Lessons from the 1997 and the 2008 Crises in the Republic of Korea

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ADB EconomicsWorking Paper Series

Lessons rom the 1997 and the 2008 Crisesin the Republic o Korea

Hangyong Lee and Changyong Rhee

No. 298 | January 2012


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ADB Economics Working Paper Series No. 298

Lessons rom the 1997 and the 2008 Crises

in the Republic o Korea

Hangyong Lee and Changyong Rhee

January 2012

angyong ee is Associate rofessor at anyang niversity, and Changyong hee is Chief conomist ofthe Asian evelopment Bank. his paper was presented at the Asian conomic olicy eview Conferenceheld on 8 ctober 2011 in okyo. he authors are grateful to the editors, Chalongphob ussangkarn

discussant), ukiko ukagawa discussant), ea umulong, and seminar participants for valuablecomments. he authors accept responsibility for any errors in the paper.


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Asian evelopment Bank AB Avenue, Mandaluyong City1550 Metro Manila, hilippineswww.adb.org/economics

2011 by Asian evelopment Bankanuary 2012 155-5252ublication tock o. 1244

he views expressed in this paperare those of the authors) and do notQHFHVVDULO\UHHFWWKHYLHZVRUSROLFLHVof the Asian evelopment Bank.

he AB conomics orking aper eries is a forum for stimulating discussion and

eliciting feedback on ongoing and recently completed research and policy studies

undertaken by the Asian evelopment Bank AB) staff, consultants, or resource

persons. he series deals with key economic and development problems, particularly

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methodological issues relating to project/program economic analysis, and statistical data

and measurement. he series aims to enhance the knowledge on Asias development

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availability of statistical data and development indicators for monitoring development

effectiveness.

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journals or chapters in books. he series is maintained by the conomics and esearch

epartment.


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Contents

Abstract v

. ntroduction 1

. he irst hase oss of Credibility 2

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B. olicy esponses

. he econd hase Collapse of xports

A. inancial xcess or lobal mbalances?

B. Macroeconomic olicies 9

C. ecapitalization of Banks 10

. Corporate estructuring 12

. essons from the 199 and 2008 Crises 12

A. Comparison of Macro olicy esponses 12

B. Bilateral waps, oreign eserves,

and lobal inancial afety ets 14

C. Banking versus Capital Market evelopment 15

. inancial egulation from merging Market erspectives 1

. Conclusion 18

eferences 19


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Abstract

he economy of the epublic of orea was hit harder than anticipated by the

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the exchange rate. hen, in the second phase, the contraction of global demand

led to a collapse of exports and a sharp decline in economic activity, raising

FRQFHUQVDERXWDIXOOHGJHGQDQFLDOFULVLVLQWKHFRXQWU\7KLVSDSHUGHVFULEHV

KRZWKHJOREDOQDQFLDOFULVLVVSLOOHGRYHULQWRWKHRUHDQHFRQRP\DQGKRZWKH

JRYHUQPHQWUHVSRQGHGWRWKHQDQFLDOWXUPRLOWDOVRSURYLGHVWKHEDFNJURXQG

DQGUDWLRQDOHIRUWKHRUHDQJRYHUQPHQWVGHFLVLRQVWRDGRSWVSHFLFSROLF\measures. Based on orean experiences during the 199 and the 2008 crises,

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issues that might have regional implications for Asia.


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I. Introduction

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WKHQDQFLDOFULVLVLQWKHHSXEOLFRIRUHDXSJUDGHGLWVPDFURHFRQRPLFDQG

QDQFLDOPDQDJHPHQWV\VWHPWRDYRLGPDNLQJWKHVDPHPLVWDNHVDJDLQ1 he orean

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took foreign exchange reserve management very seriously. ue to these efforts and the

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would be limited in scale and severity. he government believed the situation in 2008 was

different and that a slowdown of the orean economy could be expected, but not a crisis.

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eventually managed to avoid the apocalypse.

n retrospect, the global crisis spilled over into the orean economy in two phases in

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E\JOREDOLQYHVWRUVUHVXOWLQJLQODUJHFDSLWDORXWRZVVLPLODUWRWKHFDVHRIQ

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guarantees for external liabilities of orean banks, using its large foreign reserves to

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199 and 2008 to international investors. owever, these measures proved ineffective. t

was the bilateral swap arrangements with the ederal eserve that eventually stabilized

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UHVWRUHGFRQGHQFHLQWKHRUHDQHFRQRP\ZKLOHWKH6ZDVJURXQG]HURRIWKHJOREDO

crisis. owever, the positive effect of the ederal eserve bilateral swaps did not last

long.

n the second phase, the export dependence of Asian economies triggered market

pessimism, and the global crisis unavoidably spilled over to the real sectors of the Asian

economies. he expectation was that the crisis in advanced economies would hurt Asia

at least as much as the est because of its heavy reliance on exports to advanced

economies. ndeed, the epublic of orea, one of the more open economies in the1 See Lee and Rhee (2007) or lessons rom the 1997 crisis in the Republic o Korea.


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region, was vulnerable to the contraction of global demand. he year-on-year growth rate

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government, together with other advanced economies, agreed to implement a historically

unprecedented, globally coordinated expansionary policy response. ortunately, the

orean economy managed to rebound relatively fast as the global market started to

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the corporate sector after the 199 crisis.

he objectives of this paper are two-fold. irst, we describe how the orean economy

was affected by the global crisis and how the orean government responded to the

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implementing them. econd, based on orean experiences during the two crises, we

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policies in crisis management, the pros and cons of holding large foreign reserves,

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development in Asia. e believe that these are relevant not only to the epublic of orea

but also to other Asian countries.

he remainder of this paper is organized as follows. ections and describe the

causes and progress of the 2008 crisis in the epublic of orea by dividing it into two

phases. hey also describe the government policy responses during those periods.ection documents the similarities and differences in the lessons learned from the two

crises. ection concludes.

II. The First Phase: Loss o Credibility

A. Capital Outfows and Foreign Exchange Shortage

hen the subprime mortgage problems surfaced in mid-200 in the and urope, theRUHDQJRYHUQPHQWDQWLFLSDWHGWKDWWKHLPSDFWRQWKHRUHDQHFRQRP\RIWKHQDQFLDO

2 In the literature on contagion, countries are linked through two diferent channels o transmission: trade andnance. In the rst phase, the nance channel was more important in the transmission o shocks to the Koreaneconomy. The second phase, in contrast, highlighted the critical role o international trade in the propagationo adverse shocks. Gerlach and Smets (1995) and Glick and Rose (1999) stressed the international trade channelwhile Kaminsky and Reinhart (2000) and Van Rijckeghem and Weder (2001) emphasized the importance o theinternational nance channel.

