Impact of U.S. Financial and Economic Distress on South Korea

Korea’s economy in 2008 was adversely impacted by high commodity prices, especially oil, and by financial and real shocks started by the collapse of housing prices in the United States and subsequent economic and financial distress that rapidly spread throughout much of the world. Commodity prices have declined, but the continuing economic and financial distress in the United States will continue to impact Korea. Korea’s exports have declined significantly in the last few months, the economy slowed and in 2008:4 gross domestic product declined by 3.4 percent, and government policymakers will face a number of macroeconomic and financial stability issues in the next few years. Nonetheless, Korea’s economy to date has absorbed the shocks without the degree of distress exhibited in late 1997 and 1998. Although Korea continues to face major long-run challenges, as outlined by the most recent OECD economic survey of Korea, Korea’s flexibility in dealing with the current distress illustrates how much progress has been achieved since 1997–98. Not only has the Korean economy absorbed the current shocks without intense distress, but the commitment toward continued reform exhibited by Korean authorities provides a foundation for dealing with the longer-run challenges. This cautiously optimistic view needs to be conditioned, however, by the fact the Korean economy is declining much faster than anticipated; and how Korea adapts to the economic and financial distress is dependent on factors outside of its control because of Korea’s heavy reliance on exports.