Confronted with economic difficulties and no alternative options for rehabilitating the economy without international help, North Korea seems to be inclining toward greater openness to South Korea and the U.S. There are increasing signs that North Korea's relationship with the US and Japan, both political and economic, is likely to improve rather than to deteriorate as long as the political regime of North Korea remains stable. On the other hand, South Korea and the U.S. seem to be moving toward broader ranged assistance to North Korea.

In the short term, there seems to be little chance for North Korea to undertake wide-ranging reforms, but it is also unlikely that the North Korean regime will collapse. In the longer term, however, so long as North Korea maintains political stability, it is likely to grow bolder with reforms, especially if South Korea and the international community remain supportive of these reforms.

A scenario of reform will likely to entail the two Koreas entering into some period of peaceful coexistence, followed by a gradual economic integration with South Korea. On the other hand, if political stability in North Korea begins to weaken as a result of policies of broader-ranged openness, an implosion is likely to occur.

Since the agreement on the IMF restructuring program, Korea has swiftly implemented a wide range of economic reform measures. All of the measures have been driven towards rebuilding market confidence as well as expediting the economic restructuring. Although foreign sentiment relates that Korea's restructuring process is moving toward the right direction but slowly, Korea deserves much credit for its recovery and reform efforts so far made, as it has come up with solid results. The international credit rating agencies have each upgraded Korea's sovereign credit rating from non-investment to investment, and it is among the evidences, which purport to show that Korea has been committed and will continue to commit itself to changes and improvement.

In retrospect, we can draw some lessons about the role of international financial institutions (IFIs). Certainly, the key question is whether the diagnosis of the IMF was correct and the policy prescription of the IMF was relevant and effective. Regarding such diagnosis, a balanced view regarding the root of the Asian crisis is needed. The amount of research and policy papers pouring out since the onset of the Asian crisis is understandably great, with the differing views leading to different policy implications. Academics have greater liberty to choose among different economic models or theories on which to base their views. However, policy makers have to be more cautious in implementing the policy measures by taking into account the reality and relevance of all findings and views.

The fundamental difference among the academic circles may be divided into two camps for the sake of simplicity. One camp, which focuses on the liquidity shortage of the Asian countries, emphasizes the vulnerability of the international financial market and the skittish behavior of international investors and creditors as a major triggering factor in the outbreak of the crisis. In this light, expanded financial support facilities through the IFIs, orderly capital market liberalization, and safeguards in the case of emergency could be relevant policy proposals for building the new international financial architecture. In addition, this view holds that the high interest rate policy and/or other austerity programs should be reconsidered as those policy measures may aggravate the situation rather than improve credibility in the eyes of international investors.

The other camp, which focuses on structural weakness of the country in question, and, in particular, the moral hazard problem in both the corporate and financial sectors, stresses the necessity of restructuring and growth sustainability based upon a sound economic system. In the international dimension, the practice of bailing-out international private creditors with international public funds or government debt payment guarantees has created a serious moral hazard problem. In this regard, a pre-established program for international debt workouts would help to shape market expectation in advance and thereby would reduce uncertainty in times of crisis.

The purpose of this paper is to discuss the role of international financial institutions by reviewing Korea's restructuring program and its process. Based on Korea's experience of crisis management, this paper will address four issues. First, this paper will discuss the key question of whether the root of the Asian crisis should be attributed to regional structural weakness, or must be understood in the context of inherent vulnerability of the global financial market. Second, the Asian crisis has ignited a lively debate on the necessity of the inclusion of a restructuring program in the IMF rescue package. Because both internal structural weakness and external factors combined together have caused the Asian crisis, overcoming the crisis in the true sense will not be achieved without a successful completion of restructuring. Third, as the liquidity provision by the IFIs is alone insufficient to resolve the immediate crisis, we will ask if there is a catalytic effect of lending by the IFIs. In light of Korea's experience, the credibility and capital inflows are largely associated with the perceived strength of commitment of the government to economic restructuring rather than IFI involvement per se. Finally, a short remark will be made on the necessity of an international lender of last resort.

