the outbreak of the 1997 financial crisis and its recovery doowon lee professor of economics yonsei...
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The Outbreak of the 1997 FinanciThe Outbreak of the 1997 Financial Crisis and Its Recoveryal Crisis and Its Recovery
Doowon LeeDoowon LeeProfessor of EconomicsProfessor of Economics
Yonsei University, Seoul, KoreaYonsei University, Seoul, KoreaDoowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
I. Outbreak: Causes of CrisisI. Outbreak: Causes of Crisis
IMF Bail Out &
Sharp Depreciation of e
Absence of International Crisis
Management System
Korean Gov.'s Effort to Defend Exchange Rate
Failed
Failure to Roll over Short-Term Foreign Debts(kind of Bank run)
Losing International
Credibility
Financial Sector
Corporate Sector
External Sector
*Mounting Bad Loans
*Losing Competitiveness*Excessive Investment (I>S)*Poor Corporate Governance System
*Current Account Deficits Financed by Foreign Borrowing (carry trade?)*Unprepared Financial Market Liberalization
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
I. Outbreak: International Comparison of Debt-Equity Ratios of I. Outbreak: International Comparison of Debt-Equity Ratios of Mfg IndustryMfg Industry
South South KoreaKorea
(1997)(1997)
South South KoreaKorea
(2004)(2004)
GermanyGermany
(1966)(1966)
JapanJapan
(1999)(1999)
Taiwan Taiwan province of province of
ChinaChina
(1995)(1995)
U.S.U.S.
(1999)(1999)
3.963.96 1.041.04 0.980.98 1.741.74 0.860.86 1.641.64
* Sources : Krueger and Yoo (2001).* Sources : Krueger and Yoo (2001).
Bank of Korea, Bank of Korea, Bank of Korea InformationBank of Korea Information (June, 2001, p.6 (June, 2001, p.6
6)6)
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Financing Cost of Manufacture Co.
0
1
2
3
4
5
6
7
8
9
10
1996 1997 1998 1999 2000 2001
(%)
Ratio of Financial Cost to Sales
* source: The Bank of Korea website (www.bok.or.kr)
I. Outbreak: Debt Service Burden of Manufacture CompanyI. Outbreak: Debt Service Burden of Manufacture Company
Sources : Korea Financial Supervisory Service (Sources : Korea Financial Supervisory Service (www.fss.or.kr) ; ) ; The BankerThe Banker (July 2000, July 2001), recited From (July 2000, July 2001), recited From www.seri.org (200 (2001.6) and www.bok.or.kr1.6) and www.bok.or.kr
Note : Note : * Average of all the commercial banks’ NPL.* Average of all the commercial banks’ NPL.
Korea has changed its criteria of NPL in 1999 accordingKorea has changed its criteria of NPL in 1999 according
to international standard. to international standard. The ratio of NPL to total loansThe ratio of NPL to total loans
increased after the adoption.increased after the adoption. Thus ‘13.6’ is value derivedThus ‘13.6’ is value derived
from new criteria and ‘8.3’ is based on previous criteria.from new criteria and ‘8.3’ is based on previous criteria.
