A WOUNDED ASIAN TIGER
December 4, 1997
With the recent currency crisis and instability in the Asian markets, the South Korean economy has fallen on hard times and just this week accepted a bail-out from the International Monetary Fund. Following a background report, Elizabeth Farnsworth explores the cause for the crisis, the recovery plan and what the future may hold for the country with four experts.
ELIZABETH FARNSWORTH: We get four views now: Jeffrey Sachs directs the Institute for International Development at Harvard and has served as an economic consultant to several foreign governments. Mary Bush is president of her own financial advisory firm; she served on the IMF Board of Directors between 1984 and 1988. Byoung-Joo Kim is a senior analyst for the Korea International Trade Association, which represents 65,000 companies engaged in international trade. He's a Korean citizen living in the U.S.; and Meredith Woo-Cummings is associate professor of political science and director of the Round Table on Political Economy at Northwestern University. Thank you all for being with us.
A RealAudio version of this segment is available.
December 4, 1997:
A background report on the South Korea crisis.
November 26, 1997:
What did the APEC summit accomplish?
November 25, 1997:
Asia's leaders search for answers at the APEC meeting in Vancouver.
November 24, 1997:
The APEC shows a grim economic forecast for Asia.
October 28, 1997:
The instability of Asian stocks causes worldwide fluctuations.
October 23, 1997:
The Hong Kong stock market drops 10 percent.
February 11, 1997:
U.S. Ambassador James T. Laney discusses the labor strikes and rallies in South Korea.
November 25, 1996:
APEC agrees to eliminate tariffs on computers and telecommunications equipment.
November 21, 1996
A panel of experts discuss President Clinton's Asia-Pacific Tour.
December 28, 1995:
A report on the arrest of two former South Korean presidents and the bribery charges against the country's top business leaders.
Browse the NewsHour's coverage of Asia.
The Web site for the South Korean embassy in Washington, D.C.
International Monetary Fund
A traumatic event in South Korea.
Meredith Woo-Cumings, the apology we just saw indicates that this is a very traumatic event for South Koreans. Is it?
MEREDITH WOO-CUMINGS, Northwestern University: Yes, it is a very traumatic event for South Korea. In fact, in the last two weeks or so the Korean reaction to this economic debacle has gone through various phases. The first reaction to this debacle was absolute denial. And this was abetted by a government, especially the minister of finance, who kept insisting that all the fundamentals of Korean economy were sound, and that this was a garden variety liquidity crunch that could be quickly fixed by having more cash infused into the economy.
In the aftermath of the announcement that the magnitude of the IMF bailout is likely to be over $50 billion or so, that--that denial has changed into complete shock and dismay, and there has been a series of national campaigns to figure out a way to overcome this, and these measures have been, by and large, very traditional and ineffective, ranging from the citizens' disavowal, to citizens' promise not to buy foreign goods, to their promise not to spend money abroad, to saving U.S. dollars. Now, I think that probably the next phase of Korean reaction to this debacle is likely to be anger. As citizens realize--
An IMF loan.
ELIZABETH FARNSWORTH: One second. I'm going to get back to the anger in a minute. We'll come back to that. Mary Bush, help us understand how the IMF package works. Reports indicate that the first money comes in Friday. Where does it go? Who gets it?
MARY BUSH, Former IMF Board Member: The money will go to the government. The International Monetary Fund is an institution that lends directly to governments, not to private sector companies. It lends to the governments to help them rebuild their foreign reserves, so that they can pay their debts, also to rebuild their foreign reserves so that they continue importing goods from other countries, so the government gets those loans.
ELIZABETH FARNSWORTH: And then the government can use it, more or less, as it wishes, with some conditions, right?
MARY BUSH: Well, the government can generally use funds as they wish, but I'll tell you, the IMF is really breaking ground with this program for Korea. Many of us who have worked with the IMF or in relation to it have urged for many years that the IMF play a much bigger role in what we call structural reform, not just dealing with issues such as inflation, monetary policy, and fiscal policy, but also dealing with the financial structure, for instance, in Korea, because it is the financial structure of their economy that's caused many of the problems. You mentioned earlier the merchant banks that were being closed or urged to clean up their books, else they will have to close very, very soon. And the cutback in lending by the merchant banks and other financial institutions, the opening up of the system to foreign competition, these are groundbreaking things for the IMF. I think they're very good.
The IMF bail-out: Is it a good deal?
ELIZABETH FARNSWORTH: And Jeffrey Sachs, jump in here on the groundbreaking nature of this agreement and also tell us whether you think they're very good.
