[Outlook]Fix the fixesThere is a saying, “The pear drops when the crow flies from the tree.” Some might interpret that to mean the pear fell because of the crow. If you say that an event which happened first is the cause and the next event is the result, you often end up making a mistake. Interpreting two things that happen sequentially as the cause and effect is called the “post hoc fallacy” in logics.
Ten years ago, in 1997, the booming Korean economy faced a foreign currency crisis. While there have been many discussions about that financial crisis, the event has often been exploited as an argument to deny the past.
Nearly every system or program in existence before the foreign currency crisis took the blame as being the cause. Therefore, most were considered a target of reform.
Companies were blamed the most and they had to go through a complete makeover.
The most direct cause of the foreign currency crisis was the lack of foreign currency liquidity.
In 1996, the Korean economy enjoyed an account deficit of $23.1 billion, a record that has not yet been broken.
With a deficit more than 4 percent of the gross domestic product, we saw the first sign of a shortage of dollars. In that case, it was only proper for the government to promote policies which boosted exports and reduced imports to prop up the weak won. However, the Bank of Korea intervened in the foreign currency market to maintain the strong won, reasoning that it was necessary to stabilize prices.
To maintain a strong won and a weak dollar, we had to sell more dollars. The second stage of the dollar shortage began.
Foreign investors, who were concerned about the economic slump and the dollar shortage, retrieved their investments and loans at once, and the herding behavior led to the third stage of the dollar shortage. Finally, when the reserve of dollars had nearly emptied, the foreign currency crisis shook the economy.
Even with no dollar reserves, we had a last resort, the International Monetary Fund. Korea borrowed about 29 billion dollars directly from the IMF. However, with the loan, the country was forced to follow a comprehensive reform program.
The most difficult demand was high interest rates. Joseph Stiglitz and other scholars are skeptical about that policy. The high interest rate was almost a punishment which made the economy struggle even more. Some suspected that the policy was put in place to make it more difficult for the country to follow the reform program.
However, the fundamentals of the Korean economy were still alive. In 1998, the Korean economy marked a record account surplus of $40 billion. With a surplus far greater than the IMF loan that year, the country’s dollar holdings increased, and credit rating agencies raised the sovereign rating from speculative to investment grade after a year.
The economic entities that were criticized as the main causes of the foreign currency crisis contributed the most to overcoming the crisis. The country has been enjoying an account surplus until now.
In the decade since the crisis, the Korean economy has experienced many changes. There have been positive ones, but the most regrettable change is that the companies have lost their desire to invest and the growth engine has been halted.
Companies have taken pleasure in giving out high dividends and paying back their debts with their profits. In a way, they have grown lazier. With companies lacking a passion for investment and a slow growth engine, the economy is feeling the fatigue and side effects of reform.
Ten years from now, the aging of society will accelerate and the Korean economy will undergo more challenges. In the meantime, we have to step on the accelerator of growth with all of our might. We don’t have much time. We need to closely study whether we have made a post hoc fallacy in considering the merits of the Korean economy as the cause of the foreign currency crisis and review and modify the various reform programs put in place after the crisis. It is about time we reform the reforms.
*The writer is a professor of business administration at the University of Seoul. Translation by the JoongAng Daily staff.
by Yun Chang-hyun