Two Years After the financial Crisis and the IMF intervention

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Remarks at the Steering Committee
of the Korea-U.S. Business Council
Big Island, Hawaii on January 18, 2000

 

A s previous speaker has informed us, major economic indicators of the Korean economy for 1999 show that the economy has fully recovered from the financial crisis that started two years ago. In conjunction with this outcome, the International Symposium on the Financial Crisis and Structural Reform in Korea was held in Seoul on December 3 last year, in which Mr. Michel Camdessus, Managing Director of the International Monetary Fund, proudly stated that "the speed and vitality of Korea's recovery, -are- clear evidence that the policies adopted in response to the crisis were correct.." President D.J. Kim also announced in the conference that structural reforms led by the government have brought an end to the financial crisis in a matter of a one-and -a -half- year period.

No doubt the policy measures employed by the Korean government under the guidance of the IMF played a major role in overcoming the financial crisis, for which they deserve high commendation. Yet their self appraisals seem to need some qualification. As for the IMF, one may question whether the way the IMF responded to Korea's financial crisis really lived up to the objective of the IMF set forth in Article 1 of its Charter, which defines its objective as making "the general resources of the Fund temporarily available to its members under adequate safeguards thus providing them with opportunity to correct mal-adjustments in their balance of payments without resorting to measures destructive of national and international prosperity." (The Italics are mine.) I wonder if the IMF really was able to help Korea obviate "destructive measures" by making funds available at the right time and in the right amount, so that the Korean government could effectively contain the liquidity crisis as quickly as possible. Instead, in my view, the IMF, with limited resources available, had to resort to overly contractionary fiscal and monetary measures, which drove a liquidity crisis into a total economic crisis at least for a time. Even if Korea's recovery had come two or three years later than it has, the IMF might still have argued that its prescription was correct -without reckoning the cost involved that fell upon the Korean people. It is also true that Korea's economic recovery was aided by favorable international economic conditions, No doubt the policy measures employed by the Korean government under the guidance of the IMF played a major role in overcoming the financial crisis, for which they deserve high commendation. Yet their self appraisals seem to need some qualification. As for the IMF, one may question whether the way the IMF responded to Korea's financial crisis really lived up to the objective of the IMF set forth in Article 1 of its Charter, which defines its objective as making "the general resources of the Fund temporarily available to its members under adequate safeguards thus providing them with opportunity to correct mal-adjustments in their balance of payments without resorting to measures destructive of national and international prosperity." (The Italics are mine.) I wonder if the IMF really was able to help Korea obviate "destructive measures" by making funds available at the right time and in the right amount, so that the Korean government could effectively contain the liquidity crisis as quickly as possible. Instead, in my view, the IMF, with limited resources available, had to resort to overly contractionary fiscal and monetary measures, which drove a liquidity crisis into a total economic crisis at least for a time. Even if Korea's recovery had come two or three years later than it has, the IMF might still have argued that its prescription was correct -without reckoning the cost involved that fell upon the Korean people. It is also true that Korea's economic recovery was aided by favorable international economic conditions, as I will mention later.

At any rate, the IMF currently seems to be facing a grave challenge to adjust itself to the globalized money market, in which the movement of the exchange rate no longer reflects the change in the current account of goods and services of member countries but merely reflects the cross border movement of speculative short-term capital. In this regard I was personally stunned about 10 days ago by the synchronized reaction of the world stock markets to the sharp decline in the U.S. markets, which was triggered by the re-nomination of Alan Greenspan, Chairman of the Federal Reserve Board who had hinted at a policy of raising the interest rate. In particular, Seoul stock prices suffered their largest one-day fall ( 72.73 points) on January 5. One implication of these episodes is that money markets have indeed been globalized, with far reaching ramifications, and we have to review the international monetary system and rebuild the IMF in a way responding to this development, so that it can safeguard against, or cope with, possible recurrence of financial crisis anywhere and everywhere in the world.

The real contribution made by the IMF to the Korean economy, in my view, is found in its pressure on the Korean government for structural reform in the financial and corporate sectors. There is no doubt that by dint of the structural reform thus far implemented, the management style in these sectors is undergoing significant change in the direction of a higher standard of transparency and governance. However, the observation that the current recovery is the result of the structural reform needs some qualification. To be sure, the resolution of the liquidity crisis and the structural reform are closely related, but they are not same things. Structural reforms by nature takes a long time to be implemented and an even longer time for its effect to be seen in terms of greater industrial efficiency and enhanced competitiveness in the international market, as envisaged by the policy makers. In order to judge to what extent recent economic recovery is related to structural reform, we may look at the GDP data for the 3rd quarter of 1999 published by the Bank of Korea. The growth rate for the 3rd quarter turned out to be as high as 11.3%, in comparison with the same period of the previous year (1998). Yet analysis of related data shows that 43% of the growth rate is explained by a rebound of consumer demand, which has been pent up in the wake of the financial crisis. Another 42% is explained mainly by inventory adjustment in response to the picking up of consumer demand. The remaining 15% is explained by fixed investment and net exports albeit they are primal factors sustaining long-term growth. So my feeling is that the recent rapid economic recovery is related more to cyclical factors, such as the revival of consumer demand, inventory adjustment, the appreciation of the yen, and the continuing boom in the U.S. economy-- than to structural reform itself.

In fact, major tasks in structural reform are still in progress, and there is still a long way to go. Liquidation of bad debts held by the financial system, the breakup and disposition of the Daewoo conglomerate and its aftermath, the normalization of big businesses that are currently under the Big Deal and Workout, and further reforms in the public sector remain as major challenges to both the government and business community

In short we should be on guard against the illusion that the current economic recovery is the end result of the structural reform that is, up to now, merely half done. Unfounded complacency creates the danger of eroding the determination and efforts of both the government and business community, especially when the political season has set in for the general election to be held in April a few months away.