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The Shrimp that Became a Tiger

Transformation Theory and Korea’s Rise After the Asian Crisis

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Bernhard Seliger

South Korea underwent a dramatic change in the last one and a half decades, from being considered a «tiger in trouble» in the wake of the Asian crisis to a showcase of economic development. The judgment of 1998 was itself a complete reversal of the previous enthusiastic reviews of world record-high growth for several decades, from the 1960s to the 1990s. Korea, once considered a shrimp between two mighty whales, Japan and China, veritably made a jump to become a tiger. And, after the steep decline of 1998, this tiger again showed its claws. This book deals not with the causes of the crisis in retrospect, but rather with the implications for the development of a new economic model in South Korea. It argues that the crisis and the following institutional change can best be understood by applying the theory of economic transformation.

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Chapter 1: The Economic Crisis in South Korea as a Transformation Crisis of its Political and Economic Culture

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1.1 Competing explanations for the economic crisis and the role of transformation theory The reasons for the economic and financial crisis in East Asia in general and South Korea in particular are subject of intense debate. This is all the more true because economists completely failed to predict the crisis. No consensus was reached on the ultimate reasons for the economic meltdown, and often reasons and symptoms of the event were not clearly distinguished. For instance, the finan- cial upheaval was described as a crisis of trust in the economic viability of the East Asian economies, which is clearly a symptom rather than an underlying cause. Ob- servers have offered two broad competing groups of explanations for the crisis, namely the fundamental explanations and the financial architecture explanations. The fundamental explanations focus generally on ‘bad governance’ in East Asian countries and South Korea, based on factors such as: an unsustainable cur- rency peg; growing trade deficits; ‘crony capitalism’ (corruption and lack of trans- parency); credit decisions driven by politics rather than economics; a lack of com- petition in domestic markets; orientation of chaebol toward market share instead of profit; and generally the impossibility of maintaining the government-led, interven- tionist developmental models in the more global economy (The Economist, March 7, 1998; Seliger, 1999a). Financial architecture explanations focus on the growing instability of global capital markets, the moral hazard due to implicit bailout expectations, herding behavior, and financial contagion. Many authors also favor an explanation made up of a combination of...

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