Okay we have talked about the developmental state and the role of network, past network. But if look at very carefully, the overall trajectory sales in the economy, the South Korean economy was not all the time successful, South Korean went through ups and downs. I would argue that there are three major crises in the South Korean economy. Let us look into the dark side of developmental economy goals in South Korea. The first economy crisis took place between 1979 to 1980. You may recall that in October 1979 President Park Chung-hee was assassinated. Okay and there was a transitional chaos from October 1979 to May 1980. Of course in May 1980 Chun Juang took over power and they studied, the fifths republic starting from the later part of thirty year. But the photograph here is what we call the Spring of Seoul in 1980, okay? And there was a great hope for the democratic opening and tradition in South Korea following the death of Park Chung-Hee. Took place that did not take place. On the country there was a quite severe street protest. And, The social economy Crisis of 1980 was closely associated to economy crisis of the 1970-1980. Let us look at some indicators. Growth rate went -4.8%. Employment rate went up 5.5%. Foreign debt went all the way to $28 billion. By then, by the economic size of the time, $28 billion was quite huge. In fact, at one point the South Korean foreign debt went all the way about more than $40 billion US dollars, inflation rate 25.6%. It is quite unthinkable, okay. And there was a very serious economy crisis. But what went wrong? But I think the primary factor came from the external sources. In 1980 Ronald Reagan was elected President of the United States. As a way of managing domestic economy in the United States, he began to pursue high interest rate policy. Interest rate went all the way to 20%. But other times South Korea's borrowing from the international capita market at a rate of seven or eight percent. But, overnight, interest rates increase from seven to eight percent to almost 19 to 20 percent. Interest rate was extremely high. And all price was going up because at the time there was a second oil crisis and the American dollar was strong. Because of the high interest rate, everybody was looking for the American dollar. Then Korean one began to devalue. But there are internal factors too. The most important internal factor was a legacy of heavy chemical industrialization. Now the big push disregarding inflation consequences was a prime determinant of economic crisis of 1979 to 1980, because you may recall that in 1973 South Korea formally adopted heavy chemical industrialization. When South Korea got into 1975, during the 1975 to 1978 almost 70 to 80% of investment fund was allocated to the heavy chemical sector, okay. And there was just too much investment in heavy chemical sectors that drained the investment in other sectors and also they led to the what? Demand pull inflationary pressures, okay? There was negative consequences of heavy chemical industrialization. And also, Park's assassination triggered political and social instability. And also, in year 1979 and 1980, South Korea had bad harvest. All those domestic factors combined together to produce this first economy crisis, okay. And at a time, South Korea had to borrow money from the IMF. And IMF imposed several conditionalities. He said, in order to borrow money from IMF, okay. Usually IMF conditions are composed of two things, macro-economic stabilization and structural adjustment. And then afterwards, during the Fifth Republican under Chun Doo-hwan. In fact, the Chun Doo-hwan government pursued the really austere macroeconomic sterilization policy and structure adjustment. There was a major reshuffling of industrial structure and also, he Chun Doo-hwan government underwent methodical and physical austerity policy, monetary austerity policy. In that way, government would pull back the Korean economy to positive side by year 1985. Then, for example, in 1985, South Korea fully recovered from the first economic crisis and 1985 and 86 were used to high economic boom since the Tangun founding of the Korean nation, to the extent the Korean economy was booming. Of course, the other time there were some positive factors too. Interest rate went down, okay? Oil price went down. And foreign exchange rate policy environment was very conducive to South Korea. But then, from 1985 to all the way to 1996 South Korean economy was on upbeat. Then but all of a sudden, in 1997, particularly starting from November 1997, South Korea began to encounter second economy crisis, okay. The photograph shown here is at a time, our economy was so bad. Then president-elect began to appeal to the public that without people's participation, we cannot overcome the economy crisis. Therefore sometime in February and March in 1998 citizens Are entirely joined, okay, the public campaign to collect gold, so, that we sell the gold and get to find currency and to pay back our debt and also enhance our foreign reserve. The photograph shown here is a national campaign, to collect the gold from the Korean citizens. The citizen participation was really amazing. Okay. The entire world would shut. In fact the Korean credibility, went up as a result of these kinds of voluntary gold collection campaign. But anyhow, what happened was, the second economy crisis, let us get to some indicators. In 1998, Because Korean economy crisis, second economy crisis came in November, 1997. And October and November and December. December was good. December peaked the economy crisis, second economic crisis. And in December, then Kim Jong-un was elected President and there was a two-month transition period, from the from January to late February 1998. There's a transition period, okay. And, President Kim Dae Jung worked very to recover from economic shock, throughout 1998. But, when you look at the economy indicators in 1998, you can see some clear indicators. Growth rate was -3.8%, okay? And at the time when the crisis came in November 1997, our Central Bank, Bank of Korea, had only $6.7 billion. 