south korea a toothless tiger suzana karim and ryan songerath

South Korea

A Toothless Tiger

Suzana Karim And

Ryan Songerath

Historical Perspective

1950’s Adopt Japanese Model

Zaibatsu in Japan Chaebol in Korea

(chay bol)

The Chaebol’s Family controlled

Market share over profits Poor investments High debt-to-equity ratios

300%-400% Corruption

The Top Five Chaebol Over the Years

Rank

Mid-1960's 1974 1983 1990 1995 2000

Late 1950's

1 Samsung Samsung Samsung Hyundai Hyundai Hyundai Hyundai

2 Samho Samho LG Samsung Daewoo Samsung Samsung

3 Gaepung LG Hyundai Daewoo Samsung Daewoo LG

4 Daehan Daehan Hanjin LG LG LG SK

5 LG Gaepung Ssangyong Ssangyong Ssangyong SK Hanjin

Fight for Reform Chun Doo-hwan 1980 1987 Democratization Market Liberalization

Pace and Sequence? Freedom for labor union formation

Wages increase 60% from 1986 - 89

1993 acceleration of liberalization Open most protected sectors by 97-98

Why Overvalue Currency?

Politics 96-97 Failed to push through reforms Lame duck President

Son involved in scandal

Problems Begin January 97 Hanbo steel

Manufacturing Co. collapses Soon after Kia and several other mid-

sized Chaebol’s file for bankruptcy August 97 won begins rapid

depreciation

Balance of Payments

The Crisis

Recovery (1998-1999) Main Objectives:

Stabilize currency market Stop the outflows of capital Increase foreign reserve Contained the downward spiral in

credit market

Currency Market stabilization IMF announced a bailout package of

$58.4 billion(13% of Korean GDP) (Figure 2)

Government Intervention Temporary agreement with private creditors

to maintain exposure Voluntary rescheduling of short term debt-

$24 billion of short term private debt turned into claims of one to three year maturity.

Tight Monetary Policy (Figure 1) Reduced Consumption and investment Reduced demand for import and surplus in

current account-$50 billion

Credit Market StabilizationGovernments role as moderator in the financial market (Table 1)

Public funds to restructure private institutions

Two major banks were nationalized Government has more say over their operation (because it is providing fund) Forced banks to roll over loans to small firms Encouraged banks to provide new loans with govt. guarantee

Capital Market Stabilization Diversified fund resource (Figure 3)

Issued commercial paper In 1998, net commercial paper issues

jumped 154 percent from the year before and outpaced the decrease in bank loans

Revived equity market Foreign ownership of Korean equity reached

76.6 trillion won in December 1999 and increased to 87.7 trillion won by June 2000

Labor Market Improvements Some layoffs to cut costs (8.6%

unemployment rate from around 2%) Temporary workers instead of

permanent workers Wage cuts Increased productivity and large

decrease in unit labor costs of 20% (97-2000)

After Recovery Some pre-crisis problems were

unresolved Chaebols remained unprofitable Government debt increased to 40% of

GDP Nonperforming loans were 14% of all

loans Korea retained pegged exchange rate

QuestionsAnd Comments

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