| bibo:abstract |
The Asian Financial Crisis: Learning from Korea's Experience
저 자 명 : Lee Geun
날 짜 : 1998.12
Ⅳ. Conclusion
The root causes of the Asian financial crisis are non-transparent relations among
governments, banks, and corporation, ineffective financial regulatory and supervisory
frameworks, and weak financial institutions. Rapid opening of financial market without
concomitant regulatory and supervisory frameworks allowed unhealthy risky
investments by foreign hot money. Dependence on foreign hot money to compensate for
current account deficits made Indonesia, Thailand, and Korea vulnerable to sudden
outflow of short-term investments when foreign investors' confidence level dropped. In
addition, a systemic lack of information on these countries by foreign investors created
the so called problem of adverse selection where investors tend to be attracted to "high
risk high return" areas. The lack of information made investors overly optimistic about
the Asian market before and during their investments, and also overly pessimistic when
they rapidly exited from Asian countries.
One important lesson that we can draw from this Asian financial crisis is that traditional
macroeconomic indicators cannot serve as an accurate predictor of a financial crisis by
themselves. In Korea and Indonesia, current account deficits were decreasing, and they
did not have serious fiscal deficit problems. Korea's foreign debt/GDP was 21% (1997,
March), far lower than the IMF recommendation of 30% and that of Mexico's in 1994
(37.8%). Current account deficits/GDP for Indonesia and Korea was 3.7% (1996) and
4.9% (1997, March) respectively, which are also lower than the IMF recommendation of
5% and that of Mexico's in 1994 (7.8%). Domestic savings/GDP for all three countries
were quite high showing 29% for Indonesia (1996), 36% for Thailand (1996), and 34%
for Korea (1997, March) compared with 15% for Mexico in 1994.
The Asian financial crisis taught us to pay more attention to transparency problems and
the problems of weak financial institutions as well as regulatory and supervisory
frameworks. In other words, to prevent another financial crisis, countries should strengthen healthy market mechanisms and make political economic systems more
transparent so that foreign investors do not make adverse selection. The problem of
controlling hot money is also extremely important. But an easy solution does not seem
to be at hand in this area. Therefore, for the time being, priority should be given to
building a sound domestic economic system, while seeking international cooperation to
solve the hot money problem.
The IMF program in Korea rightly targets the root causes of Korea's financial crisis.
The total solution of tight monetary policy and structural reforms in financial and
corporate sectors will eventually rebuild Korea's economic base for sustained growth.
But there is a serious political problem of time lag. That is, the social cost of enduring
economic difficulties may be too big to bear until the full effects of reform are beginning
to be felt. Therefore, one major hurdle for Korea to overcome is managing the time lag
problem by rebuilding investors' confidence, stabilizing currency and rapidly
establishing a social safety net. Unless these are done in a timely fashion, Korean
society will face social unrest and erosion of the democratic base of middle class, which
could may eventually threaten Korea's national security. The Korean government is well
aware of this time lag problem, and seems to be doing its best.
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