East Asia in Search of a Second Economic Miracle

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On May 15, 1980, foreign bankers in downtown Seoul watched in horror from their high-rise offices as students and riot police clashed in the streets below. Eyes stinging from tear gas, the bankers saw one demonstrator drive a bus through a line of policemen, killing one and injuring several others. "It was like war," recalls one banker. But that was just the start. By the end of the month, bloody uprisings in two provincial cities had claimed an officially reported 189 more lives.

South Korea was living an economic nightmare in 1980, and the social turmoil was partly a reflection. That year, the country experienced its first serious recession since the Korean War, a shattering 5.7 percent decline that wiped out the growth of the entire previous year. The government's powerful economic planners had seriously erred, and the lid had come off the tightly ordered society.

Like several other rapidly developing Asian countries, South Korea had borrowed heavily to fuel its growth and it was an open question that summer how the country's technocrats could possibly approach foreign banks to help cover the balance-of-payments deficit. By the end of 1980, South Korea already owed foreign banks more than $16 billion in short- and long-term debt, on top of more than ten billion dollars in debt to other bodies such as the World Bank and foreign governments. This was money it could not hope to repay for years, if ever.

Many of the large U.S. and European banks did put tight limits on new credit to South Korea, but within weeks the panic was over. The military government reimposed its authority and foreign bankers returned to the fold. By September, four months after the uprisings, banks were competing aggressively for the right to arrange a $600 million eight-year balance-of-payments loan. With the successful marketing of that loan, the worst of South Korea's prolonged economic and political crisis was past, and planners could turn their attention back to the mammoth task of restructuring the economy...