The Asian Financial Crisis as a Catalyst for Paradigm Shift in South Korea: An Econometric Analysis
Baranowski, Adam T.
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This paper examines South Korea's economy before and after the financial crisis in 1997. Perhaps more than any other country, Korea is a highly accurate microcosm of the larger debate between "managed" and "free" markets- Korea's economy fully embodied the Asian-style, interventionist approach before the 1997 crisis, and afterwards embraced full-scale free-market reforms. The Asian Financial Crisis and the subsequent ideological paradigm shift in Korea offers a compelling narrative and a nearly-ideal study of the advantages and disadvantages of two competing economic systems. The· first part of this paper, Section B, aims to determine whether or not South Korea's state-oriented "managed" market economy was to blame for the severity of its financial crisis in 1997-98. Next, Part C: The Analytic Section endeavors to use both regression analysis and Granger Causality tests to determine whether Korea's post-crisis "free market" reforms will defend its financial system or make it vulnerable in the wake of the 2008 global financial crisis. The paper concludes that Korea's "managed" approach to development and growth did, in fact, amplify the severity of the financial crisis in 1997, although there are valid arguments in opposition. Furthermore, the econometric analysis in Section C finds that the post-crisis reform efforts will not be able to stave off another financial crisis in 2008- 09.