6 ideas
The 1997 crisis was triggered by the rapid, poorly sequenced opening of Korea's capital account and the deregulation of its financial sector in the 1990s. That opening let banks and merchant banks pile up short-term foreign debt. The chaebol's structure was not the root cause, and it was high-debt corporate finance that turned the external shock into a crisis only once state coordination had been dismantled.
Korea's developmental model worked as an integrated system. The state directed credit through banks it controlled to chaebol that undertook large, risky investments in strategic industries. The state's monitoring and discipline made high corporate debt-to-equity ratios a rational way to socialise investment risk, rather than a sign of reckless mismanagement.
An institutional feature can look pathological by an Anglo-American benchmark yet serve a coherent function inside its own system. Examples include high leverage, cross-subsidisation within business groups, and relationship banking. Removing one such element without its complements does not produce a 'normal' market economy. It leaves an incoherent hybrid that keeps the risks and loses the benefits.
The crisis came after, not during, the era of heavy state control. In the 1990s the government abandoned investment coordination and industrial policy, which let chaebol engage in duplicative overinvestment in sectors like steel, cars and semiconductors. The problem was the withdrawal of the state's disciplining role, not an excess of it.
The IMF programme imposed sweeping structural conditions on Korea: corporate governance overhaul, forced debt-ratio targets, labour-market flexibilisation and full financial opening. These went far beyond what a liquidity crisis required. The mandated austerity and high interest rates deepened the recession, and the structural agenda permanently reshaped Korea toward a shareholder-value, Anglo-American model.
Investment rates fell sharply. The economy became more financially 'sound' by orthodox measures, but it lost the high-investment engine that had powered its catch-up growth and saw rising inequality and job insecurity.