South Korea's Economic Growth Model

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 a

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tting the banks down. The problems were, therefore, quite extensive. Hassink (1999) believes that the crisis was the result of a debt-dependent financial structure that was the product of 36 years of South Korean government policy. This policy encouraged private companies and financial markets to depend on foreign loans as a means of achieving artificially high growth in the absence of sufficient domestic capital. The IMF rescue loan of $57 billion accounted for only 37 percent of the $153 billion that South Korean companies owed to international banks. This researcher believes that as early as the late 1980s, there were abundant indicators supporting a less interventionist role of the central government in the economy. Finally, the chaebol was allowed by government to take large risks, leading to an inefficient allocation of resources disguised by cross-subsidizing between divisions within chaebol concerns. Smaller businesses were neglected and the effects of the crisis on these businesses and South Korean citizens were widespread. Yoo and Moon (1999) states that the IMF formula attached to the bailout called for retrenchment in state finance and low economic growth. High interest rates were instituted, leading to the f

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