Dr. Yunjong Wang, Director of Department of Global Economy, earned his Ph.D in Economics from Yale University. He specializes in international economics, both trade and finance. Currently, his interest covers financial cooperation in Northeast Asia, Korea's exchange rate markets and policy, and Korea's restructuring process under the IMF and IBRD program. Corresponding address: 300-4 Yomgok-Dong, Seocho-Ku, Seoul 137-747, Korea. Tel. (822) 3460-1124; Fax. (822) 3460-1212, E-mail: yjwang@kiep.kiep.go.kr.

In 1997 December, 34 nations, most of which are the OECD countries, has agreed upon the OECD Convention on anti-corruption involving foreign public officials and, accordingly, Korea has legislated the Foreign Bribery and Trade Prevention Law on last January 4th.

The Convention, above all, requires Each Party to bring a criminal case against any person who intentionally offers or authorizes any undue benefit to a foreign public official for business advantages directly or indirectly and to establish the liability of legal persons including monetary sanctions for the bribery of foreign public officials. Also, Each Party must deny the tax deductibility of such bribes and take necessary measures to establish relevant accounting requirements, jurisdiction, and mutual legal assistance including extraditions.

Furthermore, for a full implementation and functional equivalence, the Working Group under the CIME shall monitor and evaluate implementation measures of Each Party and report recommendations on following-up measures to the OECD General Council. Specifically, in order to enhance the effectiveness of the Convention, the Group will first study the extension of the coverage of the Convention into foreign political party and its officials as well as candidates for public office. The Group will also study the issue of making the bribery a predicate offence for money laundering legislation and the role of foreign subsidiaries and off-shore financial centers in bribery. In addition, other OECD committees such as CFA will review bribery solicitation by public officials, corruption between private businesses, the establishment of the OECD tax audit guideline, and automatic information exchanges.

The Convention was initiated by nations such as the United States in an effort to provide a level playing field for their business. However, integrations of commodity and service markets like financial market have made a regional crisis into global one. In turn, these external effects intensified developed countries' effort to achieve a 'globalization of system' through OECD and IMF as well as a 'globalization of market' through WTO.

According to the OECD, the distorting effects of bribery on competitive conditions undermine good governance and economic growth. In particular, limited competition reduces international trade and investment and spreads out rent seeking behavior which, in the long run, contributes to market breakdown like the recent financial crises. However, rapid system reform will impose a heavy burden on the developing countries because decision-making behavior as well as economic system are dependent upon the level of economic development.According to the Transparency International, Korea ranks in 43th place among 85 nations with respect to 1998 corruption level and tends to pay bribes for the acquisition of contracts in international trade. More serious problem for Korea is its insensitiveness toward corruption which led to the stalemate in reforming measures designed to prevent and prosecute bribery, as demonstrated by the recent failure to adopt anti-money laundering law and the relaxation of the law requiring real name in financial transactions.

On the other hand, as good and service market including investment market are integrated globally, the efficiency of a nation's system which works like a sort of infra-structure in the flow of good and services emerged as a major factor in determining economic growth. The system efficiency which includes just government management is, in turn, decided eventually by sound working of system.

Thus, the important task for Korea is to initiate system reform by utilizing international movement toward globalization of economic system. First of all, it needs to bring about good governance by improving the pay system and government function because frauds most likely result from absurd administration. Secondly, in order to fight against political corruption, anti-money laundering law should be legislated and the law requiring real name in financial transactions must be reinforced. Finally, Korea should be ready to adopt internationally accepted financial supervision and accounting regulation that the IMF and OECD are currently developing in order to boost voluntary compliance by business and effective prevention of bribery.

This paper undertakes an investigation of the loans extended by Korean financial institutions to their corporate borrowers based on forward-looking criteria - namely, corporations?debt levels and their debt-servicing capabilities ?while focusing on the future size of non-performing loans (NPLs). We define NPLs as loans and credits extended to corporations, whose interest coverage ratio commonly defined as the ratio of earnings before interest and taxes to interest expense is less than 100 percent.

