THE CRISIS AND THE FALL OF CHAEBOLS: A SUMMARY

The Financial Crisis as a System Failure

This book began by posing several questions about the financial crisis that hit Korea in 1997. Twelve of the top thirty chaebols and Korea as a whole went technically bankrupt at this time. Foreign and domestic observers were amazed by such a spectacular collapse, as the Korean economy had been praised as the exemplar of economic development. Several plausible causes for the crisis have been raised: currency speculation, inadequate government policies, and heavily indebted chaebols.

Are chaebols the main culprit of the crisis? In a capitalist society, there are always some companies that go bankrupt. Schumpeter called this process, by which inefficient firms are replaced by new innovative firms, “creative destruction.” Although chaebols' performance had deteriorated throughout the 1990s, it is astonishing not only that none went bankrupt prior to the crisis but also that all went bankrupt during and after the crisis. The analysis in this book showed that technically bankrupt chaebols stayed solvent only through cross-subsidization and government intervention. To the extent the government propped up failing chaebols, is it to blame for impeding the orderly exit of already failed companies? Further, why did the international financial community advance loans to chaebols, knowing that they were heavily indebted? Why did foreign investors suddenly recall the loans?