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Korea's Fading Economic Miracle 1990-97

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By the late 1980s Korea's interventionist and export-oriented development model had contributed to a number of serious structural weaknesses in the economy. Ongoing government involvement in the banking and corporate sectors, weak prudential supervision of financial institutions, and restricted financial market and corporate competition created moral hazard, as banks and corporates believed they would not be held accountable for their actions due to their close relationship with government. This resulted in financial sector risk mismanagement and highly leveraged growth of the chaebols. After 1988, when the new democratically elected civilian administration removed long-standing restrictions on union activity, rapid wage growth, in excess of productivity gains, eroded profitability. These structural weaknesses, and policy errors and mismanagement, made Korea increasingly vulnerable to external shocks during the 1990s. In mid 1995, a rapid depreciation of the Japanese yen and a world semi-conductor glut and price fall provided the trigger for a rapid slowdown in exports and industrial output, and an unprecedented wave of chaebol bankruptcies that undermined the solvency of financial institutions. Korea's long period of sustained economic growth, low inflation, strong investment and balanced budgets had lulled policy makers into complacency. They failed to act decisively to tackle the growing structural weaknesses. Korea's high exposure to short term foreign debt and loss of foreign exchange reserves through a vain and unsustainable attempt to defend the won further undermined foreign investor and creditor confidence. This paper discusses in some detail these developments and their contribution to the financial and economic crisis experienced by the country during 1997-98. It also identifies key lessons for countries contemplating similar rapid development, and key warning signs that need to be heeded to avoid similar happenings to that which occurred in Korea.

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  • Harvie, Charles & Lee, Hyun-Hoon, 2005. "Korea's Fading Economic Miracle 1990-97," Economics Working Papers wp05-09, School of Economics, University of Wollongong, NSW, Australia.
  • Handle: RePEc:uow:depec1:wp05-09
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    1. Won-Am Park, 1996. "Financial Liberalization: The Korean Experience," NBER Chapters,in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 247-276 National Bureau of Economic Research, Inc.
    2. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
    3. Chang, Ha-Joon & Park, Hong-Jae & Yoo, Chul Gyue, 1998. "Interpreting the Korean Crisis: Financial Liberalisation, Industrial Policy and Corporate Governance," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 735-746, November.
    4. Eduardo Borensztein & Jong-Wha Lee, 1999. "Credit Allocation and Financial Crisis in Korea," IMF Working Papers 99/20, International Monetary Fund.
    5. Harvie, Charles & Lee, Hyun-Hoon, 2003. "Export-Led Industrialisation and Growth - Korea's Economic Miracle 1962-89," Economics Working Papers wp03-01, School of Economics, University of Wollongong, NSW, Australia.
    6. Soon Cho, 1994. "Dynamics of Korean Economic Development, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 25.
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    Keywords

    South Korea; export-oriented development model; structural weaknesses; financial and economic crisis;

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