TITLE

On the Causes of Financial in Korea

AUTHOR(S)
Choi, Young Black
PUB. DATE
September 1999
SOURCE
Multinational Business Review (St. Louis University);Fall99, Vol. 7 Issue 2, p45
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The paper analyzes causes of the current crisis in Korea. The immediate cause of the foreign exchange crisis, leading to a banking crisis, was a complete disintermediation by foreign lenders, which, in turn, was a reflection of the belated realization of the weakness of Korean economy. The propensity for reckless expansionism is most fundamental. The propensity is a product of the hasty promotion of industrialization over the past three decades. The Korean economic development policies involved severe financial repression, combined with policy loans, often with negative real interest rates. Policy loans encouraged expansion because they are so cheap. Expansionism has an added advantage: If you grow big enough, you are too big to be allowed to fail. Those who out-expanded others became jaebol. But expansionism has often resulted in waste of capital and negative cash flows. The liberalization of financial markets in the 1990s enabled Korean firms not only to postpone the day of reckoning by borrowing from overseas, but to further indulge in expansionism. A belated realization of the unsustainability of the situation led to disintermediation and the crisis ensued. The paper recommends that government stop interfering in the economy and let the market rule.
ACCESSION #
2214011

 

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