Download Korea

South Korea
A Toothless Tiger
Suzana Karim
And
Ryan Songerath
Historical Perspective
1950’s

Adopt Japanese Model


Zaibatsu in Japan
Chaebol in Korea

(chay bol)
The Chaebol’s

Family controlled



Market share over profits
Poor investments
High debt-to-equity ratios


300%-400%
Corruption
The Top Five Chaebol Over the Years
Rank
1
Late
1950's
Mid1960's
Samsung Samsung
1974
1983
1990
1995
2000
Samsung
Hyundai
Hyundai
Hyundai
Hyundai
2
Samho
Samho
LG
Samsung
Daewoo
Samsung Samsung
3
Gaepung
LG
Hyundai
Daewoo
Samsung
Daewoo
LG
4
Daehan
Daehan
Hanjin
LG
LG
LG
SK
5
LG
SK
Hanjin
Gaepung Ssangyong Ssangyong Ssangyong
Fight for Reform

Chun Doo-hwan 1980

1987 Democratization

Market Liberalization


Pace and Sequence?
Freedom for labor union formation


Wages increase 60% from 1986 - 89
1993 acceleration of liberalization

Open most protected sectors by 97-98
Why Overvalue Currency?
15000
10000
5000
Direct investment
0
-5000
-10000
Goods and services
Politics 96-97


Failed to push through reforms
Lame duck President

Son involved in scandal
Problems Begin

January 97 Hanbo steel Manufacturing
Co. collapses


Soon after Kia and several other mid-sized
Chaebol’s file for bankruptcy
August 97 won begins rapid
depreciation
2000 3/4
2000 1/4
1999 3/4
1999 1/4
1998 3/4
1998 1/4
1997 3/4
1997 1/4
1996 3/4
1996 1/4
1995 3/4
1995 1/4
1994 3/4
1994 1/4
1993 3/4
1993 1/4
1992 3/4
1992 1/4
1991 3/4
1991 1/4
1990 3/4
1990 1/4
Balance of Payments
120,000.00
100,000.00
80,000.00
60,000.00
40,000.00
Current account
Capital and financial account
20,000.00
Official account
0.00
-20,000.00
The Crisis
1800
1600
1400
1200
1000
800
600
400
200
0
United states($)
Japan(per 100 yen)
Hong kong(h.k.$)
Singapore(s.$)
Malaysia(ringgit)
China(yuan)
Recovery (1998-1999)

Main Objectives:




Stabilize currency market
Stop the outflows of capital
Increase foreign reserve
Contained the downward spiral in credit
market
Currency Market stabilization


IMF announced a bailout package of $58.4
billion(13% of Korean GDP) (Figure 2)
Government Intervention



Temporary agreement with private creditors to
maintain exposure
Voluntary rescheduling of short term debt- $24
billion of short term private debt turned into claims
of one to three year maturity.
Tight Monetary Policy (Figure 1)


Reduced Consumption and investment
Reduced demand for import and surplus in current
account-$50 billion
Credit Market Stabilization
Governments role as moderator in the
financial market (Table 1)
 Public funds to restructure private
institutions
Two major banks were nationalized
 Government has more say over their operation
(because it is providing fund)
 Forced banks to roll over loans to small firms
 Encouraged banks to provide new loans with govt.
guarantee

Capital Market Stabilization

Diversified fund resource (Figure 3)
 Issued commercial paper


In 1998, net commercial paper issues jumped
154 percent from the year before and outpaced
the decrease in bank loans
Revived equity market

Foreign ownership of Korean equity reached
76.6 trillion won in December 1999 and
increased to 87.7 trillion won by June 2000
Labor Market Improvements




Some layoffs to cut costs (8.6%
unemployment rate from around 2%)
Temporary workers instead of
permanent workers
Wage cuts
Increased productivity and large
decrease in unit labor costs of 20% (972000)
After Recovery

Some pre-crisis problems were
unresolved




Chaebols remained unprofitable
Government debt increased to 40% of
GDP
Nonperforming loans were 14% of all loans
Korea retained pegged exchange rate
Questions
And
Comments
30
20
10
0
GDP %∆
Inflation Rate
Private Consumtion %∆
-10
-20
-30
Back
Gross Fixed Capital Formation %∆
Back
01
10
07
04
01
10
07
04
01
10
07
04
01
10
07
04
01
10
07
04
01
10
07
04
01
Back
1990.
1990.
1991.
1992.
1993.
1993.
1994.
1995.
1996.
1996.
1997.
1998.
1999.
1999.
2000.
2001.
2002.
2002.
2003.
2004.
2005.
2005.
2006.
2007.
2008.
United states($) * Basic exchange rate
1800
1600
1400
1200
1000
800
600
United states($) * Basic
exchange rate
400
200
0
Back