ECO Assignment on: South Korean economy
The East Asian economies in the middle of the crisis were termed to be one of the most successful as well as emerging countries with regards to growth. With the applicability of the strict fiscal & various private saving rates the countries have become models for the other economies as well (Rodrik, 2001). It was quite shocking that, such rich economies would one day be embroiled amongst the worst financial crises in the post war region. After an in depth research it was seen that, the main reason for their crises was their own success (Sup, 2000).
Their own success had led to underestimate the domestic as well as foreign investor’s weakness. In the year 1998, it became one of the shocking news when the entire economy was moving towards a recession or growth at a slow pace. Quarter of the entire globe came down to recession & the trade growth of the world decreased approximately by two third of the entire growth rate of the economies. Such type of trends led to the Asian crisis (Rodrik, 2001).
The countries which were majorly hit by the Asian Crisis previously had shown high levels of growth in the past two decades. Some of the economies which were badly hit were Korea, Singapore, Taiwan, Malaysia, Philippines, Thailand, Indonesia & Hong Kong (The Third World Traveler, 2011).
With the advent of the crisis in the year 1997, all the economies mentioned above commonly known as the “Asian Tigers” were the primary examples as to how to success in the years to come. According to the World Bank, “East Asia had high levels of capacity in order to sustain the rapid growth (Sup, 2000). The rate at which the economies have been growing has been estimated to be approximately 7% in the real terms. In the mid 1970’s, the growth rate has been increased up to 9% (Sup, 2000). While the economies mentioned above continued to grow but the slowdown has raise various questions as to whether the East Asian crisis is over or not. Experiencing growth of double digit after many years, the rate at which the export has been rising is declined which has led to high levels of deficits in the current accounts” (The Third World Traveler, 2011).
Though various structural issues have aroused which has led to an end of the sustained economic growth. The export sector had continued to grow & recover itself amongst the first half of the year 1997 (Sup, 2000). High levels of deficits in the current account were mainly driven by the high private inflows rather than the domestic savings which would reflect short run vulnerabilities. There are various concerns regarding the banking systems. The risk of loss associated with the same would overstate & most of the East Asian economies are quite robust as compared to the various countries which have faced the banking crises (The Third World Traveler, 2011). In order to practice high levels of growth, sound as well as reforms should be implemented.
This essay majorly takes into consideration the process or the various reforms with which the Tiger Economies could recover from the heavy financial crisis in the years 1997. This essay highlights South Korea i.e. how this economy went under the loss & the various lessons learnt from them (Karunatilleka, 2009). A quick as well as fast restoration of the finance as well as non performance of the loans would help in order to recover in the South Korean economy. Some changes in the fiscal as well as monetary policies would help in order to depreciate the exchange which would help the Koran economy in order to recover at a high pace (The Third World Traveler, 2011).
The corporate as well as the financial bonds would help the economy in order to recover from the macroeconomics adjustment process as well as restructure the entire financial system (Karunatilleka, 2009). The various structural reforms would help in order to eliminate the weaknesses amongst the corporate sector mainly Chaebol Group. But, the fast recovery of the economy would also lead to certain side effects. Due to the fiscal expansion with the help of government bonds, liabilities, guarantee programs, transparency, etc would be deteriorated (Nanto, 2009). The structural reforms along with the financial as well as the corporate sectors would be able to rectify the importance of risk management which had led to an increase in the level of risk due to the slowdown in the corporate investment. This has led to a decrease in the long term growth of the South Korean economy (Karunatilleka, 2009).
The sudden crisis led to the biggest shock to the South Korean economy. The rate of GDP was reported to be between 6% – 7% in the year 1998. Whereas, the GDP rate before the crisis was estimated to be between 7%- 8%. A sharp decline was caused due the collapse in the investment market (Karunatilleka, 2009). The investment ratio was declined by more than 11% points i.e. 36% before crises till 25% in the year 1998.
Before the financial crises, the Korean economy had many weaknesses which made the economy unusually fragile in terms of the finance, capital outflows, etc. The balance sheet of the banks showed various vulnerable amount of foreign credit (Nanto, 2009). The South Korean banks have been suffered from the various types of mismatch problems. Some of the mismatched problems would consist of currency mismatch together with maturity mismatch. Along with the losses suffered by the Korean banks, the structural problems caused by the affiliated firms i.e. Chaebol also caused financial panic to the Korean economy (Nanto, 2009).
