Korea: In Search of a New Compact

Un-Chan Chung, Professor at Seoul National University's School of Economics Back in 1997, the Asian financial crisis seemed like it was primarily a liquidity problem-at least in Korea, where the monetary authority had to struggle by the hour to prevent foreign exchange reserves from drying up, until Korea was saved by a huge loan from the IMF. If that's the correct diagnosis, then the affected countries may be said to have learned more than their share of lessons.

First, their foreign exchange reserves are now at much more comfortable levels than before the crisis. For example, since August 2001, when Korea finished paying back the IMF the money it had borrowed during the crisis, it has accumulated foreign exchange reserves of more than $240 billion-a dramatic improvement from a meager $7 billion in 1997. Second, the earlier problem of "overinvestment" in Asian countries no longer exists. Investment rates have fallen and net exports have climbed, helped by the drastic depreciation of some Asian currencies during the crisis. Third, the macroeconomic picture in Asia is now bright. Again using Korea as an example, nearly all macroeconomic indicators look quite robust: GDP growth rates fluctuate around 4-5 percent-not bad for a country whose GDP per capita is approaching $20,000 a year-inflation is below 2.5 percent, and the unemployment rate is below 4 percent.

However, despite what the macro figures imply, it is not very clear whether the Asians who went through the financial crisis are truly better off. In Korea, many people feel that their quality of life is worse now than it was before the crisis. Nor do the nice macroeconomic numbers automatically translate into happiness for ordinary people. This discrepancy raises the question of whether there has been a fundamental change in Korea's economic structure since the crisis. To determine that, we need to look at both the financial crisis itself and the events before and after as part of a structural problem instead of as a simple liquidity problem.

Looking behind the numbers

Before the financial crisis in Korea, the main players in the country's economy, including financial institutions, large conglomerates, and the government-also known as "Korea, Inc."-formed a kind of huge risk-sharing system. But it was a system that incorporated fatal problems. Korea's large conglomerates comprised numerous...