1 / 16

Financial Crisis and Prospects for the Future

Financial Crisis and Prospects for the Future. Chapter 14. Stages of Development. World Bank classification Low income economy (per capita GNI < $745 in 2001 prices) Middle income economy High income economy (per capita GNI > $9205 in 2001 prices) Michael Porter ’ s development stages

david-richards
Download Presentation

Financial Crisis and Prospects for the Future

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Financial Crisis and Prospects for the Future Chapter 14

  2. Stages of Development • World Bank classification • Low income economy (per capita GNI < $745 in 2001 prices) • Middle income economy • High income economy (per capita GNI > $9205 in 2001 prices) • Michael Porter’s development stages • Factor-driven stage • Investment-driven stage • Innovation-driven stage

  3. Korea’s Visions by Decade • 1960s: Growth at any cost to catch up with and surpass North Korea • 1970s: HCI (heavy and chemical industry) drive in pursuit of self-defense and self-reliance • 1980s: Democratization • 1990s: Globalization • 2000s: High income economy/innovation-driven economy (a core economy)

  4. Factors Behind the 1997 Financial Crisis • Change of economic policies’ general direction • Supply factors • Demand factors • Management • Firms and industries • Government • Internationalization • Chance variables

  5. Foundations Weakened • President Kim Young-Sam: pro-(labor)union, anti-chaebol, anti-capitalist • Thirty decades of opposition (to Park Chung Hee, Chun Doo Hwan and Roh Tae Woo) • Trying to reverse the policies of his predecessors • Specific policies included: • Encouraging high wages • Maintaining high interest rates • Overvalued currency • Discouraging borrowing by big firms from the government-controlled banks • Hyundai group could not get loans from the banks due to which it avoided the dire effects of the 1997 crisis • These policies have greatly weakened Korea’s global competitiveness

  6. Supply Factors • Four Highs • Wages (increased production costs reducing competitiveness of exports) • Interest rates (borrowing for investment into capital more expensive) • Land prices (land is part of the businesses’ fixed costs of production) • Consumer goods prices in general • Three Lows • Technology • Efficiency • Value added (difference between sales and costs)

  7. Demand Factors • Overvalued Korean won made it cheaper for Koreans to buy foreign goods thus hurting domestic industries, including the export-oriented ones • Deterioration of exports decreased Korean global competitiveness • Both domestic and foreign markets are hurt

  8. Management • Management has been historically growth-oriented, global competitiveness not an issue • Family-type system of management often resulted in cronyism • Hanbo Steel

  9. Firms and Industries • Excessive government regulation made it very difficult to start a new firm in Korea • Big firms being the backbone of the Korean economy made foreign borrowing excessive • Korean banks largely considered a policy instrument for the government rather than financial intermediaries channeling savings into productive investments • Financial sector underdeveloped, did not meet international banking standards • Banks’ capacity to evaluate risks and benefits of investment projects (crucial for making sound decisions on loans!) extremely low

  10. Government • High wages, high interest rates and overvalued currency • All three undermine Korean global competitiveness • Erosion of global competitiveness resulted in low stock prices so firms could not gain much from being traded on the stock exchange • Tight monetary policy led to scarcity of domestic loans making interest rates exceed the international ones which in turn made foreign borrowing more attractive

  11. Internatiolization • Kim Young Sam’s goal of joining OECD required liberalization (opening up) of domestic capital and financial markets to the rest of the world • Korean financial sector was highly underdeveloped at the time • Private sector used liberalization to borrow more, making Korea more vulnerable to fluctuations in the world economy, also more indebted

  12. Chance Variables • Chance variables are economic factors exerting substantial influence on the economy but also being out of control by the domestic government • Japan’s economic slowdown in 1990s (recession) • Economic crisis in Indonesia and Thailand • Worldwide decline in demand for computer chips, ships, automobiles and textiles

  13. Economic Effects of the World Cup • Increase in self-confidence and self-assurance • Improved image of the country • Increase in competitive spirit • Tourist spending

  14. 2010: Projection of Korea’s Standing

  15. Directions of Development at Innovation-Driven Stage • Expand government spending on R&D • Promote venture capitalism (simplify procedures of going public/getting listed on stock exchange thus allowing small and medium-size firms to borrow funds directly from the general public by issuing stocks) • Improve financial and legal arrangements for new startups • Improve legal procedures for intellectual property rights • Reduce government interference in the economy

  16. Advantages of Korean BGs (Chaebols) • Economies of scale and scope • Information collection and use, especially important in the global knowledge-based era • Use of management resources • Financial mobilization and allocation • Global marketing • Education and training of employees • Bargaining power

More Related