Financial statements from 1998 demonstrate that the NPLs held by listed companies amount to 32.1 percent of their total debts carried. The ratio for unlisted companies in 1997 appears higher than that of listed companies. We classified our sample companies into four groups based on their sizes. The NPL ratios of unlisted companies consistently ascend in the order of second-tier chaebols, SMEs, third-tier chaebols and the top five chaebols. In the case of unlisted companies, the order is slightly different in that the ratio of third-tier chaebols precedes that of SMEs. However, the order in 1998 resembles that of unlisted companies.

Having classified our data by different industries, it has been shown that the NPL ratios of listed companies in industries, such as textile, apparel, non-metal mining products, automobiles, furniture, construction, and chemical have recently experienced relative increases. In the case of unlisted companies, their NPL ratios are high in industries, such as agriculture, fishing, wood and publishing, and transportation and telecommunications.

Our sensitivity test results show that the decline in interest rates by 5 percentage points will reduce the NPL ratio by 13.9 percentage points - from 35.7 percent to 21.8 percent. Although the reduced interest rates and the rebounding economy are alleviating the corporate debt problem to a certain extent, a significant proportion of the Korean corporate sector still remains subject to the various risks, such as commercial and market risks and external shocks. This study has the following policy implications: reflationary macroeconomic policy is the only option in the absence of plausible alternatives; debt restructuring by creditor financial institutions is necessary, given that the effects of cost reduction from lower interest rates and slimming-down efforts are proven insufficient; and additional public resources may be necessary even after the appropriate cost allocation.

In the 1990s, regional trade agreements (RTAs) have become widespread and increasingly became a threat to non-member countries. Despite the GATT/WTO Article 24 and its provision for the overall trade barriers in any new regional or bilateral trade agreement to be no higher than the preexisting ones, the trade diversion effects of regionalism are having an increasingly negative effect on the trade of non-member countries. A realistic Korean policy response to the spread of RTAs would be the establishment of free trade agreements (FTAs) with major trading partners. This paper analyzes the potential effects of a Korea-U.S. FTA, as this would become the most significant trade agreement, which Korea might enter into.

Not only would a Korea-U.S. FTA allow both countries to benefit from the preferentially favorable measures, but it would likely reduce the amount of trade disputes involving Korea. The United States is the most important trading partner for Korea, and yet, it also is the greatest source of trade friction.

Although a Korea-U.S. FTA could not eliminate every trade friction between the two countries, such a liberalization effort would likely reduce the frequency and gravity of the trade disputes.

In this paper, we have performed simulations to cover five different scenarios of tariff reduction. In each of the scenarios, we have found that the welfare of Korea and the United States would both increase, with Korea receiving a relatively greater share of the welfare benefits. Korea's greater reliance on the trade with the United States and comparatively higher existing tariffs may explain its greater potential benefits. An FTA between the two countries would improve Korea's welfare by 0.73 to 1.73 percent, and that of the United States by 0.07 percent at the most. In addition to the simulations covering an exclusive FTA with the United States, we also have performed a simulation, measuring the effects of Korea's joining the NAFTA. Due to the larger market size, trading with the NAFTA would result in a 0.54 percent increase in Korea's welfare gains, which is higher than that expected from Korea's signing an FTA exclusively with the United States. The simulations also demonstrated that the United States would optimally benefit from an FTA with Korea, if it would have a clause, eliminating all of the agricultural tariffs. In effect, this would promote liberalization for this very sensitive sector.
In this paper, we have focused on the effects of tariff reduction. A more comprehensive analysis / particularly, the one which considers the effects of preferential rules of origin - yet remains undone. And while economic considerations should be the logical starting point, political benefits and burdens of signing an FTA, which this paper only briefly addresses, also require further study.

