Beyond the Current Predicaments in Korea

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 A text prepared for presentation
before the Korea-U.S. Economic Council,
January, 2002.

 

 

Current Predicament

Toward the end of the last year, the winning of Nobel Peace Prize by President D.J. Kim was an auspicious occasion for Korea, but unfortunately it was overshadowed by a number of social and economic difficulties as reported by the mass media.

The cyclical economic downturn was further aggravated by the speeding up of the structural reform in the banking and corporate sectors amid the criticism in the intellectual community that the reform had been dragging its feet due to the inept leadership of the government. Faced with credit squeeze and another round of mass unemployment resulting from the structural reform, the labor unions in the affected public corporations and private companies staged rampant strikes against one sided structural reform.

On the other hand, various interest groups including local autonomies took recourse to group actions including street demonstrations and strikes whenever their grievances are not met with favorable response from the government. One of the notable examples was a medical doctors strike that lasted four months, opposing the new legislation mandating division of business between medical hospitals and pharmaceutical shops.

In another front, many people felt uneasy and critical about President D.J. Kims appeasement approach (referred to as Sun Shine Policy) to the North Korea following the summit meeting with Northern leader Kim Jong-Il in June last year.

In spite of these tumultuous confusions, the party politics offered no help to ameliorate the situation. On the contrary, people were fed up with the ceaseless fighting between the ruling and opposition party, not as much over the policy issues as over their own household matters. Hence party politics were denounced as offering a stumbling block instead of clearing the way for the structural reform, economic recovery and social stability. Some critics went as far as to say that general public lost almost completely confidence in parliamentary democracy. All in all, mass media termed these situations as total crisis and condemned the president for failing to act.

I have no intention to lighten those negative aspects of Korean society as they are today. Yet, I am of the feeling that the current negativism tends to shadow some of the long term trends in positive direction and overlook some salutary changes that have been taking place since the middle of the last decade in response to the three sets of formidable challenges, namely, information revolution, globalization, and democratization, which came together at the same time. The current social and economic predicaments in Korea may be viewed as an agony and pain of transition in the course of meeting these challenges. The pain, however, has been accompanied by some positive results. Let me illustrate what they are and what they will be.

Information Revolution

In the area of the information revolution, Koreas speed of adaptation is attracting international attention. The IT industry is currently growing at an annual rate of more than 40%, leading Koreas exports and economic growth. Korea ranks first in the world in the production of semiconductors, the seventh in the production of computers and other communication gadgets.

TIME magazine recently (December 11, 2000) reported that 34% of population in Korea are using internet, compared with 18% in Taiwan, 14% in Japan, 0.7% in China. The population using broadband internet is estimated at 3 million in Korea, compared with 45 hundred thousands in Japan and 6 million in the United States. The report concluded that Korea on the whole ranks first in the world in using internet and cellular phones.

To be sure, the information revolution has brought about diverse social problems to cope with as well as benefit of the public, yet there is no doubt that Korea is moving fast toward the information oriented society. Recently mass media reported a couple of financial scandals committed by venture companies in the IT industry, but it remains true that a host of small venture companies are mainly responsible for the rapid growth of IT industry in Korea.

Globalization

Turning to the area of globalization, currently, Koreas commodity and service market are wide open for foreign competition. Contrary to the expectation that market opening would lead to upsurge of deficit in the current account of the balance of payments, Korea has been able to accumulate current account surplus since 1998 amounting to $79.5 billion, which accounts for most part of foreign exchange reserves estimated at nearly $100 billion at the end of 2000.  In terms of size of foreign exchange reserves, Korea now ranks fifth in the world after Japan, China, Taiwan and Hong Kong.

What is most note worthy is the result of the structural reform in the financial sector since the onset of the IMF regime toward the end of 1997. Up to the present, 10 commercial banks, 13 securities firms and investment trust companies, 21 merchant banks, and 78 mutual saving and finance companies have been closed down by the decree of the Banking Supervisory Agency for the unsound and failing management.

On the other hand, foreign investors currently account for about 30 % of the total value of the stocks listed in the Seoul Stock Exchange; the foreign equity ownership in the major commercial banks now ranges between 23% and 63% of the total capital, with some investors directly participating or controlling management of the banks. The banks, in which a single largest share older is a foreigner, currently account for more than 40 % of the total deposits in the banking system as a whole.

The non-bank financial institutions, particularly security and insurance companies, show similar situation in terms of foreign participation. The direct investment totaled $33.7 billion up to August last year through which foreigners took over the partial or total ownership and management of the Korean companies. Moreover almost all public corporations are now on sale to foreign as well as domestic investors.

