Econ Paper: South Korea & The IMF – Friends or Foes

March 16, 2009 § Leave a comment

by Simon N. (economist)

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In the summer of 1997, the continent of Asia awoke to an economic firestorm that started in Thailand and quickly spread to the rest of continent leaving the once booming Asian economies shaken and devastated. In a fashion that could very well be described as overnight, country after country watched helplessly as the values of their currencies, assets, and stocks plummeted to unprecedented levels. Subsequently, millions of people were reduced to poverty and numerous businesses and corporations succumbed to insolvency.

The Asian Financial Crisis came as a real surprise to most observers of the international monetary system. Unlike past financial crises which were caused by over-expansionary fiscal policies leading to large public debts and severe shortages of foreign investments, the crisis of 1997 was instigated by the inability of countries to handle substantial influxes of foreign investments and capital–particularly short-term investments. In the absence of adequate prudential regulations coupled with rising U.S. interest rates, Asian financial systems as well as regional corporations that had been borrowing in U.S. dollars were living on edge. The ensuing financial and corporate failures dealt a serious blow to the credibility of affected countries. What followed were major flights of capital and forced devaluations of many currencies.

In hope of averting the financial calamity, many Asian countries looked to the International Monetary Fund (IMF) for guidance and assistance. Unfortunately, the IMF’s role in the crisis would become a magnet for controversies and contentions. While the institution provided the down-trotted countries with much needed funds as well as enhanced their financial credibility, the list of reforms that recipient countries had to comply to in order to secure the loans were met with both skepticisms and criticisms. Many argued that these reforms were the wrong prescriptions for the economic situations in the affected countries; they believe that having these sovereign states undergoing a complete restructuring of their financial system was too drastic and might have further aggravated the problems. In addition, the IMF’s requirement that countries had to tighten their fiscal and monetary policies was often criticized for having exacerbated the social costs experienced by their citizens. Proponents of the IMF’s actions, on the other hand, credited the institution for bringing about long overdue reforms that are essential to the region’s economic future.

Nonetheless, the IMF was perceived as one of the primary losers in the financial crisis. The image of Michel Camdessus–the former director general of the IMF– watching over the shoulder of Suharto, the then president of Indonesia, as he signed an IMF austerity pact was often pointed to as the symbol of a new form of imperialism–one that intrudes the sovereignty of debt-strapped countries.

The main objectives of this paper are to examine the root causes of the Asian Financial Crisis through the lens of South Korea, and to discuss the merits and demerits of the IMF’s actions in the country. I chose to focus on the case of South Korea because of the unique dynamics of the country’s economy prior to and during the crisis.

**Copies of the full text are available upon request

[Simon N.]

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