonesia and The Recent Crisis

This paper is a personal note describing the crisis as it unfolded while the writer was a key player in Indonesia's macroeconomic management. The crisis is seen as multi-faceted. It originated externally from a shock in the currency market that triggered a downward spiral from currency depreciation to fully-fledged crisis. The currency shock that hit the rupiah in July 1997 exposed in sequence the flaws embedded in the banking sector, the economic system, the social and the political system, flaws that had been obscured by long years of good economic performance. Through a complicated process of contagion and feedback effects—market disturbances, policy responses and market reactions—Indonesia deteriorated from a relatively well managed economy to the “worst case” among the Asian crisis economies. The paper discusses this process, the IMF's role, the bank closure issue, the currency board controversy and the author's dismissal as Governor of Bank Indonesia.     

A new proposal for the reunification of the two Koreas: Economic issues

We present an alternative five-step plan which not only supplements the deficiencies of the current official plans for reunification, but also incorporates recent developments, such as, joint membership of North and South Korea of the United Nations (1991), and mutual agreements on reconciliation, nonaggression and economic exchange and cooperation (1992). The plan starts with a preliminary step for the normalization of relations between the two Koreas, and then subsequently moves on to economic integration, social integration, political integration, and military integration. However, as the political confrontation in the Korean peninsula has already been well-researched elsewhere, We discuss economic issues which are likely to present themselves during the unification process. Economic issues, rather than the political ones, could prove to be of the greatest concern to a smooth reunification between the peninsula's long- divided neighbors.     

利益冲突与制度扭曲——论政府在经济发展和转型中的作用

本文在McGuire和Olson(1996)的基础上进一步讨论了政府在经济活动中的地位和作用.我们发现,即使是具有共容利益的政府,其与社会之间依然存在着利益冲突.因此,政府的存在总会造成一定的制度扭曲,使经济处于非最优效率状态.本文还研究了政府与社会之间的利益冲突在转型经济中的表现.研究表明,政府与社会之间的利益冲突会随着经济体制的改进而得到强化,从而使新制度受到更大的扭曲.另外,政府与社会之间的利益冲突会对经济体制的优化产生不同的影响,但最终都会妨碍制度变迁达至最优状态.本文的研究实际上指出了政治体制改革对经济发展和转型的重要意义.我们也指出,在转型经济中,政治体制改革的时机选择不当可能会导致结果事与愿违     

Asian Financial Crisis and the Evolution of Korean Banks Efficiency: A DEA Approach

Abstract

In the mid-1990s, the East Asian countries experienced severe financial crisis that were followed by deep economic downturns. A variety of methodologies have been used to understand the nature of the Asian financial crisis. However, the impact of the 1997 Asian financial crisis on the efficiency of the financial industry has yet to be critically examined. By employing the Data Envelopment Analysis (DEA) approach the present study attempts to examine for the first time the impact of the 1997 Asian financial crisis on the efficiency of the Korean banking sector. The study focuses on three major approaches, namely, intermediation, value added, and operating approaches. The results clearly bring forth the high degree of inefficiency in the Korean banking sector, particularly a year after the Asian financial crisis. We find that the Korean banking sector has consistently exhibit higher technical efficiency levels under value added approach, while technical efficiency seems to be lowest under intermediation approach.     

Causes for business failures: Understanding the 1997 Korean crisis

This paper explains why the Korean business sector is in such bad shape based on the hypothesis that it is partly due to bad management and partly due to bad systems and policies. Bad management of business firms, especially the large ones belonging to chaebols, was a crucial element in fermenting the crisis. This stems from the deeper problem of the lack of an effective corporate governance mechanism. There did not exist effective mechanisms with which inefficient managers could be punished. Thus, when large firms went on prolonged investment binges, nothing could have prevented them. The grave ill effects of financial controls long used by the government, were another crucial elements that instigated the current crisis. The policy, whose essence was to create economic rents through interest rate controls and allocate those rents to designated areas, had produced many ill effects. The policies, among others, made borrowers overly dependent on debts and lenders extremely burdened with non-recoverable loans, making both very vulnerable to bad shocks. If Korea can reform her government-dominated economic system toward a more market-dependent one, she will emerge from the current crisis much stronger.     

South Korea's economic reform and its aftermath

This paper analyzes the process of Korea's recovery from the 1997 financial crisis with several policy implications. The driving force behind the better‐than‐expected economic recovery was the reform measures introduced by the Korean government in four major areas such as the financial, corporate, labor and public sectors. Also, Korea's strong export performance helped by the booming U.S. economy provided a favorable external condition for recoveiy. Internally, surging investment in the IT and venture industries, which was deliberately fostered by the government, along with the revived consumption level, enabled the rapid recovery. However, as the U.S. economy slowed and the technology bubble burst in 2000, the Korean economy went through a mild recession in 2001. Based on the experiences of crisis and recovery, the implication of macroeconomic fundamentals is re‐examined. Even though the strong macroeconomic fundamentals were misleading in preventing the crisis, they later facilitated the Korean economy's recoveiy. As a result of various reform measures, the Korean economy as of today is in a different environment First, the low investment rate along with the decreased saving rate will marie the end of the high growth era. Second, the substantial deterioration of income distribution will be the major task to be tackled with in the future. Third, the Korean economy is now fully liberalized both in the commodity and capital markets with some side effects and merits. Fourth, the loan and deposit structure of the financial sector is significantly altered. Lastly, more fiscal burden is placed on the shoulders of the government due to the heavy debt service burden of public funds and the generous expansion of social welfare programs.     

