Tuesday, September 2, 2014

Korea Emerges from Crisis

SEOUL: Last year saw the worst of times in South Korea since the end of the Korean War, with Asia's crisis bringing a devastating 33.8% drop in per capita GDP, from $10,307 to $6,823 and mass starvation in North Korea threatening stability on the peninsula. Times of crisis, however, like the approach of an execution, concentrate the mind. South Korea has focused on systemic reform and, today, despite labour unrest the signs of economic recovery abound and political prospects are brightening, too. Even relations with the North may be slightly more predictable.

In the year-and-a-half since South Korea received a $57billion IMF bailout, and the 13 months since former dissident Kim Dae Jung became president, the currency (the won) has stabilized, short-term debts have been rolled over into long-term ones, foreign reserves have increased, and interest rates have been cut. Foreign reserves stood above $50 billion at the end of 1998, compared to under $9 billion a year before, thanks mostly to a $39 billion trade surplus last year, the first in nine years. This surplus enabled a stabilizing of the won at 1,200 to the dollar, compared to the 2,000 to 1 ratio of 1997.

Much has been done, but South Korea has only touched the surface in restructuring its economy, its relations with the North, and domestic political reform. A cabinet shake-up this week points to President Kim's recognition that much more needs to be done. In all areas the direction is toward even liberalization, but President Kim's path to liberalism is through a curious kind of social corporatism. These detours are necessary because of the roadblocks posed by big labor and even bigger business. The most important challenge now is for President Kim to build a new ruling coalition that can ensure a measure of political stability at home as the economy is opened up and the knotty issues of nuclear weapons and ballistic missiles in North Korea are tackled.

So-called "Asian values" are not in President Kim's vocabulary. He believes that democracy and a market economy are not opposites but complement each other. After consulting the IMF, the government has pushed insolvent banks to merge or face bankruptcy, allowed for the first big layoffs of workers, and "downsized" the bureaucracy through a strict reorganization. In all this President Kim assumed personal leadership, surprising many with his grasp of, and commitment to, liberal economic ideas.

Korea's five huge conglomerates, the chaebol – Hyundai, Samsung, Daewoo, LG and SK groups – have been dragged, kicking and screaming, into rationalization. They have been pushed into concentrating on core businesses, and encouraged to swap overlapping enterprises. So Daewoo took over Samsung's car plants, and Samsung took over Daewoo's electronics subsidiaries.

Although they pay lip service to a continued shedding of extraneous businesses, the chaebol still resist complete rationalization, claiming that they cannot rid themselves of excess capacity so long as they maintain excess employment. They say that "market forces" will, in time, sort out their profit-losing units. But without even stronger signs from President Kim that another big round of layoffs will be supported by government, it is unlikely that the chaebol will do much more restructuring on their own.

Labor unions have been just as disagreeable as chaebol bosses. Two million are now unemployed, fully 9% of the workforce and a nightmarish figure already for the government. To promote industrial peace, President Kim instituted an emergency Tripartite Commission on Labor, Business and Government so that the government could mediate conflicts between labor and business on employment policy. When this took off in January 1998, the labor unions did accept the inevitability of layoffs. As mass layoffs became reality, the radical Korean Confederation of Trade Unions withdrew from the commission. This prompted the moderate Federation of Korean Trade Unions to follow it into the wilderness. Because no social safety net protects workers, the government is finding it next to impossible to keep unions as partners in its corporatist design.

Relations with North Korea remain the central priority, and always the greatest danger. A bold program to allow cruise boats to call at the holy Mount Kumkang in the North has seen over 40,000 South Koreans visit the famous site for the first time since 1945. Whether this thaw yields more meaningful fruit hinges on the North maintaining its freeze on nuclear and missile tests. Former U.S. secretary of defense William Perry is leading a comprehensive review of the joint US/South Korean approach to the North Korea now.

But ambitious domestic and foreign policy reforms demand public and political support. President Kim must decide this year whether or not to keep the promise he made with Prime Minister Kim Jong Pil to change Korea into a parliamentary system of government. Because the president's party controls only a third of the seats in the National Assembly, a new ruling coalition will be needed, which is tricky as parties are now increasingly divided along regional lines. President Kim has needed all the powers of the presidency to push reform along this far. Whether or not to surrender some of those powers in order to deepen Korean democracy is the riskiest question he now faces.

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