1. Structural Causes of South Korea’s Economic Crisis

2. Crisis in South Korea 1997 n chaebol crisis (bankruptcies) n financial crisis – credit rating downgraded – exchange rate of won – stock market n economic crisis – economic growth rate & GNP per capita – unemployment rate

4. Chaebol’s advantages n Governance structures of chaebol – centralized control and management – lack of monitor or sanction by shareholders n Organizational advantages – mobilization of resources for new businesses – economy of scale through sharing resources – safety-net for member companies in crisis

5. Chaebol’s advantages n Park’s economic policy – promotion of export-oriented industries – promotion of heavy industry – suppression of labor movements – protection of domestic market – allocation of resources to chaebol n heyday of chaebol growth – mid-1960s to mid-1980s

6. “Octopus companies” n Chaebol’s diversification – unrelated new industries n strategic consideration – reduction of financial risk n environmental incentive – “industrial vacuum”

7. Environmental changes n Challenges since 1980s n political regime shifts n foreign pressure to open domestic market – financial and product market n rise in labor cost n competition from other Asian countries n chaebol became multinationals n industrial shift and competition

8. Democratization in ROK n 1987 election, former general Roh Tae Woo defeated opposition leaders Kim Dae Jung and Kim Young Sam n 1987, Declaration of Political Reforms n 1988 election, opposition parties won majority in National Assembly n Kim Young Sam won presidential election in 1992 (1st elected civilian president)

9. Regime shift n Democratization n deregulation – land use (1990) – import liberalization (1992) – open stock market to foreigners (1992) – open domestic capital market (1994) – deregulate loan financing in foreign market (1994)

10. Labor cost

11. Chaebol responses n Unrelated diversification in new industries – diversion of resources n from technological innovation – demand for domestic financial resources n accumulated bank loans – demand for foreign financial resources n opening of the domestic financial market n centralized control and management – new competitive environment

12. Negative consequences n Chaebol’s expansion – lack of transparency and accountability n domestic loans – government pressure on banks n foreign loans – government opened capital market yet controlled exchange rate

13. Regime shift: continued n President Kim Dae Jung (1998 - 2003) n free market – minimizing government intervention – deregulation

14. Former & current Presidents n 1997 presidential election: Kim Dae-Jung – 1st peaceful, democratic transition of power – Asian financial crises of 1997-8 n IMF branch in Seoul (1998-2003) – corruption scandals involved President Kim’s relatives and friends n 2002 presidential election: Roh Moo-Hyun – former lawyer & government minister

15. IMF conditionality n When a country borrows from the IMF, its government makes commitments on economic and financial policies n Most loans feature phased disbursements – prior actions n before approval & initial disbursement – performance criteria (quantitative & structural) n condition for agreed credit to be disbursed – program review

16. Restructure the financial sector n Troubled banks – bankrupt – sold to foreign banks – merged n Financial Supervisory Board – power to replace top managers of banks – resurrection of Park’s policies?

17. Chaebol reforms n Improve financial structure – reduce debt-capital ratio n sale of assets n foreign investors – prohibit cross-investment – prohibit internal trading – consolidated financial statements

18. Chaebol reforms n Transform governance structure n weaken the centralized control and management in chaebol – owner became formal CEO n full legal responsibilities – outside board members – legal right for minority shareholders n restrict unrelated diversification

19. Dilemmas for government n Government intervention to establish free market economy?