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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).
Reviewed by Bernhard Seliger
Hanns Seidel Stiftung
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.
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.
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.
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.
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 New Institutional Economics, has been a major cause for these events taking so many by surprise.
In the discussion of the crisis itself as well the inability to employ the insights of New Institutional Economics is highly problematic. For example, the various measurements of progress in corporate restructuring in Korea can be highly misleading if the de facto relations between owner-families and subsidiaries of Korean conglomerates (chaebol) are not taken into account. After the economic crisis revealed the extent of overinvestment by chaebol, 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 chaebol have gotten rid of hundreds of subsidiaries.
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.
Citation:
Seliger, Bernhard 2004
Review of Korean Crisis and Recovery,by David T. Coe and Kim Se-Jik (eds.), (2002)
Korean Studies Review 2004, no. 06
Electronic file: http://koreanstudies.com/ks/ksr/ksr04-06.htm
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