Chaebol Capitalism and the Currency-Financial Crisis in Korea

SCID Working Paper 89





A number of factors have been mentioned as the culprits leading to the Asian currency-financial crises. Among them are financial and capital account liberalization, the exchange rate regime, weak financial system, and crony capitalism. The relative importance of these factors and the interactions between them are little understood. This paper first briefly sketches the roles that these factors can play in theory. Then it traces the policy reforms and growth experience in Korea as well as the early history of credit rationing in Korea. Also, it examines the financial structure and performance of chaebol and of the banking system. The data indicate that chaebol were in a weak and deteriorating financial condition long before the crisis and that the banks had been “evergreening” chaebols’ outstanding debts. While it certainly was the case that a financial crisis and a currency crisis interacted to intensify the severity, the impact of exchange rate depreciation on the banks’ balance sheets must be deemed to have been relatively small. The fundamental problem was the magnitude of the leveraging the chaebol had before crisis. That, in turn, made the post-crisis workout of the banking system extremely difficult because of the necessity of restructuring the finances of the chaebol first.