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South Korea

South Korea. A Toothless Tiger Suzana Karim And Ryan Songerath. Historical Perspective. 1950’s Adopt Japanese Model Zaibatsu in Japan Chaebol in Korea (chay bol). The Chaebol’s. Family controlled Market share over profits Poor investments High debt-to-equity ratios

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South Korea

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  1. South Korea A Toothless Tiger Suzana Karim And Ryan Songerath

  2. Historical Perspective 1950’s • Adopt Japanese Model • Zaibatsu in Japan • Chaebol in Korea • (chay bol)

  3. The Chaebol’s • Family controlled • Market share over profits • Poor investments • High debt-to-equity ratios • 300%-400% • Corruption

  4. Fight for Reform • Chun Doo-hwan 1980 • 1987 Democratization • Market Liberalization • Pace and Sequence? • Freedom for labor union formation • Wages increase 60% from 1986 - 89 • 1993 acceleration of liberalization • Open most protected sectors by 97-98

  5. Why Overvalue Currency?

  6. Politics 96-97 • Failed to push through reforms • Lame duck President • Son involved in scandal

  7. Problems Begin • January 97 Hanbo steel Manufacturing Co. collapses • Soon after Kia and several other mid-sized Chaebol’s file for bankruptcy • August 97 won begins rapid depreciation

  8. Balance of Payments

  9. The Crisis

  10. Recovery (1998-1999) • Main Objectives: • Stabilize currency market • Stop the outflows of capital • Increase foreign reserve • Contained the downward spiral in credit market

  11. Currency Market stabilization • IMF announced a bailout package of $58.4 billion(13% of Korean GDP) (Figure 2) • Government Intervention • Temporary agreement with private creditors to maintain exposure • Voluntary rescheduling of short term debt- $24 billion of short term private debt turned into claims of one to three year maturity. • Tight Monetary Policy (Figure 1) • Reduced Consumption and investment • Reduced demand for import and surplus in current account-$50 billion

  12. Credit Market Stabilization Governments role as moderator in the financial market (Table 1) • Public funds to restructure private institutions • Two major banks were nationalized • Government has more say over their operation (because it is providing fund) • Forced banks to roll over loans to small firms • Encouraged banks to provide new loans with govt. guarantee

  13. Capital Market Stabilization • Diversified fund resource (Figure 3) • Issued commercial paper • In 1998, net commercial paper issues jumped 154 percent from the year before and outpaced the decrease in bank loans • Revived equity market • Foreign ownership of Korean equity reached 76.6 trillion won in December 1999 and increased to 87.7 trillion won by June 2000

  14. Labor Market Improvements • Some layoffs to cut costs (8.6% unemployment rate from around 2%) • Temporary workers instead of permanent workers • Wage cuts • Increased productivity and large decrease in unit labor costs of 20% (97-2000)

  15. After Recovery • Some pre-crisis problems were unresolved • Chaebols remained unprofitable • Government debt increased to 40% of GDP • Nonperforming loans were 14% of all loans • Korea retained pegged exchange rate

  16. Questions And Comments

  17. Back

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