Download 슬라이드 1 - Sogang

Source: Lim (2000)
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III. Financial Crisis of 1997
Growth Rate of GDP (1971 – 2006)
Bank of Korea
2
Exchange Rate (Won/Dollar)
Bank of Korea
3
The Financial Crisis of 1997
Foreign Debt Crisis
In 1997, Korea was fast accumulating foreign debts, mostly
foreign short-term loans to commercial and merchant banks
in Korea.
Questioning the ability of Korean banks to pay back these
loans, foreign banks declined to roll over the loans.
Lacking foreign reserves to pay off debts, Korea turned to IMF,
resulting in a rescue program amounting to $57 billion, the
largest in IMF’s history.
Foreign Exchange Crisis
Because of the dollar shortage and the speculative forces, the
Won/Dollar exchange rate skyrocketed from 900 to 1700
over several months.
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The Financial Crisis of 1997
Banking Crisis
For most banks, the amount of non-performing loans
exceeded equity, and was in a state of bankruptcy.
Left alone, bank runs would break out and paralyze the
economy.
The root cause of the crisis
Korean Model of Growth
– Risk partnership between government and business
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The root cause of the crisis
Korean Model of Growth
– Risk partnership between government and business
Government select target industries and select Chaebols to
develop these industries =>
Government has implicit responsibility to bail out Chaebols
if they fail.
=>
Moral hazard of underestimating the downside risks
arises.
Government subsidize Chaebols by providing loan
guarantees and low-interest rate loans
=>
Excessive investment
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Korean Model of Growth
– Mobilizing resources through state-controlled banks
State-controlled banks channel household deposits and
foreign loans to firms designated by the government.
 Banks do not develop the ability to assess and manage
risks in loan-making business
Interest rates are set by government.
Banks absorb losses from bail-out operations dictated by the
government.
=> Incompetent banking industry
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Delayed Reform
Lim (2000) pp. 42-55
Park assassinated in 1979.
Chun takes power by a military coup in 1980.
A sharp recession following the second oil shock,
political instability and the results of over-investment
in late 1970s =>
Korea on the verge of a major financial crisis
Chun adopt the stabilization package recommended by
IMF
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Tight monetary policy
Consolidating industries and chaebols
Reformatory ideas
Of Chun’s technocrats
Korea outgrew the Korean Model of Development.
The economy became too complicated to be understood and
controlled by the government.
The market and the private sector should lead.
– Liberalizing the banking industry
Privatizing commercial banks
Interest rates chosen by banks
 Ministry of Finance keeps the lever by retaining the power to select
bank presidents
From State-owed to semi-public.
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– Pro-competition policy
New Fair Trade Law
 Without splitting Chaebols or opening up trade,
limited impact on competition structure
Government tries to regulate the behavior of Chaebols.
Bureaucratic control of the government remains.
Political resistance of vested interestes
Chaebols and bureaucrats
Korea democratized in 1987
Chaebols form a new relationship with presidents and
politicians thorough (legal or illegal) campaign funds
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The Crisis of 1997: Causes and Developments
Cho (1999)
In terms of macroeconomics, the Korean economy was doing well.
Low inflation: 5%
Strong Growth: 8%
Current account deficit enlarged, but quickly receding.
Different from Latin American debt crises.
Many thought a Korean crisis is impossible.
Causes
Corporate overinvestment
Vulnerable financial structure
Banks mismatch of foreign assets and liabilities
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Corporate overinvestment
Investment surge in 1994-1996
Liberalized non-bank financial institutions.
Deregulation of entries into industries
Short-term debt increased.
High interest rates and wages
Interest rate liberalization.
Democratic labor movements
Terms of trade shock in 1996
 Profitability of firms sharply declined.
 Non-performing loans of banks increased.
Source: Cho (1999)
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Capital market opening and term mismatch
Korea became a member of OECD in 1996.
Capital market opening
stock market
short-term trade credits
allowed merchant banks to deal with foreign loans
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Cho (1999)
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Imprudent interventions in the foreign exchange markets
Upward pressure on Won/dollar exchange rate
Tried to sustain the value of Won by selling dollars.
Drained most foreign reserves.
Unwise reactions to the crisis
Tried to rescue the troubled conglomerates in the old fashioned way.
No persuasive plans for restructuring troubled banks
=> Failed to bring confidence to uneasy foreign investors.
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Imprudent lending and herd behavior of foreign lenders
High interest rates in industrializing countries
Low interest rates in advanced countries
Debtor – borrowed too much
Creditor – lent too much?
Crisis occurred in the summer of 1997 in Indonesia, Thailand and
Malaysia.
Contagion and herd behavior of international investors.
Sachs
Both debtors and creditors should be blamed.
Both have to share the costs of the crisis.
IMF should not act as an agent of the US.
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Adjustments under IMF
Macroeconomic adjustments
Tight monetary policy and high interest rates
Brings down the exchange rate.
Decreases investment and consumption and thereby decrease the
current account deficits.
Tight fiscal stance
Structural Reform
1.
2.
3.
Trade liberalization
Financial market opening
Corporate Restructing
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10 years after
Fast Recovery of GDP
Source: Burton and Zanello (2007)
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Corporate Restructuring
Source: Burton and Zanello (2007)
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Bank Restructuring
Source: Burton and Zanello (2007)
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Challenges ahead
Maintaining competitiveness in manufacturing
Consolidation of Chaebols
Spun off non-core business
Korean exports are highly concentrated on a small number of
products
Semiconductors, LCDs, Mobile Phones, Steel, Ships, Automobils
Catch-up of China and India
Sandwiched economy
Coping with open financial markets
Enhancing the competitive ness of financial sectors
Coping with volatile capital inflows and outflows
Containing bubbles in stock and housing markets
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Worsening Income Inequality
Source: Kyung-Joon Ryu (2007)
Gini
0.32
0.31
0.3
0.29
0.28
0.27
0.26
0.25
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
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