Korea's initial crisis responses appropriate, but structural reforms are key to long-term growth

• Author: Kenneth Kang/Anthony Richards
• Position: IMF Asia and Pacific Department
• Pages: 243-244

Page 243

Were Korea's policy responses to its 1997 crisis the most appropriate ones, given the circumstances? Will the crisis exert a longer-term impact on Korea's growth? A May 17-19 conference in Seoul, sponsored by the IMF and the Korea Institute for International Economic Policy (KIEP), examined these questions in the broad context of "Korean Crisis and Recovery."As KIEP President Kyung-Tae Lee noted in his opening remarks, the conference, organized by David Coe of the IMF and Se-Jik Kim of KIEP (on leave from the IMF), was designed to explore the lessons from the Korean crisis and evaluate the policies adopted by the government and supported by a three-year Stand-By Arrangement with the IMF. The conference brought together economists from inside and outside Korea, private market participants, Korean policymakers, and IMF and World Bank staff. Several of the participants were directly involved in designing and implementing the Korean program.

Initial crisis response

The conference's first two sessions touched on various themes concerning Korea's initial response to the outbreak of the crisis. Ajai Chopra of the IMF's Asian and Pacific Department, presenting a paper coauthored with several colleagues (Kenneth Kang,Meral Karasulu, Long Liang,Henry Ma, and Anthony Richards), reviewed the origins of the crisis and the basis for the Korean program. Chopra noted that Korea largely met the objectives of its IMF-supported program: macroeconomic stabilization, rapid recovery, significant reduction in external vulnerability, and creation of a basic framework for corporate and financial sector restructuring. But Korea's long-term growth, he suggested, will depend much upon further implementation of reforms in the corporate and financial sector and a stronger role for markets to drive the restructuring process.

In reviewing the lessons from Korea's experience, Chopra said that fundamental weaknesses in companies and banks-not public sector excesses or poor macroeconomic fundamentals-were the primary causes of the crisis. Thus, crisis prediction frameworks should focus on structural vulnerabilities and microeconomic performance in addition to macroeconomic factors.

How should Korea have set its interest rate policy amid a twin financial and currency crisis? Yoon Je Cho of Sogang University analyzed the country's dilemma, concluding that although the decision...