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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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PART 3 TRANSFORMATION AND THE RELATIONS BETWEEN EXTERNAL AND INTERNAL INSTITUTIONS – INSTITUTIONAL CHANGE IN KOREAN MONETARY POLICY AFTER THE EAST ASIAN CRISIS

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143 Chapter 9: Central Bank Independence and Monetary Policy After the Asian Crisis – the Case of South Korea 9.1 Introduction – monetary policy debates Monetary policy was one of the most contested fields of economic policy during the financial and economic crisis of 1997 and 1998 in South Korea. After the plunge of the Southeast Asian currencies, beginning in Thailand in July 1997, in the autumn of 1997 the South Korean won also came under pressure. Previously, several Korean conglomerates (chaebol), especially Hanbo Iron & Steel and Kia Motors, had with their bankruptcy added to the economic uncertainty. In December 1997, two aid packages from the IMF with the record size of 58 billion USD were concluded. The deep plunge of the won exchange rate posed a difficult challenge to mone- tary policy in Korea (Chopra et al., 2001: 20-26). On one hand, the heavily indebted chaebol and the small- and medium-sized companies producing intermediate products for chaebol were interested in low interest rates. On the other hand, a large part of the debt was foreign debt, and the depreciation of the won made the interest payment and principal repayment more difficult. The cooperation with the IMF led to a policy of temporarily high interest rates, which was heavily criticized as causing the deep recession of 1998, where the South Korean GDP fell by around 6 percent. However, the goal of this policy was achieved, namely the restoration of trust in the South Korean currency. Already in mid-1998 the level of interest...

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