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 Mid- 1960's Late 1950's 1Samsung Hyundai 2Samho LGSamsungDaewooSamsung 3GaepungLGHyundaiDaewooSamsungDaewooLG 4Daehan HanjinLG SK 5LGGaepungSsangyong SKHanjin

Fight for Reform Chun Doo-hwan Democratization Market Liberalization Pace and Sequence? Freedom for labor union formation Wages increase 60% from acceleration of liberalization Open most protected sectors by 97-98

Why Overvalue Currency?

Politics 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

Balance of Payments

The Crisis

Recovery ( ) 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)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)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)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)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% ( )

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

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