[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 

	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.

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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