Asia's Crash, South Korea, and IMF

Having grown up during 90s in South Korea, I remember my parents promising me that they'd buy the new toy I desperately wanted when 'IMF is over'. As a kid, I vaguely understood that economy was adverse and IMF as some kind of an evil force which everyone hated. Reading Krugman's chapter on Asia's Crash, I realized how little I know about my country's experience during the time of hardship. Therefore, I decided to use this blog post as an opportunity to teach myself about Korea during the Asian economic crisis.


Basically, Kruman argues that the devaluation of Baht in Thailand initiated panic among foreign investors to pull out capital. The shock spread throughout the entire Asia (a phenomenon which economists call 'contagion') and reached as far as South Korea. While all the affected Asian countries faced severe devaluation, Korea actually held back for quite a long time; Korean won was depreciated only by 8% against the dollar, compared to Thai baht by 42% and Indonesian rupiah by 37%.1 However, its relative more highly valued currency put Korea in a competitive disadvantage in export.


Korea had to finally let go of Won's value by October. Interestingly however, it was actually not the depreciation that gained a momentum, but the series of bankruptcy that mainly contributed to the recession1. South Korea suffered from a crony capitalism. Just as in Thailand and Japan, banks in Korea lent too freely to even the riskiest investments.2 Their main customers were corporations called 'chaebols' 재벌. Chaebols refer to wealthy Korean families that own large corporate business and have formidable political connections. A string of bankruptcy that started with Hanbo Steel in January (which also caused the fall of Kia Group, the eight largest corporation in Korea at that time) led to the insolvency of several financial institutions.1. 


In December, South Korea finally agreed to receive a $57 billion support package from International Monetary Fund.3 This bail out package led to what came to be a life long trauma for many South Koreans (Hence the name 'IMF Crisis'). The severe austerity policies that IMF imposed as conditions to be met for additional loans caused major banks and industrial business to close, thus engendering a soaring unemployment rate. However, South Korea was enable to bounce back its economy quickly and therefore 'graduated early' from the IMF programs as many South Koreans say.


Fortunately, South Korea's economy recovered pretty quickly; by 1999, Won had stabilized, inflation slowed, and currency account was in surplus.5 Many economists have praise the South Korea's resilience as 'miracle'. Although there are still controversies regarding IMF's role, I believe that its stabilization of exchange rate and fiscal policy reform did contribute to a long-term growth. However, the nation's economic resilience would not have been possible without the astonishing degree of self-sacrifice among South Koreans. The nationwide "gold collection" campaign in which millions of citizens came out to donate their wedding rings, athletic medals, and other personal treasures, helped the nation sell more than 300kg of gold ingots to in international markets4. My parents were one of these generous donators. In Korea, family friends and relatives give small gold rings for a baby's first birthday. The gold rings traditionally symbolize a charm for the baby's longevity and life-long fortune. Like many families, my parents willingly gave up these rings so that my sister and I can live in a better future. Looking back, I now realize that my parents promised me something much more nobler than a toy: "ending the IMF Crisis".  

Sources 

http://web.stanford.edu/class/e297c/trade_environment/global/hkorea.html

http://fas.org/man/crs/crs-asia2.htm

http://www.nytimes.com/2011/01/07/world/asia/07seoul.html?_r=0

http://news.bbc.co.uk/2/hi/world/analysis/47496.stm

http://graduateinstitute.ch/files/live/sites/iheid/files/sites/political_science/shared/political_science/1849/southkorea&imf.pdf