end markets in Asia.
Following South Korea‟s admission to the OECD in 1996, weaknesses
in the economy began to be identified, but by East Asian standards the quality of credit,government intervention, and financial liberalization were not in critical condition. South
Korea was a case for reform, but not an immediate concern; while it had “massively invested
in the b
est available technology,” it simply had not developed “best managerial policies.”
There was little appetite for painful reforms in the country as well. As in most developingeconomies, the status quo remained legitimate and popular as long as it continued to produce
growth, and South Korea‟s model was remarkably efficient at doing just that. The financiershad “acted as development institutions,”
providing high levels of liquidity to
conglomerates. Foreign lenders had followed suit after South Ko
investment policies were liberalized, providing more capital to the rapidly-growing economy.And despite the economic busts in many surrounding countries beginning in July 1997, SouthKorea did not feel the heat until about December of that year.The extent of vulnerability in the South Korean economic structure was exposed onlyas a result of the external shock of regional recession. Throughout the early 1990s, SouthKorean producers had expanded dramatically into emerging markets, which purchased somesixty percent of exports.
When demand collapsed around Asia as a result of the spreadingcrisis, so too did the ability of the
to service the high level of short-term debt theyhad accumulated as credit had begun tightening between 1994 and 1997, by which timealmost half of corporate debt had maturities shorter than twelve months.
The conglomerateswere caught in a classic crisis; after financing decades of growth with easy credit, both hadstalled. Debt-service payments, on the other hand, had not. In early 1998, the crisis came to ahead, and the resulting capital flight from South Korea devastated the value of its currency,
the won. With the collapse of the currency, rates of return in South Korea plummeted, “the
declined and a self fulfilling prophecy was born.”
At this point, “South Koreafaced „temporary illiquidity rather than fundamental insolvency,‟”
but the tumbling wonthreatened to drastically increase the real debt burden faced by South Korean companies andpush them over the line into actual insolvency. After intense negotiations with Seoul as thecrisis mounted, the IMF responded with a currency-
based approach. It organized a “sharp rise
Charles P. Kindleberger and Robert Z. Aliber,
Manias, Panics and Crashes: A History of FinancialCrises, 5