** Average of ten biggest commercial banks’ NPL.** Average of ten biggest commercial banks’ NPL.
*** Average of five biggest commercial banks’ NPL.*** Average of five biggest commercial banks’ NPL.
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
South South KoreaKorea
(1997)(1997)
South South KoreaKorea
(1999)(1999)
South South KoreaKorea
(June, ’01)(June, ’01)
U.S.**U.S.**
(2000)(2000)
Japan**Japan**
(2000)(2000)
Germany*Germany*****
(1999)(1999)
U.K.***U.K.***
(1999)(1999)
6.06.08.3 8.3 → →
13.6*13.6*5.75.7 1.211.21 5.445.44 1.31.3 2.172.17
I. Outbreak: International Comparison of NPL (unit: %)I. Outbreak: International Comparison of NPL (unit: %)
Corporate and financial sector restructuredCorporate and financial sector restructured
Three party agreement between labor, manager, Three party agreement between labor, manager,
and governmentand government
Export led recovery -> current account surplusExport led recovery -> current account surplus
Exchange rate stabilizedExchange rate stabilized
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
II. Crisis Recovery II. Crisis Recovery
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
II. Recovery: General ReviewII. Recovery: General Review
Support by
Government
Budget
Financial Sector
Restructuring
• M&A or Liquidation
(Applying BIS criteria)
• Liberalization
• Removing Bad Loans
Attracting Foreign Capital
• FDI
• Portfolio Investment
Establishment of Social Safety Net
• Calm Labor Dispute
• Create Jobs
• Help the Unemployed
• Increase Foreign Exchange Reserve
• Decrease Foreign Debt
Domestic
Economy
Current Account Surplus
External
Economy
Recovery
of Korean
Economy
Corporate Sector
Restructuring
• Lower Debt/Equity Ratio
• Improving Corporate
Governance
• M&A
II. Recovery: Summary of Reforms in Four Major AreasII. Recovery: Summary of Reforms in Four Major Areas
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
• Note : * BIS(bank of International Settlements) ratio measures the ratio of bank’s equity over a weighted average of
risky assets. The higher this ratio is, the more financially sound is the bank.
• sources : Bank of Korea website (www.bok.or.kr); Korea Financial Supervisory Commision website (www.fss.or.kr);
Korea National Statistical Office website (www.nso.go.kr); Korea Development Institute website
(www.kdi.re.kr); Fair Trade Commission website (www.ftc.go.kr)
1) Financial Sector
Pre-Crisis Situation Reform Measures Changes and Achievements
① 14 of the 27 commercial
banks below BIS ratio of
8%*
② Troubled loans are
estimated to be W 118
trillion as of March 1998
③ Lack of proper supervision
① FSC and FSS established.
② Initially W64 trillion of
public fund was thought to
be needed. As of the end
of 2005, total of W168
trillion was injected and
W76 trillion retrieved.
① Number of financial
institution dropped from
2,102 to 1,341 between
1997 and 2007.
② Impaired loans
(substandard or below) as
of June 2001 estimated to
be W 65 trillion, estimated
to be W 49.8 trillion.
II. Recovery: The Number of Financial InstitutionsII. Recovery: The Number of Financial Institutions
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Fianacial Sector End of 1997 March, 2007 Change
Commercial Banks 26 13 -13
Specialized and Development Banks 7 5 -2
Merchant Banks 30 2 -28
Securities Firms* 36 54 +18
Insurance Companies 50 51 +1
Investment Companies 31 51 +20
Leasing Companies 25 35 +10
Mutual Savings & Finance Companies 231 110 -121
Credit Unions (Credit Cooperatives) 1,666 1,020 -646
Total 2,102 1,341 -761
• Note : * The number of security firms increased due to the establishment of foreigners-owned security firms.
Also, some merchant banks are transformed into security firms.
• Sources : Recited from Figure 5 of Jones (2002), Financial Supervisory Service of Korea
BIS ratio of Commercial Banks in KoreaBIS ratio of Commercial Banks in Korea
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Sources : Bank Management Statistics of Financial Supervisory Service of Korea
BIS ratio
8
9
10
11
12
13
14
1997 1998 1999 2000 2001 2002 2003 2000 2005 Year
BIS(%)
Domestic Foreign Compounded
ROE ratio of Commercial Banks in KoreaROE ratio of Commercial Banks in Korea
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Sources : Bank Management Statistics of Financial Supervisory Service of Korea
ROE ratio
-60
-50
-40
-30
-20
-10
0
10
20
30
1997 1998 1999 2000 2001 2002 2003 2004 2005 Year
ROE(%)
Domestic Foreign Compounded
ROA ratio of Commercial Banks in KoreaROA ratio of Commercial Banks in Korea
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
ROA ratio
-4
-3
-2
-1
0
1
2
1997 1998 1999 2000 2001 2002 2003 2004 2005 Year
ROA(%)
Domestic Foreign Compounded
* Sources : Bank Management Statistics of Financial Supervisory Service of Korea
II. Recovery: Summary of Reforms in Four Major AreasII. Recovery: Summary of Reforms in Four Major Areas
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
2) Corporate Sector
Pre-Crisis Situation Reform Measures Changes and Achievements
① Highly leveraged firms with
debt/equity ratio of 396.3%
for manufacturing firms in
the end of 1997
② Poor corporate
governance : cross-debt
guarantees, cross-
shareholdings
③ Lack of transparency and
tricky accounting practice
① Five guidelines
② Big Deals
① Debt/equity ratio dropped :
100.9% for manufacturing
firms by 2005.
