Rebounding after Crisis: South Korea
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Case Code: ECON042 Case Length: 18 Pages Period: 2012-2013 Pub Date: 2013 Teaching Note: Not Available |
Price: Rs.400 Organization : - Industry : - Countries : Korea Themes: Opportunity in Crisis, Economic Reforms, Economic Crisis, Financial Crisis |
Abstract Case Intro 1 Excerpts
Excerpts
Background
Till the 1960s, Korea was mainly characterized by declining economic growth and rising unemployment. It was an agrarian economy, with 68.3% of its workforce depending on agriculture, forestry, and fishery for their livelihood and only 1.5% on manufacturing. Korea’s per capita income in 1961 was USD82 , which was lower than that of Haiti, Ethiopia, Peru, Honduras, and Yemen and almost 40% lower than India’s per capita income.
Beginning with General Park Chung-hee’s (Park) military coup in 1961, the country’s economy made a dramatic turnaround. In 1962, Park launched his first five-year plan and during those five years, Korea’s annual GNP growth averaged 8.3%, exceeding the planners' own forecasts. Park gave priority to exports, due to which Korea’s per capita income tripled by 1980. During the 34 years from 1962-1995, Korea transformed itself from an agrarian economy into an industrialized economy with the development of light, heavy, and high-tech industries.
In 1994, with a per capita income of US$8,260, Korea was closer to high income countries like Portugal (US$9,320) and Spain (US$13,440), when compared countries like India (US$320) and Ethiopia (US$ 100). By 1995, just a year before the financial crisis hit Korea, it had a per capita income of over US$10,000 and had emerged as the world’s eleventh largest trading nation . Korea’s real GDP during 1962-1995 advanced 8.7% per annum and its real per-capita GDP grew at 7% per annum during the same period.
However, behind Korea’s splendid transition, lay a very complex structure by which the economy was managed by the state. The state was guided by the belief that it should play an active role in the early stages of industrialization, rather than leaving the economy at the mercy of market-forces....
Origins Of The Crisis
In 1996, Korea’s current account deficit widened to 4.7% of its GDP from 1.7% in 1995 due to decreasing exports and increasing imports. The cumulative current account deficit from 1990-1996 amounted to USD48.7 billion, which was mainly financed by foreign capital. This increased the country’s net foreign debts. It was estimated that Korea’s external debts increased to a massive US$157.4 billion in 1996 from USD29.3 billion in 1989 (Refer Table I – Korea’s External Debts, Usable Gross Reserves, and Debt-Equity Ratios)....
Crony Capitalism
"Another factor which contributed to the 1997 financial crisis was the Chaebol system. Korea’s industrial policies adopted during 1962-1995, led to the creation of the Chaebol. According to analysts, the immediate cause of Korea’s financial crisis was the shortage of foreign reserves. The shortage arose due to government-backed low interest loans given to the Chaebols for their risky investments and expansion programs....."
Exhibits
Exhibit I: Korea’s External Debt, Usable Gross Reserves, and Debt-Equity Ratio (1994-2000)
Exhibit II: Top 20 Korean Chaebols: Size and Breadth
Exhibit III: Korea’s Major Financial Reforms after the 1997 Financial Crisis
Exhibit IV: Post-Crisis Financial Restructuring in Korea
Exhibit V: Post-Crisis Chaebol Restructuring in Korea
Exhibit VI: Korea’s Economic Performance After the 1997 Crisis (%)
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