2 | ADB Economics Working Paper Series No. 298


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turmoil in advanced countries would be rather limited in scale and severity. Before the

bankruptcy of ehman Brothers in mid-eptember 2008, policy makers seemed to believe

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5 months of imports of goods and services) could shield the orean economy from theQDQFLDOFKDRVLQDGYDQFHGFRXQWULHV

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collapse of ehman Brothers, the unprecedented credit crunch in the global market forced

banks in advanced economies to withdraw their funds from Asia, and in particular, from

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and resulted in sharp depreciations of the exchange rate and huge increases in credit

default swap C) premiums. he exchange rate of the orean won ) against the

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end-May. he C premium, a proxy for foreign currency funding cost, skyrocketed to

5 basis points on ctober 2 from 91 basis points in early August. he stock price also

SOXPPHWHGE\EHWZHHQ$XJXVWst and the end of ctober. uch magnitude of the

shock was way off expectations from the orean governments perspective and the bad

memory of the 199 crisis returned.

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borrowings by deposit-taking institutions domestic banks and branches of foreign banks)

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But it does not explain why the epublic of orea was particularly hit more severely than

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economy played a pivotal role, which can be attributed to many factors. espite itssustained effort to strengthen its external sector, the epublic of oreas high dependency

on large and short-term external debts was the major culprit. he stigma from the 199

crisis was also important.

Lessons from the 1997 and the 2008 Crises in the Republic of Korea | 3


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ndeed, the rapid increase in borrowings by the banking sector, especially since 200,

resulted in large external debts and thus increased the vulnerability of the orean

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end of 2005, but it grew rapidly thanks to large-scale borrowings by domestic banks and

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1998.4 Moreover, short-term external debt, whose original maturity is less than a year,

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2008. Moreover, as of the end of 2008, total current external debt debt with remaining

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debts and long-term debts due in 2009. hus, the ratio of current external debt to foreignexchange reserves became close to 1.

o be fair, there were many reasons why the orean government thought this time

was different. n responding to concerns about external debts, the orean government

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two reasons.

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supposed to be nonobligatory debt, meaning they were not subject to any repayment

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unearned revenue) for shipbuilding contracts, which would be cleared off from thebooks at the time of delivery of the ships. xcluding these nonobligatory debts, the net

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rate risk by shipbuilding companies caused more complexity.5 Because of the large size

of the shipbuilding contracts and the long time interval between orders and delivery, the

shipbuilding companies in the epublic of orea are exposed to high exchange rate risks

and thus have a great incentive to hedge the risks. hus, they open forward contracts

with banks, and accordingly banks are left with exposures to exchange rate risks in

the future. he banks then borrow foreign currency and convert these into domestic

currency in the spot market to hedge the risks in its forward position. As the government

argued, although these forward contracts raised the current external debts, the level ofdebts would be reduced at the maturity date of the forward contracts. hen shipbuilding

3 In the 4th quarter o 2008, the total external debt slightly decreased but GDP declined more, resulting in anincrease in external debt-to-GDP ratio.

4 The external debt-to-GDP ratio was 210% in the 1st quarter o 1998.5 The orders received by Korean shipbuilding companies amounted to $61.7 billion in 2006 and $97.5 billion in

2007. The growth rates o the orders received were 97.3% and 58.0% in 2006 and 2007, respectively.



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companies deliver foreign currency to banks with the received payment at the maturity

date, banks can repay the external debts with the proceeds. his is the reason why

the orean government argued that the external debts in the epublic of orea were

overly exaggerated. But the orean shipbuilders and banks never imagined that their

counterparties, whose credit ratings were higher than theirs, can be credit-constrainedand would fail to honor their contract.

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branches of foreign banks. herefore, orean domestic banks and corporations owed only

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accounted for about half of the short-term external debts. he orean regulator never

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while this tendency is not found for the branches of foreign banks. ince 200, externalassets of domestic banks also started to increase, though not as much as external debts,

but external assets of branches of foreign banks virtually remained unchanged while their

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bank branches was not matched while domestic banks were advised to do so. he

orean government never thought it was a problem. o one imagined that global banks,

which had higher credit ratings than the sovereign rating of the epublic of orea, could

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should become a new important issue for Asian policy makers.

Another indicator of vulnerability that foreign investors and media focused on after the

onset of the crisis was the high loan-to-deposit ratio in the banking sector. A high loan-WRGHSRVLWUDWLRLPSOLHVWKDWEDQNVKHDYLO\UHO\RQERUURZLQJWRQDQFHGRPHVWLFOHQGLQJ

suggesting a high leverage ratio of the banking sector. he loan-to-deposit ratio reached

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n response to this concern, the orean government argued that the loan-to-deposit ratio

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of deposit Cs) are not included in deposits, thereby increasing the loan-to-deposit ratio.

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for which banks are mandated to set provisions. urthermore, most Cs in the epublicof orea were sold at bank counters and they are essentially the same instrument as

ordinary time deposits in nature. n fact, the rollover ratio of Cs is higher than that of

deposits and the banks regarded Cs as a stable source of funding in the epublic of

6 While CDs are included in deposits under the US banks accounting system, they are separately accounted or byKorean banks.



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orea. But once the crisis occurred, individual country characteristics were not taken into

account in foreign investors perceptions.

B. Policy Responses

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memory of the 199 crisis started to haunt orean consumers and businesses. inancial

institutions and companies stopped lending to each other for fear of counterparty risks

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borrowings by domestic banks. ince most foreign governments also provided guarantees

to their banks, it was an inevitable choice to avoid reverse discrimination.

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governments less active use of foreign reserves even if it has enough holdings to cover

short-term external liabilities. owever, it is not the level of short-term liabilities but trade

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reserve holdings could limit the governments ability to respond to a shortage of trade

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to deteriorate very rapidly after the onset of the crisis. An increase in uncertainty about

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pessimistic view on the future of the orean economy by foreign investors and media,

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such as securities companies were severely hit due to their high dependence on short-

term wholesale borrowing than deposits. he Bank of orea was initially reluctant to

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intervention by the ederal eserve made it hard for the Bank of orea to avoidVXSSO\LQJOLTXLGLW\WRQRQEDQNQDQFLDOLQVWLWXWLRQVDVZHOO

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other emerging market economies. ome of the skepticism was very unfair and in part,

stemmed from the memories of the 199 crisis in the epublic of orea. Many investors

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199. he government undertook efforts to improve investor relations around the world

and stressed that this time is different to foreign investors.

owever, these government investor relations efforts turned out to be ineffective,

and ironically, it was the bilateral swap arrangement with the ederal eserve on 29

ctober 2008 that eased the concerns about a currency crisis and stabilized the foreign

exchange market. he bilateral swap arrangements with the ederal eserve were

effective because they were not subject to the stigma effect. As announced by the

ederal eserve in its press release, the swap arrangement was designed to mitigate

WKHVSUHDGRIGLIFXOWLHVLQREWDLQLQJ6GROODUIXQGLQJLQIXQGDPHQWDOO\VRXQGDQGZHOO

managed economies. Brazil, the epublic of orea, Mexico, and ingapore were included

