The massive International Monetary Fund loan to South Korea is a major dent to the pride of a country which once boasted of being the strongest of the fast-growing Asian tiger economies. Alice Donald reports:

South Korea has long been proud of its dramatic rise from the ashes of the Korean war in the 1950s to becoming one of the world's largest economic powerhouses.

Growth rates have approached double digits for most of the last three decades, transforming South Korea into the world's eleventh largest economy.

But in the past few months South Korea has succumbed to the contagion afflicting several South-East Asian markets.

The national currency, the won, has plunged in value and interest rates have risen. Foreign investors have been scrambling to sell shares -- alarmed by the bad debts of about $30 billion in the banking system and snowballing bankruptcies among Korean conglomerates which can no longer service their debts.

The financial package announced by the government during October showed that it had at least woken up to the urgent need for financial reform. The measures included opening up the debt market to foreign investors, liberalising the exchange rate system and a $10 billion rescue package for the banks.

However, the markets delivered a clear message that the package was "too little, too late". With dwindling foreign exchange reserves and short-term debt of more than $70 billion, South Korea's need for substantial external help became overwhelming.

Why does South Korea matter?

South Korea's economy is as big as the battered South-East Asian economies of Thailand, Indonesia and Malaysia combined. The greater the devaluation of the won, the more serious it is for Taiwan, China and, crucially, Japan, whose own economy is stagnating and whose products compete with directly with those of Korea in many export markets.

Some economists say it is at least conceivable that the crisis in East Asia -- which accounts for about a quarter of global output -- could in turn lead to a global deflationary crisis.

So what has put the Asian Tigers in so much trouble?

In a sense, it is success itself which has bred failure.
Fast growth encouraged over-dependence on debt. It also led to huge, debt-financed investment in poor quality, wasteful projects. Such shaky financial structures could survive as long as growth was rapid and exchange rates stable. But now that these conditions have evaporated, underlying weaknesses are cruelly exposed.

Seeking help from the IMF involves painful decisions

Companies and banks will have to close. There are still questions about the country's willingness to take tough medicine; trade unions and other interests have long battled against previous efforts at reform.

However, many analysts say that what is required in South Korea and the other ailing Tigers is a complete change of mindset from that which prevailed during the boom years -- a recognition that never again can such dizzy rates of growth be sustained through uncontrolled borrowing.
 

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