Silviase/jgov_v1.4_full_ann huggingface dataset:
### I. Introduction

In November 1997, Korea suffered a severe financial crisis, a phenomenon the country had not experienced previously. An International Monetary Fund (IMF) mission team visited Korea in October, immediately before the crisis, and its preliminary assessment was that Korea's economy was fundamentally healthy. The mission chief informally indicated a rosy outlook that Korea's domestic and external economic fundamentals were sound overall despite a string of significant corporate bankruptcies and estimated that the economy would grow by a robust 6.5 percent in 1998 (Korea Herald, October 16, 1997). Until about one month before the crisis, the opinion prevailed that the Korean economy was fundamentally healthy despite the moderately severe 1996 downturn that, in hindsight, provided glimpses of some structural weaknesses.

Korea had consistently registered relatively stable macroeconomic indicators for growth, inflation, unemployment, and trade volumes. Therefore, some experts predicted that the Korean crisis was just a temporary currency shortage due to the depletion of foreign exchange reserves when foreign capital flowed out of the country and the exchange rates soured. But the crisis did not stop with the currency crisis, despite IMF promises to inject sufficient currency. It was only in the second half of 1998 that the Korean crisis began to subside, and Korea entered a period of rapid recovery. In 1999 Korea regained pre-crisis levels of growth and output. Following the crisis and subsequent economic downturn, the Korean government introduced a wide variety of reform programs that were intended to cure the economy’s structural weaknesses and vulnerabilities in a short period of time. Korea has succeeded in recovery by introducing prompt and consistent structural reforms.

Many economists have analyzed the causes of the Korean crisis. These analyses have mainly focused on Korea’s structural vulnerabilities or mistakes of economic policy. A full analysis, though, should also consider the following questions: Why did the Korean economy experience such a severe crisis although many experts felt its economic fundamentals were solid? Why did the Korean economy continue to worsen despite IMF
bailout programs? Why could Korea introduce and implement structural reform programs so promptly? Traditional macroeconomic analysis failed to anticipate Korea's 1997 crisis. To adequately respond to the above questions, it is necessary to consider the institutional and cultural changes inherent in Korea's development, as well as standard economic analysis. In particular, intangible factors such as the practices and attitudes of economic players should be incorporated, and the East Asian countries' history and cultural background should be recognized.

The aim of this study is to re-examine the causes of the Korean crisis from a cultural point of view and analyze evidence of the cultural transition. Section II explores three questions tracing the economic situation from 1996 to 1998. Section III reviews the causes of crisis and describes cultural barriers that hamper the shift toward global trends. Section IV describes the cultural conflict between Korea's traditional culture and the emerging global culture, tracing its historical background and introducing evidence of continued transition after the crisis, and Section V presents conclusions.
### I I. Three Questions on the Korean Financial Crisis

The Korean financial crisis has been the topic of considerable debate and analysis. As one of the strongest of the “Asian Tigers,” Korea’s sudden and severe difficulties led to a re-examination of the Korean “miracle.” New interpretations were explored through consideration of the causes of the sudden collapse of a healthy-looking economy and the causes of the worsening of problems despite the introduction of bailout programs and prompt implementation of reform plans.

## Why Did the Healthy-Looking Korean Economy Come to a Crisis So Suddenly?

There did not seem to be significant signs of severe problems in Korea’s economy until mid-October 1997, about one month before the crisis. It is understandable that the IMF mission team assessed the Korean economy as fundamentally healthy. Balino and Ubide (1999), who studied the causes of the Korean financial crisis, also concluded that there was no significant indication of the impending crisis in the economic fundamentals, although some indicators related to external imbalances were an increasing source of concern. Demirguc-Kunt and Detragiache (1998) suggested that financial crises emerge more easily when the macroeconomic environment is weak, as indicated by low Gross Domestic Product (GDP) growth, high inflation rates, and high real interest rates. As early warning indicators as much as 24 months in advance of a currency crisis, Kaminsky, Lizondo, and Reinhart (1998) recommended checking international reserves, the real exchange rate, domestic credit, inflation rates, trade balance, money growth, real GDP growth, and the fiscal deficit. For Korea, none of these factors suggested that a crisis was imminent. Furman and Stiglitz (1998) estimated the possibilities of crises using the models of Frankel and Rose (1996), Demirguc-Kunt and Detragiache (1998), and Kaminsky, Lizondo, and Reinhart (1998) and concluded that the East Asian crisis did not follow the general patterns of the past two decades.