DQGLGHQWLHGDVODUJHDQGV\VWHPLFDOO\LPSRUWDQWHFRQRPLHV7KHVWLJPDHIIHFWZDV

effectively minimized as the ederal eserve swap did not single out a country, unlikethe case of the bilateral nternational Monetary und M) program. n fact, the orean

government declined the bilateral offer from the M to subscribe to its new lending

facility, the lexible Credit ine in mid-ctober, as it feared the stigma effect will worsen

LQYHVWRUVFRQGHQFHHYHQWKRXJKWKHOH[LEOH&UHGLWLQHFDUULHGOHVVHUFRQGLWLRQDOLWLHV

than its standard program loans. t was an ironical moment since it was the that

LQLWLDWHGWKLVFULVLVDQGWKHQUHVWRUHGFRQGHQFHLQWKHRUHDQHFRQRP\

Meanwhile, the epublic of orea did not avail of the Chiang Mai nitiative

Multilateralization CMM) swaps, a regional safety net among AA countries,

because the CMM is an ex postcrisis-resolution mechanism, not an ex ante crisis

prevention mechanism, and the epublic of orea was not in default situation. n addition,WKH&UHTXLUHVWKHVVXSHUYLVLRQLIPRUHWKDQRIWKHVZDSDUUDQJHPHQW

amount is used.

III. The Second Phase: Collapse o Exports

A. Financial Excess or Global Imbalances?

he swap arrangement with the ederal eserve was a turning point in the stabilization ofWKHRUHDQQDQFLDOPDUNHW%XWLWVSRVLWLYHHIIHFWGLGQRWODVWORQJURPPLGRYHPEHU

the credit crunch problems again began to worsen. his time, it was not just the epublic

RIRUHDEXWWKHZKROHRI(DVW$VLDWKDWORVWJOREDOFRQGHQFH7KHDUJXPHQWJRHVWKDW

7 Baba and Shim (2011) point out that Bank o Korea loans unded by the swap lines with the Federal Reserve weremore efective than swaps using its own oreign reserves. It suggests that a countrys own oreign reserves andintercentral bank swap arrangements are ar rom perect substitutes.



16/28

even though the crisis started from the est, Asia would suffer at least as much due to

its heavy dependence on exports to advanced economies. Contraction of global demand

would lead to an export collapse and sharp declines in economic activity, which would

deteriorate the balance sheets of Asian corporations and banks. hen, the balance sheet

effects could trigger a banking crisis eventually. his possibility could become a realityparticularly in the epublic of orea because income-elastic capital goods and durables

account for a large part of orean exports.8

ogether with the changes in market sentiments, a subtle reinterpretation of the global

QDQFLDOFULVLVHPHUJHG$WUVWLWZDVDUJXHGWKDWWKHFULVLVZDVFDXVHGE\WKHIDLOXUHRI

UHJXODWLRQVDQGVXSHUYLVLRQRQQDQFLDOLQVWLWXWLRQV7KXVWKHLQLWLDOSROLF\UHDFWLRQVLQWKH

LQWHUQDWLRQDOFRPPXQLW\VXFKDVWKH*IRFXVHGRQVWUHQJWKHQLQJQDQFLDOUHJXODWLRQV

But from the beginning of 2009, the root cause of the global crisis started to be

challenged. ome countries asserted that the global imbalances, partly due to excessive

current account surpluses in merging Asia, allowed the funding costs to remain low for

a prolonged period of time in the and therefore fueled housing market bubbles andWKHJURZWKRIJOREDOQDQFLDOPDUNHWV7KHH[SRUWRULHQWHGVWUXFWXUHRI$VLDQHFRQRPLHV

became an easy target for this criticism.

o the orean government, this doomsday scenario for ast Asian countries was

PXFKKDUGHUWRGHIHQGQWKHUVWSKDVHRIWKHFULVLVWKHORVVRIFRQGHQFHLQWKH

orean economy was by nature, a short-term problem and stemmed from, in part,

misunderstanding and distrust of foreign investors on the transparency of the orean

government. n contrast, the concern raised in the second phase was a long-term and

structural problem.

ndeed, the orean and ast Asian economies witnessed a collapse in exports from'HFHPEHU7KH\HDURQ\HDUJURZWKUDWHRIRUHDQH[SRUWVSOXPPHWHGIURP

in the rdTXDUWHURIWRLQWKH thTXDUWHUDQGIXUWKHUSOXQJHGWR

in the 1stTXDUWHURI7KHVKDUSGURSLQH[SRUWVRIRWKHU(DVW$VLDQFRXQWULHV

LQFOXGLQJDSDQZDVHTXDOO\VKRFNLQJ9 he danger of the crash in exports leading to

UHFHVVLRQDQGWKHWKUHDWRIDEDQNLQJFULVLVEHFDPHUHDOLQ$VLDDQGUHTXLUHGQHZSROLF\

UHVSRQVHV7KHJRYHUQPHQWKDGWRDJJUHVVLYHO\UHO\RQH[SDQVLRQDU\PRQHWDU\DQGVFDO

SROLFLHVWRERRVWWKHUHDOHFRQRP\DQGWRSURWHFWWKHYXOQHUDEOHQDQFLDOVHFWRUQWKH

epublic of orea, construction, shipbuilding, and the export sectors were heavily hit and

the government needed to accelerate corporate restructuring in order to prevent further

VSLOORYHUVRIFRUSRUDWHGLIFXOWLHVWRWKHEDQNLQJVHFWRU3URWHFWLQJWKHEDQNLQJVHFWRU

IURPHPHUJLQJFUHGLWULVNVQRWXVWIURPDOLTXLGLW\FULVLVEHFDPHDQXUJHQWWDVN7KHeffectiveness of policy measures in responding to the crisis in the second phase were

8 In act, there exists a clear negative relationship between the share o durables in exports and the growth rate oexports during the ourth quarter o 2008 till the rst quarter o 2009. See Lee (2010) and Kawai and Takagi (2009).

9 In the 1st quarter o 2009, the year-on-year growth rates o exports were 40.6% or Japan and 19.7% or thePeoples Republic o China.



17/28

largely owed to the experiences gained during the 199 crisis and the institutions that

were created to deal with it sutsumi, ones, and Cargill 2010).

B. Macroeconomic Policies

1. Monetary Policy

ust like many other central banks in the world, the Bank of orea conducted an

aggressive expansionary monetary policy by cutting the base interest rate. he base rate

ZDVORZHUHGIURPWRLQVL[VWHSVEHWZHHQFWREHUDQGHEUXDU\

7KHPRQHWDU\HDVLQJLQDQGXQGRXEWHGO\FRQWULEXWHGWRSURPRWLQJQDQFLDO

market stability and supporting economic recovery.

n addition to monetary easing, the Bank of orea broadened the eligible securities and

counterparties for open market operations. n ovember and ecember 2008, it made

bank debentures and some government agency bonds eligible for use in open marketoperations. At the same time, 12 security companies were additionally selected as the

central banks counterparties for repo operations. Moreover, in ecember 2008, the Bank

RIRUHDSDLGWKHEDQNVDRQHRIILQWHUHVWRI:ELOOLRQRQWKHLUUHTXLUHGUHVHUYH

deposits to immediately improve bank balance sheets.

