South Korea

1
South Korea

• A Toothless Tiger
• Suzana Karim
• And
• Ryan Songerath

2
Historical Perspective

• 1950s
• Adopt Japanese Model
• Zaibatsu in Japan
• Chaebol in Korea
• (chay bol)

3
The Chaebols

• Family controlled
• Market share over profits
• Poor investments
• High debt-to-equity ratios
• 300-400
• Corruption

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5
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

6
Why Overvalue Currency?
7
Politics 96-97

• Failed to push through reforms
• Lame duck President
• Son involved in scandal

8
Problems Begin

• January 97 Hanbo steel Manufacturing Co.
  collapses
  
• Soon after Kia and several other mid-sized
  Chaebols file for bankruptcy
  
• August 97 won begins rapid depreciation

9
Balance of Payments
10
The Crisis
11
Recovery (1998-1999)

• Main Objectives
• Stabilize currency market
• Stop the outflows of capital
• Increase foreign reserve
• Contained the downward spiral in credit market

12
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
  

13
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
  

14
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

15
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 (97-2000)
  

16
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

17

• Questions
• And
• Comments

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