Review of Korea’s macroeconomic situation from 1995 through October 1997 provides few hints of the events that were to follow. GDP continued to grow strongly, recording
quarterly growth rates generally exceeding 5.0 percent, although the growth rate started to moderate in 1996. Unemployment rates remained stable and low, averaging about 2 percent during the period. The rate jumped temporarily to 3.4 percent in March 1997 but then returned to the 2 percent level. The production index also showed a steady, increasing trend until October 1997.

Nor could any symptoms of inflation or a collapse in asset prices be found. The Consumer Price Index (CPI) was stable, fluctuating around 5 percent, and asset prices such as housing and stocks were steady, although stock prices showed cyclical ups and downs.

Domestic monetary and fiscal positions appeared to be sound as well. Interest rates were stable, although a little higher than in other OECD countries, with yields on corporate bonds at around 12 percent. Money supply was sufficient to support domestic demand but not excessive or leading to inflationary pressures; M2 growth was somewhat above nominal GDP growth rates. The central government budget had a surplus of 0.3 percent of GDP and public debt was below 11 percent of GDP.

Korea’s external economic situation did not appear to give significant hints of the difficulties that were to follow. The exchange rate was managed within a small daily band of fluctuation of 2.25 percent around 800 won per dollar (Figure 1). $ ^{1} $ Foreign exchange reserves were maintained at the level of 3 months of imports, as recommended by the IMF at the time (Figure 2). $ ^{2} $
Figure 1. Foreign Exchange Rates

Source: Bank of Korea (2002)

Figure 2 Foreign Exchange Reserves

Source: Bank of Korea (2002)

The only difficulties in sight were a worsened current account balance caused by a slump in exports and a series of bankruptcies and subsequent increase of non-performing loans (NPL) in the financial sector. $ ^{3} $ Korea had experienced an economic downturn in 1996 due to a slump in exports, and there had been concerns about the economy’s health. In 1996, the Korean export sector began to slow down, particularly due to weakness in semiconductor exports, and Korea recorded a record monthly current account deficit of 3.6 billion dollars. By the end of 1996, Korea’s current account recorded a huge deficit.
of $23 billion, compared to a deficit of $8.5 billion at year-end 1995. This development was particularly significant because high levels of investment and strong exports had supported Korea's strong growth. Exports account for 40 percent of Korea's GDP, so the current account balance is an important indicator of business activity and economic health.

But those concerns peaked at the end of 1996 and began to fade in 1997. The current account deficit improved substantially during 1997, beginning in April, and ended the year with a surplus (Figure 3). For much of 1997, Korea’s economy seemed to be improving.

Figure 3 Current Account By Month (November 1995 to November 1997)

Source: Bank of Korea (2002)

Perceptions of the economic performance were reflected in stock prices as well. The Korea Composite Stock Price Index (KOSPI) plunged from a peak of 986.84 on May 7, 1996 to 651.22 at year-end, a decline of 34.0 percent. After it hit a low of 611.05 on January 7, 1997 a bull market emerged until September 1997 when it turned to a bearish market (Figure 4). This trend in part reflected fluctuations in its trade balance and corporate bankruptcies.