Up until very recently, Korea had maintained a steadfast support of trade liberalization realized only through multilateral means, such as through the WTO and APEC. However, as countries of almost all regions except East Asia have embraced regionalism, Korea has been forced to question its adherence to a view that would see it lose out to the substantial trade diversion of these growing agreements, even though Korea still remains a strong supporter of the WTO. This paper begins with a more detailed analysis of the factors that led to Korea's more open approach to FTAs, culminating in the officially stated intention of exploring a bilateral FTA with Chile. Korea and Chile have concluded preliminary talks and working-level negotiations are expected to begin in 1999. Looking beyond the FTA with Chile, Korea has stated that it is pondering establishing FTAs with Thailand, South Africa, and Turkey. The choice of these countries is part of Korea's strategy to establish an FTA with a country in each continent in order to increase market access around the world. However, this paper takes the position that if Korea seeks for future free trade partners after the establishment of a Korea-Chile FTA, Korea needs to look a new regional trading bloc within APEC. Through extending preferential bilateral FTAs to other APEC economies, Korea's FTA may not only accelerate the trade and investment liberalization of APEC, but also help Korea play a leading role in APEC in the future.

This paper then proceeds to support a view that Korea's next move needs to be the consideration of bilateral FTAs with Australia, New Zealand and Canada or a multilateral FTA encompassing all four countries. While trade with all of these countries would be highly complementary for both sides, the most compelling reason for such a FTA would be its potential for spreading free trade throughout the Asia Pacific region. Along with Chile, Australia, New Zealand and Canada are all APEC members. Such a free trade area would demonstrate the benefits of free trade to regional economies and possibly exert the pressure needed to restart the currently stalled free trade talks of APEC. Such progression would move Korea to the forefront of international trade talks.

Korea's overall position remains one of the pursuit of widening free trade through multilateral agreement. APEC is one potential vehicle through which Korea's goal may be realized. However, currently, efforts to expand APEC trade liberalization appear stalled. This paper takes the stance that one possible approach to reinvigorating free trade under APEC free trade talks is for a group of member economies to spur intra-APEC trade.

The paper evaluates the economic impact of Korea's bilateral and multilateral FTAs with Australia, Canada, and New Zealand. While individual bilateral trade agreements with each country would increase the welfare of Korea, they would also result in an overall increase in Korea's trade deficit. Meanwhile, Korea would likely realize a trade surplus if a multilateral agreement includes all four countries. Furthermore, this four-way multilateral agreement increases Korea's welfare the most. Therefore, this paper concludes that pursuing a multilateral FTA covering all four countries is more in Korea's interest than pursuing bilateral FTAs with each country individually.

Dr. Inkyo Cheong, a Research Fellow of KIEP, earned his Ph.D. in Economics from Michigan State University. He specializes in Korea's FTA policy, economic cooperation in the Asia-Pacific region, international trade policy, and building multi-region, multi-sector computational general equilibrium model (CGE). He wrote several books about Korea's FTA policy and published academic articles on APEC economic cooperation in leading international journals. Corresponding address: 300-4 Yomgok-Dong, Socho-Ku, Seoul 137-800, Korea. Ph. (822) 3460-1208; Fax. (822) 3460-1077; E-mail: ikcheong@kiep.kiep.go.kr

Prospects and Policy Implications of the WTO New Round
Wook Chae & Chang-Bae Seo

Discussions on the upcoming New Round of negotiations have begun in the WTO. In light of the nature, scope and scale of the round of negotiations, it is expected that the round will have a substantial impact on the trade patterns, industrial structures and world trade order of the 21st century. Decisions regarding the specific issues including the scope, modality and duration of the negotiations are to be officially announced at the 3rd WTO Ministerial Meeting to be held in Seattle from November 30 to December 3 of this year.

The most important issue at hand regarding the New Round is deciding upon the scope and modality of the negotiations. While several countries including Korea, EU, Japan and Australia have proposed the negotiations to be conducted as a single-undertaking, comprehensive round of negotiations, allowing the interests of all WTO members to be considered in the talks, the U.S. has strongly advocated a sectoral approach, asserting that the comprehensive approach may unnecessarily prolong the negotiation period. With regard to the scope of the negotiations, developing countries argue that the talks should focus on the UR Built-In-Agendas (BIAs), including agriculture and services, while developed countries have proposed to include tariff-cuts in manufactures and new issues such as investment, competition policy, environment, electronic commerce and transparency in government procurement. On the issue of the duration of the negotiations, most countries agree on the 3-year time frame, reflecting the problems of prolonged UR negotiations.
The discussions to date reflect a possibility of the New Round being pursued in a single-undertaking, comprehensive manner over a relatively short period.

