Did Globalization Cause Korea to be a Paper-tiger?
Jae-Yiew Lee,
Majored in Economics,
Academy of Korean Studies.
Ⅰ. Introduction
The processes of globalization have been studied in many facets of our societies, which include the fields of sociology, economics, politics, anthropology, cultural studies and so on. Furthermore, they have been applied the various methods of the studeies on globalization to.
In the study we would rather specify the scope of our study to concentrate on economic parts than choose a lot of subjects on them. In particular, among economic globalizations or libralization what impact did financial globalization give the Korean economy? Did it contribute to degrading the Korean economy to a paper-tiger or an anaconda from one of Asian tigers or dragons?
Since the Korean economy accelerated economic globalization, opening financial markets in the 1980s, is it possible for the external shocks accruing to the rapid globalization of Korea to bring about the economic depressions and financial crisis thereafter in the 1990s?
Therefore, the relationship between financial globalization and economic crisis needs to be focused on. There have been the studies on the positive or negative effects of the financial globalization on economy.
The previous studies on financial globalization have been researched in Augusto de la Torre, Eduardo Lervy Yeyati, and Sergio L. Schmukler(2002), Graciela Laura Kalminsky and Sergio L. Schmukler(2002), and Jong-Il You and Ju-Ho Lee(2000).
The paper is composed of section 2 discussed in our model specification, data analysis and results and the conclusion in section 3.
Ⅱ. The Effect of Financial Globalization on Korean Economy and its Empirical Analysis
1. Model
Our model shows the effects of globalization on economic growth after introduced into almost freer capital market opening in January, 1997.
G=G( m, d, p, u, s, b, a, l), where G is defined as the rate of growth in Korean gross domestic poduct, m meaning the rate of increase in M2, d, the rate of dishonor, p, the rate of inflation, u, the rate of unemployment, s, the rate of growth in stock transactions, b, net government budget balance, a, current account and l represents a dummy variable with the value of one if the financial market is opened more fully since January 1997, and 0, otherwise.
2. Data and Analysis Method.
The time series data are used from the Monthly Report of Survey and Statistics in each year published by the Bank of Korea from 1971 to 2000 as shown in Table 1.
The data are analyzed through the method of statistical analysis so-called ordinary least squares
3. Results and Interpretation
As the degree in financial openness have been going forward, Korean economy is feeble to react against external shocks from foreign countries, in fact.
In 1997 Korean economy experienced in economic liquidity problems, that is, financial crisis due to the shortage in foreign currency reserves. That came from the weak issues of financial structure in Korea against foreign shocks, interpreted as that type of economic fundamentals different from an example of South American currency crisis.
Then, using the data of Table 1, the weakness of financial structures in the process of financial globalization in Korea could be inferred from analysing the relationships among the rate of growth in the real gross domestic product as the dependent variable and the other various independent variables such as the rate of increase in money supply on the base of M2, current account, the rate of growth in the amount of stock exchange, the rate of unemployment, the rate of inflation, a dummy variable demonstrating unity one of the degree in more application to financial globalization since January 1997 as a turning point of the institutional change including the deregulation related to the transactions of foreign currency and foreign investment in Korea, choosing the value of zero before then.
The effects of financial globalization on economic growth are estimated as follows:
(1) Money supply
g = g ( m, l ),
g = 7.92 + 0.03 m - 6.41 l, R2 = 0.39
(1.72) (0.04) (3.25)
The above-mentioned numbers in parethesis mean standard errors (shown likewise hereafter).
Economic growth expressed as changes in individual domestic productivity, which is obtained from the rate of annual growth of the value found after the gross domestic product divided by Korean population is positively connected with the rate of increase in money suppy on the M2 scale in the progress of economic globalization, ceteris paribus, while economic globalization negatively contributed to the rate of growth in real gross domestic product.
(2) Insolvency
g = g ( d, l ),
g = 10.68 - 14.93 d - 1.87 l, R2 = 0.43
(2.11) (13.25) (5.39)
In the study, one of the most important issue to be paid attention to is considered as the impact of economic globalization on debt. The rate of dishonor is a barometer of the inability for the debted to return the principal and interest to their creditors.
The rate of dishonor has the negative relationship with economic growth when Korean economy has been globalized. Owing to the structural vulnerability of Korean financial status and industries, the drastic market openness must be burdensome shocks on the conditions of premature preparation for financial globalization including moral hazard of bankers and investors, who tend to search for higher opportunity for profit, regardless of risk. There was a difference in competitiveness of industries between Korean and foreign markets. In these trends, the drastic economic globalization must be the cause of the failure in industries of financial fields following the insolvency of vulnerable companies in the physical parts of production in the developing country of Korea with low competitiveness.
Therefore, rapid economic globalization was the cause of failure in paying their debt of companies of low productivity in return and increasing numbers of the dishonor in Korea since 1997 prove to be evident through that fact, giving negative impacts of the globalization of the Korean economy on economic growth .
(3) Unemployment
g = g ( u, l ),
g = 12.46 - 1.09 u - 5.20 l, R2 = 0.42
(3.74) (1.03) (3.49)
As mentioned in the previous parts, the increasing rate of unemployment since the globalization of the economy was related to the failure in the low-productivity industries or their insolvencies. Unemployment has negative effects on economic growth with globalization as shown in the above regression.
(4) Stock transaction
g = g ( s, l ),
g = 7.50 + 0.02 s - 7.72 l, R2 = 0.49
(1.27) (0.01) (3.05)
The increasing amounts of stock transactions has given the positive effects on economic growth, whereas the economic openness has the negative impacts.
(5) Government Finance
g = g ( b, l ),
g = 8.71 + 0.000527973 b - 2.46 l , R2 = 0.48
(1.11) (0.0002977577) (3.90)
The government balance has the very weak positive or neutral relationship with economic growth, while economic globalization could act as negative factor of economic effects.
(6) Current Account
g = g ( a, l ),
g = 8.61 - 0.00006278 a - 5.49 l , R2 = 0.39
(1.17) (0.000116457) (4.02)
The current account is so weekly or neutrally related to negative economic growth and economic globalization didn't help the Korean economy grow.
(7) Inflation
g = g ( p, l ),
g = 12.30 - 0.35 p - 9.14 l , R2 = 0.56
(1.76) (0.13) (3.01)
With economic globalization in progress, inflation obstructed Korean economic growth as demonstrated in the negative sign of the regression, and globalization was negatively correlated to economic growth, too.
Ⅲ. Conclusion
Economic globalization is shown as a negative actor of economic growth to be called a paper tiger or anaconda degraded from one of Asian tigers or dragons nick-named rapid growing economies in Asia for the past 30 years in our empirical study.
The effects of economic libralization or globalization could never always be negative ones. But drastic economic globalization would be too big external shock for the short time period.
The Korean economy has had negative impacts on globalization in the speed or magnitude of the progress. In our conditions of the economic development, the economic globalization should have been rearranged for solving the problems of unemployment, inflation, insolvency, finance, budget, current account, stock market and money markets in advance. It is helpful that in the process of economic globlization we would take measures stage by stage of the economic development to mitigate the external shocks.