The Asian Crisis of 1997 presented the international community—not to
mention the affected countries—with many new challenges. It revealed
our ignorance of the mechanics of international financial crises and questioned
the traditional understanding of the merits of international capital
flows. Meanwhile, how to restructure the devastated financial sectors in
the crisis countries urgently demands answers.

In what follows, this edited book attempts to address some of the
issues relating to the Asian crisis and, more specifically, the Korean case.
The topics selected for investigation are risks of capital mobility, causes of
financial crises, and the restructuring of the financial sector—three areas
that, in the opinion of the project organizers, are in the greatest need of
study not only for Korea but for other individual countries affected by
crises. On each topic, the existing arguments are critically reviewed based
on experiences of Korea and other countries, and new policy implications
are sought.

Papers in the volume argue that the Asian crisis, including the Korean,
is difficult to be construed in terms of the traditional "fundamentals-misalignment"
view. In this regard, one common theme throughout the volume
is that, while the fundamental virtue of "globalization" or "international
financial integration" needs to be reaffirmed, limited controls on
short-term capital flows may be necessary to contain associated risks. It is
notable that the Korean economy has already accommodated this advice
recently by fully liberalizing its capital account. Also aware of the potential
risk of short-term capital flows, policy makers have granted government
the power to introduce measures dealing with destabilizing short-term
capital movement in an emergency.

Regarding the restructuring of the financial sector, the volume advocates
decisive action on the part of policy makers and provides a warning
that political setbacks can be major challenges to overcome in many countries.
As financial sector restructuring is still ongoing, a challenge thus
facing Korea is whether it can develop the political leadership that will
provide consistency and continuity in restructuring aimed at long-term
sustainable economic growth.

The volume comprises the papers presented at two conferences:
(1) "Restructuring and Strengthening the Korean Bond Market in a Global
Economy" (August 6–7, 1998), jointly sponsored by the Korea Securities
Supervisory Board and the East-West Center, and (2) "Restructuring
Korea’s Financial Market" (August 10–11, 1998), jointly sponsored by the
Korea Development Institute and the East-West Center. Both conferences
were held at the East-West Center’s Hawaii Imin International ConferenceCenter in Honolulu. The Introduction and Overview chapter has been
updated to reflect recent changes in economic environments. I would like
to thank Dr. Lee-Jay Cho, senior advisor of the East-West Center, Dr. Yoon
Hyung Kim, professor of economics at Hankuk University of Foreign
Studies and senior fellow at the East-West Center, and Dr. Inseok Shin, fellow,
the Korea Development Institute, for coordinating the conference and
preparing this volume for publication. I also thank the paper writers, discussants,
and other participants who contributed to the conference. Our
gratitude goes to Dr. Kennon Breazeale for production coordination and
the East-West Center’s graphics and production services, which prepared
the cover and book design and brought the book to a camera-ready state.

Figures
Tables
Contributors
Preface
Introduction and Overview

Part I. Risks of Capital Mobility and Causes of Financial Crises

1. International Financial Integration: Pitfalls and Possibilities
　Trade in Financial Services: Effects on Real and Financial Sectors
　Capital Flows and the Domestic Economy
　Policy Lessons for East Asian Emerging Markets
　Conclusions on Financial Integration

2. Potential Impact of International Capital Flows on the Korean Financial Market and Real Sector: Korea’s Strategic Responses
　Introduction
　Recent Developments in International Financial Markets
　Financial Innovations in World Capital Markets
　Patterns of Capital Flows to Developing Countries
　Private Capital Flows to Korea
　Capital Controls and Their Implications
　Strategic Issues for Strengthening the Korean Bond Market
　Conclusions and Recommendations

3. Why Latin America 1995 and East Asia 1997 Are Alike
　Introduction
　Overview
　The Disequilibrium View
　Multiple Equilibrium Models
　The Composition of Capital
　An Insurance Model
　Conclusion
　Data Appendix

4. The Korean Financial Crisis: Causes and Resolution
　Introduction
　Causes of the Korean Financial Crisis
　Resolution of the Financial Crisis in Korea
　Conclusion: Lessons and Future Challenges

5. International Economic Policy in the Wake of the Asian Crisis
　Introduction
　The Cautious Case for Capital Mobility
　Lessons for Country Policy
　Implications for the International Monetary Fund
　Conclusion
　COMMENTS

Part II. Recovery from Crises and Restructuring of Financial

6. Recovering from Crises: Lessons from Mexico
　Introduction
　What Led to the Crisis?
　Policy Measures in the Aftermath of the Crisis
　Evolution of the Mexican Economy: 1995-97
　Evolution of the Banking Rescue Program
　Lessons from the Mexican Experience

7. Resolving, Recapitalizing, and Restructuring Insolvent Banks and Banking Systems
　Introduction
　Financial Problems and Macroeconomic Stability
　Resolving and Recapitalizing Insolvent Banks
　Maintaining Bank Solvency and Efficiency
　Summary and Conclusions

8. Corporate Restructuring and Financial Reform in Korea
　Introduction
　Chaebol: Growth Engine of the Past
　Challenges and Their Origin
　Corporate Governance and the Role of Government
　Other Issues
　Conclusion

9. A Comparative Study of the Fixed-Income Market in the United States, Europe, and Japan: Lessons and Implications for East Asian Emerging Markets
　Introduction
　Debt Securities Markets in the United States, Europe, and Japan
　Lessons from Government Securities Markets
　Lessons from Corporate Debt Securities Markets
　Conclusion

10. Korea: Bond Market in Transition
　Ismail Dalla
　Executive Summary
　Introduction
　Financial Crisis and Macroeconomic Development
　Policy Responses
　The Financial Sector
　The Bond Market
　Legal and Regulatory Framework
　Clearing, Settlement, and Custody
　Taxation
　Rating Agencies
　Internationalization of the Bond Market
　Issues and Prospects
　Appendix
　COMMENTS
　FINAL COMMENTS