The implications of the New Round are as follows:First, it will establish a firm foundation of the multilateral trade rules by advancing liberalization in existing trade sectors through the improvement of current rules which have not been implemented well or where issues remain incomplete.

Second, it will allow for a substantive trade liberalization through a provision of international rules on new issues. The provision of international rules on those issues will certainly expand world trade in real terms since they are closely related to various national systems and practices which affect trade.

Third, it will strengthen the multilateral trading system through the WTO. The WTO desires not only to enforce institutional functions through expansion of coverage and improvement in its ability to supervise the system and settle disputes among member nations, but also to contribute to the world-wide economic welfare by expanding its functions of assisting developing countries.

All these provide various important implications to the Korean economy. First of all, Korea should recognize the need to devise a comprehensive, sectoral negotiating strategy on the basis of studies of the effects of the New Round on the domestic economy. In Korea's perspective, a singe-undertaking, comprehensive negotiation seems to be advantageous, considering the economic and political sensitivity of agriculture and services. For the negotiatins to be carried out efficiently, it is strongly recommended that Korea utilize experts from the private sector in preparing for the round of negotiations. As a priori, it is necessary to establish a task force comprising of government officials from all relevant ministries. A close cooperation between the government and non-governmental sectors will certainly maximize the nation's benefits from the negotiations.

It should be important to provide a comprehensive and systematic negotiating strategies from the perspective of national trade benefits based on analyses of the expected sectoral effects. At the same time, the government should focus its efforts in building up a national consensus on the future policy directions by actively publicizing the implications and effects of the New Round. In particular, it is crucial to draw nation-wide concerns over the liberalization issues in the agricultural sector which made the process of the previous negotiations difficult.

Reform Experiences in Latin America and Britain:Their Implications for KoreaWon-Ho Kim/Chong Wha Lee/Cheol-Won LeeKi-Su Kwon/Jin-O Kim

Up until the mid-1980s, Latin America experienced repeated periods of political and economic crisis. The region was characterized by a deeply rooted dictatorial form of political governance, and by class, regional, ethnic and social conflict. Moreover, the growing fiscal deficits caused by negligent handling of public finances and deep-rooted inflation on the part of the military regimes increased the need for reforms. From the late 1980s, a new form of government emerged. Governments began to pursue market-oriented reform policies such as privatization of state enterprises, trade liberalization and deregulation. From 1979, the British government under Prime Minister Margaret Thatcher sought drastic structural reforms such as industrial restructuring, privatization of state enterprises, deregulation of economic activities, labor market reform and renovation of the bureaucratic framework. The success of these reforms led many to regard Britain as the most advanced among the OECD countries in terms of its ability to implement effective economic changes.

There are several lessons one can extract from the experiences of reform among the four countries of Latin America--Mexico, Argentina, Brazil and Chile--and Britain.First, the reform must be wide-ranging. An economic crisis, such as a currency crisis, has the potential to propel economic reforms. However, economic reforms cannot be successful unless they are pursued parallel to political and social reforms. Previous attempts to implement market-oriented reforms in the Latin American countries in the wake of the economic crises of the early 1980s were hindered by the military dictatorships which held the reins of power. It was not until these regimes stepped down and popularly elected administrations took over that these reform attempts began to bear fruit. However, further political and social reforms are necessary among many Latin American countries. While Chile has been relatively successful in building a transparent political apparatus, deep-rooted corruption in Argentina and Brazil has continued to impede the reform process in those nations. There also remains a social structure of conflict between the capitalist and labor/peasant classes in Latin America, and between the white ruling class and the native/mestizo-dominated class. The social instability now arising from the latter conflict is preventing further market-economy reforms.Secondly, political stability is also crucial for an environment conducive to reform.

