South Korea's successful economic growth model, which was based largely on strong central government trade, technology and industrial policies, was long emulated by policymakers from many developing countries. Since November of 1997, however, South Korea has been faced with its severest economic crisis since the Korean War of the 1950s. Many analysts believe that the crisis was a result of strong central government backing for both the financial sector and the chaebol (large industrial enterprises), which led to inefficient allocation of resources and large enterprise debts (Hassink, 1999).
At issue in the proposed study is the question of whether or not South Korea, at the time of the 1997 financial crisis, was illiquid or insolvent (terms which will be defined below). The research hypothesis to be tested is stated as follows: South Korea was illiquid but not insolvent at the time of its 1997 financial crisis. A related issue is the effectiveness of the International Monetary Fund (IMF) "bailout" and "austerity" policies with respect to the South Korean financial crisis.
Debate over the increasingly aggressive role of the IMF and, by extension, the World Bank, in financial crises such as those occurring in South Korea is frequently described in the literature (Min, 1999). Dean (1999) notes that since the 1980s, several waves of international debt crises beginning in Mexico and spreading quickly throughout Latin America to parts of Asia and Eastern Europe, have led to the increased involvement of both the IMF and the World Bank in the economic activities of affected countries. Generally, when these agencies participate in an economic bailout, strenuous conditions are attached. Macroeconomic as well as microeconomic policies, some demanding austerity measures, are often imposed upon a country participating in a bailout. Similarly, Lowell and Paisley (1997) have pointed out that the IMF often finds a high level of ...