his paper shows that after the 1997 foreign exchange crisis, Korea suffered
negative net capital gains from international investment equivalent to 2.3
percent of GDP on average annually, or about 370 billion dollars in 2014
prices, while before the crisis the amount of net capital gains was negligible.
The negative net capital gains after the crisis does not reflect mutually
beneficial risk-sharing between Koreans and foreign investors: Korea had to
do asset fire sale immediately after the crisis; Korea is unlikely to have
reduced the probability of another foreign exchange crisis; there is no negative
correlation between net capital gains and GDP. It is also unlikely that the
negative net capital gains are offset by the rise of growth rate or improvement
in distribution: growth rate fell and distribution deteriorated, but there is little
room to argue that the reform and capital market opening after the crisis
enhanced growth rate and improved distribution but other factors more than
offset the effect of the reform and capital market opening. The paper then
discusses the nature of the 1997 foreign exchange crisis and the issues related
to the capital market opening to clarify how Korea came to the situation
whereby Korea pays such a large cost.