Revisiting the 1997-8 Korean Financial Crisis from a Financial Perspective
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Korea experienced the worst financial and economic crisis in history which broke out in November 1997 in the wake of the contagious currency turmoil in the Southeast Asian region. The crisis has since changed drastically the economic and social paradigm of the country over the past decade and still has an impact on its both economy and people. The last decade has seen a plethora of studies examining the Korean financial crisis that focused on fundamental weaknesses in the country’s economy. This paper intends to shed light on the causes behind the 1997-98 Korean financial crisis from a financial perspective, rather focusing on the microeconomic problems. Overall macroeconomic conditions were apparently sound with high growth, low inflation and government’s budget in surplus. Foreign exchange rate was relatively flexible. Current account deficit seemed manageable although it widened in 1996 due to the temporary decline in the price of the electronic products. However, some serious microeconomic problems persisted for a long time without being cured. The Korean financial crisis was the product of the flaws, such as an increasing build-up in short-term debt, and excessive currency and maturity exposure in financial institutions; poor prudential regulation and fragmented supervision system; and moral hazard. The crisis was more due to structural weaknesses than to macroeconomic fundamentals.
Abstract
Korea experienced the worst financial and economic crisis in history which broke out in November 1997 in the wake of the contagious currency turmoil in the Southeast Asian region. The crisis has since changed drastically the economic and social paradigm of the country over the past decade and still has an impact on its both economy and people. The last decade has seen a plethora of studies examining the Korean financial crisis that focused on fundamental weaknesses in the country’s economy. This paper intends to shed light on the causes behind the 1997-98 Korean financial crisis from a financial perspective, rather focusing on the microeconomic problems. Overall macroeconomic conditions were apparently sound with high growth, low inflation and government’s budget in surplus. Foreign exchange rate was relatively flexible. Current account deficit seemed manageable although it widened in 1996 due to the temporary decline in the price of the electronic products. However, some serious microeconomic problems persisted for a long time without being cured. The Korean financial crisis was the product of the flaws, such as an increasing build-up in short-term debt, and excessive currency and maturity exposure in financial institutions; poor prudential regulation and fragmented supervision system; and moral hazard. The crisis was more due to structural weaknesses than to macroeconomic fundamentals.
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