Figure 4 Korea Composite Stock Price Index (October 1996 to October 1997)
Source: Korea Stock Exchange (http://www.kse.co.kr) (2002)

Bankruptcies continued to be a major threat to Korea’s economy. With the economic downturn, several large business groups faced serious cash flow problems. This development led western bankers to be more cautious in lending to Korean chaebols. At the beginning of 1997 the Hanbo Group, the 14 $ ^{th} $ largest chaebol in Korea, declared bankruptcy. The 1997 economy was marked by troubles in other ailing chaebols and their affiliate firms. The domino effect that started with Hanbo in January spread to other large firms including Sammi, Kia, Jinro, Daenong, Newcore, Haitai, and Halla (Table 1). As the “Kia crisis” dragged on, the economy suffered along with Kia, alerting major international credit rating firms and financial institutions that further economic trouble was brewing in Korea. The government took actions to cope with the growing problem of NPL in the financial sector, passing the “Law on Efficient Management of Non-performing Assets of Financial Institutions and Establishment of Korea Asset Management Corporation (KAMCO)” in August and rushing to launch KAMCO in November.

## Table 1 Bankruptcies of Chaebols in 1997

Jan. 23 Bankruptcy of Hanbo Group

Mar. 19 Bankruptcy of Sammi Group

Apr. 21 Jinro Group filed under Corporate Bankruptcy Postponement Accord

May 28 Daenong Group filed under Corporate Bankruptcy Postponement Accord

July 15 Kia Group filed under Corporate Bankruptcy Postponement Accord

Nov. 1 Bankruptcy of Haitai Group
It is generally acknowledged that the wave of financial crises that was sweeping across countries in Southeast Asia added to Korea’s problems as well. A rapid currency depreciation occurred in Thailand July 1997 and was followed by currency crises in the Philippines, Malaysia, and Indonesia. Korean economic authorities were concerned and watched the on-going currency crises closely through the summer but nothing happened in Korea until autumn.

Seemingly defying the difficulties elsewhere in Asia, the Korea Development Bank, a state-run bank, succeeded in issuing $1.5 billion in global bonds in September 1997 without any difficulty. It was the largest foreign currency bond issue ever offered by a Korean bank or corporation. The bank originally planned to issue $1 billion in bonds but added $500 million more to meet the demand of foreign investors seeking safer alternative investments as South Asian economies stumbled. The September issue, though, was a last show of strength.

Following the September bond issue, market sentiment toward Korea and the effect of the Asian crises on its economy turned ambiguous. Some funds flowed out in response to overall anxiety regarding the Asian economies while other investors saw Korea as an opportunity. At the end of October, though, sentiment turned sharply pessimistic. Korea’s eighth largest chaebol, Kia Group, faced extreme financial difficulties; the Hong Kong stock market faltered; and then the credit rating agencies downgraded Korean debt. Foreign investor confidence plummeted, and the abrupt outflow of short-term foreign portfolio investment funds initiated an overall capital flight and currency tumble. In November 1997 the won plunged 27.5 percent against the U.S. dollar; over all of 1997, December to December, the won lost 40.3 percent of its value against the dollar.

Why Did the Korean Economy Continue To Worsen Despite the Announcement of Bailout Programs?
On the eve of the Korean crisis, the soaring foreign exchange rates were considered just a temporary symptom of the financial jitters caused by foreign investors' concerns over the depletion of foreign exchange reserves. It was expected that the IMF loans to support the foreign reserve position would ease foreign investors' concerns, on the assumption that Korea's economy was fundamentally healthy. But they did not.

From the beginning of November, the foreign mass media carried articles critical of Korea’s financial situation. The Asian edition of the Wall Street Journal (November 3, 1997) pointed out that the central bank’s foreign reserves were disappearing fast. The Financial Times (November 4, 1997) said that the Korea economy had serious structural problems resulting from significant industrial overcapacity and a fragile banking sector, as well as a grave debt crisis due to high levels of short-term private debt in the corporate and banking sectors. On November 5, 1997 Bloomberg News Service and the International Herald Tribune reported that Korea would soon ask for bailout funds from the IMF.

On November 10, the won/dollar rate passed the 1,000 won/dollar mark for the first time, and on November 16 Michel Camdessus, Managing Director of the IMF, secretly visited Seoul to discuss rescue loans. On November 17, another effort to soothe foreign investors' concerns failed when the National Assembly failed to approve a package of 13 financial reform bills before the end of the regular session.

