South Korea’s Looming Crisis
In the 1990s, South Korea waited for a crisis to erupt before responding with necessary reforms. But now the country is confronting a new set of internal and external risks, which it should nip the bud, both by pursuing domestic economic reforms and by working with China and the US to defuse the North Korean nuclear threat.
SEOUL – Twenty years after the Asian financial crisis, South Korea seems to have learned its lesson, having taken great pains to strengthen its economic resilience. But now the country is confronting a new set of internal and external risks, which may foreshadow another major economic crisis – or worse. Given the ongoing nuclear crisis with North Korea, a new bout of economic tumult is the last thing the country needs.
In July 1997, a currency crisis that struck Thailand quickly spread to neighboring economies. South Korea was not hit right away, and many believed that it would be spared. By that November, however, the country faced a sudden withdrawal of foreign capital, which, together with financial institutions’ inability to borrow from abroad, quickly depleted the country’s international reserves.
The following month, South Korea turned to the International Monetary Fund for assistance, and launched painful structural reforms. Companies and financial institutions went bankrupt, and millions of jobs were lost. In 1998, the economy contracted by 5.5%.