Twenty years ago this week, Korea went to the International Monetary Fund for a $58 billion bailout to save it from an insolvency crisis caused by a foreign exchange meltdown.
Many Koreans vividly remember the savage restructuring prescribed by the IMF and the consequent bankruptcies, closures and layoffs that pounded the whole society.
The impact was so huge that even after two decades, 57.4 percent of respondents to a recent survey picked the “IMF crisis” as the most difficult economic time for the country.
The turbulence was caused by the Asian financial crisis that started in Thailand in July 1997. Foreign investors pulled their funds out of Korea and other Asian countries, which dried up their foreign exchange reserves and put them on the verge of default.
Behind the weakness and vulnerability of the Korean economy were fundamental problems like the concentration of wealth by the family-controlled chaebol, mishandling of foreign exchange reserves, failure to regulate and oversee financial institutions and corrupt ties between government, politics and business.
Then what changes has the crisis brought upon the nation over the past two decades? There have been both positive and negative ones, with the latter still troubling Korea’s economy and society.
First of all, the painful reforms prompted by the IMF bailout helped liquidate marginal firms and financial institutions, which improved overall competitiveness.
Some figures show that Korea is indeed totally different from what it was 20 years ago. The nation’s foreign exchange reserves, which fell to $20.4 billion in the heat of the crisis, had grown to $384.46 billion by the end of last year, the world’s ninth-largest.
Korea’s current account surplus stood at $93.38 billion in the January-September period, compared with a deficit of $10.28 billion in 1997. The benchmark Korea Composite Stock Price Index exceeded the 2,500 level, a remarkable rise from below 400 in late 1997.
Also reassuring is that the ratio of South Korea’s short-term foreign debt to its foreign reserves remained at 30.8 percent at the end of June, compared with 286.1 percent in 1997. The large proportion of the short-term foreign debt, external liability with a maturity of less than one year, was one of the direct causes of the crisis.
Backed up such strong fundamentals, Korea’s sovereign ratings are higher than those of Japan and China.
There are of course downsides to the changes the nation witnessed since the crisis. The biggest problem is polarization of income and wealth.
In 2016, those in the top 20 percent of the income brackets made nine times as much as in the bottom 20 percent. What the top 10 percent earned in 2015 accounted for 48.5 percent of the total, compared with 32.9 percent in 1999.
Employment is another area in which gaps are widening. Contingency workers now account for more than 40 percent of the total workforce. Youth unemployment rate, which remained at 5.7 percent in 1997, surged to 9.8 percent last year.
The Korean economy has apparently been stuck in a deep low-growth trap. It has grown only 2 to 3 percent in recent years, moving at a slower pace even than the average world economy.
The IMF recently pointed out that Korea’s growth potential, which was around 7 percent in the early 1990s, had dropped below 3 percent and its labor productivity remains at 50 percent of that of the US.
Those dark sides, along with the increasingly serious problems like rapid population aging and the low birthrate, pose daunting challenges to the Korean economy. Besides, the nation has yet to break itself away from some of the problems that caused the crisis, including concentration of wealth by chaebol and corruption as evidenced by the scandal involving ousted President Park Geun-hye.
As we look back at the past 20 years, eyes should be set to find what more is needed to redress the problems that put the nation into such unprecedented devastation and misery.