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Was the IMF's Imposition of Economic Regime Change Justified? A Critique of the IMF's Economic and Political Role in Korea During and After the Crisis

  • Kang-Kook Lee
  • James Crotty

As late as October 1997 the IMF declared that the Korean economy was experiencing a temporary liquidity squeeze, not a solvency problem. Yet in December 1997 Deputy Managing Director Stanley Fischer declared that Korea suffered from a systemic “breakdown of economic relations” so complete that only radical economic restructuring could restore prosperity. The IMF attached what it called “extreme structural conditionality” to its loan agreements with Korea, demanding a complete and rapid transition from Korea’s traditional East Asian economic model to a globally integrated neoliberal model. We subject the IMF’s assertion that the allocative efficiency of the Korean economy had collapsed by 1997 to a number of empirical tests, including time series and cross-section analyses of capital productivity and corporate profitability, and firm and industry level econometric tests of the proposition that investment spending was excessive and misallocated in the pre-crisis period. This evidence does not support the IMF’s systemic breakdown claim. We conclude that the IMF’s imposition of “extreme structural conditionality” on Korea is best understood as an illegitimate and antidemocratic exercise of power designed to meet the needs of the IMF’s key constituents rather than those of the majority of Korea’s people.

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp77.

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Date of creation: 2004
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Handle: RePEc:uma:periwp:wp77
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  1. Ajit Singh, 1998. ""Asian Capitalism" and the Financial Crisis," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 1998-15, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  2. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers ysm123, Yale School of Management, revised 01 Mar 2001.
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  4. Claessens, Stijn & Djankov, Simeon & Xu, Lixin Colin, 2000. "Corporate Performance in the East Asian Financial Crisis," World Bank Research Observer, World Bank Group, vol. 15(1), pages 23-46, February.
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  7. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
  8. Kang-Kook Lee & James Crotty, 2001. "Economic Performance in Post-Crisis Korea: A Critical Perspective on Neo-Liberal Restructuring," Working Papers wp23, Political Economy Research Institute, University of Massachusetts at Amherst.
  9. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  10. Chang, Ha-Joon, 1998. "Korea: The misunderstood crisis," World Development, Elsevier, vol. 26(8), pages 1555-1561, August.
  11. Dieter Ernst, 1998. "Catching-Up, Crisis and Industrial Upgrading. Evolutionary Aspects of Technological Learning in Korea's Electronics Industry," DRUID Working Papers 98-16, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  12. Timmer, Marcel & Ark, Bart van, 2000. "Capital formation and productivity growth in South Korea and Taiwan: realising the catch-up potential in a world diminishing returns," CCSO Working Papers 200003, University of Groningen, CCSO Centre for Economic Research.
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