In the streets of Seoul one sees dozens of cars with names like Elantra, Grandeur, Sonata, Prince, Espero, Tico, Accent and Dynasty, all made by the three big Korean car companies. After a while you notice that there are no Toyotas or Hondas or any other Japanese-made vehicles.

The explanation is rooted in post-war history. A guilt-ridden Japan reluctantly agreed to stay out of the car market of the neighbour it had occupied so as not to swamp it with cheap exports and create a huge balance of payments deficit.

This kind of protectionism is common in some Asian economies. One of the conditions of the $57 billion (£39 billion) International Monetary Fund rescue package for South Korea is that it comes to an end. Seoul must open its automobile and other markets to Japan in 1999 by scrapping the "Import Diversification Programme" which controlled the influx of Japanese goods.

The country is also required to allow foreign investors to buy more stocks and bonds, allow access to foreign banks and improve the transparency of financial dealings and company accounting. Overall growth will fall from an average of 8.6 per cent over three decades to 2.5 per cent - or even near or below zero, according to some diplomats, a recipe for mass unemployment. A million or more workers will lose their jobs as big companies go bankrupt, while foreigners gain market share in a country proud to go it alone.

South Korea is a nation which transformed itself through hard work, rigorous education and self-sacrifice. Small wonder that a conspiracy theory is popular in Seoul. It holds that the crisis started several weeks ago when Japanese lenders, which provided more than 30 per cent of loans to Korea, suddenly withdrew their loans, taking out $6 billion in 10 days, and as yesterday's Korea Times put it, "driving Korea into a corner and forcing the nation to go hat in hand to the IMF".

The newspaper surmised that Washington and Tokyo collaborated to tame Korea and pry open its consumer and financial markets.

But many Korean analysts concede that the South Korean crisis is of its own making. Under its system of state-guided capitalism, government funds were for decades pumped into big family concerns, called chaebols, unique to South Korea. This policy helped transform a country of 45 million people in a generation from a nation of subsistence farmers to the world's 11th-largest economy and the largest maker of ships and memory chips.

But the system encouraged over-borrowing and secrecy. Banks doled out huge amounts of cash on the basis of government directives rather than risk assessment.

At first the results were spectacular. The conglomerates expanded at a furious rate. Exports grew from $33 million in 1960 to $130 billion last year - and are still going up.

"The Government controlled credit through banks which were accustomed to taking their orders from the government," said Mr Park Jae Ha, chief of the financial policy division of the Korea Institute of Finance.

Of the top 30 chaebols, which account for 70 per cent of South Korea's output, 25 now have debt-to-equity ratios of more than three to one and 10 of more than five to one. The norm in western economies is one to one.

The chaebols had many bad customs which caught up with them, Mr Park explained. One would typically own several different companies, making a range of products from cars to computers. The top five controlled an average of 140 businesses each. The successful businesses would guarantee the debt of the unsuccessful, which always had the capacity to get out of control and bring them all down.

Eight of the big over-leveraged family companies have collapsed this year, leaving the banks with huge unpaid debts.

The response to the economy's deterioration failed to take into account the reality - that foreign confidence had been evaporating for months, if not years, said a western analyst in Seoul. He added that corruption was also a big factor. "It was only a matter of time before they all decided to pull their money out of South Korea."

Five years ago, the country opened up its stock markets and in 1994, President Kim Young-sam announced a globalisation programme. It looked fine, but many foreign investors got badly burned and US and Japanese firms ended up firing most Korean staff after taking big losses.

With the slide in Asian currencies pulling down the won, Japan's economy at a standstill and foreign funds and banks pulling out their dollars fast from Seoul, South Korean banks found that the collateral and other assets backing up deposits were not worth the bank's valuations.

South Korea's Central Bank was embarrassed earlier this week when details of its official reserves were made public in the leaked IMF report. With short-term debt estimated at $100 billion, usable reserves had dwindled to just $6 billion on December 2nd after a large amount was used to finance the short-term debt of Korean commercial banks' offshore branches.

"We were told we still had $23 billion," said an official of the Korean Congress of Trade Unions in disgust over lunch in the foreign press club. "They have lost all credibility."

Despite the sharp turn for the worse in the external situation in late October, the authorities waited until November 21st to approach the IMF, by which stage market sentiment had turned overwhelmingly negative and the reserves had been decimated.

On Wednesday, Seoul suspended five merchant banks, making a total of 14 in a week, and opened its bond market, allowing foreigners to buy mid- and long-term guaranteed bonds. The South Korean stock market made history by allowing foreigners to buy up to 50 per cent of the shares of Korean companies. But foreigners stayed away because of the deepening chaos. Yesterday, Moody's Investor Services downgraded South Korea's bonds. All this set the scene for yesterday's extraordinary statement of public despair by President Kim. "I am whipping myself every day thinking of the despair of entrepreneurs who have defaulted on loans and fathers who have lost their jobs," he said. He felt "bitterly responsible" that the economy had reached the current situation.

The problem for South Korea is that President Kim is on the way out and is a lame duck. The election for his successor will be held on December 18th but the new president will not take office until February. The political vacuum coincides with the IMF crisis and the climax of an Asian-wide financial convulsion.