By Hwan Kang and Jeff Zwick
Twenty years ago, South Korea was enjoying its height as a roaring “Asian tiger” with record economic growth, led by manufactured exports, transforming a war-torn, poor country into a member of the rich nation’s club – the Organization of Economic Cooperation and Development (OECD). However, such confidence masked many underlying weaknesses that undermined the country from within to fall into what Koreans remember as the “IMF Foreign Currency Crisis.” These included a lack of vigilance on asset management of companies and banks, and the government’s failure in dealing with these problems. This domestic blind spot morphed into an external problem when such mistakes damaged the financial credibility of the country and foreign creditors suddenly pulled their money out of Korea. Large industrial Korean conglomerates or “chaebols” racked up short term foreign debts with cheap interest rates that the country was unable to pay off. It was only at that point that the Korean government officially called for help from the IMF.
South Korea received the help it needed in the form of a major rescue package from various sources totaling $55 billion, including $21 billion in loans that came from the IMF. With the loans came the hope for a financially stable region, which also brought about policy commitments that opened up more of the Korean economy to foreign investors and goods. However, increased unemployment resulting from layoffs and bankrupt companies would be the cost to the South Korean people with no guarantee of a stable economy in the future.
South Korea agreed to follow the painful program prescribed by the IMF as a condition of the receipt of the loan package that focused on restoring market confidence. According to an IMF report, the program comprised of restricting banks and chaebols, and allowing more commercial practices into various aspects of the country’s financial sector. More specific points included eliminating interest rate ceilings, deregulating exchange rates, stringent money management for the central bank, and improving the transparency and governance of the economic system. Experts considered these actions successful in that South Korea was able to quickly recover (in comparison to other nations similarly affected by the Asian financial crisis) and pay off the loans in a relatively short period of time. As a result of these tough reforms, South Korea is now one of the most financially trusted and open markets in Asia.
This crisis was also the point at which South Korea began to open up its relatively closed economy to international competition in both the financial and commercial sectors, a move to which South Korea now owes much of its success. The Korean government allowed foreign banks to freely invest and provide financial services under the guidance of the IMF. Such liberalization of the Korean economy increased the foreign shares in chaebols, which were previously dominated by Koreans, and became the prelude to many free trade agreements that South Korea has made with other countries since the early 2000’s.
Lee Kyu-sang, South Korea’s former minister of finance and economy (1998-1999) stated that the financial crisis was “a blessing in disguise.” While many share this view, there are also those who disagree that the 1997 IMF rescue package solved all of South Korea’s economic woes. Many South Koreans still feel the dire consequences of the IMF program. When the Kim Dae-jung administration decided to follow through with the program, adopting changes that many Koreans could hardly imagine, its policies resulted in much scrutiny and blame. Intensive restructuring the sale of major chaebols like Kia and Daewoo resulted in massive layoffs that increased the unemployment rate from 2.6 percent to 7 percent in just a year. It shattered the assurance of life-time employment and drove Koreans to prioritize jobs that offered stability and security over risk and reward, impeding domestic small businesses and entrepreneurship. A recent survey done by the Korea Development Institute reflects this sentiment. In addition to considering “the IMF crisis” as the worst economic situation South Korea has gone through in the last 50 years, more than 80 percent of the respondents believe that employment related issues had become the most pressing matter and still needed remedies, particularly in the area affecting “irregular” workers. Such workers are employed on a short-term contractual basis and paid less for similar work performed by “regular” workers who have more job security.
Today marks the 20-year anniversary of the decision by the IMF to assist Korea with its most challenging economic crisis since the Korean War. Twenty years later, South Korea has not only recovered from the crisis, but has become the world’s 14th largest economy, ahead of Spain, Canada, and Australia. In 1997, Korea held a mere $20.4 billion in foreign exchange reserves. Now those reserves have grown to $384.46 billion, placing South Korea as the 9th largest holder of foreign exchange reserves in the world. The country’s ratio of short-term foreign debt has dropped from 286.1 percent in 1997 to 30.8 percent in 2017. South Korea’s 1997 budget deficit of $10.28 billion has transformed to a surplus of $93.38 billion in 2017. Additionally, the country has secured currency swap agreements with several countries (most recently with Canada) and renewed its agreement with China, protecting it from a financial crisis in the future. Such heightened confidence in South Korea is most evident in its independent credit ratings, which mostly range around the high AA or Aa2 levels, according to Standard & Poor’s and Moody’s, respectively. It is especially significant in that the country borders a rogue nation with weapons of mass destruction and had the ratings of B+ or B- in the same indices after the IMF rescue.
Twenty years after the crisis, South Korea’s economy has enjoyed consistent economic growth and is still expanding at a predicted growth rate of over 3 percent this year according to the IMF. Considering the fact that Korea’s growth rate is higher than the average growth rate of other advanced countries, which is 2.2 percent, the outlook for the country does not look so grim. While the IMF package rescued Korea from the immediate crisis, which propelled it on a more stable course and openness to international competition, Korea is still dealing with lingering issues from the reform effort, particularly the dichotomy in its domestic labor market. The year 1997 will remain a monumental time at which the aforementioned changes began to take hold in the South Korean economy. Furthermore, the lessons learned from the crisis will be valuable for Korea should it ever start to fall into an economic depression in the future.
Hwan Kang is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Seoul National University in South Korea. Jeff Zwick has a Master’s degree in Asian Studies from the University of Utah and is currently an intern at the Korea Economic Institute of America. The views expressed here are the authors’ alone.
Photo from Park Keun Hyung’s photostream on flickr Creative Commons.