Sun Ho Choi, Soon Sam Kang Ki Seok Yang, Sang Jun Yeo

Overview Introduction Causes of the Crisis Policy Response Policy Lessons

I. Introduction Background (Until 1997) –After Korean war, Economic growth like miracle after 1960’s. –Korea’s Growth rate surpassed 7% –Inflation remained at moderate levels –Domestic saving increasingly financed the rapidly rising investment rate

II. Effects of the Crisis Recession and terms of trade deterioration Corporate Bankruptcy Banking Crisis Contagion from foreign currency crises Currency crisis

II. Effects of the Crisis  Recession and terms of trade deterioration GDP Q. Deterioration? A.The structure of Korean Economy Problem  Inventories up,  Demand down  Cause production cost

II. Effects of the Crisis Major Economic Indicators in Korea around GDP growth rate 1) (%) CPI (rate of change, %) Current account (bill. US$) Unemployment rate (%) Budget balance/GDP 2)(%)

II. Effects of the Crisis  Corporate Bankruptcy the chaebols (Korean big business groups) went bankrupt. the chaebols (Korean big business groups) went bankrupt. The portion of non-performing loans The portion of non-performing loans In total loans of banks rose In total loans of banks rose from 4.1 percent at the end of 1996 from 4.1 percent at the end of 1996 to 6.0 percent at the end of to 6.0 percent at the end of 1997.

II. Effects of the Crisis  Banking Crisis Under these circumstances, Under these circumstances, the Thailand Baht suddenly plummeted on July, 1997 the Thailand Baht suddenly plummeted on July, 1997 signaling the beginning of currency crises signaling the beginning of currency crises in South East Asian countries. => No longer loan from abroad

II. Effects of the Crisis  Currency crisis The nation's stock of foreign reservesThe nation's stock of foreign reserves was rapidly depleted Financial institutions failed to recoverFinancial institutions failed to recovercredit-worthiness. In consequence, the Korean government askedthe Korean government asked the International Monetary Fund for emergency credits. (IMF)

II. Effects of the Crisis  Check Point Korean Economy in 1997 OverinvestmentOverinvestment  Excessive competition, Expand Area.  More and more, low profit Maturity MismatchesMaturity Mismatches => No choice, firms rely on short term foreign debt. Lack of DisciplinesLack of Disciplines => Rapidly change but over control

II. Effects of the Crisis External shocks were weaker, but their effects were much stronger ExternalInternal Unstable international oil prices Turmoil in the international financial market World-wide economic recession Bad harvest Political and social unrest

III. Policy Response Methods molded after general IMF crisis resolution (Stand-by Agreement) –Macroeconomic stabilization policy: Restructuring policy –Microeconomic Structural adjustment Policy: Structural Adjustment Policy by two stages

III. Policy Response  Macroeconomic stabilization Goals –Restriction of domestic demand and expenditure- switching –Preventing capital inflows –Correct the balance of payment deficits Exchange rates were allowed to depreciate freely and reflect market forces fully Money market rates were raised sharply to control the inflationary impact of won depreciation

III. Policy Response  Microeconomic Structural Adjustment Goal –Resolve structural problems in each market –Establish the institutional Setting for a well Functioning market mechanism Two stages –First: Establishing basic institutions needed for smooth operation of a market economic system –Second: Improving the management and governance of firms and banks through their initiatives

III. Policy Response First, Institution three existing financial supervisory agencies into one agency  The Financial Supervision Commission  Expanded the function of Korea Deposit Insurance Corporation (KDIC).  Establishing Korea Asset Management Corporation (KAMCO) to dispose of non-performing loans.

III. Policy Response Amended Bankruptcy law provisions Eased M&A restrictions Strengthened disclosure requirements for accounting information Introduced measures to improve corporate governance Provided better monitoring and supervision of corporate or bank managers Devised measures to restrain over-borrowing by firms Government forced extremely troubled banks to exit the market Used public funds to buy non-performing loans Allowed main creditor banks lead the debt workout programs resolved delinquent firms

III. Policy Response Second, Improving management and governance Includes efforts to correct problems in the financial, enterprise, labor, and public service sectors. Addresses issues of regulating the undesirable behavior of economic agents, like moral hazards. –Adopting the global accounting standards –Strengthening the rule of law

IV. Policy Lesson 1)Problems intrinsic to the economic system should be cured fundamentally to prevent recurrence 2)Fixed or managed fixed exchange rates can be dangerous 3)Strengthen financial systems against external financial shocks 4)Deliberate approach on financial liberalization 5)Proper post-crisis resolution policies by a competent government is important