② Cross-debt guarantee
decreased from W 11
trillion of 1998 to W 0.2
trillion of 2001 for the
largest 5 conglomerates
• sources : Bank of Korea website (www.bok.or.kr); Korea Financial Supervisory Commision website (www.fss.or.kr);
Korea National Statistical Office website (www.nso.go.kr); Korea Development Institute website
(www.kdi.re.kr); Fair Trade Commission website (www.ftc.go.kr)
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
II. Recovery: International Comparison of Debt-Equity Ratios of II. Recovery: International Comparison of Debt-Equity Ratios of Mfg IndustryMfg Industry
South South KoreaKorea
(1997)(1997)
South South KoreaKorea
(2005)(2005)
GermanyGermany
(1996)(1996)
JapanJapan
(1999 -> 2003)(1999 -> 2003)
Taiwan Taiwan provincprovinc
e of e of ChinaChina
(1995)(1995)
U.S.U.S.
(1999 -> 2004)(1999 -> 2004)
3.963.96 1.011.01 0.980.98 1.74 -> 1.451.74 -> 1.45 0.860.86 1.64 -> 1.411.64 -> 1.41* Sources : Krueger and Yoo (2001).* Sources : Krueger and Yoo (2001).
Bank of Korea, Bank of Korea, Bank of Korea InformationBank of Korea Information (June 2001, Sep 2005) (June 2001, Sep 2005)
Bank of Korea, Bank of Korea, Principal Economic IndicatorsPrincipal Economic Indicators (May 2007) (May 2007)
Average of 1990~1997
1998 2000 2002 2004
Corporate Finance
115.9 59.6 128.7 167.2 176.6
Internal Source
33.9
(29.3)
31.6
(53.0)
62.9
(48.9)
83.9
(50.2)
110.8
(62.7)
External Source
82.0
(70.7)
28.0
(47.0)
65.8
(51.1)
83.3
(49.8)
65.8
(37.3)
The Volume and Composition of Corporate FinanceThe Volume and Composition of Corporate Finance
* Note : Numbers in parentheses are % ratios.
* Source : A periodical, “ 경제포커스 (in Korean)” No.112, Samsung Economic Research Institute
(Unit : bn Kr\, %)
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Proportion of Direct Finance Out of External SourcesProportion of Direct Finance Out of External Sources
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
•Source : Hahm, Joon-Ho(2007), “ 금융시스템의 변화와 평가” presented at 『 A Decade after Financial Crisis : Process and Problem 』 , 2007 Seminar of Korean Economic Association (June 11th, 2007)
II. Recovery: Summary of Reforms in Four Major AreasII. Recovery: Summary of Reforms in Four Major Areas
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
3) Labor Market
Pre-Crisis Situation Reform Measures Changes and Achievements
① Rigid and militant labor
union
② Average nominal wage
increase rate (13.45%)
higher than average labor
productivity growth
rate(10.37%) from ’92~’96
③ Absence of social safety
net
① Tripartite Commission
established.
② Social safety net hastily
set up (employment
insurance system, public
works program, national
basic livelihood security
act).
① More flexible labor market
② Average labor productivity
growth rate (18.73%)
higher than average
nominal wage increase
rate (5.87%) from ’98~’00.
③ Productive welfare system
• sources : Bank of Korea website (www.bok.or.kr); Korea Financial Supervisory Commision website (www.fss.or.kr);
Korea National Statistical Office website (www.nso.go.kr); Korea Development Institute website
(www.kdi.re.kr); Fair Trade Commission website (www.ftc.go.kr)
Painful Process of Laying-OffPainful Process of Laying-Off
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Sources : Recited figure 3 of An article on East Asian Economies “Gold from the Storm”, Economist, June 28th 2007
II. Recovery: Unemployment RateII. Recovery: Unemployment Rate
2.6
76.6
4.44
3.33.6 3.7 3.7 3.5 3.3
0
1
2
3
4
5
6
7
8
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
%
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* source : Bank of Korea (http://www.bok.or.kr)
II. Recovery: Summary of Reforms in Four Major AreasII. Recovery: Summary of Reforms in Four Major Areas
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
4) Government Sector
Pre-Crisis Situation Reform Measures Changes and Achievements
① Regulation
② Inefficient public
enterprises
① Administrative reform
② Deregulation
③ Privatization
① Total number of civil
servants decreased from
919,404 to 885,164
between Feb 1998 and
Feb 2003.
