South Korea’s Crisis in Retrospective

South Korea turned from economic miracle to near basket case almost over night during the Asian financial crisis in 1997. The country — with its proud corporations and strong unions — lost its bearings. The current crisis in Turkey gives ample case to look back at South Korea’s economic crisis — and the challenges involved.

Were there any early warning signs foreshadowing the 1997 Asian financial crisis?

“This is extreme egomania that could lead to reckless overexpansion.” (Investment bank analyst, commenting on the expansion plans of South Korea’s chaebols and conglomerates, March 1995)

And how did economists assess the initial damage of the financial crisis?

“Korea Inc. is already bankrupt. All that’s left to do is file the papers. This is a zombie economy.” (Ed Yardeni, chief economist, Deutsche Bank Securities, December 1997)

Why was South Korea hit so hard?

“Korea violated a cardinal rule taught in economics 101: Don’t get short-term loans to finance long-term investments. Match long-term investments with long-term liabilities.” (Sydney Jones, former U.S. Undersecretary of Commerce for Economic Affairs, June 1998)

How did the Korean people react to the crisis?

“We feel as if we are a patient on an operating table with too many teams of surgeons. We’ll have to cut off this arm, one says, We’ll have to take out your stomach, says another.” (Yung Chul Park, former President of the Korean Institute of Finance, June 1998)

Many South Koreans blamed western institutions. Was there any truth to that?

“People here blame the IMF — and talk about the East Asian model. But it’s precisely the East Asian model of using connections and high debt that’s created this situation.” (You Jong Kuen, South Korean State Governor, December 1997)

Speaking of the IMF, how did people react to the Fund’s intervention?

“I.M.F = I’M Fired.” (Poster at a street demonstration of South Korean employees against IMF-imposed economic restructuring, December 1997)

But was there a deeper reason for South Korea to fear IMF-imposed reforms?

“The legacy of Japanese colonialism, the artificial division of the peninsula and a terrible civil war that reflected rivalries between two much larger powers feed apprehension about foreign influence.” (Wall Street Journal reporter Don Kirk, July 1998)

Would it have been easier to knock at Japan’s doors — fellow Asians, but former colonial rulers?

“When Korea asked Japan for help in the fall of 1997, it was like the Irish going to the British — and asking for a potato delivery.” (Washington-based analyst, on the Asian crisis, October 1998)

Yet, with Japan in economic doldrums, most of the help actually came from the West. Why?

“The purpose of this is to help Korea. A byproduct is, we help investors and creditors.” (Then-U.S. Treasury Secretary Robert E. Rubin, on a new “rescue package” for South Korea, December 1997)

As far as the future is concerned, how will South Korea have to change?

“We are told we have to replace this machine, which worked well for 40 years. But no one knows what this new machine is supposed to look like.” (Yung Chul Park, President of the Korean Institute of Finance, on Korea’s “export machine,” June 1998)

And what did the world learn from South Korea’s troubles?

“After the financial crisis in Mexico, there was talk about the principle of regional responsibility and leaving it to the United States. Now, with the Korean crisis, there is a general recognition of the principles of global responsibility.” (Larry Summers, then-Deputy U.S. Treasury Secretary, December 1997)