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Public Finance - Essay Example

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Public Finance

This work looks into the experience of South Korea and identifies a few lessons in public finance. Describing the Asian Crisis as a financial crisis, Heo and Sumwoong reported that South Korea prior to the crisis, “average a growth close to 10% per year” commencing in the early 1960s (490). The authors described the Asian Crisis as a failure of a development paradigm premised on a statist approach that called for a strong government role in the economy (490). Statism or statist pertains to a strong role of the state. In their assessment, Heo and Sumwoong estimated that in 1997, the exchange rate against the dollar “went from below 900 won to the dollar that summer to around 900 won to the dollar the summer to around 1,500 in mid-November” (490). Kwan attributed the financial crisis in South Korea to the South Korean government practice of targeting large conglomerates in Korea known as chaebols and extending to chaebols various types of government assistance and support. According to Kim, the chaebols in both the banking and corporate sectors received a lion’s share of government financial assistance (5). Assistance and guarantees of assistance to the chaebols “led to a rapid rise in industrial concentration but also rendered Korea’s corporate sector and the economy vulnerable to external shocks” (Kim 5). ...
wings by the corporate sectors on the banks and over-investment and excessive loans of the banks to risky investments which were thought to be good investments because of government guarantees (Kim 5-6). With this as background, “by the end of 1996 the average debt-equity ratio of the top 30 chaebols reached 400%, which was twice the international banking norm of 200%” (Kim 5). Kim presented the table below to describe how the Asian crisis affected Korea during the late 1990s. Table 1. Macroeconomic Indicators of South Korea, 1994-1998 Source: Table 1 of Kim (8) In Table 1, we see that the Asian crisis caused South Korea to acquire a 7% unemployment rate in 1998 from the usual of 2% and to have a negative 5.8% real gross domestic product growth rate from the usual positive real GDP growth rate. We also see in Table 1 that the won/dollar exchange rate deteriorated from the usual 700-800/won to a won/dollar rate of more than 1,000. For Kim, the “most significant blunder was the decision for an abrupt financial liberalization in 1996 when Korea did not have a fully developed, market-disciplined financial system” (10). According to Kim, “many newly-created financial institutions, called the ‘merchant banks,’ procured foreign currency funds on short-term basis which were used for long-term investment in Southeast Asian Countries like Thailand and Indonesia” (Kim 10). This was the formula for a multiple whammy or multiple blows: it was bad enough that South Korea is vulnerable to a crisis (as the policy of state support for chaebols encouraged the banks to put money on risky investments) but South Korean investments on countries equally vulnerable to crises complicated the risk, problem, or vulnerability by so many times. The Kim material of year 2000 used ...Show more

Summary

South Korea during the Asian Crisis: The IMF and Lessons in Public Finance The Asian Currency Crisis of 1997 also known as the “Asian Crisis” and as the “Asian Financial Crisis” preceded the United States and the current global crisis also known as the “global financial crisis” that started in 2008…
Author : bartelleloise
Public Finance essay example
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