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--></style><title>[KS] KSR 2004-06: _Korean Crisis and Recovery_, by
Dav</title></head><body>
<div><font color="#000000">_Korean Crisis and Recovery_, by David T.
Coe and Kim Se-Jik (eds), 2002. Seoul: International Monetary Fund and
Korea Institute for International Economic Policy. 531 pages.
(ISBN 1-589-06068-7).</font></div>
<div><font color="#000000"><br></font></div>
<div><font color="#000000">reviewed by Bernhard Seliger<br>
Hanns Seidel Stiftung<br>
bjseliger@yahoo.de</font></div>
<div><font color="#000000"><br>
<br>
When the International Monetary Fund (IMF) and South Korea concluded
the largest IMF rescue package ever in early December 1997, with an
overall volume of US$ 57 billion, it came as a shock to the Koreans,
who just that year had entered the OECD, the club of highly developed
nations. Only a few years earlier South Korea had been the most
prominent showcase for the "East Asian miracle" promoted by
the World Bank and were for several decades world leaders in economic
growth. While the causes of the economic and financial crisis of 1997
and 1998 were manifold and not in the least related to the decade-old
economic structures of the country, the policies of the IMF soon came
to be regarded very critically not only by the Korean population, but
also by many Korean economists. The rise of the interest rate, in
particular, was seen as a reason for the grave recession South Korea
faced in 1998, when its economy shrank by almost six percent. (The
overnight call rate, the most important short-term interest rate,
increased from 12 percent in early December 1997 to 32 percent by the
26th of the month). Indeed, the situation became popularly known as
the "IMF" crisis. When the program goals of the IMF changed
five times between January 1998 and February 1999, the adjustments
were at best seen as a sign for a policy failure of the IMF, and, at
worst, as part of a conspiracy to bring down the formerly successful
Korean economy. <br>
<br>
<x-tab> </x-tab>However, as much as the situation drastically
worsened in 1997 and 1998, the following two years, 1999 and 2000 saw
an equally impressive macro-economic comeback for the Korean economy,
with record growth rates, low inflation, greatly improved unemployment
data and record inflows of foreign investment. So, when in May
2001, four years after the outbreak of the economic and financial
crisis, the International Monetary Fund and the Korea Institute for
International Economic Policy (KIEP) jointly organized a conference in
Seoul to look back at the lessons of the economic and financial
crisis, they also could look back at a recovery at breath-taking
speed. Hence, the title "Korean Crisis and Recovery" for a
2002 book that collects the papers of this conference seems indeed
appropriate.<br>
<br>
<x-tab> </x-tab>The objective of
the collection of articles is to look back at what lessons can be
drawn from the Korean crisis and recovery, by inviting Korean and
non-Korean economists alike to discuss this topic. Included among
these commentators are a number of IMF and World Bank staff members,
who were themselves partly involved in policy-making during the
crisis. The 13 papers plus the comments on them by distinguished
economists cover a number of important aspects related to the crisis.
It is enlightening to see that conflicting views on the crisis not
only exist between Korean and non-Korean economists, but also among
Korean economists themselves: thus, Cho Yoon-Je's critical analysis of
the efficacy of the high interest policy prescribed by the IMF at the
beginning of the crisis is not only challenged by the IMF team's
evaluation (which incidentally offers an excellent introduction to the
relevant issues), and by commentator Barry Eichengreen, but also by
Chung Chae-Shik and Kim Se-Jik, whose empirical analysis of high
interest rates and the exchange rate follows Cho's piece.</font><br>
<font color="#000000"></font></div>
<div><font
color="#000000"><x-tab>
</x-tab>In addition to overview articles by an IMF-team consisting of
Ajai Chopra, Kenneth Kang, Meral Karasulu, Hong Liang, Henry Ma,
Anthony Richards and the aforementioned Cho Yoon-Je), in-depth
analyses of the most important aspects of the crisis appear. These
include the article on the high interest rate cited above, and
articles on the labor market (Kim Dae-Il), economic growth (Robert J.
Barro), the recovery in Asia (Park Yung-Chul and Lee Jong-Wha), the
international financial system (Barry Eichengreen) and the Korean
exchange rate policy (Michael Dooley, Rudi Dornbusch and Park
Yung-Chul). It is not surprising that issues related to the private
sector and financial reform are quite prominent, since these two areas
remained among the unresolved problems of Korean economic
restructuring after the crisis. Indeed, financial sector restructuring
is still not completed now in 2004. An overview of private sector
reform is given by William P. Mako; Oh Gyu-Taeg and Rhee Chang-Yong
discuss the role of the corporate bond market; Eric Friedman, Simon
Johnson and Todd Mitton treat corporate governance and debt issues in
Asia; and Kim Woo-Chan and Byeon Yang-Ho discuss the short-term debts
of Korean banks. </font></div>
<div><font color="#000000"><br>
<x-tab> </x-tab>Each paper
follows quite a quite different approach, ranging from econometric
modelling to narratives of events in the crisis. Overall, this
volume is a highly useful compendium on the Korean economic and
financial crisis and its aftermath. However, it is surprising that
although institutional factors are cited in most papers as influencing
the outcome (i.e. effectiveness) of policies, they rarely receive more
than a bare mention. Along with the transformation of economies in
Central and Eastern Europe since 1989, the East Asian crisis has been
one of the world's most major and unexpected economic events of the
last generation. The lack of analysis of the interplay of formal and
informal institutions and the cultural embeddedness of institutions,
the focus of the so-called<i> New Institutional Economics</i>, has
been a major cause for these events taking so many by
surprise.</font><br>
</div>
<div><font color="#000000">In the discussion of the crisis itself as
well the inability to employ the insights of<i> New Institutional
Economics</i> is highly problematic. For example, the various
measurements of progress in corporate restructuring in Korea can be
highly misleading if the<i> de facto</i> relations between
owner-families and subsidiaries of Korean conglomerates<i>
(chaebol</i>) are not taken into account. After the economic crisis
revealed the extent of overinvestment by<i> chaebol</i>, divestment by
sale, merger or closure of units has been the goal of economic policy.
However, holding or "virtual holding" companies exert a
persistent influence on former daughters through personal relationship
networks, even after they almost completely divest their shares of
subsidiaries. The ongoing fight for control among Hyundai subsidiaries
well exemplifies this unresolved problem. A view that does not
consider institutions, however, can easily mislead since at a formal
level<i> chaebol</i> have gotten rid of hundreds of subsidiaries.<br>
<br>
<x-tab> </x-tab>In sum, this
collection of articles is a fascinating starting point for debate
about the lessons from the Korean economic crisis and recovery, but
not at all a finished result.<br>
<br>
Citation:<br>
Seliger, Bernhard 2004<br>
_Korean Crisis and Recovery_, by David T. Coe and Kim Se-Jik
(eds.),<b> </b> (2002)</font></div>
<div><font color="#000000">_Korean Studies Review_ 2004, no.
06</font></div>
<div><font color="#000000">Electronic file:
http://koreaweb.ws/ks/ksr/ksr04-06.htm</font></div>
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