6.7 billion dollars, a shortfall of foreign reserve. Okay. And which in turn created ,the so called sovereign default situation. Okay. And there were massive corporate and banking bankruptcies, okay, and when firms and banks went to bankrupt, then there were massive layoff's too, okay. And the Koreans were selling off their assets. And there was a really unprecedented economic crisis. At the time Koreans called it IMF crisis, because IMF conditionalities made the Korean economy much harder and worse. Then, the widest kind of certain crisis in 1997. There were ongoing debates. Some people focused on the international liquidity, okay, crisis. Some argued that, it has something to do with the domestic economy case of Korea. They argued that the 1997 and 8 financial crisis in South Korea, was a solvency crisis. And here, liquidity crisis simply means what? Short-term cash flow problem. Solvency crisis means what? Is more than in a cash flow problem. There are something wrong with the structure of the economy. Okay it was different kinds of arguments. But there were the core of the second economy crises in south Korea. It's a combination of all. Most important it was the containment of the contagion effect and the liquidity crisis. At a time starting from May, 1997 in Thailand. Thailand once with a fighting to change crisis. That created domino effect in Indonesia to Philippines and, then toward the October in 1997. Most kinds of foreign exchange crisis in those three countries brought about the negative impact on the Hong Kong's stock market. October 1997, Hong Kong strong market crashed which in turn made the negative impact on Tokyo Strong market. It was a kind of domino effect. Then every time, South Korean firms and banks were borrowing money from Tokyo and Hong Kong and both Tokyo and Hong Kong were recalling those loans from South Korea. And from South Korea. But we did not have any kind of fine retail. That pushed Korea to the verge of, on the verge of sovereign bankruptcy. That was if any external factors, very important factors, but there's other factors, too. There's you know, corporate things. At the time, big chaebols Big business conglomerates in South Korea were making lots of investment with borrowed money from bank, okay? And commercial and merchant bank, okay? And they will not making any profit. That the pressure, from the bank lenders were very high, okay? And those could not simply pay back. Then almost seven went bankrupt from May to November, 1997. If a corporate failure is a big factors too. Another failure was banking and financial failures. Here, the really failure were moral hazards. Because at that time Korean banks were lending money to chaebols and other private firms，not out of so called with sheer economic calculation but because of personal ties, networks or when the government urged banks to lend the money to specific firms, they lend the money. But government was not responsible, then that created a more hazard situation. And also finally, apart from the corporate failures and banking and financial failures, there were government failures, too. The most important thing is a policy failure. Government had to devalue Korean currency. But in order to achieve the political goal of per capital income $10,000. They, Kim Young-sam government intentionally and purposefully, appreciating the Korean won, so that they can meet the goal of capital income $10,000. There was the fundamental mistake. Our government had it to devalue Korean currency. Another big issue's a one-three famous, okay? Korean merchant banks, investment banks were borrowing money from Hong Kong and Tokyo. And they were making investment in branding in North America. And they were making bond investment in the Russian treasury. Treasury bond, is all junk bond. But our government officers fail to monitor their kind of behavior. And also they were bureaucratic infighting between, bank of Korea, Central Bank, and Ministry of Economy and Finance, over who controls supervising role of banks and Securing funds and insurance kinds of things, but most important government failure came from the leadership failure. President Kim Young-Sam didn't know that economic crisis was coming. He was ignorant and he was incompetent. Only after President Clinton made a phone call to Kim Young-Sam, President Kim Young-Sam realized that the economy crisis was coming, okay? But that kind of leader's failure can be attributed to be one of the primary source of second economy crisis in 1997. And finally, during the second economic