IMF Survey: What was the impetus for this conference, and why did you think the timing was right?
Coe: In the winter of 2000, I was having lunch with Se-Jik Kim, who was at the Korean Institute for International Economic Policy (KIEP)—a government-sponsored research institute—and on leave from the IMF’s Research Department. A lot of research was being done on the crisis, and we remarked that there had been quite a few conferences about the Asian crisis or the Korean crisis, most of them in the United States. Although Korean economists had participated, the conferences were dominated by well-known U.S. academics. We thought it would be good to organize a conference in Seoul, with equal participation of Korean and outside economists, as well as government officials and staff from the World Bank and the IMF who had actually participated in the design of the IMF program.
We got very good support for the idea from KIEP management and the IMF’s Asia and Pacific Department. As for the timing, the IMF program ended in early December 2000 and the conference was held in May 2001, by which time the Korean economy was recovering. In some sense, the crisis was over, at least the macroeconomic crisis, and that provided perspective. Many of the other conferences had been held as the crisis was unfolding, and their assessments were inevitably colored by the 7 percent collapse in output in 1998. Another impetus for the conference was to focus on a single country and its unique experience.
IMF Survey: What are the major lessons we have learned from the Korean crisis?
Coe: A key lesson is the importance of political leadership. The crisis in Korea broke out during a preelection period and, not unlike what we saw in Brazil, there was a fair amount of political uncertainty. In Korea, some presidential candidates were saying that, if elected, they would renegotiate any program with the IMF. After Kim Dae-Jung was elected—in a razor-thin victory—he wholeheartedly embraced the idea of working with the IMF, which represented quite a turnaround from his position before the election. He was able to unify the country to overcome the crisis. We call this, in IMF jargon, “ownership.”
A second lesson is the importance of private sector involvement. The program was negotiated in early December 1997, but the agreement with the banks was not reached until the end of December 1997. Until the agreement with the banks, there was a great deal of uncertainty about whether the program would succeed. In fact, during most of December, it looked as if it wasn’t succeeding.
IMF Survey: But wasn’t it too early to tell?
Coe: In retrospect, it was too early to judge. But one of the ideas of an IMF program is that you go in with a lot of money, reestablish confidence, and turn things around; if that works, you may not even have to use the money. In Korea, it didn’t work that way. The situation turned around only after the agreement with the banks to roll over Korea’s maturing debt. A chapter by Yangho Byeon, who was actually involved in the negotiations with the banks, and Woochan Kim is a historical record of the negotiation with the banks and how the Korean government approached it. So the lesson here is that private sector involvement can be crucial.
It is also very important to tackle structural issues, especially in the financial sector, early and with determination. Korea has probably done more than any other country affected by the Asian crisis to address the problem of nonperforming loans and make banks’ balance sheets healthy again. This is in sharp contrast with a number of Asian countries that have not been able to address this problem in a meaningful way.
In my view, another important lesson is that high interest rates are effective in stabilizing the exchange rate. In Korea, monetary policy—the high interest rate policy—pretty much worked as advertised. Interest rates were raised substantially early in the crisis and had to stay high for a relatively short time until the exchange rate was stabilized. Then, within about six months, they were back to precrisis levels.
IMF Survey: Did any startling or new insights emerge from the conference?
Coe: There’s nothing startling in the book, but it certainly contains some new results and some very good papers. The second chapter, by Ajai Chopra and the other members of the Korean team at the time, is an excellent overview of the IMF’s view of the crisis, its causes, and the strategy adopted to resolve the crisis; the third chapter presents a more critical assessment by Yoon Je Cho. There’s some new research on the impact of interest rates on the exchange rate by Chae-Shick Chung and Se-Jik Kim. And Michael Dooley, Rudi Dornbusch, and Yung Chul Park propose a novel framework for exchange rate policy in Korea. There are also excellent papers by, among others, Anne Krueger, Robert Barro, Jong-Wha Lee, Barry Eichengreen, Changyong Rhee, and Simon Johnson.
IMF Survey: After absorbing these lessons, is Korea likely to once again become one of the honor students of economic growth?
Coe: The Korean economy bounced back after the tremendous contraction of output in 1998. In the next two years, it averaged almost 10 percent growth annually. It was inevitable that growth would slow after that and indeed it did, at the same time that the global economy slowed. The Korean economy weathered this slowdown better than most, and our current projections for this year and next are for growth to average about 6 percent. At least so far, the evidence is that the economy is again growing strongly. In fact, chapters by Robert Barro and by Yung Chul Park and Jong-Wha Lee specifically address the question of whether potential growth in Korea has been lowered because of the crisis. In both cases, they conclude that it hasn’t.
Korea can truly be described as an economic miracle. It is well known that, in the 1950s, Korea was as poor as Ghana and other African countries. Starting in the early 1960s, growth in Korea averaged more than 8 percent a year for about 30 years, which is really remarkable. Per capita incomes are now about $10,000, Korea is a member of the Organization for Economic Cooperation and Development, and it is classified as an advanced economy by the IMF’s World Economic Outlook. I don’t think anybody expects sustained annual growth of 8 percent in the future simply because Korea is converging to the levels of income we see in the richest countries, and as it gets closer, growth will tend to slow. But I would expect Korea to continue to grow relatively rapidly. If you look at the countries that were hit by the Asian crisis, Korea has probably done the best job on the tough things: cleaning up the banks, restructuring the financial sector, and improving corporate governance. So, yes, Korea is once again, and probably will continue to be, one of the honor students of economic growth.
IMF Survey: How about lessons for some of the more recent crises in Latin America?
Coe: Some of the lessons I mentioned before—the importance of ownership and of tackling tough problems early and determinedly—are clearly applicable to Latin America and other countries. But we have to be cautious about drawing lessons because Korea is unique. It’s only about the size of New York State, with a very homogeneous population—one of the most homogeneous in the world. After the Korean War, the Korean people united behind a common goal of economic development, and they were able to do the same to overcome this crisis.
IMF Survey: Who would be interested in this book?
Coe: The book will be interesting to various readers, including policymakers, economists, and historians, as well as the general public interested in international economic developments. In addition to the papers mentioned previously, there are chapters on the impact of the crisis on the labor market, the role of the chaebol, corporate restructuring, corporate governance, and the international financial architecture. With half of the chapters written by Korean authors, the Korean perspective is well represented.
Copies of Korean Crisis and Recovery, edited by David T. Coe and Se-Jik Kim, are available from IMF Publication Services for $32.00 each. For ordering details, please see page 341.