The Korean stock market volatility during the currency crisis and the credit crisis

This paper studies the volatility of the Korean stock market during the Asian currency crisis of 1997–1998 and the global credit crisis of 2008–2009. We use a fad model with Markov switching heteroskedasticity, which was first proposed by Kim and Kim (1996). Using the monthly data from January 1980 to October 2009, we find that the volatility of the transitory component of the stock return, or fads, increased during the currency crisis, but did not rise much during the credit crisis. It implies that the stock price fluctuations were not driven by irrational sentiments during the recent global crisis as much as during the former crisis. However, when we consider the dollar value of the Korean stock index in order to estimate the volatility that foreign investors confront, we find that the volatility of the transitory component was raised during the credit crisis as well as during the currency crisis. That is, foreign investors experienced greater volatility than domestic investors in the recent financial market turmoil. This asymmetric volatility that domestic and foreign investors face is one of the characteristics of the credit crisis.For more detailed analysis, the same model was applied to the weekly data from January 2005 to October 2009 and provided the result that the data measured by won–dollar exchange rates were more increased than the raw data. It holds that foreign investors confronted much greater volatility than domestic investors while the stock volatility was relatively lower in the credit crisis state than in the currency crisis state.     

经济虚拟化与金融危机、美元危机

本文指出美国经济运行的特殊循环导致了美国经济的去工业化和虚拟化,虚拟经济和实体经济的背离才是次贷危机、美元危机的深层次根源;阐述了美国次贷金融危机与美元危机的区别,进而从目前次贷危机的救助措施、境外投机者力量以及美元最终支撑等方面分析了美元危机的必然性。     

The puzzle of migrant labour shortage and rural labour surplus in China

The paper examines the contentious issue of the extent of surplus labour that remains in China. China was an extreme example of a surplus labour economy, but the rapid economic growth during the period of economic reform requires a reassessment of whether the second stage of the Lewis model has been reached or is imminent. The literature is inconclusive. On the one hand, there are reports of migrant labour scarcity and rising migrant wages; on the other hand, estimates suggest that a considerable pool of relatively unskilled labour is still available in the rural sector. Yet the answer has far-reaching developmental and distributional implications. After reviewing the literature, the paper uses the 2002 and 2007 national household surveys of the Chinese Academy of Social Sciences to analyse and explain migrant wage behaviour, to predict the determinants of migration, and to examine the size and nature of the pool of potential rural–urban migrants. An attempt is also made to project the rural and urban labour force and migration forward to 2020, on the basis of the 2005 1% Population Survey. The paper concludes that for institutional reasons both phenomena are likely to coexist at present and for some time in the future.     

Competition policy in Indonesia: Conglomerates versus SMEs1

Since the currency crisis, Indonesia has undergone rapid economic and political changes. However, the IMF‐directed recovery program, such as decentralization, does not seem successful. Despite the improvised legal system, the implementation of the recovery program is very poor. Lack of consensus on the role of conglomerates and the direction of competition policy, has prevented Indonesia from recovery. Anti‐conglomerate sentiment of the post‐Suharto times has given rise to unbalanced competition law and inconsistency among related laws. Treatment of the banking sector including ownership is a critical factor in the recapitalization process. Due to the similarity between Indonesia and Korea, Korean experiences would help Indonesia to establish the principles on competition policy. The separation principle is strongly recommended for Indonesia at the current development stage, and it is urgent to establish a rule‐based, not a discretion‐based, economy. The problems of conglomerates should be resolved through comprehensive competition policies.     

An introduction to problems of economic development in the CMEA countries

Through the Asian financial crisis, many key international economic issues have come to the forefront the stability of the international financial system under the IMF, “Asian values”, the universal validity of the Asian Economic Development Model, China's leadership in the regional world economy, Japan's role in the region, and the immunity of Greater China from the current financial crisis. Currently, most Asian countries seem eager to redress structural problems involving the government sector, banking, and corporate governance. In the process of this full scale restructuring, Korea must reevaluate its economic relationship with Central Asia. This paper argues that Korean financial crisis stems basically from the system failure. Furthermore, since a small open economy carries with it intrinsic vulnerabilities, the government should be more careful in securing optimal foreign exchange, opening capital markets based on the economy's absorption capacity. In this respect, the banking industry should be run based on the profitability of capital. Once banking industries are distorted by the practice of government‐led policy loans, it is more difficult to correct those customized distortions. The banking industry should play a larger role as the “brain of the economy”, sensing abnormalities of the economy. Moreover, in today's increasingly interdependent global economic system, no single country can solve its problems without close coordination of its policy with the outside world. An early warning system to signal financial instability would help developing economies in modernizing and strengthening their domestic financial institutions and would also work as a supplement to the IMF standby fund. Also, human resource management has proven too important to be neglected. Central Asia could derive lessons from the above Asian “failure”, not the Asian “miracle”, to avoid inappropriate policies and to deepen its economic development.     