2. Fiscal Policy

o invigorate the domestic economy, the orean government also carried out a massive

VFDOVWLPXOXVSDFNDJH7RJHWKHUZLWKWKHVXSSOHPHQWDU\EXGJHWSODQWKHVL]HRIVFDO

expansion in the epublic of orea turned out to be larger than those in many other

countries. According to the M 2009), the size of crisis-related discretionary measuresLQWKHHSXEOLFRIRUHDDPRXQWHGWRRI*'3LQZKLFKZDVWKHODUJHVWVFDO

expansion among 20 countries. t should be also noted that the implementation lag of

VFDOSROLF\ZDVPXFKVKRUWHULQWKHHSXEOLFRIRUHDWKDQLQDGYDQFHGHFRQRPLHV

7KHJRYHUQPHQWH[HFXWHGDERXWRIWKHFRPELQHGDQQXDORULJLQDODQGVXSSOHPHQWDU\

EXGJHWVE\WKHUVWKDOIRIWKH\HDULQRUGHUWRPD[LPL]HWKHVFDOHIIHFWVRQWKHHFRQRP\

LQDWLPHO\PDQQHU7RH[SHGLWHWKHLPSOHPHQWDWLRQRIWKHVFDOVWLPXOXVWKHRUHDQ

JRYHUQPHQWHYHQDGYDQFHGLWVQHZ\HDUDQQXDORSHUDWLRQSODQEULHQJIRUHDFKPLQLVWU\

to mid-ecember in 2009, instead of the usual schedule of late anuary to ebruary in

the new year.

$OWKRXJKWKHFHQWUDOJRYHUQPHQWGHEWLQFUHDVHGIURPOHVVWKDQRI*'3LQWRLQLWVVRXQGVFDOSRVLWLRQUHODWLYHWRRWKHUPDRUFRXQWULHVHQDEOHGWKH

HSXEOLFRIRUHDWRLPSOHPHQWDODUJHVFDOHVFDOVWLPXOXVLQUHVSRQVHWRWKHJOREDO

QDQFLDOFULVLV10QGHVLJQLQJWKHVFDOVWLPXOXVSODQWKHRUHDQJRYHUQPHQWWULHGQRW

10 Using new data on 44 countries spanning about 200 years, Reinhart and Rogof (2010) nd that the relationshipbetween government debt and real GDP growth is weak or debt/GDP ratios below a threshold o 90% o GDP.Above 90%, median growth rates all by 1%, and average growth alls considerably more.



18/28

WRFRPPLWLUUHYHUVLEOHVFDOVSHQGLQJVXFKDVLQFUHDVLQJHQWLWOHPHQWSURJUDPVLQRUGHUWR

PDLQWDLQLWVORQJUXQVRXQGVWUXFWXUDOVFDOVWDQFH

C. Recapitalization o Banks

$IWHUWKHRQVHWRIWKHJOREDOQDQFLDOFULVLVWKHUHZDVPDVVLYHEDQNUHFDSLWDOL]DWLRQ LQ

advanced economies in the process of bailing out and bank restructuring. As economic

conditions worsened, the orean government was also pressured by the media and the

PDUNHWVWRUHFDSLWDOL]HGRPHVWLFEDQNVHYHQWKRXJKRUHDQEDQNVZHUHDGHTXDWHO\

FDSLWDOL]HGZLWKWKHLUDYHUDJH%6FDSLWDODGHTXDF\UDWLRUHJLVWHUHGDWDWWKHHQG

of 2008. he argument for further enhancing their capital basis was underpinned by

three reasons.11 irst is to prevent reverse discrimination, since all troubled banks in the

est were recapitalized or publicly owned. ithout government support, orean banks

would not be able to secure foreign funding in international markets. econd, in return for

injecting more capital, the government could encourage domestic banks to extend loans

to small and medium enterprises more aggressively to ease the credit crunch. hird,given the increasing uncertainty, preemptive policy measures were called for in order

to safeguard the soundness of the banking sector. ince loan losses resulting from a

deep recession could cause a substantial fall in bank capital, additional bank capital was

UHTXLUHGIRUDSUHFDXWLRQDU\SXUSRVH

owever, injecting public money involuntarily to normally operating private banks was not

OHJDOO\IHDVLEOHDQGHFRQRPLFDOO\GHVLUDEOH7KHLU%6UDWLRVZHUHDERYHHYHQDWWKH

end of 2009. t was unlike the case of 199 and the case of advanced economies after

the subprime crisis whose banks either de facto defaulted or were asking for voluntary

FDSLWDOLQHFWLRQ7RFLUFXPYHQWWKHVHGLIFXOWLHVWKHRUHDQJRYHUQPHQWGHFLGHGWR

create a fund that can provide banks with credit lines. n ecember 2009, the Bankecapitalization und was launched with a size of 20 trillion, which was expected to

LQFUHDVHWKHDYHUDJH%6UDWLRE\SRLQWV

igure 1 describes the structure of the Bank ecapitalization und. n voluntary capital

call basis, banks can access the Bank ecapitalization und by issuing preferred shares,

hybrid bonds, or subordinated bonds to the und whenever they need to raise capital.

n order to minimize the possible stigma effect, the government assigned a credit limit

per bank that depended on their asset sizes irrespective of their credit ratings. he

orean government expected that the und would help domestic commercial banks

UDLVHWKHLU%6FDSLWDODGHTXDF\UDWLRZKHQQHHGHG7KH%DQNHFDSLWDOL]DWLRQXQG

DLPHGWRVXSSRUWEDQNVWRPDNHORDQVPRUHDJJUHVVLYHO\UDWKHUWKDQWRSXUVXHQDQFLDOrestructuring as in the case of the troubled banks with large nonperforming loans in

advanced countries. By enhancing the soundness of the banking sector, the und was

intended to provide a safety net to prevent bank panics and encourage banks to keep on

lending during times of crises.

11 The nationwide banks accounted or 90% o deposits and loans in the domestic banking sector.



19/28

Figure 1: Bank Recapitalization Fund

Bank o Korea(W10 trillion)

Institutional Investors(W8 trillion)

Korea Development Bank(W2 trillion)

Bank Recapitalization Fund

Securitization

Credit GuaranteeCorporationCreditenhancement

Bank A Bank B Bank DBank C

Loan

Subordinatedsecuritized

securities

Preerred shares,hybrid bonds,

subordinated bonds

Recapitalization

Source: Financial Services Commission.

