South-Western College Publishing - Economics  
Won Wonderful Recovery?
Subject Recession
Topic International Finance
Key Words Recession, GDP, Exchange Rates, Economic Growth
News Story

Asia's economic crisis spread to Korea in October 1997. By December, the won, Korea's currency, had plummeted, foreign reserves had dried up and many thought that Korea would default on its externally held debt. A $58 billion IMF bailout prevented Korea from defaulting on its loans. Korea's economy contracted and Gross Domestic Product (GDP) fell by 5.8 percent in 1998. So far this year, the economic news is good: Korea's economy appears to have turned around. The won has risen, the stock market is up 49% and economists are forecasting 4.0 percent economic growth for the year. If Korea's economy has turned around, this change has been accomplished without the drastic reforms to its economy that economists had said were necessary.

The Korean government played a major role in the remarkable growth of the Korean economy in the post World War II era. The government set economic goals, directed the financial sector to provide the loans needed to fuel the development, and encouraged the growth of family-run conglomerates known as chaebols. Labor unrest was suppressed by laws barring layoffs. Insulated from competitive pressures, the conglomerates expanded into areas that were not profitable, took on increased debt and were economically inefficient.

The President of Korea, Kim Dae Jung, was elected in December 1997 and supported economic reform. President Kim enlisted the support of labor, the general population and the chaebols for the layoffs, bank failures, cuts in government spending and restructuring of the conglomerates for which the International Monetary Fund (IMF) and others were calling.

Korea initiated some of these reforms causing the won to stabilize and then increase. Manufacturing has also recovered. The economy's gains have caused the push for reforms to slow. Analysts argue that efforts to make the economy more efficient have only been half-hearted and unless reforms are completed, economic growth will suffer.

(Updated June 1, 1999)

1. Suppose that Korean firms have borrowed dollars from international banks and must repay their loans in dollars. How are their payments affected by the won-dollar exchange rate?
2. What role does exports and imports play in determining the value of a currency?
3. During the height of the crisis, the Korean government asked its citizens to trade their gold jewelry for won at the current reduced exchange rate. Koreans responded to this request by providing $1.3 billion in gold. How did this proposal assist the Korean government in resolving its economic crisis?
Source Michael Schuman, "Korea's Fast Recovery Suggests That Reform Isn't the Only Answer", The Wall Street Journal, May 14, 1999.

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