Introduction
From the early 1960s to the mid-1990s, South Korea enjoyed a phenomenal average annual growth rate of 6.6 percent. (Root 1999) However, the growth of the economy slowed in the mid-1990s. In 1997, the economy was hit hard by a foreign exchange crisis. Foreign banks pressured South Korean banks and non-bank financial institutions to pay off loans. In order to avoid default, the South Korean government requested that the International Monetary Fund (IMF) provide an emergency rescue fund. On December 4, 1997, the IMF organized a financial rescue package of US $56 billion. (.Digital Chosun Ilbo, December 5, 1997) In addition, through emergency negotiations with the Korean government, a dozen major banks around the world agreed to convert US $15 billion in short-term loans into long-term loans for Korean financial institutions. (Digital Chosun Ilbo, December 30, 1997)
Although the foreign exchange panic had subsided by the spring of 1998, the economy has continued to deteriorate until only recently. The tight macroeconomic policies urged by the IMF caused interest rates to rise and many corporations to go bankrupt. The unemployment rate reached the highest level ever (8 percent) and the GNP dropped by 6.6 percent. (Digital Chosun Ilbo, August 27, 1998)
What caused the South Korean economic miracle to evaporate so rapidly? According to Root (1999), South Korea did not make adequate institutional and policy adjustments in response to the changing global economic environment. In particular, the government-led development approach, once successfully employed by South Korea, has been heavily criticized. In this paper, I investigate not only the causes of the South Korean financial crisis from both political and economic perspectives, but also discuss pre-crisis and post-crisis policies.
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