7KH%DQNHFDSLWDOL]DWLRQXQGZDVQDQFHGE\D:WULOOLRQORDQH[WHQGHGE\WKH

Bank of orea along with 2 trillion from the orea evelopment Bank. he und would

securitize its investment on bank debentures and raise 8 trillion from institutional

investors. he structure of the Bank ecapitalization und was carefully designed to

minimize the concerns about the use of taxpayers money that would inevitably invite

debate on government control over the normally run private banks. hanks to the legal

DQGQDQFLDOLQVWLWXWLRQDOLQIUDVWUXFWXUHVXFKDVWKHLQWURGXFWLRQRIWKHVHFXULWL]DWLRQODZV

WKDWWKHRUHDQJRYHUQPHQWGHYHORSHGDIWHUWKHQDQFLDOFULVLVLQWKHLQWURGXFWLRQ

of the und was made possible.

n retrospect, the Bank ecapitalization und was a success story. t provided a

safeguard to banks against possible substantial losses, yet the safeguard was never

XVHGDQGGLGQRWFDXVHDQ\VFDOEXUGHQ+RZHYHUIURPDQXDU\WKHPHGLDZURQJO\

categorized the policy as a failure on the ground that banks seldom utilized the und.

WZDVGLIFXOWWRH[SODLQWKDWWKHEHVWLQVXUDQFHSROLF\LVWKHRQHWKDWLVQRWXVHG

nfortunately, the government could not stand public criticism and mandated the banks to

use the und, urging them to extend loans to small and medium enterprises and the poor.

he policy to protect the soundness of the banking system thus turned to be part of the

expansionary and redistribution policy packages.



20/28

D. Corporate Restructuring

QHRIWKHPDQ\YLWDOOHVVRQVWKHHSXEOLFRIRUHDOHDUQHGIURPWKHQDQFLDO

FULVLVLVWKDWSUHHPSWLYHFRUSRUDWHUHVWUXFWXULQJLVFUXFLDOWRPLQLPL]HWKHFRVWRIQDQFLDO

restructuring and employment adjustment. As economic conditions deteriorated further,problems in the construction and shipbuilding industries got worse from ecember. n

IDFWHYHQEHIRUHWKHRQVHWRIWKHFULVLVPDQ\FRQVWUXFWLRQFRPSDQLHVKDGQDQFLDO

GLIFXOWLHVGXHWRWKHLURYHUH[SDQVLRQGXULQJWKHKRXVLQJERRPSHULRGV6KLSEXLOGLQJ

companies were severely hit by the rapid drop of logistics transactions due to the

FROODSVHLQZRUOGWUDGHWKHVLJQLFDQWFDSLWDOORVVGXHWRH[FKDQJHUDWHGHSUHFLDWLRQDQG

their high leverage in foreign currency-denominated debts.

owever, many troubled companies were still muddling through, barely surviving the

GLUHFRQGLWLRQV\HWKDGQRWOHGIRUEDQNUXSWF\7KH\ZHUHFUHDWLQJXQFHUWDLQWLHVLQWKH

PDUNHWDQGDEVRUELQJOLTXLGLW\IXUWKHUDJJUDYDWLQJWKHFUHGLWFUXQFK%XWXQOLNHWKHFDVH

in 199, the government could not initiate direct corporate restructuring as most of theUPVZHUHQRWRIFLDOO\QRQYLDEOHQVWHDGWKHJRYHUQPHQWKDGWRIDFLOLWDWHWKHFRUSRUDWH

UHVWUXFWXULQJSURFHVVWKURXJKFUHGLWRUQDQFLDOLQVWLWXWLRQV&UHGLWRUQDQFLDOLQVWLWXWLRQV

were asked to jointly evaluate the credit risks of corporations in the struggling industries

VXFKDVFRQVWUXFWLRQDQGVKLSEXLOGLQJ7KHFRUSRUDWLRQVZHUHFODVVLHGLQWRIRXUJURXSV

DFFRUGLQJWRWKHLUIXWXUHYLDELOLWLHVJURXS$QRUPDOJURXS%WHPSRUDU\OLTXLGLW\

VKRUWDJHJURXS&VKRZLQJVLJQVRILQVROYHQF\EXWYLDEOHDQGJURXS'QRQYLDEOH

'LIIHUHQWDFWLRQVZHUHWKHQWDNHQIRUHDFKJURXS&RUSRUDWLRQVFODVVLHGDVJURXS$DQG

JURXS%FDQUHFHLYHIXUWKHUOLTXLGLW\VXSSRUWZKLOHFRUSRUDWLRQVLQJURXS&DQGJURXS

are placed under workout programs and bankruptcy procedures, respectively. he

JRYHUQPHQWHYHQHQDFWHGWKHDVW7UDFNVHUYLFHWRH[SHGLWHWKHFODVVLFDWLRQSURFHVV

&RUSRUDWLRQVFDQYROXQWHHUWREHFODVVLHGE\WKHFUHGLWRUQDQFLDOLQVWLWXWLRQVVRWKDWWKH\FRXOGEHSODFHGXQGHUUHVWUXFWXULQJSURJUDPVRUUHFHLYHSURSHUOLTXLGLW\VXSSRUW

expeditiously. ne of the lessons that the orean government learned from the 199

crisis was the importance of coordinating creditor institutions joint decisions in order to

DYRLGGHOD\VLQFRUSRUDWHUHVWUXFWXULQJDQGWKHFRQVHTXHQWODUJHUVRFLDOFRVWV

IV. Lessons rom the 1997 and 2008 Crises

A. Comparison o Macro Policy Responses

1. Monetary Policy

he monetary policy stance taken by advanced economies in the recent global crisis was

TXLWHGLIIHUHQWIURPWKRVHSUHVFULEHGWRWKHHSXEOLFRIRUHDE\WKHGXULQJWKH



21/28

crisis. n 199, the Bank of orea had to raise the base interest rates from approximately

WRDOPRVWDVSDUWRIWKHDGXVWPHQWSURJUDPDQ\RUHDQVWKHQEHOLHYHG

that the higher interest rates ultimately aggravated the banking crisis and led to deep

FRQWUDFWLRQVLQHFRQRPLFDFWLYLW\7KH\TXHVWLRQHGZK\DGYDQFHGHFRQRPLHVGLGQRW

adopt the same tight monetary policy in 2008.

WKHUWKLQJVEHLQJHTXDOZKHQDFXUUHQF\FULVLVLVWULJJHUHGE\DSOXPPHWLQJYDOXHRI

the currency, central banks in emerging market economies are faced with a dilemma of

monetary policy directions. f the central bank raises interest rates to encourage capital

LQRZVLWPD\EHDEOHWRGHIHQGWKHFXUUHQF\+RZHYHUKLJKHULQWHUHVWUDWHVZRXOG

deteriorate the balance sheets of banks and corporations, leading to a severe economic

downturn and possibly banking crisis. n the other hand, if the central bank lowers

interest rates, it may not be able to maintain the value of its currency.

