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What Role Did the Korean Government Play in Creating the 1997 Crisis

Essay by   •  November 18, 2013  •  Essay  •  383 Words (2 Pages)  •  2,773 Views

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What role did the Korean government play in creating the 1997 crisis?

The Korean government played a significant and costly role in creating the 1997 crisis that ultimately led to the country accruing more debt and severely weakening their currency. After becoming President, Kim Young-Sam set out to boost the economy by encouraging investment in businesses that focused on exporting goods by urging the chaebol to invest heavily in factories using short-term loans beyond the equity of the chaebol in US currency instead of the won. The projections used were unrealistic and resulted in overcapacity at a time when demand plummeted in several industries and a weakening won. The government stepped into the foreign exchange market in an effort to prop up the won but South Korea's credit rating was downgraded causing their stock market to decline and the won to fall.

What role did Korean enterprises play in creating the 1997 crisis?

The Korean enterprises yielded to the government's requests, failed to adequately understand the risks involved, borrowed beyond the equity of their business and were ill prepared for a potential drop in demand. These companies found themselves further in debt given the decline in the won and unable to make their scheduled payments forcing them into bankruptcy.

Why was the Korean central bank unable to stop the decline in the value of the won?

The Korean central bank was unable to stop the decline because they had not addressed the root issue, the underlying debt problem faced by the South Korean companies in addition to the government broadcasting their intensions of taking over the troubled companies.

What are the common elements between the Korean financial crisis in 1997 and the economic meltdown that the United States experienced in 2008? Should the U. S. Government have done anything different to prevent the meltdown?

The dangers of high leverage, credit availability, and consumer spending encouraged by the current administration were common elements between the Korean financial crisis and the United States meltdown. The U.S. Government was just as ill prepared as the South Korean Government as they believed that the U.S. economy was much more sophisticated and durable - the lessons learned through the issues in South Korea somehow did not apply to the U.S.; they did not fathom a need to prevent the meltdown.

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