The 1997 Korean foreign exchange crisis broke out not because of thedomestic economic structure but because of the liquidity problem in the processof capital market opening. The US Treasury Department took advantage of theliquidity problem in order to throw open the Korean capital market, and forcedKorea to go to the International Monetary Fund (IMF), blocking the Japaneseefforts to help Korea. Korea nevertheless accepted the demands made by theIMF and the US Treasury Department to utilize them for the purpose of carryingout the needed reforms of the domestic economy. Korea thereby managed toresolve the longstanding structural problems represented by the chronicgeneration of non-performing loans by firms. The reform however meantintroducing the institutions inconsistent with the contemporary situation of theKorean economy. After the crisis, the growth rate of the economy fell as aresult of underinvestment emerging after the crisis rather than the normalizationfrom the overinvestment before the crisis. In addition, a large amount ofnegative net capital gains from international investment eroded national income.Business cycle became more stable and the inflation rate fell. Current accountturned into chronic surplus.