JEFFREY SACHS, Harvard University: Well, the first thing is we don't know what's in the agreement, and we may not ever know. The tradition of the International Monetary Fund is to keep these things secret, which would be absolutely unacceptable, of course, with $57 billion of international money going in. So it's a little premature to say exactly what is in the agreement. There's a lot, though, that appears based on the public discussion to be quite traditional, and that is the IMF is pushing up interest rates, forcing rapid bank closures, and forcing cutbacks in government spending. And my concern is that what the IMF is doing here--together with its programs in Thailand, Indonesia, and the Philippines--is pushing a region in the middle of a financial panic caused by a rapid withdrawal of foreign lending money to a much deeper recession than is necessary.
I think the finance minister of Korea was more right two weeks ago than in his forced abject apology today. Korea is being hit by a private market financial panic that greatly over-emphasizes the supposedly deep weaknesses of the Korean economy. And if we add now this piling on of overly-tight interest rate policy, budget spending cuts, and sharp closures of the banking sector, as has occurred now in Thailand, Indonesia, and now in Korea, it's a bit like taking a meat cleaver to very sophisticated economies, and I worry that we're doing a lot of unnecessary damage.
ELIZABETH FARNSWORTH: Byoung-Joo Kim, what do you think of that? What about the companies you represent, is this going to be like taking a meat cleaver to some of them? Will some of them have to close down?
KIM BYOUNG-JOO, Korea International Trade Association: I'm sure there's no doubt that some companies with weak financial structure will have to close down, and that will be good for the economy in the long term. Other companies still have some hard times financing their business and operations, but eventually they'll all go through this.
ELIZABETH FARNSWORTH: So do you think that the IMF package overall is good for Korea?
KIM BYOUNG-JOO: I think it is a good package, and I don't have any strong reaction to it. It should work.
ELIZABETH FARNSWORTH: Mary Bush, what do you think?
MARY BUSH: Well, I think in terms of the bank closings that Mr. Sachs mentioned and what you really have to look at is what are the underlying reasons for this happening--like many economies in Asia--has had their lending directed by the government. The banks are told which industries, which companies to whom they should lend. This has created a problem because the banks have, therefore, made loans that are low quality, that are not creditworthy. This has flowed over into the corporate sector. Corporations are being propped up by loans that they probably should not have, and because there is the lack of competition, because the government is directing the financial institutions, as to what kind of lending that they should do, you've gotten one--growth rates that are very, very high, and I think growth--in Korea--very high rates. But based on the kind of funding and the kind of financial system that makes sense for them to be a player in the global markets. Korea, like many other Asian countries, want to be global players. In many ways they are because they export--they have wonderful machines in terms of exporting their products to other countries; however, as long as the financial system remains protected by the government and competition is not allowed in, then I think you could run into the same kind of problem again.
ELIZABETH FARNSWORTH: Meredith Woo-Cummings, where do you come down in this debate?
MEREDITH WOO-CUMINGS: Well, the kind of measures that are now asked for by the IMF are the kind of measures they should have been taken a long time ago. In fact, Korea has enacted financial liberalization about 16 years ago. It's been a long and torturous process. On the other hand, I think that the impact of the kind of measures being asked for by the IMF is these measures are going to have tremendous impact and repercussion in the current economy to the extent that I think that the pain that was felt--years was their own stabilization in 1995--is going to look like child's play. And this is because very serious--and serious structural reforms are being demanded on our economy that is going through serious recession, and of course, with Mexico, these kind of structural reforms weren't asked for because they were done already in the 1980's.
ELIZABETH FARNSWORTH: Just very briefly, what do you mean when you say structural reforms, just briefly?
MEREDITH WOO-CUMINGS: Yes. By structural reforms I mean overhauling the financial system so that there is greater transparency and getting the government mitts off these financial institutions, so that health of the banking system is restored, and that also means that the huge conglomerates, or the chaebol, who are the mainstay of the Korean economy, will not automatically have access to bank windows.
Reaction in South Korea.
ELIZABETH FARNSWORTH: And Meredith Woo-Cumings, because it may get very tough, that's what people--getting back to your original point about anger--
MEREDITH WOO-CUMINGS: Anger--yes--as they realize what these stabilization measures mean for their livelihood, as they see their taxes go up, as they see interest rates go up, as--in general--there is--there will be stabilization and belt-tightening and reduction in government expenditure--I think that they're going to feel the anger. Now the question is whether the government will have the political will and political skill to deal with volatility of especially Korean labor.
ELIZABETH FARNSWORTH: And Jeffrey Sachs--your experience--you've been advising a lot of governments around the world in situations like this--what's your experience tell you about what Korea--South Korea can expect in the coming weeks and months?
JEFFREY SACHS: The question is how painful this has to be. Sure, there need to be changes. The question is in which way they're made. My concern is that this is overkill right now, and blaming the victim. You see, for all of these loans we're talking about, the counterpart was international banks making these loans. All of a sudden we say Korea is a hopeless economy, but it was the international financiers that put in hundreds of billions of dollars into these economies, including a hundred billion dollars from international banks into the Korean economy. That's because there was fundamental and still is fundamental soundness. Now, if we go in with this very blunt edge and start demanding closed down nine banks, hike up interest rates, play into the panic by tightening even more, we'll do a lot of unnecessary damage, so change needs to be made, of course, but the question is how to make it, and for that we need to see these documents public, and we need to have a real debate about the methods that are being used.