After the most devastating crisis, the main focus for the Korean economy was to recover the financial sector as well as restructure the entire financial system. Along with the restructuration of the financial sector, restructuration of the corporate would also revitalize the entire banking sector (Lee, Jay-Min & Eo, 2009). In order to break the vicious cycle of the corporate along with the financial distress, a wide range of restructuring methods were used which would help in order to distress the firms & liquidate NPL into the financial sectors. The public institutions such as KAMCO as well as the foreign vehicles would play quite an important role in to the restructuring process (Lee, Jay-Min & Eo, 2009).
With the crisis in the year 1997, KAMCO purchased approximately 110 trillion in NPL out of which approximately 72.9 trillion have been disposed off. Out of the 95 trillion of NPL, 45 trillion were being disposed off by the end of the year 2000. This depicts the importance of KAMCO while restructuring of the financial as well as corporate in the years to come. From the year 2000 onwards, NPL which were being purchased or disposed of by KAMCO had declined (Sup, 2000).
The various lessons learnt from the financial & corporate restructuring could be discussed as under. This has helped the Korean economies in order to resolve all the issues & come up as a healthy economy. Firstly, the financial institutions consumed large amounts of funds from the public (Lee, Jay-Min & Eo, 2009). This has helped the economy in order to restore its financial stability as well as recover rapidly from the crisis. The quick purchase of the NPL from an effected financial institution would be a better option rather than selling it. The South Korean economy was requested by IMF to dispose approximately 50% of NPL which KAMCO had acquired for the past three years from now (Lee & Rhee, 2007).
Secondly, it would be quite important in order to develop the local NPL market just before the crisis. There was a high level of hue & cry as the NPL market was majorly dominated by the foreign capital market. Looking at the bidders of the KAMCO various activities such as CRC, auctions, asset backed securities, joint asset management, etc would dominate the foreign players in the market (Sup, 2000).
Thirdly, standardizing the information regarding NPL & its legal system were quite helpful to provide efficient resolution of NPL. Soon after the crisis, KAMCO did not harmonize the IT standards which would help in order to determine the prices & the resolution methods. The KAMCO developed its own NPL system which has helped the South Korean to standardize the information system just before the crisis of the well known financial institutions (Lee & Rhee, 2007).
Fourthly, restructuring of the vehicles were introduced which would mainly focus upon addressing the problems of distressed or the non feasible firms. In order to make the entire corporation more competitive, the restructured market would be required to provide mergers & acquisition within the healthy firms. The Korean government had recently signed a bill which would help in order to establish the equity funds (Crafts, 2008).
Some of the lessons learnt from the Chaebol reforms which would help the Korean economy in order to improve their status as well as overcome all the losses which were made during the financial crises (Lee, Jay-Min & Eo, 2009). With the help of transparency in the management level & corporate governance would increase the profitability in the long run. This would help the Korean economy to be resilient towards the external shocks. The Chaebol reforms would help in order to reinforce the entire economy. Various government measures were used prior to the crisis which has helped the Korean economy not to decline the investment (Crafts, 2008).
The last way through which the South Korean economy would be able to overcome all the possible losses would be with the help of the improvement in corporate governance as well as capitalism shareholder. This would help in order to increase the level of transparency in the Korean stock market (Sup, 2000). The average rate of return is quite lower as compared to the corporate or the government bonds. Hence, the risk premium in case of Korean stock market is negative. These new moves have helped the Korean economy in order to contribute towards the rapid growth of the prices of the stock as well as spread the shareholders capitalism immediately after the crisis. This would help the economy in order to create more number of jobs as well do investment which would help them in long run (Crafts, 2008).
Hence, it could be concluded that South Korean economy was under huge financial crisis & various lessons were learnt from the same. It must be seen that, the fast recovery of the Korean economy had led to high levels of damage which in turn led to side effect for the economy (Collins, Susan & Bosworth, 2006). This also generated various types of challenges for the South Korean economy as well. The fiscal expansion with the help of the government bonds & the various public credit programs led to an increase in the levels of sovereign liabilities which also led to the deterioration of the transparency in the official fiscal sector. Increased levels of risk in the corporate & the household sectors would also lead to high levels of capitalism into the South Korean culture which contributed towards the slowdown of the corporate investment, thereby leading to the reduction in the growth perspective (Collins, Susan & Bosworth, 2006).
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