QWKHEHOLHYHGWKDWWKHWRSSROLF\SULRULW\VKRXOGEHWRUHVWRUHFRQGHQFHLQ

the currency market in the epublic of orea and insisted that interest rates be raised toUHVXPHFDSLWDOLQRZVGHVSLWHLWVQHJDWLYHHIIHFWVRQWKHEDQNLQJDQGFRUSRUDWHVHFWRUV

n fact, the 199 crisis was regional while the 2008 crisis was truly global. o global

investor could afford to invest abroad at this time as they had to take care of their internal

SUREOHPVUVW7KXVLQOLQHZLWKPRQHWDU\HDVLQJLQRWKHUFRXQWULHVWKH%DQNRIRUHD

ZDVDEOHWRFXWLQWHUHVWUDWHVZLWKRXWDVLJQLFDQWLPSDFWRQFDSLWDORZV

arge foreign reserves and the lessons learned in 199 in foreign reserve management

played an important role in 2008. Cho 2010) argues that the most important factor that

led to different foreign reserve situations was the governments approach to the foreign

exchange market. n 199, the government misunderstood that it could, probably should,

control the foreign exchange market, and actually attempted to engineer a smooth andorderly depreciation from the beginning of 199. his approach, however, only invited

currency speculations and catalyzed reserve depletion in the end. n 2008, in contrast,

the government let the exchange rate adjust to the shock rather than waste foreign

UHVHUYHVZKLFKHYHQWXDOO\VDYHGWKHH[LELOLW\RIPRQHWDU\SROLF\

he high interest rate policy contributed to corporate restructuring after 199. n 199,

major corporations in the epublic of orea were heavily indebted and their average

GHEWWRFDSLWDOUDWLRZDVZHOODERYH6XEVWDQWLDOIRUHLJQDQGGRPHVWLFFXUUHQF\

debts made them vulnerable to a sharp depreciation in exchange rates and a sharp

increase in domestic interest rates. owever, in 2008, corporate sector debt was not a

serious risk factor. t was household liability that caused more concern.

2. Fiscal Policy

7KHH[SDQVLRQDU\VFDOVWDQFHGXULQJWKHFULVLVLVSDUDOOHOWRWKHSROLF\UHDFWLRQV

during the 199 crisis, ex postCho 2010). owever, in terms of timeliness, there is a



22/28

noteworthy difference. ollowing the Ms recommendation, the orean government

initially maintained a balanced budget when the currency crisis was triggered in 199.

$IWHUDVHYHUHUHFHVVLRQHPHUJHG LQPLG WKHEXGJHWGHFLWZDVDOORZHGDQG

gradually expanded as the recession deepened. n the 2008 crisis, in contrast, the

RUHDQJRYHUQPHQWDQQRXQFHGVFDOH[SDQVLRQDVVRRQDVWKHJOREDOFULVLVZDVXQGHUZD\DQGFDUULHGRXWDVFDOVWLPXOXVSDFNDJHLPPHGLDWHO\$VXSSOHPHQWDU\EXGJHWRI

10 trillion was implemented in ovember 2008, and an additional supplementary budget

of 28.4 trillion was drawn up by March 2009. Considering the time lags common to

VFDOSROLF\HIIHFWVWKHHDUO\H[HFXWLRQRIVFDOVSHQGLQJLQPXVWKDYHFRQWULEXWHG

to economic stabilization. n this sense, the orean experience in 2008 demonstrated that

PRUHSURPSWH[SDQVLRQDU\VFDOSURJUDPVLQVKRXOGKDYHEHHQLPSOHPHQWHGZKHQ

they were needed most in order to offset the inevitable slowdown in economic growth.

he orean case in 199 was different from the peripheral countries in urope in 2008.

7KHHSXEOLFRIRUHDLQKDGPRUHVFDOVSDFHWRXWLOL]H

B. Bilateral Swaps, Foreign Reserves,and Global Financial Saety Nets

3UREDEO\WKHPRVWGLIFXOWOHVVRQWKDWPDQ\HPHUJLQJHFRQRPLHVLQ$VLDOHDUQHGIURPWKH

WZRFULVHVLVWRUHFRQUPWKHEHOLHIWKDWPRUHIRUHLJQH[FKDQJHUHVHUYHVLVEHWWHU$IWHU

H[SHULHQFLQJVXGGHQUHYHUVDOVRIFDSLWDORZVDQGWKHFRQVHTXHQWVRFLDOORVVLQ

Asian emerging economies started to accumulate foreign reserves aggressively. n the

SDVWVXGGHQUHYHUVDOVRIFDSLWDORZVZHUHW\SLFDOO\DVVRFLDWHGZLWKSUREOHPVLQWHUQDO

to the emerging market countries, such as mismanagement of the macroeconomy and

ZHDNQDQFLDOUHJXODWRU\V\VWHPV$FFXPXODWLQJIRUHLJQUHVHUYHVLVLQWHQGHGWREHD

SDUWRISUHFDXWLRQDU\SROLFLHVWRFRYHUXQH[SHFWHGRXWRZVLQWLPHVRIFULVHV7KH

FULVLVKRZHYHUGUDPDWLFDOO\GHPRQVWUDWHGWKDWWKHUHFRXOGEHRWKHUFDXVHVRIFDSLWDORZ

UHYHUVDOVDJDLQVWZKLFKSXUHO\GRPHVWLFVDIHJXDUGVGRQRWSURYLGHVXIFLHQWGHIHQVH

he 2008 crisis had its origins in advanced economies against the backdrop of the

VXESULPHFULVLV7KHVHHYHQWVUHVXOWHGLQWLJKWHQHGOLTXLGLW\FRQGLWLRQVLQLWLDOO\LQWKH

QDQFLDOFHQWHUVRIDGYDQFHGFRXQWULHVDQGWKHQHYHQWXDOO\LQHPHUJLQJPDUNHWV$VD

result, Asian policy makers came to the conclusion that countries need to keep even

larger amounts of foreign exchange reserves. he fact that countries with larger reserves

generally fared better in the recent crisis may have further strengthened their belief.

n particular, small open economies, which are highly dependent upon international trade

IRUWKHLUHFRQRPLFJURZWKDUHPRVWOLNHO\WRQHHGVXIFLHQWO\ODUJHIRUHLJQH[FKDQJH

UHVHUYHVWRVKLHOGWKHLUHFRQRPLHVIURPDGYHUVHH[WHUQDOVKRFNV:KHQH[WHUQDOQDQFH

LVQRORQJHUDYDLODEOHWKHFRXQWULHVFRXOGVXIIHUIURPGU\LQJXSRIWUDGHQDQFHZKLFK

in turn may lead to a severe downturn of exports and imports, and ultimately, of the

whole economy. aced with extreme uncertainties about the duration of the global crisis,

therefore, the epublic of orea could not afford to actively use its foreign exchange



23/28

reserves, which would be its last resort to guard against constrained external trade

