• FIC Hansraj

IMF Tribulation South Korea

~ By Abhishek Lal


Amid a series of 'foreign exchange crises' in Southeast Asian nations such as Thailand, Malaysia, the Philippines, and Indonesia, the unexpected happened when the South Korean Economy got hit by a devastating financial crisis in late 1997. Although it is often pointed out that the unsuccessful foreign exchange management policies of the Korean government are the direct cause of the 'IMF crisis’, there isn’t just one single external factor that can be blamed but an unhealthy, inefficient, mismanagement that led to the crisis.

The IMF Tribulation South Korea 1997 | FIC Hansraj
The IMF Tribulation South Korea 1997

When we talk about the causes of this crisis, one major cause was the Korean fixed exchange rates policy that included the fixing of the Korean Won to the US dollar. When the global repercussions of the Asian financial crisis arrived in Korea, it caused individual investors to judge won’s value to have improved. However, due to rapidly declining exports and rising imports, it seemed that the won had been overvalued. Hereafter, like several other currencies that had been attacked by the speculators, the Korean won started to heavily depreciate in October 1997. A combination of selective liberalization with close government–bank–business relations i.e. politicians, bureaucrats, banks, and chaebols (family-owned multi-billion conglomerates like in japan) contributed to the investment boom and excessive leveraging that made the Korean economy vulnerable to external shocks.


Prevalence of overinvestment of short-term borrowings from abroad soon led to liquidity suffered by local finance companies as a result of asset-liability mismatch which further led to severe credit crunch (a condition when investment capital is hard to secure), a revelation of unsound debt, poor corporate practices, and crony capitalism. The investors started withdrawing capital in an already fragile state of economic uncertainty. The combination of those factors created conditions that made the Korean banking industry susceptible to the sentiments of foreign investors, simultaneously eroding the power of the Korean Central Bank to act effectively as a lender of last resort and led to devastating concerted attacks against ill-managed businesses staged by speculative hedge fund operators.


These developments resulted in negative Labour-market outcomes in form of increased unemployment, greater use of contingent workers, and widened income inequalities. Also, continued restructuring drives prompted unions to merge into industrial unions and wage strikes with increased frequency and intensity.

IMF Tribulation - South Korea 1997, FIC Hansraj
IMF Tribulation

The Republic of Korea's request for relief financing from the IMF led the Republic of Korea, in a crisis of State Default, to sign a memorandum of understanding to receive funding from the IMF on December 3, 1997. As companies went bankrupt, their foreign exchange reserves plummeted and they requested an emergency loan of $2 billion from the IMF.


Korea negotiated a bailout of $19.5 billion from the IMF, the Korean government accepted the economic system demanded by the IMF, and a major national economic restructuring began according to the requirements. According to the Ministry of Finance and Economy, the growth rate of 5.8% in 1997 turned negative in the first quarter of 1998, after the financial crisis, and plummeted to -8.7% in the third quarter. However, it attempted a positive reversal from the first quarter of 1999, and in 1999, it jumped to 7.6% in the second quarter and 13.8% in the third quarter, causing an overheating debate among economic institutions.


South Korea was changed forever despite much criticism. The changes included- a shift of national consciousness towards a unified Korea evident in the gold-raising campaign in mid-1998 to endure the IMF system and repay a foreign-exchange debt of $304 Billion. There was a Regime change of the ruling and opposition parties for the first time, Dissolution of monopoly chaebols (Daewoo Group, Hanbo Steel, Hyundai Steel, Ganwon Industries, Jinro Group, etc. went bankrupt) allowing smaller companies to grow and Changes in government corporate policy.


"Over the subsequent 10 years, we’ve overcome the foreign exchange crisis by changing the economic structure of convergence and unbalanced growth to an innovation-driven sustainable growth structure, and created a solid and solid Korea from the ground up."

If anyone has watched the film Sovereign Default (2018) which stirred up much debate recently or read any manhwa or novel that relates to Korean Finances in any way, they might have happened upon the mention of the Crisis which goes on to show its importance and impact on South-Korean psyche and lifestyle. South Korea declared prepayment of IMF credit in August 2001 and is on a train of constant growth and development since then, even a relatively quicker economic recovery in 2020.