Ups and Downs
Subject South Korean economy
Topic Recession
Key Words Recession, Inflation, Economic Growth, Investment
News Story

First it was the Asian financial crisis that sent South Korea's economy into a tailspin. A remarkable recovery followed, with South Korea experiencing double -digit growth for 1999 and the first quarter of 2000. South Korea's growth slowed in the second quarter and many fear that incomplete reform efforts, a-not-as-favorable international climate and rising oil prices will slow economic growth considerably.

The 1997 Asian financial crisis hit South Korea particularly hard. The economy contracted 6.8 percent in 1998, there were a number of business failures, and South Korea's budget deficit climbed. In order to rebuild investor confidence and restore the economy, South Korea embarked upon a number of economic reforms. It tried to eliminate dishonest business practices and debt-laden corporations.

South Korea appears to have had remarkable success. Economic growth was 10.7 percent in 1999, exports soared to record levels and the stock market experienced significant growth. Recent events, however, indicate that there are still some obstacles to South Korea's complete recovery. There are renewed concerns about the health of many of South Korea's large corporations. Daewoo Motor and Hanbo Iron & Steel Co. are both insolvent, and foreign investors have been reluctant to purchase them. The financial sector, strained by bankruptcies and heavy debt, has received additional federal assistance. Inflation, pushed by higher oil prices, is increasing. As a result, the stock market has fallen 47 percent since its year-2000 high in January and the government has warned that higher oil prices could generate a $1 billion current account deficit in 2001.

To many economists, the economic slowdown indicates that South Korea's economy is in need of additional reforms. Since South Korea's economy is an integral part of the other Asian economies, any slowdown or recession would have widespread impact throughout the region.

(Updated November 1, 2000)


Attracting international investment is vital to the economic growth of Korea. How does an increase in investment stimulate economic growth?

2. According to the article, many South Korean firms are heavily indebted and some have already collapsed into bankruptcy. In the short run these changes may hurt the economy, however, economists believe, the long run impact is to improve efficiency and economic growth. Explain.
3. The government of South Korea continues to subsidize the operation of firms that would otherwise go out of business. What is the impact of the subsidy on the government deficit. On the firm? On consumers of the product?
Source Michael Schuman "Will Half-Finished Reforms Send Korea Back Into Fiscal Crisis?" The Wall Street Journal, October 12, 2000.

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