Export-led industrialisation and growth: Korea's economic miracle, 1962–1989

During 1962–1989, South Korea underwent a remarkable economic transformation from being poverty-ridden to attaining the status of newly industrialised nation. This transformation was achieved through the adoption of an outward-oriented, industry-led strategy. It was based, particularly during the 1970s, upon the development of large-scale industrial conglomerates and the attainment of economies of scale and technology to achieve international competitiveness. By the early 1980s, this strategy had resulted in major structural imbalances, a weakened financial sector, heavy concentration in domestic markets, and a repressed development of small and medium enterprises. By the end of the 1980s, despite attempts at economic reform, the structural and financial problems remained and became the country's undoing during the crisis of 1997–1998. This article reviews the question whether Korea's performance during this period can be described as an economic miracle. The empirical evidence is mixed and inconclusive, although the achievements of the Korean economy should not be underestimated.     

The expectations management approach to stabilization in Argentina during 1976–1982

The main goals of the economic authorities in Argentina during 1976–1982 were to open the economy to foreign trade and to reduce inflation. The stabilization plan relied first on the control of money and wages, later on a preannounced schedule of a declining future exchange rate—actions that were supposed to be accompanied by a fiscal policy to reduce the public sector deficit.The stabilization plan was abandoned in the first quarter of 1981 for two reasons: an important financial crisis during the second quarter of 1980, and a deterioration of fiscal discipline that could no longer assure coherence between the deficit and the preannouncement schedule. The paper also argues that the political situation in Argentina undermined the credibility of the reforms and particularly the stabilization attempts. With the abandonment of the stabilization schedule, new commercial and exchange rate measures were gradually introduced, reversing the policy of opening the economy to foreign trade. The financial reform was reversed in 1982 with the virtual nationalization of deposits.The experience of Argentina suggests that capital inflows responding to interest rate arbitrage play a fundamental role in the short run dynamics of real exchange rates. They can promote the adjustment, or they can precipitate a run on the foreign exchange market. The lesson is that a stabilization plan based on the preannouncement of future exchange rates is highly risky for an economy like Argentina's.     

金融危机前中国经济发展模式反思与后危机时代战略选择

文章通过对本次金融危机爆发前中国经济发展模式的反思,指出了困扰中国经济发展的长期问题并分析了其成因,认为在经济下滑趋势已得到基本遏制的后危机时代,应充分考虑短期策略与长期战略的结合,通过实施就业优先战略,加快民生领域改革,推进经济发展模式的转变。     

NTT SANDALWOOD: ROOTS OF DISASTER

For decades the government of Nusa Tenggara Timur (NTT) province has exploited the sandalwood sector, to the detriment of the growers of the trees. Severe depletion of the stock of sandalwood in the province has been the result. This paper documents NTT policies toward the sector, which it argues have been both inefficient and inequitable, and offers a detailed approach for reform. It also examines the political economy of these policies, and argues that the case of sandalwood provides an example of the dangers of decentralisation of economic authority in the absence of local democracy.     

Migration constraints and development: Hukou and capital accumulation in China

Rural–urban migration flows are a crucial corollary of economic development. The adverse or beneficial effects of internal migration, for sending as well as receiving areas, and the definition of optimal migration policies, have remained much discussed issues since the seminal works of Harris and Todaro (1970). This debate is especially acute in China where the “household registration system” (hukou) acts as a strong constraint on individual migration. This paper aims to assess the consequences of hukou through a simple model of a developing dual economy with overlapping generations. Contrary to existing studies focused on the contemporaneous allocation of economic resources, it deals with the dynamic consequences of migration flows and migration policies. It shows that, in fairly general circumstances, hukou-related migration constraints can actually hasten development, understood as the transfer of the labor force to the modern sector, driven by capital accumulation. The hukou system could thus be one of the causes of the extremely high Chinese saving rate and of the high pace of Chinese development. Insights from the model are confronted with stylized facts from the Chinese development, and theoretical results are especially consistent with the effects of the 2001 “towns and small cities” reform.     

INDONESIA'S ECONOMIC CRISIS: CONTAGION AND FUNDAMENTALS

The severe and unanticipated economic downturn in Indonesia mirrored the regional economic fallout following the 1997 financial crisis. Although it is likely that the crisis in neighboring countries had an adverse impact on Indonesia, the issue has so far received little attention. This paper examines whether contagion from the economic crisis in Thailand triggered the crisis in Indonesia. Evidence of such a contagion is revealed, and the contagion was possibly exacerbated by increasing imbalances in the Indonesian economy. The paper also examines the channels through which the economic difficulties of Thailand might have been transmitted to Indonesia. Investors’behavior, rather than real links, is identified as one important channel for the contagion.