② Number of regulations
decreased from 10,717 of
August 1998 to 7,156 of
July 2001.
③ Privatized 6 public
enterprises and plan to
privatize 5 more as of Jan.
2001.• sources : Bank of Korea website (www.bok.or.kr); Korea Financial Supervisory Commision website (www.fss.or.kr);
Korea National Statistical Office website (www.nso.go.kr); Korea Development Institute website
(www.kdi.re.kr); Fair Trade Commission website (www.ftc.go.kr)
The Number of Public Officials by Successive AdministrationsThe Number of Public Officials by Successive Administrations
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Sources : Maeil Business Newspaper, July 11th 2007.
(unit : persons)
The Total Number of Public Officials
5th
Administration6th “Civilian” “A People” “Participation”
II. Recovery: Growth Rates of Macroeconomic IndicesII. Recovery: Growth Rates of Macroeconomic Indices
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
• Note : * The growth rates are compared to the same quarter of the previous year.
** Figures for 2000 and 2001 are annual figures.
• sources : Major Indicators of Korean Economy, Korea Development Institute, 2002. 3. 9., p.41
Bank of Korea website (www.bok.or.kr)
1998 19992000 2001
1/4 2/4 3/4 4/4 1/4 2/4 3/4 4/4
Growth Rate(%) *
GDP -6.7 10.9 12.6 9.7 9.2 4.6 3.7 2.7 1.8 3.7
Consumption -11.7 11.0 10.8 8.9 5.7 3.2 1.5 4.1 4.8 6.6
Investment(equipment) -38.8 36.3 62.6 41.6 31.9 8.1 -8.4 -11.2 -15.7 -3.1
Investment(construction) -10.1 -10.3 -6.8 -4.2 -3.5 -2.5 1.5 1.1 8.2 10.7
Consolidated budget
/ GDP(%)**-4.2 -2.7 1.3 1.0
Current account balance
(bn $)40.4 24.5 1.6 2.9 4.2 3.5 2.8 3.8 1.0 1.1
Inflation rate 7.5 0.8 2.0 1.6 3.0 2.5 3.6 5.0 4.2 3.4
Unemployment rate 6.8 6.3 5.1 3.8 3.6 3.7 4.8 3.5 3.3 3.2
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
II. Recovery: Exports Have Been the Main Driver for II. Recovery: Exports Have Been the Main Driver for GrowthGrowth
10
15
20
25
30
35
40
45
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
10
15
20
25
30
35
40
45Merchandise Exports
(Percent change, y/y, two-month average)
II. Recovery: Exchange Rate Fluctuation (monthly)
II. Recovery: Exchange Rate Movement (annual)II. Recovery: Exchange Rate Movement (annual)
771 805
951
1,399
1,1891,131
1,291 1,2511,192
1,145
1,024956
0
200
400
600
800
1,000
1,200
1,400
1,600
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(won)
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* source : Bank of Korea (http://www.bok.or.kr)
0
200
400
600
800
1000
1200
1998-01-03 1999-01-03 2000-01-03 2001-01-03 2002-01-03
KOSPI
II. Recovery: Movement of KOSPI after the Crisis
Withdrawal of foreign capital, but in what Withdrawal of foreign capital, but in what
channel?channel?
