South Korean Currency Crisis

1. What role did the Korean government play in creating the 1997
crisis?
The government had a big role in the economic crisis of Korea in
1997. In 1993 Kim Young-Sam was elected as president, which
was during a mild recession. He wanted to promote economic
growth by becoming involved with industrial conglomerates.
These conglomerates are known as the chaebol. To help the
economy he urged the chaebol to invest in export oriented
industries and new factories. This led to an economic boom, but
only from 1994-1995. But because of the heavy borrowing the
chaebol built up massive debts four times their equity.
2. What role did Korean enterprises play in creating the 1997 crisis?
Enterprises played a large role in the crisis as well. Like what
was being done with the chaebol many investments were being
done during the 1990s, but with the volume of these investments
increasing the quality was decreasing. The investments were
being made on the basis of unrealistic projections of future
conditions. They were investing in the steel industry, the
automobile industry and semiconductor factories, which lead to
the risk of corporate bankruptcy.
3. Why was the Korean central bank unable to stop the decline in
the value of the won?
Much of the money that was borrowed when investing and
paying back debts was being borrowed in U.S dollars rather than
the Korean Won. This seemed like a good idea because there was

a stable exchange rate between the won and the dollar, and all
loans had to be paid back in one year. But, the won depreciated
against the dollar which caused the debt owed by Korean
currencies to increase when measured in local currency,
depressed corporate earnings and increased the risk of
bankruptcy. Because of this in 1997 foreign investors became
alarmed that Korean companies would not be able to pay back
their debt and began to withdraw their money from the Korean
stock and bond market. So when the Korean bank stepped in,
they tried to push up the value of the won in dollar terms and
restore investor confidence but this did not address the
underlying debt problem faced by Korean companies. In turn, the
central bank could really do nothing else and the Korean stock
market plunged 5.5%.
4. If the IMF had not stepped in, what might have occurred?
In late 1997 the IMF stepped in with a rescue package that
included $55 billion in emergency loans to support the currency.
These loans had the effect of stabilizing the won and over the
next few years South Korea enjoyed a strong recovery. If this was
not the case, the debt would continue to be increasingly piling up
without Korea having anyway to pay it back. Their economy and
stock market would continue to plummet and more and more
investors would retract any money they had in Korea.