Over-reliance on foreign debt: Behind South Korea's economic crisis of 1997

South Korea, known for its impressive economic growth and technological advancements, faced one of the most challenging times in its history in 1997. The country's currency, the Won, collapsed, triggering a widespread financial crisis that threatened to cripple the economy. We know this event as the 'Asian Financial Crisis,' caused by a combination of internal and external factors. 

Why did it happen? As several South Asian countries are facing currency crises, including ours, we can take a look at this significant past event to reflect on our situation.

The buildup

In the 1960s, South Korea was one of the poorest countries in the world, with an economy largely dependent on agriculture. However, the country transformed itself into an economic powerhouse through ambitious economic policies and government intervention. By the 1990s, South Korea had become the world's 11th-largest economy, with a strong focus on manufacturing and exports.

But the crisis was building, and nobody could see it coming. One of the main reasons behind the economic crisis was the country's heavy reliance on short-term foreign borrowing, making it vulnerable to global financial market changes. 

In reality, the country's rapid economic growth had led to excessive borrowing and investment, causing a buildup of debt. This happened due to the government's lack of oversight in the financial sector. 

The government allowed banks and other financial institutions to operate with minimal regulation, leading to high risk-taking and speculative investments.

A series of external shocks, such as the devaluation of the Thai Baht, had a ripple effect on other countries in the region, including South Korea. Investors began to lose confidence in the Korean economy, leading to a sharp decline in the value of the Won and causing many businesses to fail.

The crisis unfolds

The Korean economic crisis that had been building up for years began to unfold in the summer of 1997, when several major Korean corporations, including Daewoo and Hyundai, started to experience financial difficulties, and many went bankrupt. The government attempted to prop up these companies with loans, which only added to the country's debt burden.

As the crisis deepened, the value of the Won continued to decline, and many Korean companies were forced to default on their loans. The government responded by raising interest rates and imposing austerity measures, but these actions only worsened the situation, leading to widespread unemployment and social unrest.

Tackling the Crisis

To ease the situation, the South Korean government implemented a series of bold measures. One of the first steps was to seek assistance from the International Monetary Fund (IMF), which provided a USD 57 billion bailout package.

The government also implemented various structural reforms to address the underlying issues that had contributed to the crisis. These reforms included increased transparency and regulation in the financial sector and measures to reduce corporate debt and improve the balance of payments.

Additionally, the government launched a program to restructure the country's conglomerates, or chaebols, which had played a significant role in the crisis. This program involved breaking up some of the largest chaebols and reducing their economic influence.

Within just 2 years after the crisis unfolded, South Korea stabilised its economy and emerged from the crisis successfully, thanks to the timely measures. The country's GDP began to recover in 1999 and grew at an impressive rate in the following years.

However, the crisis had a lasting impact on the Korean economy and society. Unemployment remained high for several years, and many businesses and individuals were forced to declare bankruptcy. 
The crisis also highlighted the need for continued reform and oversight in the financial sector to prevent similar events from happening in the future.

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