ELIZABETH FARNSWORTH: And then on the question also, Jeffrey Sachs, of what might happen in the future, do you expect to see quite a few more bankruptcies? I saw one report that an analyst in South Korea said there could be 25 percent of the companies on the stock exchange could go bankrupt. Is that what often can happen?
JEFFREY SACHS: If the IMF insists, as it often does, on holding interest rates very, very high, what you can do is poison the entire corporate sector unnecessarily because no corporate sector can resist month after month of 30 percent interest rates after inflation, which is the kind of interest rates that the IMF is urging in a number of these countries. And that's what worries me.
ELIZABETH FARNSWORTH: Byoung-Joo Kim, on the question of labor unrest, one of the main labor confederations has announced that it will oppose any; that it will very actively oppose any layoffs or further closures of companies. What are you expecting from labor now, and what do your companies look for? What do you think they should be looking for?
KIM BYOUNG-JOO: I'm sure there will be some resistance and dissatisfaction from the labor side, but there is a consensus emerging inside Korean society that we need to go through this so-called crisis, and eventually I think they will join the march, and we--I don't think we'll see serious labor unrest problems inside Korea.
ELIZABETH FARNSWORTH: And Byoung-Joo Kim, also, are the reports exaggerated that are in the U.S. press and also in the wires, that leaders of Korean industry are saying that this deal was really backed by the U.S. and Japan in order to get rid of the large Korean conglomerates that have been so successful? Is this something that they are saying?
KIM BYOUNG-JOO: Yes, they are saying that, and I think they probably misunderstand what's going on here, but such sense--and even though it's a misunderstanding--such sense is real inside Korea, and that's something we all of us have to work on.
"I think that we're dealing with a very volatile situation."
ELIZABETH FARNSWORTH: Meredith Woo-Cumings, there are presidential elections in two weeks. How's all this going to affect those elections?
MEREDITH WOO-CUMINGS: Well, these are going to affect elections very much, but I'd like to get back to the question of labor, because I think that by far this may be the most important question that faces Korea today. You have to remember that Korean labor is very strong. Labor is not instituted--institutionalized in the ruling party, not like the labor in Mexico, within the governing structure of PRI--however, the labor in Korea is very strong. It is very well organized. In January of this year there was general strike; millions of workers filled out the streets, thereby paralyzing the country. So I think that we're dealing with a very volatile situation.
In terms of which way the labor is going to go, I think it depends on the political skill of the government and also what IMF does; that is to say that--equitably--that the pain will be spread not only to be suffered by workers and the middle class and above all by the chaebol, the huge conglomerates. I think that it is quite possible that the workers will decide to ride out the rough times and cooperate with the government. Now if however the widespread perception on the part of labor is that the primary reason for the measures of the International Monetary Fund is to benefit westerners and foreigners so that they can come in and take over banks and corporations that used to belong to Koreans and if they also feel that part of the reason for the severity of the IMF measures is so that the Japanese can cripple the formidable Korean competitors, then I think that there is some possibility that resentment toward both the government and the western world and as well as the IMF could grow.
ELIZABETH FARNSWORTH: Byoung-Joo Kim, you're shaking your head.
KIM BYOUNG-JOO: Yes. I think that statement is a little bit too alarmist. Korean labor has no history of staging a big chaotic movement when there is no popular support, and when there's a consensus inside that Korean society that we have to go through this crisis, I don't think labor will eventually raise any fundamental problems in this process, and such understanding or expectation of huge labor crisis is a little bit exaggerated.
The impact on North-South relations.
ELIZABETH FARNSWORTH: Meredith Woo-Cumings, we only have a few seconds left, and I want to ask you to please comment on how this might affect the very difficult relationship between North and South Korea.
MEREDITH WOO-CUMINGS: Well, one immediate effect of this probably is that this reduces the leverage the South Koreans have in the four-party talks relating in--and in their relationship to North Korea.
ELIZABETH FARNSWORTH: These are the talks in Geneva right now going on--
MEREDITH WOO-CUMINGS: In Geneva.
ELIZABETH FARNSWORTH: --to end the Korean War.
MEREDITH WOO-CUMINGS: Right. To finally put an end to the Korean War. And the strength of the South Korean position has always been that it is a wealthier half of Korea, and that it could--it could help North Korea out economically and help it out--help it come out to the world. And it could--it also guaranteed and promised a great deal of investment and the possibility of trade. Now, that card has been taken away.
ELIZABETH FARNSWORTH: Okay. Well, thank you all very much for being with us.