Story of Structural Reform in Korea
- An Address prepared for presentation before the meeting
the State Government of Hawaii,
August 28, 2000.
thank you for inviting me to this distinguished gathering today and for the opportunity to make a few
remarks about what has been happening in Korea since the onset of financial
crisis toward the end of 1997.
would like to begin by saying that Korea was able to come out of the financial
crisis in a relatively short period of time. Let me quote some numbers in the
Macro economic variables indicating the economic recovery.
growth rate of GDP that sagged down to –5.8 % in 1998 recovered to 9% in the
following year of 1998.
- Current Account deficit of
$8.1 billion in 1997, following deficits in the preceding 3 years, turned to a
surplus of $40.5 billion in 1998.
- The net capital inflow dropped
from $23.3 billion in 1996 to $1.3 billion in the crisis year of 1977 and even
turned to net outflow of $3.2 billion in 1998
- In spite of the financial
crisis, the external debt in the IMF definition slightly decreased from $158.1
billion in 1997 to $149.4 billion at the end of 1998. Of which the short term
debt (with maturity less than one year) also decreased from $63.2 billion to $30.8 billion, reducing its
ratio to total debt from 40% to 20%.
- The nation’s foreign exchange
reserves increased from the meager $8.1 billion in 1997 to $40.5 billion at the
end of 1998.
- From the foregoing
observation, it is clear that the current account surplus was the major factor
contributing to the resolution of Korea’s foreign exchange crisis. In other
words, the contraction of the economic activities (reflected in the negative
growth of the GDP) and the austerity of the people played the major role in
containing the crisis.
- A heavy burden of adjustment
fell upon the house hold sector: the unemployment increased from 2.6 % in 1997
to 6.8% in 1998; consumer price index rose by 7.5% in 1998, compared with 4.5%
in the previous year.
- Business sector underwent
unprecedented hardship under the contractionary fiscal and monetary policies
which were adopted by the government to cope with the liquidity crisis and to
implement structural-reform program, entailing sagged demand and credit crunch.
The price paid
to overcome the crisis was high enough, yet the macro performance was
remarkable, which led Mr. Michel Camdessus, then Managing Director of the
International Monetary Fund, to state proudly 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 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.
Reform in the Financial Sector
statement of the President requires a qualification because the resolution of
the liquidity crisis is one thing and the structural reform is another,
although they are closely interrelated. In other words, the recovery from the
financial crisis does not necessarily mean that Korea’s structural reform has
been done, simply because it is still going on and the structural reform by
nature takes longer time to reveal its effect in terms of marked improvement in
the overall industrial efficiency and enhanced competitive power in the
international market. So let me summarize the major aspects of the structural
reform in the banking sector and corporate sector in a synopsis form.
In the banking sector the major measures
undertaken for the structural reform include the following:
- Non-viable financial
institutions were closed down including 5 local banks, 16 financial companies,
1 Investment Trust Companies, 2 Securities Companies, and 4 Insurance companies
as of the end of 1998.
- Financial market was opened
almost completely. As a result, the equity participation of foreign banks at
least in the three major commercial banks is currently negotiation and foreign
investors have come to play a major role in the security market in Korea.
- A large part of the total non
performing assets, defined as loans overdue for 3 months or more with the banking
system, was liquidated partly by write off and partly by the purchase of bad
debt by the Korea Asset Management Corporation which had been set up to help
resolve bad debts on the basis of the government funding.
- Various new legislations were
introduced to promote disclosure and transparency in the financial and business
management; to strengthen the prudential regulation and corrective action for
the financial system; to introduce global standard in accounting and audit
system; and to improve deposit guarantee system.
- Number of banks were reduced
from 27 to 17 by closure and merger and man power was cut by 34 % to save
Structural Reform in the
Turning to the structural reform in the
corporate sector, major target of the government was directed to the top five
Chaebols (business conglomerates) with the objectives defined by the government
- Enhancement of the managerial
- Elimination of Cross
Guarantees for loans between corporations under the umbrella of Chaebol.
- Reduction of debt-equity ratio
- Concentration of the
managerial resources on the most competent line of industry for each Chaebol.
- Establishing accountability of
major shareholders and management.
The programs implemented in pursuit of the above objectives
include the following.
- The top five Chaebols were to
reduce debt- equity ratio from 672.3% at the end of 1997 to 200% by the end of
1999. The ratio actually fell only to 449.3% by the end of 1998
- The top five Chaebols were to clear
off mutually guaranteed loans (about10 trillion won) by means of divesting
affiliated companies by the end of 1999. This plan in turn was backed by the
plan of downsizing number of affiliated companies within the top five from 283
at the end of 1998 to 135 by the end of 1999. The result is yet to be seen.