QDQFLQJLQWKHZRUVWFDVH

+RZHYHUKROGLQJODUJHDQGH[FHVVLYHUHVHUYHVLVTXLWHFRVWO\GRPHVWLFDOO\DQGJOREDOO\

he reserves are often held in safe assets that yield low returns, thus the opportunitycosts are not negligible. t is important to note that the costs of such policies are not

only borne by the individual countries holding them. After all, holding excess reserves in

safe assets diverts resources from other productive uses with potentially higher returns,

which could contribute to global growth. t also contributes to widening global imbalances,

LQHYLWDEO\LQWHQVLI\LQJLQWHUQDWLRQDOWUDGHFRQLFWV

o reduce the excessive precautionary motive for accumulating large reserves, countries

whose currencies are international reserves have to bear more responsibility in providing

JOREDOOLTXLGLW\LQSDUWLFXODUIRUWUDGHQDQFHDWOHDVWLQFDVHVZKHUHWKHRULJLQVRI

shocks start from the center. hat is why the epublic of orea promoted the agenda

RIVWUHQJWKHQLQJ*OREDOLQDQFLDO6DIHW\HWVLQWKH*6XPPLWLQ$WUVWWKHepublic of orea wanted to institutionalize the bilateral swap arrangements with the

HGHUDOHVHUYH(YHQWKRXJKWKH\ZHUHYHULHGWREHYHU\HIIHFWLYHGXULQJWKH

crisis, bilateral swap arrangements have limitations as credible and secure sources of

IRUHLJQFXUUHQF\OLTXLGLW\GXHWRWKHLUWHPSRUDU\DGKRFDQGSROLWLFDOQDWXUHQGHHG

most major central banks were resistant to this idea, pointing out that bilateral swaps can

cause serious moral hazard problems. As a politically feasible second best option, the

20 focused on the Ms new ex ante crisis-prevention lending toolkit by establishing

the multicountry lexible Credit ine and the recautionary Credit ine. owever, in

the future, in order to effectively reduce excess reserve accumulation by emerging

economies, the role of central banks with reserve currencies should be reexamined

DQGWKHLUFROODERUDWLRQZLWKWKHVQHZOHQGLQJIDFLOLWLHVDQGWKHUHJLRQDOQDQFLDOarrangements such as the Multilateralized Chiang Mai nitiative Mechanism should be

further explored.

C. Banking versus Capital Market Development

6LQFHWKHFULVLVZDVWULJJHUHGE\QDQFLDOH[FHVVHVLQFDSLWDOPDUNHWVLQDGYDQFHG

countries, capital market development, including investment banking, derivatives, and

securitization, suddenly became bad words. he ashington consensus and free

capitalism came under attack even in advanced economies. here were loud calls for

VWURQJHUQDQFLDOUHJXODWLRQDUHWXUQWREDVLFEDQNLQJDQGDQDYHUVLRQWRFRPSOH[

instruments in the capital market.

But these were inconsistent with the message that Asian countries heard after the

199 crisis. Back then, policy prescriptions emphasized capital market development,

GHUHJXODWLRQDQGSULYDWL]DWLRQQHRIWKHIUHTXHQWO\VXJJHVWHGXQGHUO\LQJFDXVHVRI

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mismatch between assets and liabilities in the bank balance sheets. As the epublic of

RUHDDQGPRVWRIWKHRWKHU$VLDQFRXQWULHVKDGEDQNGRPLQDWHGQDQFLDOV\VWHPVWKH

maturity mismatch was inevitable since banks made long-term loans and funded them

by issuing short-term deposits. he 199 experience highlighted that the social costs of

such a system were unnecessarily large, and the necessity of developing capital marketsbecame an important policy task. t is better to have a bicycle rather than a monocycle for

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necessary for longer maturity options and wider risk sharing by the market.

ince the 199 crisis, Asian countries have attempted to reduce their dependence on

banks and to develop capital markets, particularly local currency bond markets. his is

demonstrated by the Asian bond market initiatives of the AA. ndeed, although

$VLDQQDQFLDOPDUNHWVDUHFXUUHQWO\VWLOOEDQNGRPLQDWHG FDSLWDOPDUNHWVDQGQRQEDQN

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After the crisis in 2008, Asian policy makers were at a loss. hould Asia continue to

develop its capital market or should its small local banking system be regarded as a

virtue to keep? But this may not be the right lesson for Asia to take away from the global

QDQFLDOFULVLVIZHGRQRWOHDUQKRZWR\WKHUHZLOOEHQRSODQHFUDVKHV

n efforts to avoid the middle income trap, Asias industrial structure will need to becomePRUHFRPSOH[UHTXLULQJPRUHULVN\SURHFWVI$VLDGRHVQRWGHYHORSFDSLWDOPDUNHWV

banks will inevitably be responsible for supplying funds to high value-added industries

such as information technology, biotechnology, and green growth industries, which

intrinsically carry higher risks and greater uncertainties. overnments will be hard-

pressed to provide guarantees, in effect transferring the risks to the public sector. Capital

market development in the region will diversify risk concentration in banking sectors,

SURPRWHHIFLHQWULVNDOORFDWLRQDQGWKXVFDQVXSSRUWIXWXUHHFRQRPLFJURZWKHYHQ

though it intrinsically carries more risks.

n fact, efforts in the last decade to develop the capital market in the epublic of orea

contributed a lot to its recovery from the crisis in 2008. n 199, capital in the epublic ofRUHDVQDQFLDOPDUNHWZDVPRVWO\VDIHW\VHHNLQJEDQNFDSLWDO$VDUHVXOWWKHRXWEUHDN

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25/28

Also, as explained in the previous section, the introduction of the Bank ecapitalization

und was possible because the epublic of oreas capital markets have grown

VLJQLFDQWO\VLQFH

o, should Asia revert to a bank-dominated system? At this point, there is no consensus\HWEXW$VLDQHHGVWRQGLWVRZQDQVZHU:KDWLVWKHULJKWOHYHORIFDSLWDOPDUNHW

development and how should regulation be enhanced to avoid the mistakes that

advanced economies committed, which eventually led to the global crisis of 2008?

robably, the lesson that we have to learn from the global crisis is that we need better

QDQFLDOUHJXODWLRQQRWXVWPRUHDQGVWULFWHUUHJXODWLRQIZHEOLQGO\UDLVHUHJXODWLRQ

levels on Asias banks that mainly focus on commercial banking activities, the Asian

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D. Financial Regulation rom Emerging Market Perspectives

7KHJOREDOQDQFLDOFULVLVXQGHUOLQHGWKHZHDNQHVVHVRIWKHJOREDOQDQFLDOPDUNHWDQGKDVOHGWRFDOOVIRUHQKDQFHGQDQFLDOPDUNHWUHJXODWLRQ+RZHYHU$VLDKDVJHQHUDOO\

