A Case Study of Illicit Foreign-Currency Finance at Korean Firms in the Development Era (1962-96)

Abstract

Korea’s economic growth in the Development Era (1962~1996) was phenomenal. However, the growth was largely financed by debt capital: net capital inflow from abroad for the whole economy and bank loans for industrial firms. Overall demand for loans was so huge that various abnormal techniques, legal or not, had to be utilized to circumvent the tight government regulations and to take the maximum amount of loans from commercial banks. In most cases, the techniques were jointly developed by general trading companies and their prime banks. This study illustrates various techniques of illicit foreign-currency finance including advanced negotiation of L/Cs, intra-corporate D/A, intra-corporate red-clause L/Cs, loans with a forward contract, loans from written currency options, and others in the grey area. This case study is prepared on the basis of the author’s first-hand experience and additional research, for the purpose of shedding some light on financial stringency in Korea as a fast-growing economy and ingenuity of firms to overcome it. The author does not intend to denounce or criticize any party referred to in the study.