- The mutual capitalization on paper
between companies under the umbrella of the Chaebol was banned with a few
- To establish disclosure and
- Chaebol was
required to produce consolidated financial statement covering the whole
companies comprising Chaebol Group by June 2000.
disclosure standards was strengthened;
- The minimum
representation requirement for class action suits was reduced to 0.01% from 1%
of outstanding shares.
- All listed
companies are required to appoint outside directors.
were ordered by law to create a formal committee for the selection of
- The de facto director system
and a cumulative voting system was introduced.
- Institutional investors were
urged to exercise their voting rights to monitor management practices and
Since these measures were tantamount to breaking up of
Chaebol, the founding fathers of Chaebols were greatly discouraged. The
internationally well known Daiwoo Chaebol have been virtually broken up and its
founder Kim Woo Joong, an idol in Korea’s younger generation, is now in a self
imposed exile somewhere in Europe. Recently I have been to Greece and Turkey
where I found an irony that a compact car called Matiz produced by Daewoo was
so popular that buyers had to wait for months for the delivery of cars. At
present Daewoo is negotiating with American auto giants such as General Motors
and Ford for a joint venture.
Recently mass media highlighted what appears to be a family
feud between sons of Mr. Chung Ju Yong regarding division of the ownership and
the control of the companies under the Hyundai Group. As you know Mr. Chung Ju
Yong is a businessman renowned both at home and abroad. He is indeed a legendary
figure in Korean society who has built up the Hyundai Empire as it is today by
his prodigy of entrepreneurship. He had been to North Korea several times
before the summit meeting between President D.J. Kim and the North Korean
leader Kim Jong-Il took place in last June. He met with Kim Jong-Il whenever he
visited Pyongyang to discuss ways and means of business cooperation with the
North Korean government. One result, among others, was opening up of a tourist
route by sea between Sokcho in the South and the famous Diamond Mountain in the
At the time of his first visit to the North last year, Mr.
Chung surprised the whole world by taking 1001 cows in a long column of trucks
crossing the border to the North to donate them to North Korean people. (How
the cows have been disposed of by the North is unknown) He said one cow
represented returning of the cow he stole when he as a young boy deserted home
in the Northern village to begin his career as a businessman and the remaining
1000 cows stood for the punitive compensation for his act of stealing.
Mr. Chung is now an octogenarian and seems to have lost his
vigor to govern his empire, which now seems to be in a disarray and even odd
with the main banks and the government with regard to the scope and method of
structural adjustment to clear up the financial mess of the conglomerate and
the unlawful involvement of Chung family members in the decision making for the
companies in question. Hyundai Motor Company is also seeking a foreign partner
(reportedly Chrysler and Renaul) with a view to secure its place in the world
market by uniting with one or two of the major auto makers in the world.
At any rate it is clear that Korea’s Chaebols have lost the
tide of the times and are currently confronting great challenges from the
reformist government as well as from the changing conditions in international
market. They are compelled to reshape themselves by breaking up the
conglomeration to give way to independent management of individual companies by
professional managers in stead of family members. At the same time they are
forced to reduce number of affiliated companies within the Group by divestiture
in the interest of normalizing financial conditions of the Group as a whole.
Policy makers are well aware that Chaebol is not synonymous
with a big business. They say that big business is welcome because it can be
powerful in terms of efficiency and competition in the international market.
But they are against concentration of businesses on fewer hands and the family
oriented dictatorial management that led to the inefficiency and the unsound
financial practices in the banking sector, contributing to the outbreak of
Korea: Today and Tomorrow
The apparent dragging of Hyundai in
responding to the government request added to the current public jitters over a
number of problems including: deceleration of growth rate, downward trend of
the current account surplus, higher oil prices, threat of inflation, credit
crunch for small business, labor dispute, and the unprecedented medical
doctors’ all out strike against the legislation separating the business of the
hospital from the business of pharmaceutical store. Moreover, people were
overly exited about the first summit meeting between President D. J. Kim and North
Korea’s leader Kim Jong-Il that brought about, as the first gesture of
reconciliation, an arrangement in which the reunion of separated families
between north and south took place last week.
may add that this new development of reconciliation with the North was
synchronized with the episodes of unfortunate affairs revealed by
papers, such as
the use of a defoliant and the alleged shooting of a group of
innocent civilians by the U.S. troop at the time of Korean War. This fanned the anti-American
sentiment in a small segment of the population- to the extent that it has
become a matter of concern to the government and the informed people.
