Financial contagion in East Asia and the origins of the economic and financial crisis in Korea

In this article the major elements of the 30 year old Asian development model are examined in the light of the financial crisis in the region. The notion of a common model is examined and found to be overstated. The monetary crisis in Asia has affected countries to different degrees, with Indonesia and Korea being particularly weakened. Korea has two major economic problems which can be traced to economic policies established in the 1960s. First, the industrial organization of the economy under a few industrial conglomerates, which has outlived its usefulness and is now a major source of the troubles in the economy. The conglomerates have been responsible for an investment policy where risk has been pushed to recklessness and the rate of return on capital employed is meagre. Second, banking policy, which is best characterized as a severe form of ‘moral hazard’. Both of these policies, while having played major parts in past economic successes, are now the main cause of a weakened economy in a globalized world.