- Little FDI before 1997 - Little FDI before 1997
- Stock market partially opened- Stock market partially opened
- Borrowing from foreign banks- Borrowing from foreign banks
- Especially the loan from the Japanese - Especially the loan from the Japanese
banksbanks
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
III-1. Role of Foreign Capital in the Outbreak of CrisisIII-1. Role of Foreign Capital in the Outbreak of Crisis
Inflow & Outflow of Portfolio InvestmentInflow & Outflow of Portfolio Investment
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Source : Economic Statistic System, Bank of Korea
Inflow & Outflow of Portfolio Investment
- 5
- 4
- 3
- 2
- 1
0
1
2
3
4
5
1997 1Q 2Q 3Q 4Q 1998 1Q 2Q 3Q 4Q
(Year, Quarter)
(bn, US$)
Outflow of Portfolio Investment Inflow of Portfolio Investment
Composition of Foreign LiabilitiesComposition of Foreign Liabilities
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Source : Economic Statistic System, Bank of Korea
(mn, US$)
Total Foreign LiabilitiesGovernmentMonetary AuthorityCommercial BanksExcetra (NBFI)
Were there no crisis if capital market was not liberalized?Were there no crisis if capital market was not liberalized?
Even before capital market liberalization, there existed inEven before capital market liberalization, there existed in
satiable demand for capital by satiable demand for capital by conglomerates.conglomerates.
Excessive investment caused chronic trade deficit and incrExcessive investment caused chronic trade deficit and incr
easing NPLseasing NPLs
Foreign exchange crisis could have been avoided if e was aForeign exchange crisis could have been avoided if e was a
llowed to depreciate, which was politically difficultllowed to depreciate, which was politically difficult
Even if capital market was not liberalized, mounting NPLEven if capital market was not liberalized, mounting NPL
s would have caused domestic financial crisis.s would have caused domestic financial crisis.
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
III-1. Role of Foreign Capital in the Outbreak of CrisisIII-1. Role of Foreign Capital in the Outbreak of Crisis
Initially, it provided much-needed liquidities.Initially, it provided much-needed liquidities.
It boosted stock market, and partially eliminated It boosted stock market, and partially eliminated
the so-called ‘Korea Discount’ the so-called ‘Korea Discount’
Structural reforms and improved profitabilityStructural reforms and improved profitability
Protection of minority shareholders’ rightProtection of minority shareholders’ right
Improved transparency (case of SK)Improved transparency (case of SK)
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
III-2. Role of Foreign Capital in the Recovery: Positive III-2. Role of Foreign Capital in the Recovery: Positive AspectAspect
Inflow of Foreign CapitalInflow of Foreign Capital
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Source : Economic Statistic System, Bank of Korea
Inflow of Foreign Capital
- 50- 25
0255075
100125150175200225250275300325350
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(Year)
(bn, US$)
FDI Portfolio Investment Foreign Debt
Price Earning Ratio, August 10 2005
0
5
10
15
20
25
30
J apan U.S. HongKong
Singapore Taiwan Thailand Korea
PER
Price Earning Ratio, Apr 18 2006
0
5
10
15
20
25
30
35
40
J apan U.S Singapore Taiwan Hong Kong Korea Thailand
PER
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Price Earning Ratio (PER)
MSCI World Average PER MSCI World Average PER (left scale)(left scale)
MSCI Korea PER MSCI Korea PER (left scale)(left scale)
( times)( times)
yearyear
Korea PER / World PER Korea PER / World PER (right scale)(right scale)
* source : Maeil Business Newspaper (June the 4th, 2007)
Proportion of Foreign Possession in Stock MarketProportion of Foreign Possession in Stock Market
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Sources : A Periodical “Securities & Futures, the May 2007 issue, Korea Exchange
(%)
Institutes Corporate
Individuals Foreigners
Consumer loans increased, and HH debt (fueled Consumer loans increased, and HH debt (fueled
by the government policy of easy credit) by the government policy of easy credit)
accumulated that dampened consumptionaccumulated that dampened consumption
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
III-3. Role of Foreign Capital in the Recovery: III-3. Role of Foreign Capital in the Recovery: Negative Aspect 1Negative Aspect 1
Proportion of Corporate Loan and Household Loan Out of Proportion of Corporate Loan and Household Loan Out of Commercial Bank CreditCommercial Bank Credit
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Corporate Loan Household Loan
•Source : Hahm, Joon-Ho(2007), “ 금융시스템의 변화와 평가” presented at 『 A Decade after Financial Crisis : Process and Problem 』 , 2007 Seminar of Korean Economic Association (June 11th, 2007)
Household Debt & Credit (percentage of GDP)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Household debt Household credit
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
HH Debt Suppress ConsumptionHH Debt Suppress Consumption
-4
-2
0
2
4
6
8
10
12
14
1999 2000 2001 2002 2003 2004 2005 2006 1/4
Consumer Expenditure GDP
* source : ecos.bok.or.kr* source : ecos.bok.or.kr
Growth potential deterioratedGrowth potential deteriorated Less investment as banks are reluctant to lendLess investment as banks are reluctant to lend
Threat of hostile take-over has prevented big companieThreat of hostile take-over has prevented big companie
s from making large-scale and long-term investment: cs from making large-scale and long-term investment: c
ash-hoarding, increased divident payment, buying its oash-hoarding, increased divident payment, buying its o
wn shares. But, it is difficult to generalize.wn shares. But, it is difficult to generalize.