Even though the countries of Latin America have been redemocratized since mid-1980s, political instability remains partly due to the overflow and disorganization of political parties, and the lingering remnants of authoritarian rule. This can seriously hinder reform legislation, which in the recent case of Brazil precipitated an economic crisis. Britain, on the other hand, was able to put the reform measures into effect under an environment of political stability under Prime Minister Thatcher's nine years of governance.The third lesson that can be extracted is that reform must be based on market principles. After the currency crises, the Latin American countries and Britain carried out core economic reforms such as slimming of the bureaucratic structure, reduction of public debt, privatization of state enterprises, financial reform, deregulation, and promotion of labor market flexibility and an open economy. Similar economic reforms have been or are being put into effect by Asian countries in an attempt to heal their economies following the region-wide crash that began in late 1997.A fourth conclusion is that consistency and continuity in reform constitute crucial factors for a successful reform. During its 1976 currency crisis and 1982 foreign debt crisis, Mexico attempted to carry out reforms. For political reasons, however, the reform process was abandoned within two to three years of implementation, allowing the crisis to re-emerge. On the other hand, the reformist efforts in Britain since the early 1980s worked well under the policy consistency by Prime Minister Thatcher.Fifth, it is important to establish labor stability. The common dilemma of increased unemployment and the shrinking of the middle class have been a recurring problem in the process of reform. In 1976, a general strike among British workers led to the ouster of the James Callaghan administration. Similarly, labor instability in Latin American countries lies dormant just beneath the surface, threatening decisive reform efforts. In establishing labor stability, it is important to uphold the principles of a market economy: free and impartial competition, and consent on the outcome of competition. It is also necessary to eliminate the sense of alienation felt by workers, by instituting measures to reduce unemployment, expand the social safety net, ensure a more equal distribution of wealth, and promote employees participation in management and ownership.

The final lesson to be learned is the importance of reform supervision. It is important to maintain the direction and the adequate supervision of the reform process. The role of the government should ideally change over time. In the initial stage of reform, the governments's direct intervention is unavoidable. As reforms are carried out, though, the government's role--supervision of the institutions operation, analysis of effectiveness, and institutional improvement--should shift to a more indirect one.

Trade policy in the United States since 1930 is evaluated in this publication. Using a public choice analysis to identify and explain protectionist behavior, Charles K. Rowley, Willem Thorbecke and Richard E. Wagner demonstrate why unilateral free trade cannot be achieved through the normal political process and make a strong case for constitutional reform.

Trade protection in the United States analyzes the history of U.S. trade policy to explain why interest groups are able to foster protectionist policies despite the advantages that free trade offers consumers. The authors also explain why the principles of managed trade - as epitomized in the institution of the GATT - are inevitably subverted by protectionism. This important book concludes with a vigorous justification of unilateral free trade and makes a convincing case for protecting the freedom to trade though an amendment to the U.S. constitution.

Applying recent developments in constitutional political economy to a key policy issue, this book will be welcomed by economists, political scientists and lawyers as a major statement of the right to trade.

Foreword

Acknowledgements

Contents

Executive Summary

I. Introduction

II. The Nature and Current Development of the IMF Fund Support
1. The Nature of Fund Support by the IMF
1-1. Conclusion of the Stand-by Arrangement with the IMF
1-2. Conditionality of the IMF
1-2-1. The Concept of Conditionality
1-2-2. The Letter of Intent and Stand-by Arrangement
1-2-3. The Performance Criteria
1-2-4. The Legal Nature of Stand-by Arrangement
1-3. Drafting of the IMF Macroeconomic Program
2. Financial Assistance of the International Financial Institutions
3. Types, Conditions, and Terms of the Financial Support

