Korea has recently experienced a rapid increase of total external debt and a predominance of short-term loans. Instead of the level of debt itself, the debt structure and the increase in the growth rate of debt are the most important factors involved in the current debt crisis.

The empirical analysis on Korea's foreign debt indicates that an increase in the growth of debt is harmful to Korea's economy and that total external debt may not be sustainable. The result of the sustainability test implies that the gradual reduction of foreign debt to a certain level is desirable. In order to decrease the foreign debt, Korea needs to increase its current account surplus, either by increasing savings or by decreasing investment, and increase foreign direct investment through deregulation.

The structural problems associated with a rapid increase in debt are: accumulation of current account deficits; over-investment; a large amount of bank liabilities due to government intervention; labor market inflexibility; and a loss of policy credibility. These contribute directly or indirectly to the tremendous increases of foreign debt.

The current debt crisis was difficult to predict because it was caused by complex economic, financial and political events. For the efficient debt management, a possible solution is to set up an early warning system that can predict debt crisis. It is necessary for the government at this point to improve the national debt management system in order to monitor and manage the scale and structure of outstanding debt. Then, Korea will be able to track down the flow of its debt structures and trends. In this way, Korea can plan and prepare well in advance to prevent future debt problems.

Abstract

I. Introduction

II. Foreign Debt Analysis

III. Economic Effects of Debt
1. Recent Research on Debt
2. VAR Approach
3. Economic Effects
4. Sustainability

IV. Structural Problems of Foreign Debt
1. Current Account Deficit
2. Over-investment
3. Bank Liability
4. Labor Inflexibility
5. Policy Credibility

V. Conclusion

Appendix Ⅰ. VAR and Impulse-Response Functions
Appendix Ⅱ. Data Source
Reference