EHHQDE\VWDQGHUUDWKHUWKDQDQDFWLYHSDUWLFLSDQWLQWKHGLVFXVVLRQVRQJOREDOQDQFLDO

UHJXODWRU\UHIRUPWRGHVLJQQHZVWDQGDUGVIRUQDQFLDOUHJXODWLRQ3DUWO\EHFDXVHLWV

QDQFLDOLQVWLWXWLRQVZHUHOHVVDIIHFWHGE\WKHJOREDOFULVLVDQGLWVFDSLWDOPDUNHWVZHUH

less developed, the current discussions on most of the topical global issues such as

UHJXODWLQJV\VWHPLFDOO\LPSRUWDQWQDQFLDOLQVWLWXWLRQVDQGUDLVLQJFDSLWDODGHTXDFLHVGR

not seem currently relevant for them.

owever, Asia must decide to more actively engage in the discussions for two reasons.

irst, what is decided today will affect the region in the next decade or so. econd, even

DWWKLVVWDJHWKHUHDUHPDQ\LPSRUWDQWXQLTXHDVSHFWVWKDWKDYHDODUJHULPSDFWRQAsia, but may not be properly discussed by advanced economies. ne example is how

to regulate the foreign exchange liabilities of branches of foreign banks in Asia. his

LVUHODWHGWRWKHFURVVERUGHUUHVROXWLRQPHFKDQLVPRIV\VWHPLFDOO\LPSRUWDQWQDQFLDO

institutions. Another example is the accounting issue due to exchange rate volatility.

he use of historical value versus market value accounting is one of the hot issues in

redesigning international accounting standards, but the current focus in international

discussions is more on stock price volatility. n Asia, however, volatility due to exchange

rate changes can be more devastating in some countries. he regions experience during

the 199 crisis and the epublic of oreas experience during the recent global crisis are

other key examples of why Asian policy makers have to pay attention to this issue.



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V. Conclusion

7KLVSDSHUGHVFULEHVKRZWKHRUHDQHFRQRP\ZDVDIIHFWHGE\WKHJOREDOQDQFLDO

crisis and how the government responded to the crisis. he paper also highlights many

GLIIHUHQFHVLQWKHRUHDQVLWXDWLRQLQDQGDQGWKHFRQVHTXHQWLPSOLFDWLRQVRQFULVLVPDQDJHPHQWLQWHUPVRIPDFURHFRQRPLFSROLFLHVQDQFLDOSROLFLHVDQGFRUSRUDWH

restructuring. Based on the orean experiences during the two crises, the paper raised

several policy issues that might have regional implications for Asia. e argue that the role

RIFHQWUDOEDQNVZLWKUHVHUYHFXUUHQFLHVVKRXOGEHUHH[DPLQHGDQGWKDWUHJLRQDOQDQFLDO

safety nets such as the Multilateralized Chiang Mai nitiative should be strengthened. e

also believe that Asia needs to continue its capital market development plans such as the

$VLDQ%RQGDUNHWVQLWLDWLYH LQRUGHUWRXSJUDGH LWVQDQFLDOPDUNHWVGHVSLWHWKHUHFHQW

JOREDOWUHQGWRZDUGVWURQJHUQDQFLDOUHJXODWLRQRQFDSLWDOPDUNHWVDIWHUWKHVXESULPH

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regulations, incorporate regional perspectives in global rule-setting, and emphasize the

EDODQFHGDSSURDFKEHWZHHQVWDELOLW\DQGJURZWKRIQDQFLDOPDUNHWVDQGLQGXVWULHVFRQVLGHULQJWKHVWLOOXQGHUGHYHORSHGVWDJHRI$VLDQQDQFLDOPDUNHWV

uring the 199 crisis, Asia was devastated and had to comply with estern policy

prescriptions, even if it was not in total agreement with their recommendations. n

the recent global crisis, Asia was relatively immune. ndeed, the region led the global

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SRVLWLRQWRTXHVWLRQWKHWUDGLWLRQDOZLVGRPLPSRVHGRQWKHPE\DGYDQFHGHFRQRPLHV

in the past. n fact, advanced economies themselves did not use the old prescriptions

signed off to Asia in 199.

he positive side to this is that Asia can contribute to global knowledge from its

own experience during the two crises. owever, Asia has not developed an Asian

consensus yet. his paper suggests some areas where Asia needs to develop its own

stance, whether it is consistent with old wisdom or not, in many issues such as crisis

PDQDJHPHQWUHVHUYHDFFXPXODWLRQFDSLWDOPDUNHWGHYHORSPHQWDQGSURSHUQDQFLDO

regulation. n 199, Asia adopted voluntarily and involuntarily the estern textbook. After

2008, it recognized the problems of that prescription. But we still do not know which part

is right and which part we have to abandon as we have never written our own textbook.

erhaps now is the right time to do so.



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Cho, . 2010. esponses of the orean conomy to the lobal Crisis Another CurrencyCrisis? aper presented at the C/ Conference on lobal conomic Crisis mpacts,7UDQVPLVVLRQDQGHFRYHU\$XJXVW+RQROXOX

erlach, ., and . mets. 1995. Contagious peculative Attacks. European Journal of PoliticalEconomy

lick, ., and A. . ose. 1999. Contagion and rade hy are Currency Crises egional?Journal of International Money and Finance

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aminsky, ., and C. einhart. 2000. n Crises, Contagion, and Confusion. Journal ofInternational Economics

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ee . ., and C. hee. 200. Crisis and ecovery hat e ave earned from the outhorean xperiences?Asian Economic Policy Review

einhart, C., and . ogoff. 2010. rowth in a ime of ebt. American Economic Review:Papers and Proceedings

sutsumi, M., . ones, and . Cargill. 2010. he orean inancial ystem vercoming thelobal inancial Crisis and Addressing emaining roblems. C orking aper o. 9,rganisation for conomic Co-operation and evelopment, aris.

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About the PaperHangyong Lee and Changyong Rhee describe how the 2008 global crisis spilled overto the economy of the Republic of Korea and how the government responded to thefinancial turmoil. They also provide the background and rationale for the governmentsdecisions to adopt specific policy measures. Based on Korean experiences during the1997 and 2008 crises, they document the lessons learned and identify several important

policy issues that might have regional implications for Asia.

About the Asian Development BankADBs vision is an Asia and Pacific region free of poverty. Its mission is to help itsdeveloping member countries reduce poverty and improve the quality of life of theirpeople. Despite the regions many successes, it remains home to two-thirds of theworlds poor: 1.8 billion people who live on less than $2 a day, with 903 millionstruggling on less than $1.25 a day. ADB is committed to reducing poverty throughinclusive economic growth, environmentally sustainable growth, and regionalintegration.

Based in Manila, ADB is owned by 67 members, including 48 from the region. Its

main instruments for helping its developing member countries are policy dialogue, loans,equity investments, guarantees, grants, and technical assistance.

Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.org/economicsISSN: 1655-5252Publication Stock No. WPS124433

January 2012

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Documents

Lessons from the 1997 and the 2008 Crises in the Republic of Korea