Financial Crisis in South Korea in 1997 - Research Paper Example

The ration between GDP and foreign reserves was less than 30%. It was the lowest ration throughout the developing countries at global scale, even less than several advanced countries as well. Annual budget had also a balanced composition. Therefore, due to this macro analysis, numbers of economic institutions including IMF had no idea of occurrence of an economic crisis that had affected Southeast Asian countries during the summers of 1997 (5). The crisis was so massive that lots of financial experts had predicted a likely sovereign default of South Korea.

South Korea, after great struggle, could hardly manage to survive by getting support from IMF, friendly countries, and several other institutions. The extent of economic downturn of South Korea can be evaluated and measured more accurately by utilizing the five macroeconomic parameters i.e. GDP rate, Inflation rate, Unemployment rate, and Interest rate. Korean GDP rate observed a steady phase during 1990 to 1996 as it remained between 5.9 to 9.4% with an average growth of about 7.9% per year.

Due to financial crisis and reduced exports, the GDP growth experienced a downward trend in 1997. It dropped to a negative 6.8% in 1998. Mishkin and Hahm (2000) described four basic factors which as a combined effect lead to the financial instability. These factor include financial deterioration in in terms of balance sheets, increasing interest rates, worsening of nonfinancial balance sheets, and upturn in uncertainty. All these factors were rightly observed as a source of financial crisis in South Korea.

Due to prompt survival of national economy and by the help of IMF, a recovery was observed in 1999 and 2000 (Hardy & Pazarbasioglu, 1998). The main objectives of this paper are to analyze the historical perspective of different economic policies in different political regimes and what did they contribute as well as to discuss the factors that contributed towards this credit-crunch. The role of IMF is discussed briefly that how it affected and supported the country financially. At the end of the paper, a conclusion is drawn, based upon different policies and findings, and few recommendations are suggested for the Korean government in terms of future perspectives.

Economic Policies and Performances After independence in 1945, South Korea observed a great financial progress as well as declining phases. These economic ups and downs have been based on numbers of different economic policies which have been devised by different governments in different scenario. These policies could be the reconstructing of institutions (1945-1961), export promotion and growth policies (1961-1972), recovery and stabilization (1973-1981), adjustment and expansion era (1982-1996) or the two economic crisis of 1997 and 2008.

The economic policies which were enforced during the regime of Park Chung-Hee are characterized as the government-led model, also referred to as the statist approach (Alice, 1992). This type of policy, the role of government is most important because it is the authority to formulate all the structures and designs of economic policies and then ensures its implementation (Caporaso & Levine, 1992). Park’