Increased regulation, rapidly aging population, and insIncreased regulation, rapidly aging population, and ins
table labor relation are also responsible for deterioratitable labor relation are also responsible for deteriorati
on of growth potentialon of growth potential
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
III-3. Role of Foreign Capital in the Recovery: III-3. Role of Foreign Capital in the Recovery: Negative Aspect 2Negative Aspect 2
- 8
- 6
- 4
- 2
0
2
4
6
8
10
12
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Years
GD
P G
row
th R
ates
경제성장률 잠재성장률
Falling Growth Rate
Falling Growth Rate
Five Asian Economies’ Investment ratio & Growth rateFive Asian Economies’ Investment ratio & Growth rate
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* Sources : Recited figure 1 of An article on East Asian Economies “Gold from the Storm”, Economist, June 28th 2007
PEF: Short-term speculative gains that were non-taxable: PEF: Short-term speculative gains that were non-taxable:
Case of Case of Lone Star’sLone Star’s take over of take over of Foreign Exchange BankForeign Exchange Bank o o
f Korea in 2003f Korea in 2003
As part of the banking sector is under foreign ownership, As part of the banking sector is under foreign ownership,
public goodpublic good nature of banking industry is under threat. Al nature of banking industry is under threat. Al
so, it is difficult to carry out the old-style industrial policy so, it is difficult to carry out the old-style industrial policy
(case of (case of The First BankThe First Bank w.r.t. Hynix), which is not always w.r.t. Hynix), which is not always
a bad thing.a bad thing.
Some myths about foreign capital: herd behavior? IncreasSome myths about foreign capital: herd behavior? Increas
ed volatility? Increased divident/profit?ed volatility? Increased divident/profit?
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
III-3. Role of Foreign Capital in the Recovery: III-3. Role of Foreign Capital in the Recovery: Negative Aspect 3Negative Aspect 3
Invasion of Private Equity FundInvasion of Private Equity Fund
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* source : Maeil Business Newspaper (June the 23rd, 2007)
Fixed e with capital market liberalization is difficult to Fixed e with capital market liberalization is difficult to
maintainmaintain
After all, it was sound fundamentals of the Korean After all, it was sound fundamentals of the Korean
economy that enabled the recovery economy that enabled the recovery
Foreign capital is a two-edged sword. Also, it is difficult Foreign capital is a two-edged sword. Also, it is difficult
to define ‘foreign capital’ in one word as they are not to define ‘foreign capital’ in one word as they are not
homogeneous.homogeneous.
