The Role of International Finance in Korean Economic Reconstruction and Reunification

In December 1997, international lenders staved off the collapse of the South Korean economy. This effort has been heralded as a benchmark of cooperation among private and public sector lenders and governments and could serve as a model for the role that international capital can and should play in effecting stabilization following the reunification of North and South Korea. However much the post–crisis rebound of the South Korean economy has provided the illusion of restructuring, it has only enabled Korea to avoid much needed real reform, and decreased the leverage of multilateral lenders to encourage change—a situation that does not bode well for the challenges the society will face if the Korean Peninsula is reunified.

If a unified Korea is to move quickly from being a humanitarian problem to a dynamic economic entity, the South must now embark upon a serious commitment to restructure the economy through deregulation, transparency, competition, and banking reform. Foreign governments and societies can encourage South Korea through investment programs and policies, but ultimately Koreans must reform the Korean economy—and they must do it quickly if they are to have a reasonable chance of absorbing the North. If, as Dr. Johnson said, nothing concentrates a man’s mind like the prospect of a good hanging, [1] then in the market economy nothing concentrates a lender’s mind like the imminent bankruptcy of a borrower. In December 1997 the South Korean economy was on the verge of bankruptcy, and the world’s financial glitterati scrambled themselves out of Christmas revelry to converge upon Seoul and hammer out a solution to South Korea’s liquidity crisis. The World Bank and the International Monetary Fund (IMF) agreed to extend credit to the South Korean government on a short– and long–term basis and convinced international bankers from around the world to roll over a series of loans. South Korea later (in March of 1998) took advantage of a resurgence in market sentiment to sell long–term dollar–denominated debt that allowed it to weather the balance–of–payments crisis.

The patching together of a consensus to stave off the collapse of the South Korean economy has been heralded as a benchmark of cooperation among private and public sector lenders and governments and could be a model for the role that international capital can and should play in effecting stabilization around the globe. Certainly, in comparison to the difficulties encountered elsewhere in Asia, the Korean example looks like…

[1] James Boswell, The Life of Samuel Johnson, cited from a letter from Johnson to Boswell dated September 19, 1777. The precise quote is: “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”