Document Type

Article

Disciplines

International Law

Abstract

In 2003, South Korea was the eleventh largest economy in the world with a GDP of USD $679.7 billion.' But only half a century ago, it was considered one of the most underdeveloped agrarian countries in the world.2 To develop its economy, the government heavily controlled South Korea's financial sector and thereby the operation of its largest firms, which are known as "chaebols.' 3 For several decades, South Korea enjoyed a growing economy, an increasing role in international financial markets, and membership in international organizations, such as the Organization for Economic Co-operation and Development ("OECD"), 4 and the World Trade Organization.

Much credit could have been given to the government for South Korea's impressive rate of development but for the 1997 Asian Financial Crisis ("Crisis" or "Financial Crisis")6 that exposed the government's role in South Korea's weak capital structure. 7 Although the government's intervention appeared to result in high levels of investment and rapid growth, in reality many of the large firms' that were considered competitive in world markets were experiencing severe financial difficulties. 9 Moreover, the government prevented many of these distressed firms from liquidating or entering into long-term restructuring plans; thereby, creating exit barriers that worsened the financial situation.

When the Financial Crisis hit South Korea, there was no system in place to address the problems of distressed firms in a reasonably efficient manner." During the two-and-a-half years since the beginning of the Financial Crisis, about one-third of chaebols became insolvent or nearly insolvent.' 2 The huge amount of debt, in turn, caused the insolvency of many banks and financial institutions. 3 The Financial Crisis could neither be resolved through South Korea's existing corporate insolvency laws nor through the government's direct assistance.14 South Korea had to rely on the International Monetary Fund ("IMF") and The World Bank to support its banking sector and to replenish its foreign currency reserves.

This paper will explore South Korea's insolvency system, the reforms that were made after the Financial Crisis, and whether and to what extent changes need to be made as South Korea becomes more economically liberalized.' 6 Part I describes the extent to which the Financial Crisis devastated the country. Part II gives a broad overview of South Korea's insolvency system and the changes that have been made after the Financial Crisis. Part III provides criticisms and recommendations to improve South Korea's insolvency system. This Note briefly concludes with a recognition of South Korea's achievements and the need for it to continue to make reforms to remain a leading economy.

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