Abstract

In the face of the Asian financial crisis of 1997, the first part of this chapter carefully studies the characteristics of the financial crisis and its impacts on the Taiwanese and Korean economies. We examine 22 macroeconomic fundamentals, such as GDP, inflation rates, government budget, trade balance, external debt and so on, between Korea and Taiwan. We find that the macroeconomic fundamentals of both countries were basically the same, with the exception of the international finance sector. After defining the currency crisis and banking crisis, the causes of crises are identified as the nominal exchange rates and the short-term external debt to international reserves ratios. In view of this, in the second part of the chapter, we use cointegration and causality tests to examine the relationship between these two time series. We find a unidirectional causality from the short-term debt ratio to the exchange rate for Korea, but no causality is found between the two for Taiwan. The chapter ends with some discussion on the lessons and challenges from the experiences of these two countries.

Introduction

It is well known that Korea and Taiwan are the only two noncity-state countries, other than Japan, that have achieved and maintained rapid modern economic growth since the end of World War II. As such, most studies often lump them together as both countries achieved impressive growth through rapid industrialization and accelerated exports, like two wheels of a cart. Thus they are generally treated as twins, if not as identical, in world capitalistic development.

In recent years, however, their differences in the development process have also come to light. Taiwan relied more on domestic savings and direct foreign investment, along with emphasis on the contribution of small and medium-size enterprises. Korea depended on foreign borrowing, incurring large external debt, with a major role played by large conglomerates or chaebols in industrialization and trade. What are the impacts of the Asian financial crisis on these differences?