Weak Legal Environments in Asia Essay Example | Topics and Well Written Essays - 2000 words

Weak Legal Environments in Asia - Essay Example While in 1977 the economic crisis was triggered by the Thai baht, this time the crisis began on Wall Street. Many South Koreans are of the opinion that their economy is vulnerable to western market panic and destabilization because it is more transparent and open to foreign capital than its neighbors3. This is the reason that countries like Japan and China have not been as seriously affected by the global crunch as South Korea has been. However the reason behind South Korea being affected is that the Korean banks have huge foreign debts unlike the neighboring nations and as the global credit market dried up, the banks were in trouble as they needed dollars to repay the maturing foreign currency loans. What added to the pressure was that the foreign banks refused to roll over the existing loans. Before the 1997 crisis occurred in the Asian countries, the corporate sector in Korea showed very high debt-equity ratios and low profitability and they were still expected to yield high profitability.4 Such crises do not occur overnight and in Korea even ten years before the actual meltdown took place, the return on capital fell short of the oppurtunity cost. Profitability declined even after control of firm-specific and industry-specific factors and the macro-economic conditions. The rate of return on assets (ROA) was much lower in Korea than in other countries. The corporate governance in Korea was very weak as the system failed to provide sufficient monitoring and discipline. The larger firms did not face exit threats and the Korean laws protected incumbent controlling shareholders.5 Because of the Korean family structure, in the chaebols or the business groups, ownership is heavily concentrated to the extent that an individual has almost total control over all the firms within the group.