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Study: South Korea's Financial Crisis Not Over

The Washington-based Institute for International Economics Wednesday released a study showing that five years after a major financial crisis the restructuring of South Korea's industrial conglomerates (chaebol) is only partially complete. The reckless financial dealings of the chaebols contributed to South Korea's 1997-98 financial meltdown.

Former Duke University business professor Edward Graham says despite significant reform in some areas, the chaebols are still too big and too powerful. The new South Korean president has promised to crack down on the practices of the chaebol. This week the government said it is investigating possible illegal securities transactions by the chaebol.

At the time of the 1997 crisis, the biggest conglomerates or industrial holding companies were Hyundai, Samsung, Daewoo, L.G., and S.K. In 1999 Daewoo was permitted to fail or go bankrupt, with its auto manufacturing assets being sold off. South Korea's financial crisis occurred when the central bank was unable to stand behind the short-term debts of the chaebols, which had expanded aggressively and piled up a huge volume of debt.

Mr. Graham says the finances of the remaining chaebols are still questionable. He says South Korea's industrial economy is still lacking in transparency. Off balance sheet operations similar to those which contributed to the collapse of the Enron energy trading company in Texas are common in South Korea.

Mr. Graham says it may be a good idea to break up the chaebols. He says South Korea still has a relatively weak financial system and the reforms that have been made are only half-complete. He says it is not true that South Korea has followed the Chinese example and fully opened its previously closed economy to foreign direct investment. Mr. Graham says while there was some opening in the aftermath of the crisis, foreign investment has recently leveled off at relatively low levels.

South Korea's economy registered stunning economic growth rates in the 1980s and early 1990s. Ten percent annual growth was not unusual. After the crisis, the economy contracted by 8 percent in 1998 but growth resumed by 1999.