The Korean financial crisis: Diagnosis, remedies and prospects

Abstract

Pulling down the curtain on its economic miracle of the last three decades, South Korea suddenly fell into a financial crisis in 1997, and was rescued by the IMF. The causes of the crisis are identified in four different sectors of the Korean economy: the real sector, the banking sector, the securities market and the foreign exchange market. Underlying the numerous causes identified for the crisis is the failure of the very institutions and economic structure that propelled Korea to its economic success, in adapting to emerging changes in domestic and international environments. The IMF rescue package is therefore intended to remedy the institutional and structural flaws. The Korean economy is at a crossroads. If it complies well with the IMF conditionality, the economy will be revitalized based on a firmer institutional and structural foundation within a few years. If, however, Korea fails to do so, it will remain an IMF recidivist. Although it has made substantial progress, Korea still faces serious challenges for a successful completion of the IMF programme.