Macroeconomic impacts of the Korean financial crisis: Comparison with the cross-country patterns

It has already been more than three years since the Asian financial crisis that erupted in 1997 brought unprecedented economic and social distress to the Korean economy. No one had expected its initial impacts would be so severe as to throw the booming economy into a tailspin in such a short period of time. The GDP growth rate in Korea plummeted from the pre-crisis average of 7 per cent to -6.7 per cent in 1998, while the inflation rate rose from 4.5 per cent to 7.5 per cent. Only from the second half of 1998 did the Korean economy start to recover from the free-fall, but the recovery process has been no less drastic than its free- fall. The GDP growth rate in 1999 bounced back to 10.7 per cent. The purpose of this paper is to make an assessment and provide a summary of this speedy adjustment in Korea. In particular, we analyse the macroeconomic adjustment process of the Korean financial crisis in a broad historical and international perspective. This paper consults the records of all countries that have experienced a currency crisis and received conditional financial assistance from the IMF during the period of 1973 to 1994. From these cross-country data, we draw some stylised facts about the behaviour of key macroeconomic variables such as GDP growth, inflation, current account, and employment growth during the adjustment period. Then we compare these stylised facts with the Korean cases.