South dated back to 1950’s. In its earlier days

                                            SouthKoreas economy development can be termed as the one of the most rapiddevelopments in the history of the modern world. The roots for the growth ofSouth Korea economy can be dated back to 1950’s. In its earlier days afterindependence the government of south korea laid down plans for the developmentand upliftment of farmers as they are the highest population share. The wealthylandlords had sold their farms at a lower rate to other farmers because of thegovernment initiatives, which led to the distribution of wealth among differentclasses of the society.

The present economicdevelopment and achievement of south korea has been laid down because of thedifferent policies and measures since 1960’s, which not only developed theeconomy but also stood out as a self-sufficient nation in the modern arena. Thefollowing timeline of events will describe the growth of South Korean economyover the past 2 decades 5Year Economic Development Plans1st5 Year Plan (1962-1966)In 1962, President Parkhas introduced Economic Planning Board (EPB), which laid down 5 Year EconomicDevelopment Plans (1962-1966), for overall development of the country &especially identifying the best performing industries and develop them. Duringthis 1st 5year period many initiatives like export promotion, lowinterest rates on loans, devaluation of “Korean Won”, lifted certain exemptionson imports, soft loans were taken from Japan & America were being taken andinitiated to increase capital flow and development of the country.2nd5 Year Plan (1967-1971) It mainly concentrated onHeavy & Chemical Industries. It also began to increase its defensecapabilities by spending a major chunk of its budget on military activities.

From 1971-1980, thecountry main focused on overall internal development like construction ofprojects, dams, highways R & D programs, industrial parks etc. which leadto creation of jobs and increase cash flow in the economy.  SouthKorean 1979 Economic CrisisThis crisis wasinevitable because of the following reasonsØ  HighInflationØ  RisingWagesØ  OilPrices downturn worldwideØ  Assassinationof President ParkØ  Highamount of Foreign debt ($20.3 billion in 1979)SouthKorean Economy From 1980 – 1988The year 1980 waschanging phase in the history of South Korean economy, as government initiatedits 1st “growth” strategy for the betterment of the economy.

The main events whichtook place during this time are as follows1.     National Stabilization program was launched,which ordered not to increase any wages for employees, cutting down employees,repressing labor unions were main priorities of government to tackle the”economic crisis”2.     During this period, the south Koreaneconomy faced many challenges. The main events during this period are asfollows3.     4 National Banks were Privatized (1981-1983)4.     Imposed restriction of individualownership on banks with a maximum level of 8%5.     Tariff reduction programs were introducedto eliminate trade barriers6.     Government Regulated market entry &investments in rationalized industries.

7.     Tax benefits for existing companies 8.     Increase the usage of Information &Communication Technology9.     Increased export activities10. Labor unions became rampant in thecountry, which fought for the rights of the fellow labors.SouthKorean Economy from 1993 – 1997Kim Young Sam became the1st civilian president.

He developed the policy of “globalization”,to make the economy stronger. He has introduced 5 Year Financial Liberalizationplan in 1993 to attain the required criteria for OECD. The key policies are asfollowsØ  Interestrates “deregulation” was doneØ  Abolishmentof “policy loans”Ø  Promotingforeign investments in to the countryØ  Liberalizationof capital accounts Ø  Shortterm borrowing was encouraged rather than long term borrowings as it wouldincrease the cashflow in the market.Ø  EnteringOECD in 1996, helped in increase of foreign portfolio investment at an accountof $12.4 billion.Ø  Thecorporate growth sector has also slummed to -14% which deteriorated the healthof the economy.

Ø  Thebankruptcy of Hanbo Steel, Jinro & Sammi from the top 30 chaebols furtherweakened the growing economy, which could not withstand the upcoming financialcrisis in the Asian region.   FinancialCrisis 1997In the year 1996, Koreahas become the 11th largest economy in the world. Later in the same year itjoined the Organization for Economic Cooperation and Development (OECD). But,the happiness and achievement didn’t last long as the economy is effected bythe “Asian financial crisis”, which opened the basic weaknesses in the system,starting from Ø  Badloans in the banking sector Ø  Overcapacityof the manufacturing sector Ø  Carelessgrowth policies followed by large conglomerates Most of the Asiancountries were affected by this crisis at the initial stage. Thailand was the 1stcountry to collapse by this crisis. The south korean economy did not expectthis crisis to hit its economy in the starting stages.

