Insolvency in the Corporate Sector and Financial Crisis in Korea

Abstract

The paper argues that by the time of the 1997-98 crisis, Korea's corporate and financial sectors became highly vulnerable to bankruptcy. Evidence is presented showing that between the late 1980s and 1997 the profitability of Korea's corporate sector was on a decreasing trend although it had some short-term ups and downs. It is argued that the declining profitability, which in combination with a rising debt leverage impaired the corporate sector's debt-service capacity, was due to rising labor costs in Korea and increasing competition from labor-abundant, developing countries such as China.