PUBLICATIONS & REPORTS

Contents Introduction

This paper aims to identify the underlying causes of the Korean economy leading to the 1997 crisis. Its main findings include that the profit rate shows a declining trend for an extended period over a decade before the crisis and its main cause was the continuous and fast deteriorating capital productivity. While policy mistakes on exchange rate management and financial liberalisation were more direct causes to trigger off the crisis, reckless investment behaviours were primarily responsible for deteriorating capital efficiency, which gave mounting stress on the economy and eventually developed to a crisis. The reason behind widespread imprudent investments was the dismantling of the traditional privilege-disciplinary regime of industrial policy from the late 1980s. In order to improve investment