[KS] KSR 2004-06: _Korean Crisis and Recovery_, by David T. Coe and Kim Se-Jik (eds.)
Stephen Epstein
Stephen.Epstein at vuw.ac.nz
Mon Mar 29 18:45:14 EST 2004
_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
bjseliger at yahoo.de
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
_Korean Crisis and Recovery_, by David T. Coe and Kim Se-Jik (eds.), (2002)
_Korean Studies Review_ 2004, no. 06
Electronic file: http://koreaweb.ws/ks/ksr/ksr04-06.htm
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