April 27, 1999.
Institute for Corean-American Studies, Inc.
965 Clover Court, Blue Bell, PA 19422
[Editor's note: This paper is, with permission from the
author, a special contribution to The ICAS Lectures series. Han
presented this paper at the 1999 International Trade and Economic Policy Forum
"The Crisis Continues: Rethinking Globalization" Organized by the
Economic Strategy Institute, Ronald Reagan International Trade Center,
Washington, D. C., April 27-28, 1999. sjk].|
I am very pleased to be invited to discuss an issue of immense importance not only to the so- called "tigers" but also to others, i.e. whether it is likely that the emerging economies of East Asia will recover their buoyant growth and if it is, when it will be, and if it is not how it can be brought about. Not being an expert on aging in general, I will concentrate on Korea then try to draw some lessons Korea's experience for other countries similarly in crisis management.
The year of 1998 was a very difficult one for Korea. It was a year of rising unemployment and negative growth rate. The rate of unemployment, which hsd averaged between 2 and 2.5% for many years increased to over 8% and the economy contracted by 5.9%, the first time since 1980 when the Korean economy registered a negative growth of 4%.
However, it was also remarkably year of reforms and changes. Nineteen eighty-eight marks an historical turning point in Korea,s transition to an open, globalized, market-oriented 21st century economy. The reforms have been so dramatic and the changes so drastic, I'm not sure whether the tiger I am going to discusses is the same beast that we saw before the financial crisis of November-December of 1997. In Korea's case at least, the old saying about the Tiger never changing its stripes has certainly been proven wrong!
At one time Korea had real tigers, but they were hunted to extinction by the 1920s. Fortunately, our metaphorical tiger is doing much better, having backed off in the nick of time from the brink of financial collapse. Now he has changed stripes and regained the spring in his step.
To speak more prosaically, the old ways of doing business and managing the national economy are now widely seen to have failed us, however successfully might once have been in the past. The bureaucratic style of economic management has been widely discredited, and Korea has adopted a new policy paradigm of growth and prosperity.
The Korean economy seems to be seeing the light at the end of the economic tunnel. Its macroeconomic conditions began to improve remarkably in recent months. The Korean economy is predicted to grow at about 4% and the rate of inflation is contained at about 3% this year.
The foreign exchange market has been stabilized with the rate being stabilized at about a 1,200 won to the U.S. dollar compared with 1,965 won to a dollar at the height of the crisis. The interest rate which was close to 30% at the height of the crisis is now in the single-digits. The stock market is on a roll having neatly tripled value since hitting bottom last June.
Korea's foreign reserves at the end of March stood at US$ 54 billion, more than seven times monthly imports. Korea's external debt profile has greatly improved with the short-term debt as a percentage of the total declining from 44% in 1997 to 20% as of January 1999. The current account surplus is predicted to be about US$ 23 billion in 1999 as compared with US$ 43 billion last year.
How then was it possible that the Korean economy began to rebound within about a year since the start of the financial crisis? The reason is that Korea embarked on a radical path to regain international credibility through wide-ranging reforms, accompanied by a fundamental change of the people's perception of globalization.
At the risk over simplification, I would like to identify two different approaches to the management of financial crisis in Asia: crisis management a la Korea and a la Malaysia.
The former approach is outward looking in tune with globalization. Its policy emphasis is on market-opening and deregulation. The latter, by contrast, is more inward-looking seeking to shelter the national economy -- at least to some extent -- from the effects of global market forces. It places heavy reliance on government intervention and regulation to mitigate the impact of financial crisis.
Let me emphasize here that I am talking about approaches to crisis management, not economic policy in general. As I understand it the Malaysian approach is intended to be short-term and even somewhat experimental.
Unfortunately, where a government's prestige is at stake, the short-term has a way of expanding its lease on life. If the experiment succeeds, crisis management a la Malaysia could become a la mode. But this seems to be rather improbable.
I am not saying that there are no critics of the Korean approach but the fact is that crisis management a la Korea has been showing impressive results in recent months. Perhaps the most important aspect of these recent changes is the change of the people's perception of foreign capital.
Until the outbreak of the financial crisis in 1997, public policy and popular attitudes toward foreign capital tended to be both conservative and nationalist. Beginning in the early 1960s when Korea embarked on its first five-year development plan, the government policy toward foreign capital was basically one of "borrow, build factories and pay back with export earnings" rather then "encourage foreigners to invest directly in Korea."