On November 19, the government announced a financial stabilization package intended to encourage the return of foreign funds into the domestic market. $ ^{4} $ The package widened the acceptable band for daily foreign exchange fluctuations of the won from 2.25 percent to 10 percent; introduced measures to stabilize the financial sector by streamlining mergers and acquisitions (M&A) of financial institutions; provided for the liquidation of bad corporate debts at local and merchant banks; and further liberalized the
bond market. These measures, though, failed to prevent the country from sliding further into financial turmoil, and won/dollar exchange rates soared from 1012.8 on November 19 to 1139 on November 21.

Figure 5 Won / Dollar Exchange Rates

Source: Bank of Korea (2002)

On November 21 the Korean government officially announced that it had decided to apply for a bailout loan from the IMF. The date marked a turning point in the crisis. Boosted by the government’s decision to seek assistance from the IMF, both Korean stock prices and currency rebounded briefly but became unstable again.

Although Korea had requested financial assistance from the IMF, downgrades by credit rating agencies fueled a depreciation of the won and a sharp tumble in stock prices. On November 25, Standard and Poor's (S&P), a U.S. credit rating firm, lowered its rating on Korea's long-term sovereign debt to single A-minus from A-plus, stating, "The downgrades reflect the rapid deterioration in Korea's financial position and the authorities' continued reluctance to recognize and effectively manage the confidence crisis affecting the banking and corporate sectors." Another U.S. credit rating agency, Moody's Investors Service Inc., lowered Korea's sovereign rating from A1 to A3 on November 28. Reflecting these actions, won/dollar exchange rates rose again from 1076.4 won on November 24 to 1249.5 won on December 4.
On December 3, Korea and the IMF reached an agreement on a financial aid package totaling $58.35 billion that included loans worth $21 billion from the IMF, $10 billion from the World Bank, $4 billion from the Asian Development Bank (ADB), and $23.35 billion from the G-7 and other countries. The nation, however, was obliged to accept the terms and conditions imposed by the IMF in order to resolve its financial crisis stemming from a foreign exchange shortage and stock market collapse. Economists expected that the award of the IMF aid would serve as a kind of guarantee, and foreign financial institutions would feel confident enough to roll over most of Korea's short-term debts, helping to ease the foreign currency crunch. However, Korea's ever-deteriorating international credit rating dominated and made it increasingly difficult to obtain foreign currency, leading to further depletion of the country's foreign reserve holdings.

On December 10 Moody’s downgraded Korea’s debt again, from A3 to Baa2, semi-junk bond level. One day later, S&P also downgraded Korean debt three steps from A- to BBB-. These downgrades reflected concerns about the effective implementation of the IMF’s restructuring plan. Won/dollar rates, which were 1156.1 won on December 5, sharply soared to 1719.39 on December 13.

On December 21, Moody's downgraded the country's credit rating to non-investment grade, to Ba1 from Baa2, based the outflow of funds from the markets and the resulting currency depreciation that added to the banking sector's existing asset quality problems. Two days later, on December 23, S&P also downgraded Korea, by four steps from BBB-to B+, mentioning that "recent steps taken by the government to assist its banking sector placed the nation's own external position at risk and were inconsistent with the spirit of the IMF bailout program."

Table 2 Credit Rating Agency Downgrades of Korean Debt

S&P	Moody's	Fitch
AAA	Aaa	AAA
AA+	Aa1	AA+
AA	Aa2	AA
Investment-grade	AA-	Before Oct.24, 1997	Aa3	AA-	Before Nov. 18, 1997
A+	Oct. 24, 1997	A1	Before Nov. 28. 1997	A+	Nov. 18, 1997
A	A2	A	Nov. 26, 1997
A-	Nov. 25, 1997	A3	Nov. 28, 1997	A-
BBB+	Baa1	BBB+
BBB	Baa2	Dec.11, 1997	BBB
BBB-	Dec. 11, 1997	Baa3	BBB-	Dec.11, 1997
Non-investment-grade	BB+	Ba1	Dec. 21, 1997	BB+
BB	Ba2	BB
BB-	Ba3	BB-
B+	Dec. 23,1997	B1	B+
B	B2	B
B-	B3	B-	Dec.23, 1997
Default-grade	CCC+	Caa	CCC+
CCC	CCC
CCC-	CCC-
CC	Ca	CC+
CC
CC-
C	C	C+
C
C-
D	D