III. Changes and Development of the IMF / Korea Agreements
1. The Macroeconomic Policy
1-1. Macroeconomic Indicators
1-2. Monetary and Exchange Rate Policies
1-3. Fiscal Policy
1-4. Foreign Reserves and External Debt Management
2. Restructuring of the Financial Sector
2-1. Development and Problems of the Financial Sector
2-1-1. Structural Problems of the Financial Sector
2-1-2. Current Development of the Non-Performing Loans
2-2. Directions for Restructuring the Financial Sector under the IMF Program
2-2-1. Legislation to Improve Soundness of the Financial Sector
2-2-2. Restructuring of the Merchant Banks
2-2-3. Restructuring of the Banks
2-2-4. Strengthening Prudential Regulations, Information Disclosure, and Transparency
3. Improving the Corporate Governance and the Corporate Restructuring
4. The Trade Liberalization
5. The Capital Account Liberalization
6. Improvement of the Labor Market Flexibility and the Establishment of a Social Safety Net

IV. Progress of the IMF Program in Korea
1. The Macroeconomic Policy
1-1. Current Trends of the Macroeconomic Indicators
1-2. Current Progress of the Monetary Policy
1-3. Implementation of the Exchange Rate Policy
1-4. Implementation of the Fiscal Policy
1-5. Foreign Reserves and External Debt Management
2. Progress of Restructuring the Financial Sector
2-1. Legislation to Restore Soundness to the Financial Sector
2-1-1. Establishment of a Consolidated Financial Supervisory Organization
2-1-2. Liquidation of the Nonviable Financial Institutions and Establishment of the Principles for Loss Sharing
2-1-3. Efficient Handling of the Non-Performing Loans and Protecting the Depositors
2-2. Progress of the Bank Restructuring
2-2-1. Measures Toward Korea First Bank and Seoul Bank
2-2-2. Management Improvement Measures for the Banks Failing to Meet the BIS Standards
2-3. Progress of the Merchant Bank Restructuring
2-4. Progress of Strengthening Prudential Regulations, Information Disclosure, and Transparency
2-4-1. Strengthening the Prudential Regulations
2-4-2. Information Disclosure and Enhancement of Transparency
3. Progress of the Corporate Restructuring and Corporate Governance
3-1. Enhancement of Transparency in the Corporate Management
3-1-1. Improvement and Internationalization of the Corporate Accounting Standards
3-1-2. Introduction of the Combined Financial Statements
3-1-3. Enhancement of Credibility in the Account Auditing
3-1-4. Improvement of the Corporate Public Disclosure
3-2. Abolishing the Mutual Debt Guarantees of Affiliate Companies
3-3. Improving the Financial Structure
3-4. Determining the Core Business Areas
3-5. Increasing the Accountabilities of the Controlling Shareholders and Managements
3-5-1. Mandatory Appointment of the Outside Directors and Auditors
3-5-2. Strengthening the Minority Shareholders' Rights
3-5-3. Systemizing the Institutional Investors' Voting Rights
3-5-4. Developing the Mergers and Acquisitions Market
4. Progress of the Trade Liberalization
5. Progress of the Capital Account Liberalization
6. The Labor Market Flexibility and Establishment of a Social Safety Net

V. Implementation Plans for the Future IMF Programs
1. Major Future Plans of the Financial Restructuring
1-1. Basic Directions for the Financial Restructuring
1-2. Financial Restructuring as the Top Priority : Modality and Timetable
1-2-1. Priority Status of the Financial Restructuring
1-2-2. Principles of the Bank Restructuring
1-2-3. Methods of the Bank Restructuring
1-2-4. Implementation Plan and Schedule of the Bank Restructuring
1-2-5. Timetable for Restructuring the Merchant Banks
1-2-6. Modality and Timetable for Restructuring the Secondary Financial Market
1-3. Strengthening the Prudential Regulations
2. Future Plans for Structural Adjustment of the Corporate Sector
2-1. Principles and Modality of the Corporate Restructuring
2-2. Strengthening the Accountabilities of Management and Improving the Corporate Governance
2-3. Improving Transparency of the Corporate Management
2-4. Revitalizing the Stock Market
2-5. Lifting the Entry Barriers
2-6. Privatization of the Public Enterprises
2-7. The Exit Facility

