The Korean did three things with extreme precision that allowed them to recover from this “Asian Crisis” faster then many of their neighbors. These three things are: the injection of public funds, the Korea Asset Management Corporation’s (KAMCO) purchase of bad debts, and Financial Supervisory Commission (FSC) ability to enforce these and all other reforms. (5)
The government put 64 trillion won toward the rehabilitation of the Korean economy. The majority of this money came from the IMF. This sum translates to 15% of Korea’s GDP. It took only five moths for the IMF to respond with support. Then Korea went to work putting 33 trillion won for the purchase of bad debts by the Korea Asset Management Corporation (KAMCO), 13 trillion won for raising capital, and another 18 trillion won for expanding the operations of the Korea Deposit Insurance Corporation (KDIC). All of these funds were distributed by the end of 1998. The remainder of these funds was used in1999 to supplement the money already invested. (5)
The KAMCO aided reconstruction greatly. They started by purchasing bad debt from financial institutions. Between October 1998 and June 1999 KAMCO had purchased 44 trillion in bad debt. KAMACO has also issued bond in order to raise capital they plan to get ride of all bad debt with in the five year period of these bonds through various methods. By implementing these policies at such a fast rate Korea was able to pull them selves out of crisis much faster then expected.(5)
In April 1998 the Financial Supervisory Commission (FSC) was born. This organization was given power over the financial sector which was formally split between the Bank of Korea, the Ministry of Finance and Economy and the Security Exchange Commission. This was the first time that the Korean banking system was organized under one governing body. This aided in the implementation of the reforms of the IMF. (5)
Description
Banking Reform
After the mergers of the Commercial Bank of Korea and Hanil Bank, Kookmin Bank and Korea Long Term Credit Bank, Hana Bank and the Boram Bank was complete along with the introduction of foreign capital in the Korea Exchange Bank and the Kookmin Bank the Moody's Investor Service changed the outlook rankings of these nine commercial banks from "negative" to "stable. This shows much promise in the once corrupt Korean banking system. These reforms will help Korean banks to finally start posting positive profits for the first time in a long time. (5)
Chaebols
Description
Although there are many different opinions of why the Korea economy failed the majority of the theories cite the structural problems of the chaebol groups (A conglomerate of businesses, usually owned by a single family, especially in Korea (2)) as the main reason for economic failure. Since this structure failed restructuring was necessary. Korean businesses were narrow minded and slow to change what they have been doing all of there lives. In order to fix these problems taking a step back to alter the public’s perception to understand that change was needed for survival. (1)
After the Korean banks were up to speed with structural reforms the chaebols were still lagging behind. One example of the chaebols’ failure to restructure themselves can be seen in the Daewoo group financial crisis that occurred in July of 1999. The financial groups that had bought up their debts went into crisis in result launching them into crisis as well. The government had to bail them out. If they hadn’t it could have had a chain reaction of failure throughout the country. It is reformers hope that this crisis will jump start the chaebols into structural reform. (5)
The cheabols’ interaction among themselves is not the only possible problem. Currently, there is a strong relationship between the government, financial institutions and the cheabols. This is fine during a time of reconstruction however, once completed how will their roles change? This possible instability is a very big concern for economist everywhere. The FSC will have to play a large role in the near future to mediate the roles of these three groups. (5)
Due to the nature of the cheabols a repeat of the 1997 financial crisis is unlikely. However, the bankruptcy of one chaebol could cause the current recovering economy to fall, cripple the fine balance between the government, financial institutions and chaebols as well as brings the over all sentiment of financial insecurity in Korea. (5)
Impact on the United States
Description
There were very dramatic changes in Korean-US relations after the crisis. Reduced trade with Korea along with other Asian countries will lead the United States to a 50 billion dollar trade deficit. Also, the trade tension between American business and Korea business created by the Korean economic crisis may create an instability that leads to a severance of trade relations. (4)
Progress
The dishonored bill ratio has not fluctuated much since the beginning of 1999 which indicates that “vicious cycle - financial institutions burdened with increasing bad debts reluctant to grant loans, causing further increases in bad debts” has been broken.(5)
The Future of the Korean Economy
Dong-Sung Cho offers three possibilities for the future success of the Korean economy. One, Korea continues to increase exports which would in return increase the trade surplus. This would allow firms to repay their foreign debts quickly. Two, they can strengthen the competitiveness of the capital intensive industries such as steel, shipbuilding, automobile, electronics, semiconductor and petrochemical by lowering costs and streamlining their excess capacity. Three, they can invest in information intensive industries as well as technology based industries which will build a stronger base for industry leading to improved products. Overall, this will create a more successful Korean economy. (1)
Although the future looks bright there are still some shadows lingering that could prevent Korea from fully recovering. Banks still require 25 trillion won to get ride of bad debt completely. There are also problems with: the government giving foreign firms the right to run Korean business, the FSC’s ability to evaluate assets as well as other conflicts among government organizations and foreign firms. Basically the different parties are squabbling over minor details failing to see the big picture. (5)
