Amsdem on Korea

[Michael Perelman <michael@xxxxxxxxxxxxxxxxx>]

I asked Amsden if she wanted to tell us anything about Korea.  She is on
sabbatical, so she just said to look at her op ed piece:

Section A; Editorial Desk
Behind Korea's Plunge
----
By Alice H. Amsden and Yoon-Dae Euh
11/27/97
The New York Times
Late Edition - Final
Page 39, Column 1
c. 1997 New York Times Company
  South Korea has competed brilliantly in basic industries like steel
and semiconductors, and has moved ahead quickly in high technology. Yet
financial markets are teetering, the Korean currency has nose-dived, and

International Monetary Fund officials are considering South Korea's
request for a $20 billion bailout loan.
   Economic experts have blamed too much Government regulation and
oversight for South Korea's problems. But it isn't that simple. When the

Government controlled the financial markets in the 1970's and 1980's,
Korea's growth was stupendous. Not until the early 1990's, when
financial markets were deregulated, did the economy sink. Indeed, it was

the Government's decision to allow banks and other financial
institutions to borrow and lend without interference that created the
current crisis.
    In the 1970's, the Government decided how many financial
institutions could exist and what they could do. But in the 1980's the
world's leading financial institutions expanded internationally, and, in

order to compete, South Korea had to loosen its rigid controls. The
Government allowed banks to have more say on interest rates and to have
overseas operations.
   But the Government went too far. In 1995, South Korea made a Faustian

bargain with the United States. In exchange for membership in the
prestigious Organization for Economic Cooperation and Development, it
agreed to loosen almost all controls on financial institutions, both
international and domestic.
   Foreign banks were no longer barred from buying and selling large
amounts of foreign currency; that enabled them to speculate against the
Korean currency, the won. The result? When Southeast Asian currencies
fell this year, the won also weakened, but speculation made the
currency's slide even more dramatic.
   South Korea also didn't monitor its own banks as they ventured
farther afield. Merchant banks, which can engage in most financial

transactions, lent recklessly. They took out loans from international
institutions, but gave out loans to risky ventures, like finance
companies in Southeast Asia. When many of these businesses went bust
earlier this year, South Korea's merchant banks were stuck with bad
loans totaling $3 billion.
   The Government's looser restrictions on manufacturing companies were
also harmful. Companies became free to take out loans from foreign banks

-- and many of them overindulged. They borrowed lots of money, yet they
didn't turn these loans into sensible long-term investments. The
companies defaulted on loans, partly because the won had weakened.
   These bad loans helped create a crisis for South Korea's entire
commercial banking system. Not only were companies unable to pay back
their foreign loans, but they couldn't pay back their old loans to South

Korea's commercial banks, either.
   When word got around that some financial institutions were failing,
there was an old-fashioned run on the banks. Businesses and individuals
withdrew their money, and banks were forced to call in their loans to
companies that were highly leveraged but profitable. These companies
were innocent victims; because of the panic, they went bankrupt.
   Hoping to avoid future crises, international economists and
regulators are calling for an overhaul of South Korea's manufacturing
and financial sectors. Certainly, the Government must reform its banking

system and revamp some of its industries.
   But the crisis also shows that the United States, acting out of
self-interest, was wrong to push the South Korean Government to open up
its financial system so quickly. The Government and its financial
institutions didn't have time to develop adequate ways to control and
monitor this brave new world. As the international experts set the terms

for South Korea's bailout, they would do well to remember this mistake.
  About the Author: Alice H. Amsden is professor of political economy
at the Massachusetts Institute of Technology. Yoon-Dae Euh, a
professor of international finance at Korea University, is a former
member of South Korea's Monetary Board.


--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 916-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx