By 1979, the government realized the dangers posed by these structural imbalances. Accordingly, it initiated a comprehensive stabilization program designed to control excess liquidity, realign credit priorities, eliminate price distortions, and promote competition. However, external and internal circumstances such as the second oil shock and the assassination of President Park Chung-hee in 1979 pushed the Korean economy into turmoil. Korea's economic performance in 1980 was the worst in more than 20 years as the economy contracted by 5.2%, with the wholesale price soaring more than 38%, and the current account deficit reaching US$5.3 billion.

To address the excess liquidity problem, the government forced firms suffering from excess capacity, namely those involved in power-generation equipment industry and automobile industry, to merge. The power-generation equipment manufacturing industry was consolidated into the Korea Heavy Industrial Company in August 1980, the automobile industry was also ordered to specialize its production of vehicles to attain economies of scale in production. Later that year, firms producing diesel engines, heavy electrical equipment, electronic exchangers, and copper smelting were also ordered to specialize according to particular product lines, or to merge with others.

Between 1984-1987, further rationalization of industries took place in shipping and overseas construction. The rationalization program entailed reducing the number of firms through mergers, calling off deficit-ridden overseas construction projects, and lowering tax and financial burdens in the process.

While these measures did, to some degree, reduce excess capacity in HCI, the concentration of economic power increased, since many of the troubled firms were taken over by the growing Korean conglomerates or chaebol. Moreover, the restrictions on market entry and investment further deepened a monopolistic hold on the markets for HCI products.

Such large-scale restructuring of industrial firms required continuous government intervention in the credit markets. Due to the world recession following the second oil shock, many debt-ridden firms became financially insolvent. The government's concern over unemployment and financial instability led it to bail out these firms for the sake of social stability. At the same time, the government attempted to reduce the scope of intervention in the allocation of financial resources. From 1981 to 1983, commercial banks underwent privatization. The interest rate gap between policy loans and ordinary bank loans was almost completely eliminated in 1982.

Furthermore, entry barriers into the financial industry were lowered and financial services provided by different intermediaries were diversified and streamlined. The government restrictions on foreign direct investment (FDI) were relaxed substantially in recognition of the FDI's role in promoting competition and transferring advanced foreign technologies. The revision of the Foreign Capital Inducement Act in 1984 precipitated a shift to a negative system, abolishing restrictions on the foreign ownership ratio and the repatriation of capital.

Real GNP growth from 1982 to 1988 averaged 10.5% annually, and inflation in both the wholesale and the consumer sectors was well below 5% annually after 1982. The trade surplus began in 1986 and the amount of current account surplus reached $14.2 billion in 1988. Throughout the decade, the economy generated about 2.8 million new jobs, and the unemployment rate sank to the unprecedented level of 2.5% in 1988.