This wariness towards foreign direct investment had historical roots. Korea, being a small country surrounded by major powers, had consistently to be on guard lest its sovereignty be violated. Many Koreans believed that foreign ownership of national assets meant economic domination, which could lead to political domination and even occupation. Thus the defensive mentality of the Koreans led the government to adopt a policy in favor of borrowing rather than foreign direct investment.
However, with rapid economic growth and accumulation of national wealth, Korea became a middle ranking economic power and the Koreans became much more self-confident. By the time the economic crisis erupted, the Korean people were psychologically ready to accept foreign direct investment and had become more positive toward globalization.
Riding on this wave of tolerance towards globalization, the Korean government has taken the first step of fully liberalizing the economy by opening all sectors of industry to foreign investment with the exception of a few businesses related to national security. The capital market has also been fully opened. There are no more ceilings on foreign equity ownership and no more restrictions on foreign ownership of local bonds and short-term money market instruments.
Foreign exchange transactions are also been considerably liberalized. The.last major barrier that remained to foreign investors' entry into Korea, namely the real estate market, has been demolished.
Crisis management a la Korea also involves major reforms to restructure the economy through enhancing efficiency with economic liberalization and market discipline. The four main areas of reform are the financial sector, the corporate sector, the public sector and the labor market.
In financial sector restructuring, a total of 196 financial institutions, including five commercial banks have been liquidated to date. Two commercial banks are in the process of being sold to foreign investors. This alone signifies a once unimaginable change on the part of the government as well as the people's perception of foreign capital. To support the financial sector reform, fiscal resources of 72 trillion won or approximately US$60 billion were allocated. Of this, 49 trillion won has been allocated to support the disposal of non-performing loans and for recapitalization.
In the corporate sector, the emphasis is on enhancing transparency, and reducing excess debt leverage and over-capacity. This applied particularly to the large chaebols. The five largest chaebols agreed to reduce their debt equity ratios, and newly-created Financial Supervisory Commission is closely monitoring their progress. These five chaebols are also strengthening their core business competency through spin-offs, mergers and swaps. At the same time, standards in corporate governance and transparency are being substantially upgraded.
In the public sector three goals are being pursued. The first is downsizing through cutting government workforce. The second is privatization. Major public corporations such as POSCO., Korea Heavy Industries Corp. among others, will be privatized. The third is deregulation. All regulations affecting business are under review for possible elimination.
In the labor market, flexibility was legally instituted last year. The tri-partite Commission composed of labor, management and government was established early in 1998 to deal with industrial relations. .Although the tri- partite Commission has seen cups and downs, the consensus building process in labor-management disputes is a new and promising experiment for Korea.
Apart from the positive aspects as noted above, there are several remaining areas of concern. The most pressing problem facing Korea today is rising unemployment. Since the economic take-off in the mid-1960s, unemployment has never before been a major policy issue. With almost 1.8 million unemployed and lack of a social safety net, Korea will have to wrestle with this unfamiliar problem for many years to come.
Also as a major problem affecting government-chaebol relations is that the perceived urgency of reforming the corporate sector is directly related to the government's remaining time in office. As the crisis mentality passes and the government's effectiveness in influencing chaebol behavior declines, corporate sector reform may be put on the back burner.
The political schedule and political infighting will also affect the future of the Korean economy. There is a general election in April next year and the coalition partners, the National Congress for New Politics and United Liberal Democrats, have to settle the issue of constitutional change. Before the presidential election in December 1997, both parties agreed to amend the Constitution to establish a cabinet system of government. On this issue, the coalition partners are critically divided. The opposition party is to oppose the constitutional change. Political uncertainties could therefore jeopardize the recovery of the Korean economy.
However, despite these current problems and future uncertainties, the momentum of reform is carrying Korea forward into a robust recovery. The recovery so clearly underway is in part cyclical, but I think it also reflects growing domestic and overseas confidence in the staying power of Korea's economic reform drive. If anything, international confidence in Korea is perhaps ahead of domestic opinion. This can be seen in the recent upgrades by major foreign credit rating agencies and their record amounts of new foreign investment, both direct and portfolio, flowing into Korea.
Koreans are right to be somewhat cautious. After all, foreigners needn't worry about Korea's nagging unemployment problem. More to the point, at the stage over confidence compose the greatest threat to long-term recovery if it undermined the sense of urgency driving the reform effort.
Yet I think this is unlikely. The tiger may lack the elephant's memory, but the Korean tiger will not soon forget the traumatic experience of the past 18 months. He may never be the king of the jungle, but this leaner, sleeker, more agile beast will, I believe, restore his competitive prowress the 21st century.
Thank you for your time and attention.