Asian Financial Crisis / South Korea

Newaglish

Hey, I'm writing a short report on South Korea's economy and am having trouble getting my head around the asian financial crisis. I think I've got the idea behind it, but I wonder could some check what I've written so far for this section? If there's something missing or plain wrong, I'd appreciate a heads up - thanks!!

The East Asian economic crisis was undoubtedly the most important economic event in the region for the period under consideration (Khor 1998). In the Korean economy, the past 15 years can be divided into two distinctive periods; the period of declining economic success prior to 1997, culminating in financial crisis and recession, and the ensuing recovery.

Despite fundamentally outstanding macroeconomic performance until 1990, a number of structural weaknesses had developed as a consequence of Korea’s interventionist and export-driven policy. Since the 1960s, the Korean government maintained economic growth by allocating capital among big conglomerates (chaebols) and small and medium-sized firms; a procedure carried out through government direction of finance using both commercial and special state-owned banks. This created moral hazard as banks and corporations became complacent, relying on the protection and assistance of the government (Kiser & Koo 2001 and Harvie & Lee 2005).

This problem stood at the core of a number of other urgent issues. Industrial, financial, banking, labour and trade reform and liberalisation were desperately needed. Non-performing loans were accruing to banks due to imprudent lending based on ‘political whims’. Trade remained restricted as the chaebols opposed any threat to their domination of domestic markets. In 1988, restrictions on union activity were relaxed, resulting in hostile industrial relations and rapidly increasing labour costs relative to productivity, which eroded profits. In 1993, capital market liberalisation led to excessive short-term borrowing from abroad, increasingly over-leveraged chaebols and an appreciation of the won (Harvie & Lee 2005).

During 1997, the fragility of the situation became apparent. A number of chaebols collapsed, causing further bad debt and tightening credit from banks, thus invoking further corporate difficulties and failures. In October, the won began to slide back against the dollar, representing a decline in confidence in the Korean currency. Pressure intensified on the banking and corporate sectors as payment of short-term loans denominated in US$ fell due, and as loans and capital were withdrawn owing to heightening fears among creditors and investors, particularly in view of problems elsewhere in South-East Asia (Harvie & Lee and Kiser & Koo 2001). This twin crisis of banking and currency disasters represents a major failure of the Korean economy; one of the foremost failures of recent economic history.