In addition, there is much controversy over the way the IMF
responded to the Korean financial crisis and the way Korean government handled
businesses in the name of structural reform. Yet, I am inclined to say that
Korea by and large is moving in the right direction and has made a substantial
progress in the economic and political reform, not without cost, of course.
The overriding view in Korea today is that an overall
reform is needed not only in economic but also political and social life to
meet challenges from the age of information and globalization, and Korea has
come a long way in the needed structural adjustment to that end.
In particular, there is a growing awareness among Korean
leaders that Korea will be called to play a central role in the Northeast Asia
in the years ahead. As you know, Korea is situated in the epicenter of the Northeast
Asia, surrounded by Japan, China, and Russian Siberia. The geographical
conditions are ideal for Korea to become a transportation hub for Northeast
Asia linking the region to the rest of the world by sea, land, and air. For
instance Inchon Airport currently under construction commands a land area which
is about 7 times as large as Kansai Air Port in Japan and the aviation experts
say that it will make one of the largest airports in Asia in the years to come.
Vessels from major ports of the world will have to stop at Busan or Kunsan or
Inchon in Korea in her route to the Northeast Asian ports. Asian Highway
contemplated by ESCAP will certainly go through Korean peninsula.
Thus Korea’s policy makers are concerned with how to meet
the call of the time. Some argue plausibly that Korea must develop a city in
the west coast, something like Singapore or Hong Kong or make the whole country
completely open so that it truly becomes international hub for transportation,
commerce, and finance
Implication for Hawaii
my remark, I may make a few words about the implication of what I have said for
Hawaii. I recall that a high
ranking official of the U.S. State Department once said in a gathering that
Hawaii and Guam are closer geographically to Asia than to the U.S. main land,
therefore the United States belongs to the Asia Pacific countries. One thing is very clear that Hawaii is
linking the U.S. with the Northeast Asia in many ways-economically as well as
culturally. Even in political terms, Hawaii has been playing a strategic role
not only for the security of the United States but also for that of the
Northeast Asia as a whole. That is to say that the U.S. is destined to play a
counterbalancing role to maintain a balance of power among countries in the
region in the years ahead as well as in the past.
We sometimes forget how tremendous will be
the impact of economic development in the Northeast Asia on the rest of the
world. It is safe to say that China’s GDP will surpass that of the United
States before the middle of this century. Japan and Korea will continue its
economic growth regardless of their current stumbling. The rich natural
resources in Siberia, Mongolia, and North Korea will not remain ignored as long
as the neighboring economies continue to grow.
have no doubt that the impact of the economic growth in Northeast Asia will
have a strong impact on the state of Hawaii. I learned recently that more than
20% of passengers for Korean Air coming to Hawaii are from China and the number
has been steadily increasing from year to year. Can you imagine that how many
tourists out of 1.3 billion population will find their way to Hawaii as their
standard of living goes up as a result of economic growth and gradual
liberation of Chinese economy?
Moreover, there is no doubt that Japanese and Korean tourists coming to
Hawaii will be on a rising trend, if not without ebb and flow.
I came to Hawaii in every summer and winter in the last several years
for two reasons. Because I can enjoy here, more than anything else, the clean
air, blue sky and white clouds, vast ocean, and pleasant climate. The beautiful
natural environment in Hawaii is the most valuable resources bestowed upon
Hawaii for which demand will increase rapidly as countries in the Northeast
Asia becomes more industrialized, more crowded and more polluted. It behooves
Hawaii to figure out how to meet such demand.
I can also imagine that some business linking the east and the west in
Hawaii may have comparative advantage. For example the East-West Center is an
ideal venue to get American and Asian intellectuals together because Hawaii is
located between the two continents across the Pacific and every body wants to
come over this place for pleasure as well as work.
Exchange of education may be another area in which Hawaii could have a
comparative advantage. As globalization makes progress, the need for learning
foreign language will increase. Hawaii can provide a best venue for the
exchange of language educations as well as general education for a competitive
cost. Hawaii also can provide facilities for the exchange of information and
knowledge between the United States and Asia. Pushed to the extreme Hawaii may
become a knowledge society in which the east and west are well blended in terms
of knowledge, technology, and culture.
In conclusion I may say that although Korea is currently facing many
challenges, her economy will continue to grow and its on-going structural
adjustment will make the country better meet challenges of the age of information
and globalization. And Korea will be playing an increasingly important role in
the economic development in the Northeast Asia and the economic development in
the region as a whole will have a great salutary impact on the Hawaiian
Thank for your attention.