The Korean Crisis and the End of Late Development James Gray

Origin of the Crisis Major Factors Inflation Recession in world economy Appreciation of Korean Won

Financial Sector Foreign Exchange Management Act. (over reliance on foreign capital) Removed certain restrictions on asset and liability management of financial institutions. General public Rapid economic growth Increase in labor costs Government Unhealthy relationship with the private sector Opening of the short-term financial market

Financial Bailouts Several business conglomerates, whose survival had strong consequences on stability of the economy, were facing bankruptcy. The Korean Government believed the chaebol groups needed to stand on their own without any support.

Bankruptcy of Hanbo, Sammi, Jinro Government delayed in providing bailout to KIA Motors International credit rating agency’s downgrade of Korea

Foreign Investors and Creditors, including USA Bank and Japan Bank, lost confidence due to the currency crisis in south Asia South Korea to use its limited foreign currency Depleting its foreign reserve and forcing them to approach IMF

Major Loans The United States arranged 10 billion emergency loans to Seoul Total over 100 billion loans Loans of all types equaling 51% of Korea’s GNP

Korea’s Rebound Massive Trade Surplus Roll-over of Debts and Return of Foreign Capital Restructuring of Economy and Liberalization of Markets

Financial Reforms designed to strengthen legal infrastructure restructuring process of financial institutions, leading to dump all the non performing loans Capital account liberalization free floating exchange rate was adopted restrictions on M&A by foreigner was abolished Strengthen corporate governance of Financial Institution commercial institution with more risk were closed