An  Address prepared for presentation before the meeting
held by the State Government of Hawaii,
August 28, 2000.

 I 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.

Overcoming Liquidity Crisis 

I 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.* 

  1. The growth rate of GDP that sagged down to –5.8 % in 1998 recovered to 9% in the following year of 1998.
  2. 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.
  3. 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
  4. 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%.
  5. The nation’s foreign exchange reserves increased from the meager $8.1 billion in 1997 to $40.5 billion at the end of 1998.
  6. 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. 
  7. 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. 
  8. 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.

Structural Reform in the Financial Sector

The 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: 

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Number of banks were reduced from 27 to 17 by closure and merger and man power was cut by 34 % to save operational cost.

Structural Reform in the Corporate Sector

  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 as follows:

  1. Enhancement of the managerial transparency.
  2. Elimination of Cross Guarantees for loans between corporations     under the umbrella of Chaebol.
  3. Reduction of debt-equity ratio
  4. Concentration of the managerial resources on the most competent line of industry for each Chaebol.
  5. Establishing accountability of major shareholders and management.

The programs implemented in pursuit of the above objectives include the following.

  1. 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
  2. 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.
  3. The mutual capitalization on paper between companies under the umbrella of the Chaebol was banned with a few exceptions.
  4. To establish disclosure and transparency,

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 North.

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 financial crisis.

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.  

I may add that this new development of reconciliation with the North was synchronized with the episodes of unfortunate affairs revealed by American news 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

Some Implication for Hawaii

 Before closing 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.

I 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 economy.

Thank for your attention.


* Statistical figures quoted in this paper are from the Bank of Korea.