Academic journal article Washington International Law Journal

Money for Nothing, Your Crises for Free?: A Comparative Analysis of Consumer Credit Policies in Post-1997 South Korea and Thailand

Academic journal article Washington International Law Journal

Money for Nothing, Your Crises for Free?: A Comparative Analysis of Consumer Credit Policies in Post-1997 South Korea and Thailand

Article excerpt

I. Introduction

Since the 1997-98 Asian financial crisis ("1997-98 Crisis"), South Korea1 and Thailand have witnessed a rapid growth of the credit card industry and increasing levels of bad debt as a result of such growth. South Korea, in particular, has become a nation of massive credit card defaulters. In 2003, nearly ten percent of the entire Korean population (approximately four million individuals) defaulted on their personal credit card debts or loans.2 Representative Lee Han-koo of South Korea's main opposition Grand National Party declared that one out of every 8.4 employed Koreans are credit defaulters,3 despite strong government efforts to curb the problem.4 In 2002-2003, Korean households held an average household debt of approximately 27,000 U.S. dollars ("USD").5 In 2006, Korea ranked second in credit card use (slightly behind Britain) with sixty-eight percent credit card use penetration, eighty-three million cards in circulation, and 3.6 trillion Korean won ("KRW") (USD 3.6 billion) in transaction volume.6 At the same time, new personal bankruptcy filings totaled 122,608 in 2006, nearly triple the previous year's total of 38,773 and a staggering ninety-fold increase from 2002, according to the Korean Supreme Court.7

Following the 1997-98 Crisis, the Korean government spurred consumer credit card use through two proposed solutions to boost domestic consumer spending.8 The first government initiative provided incentives for consumers to use credit cards, such as a twenty percent income tax deduction for those whose credit card expenditures totaled more than ten percent of his or her annual income.9 The second government initiative provided deregulatory incentives to consumer credit card issuing institutions, including the lifting of long-held restrictions against cash advances.10

Shortly after 1997-98, South Korea's economy experienced a decrease in consumer domestic spending. " Beginning in 1999, however, the government spurred consumer spending by promoting the use of credit cards. As a result, consumer spending behavior dramatically changed so that individuals spent money on credit in a far greater proportion than ever imagined by policymakers and credit-lending institutions. This ultimately led to binge credit spending in the form of credit repayment delinquencies and debtor defaults.1

Similarly, Thai policy makers have widely acknowledged the key role that personal consumption and the liberalization of retail credit played in reviving the Thai economy after the 1997-98 Crisis.13 Many have noted that Korea and Thailand share a broad pattern in that both are recovered economies driven in large part by domestic spending. Others have argued that the similarities between the two countries endorsing credit card spending as a main cure for the economy are limited in several respects.14 Nevertheless, Thailand witnessed rapid growth in its domestic credit card industry from 2001 to 2003, the same time period in which South Korea also witnessed rapid domestic credit card growth. The year 2002 alone saw a 119% increase in the number of credit cards in circulation.15 While growth has since slowed, the year-on-year number of cards in circulation climbed by fourteen percent in 2006 continuing a trend of annual double digit increases. 6

Following such developments, and despite tighter regulations from the Bank of Thailand ("BOT') to cope with such rapid growth,17 observers ranging from research bodies18 to Thai Prime Minister Thaksin Shinawatra, voiced concerns regarding the surge in credit card usage.19 In October 2005, the Thai Ministry of Finance ("MOF') unveiled an extremely controversial personal debt restructuring measure ("PDRM") that was widely reported in the press as targeting a fifty percent reduction of debt principal and a complete interest write-off (i.e., 100%)20 of qualified personal and credit card loans.21 As reported, the PDRM would have wiped out seven billion Thai baht (1THB") in debt principal and twenty billion THB in accrued interest22 (approximately USD 675 million for the total debt amount of THB twenty-seven billion). …

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