Macroeconomics Case Study

South Korea's Currency Crisis in 1997 and After

OR

Abstract:
The economy of South Korea was based on its labour-intensive industries and a favourable international market. The nominal rate of the Korean currency, the won, was fixed at 484 per dollar. A reduction in the exports, during 1980, led to the devaluation of the won to 580 per dollar. Later, in 1993, South Korea allowed the won to fluctuate within a permitted range of plus or minus 2% against the dollar. In 1997, the Korean banks extensively borrowed foreign capital on a short-term basis and then lent on a long-term basis without proper evaluation of risks. This led to the Korean currency crisis, and affected the foreign trade of the country. After widening the permitted range of the won to 10% for a short period, the Korean government allowed the won to float freely in December 1997. The Korean trade showed improvement by the end of 1999.

Pedagogical Objectives:

To discuss the reasons that led to the currency crisis in South Korea, and its effects on the foreign trade of the country.

Keywords : South Korea's currency crisis, South Korean economy, Foreign exchange market, Bank of Korea, South Korean chaebol, Korean won, Devaluation of the Korean won, Asian development bank, Long-term investment, Short-term borrowing, Memorandum on economic policies, Monetary Policy Case Study, Non-performing loans, IMF bailout package, South East Asian financial crisis, International Monetary Fund