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South Korea has long been touted as an outstanding model of economic development. Despite poor resource endowment and a large population, a colonial legacy, the devastation following the Korean War, chronic political instability, and the protracted military confrontation with North Korea, South Korea has made an impressive ascension in the international economic system, becoming the 13th largest economy and the 8th largest trading state in the world in a relatively short span.
Beneath the economic miracle lay human capital investment, a timely transition to an export-led growth strategy, and the visible hands of the developmental state. As a developmental state, South Korea was able to expedite the pace of economic growth by identifying strategic industrial sectors, making discretionary allocation of resources to those sectors, and minimizing the collective action dilemma pervasive in most developing countries.
In November 1997, however, a vicious economic crisis jolted South Korea's miracle economy. Eroding international competitiveness and dismal corporate performance, proliferation of nonperforming loans and paralysis in the banking and financial sector, economic mismanagement of the government, mounting foreign debts and an acute liquidity crisis, regional contagion effects, and the panic behavior of international lenders drove the South Korean economy to the brink of default and collapse.
The subsequent IMF bailout was predicated on the government's agreement to carry out comprehensive structural reforms that would remake the South Korean economy and transform it from a semi-mercantilist economy to a more market-oriented one. Kim Dae Jung, who won the presidential election in the middle of the crisis and was inaugurated in February 1998, has undertaken the structural reforms quite successfully by complying with the IMF conditions. As a consequence of the president's reform efforts, the South Korean economy has recovered. The GDP growth rate rose from minus 5.8 percent in 1998 to 10 percent in 1999, while the rate of industrial productivity increased from minus 7.3 percent to 20 percent in 1999. The current account balance went from deficits of $23 billion in 1996 and $8.2 billion in 1997 to a surplus of more than $20 billion in 1999. Foreign reserves rose from a meager $7.2 billion in November 1997 to $68.4 billion two years later. The stock market also revived, going beyond the 800 level since June 1999. Along with this, the rates of dishonored corporate bills also returned to pre-crisis levels, recording 0.10 percent since January 1999. The unemployment rate was also drastically reduced from a high of 8.6 percent in February 1998 to 4.7 percent in March 2000.
Can the improvement in macroeconomic indicators be interpreted as the sign of full economic recovery? Can it be ascribed to the structural reforms? To what extent have the structural reforms been successful? And is there any chance for recurrence of the economic crisis? This monograph is designed to explore these questions from a political economy perspective.
Chapter 2 provides a detailed examination of the causes of the economic crisis in South Korea, looking into the dynamic interplay of both internal and external factors. Chapter 3 presents a comprehensive overview of the IMF's conditions and the structural reforms undertaken by the Kim Dae Jung government, focusing on the banking and finance, corporate, and labor sectors, as well as on liberalization and deregulation. Chapter 4 explores the political dynamics of the structural reforms. Chapter 5 makes critical assessments of Kim Dae Jung government's structural reforms by analyzing actual implementation and outcomes. Chapter 6 discusses newly emerging barriers to the continuation of structural reforms. Finally, in Chapter 7, the monograph suggests several comparative policy implications.