Korean Economy

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Despite the Korean economy's ability to gain strength throughout the 1960s and 1970s, there were several problems that impeded its growth.

1. The Korean economy was prone to inflation.
2. Policy makers at the time were more concerned with growth than inflation.
3. An average annual inflation rate of 16-17 percent during 1960-80 prevailed; this rate was higher than any other East Asian country.
4. During this time period, Korea's economic performance was hindered by its current account deficit.

Smith furthers the analysis of Korea's economic downfall by noting that when it came to Koreas investment practices, investors and bankers were ill prepared to handle the sudden changes that befell the Korean economy: "Administrative guidance and state-directed lending, which had appeared to work in the early part of industrial development, created an industrial structure characterized by highly leveraged firms and a banking sector with little or no experience in managing risk". Despite these shortcomings, the Korean economy was able to sustain itself into the early 1990s. In fact, problems of inflation, and unstable investment infrastructure did become apparent until Korea began to loose its competitive edge.

All of this changed in the fall of 1995, however, when the Japanese yen bean to drop over other currencies and Korea's price advantage over the Japanese was lost. Additionally, Korea's increasingly inflexible labor market was also undermining competitiveness. It seems that when it came to exports, beginning in 1990, there were marked drops in the prices of major export items relative to the increased labor costs. Further exacerbating the situation Korea's industrial structure was undermining competitiveness. Failure to maintain competitiveness to its rivals in technologically advanced product lines, Korea's economy began to slip even further.