Sequential liberalization of capital market is necessarySequential liberalization of capital market is necessary
Too much foreign exchange reserve can also be a problemToo much foreign exchange reserve can also be a problem
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
IV. Lessons of the Korean CrisisIV. Lessons of the Korean Crisis
Low investment growth rateLow investment growth rate
Credit bubble and household debt -> weak consumption Credit bubble and household debt -> weak consumption
growth growth
Government owned financial institutionsGovernment owned financial institutions
Ballooning government debt: public fund and budget Ballooning government debt: public fund and budget
deficitdeficit
Worsened income distribution and poverty problemWorsened income distribution and poverty problem
Bi-polarization of the economyBi-polarization of the economy
Set back of reforms in labor market and governmentSet back of reforms in labor market and government
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
V. Side Effects and Remaining AgendaV. Side Effects and Remaining Agenda
Resulting in Unbalanced GrowthResulting in Unbalanced Growth
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
40
60
80
100
120
140
160
180
200
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1/440
60
80
100
120
140
160
180
200
Industrial Production Index Export * source : kosis.nso.go.kr* source : kosis.nso.go.kr
Private consumption & Export % changePrivate consumption & Export % change
-20
-15
-10
-5
0
5
10
15
20
25
30
35
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
% c
hang
e
private consumption export
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* source : Bank of Korea (http://www.bok.or.kr)
Recipient of Basic Livelihood GuaranteeRecipient of Basic Livelihood Guarantee
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
1,420
1,351
1,374
1,424
1,513
1,250
1,300
1,350
1,400
1,450
1,500
1,550
2001 2002 2003 2004 2005
(thousand)
Gini's coefficientGini's coefficient
0.283
0.3160.320
0.317 0.319
0.312
0.3060.310 0.310
0.26
0.27
0.28
0.29
0.30
0.31
0.32
0.33
1997 1998 1999 2000 2001 2002 2003 2004 2005
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
* source : Bank of Korea (http://www.bok.or.kr)
Recent movement of Korean labor market:Recent movement of Korean labor market:
• Anglo Saxon to Europe
0
1
2
3
4
5
6
7
8
0 2 4 6
Labour Regulation Index
Unem
plo
ym
ent
(%)
1996
2003
1997
1998
1999
2000
2001
2002
2004
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Conflicts between Labor and CapitalConflicts between Labor and Capital
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
0
50
100
150
200
250
300
350
400
450
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
the
num
ber o
f par
ticip
ants
(thou
sand
)
0
200
400
600
800
1000
1200
1400
1600
1800
the
num
ber o
f cas
es
participans(left scale) cases(right scale)
* source: Korea Labor Institute (https://www.kli.re.kr)
7.9
7.4 7.3
6.9 6.8 6.8
6.36.1
5.7
5.1
4.7
3.5
0
1
2
3
4
5
6
7
8
9
Singapore Hong Kong Canada USA J apan UK France Germany Italy Korea India China
country
%
Deregulation Index (2004)
Year 1998 2000 2002 2004 2007
Regulations 10190 7156 7723 7846 8083
Number of Regulations
Korea of 2004 and the reference years of advanced countriesKorea of 2004 and the reference years of advanced countries
Countries Finland France German Ireland Italy Japan
Years 1997 1986 1990 1995 1987 1987
Countries Netherlands Norway Spain Sweden U.K. U.S.A.
Years 1989 1978 1999 1987 1989 1974
Reference Years for Advanced Economies
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Government role and size: Government role and size: G/Y, social security/G, index of agingG/Y, social security/G, index of aging
Country Reference YearGovernment Size (%,
G/Y)
Social Security and
Welfare out of GDP (%)Index of Aging unemployment rate
Japan1) 1987 16.48 9.79 11.5 2.8
USA 1974 19.4 8.1 10.11 5.59
Spain 1999 20.64 11.34 16.4 15.88
Korea 2004 25.18 6-7 (2005) 7.28 3.49
Germany 1990 29.46 13.78 15 6.21
Ireland 1995 30.63 10.31 11.4 14.1
UK 1989 33.93 10.6 15.5 5.99
Finland 1997 34.54 13.52 14.5 16.35
Norway 1978 35.35 17.26 14.8 1.65
Italy 1987 38.63 17.84 14.1 11.9
Sweden 1987 39.63 18.4 17.7 2.1
France 1986 43.4 19.41 13.5 10.4
Netherlands 1989 54.08 18.61 13 5.8
Doowon Lee, School of Economics, Yonsei UniversityDoowon Lee, School of Economics, Yonsei University
Decomposition of Sectoral Output per Worker Growth, Average of 1970-2001
1.5
2.9
5.8
2.61.7 1.9
0.3
1.9
0.5
0.3
-0.1 -0.1
0.6 0.1
-0.2
0.5
2.7
3.9
5.3
-0.4
0.6
3.6
-1.6
3.0
-2
0
2
4
6
8
10
12
All industry Manuf. Elec.,gas,water Construct. Wh.,retailtrade
Transport Finance Other serv.
Capital-labor Human capital Productivity