The Korean economy emerged from the crisis in an entirely different shape. First, it became much more open to international capital flows. Most of the restrictions on inward FDI were lifted at the end of 1997. FDI surged in and the accumulated amount of FDI inflows reached 100 billion dollars in October 2004, of which 82 percent had occurred since the crisis. Foreign exchange trading was liberalized in two stages between April 1999 and January 2001, which helped the daily trading volume to jump from 4 billion dollars (1 percent of GDP) in 1998 to 30 billion dollars (3 percent of GDP) in 2006. 1) The government also abolished the ceiling on foreign shareholdings in listed companies in May 1998. The foreigners’ share of total market capitalization rose sharply and exceeded 40 percent in 2004, up from less than 15 percent in 1996. 2)
Second, the transparency of corporate management was substantially enhanced. Accounting standards were revised, the chaebol were required to prepare consolidated financial statements, and external auditors and corporate accounting officers were subject to stiffer penalties. In particular, the punishment of Daewoo’s management and its accounting firms sent a strong signal that corporate crimes would no longer be tolerated. 3) In corporate governance, outside directors became apermanent part of the governance structure and the rights of shareholders were significantly strengthened. 4)
Third, the working of the financial market improved substantially. Most importantly, interest rates were fully liberalized and could now play their proper role as a price mechanism. Previously, liberalization was delayed because it would increase interest rate volatility given the BOK’s control of the money supply. In the wake of the crisis, BOK shifted to a policy of inflation targeting, discontinued its control of the money supply, and began to influence the interest rate directly through open market operations. In the meantime, the treasury bond market increased in size and provided a stable benchmark interest rate. The stock market also grew steadily from 2003, helped by strengthened shareholder rights, the full opening of the market to foreigners, the increased role of institutional investors, and low interest rates.
Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.
NOTE
1)The volume of FDI flows and foreign exchange trading, however, is still small compared to those in other advanced economies.
2) In comparison, the foreigners’ share was 10.3 percent in America, 17.7 percent in Japan, 38.8 percent in France, and 23.1 percent in Taiwan.
3) In 1999, regulators suspended two of Daewoo’s accounting firms from receiving new business and terminated the licenses of two accountants, sending shockwaves throughout the industry. In 2006, the Korean Supreme Court fined former Daewoo Group executives a total of 23 trillion won and sentenced some of them to prison for their involvement in accounting fraud and other corporate crimes. The fines were the largest ever levied in Korea.
4) But the role of outside directors remains limited, and shareholders do not yet actively exercise their rights.