VI. Effects and Assessment
1. Trends of the Korean Economy under the IMF Program
1-1. Recent Trends of the Macroeconomic Indicators
1-1-1. The Domestic Recession
1-1-2. The Sluggish Production Activities and the Rising Unemployment
1-1-3. The Rising Price Inflation Rate of the Economic Recession
1-2. Trends of the Financial Market
1-2-1. The Domestic Financial Market's Credit Crunch and the High Interest Rates
1-2-2. Declining Rate of the Dishonored Corporate Bills
1-3. Stabilizing the Foreign Exchange Market and Improving the External Debt Structure
1-3-1. Stabilizing the Exchange Rate
1-3-2. The Increased Usable Foreign Reserves
1-3-3. Improving the External Debt Structure
1-3-4. Successful Bond Issuance of the Exchange Equalization Fund
1-4. The Trade Balance and the Trends of Exports and Imports
1-5. Stagnation of the Domestic Securities Market and the Fall of Stock Prices
2. Trends of Korea's Sovereign Credit Rating Since the Request for the IMF Fund Support
2-1. Characteristics and Implications of the International Credit Rating Agencies' Standards
2-2. Historical Background and Trends of Korea's Long-term Foreign Currency Denominated Debts
2-3. Implications of the Future Adjustments of Sovereign Credit Rating
3. The Characteristics of the IMF Program in Korea
3-1. The Unprecedented Support Package and Early Support
3-2. Emphasis on the Corporate and Financial Restructuring

VII. Conclusion

Annex 1. Key Measures and Chronology of Events Related to Korea's Currency Crisis

The East Asian financial crisis emerged as Thailand's currency crisis in July 1997 spread to the neighboring countries, which eventually forced Indonesia and Korea to request assistance from the IMF. The Korean government had officially made the request on November 21 after nearly all of its foreign reserves were depleted in defense of the Korean won. For the short-term, the IMF program stresses on a tight aggregate-demand policy to stabilize the foreign exchange market. For the mid- and long-terms, it stresses on the structural reforms of the financial and corporate sectors, which were the underlying causes of the currency crisis. The IMF programs for the affected East Asian countries - including Korea - are a combination of the traditional aggregate demand and restructuring policies.
The international financial institutions' assessment of the Korean economy and the Korean government's mandated and voluntary reform measures wields a significant influence over Korea's ability to attract fund support from the governments and banks of the United States, Japan, and other advanced economies, including foreign investors. Thus, a continued cooperation with the international financial institutions, such as the IMF and IBRD, and, particularly, the steadfast compliance with, and successful implementation of the IMF program is the highest priority for Korea to overcome the current currency crisis.
The aim of this publication is to help improve wide audience's understanding of the posed issues in the IMF Restructuring Program Agreement, and to examine the progress of Korean government's implementation of the Program. The structure of this book is as follows. In Chapter II, we will examine the nature of the IMF support and the conditions, which Korea must adhere to. In Chapter III, we will examine the trends of working relationship between the IMF and Korean government while the discussions of the Program were in progress. The book covers from the 1st Letter of Intent of December 3, 1997 to the 6th Letter of Intent of May 2, 1998 - 6 rounds of fund support. The changes of issues are classified into five categories: macroeconomic policies (monetary, exchange rate, fiscal, foreign reserves, external debt management), financial sector restructuring, corporate restructuring, trade and capital account liberalization, and labor market policies. In Chapter IV, we will review the Korean government's implementation of the IMF Program. In Chapter V, we will introduce and discuss the future implementation schedule of the IMF Program, as indicated in the 6th Letter of Intent. An emphasis will be placed on major reform issues for the financial and corporate sectors in the future. In Chapter VI, we will analyze and evaluate the enduring effects, which the crisis and the IMF Program both have had on the Korean economy, largely through reviewing the macroeconomic indicators from November 1997 to June 1998. In Chapter VII, we will summarize and make policy recommendations for the future.