The international credit-rating agencies’ lowering of Korea’s credit rating to junk bond status brought about a tremendous downturn in the Korean currency. On December 24, the exchange rate rose to 1,964.8 won per U.S. dollar, a depreciation of 16.6 percent from the previous day. On December 25 the IMF and the international agencies, along with the U.S. and 13 industrialized countries, announced their willingness to provide $10 billion between that date and early January as part of the bailout package. Due to immediate aid by the IMF-led international community, Korea avoided a full economic disaster, and the won/dollar exchange rate temporary exceeded 2,000 won for the first time.

But effect of the IMF aid lasted for only a few days. In the early days of 1998 foreign exchange rates rebounded and moved around 1700 won. The Korean government
realized that it needed to negotiate with private banks to stop the currency outflow. A Korean government delegation began discussions in New York with 13 foreign banks to reschedule short-term debt, and on January 28 they reached an agreement to roll over and extend the maturity of Korean commercial banks' short-term debts by one to three years, with interest premiums $ ^{5} $ and government payment guarantees. On March 16, the government announced the results of additional rollover negotiations. A total of 21.8 billion, representing 94.8 percent of the targeted short-term debt, was successfully rolled over after two and a half months of negotiations. After this, the won/dollar exchange rates started to stabilize rapidly.

Presentations (“road shows”) aimed at issuing global bonds to foreign investors were held concurrently in 12 major cities in seven countries including Hong Kong and New York from March 26 through April 3. The effort successfully issued 4 billion in bonds, 1 billion beyond the projected target of 3 billion. $ ^{6} $ The successful issuance of the foreign exchange equalization fund bonds indicated that Korea could raise new money in the market and the foreign-exchange turmoil was over. Following the successful rollover of the banks' short-term debts and the 4 billion global bond issue, Korea's foreign exchange conditions improved and stabilized, with won settling at the 1,300 won per dollar level.

## Why Could Korea Introduce Reform Plans So Quickly?

After the financial crisis occurred, Korea was able to implement most reforms of its legal framework and organizations within a year. Considering the needs of building consensus and working with the administrative and political processes, Korea’s reform implementation was amazingly speedy and orderly. For example, the U.S. took more than one year to reorganize the Department of Homeland Security after the September 11 attacks.
Korea’s financial crisis was approximately coincident with the transition of the nation’s leadership. The Presidential election was held on December 18 and opposition leader Kim Dae-Jung was elected to a 5-year term as the 15th President of the nation. This shift of political power to the opposition party was the first in Korea’s political history.

The transition was orderly and peaceful, without the confusion and turbulence that occurred in neighboring countries. In Indonesia, the economic crisis triggered economic and political turbulence and eventually President Suharto stepped down on May 21, 1998 following fierce anti-government demonstrations. In Malaysia, Prime Minister Mahathir objected to the IMF bailout programs and suggested a “Wall Street conspiracy” of hedge funds that hoped to profit from currency speculation.

On December 22, immediately following the election, President-elect Kim Dae-Jung met with the out-going President and launched an interim Emergency Economic Committee composed of cabinet members and leading politicians from the President-elect's party to deal with current economic issues. After Kim was inaugurated on February 25, the newly-installed government created the Economic Policy Coordinating Council, headed by the President and consisting of senior advisors and economic ministers, the head of the Financial Supervision Commission (FSC), the governor of the Bank of Korea (BOK) and a private professor. At its first meeting, on March 11, the group discussed measures to overcome the economic crisis facing nation.

After the election, the National Assembly promptly reconvened in an extraordinary session and passed a package of 13 financial reform bills on December 29. The financial reform package, which revised the laws governing the BOK and created a new financial supervisory agency, was designed to speed up the previously proposed structural renovation of the nation's financial sector. The revisions to the law governing the BOK made the central bank more independent to better enable it to control inflation and designated the head of the BOK to lead the policy-making Monetary Board. A new, consolidated financial supervisory agency was created through the merger of the three