crisis, and I see Kim Young-Sam governments, government was right. because anytime officials of Kim Young-Sam governments was arguing that the fundamentals are good, okay? And I think the fundamental macroeconomic indicators were good, but IMF alerted the South Korean government to push for the massive macroeconomic stabilization, such as what? Hiking up interest rate, devaluation of Korean currencies, but that was the wrong prescription. What at a time of structural adjustment such as a corporate reform, banking financial reform, labor reform, trade and investment reform, privatization and introduction of fair trading system. Those are the very important factors which we made to the structural adjustment, but fiscal policy, monetary policy, was in good shape. Yet IMF come up with prescriptions of over-kill that really screwed up the Korean economy. Therefore, South Korea suffered more than what is supposed to suffer, okay? In 1998, South Korea suffered more after Kim Young-Sam government began to implement IMF conditionalities. Of course, later IMF withdrew some of those kinds of overkill policies. But again, apart from the bank financial failure, government failure, international lending institutions such as IMF made another major policy mistakes that made the Korean economy from bad to worse. If you look at the first crisis since second economic crisis, you see major commonality, that commonalities blow up the state. Therefore in 60s and 70s, South Korean state play the decisive role in transforming the economy making the Korean Miracle possible but if you look at the first economic crisis, it was the state. State over investment in heavy chemical industry sector which primarily contributed to the first economic crisis. In other words, Over investment by the state disregarding inflationary consequences played a very important role but if you look at the second crisis, state tend to be more problematic, okay?. Government failure was a primary factors, in addition to the corporate failures, and banking and financial failures. Then even where the corporate failure and banking and financial failures come from, that came from the state. State created the social ambiance, in which big corporations would not go bankrupt. We Korean's call the term, daemabulsa 대마불사 big horses do not die. There big hostess suggest, no troubles, do not go to bankrupt because government, eventually will rescue them. But that kinds of rescue mentality was widely spread on big business corporation in South Korea. Therefore, big chaebols were making extremely reckless behavior in making corporate expansion. Again, banking and financial failures that had something to monitoring failure, failure of the government. Therefore the development of state was instrumental for economical in the 60s and 70s., but 80s and 90s, the development of state has become root of the problem. Okay, same problem. The third economy crisis in 2008 and 2009. Obviously, any time, okay, it was A primarily treated by the international system. The Lehman Shock was a primary factor. But again, let us go back to the story of the time. In 2008, newly elected President Lee Myung-Bak was inagurated in February. He came up with a very interesting presidential election campaign pledge, called the 747. 747 denotes 7% growth rate, $40,000 per capita income during his reign and the 7th largest economy in the world. It's very beautiful as the election campaign matures. But despite his grandeur, electoral campaign, the outcome was quite in a dismal, okay? For example, period has at least more than 5% growth rate, but growth rate went down in 2008 and 9. Trade deficit was rising, up until governments, South Korea enjoyed trade surplus. But Lee Myung-Bak period suffered from trade deficit of $14.8 billion and stock market crash, okay. With 600 trillion won, it's humongous, okay, and severe liquidity crisis. If South Korea was able to overcome the liquidity crisis by having swap our agreement with the United States, later Japan and China. Therefore, without American support, Lee Myung-Bak government could not have overcome liquidity crisis, foreign reserve crisis triggered by the Lehman shock, okay. But another important point to keep in mind is this, at a time there was heavy dependence on foreign trade, okay. Almost what? 70% of South Korean economy was dependent on foreign trade, okay, and, excessive foreign ownership of stocks. Almost 52% of South Korea's stocks were owned by foreigners. When Korean economy went down as a result of Lehman shock, they withdraw from the Korean stock market pushing the stock price further down in South Korea, okay? And also anytime government pursue the very aggressive devaluation in a policy, in order to promote export which of extreme benefit to big business, okay. But those were the kinds of things that contributed the genesis of third economic crisis in 2008 and 2009. And now, by now then we can clearly see the South Korean economy has ups and downs, okay? And the ups and downs tend to be quite big, and the gap appears to be quite big in South Korea, okay? And that indicate what? South Korean economy has become extremely vulnerable to the international economic system even developmental state has fundamental limitations, okay? Let us examine all those issues in the concluding part of this course.