The government and itsofficials were of confidence that it can be tackled by taking few necessarypreventive steps. But their calculations and expectations went wrong when SouthKorean Won has depreciated more than 20% in November 1998.Later in December 1998,as there was only 1 option left out, South Korea has taken financial help from theInternational Monetary Fund (IMF) for an amount of $58 billion, which was thehighest amount of loan, ever taken by any country worldwide.But these steps did notstop the economy from collapsing as in by mid December there was “nationaldefault”.

The currency has gone down by 40% & $9 billion of IMF were usedby this time. The U.S Federal Reserve & other Central Banks around the worldwere asked not to give loans, if so they give they would face a defaulter atthe end of the day. But, IMF came to SouthKorea rescue and immediately gave $10 billion to the government. SouthKorean Economy Causes for the Financial Crisis1.     More emphasis on exports has been done andthe domestic market segment was neglected.2.     Firms heavily relied on state guaranteedborrowing systems & monetary stabilization bonds which were maintainedbelow the actual market prices.

3.     Domestic banks were restricted in creditdecisions by government regulations 4.     Large amount of subsidized loans was givento large conglomerates 5.     Stringent industrial policies were not putinto place6.     No alternative business groups weredeveloped and over dependence on chaebol group was done.

7.     Economies in scale of production wereexploited by the large corporation’s and the medium and small enterprises wereleft out behind. They were not supported by any kind of industrial supportiveprograms. 8.     Policy loans were given high importanceand were allocated to their favorable corporates, which also led tovulnerability of capital markets, to tackle external undesirable events.  9.     High amount of external debt nearly $42Billion was taken by the banks, foreign capital was imported at a very highrate.

10. Korea’s developmental state also rewardedsuccessful exporters by basing support on the quantitative results of theirexports. Which decreased the confidence of local producers and createdstructural imbalances in the economy. 11.

 The capital markets of the south Koreaneconomy are underdeveloped, so companies preferred “debt” as main investmentsource in their operations. The chaebols were given loans on low interest ratesreceived foreign capital in high amounts, investment licenses were given tofavored ones.12. Illicit Wealth Accumulation Act was passedin which many famous business men were arrested and later on released those whoagreed with conditions of the government, where the business people should dobusiness even if there is no profit involved.  SouthKorea’s Reform MeasuresØ  FiscalAusterity Program: It was implemented, in which government sending was reducedand increased taxes on products and materialsØ  Peoplevoluntarily donated gold rings and bracelets i.e., worth of $2 BillionBankingSector ReformsØ  Non-performingor viable banks have been shut down by the governmentØ  Somebanks have been merged & some other are required to shut downØ  KoreanAsset Management Corporation: It was set up to dispose bad debts throughnational & international auctions.

ForeignInvestments ReformØ  LiftedLegal Restrictions on foreign investmentØ  Localbanks were taken over or merged by foreign banksØ  Capitalmarket was also opened to foreign investmentsØ  Free-Tradeagreement with U.S(3rd biggest trade partner)ChaebolReform Ø  Transparentmanagement practices should be followed by the companiesØ  Companieswere asked to give more importance to core businesses rather than sidebusinessesØ  Makingmanagers & shareholders of the respective businesses accountable in case ofdefault.Ø  Nodebt payments were allowed within business groups or entitiesØ  Thetop 5 conglomerates swapped businesses with each other to eliminateovercapacity in certain sectors. Ø  Reportingof the financial statements to the shareholders AfterCrisis EffectØ  RecessionØ  LowinvestmentsØ  Risein UnemploymentØ  DomesticPrivate Consumption was encouragedØ  CorporatebankruptciesØ  FallOut of ExportsBy the year 2001 Koreaneconomy grew by 3 %, which was a phenomenal growth.

The usage of credit cardsalso got increased heavily as people stated to spend at a very high rate. In2003, due to heavy usage of credit cards the largest credit card company LGCreditt Card Co., has gone bankruptcy, but the then President Roh haveannounced rescue packages and public fund to avoid another crisis.  WayForwardBy 2007, South Korea isone of the fastest growing economy amongst the ASIAN nations.

President Lee hadpromoted “747” vision which impliesto 7 % annual growth rate, $40,000 per capita income & to become 7thlargest economy in the world.SolutionsØ  ImplementCentral bank’s autonomy Ø  Secureforeign investment Ø  Foreignreserves should not deplete Ø  Chaeboldomination should be brought under control Ø  Bankingsector should be regulated