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1997 Financial Crisis South Korea

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The 1997 financial crisis was to see South Korea's economic growth fall for the first time in nearly thirty years. However, this downturn in growth did not last anywhere near as long as economists predicted or as long as it did in China, India and Thailand. The reason for the financial crisis was because of a rapid devaluation of Thailand's currency in July 1997. As a result of this, South Korea was forced to approach the International Monetary Fund (IMF) for help in order to escape and external payments crisis and a debt default that looked inevitable. The IMF's rescue package consisted of $58billion of which $21billion was a loan being the largest amount lent to any country in a single deal. Eighteen months later, in May 1999, South Korea's foreign exchange reserves had risen from $24billion to $56billion and a severe economic downturn during 1998 had been transformed into a growth rate of between 2-4 per cent. South Korea recovered quickly by reducing interest rates from extremely high levels to fewer than 5 per cent along with the decision to allow hostile takeovers by foreign investors to encourage foreign direct investment injecting money into the Korean economy. Foreign direct investment increased to $8.3billion in 1998 and then soared to $15.5billion in 1999. The procedures used to deal with failed companies' were amended at the beginning of 1998 with over half the 11,000 regulations being discarded. During the crisis, the Korean government responded by creating more public sector jobs that helped reduce the recovery rate as it increased the amount of money in the circular flow of income'. Government assistance in helping companies during the financial crisis was crucial to the economy for example, Daewoo had debts almost one fifth of the countries GDP and would have ceased to exist much longer if it wasn't for the Korean governments coordination role. Another reason South Korea came out of the crisis quickly, was because of a government strategy called the big deal'. This involved the top chaebols exchanging some of their assets with one another. They were therefore encouraged to concentrate on their core competence that is the advantage they have over rival firms as mention above. In 1998,the top five chaebol.



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