SEOUL: Despite World Bank emergency grants and IMF rescue funding of $57 billion, Korea's economy, the world's 11th largest, remains on the brink of collapse. If a debt moratorium or default can be avoided, however, Korea's state-led capitalism may yet be transformed into something like market-led capitalism, one more competitive in -- and open to -- global markets.
The politics of this transition, however, will be harshly uncertain. Kim Dae Jung (the new president) was elected with a mere 40.3% of the vote, his opponents maintain a majority in parliament, and an angry tide of populism is rising. Far from over, Korea's crisis is shifting ground.
The Korean state's inability to supervise and manage the impact of financial globalization, made worse not better since the civilian Kim Young Sam assumed power in 1993, is the direct cause of crisis. Until that year, South Korea seemed a model "developmental state." Like Japan, Korea was characterized by close government-business relations, conglomerates (known here as chaebols), a weak labor movement, and mercantilist industrial and trade policies, with foreign exchange and domestic credit allocated by the state.
One irony of Korea's crisis is that a source of failure, the chaebols, were authorized decades ago to create companies capable of competing in global markets. By fostering ceaseless collusion between politicians and businessmen – the former providing favors to the chaebols, the latter providing political funds to the rulers – within this national objective lay the seeds of today's crisis. The vast sums accumulated by former presidents Chun Doo Hwan (who amassed a $900 million slush fund) and Roh Dae Woo (who amassed $600 million from the business community) were but the tip of an iceberg of corruption and inefficiency that saturated both politics and the economy.
Moreover, the "democratization" that followed Kim Young Sam's election and formation of a "civilian government" in 1993, also contributed to the problem. Fearing opposition, the government failed to restructure the economy to meet challenges of globalization. In 1994 it delayed labor and financial reforms necessary to cope with a growing pattern of high cost and low productivity. Wages in Korea, indeed, became twice that prevailing in Britain and banks remained under the thumb of government. When the Kim Young Sam government did try to ram through labor reforms designed to increase labor flexibility, it was met with violent labor protests and quickly climbed down.
Even after Kia, South Korea's second largest automaker and the eighth largest chaebol, went bankrupt earlier this year because of overextended investments, Kim Young Sam's government balked at undertaking financial reforms to open and supervise the banking system. It feared a return to street protests. These problems unaddressed, scores of commercial banks and enterprises began to fail; foreign capital fled; and foreign banks demanded early repayment of dollars loaned to Korean banks and enterprises.
Disentangling political and economic reform is impossible. Because the bureaucracy tightly controlled banks and allocated credit, for example, chaebols expanded investment by cultivating good relations with bureaucrats and bankers. To meet any shortfall in credit, the banks and chaebols relied heavily on attracting short-term debts from foreign capital market. So cavalier was this practice that most chaebols had average debts of more than seven times the value of their equity. So casual and systematic was this collaboration, indeed, that when the IMF package was announced December 3rd, the bureaucracy had little or no idea of the scale of debts Korea had accumulated, nor even a clear picture of the foreign exchange reserves held by the Bank of Korea.
Only after the Korean won reached 2,000 won per dollar, halving the exchange rate within a few months, did the IMF and the U.S. (representing the the G-7 group) agree to disburse $10 billion this Christmas Eve. In return, Korea promised to completely open her financial market and to legislate labor reforms that may allow layoff even if there may be two million unemployed in1998.
But curbing the power of the state in business is the beginning, not the end. As Korea's economy changes, so must its politics. This political revolution likely will be as demanding and far-reaching as any the country has yet undertaken. For when he becomes president in February, Kim Dae Jung will have no choice but to reverse his campaign commitments to achieve full employment, which would have required more state intervention, because he also promised to fully implement the agreement with the IMF.
President Kim's most daunting task will be to forge a domestic consensus and governing coalition to support the IMF deal. Here, the decision to pardon former presidents Chun and Roh certainly is a good augury for unity. But as President Kim puts the economic house in order he must also tackle constitutional reforms in order to establish the parliamentary form of government he has pledged to build. That bold political pledge, indeed, allowed him to form an alliance with his former rival, Kim Jong Pil, who will be prime minister in President Kim's first cabinet.
Should Korea abide by IMF rules and survive her worst economic downturn, what kind of capitalism will emerge? It is too early to say, but one thing is certain: as the role of the state decreases and the role of the market increases, Korean capitalism will not necessarily become an open American-style affair. No matter the depth of reform, the role of the state in managing globalization, and the continuing Confucian disciplines, are likely to remain as vital as ever. So Korean capitalism will likely head in the direction of the more authoritarian Singapore model – a society open to global markets but still directed by a corporatist, rather than a pluralist, state. The more things change, it seems, the more they will stay the same.