Continuing our series on the Asian financial crisis, we spoke with Changyong Rhee, Director of the Asia Pacific Department at the IMF. Changyong is a well-respected economist who has worked as an academic, an advisor to the Korean government, and at a variety of international institutions. He brings along many years of experience covering economic and financial developments in Asia.
Some of the key takeaways of our conversation with Changyong include:
- Korean policymakers were aware of the risks of opening up financial markets and pursued a gradual and indirect approach to capital account liberalization.
- Financial liberalization prioritized indirect borrowing by financial institutions, rather than more stable FDI, making Korea susceptible to capital outflows during the crisis.
- Although strong cooperation between the government, conglomerates, and banking sector was critical to South Korea’s growth, it also created large moral hazard problems.
- The IMF program helped Korea restructure its economy and become more resilient to financial shocks, but some of the policy recommendations created domestic backlash.
- While Asian economies are in a far stronger position compared to the past, there are still significant economic risks stemming from high leverage and rapid demographic aging.