KOREAN CRISIS: Unraveling the Miracle in the IMF Era.

KOREAN CRISIS: Unraveling the Miracle in the IMF Era. By Donald Kirk. New York: St. Martin Press. 2000. xii, 365 pp. US$55.00, cloth. ISBN 0-312-22442-7.

The Korean crisis began with financial meltdown in the fall of 1997 when the government had to appeal to the International Monetary Fund for loans to meet foreign exchange obligations. Kirk's reasons for the crisis include excessive borrowing by the chaebol (Korea's large conglomerates), borrowing that was facilitated by a complaisant financial system that governments had used as conduits for their industrial policies. Among IMF loan conditions were demands that Korea slow GNP growth, liquidate insolvent banks and reform the chaebol by consolidation and more open ("transparent") accounting practices. Though meltdown occurred during Kim Young Sam's presidency, most of the "IMF era" comes after Kim Dae Jung's inauguration in February 1998.

Kirk discusses chaebol over expansion and resistance to restructuring, the government's ambivalence toward and inability to curb them and the IMF's role as villain in Korea. He examines the gap between rhetoric and actual reform, the impact of impaired credit on exports and the by-now-traditional search for those in the previous government responsible for today's troubles. A newly established Financial Supervisory Commission tried to reform the chaebol by banning cross-ownership and loan guarantees, divesting their money-losing units and exchanging operations to concentrate activity in a few core businesses, but little came of this. One reason was that Korean bankruptcy does not require liquidation and write-off of debts but, rather, allows continued operation and loan renewal under receivership.

Excessive borrowing also generated non-performing loans that weakened banks and other financial institutions. Borrowing was excessive because overcapacity and "wasteful competition" (p.182), as exemplified by the auto industry, led to large losses. Attempts to sell and auction the most troubled units were not wholly successful because foreign firms, the logical buyers, faced discrimination and a hostile business climate in Korea.

The last three chapters deal with continued confrontation between North and South Korea, increased anxiety and tension after the North fired a long-range missile in 1998, and what Kirk calls the "crisis of identity." This last lies in the conflict between the traditional nationalism and conservatism of the older generation and their childrens' interest in forbidden Japanese pop music and other features of globalization.

Some of the analysis, particularly of causes and consequences, is weak in Korean Crisis. For example, capital-market liberalization in the early 1990s that allowed banks and chaebol to obtain short-term foreign loans for long-term uses is not mentioned. Nor is government intervention in bank management (to funnel "priority loans" to the chaebol, among other things) or the loose supervision and weak prudential regulations that allowed reckless borrowing.

Kirk is surprised that actual reform has not matched government rhetoric. He should not be. The obvious reforms, closure and recapitalization, are both unappealing. Closure would add to already excessive unemployment, while heavily indebted, money-losing firms are poor buyout candidates.

One point that may puzzle readers is chaebol expansion into already overcrowded markets. This makes no sense and is not explained, but can be understood as a moral-hazard problem. The chaebol believed they were too big to fail and knew that the usual penalties for managerial failure -- dismissal, hostile takeover, or liquidation -- did not apply to them.

Criticism of analytical omissions here should not be allowed to overshadow the merits of Korean Crisis. Kirk, a reporter, provides a blow-by-blow account of financial meltdown and its aftermath. He interviewed dozens of participants in the crisis and reform, as well as ordinary people who have been affected. The result is a lively study that should be read by anyone interested in the contemporary Korean scene.