Such being the case, the foreign capital has become to play a major role in the financial industry in Korea so much so that any withdrawal of sizable capital from Korea will have debilitating effect on the Korean economy. There are naturally some voice of anxiety and opposition to this situation, yet there is a growing awareness in intellectual community that without foreign participation in the management, Koreas financial sector will never be able to get out of the outmoded banking practices and irregularities.

As expected, some salutary effects of globalization are to be seen both in financial and corporate sectors, which include:

  1. The targets of raising the BIS ratio for the bank to higher than 8% and reducing the equity-debt ratio for the corporate to lower than 200% have generally been met with a few exception. 
  2. The Board of Directors came back to its own, exercising its right to make major managerial decision and supervise and evaluate executive performance.
  3. The corporate priority is shifting from the expansion of business volume to the  profit oriented management, downsizing number of business units within the group with a view to specialize in a few competitive businesses.
  4. Transparency is a key word in every managerial unit, trying to follow global standard in accounting, auditing, and disclosure of financial statement .
  5. A growing number of companies is now adopting a new personnel and pay system based on performance rather than seniority.
  6. The financial institutions are now better equipped with American techniques of credit rating, portfolio and risk management in their operations.
  7. Chaebols are reshaping themselves into a modern type of business group in compliance with the regulations of the government, which prohibits, among others, cross guarantees, cross capitalization, and closed dealings, respectively, among member companies of chaebol and makes it mandatory to nominate outside (non-stock owner) directors in addition to shareholder directors in the Board.
  8. Competition has gained force not only in the market but also in the public organizations such as universities with the result that price and quality of goods and services are generally getting better and quality of higher education has markedly improved.
  9. These changes are in no way complete and still leave much to be desired. Yet, there is no doubt that Korea is moving in the right direction for the better. 

      Democratization

 It the area of democratization the pace of change is rather slow but not without some progress. For example, we dont see any longer the managerial dictatorship of the founding fathers of chaebols without legal responsibility, and the vertical order of decision making is now giving way to the horizontal net work oriented decision making.

The adamant and unlawful conduct of labor unions are considered to be one of the major obstacle in the way of structural reform, but their attitude is also changing. They are now more mindful of public opinion urging to understand economic reality and respect laws, as evidenced by the recent breaking off of all-out strikes at the persuasion of the government. They finally accepted in principle mass dismissal of workers needed for structural reform in the public corporations producing public utilities such as services of subway, rail road, and electricity.

Following introduction of the system of local autonomy in 1995, the egoism of the local entities have emerged as a new problem, denounced by outsiders as well as the central government. Peoples in a local district, for example, are strongly opposed to their territory being selected by the central government as a site for power generation or garbage disposal facilities. Yet, this sort of situation may not be confined to democratizing countries, but also is found in advanced democracies. What is needed here is closer coordination between the central and local governments on the matter of environmental protection and compensation.

The most disappointing situation in democratization is found in the party politics as alluded earlier. But the working of democracy, inadequate as it were, may not tolerate the known political evils forever. There have been severe confrontation in the last few years between the ruling and opposition party over such issues as transparency in political fund management; political independence of the Public Prosecutors Office in dealing with cases involving politicians of different parties; the change in party membership after the election; passage of bills by force in the National Assembly, etc. Yet it is highly likely that these irregularities will disappear before long by virtue of the enhanced political maturity of the voters, combined with corrective movement of the NGOs plus younger generation in the National Assembly.

Back to Principles

Having reviewed both negative and positive aspects of Korean society as they are today, I may point to some known principles that we should keep in mind even more in tiding over the current predicaments as implied in the foregoing observations.  

  1. Korea must carry out structural reform to the end in the four sectors : financial, corporate. Government, and labor, without compromise with political expediency. One can argue that the price so far paid for the reform was unnecessarily high due to shortcomings in the government approaches to the reform . Yet, one can also argue that the price so far paid may be less than the price to be paid if the structural reform were evaded on the pretext of the economic and social difficulties involved.
  2. Korean people have the traditional notion that any problem under the heaven must come under the attention of the government for immediate action. But in the age of globalization and open economy, the scope of the valid intervention of the government is rather limited. Pressuring the government to interfere with every problem would merely lead to authoritarian rule and spawn of regulations distorting working of market and rational human behavior. What is needed for Korea now is not reverting to government control but greater degree of self-help and self-regulation by the private sector itself in order to secure greater degree of freedom in the economic and social activities.
  3. There is no other way but dialogue and compromise in resolving issues on the basis of self-regulation. In order for this to be effective, one must respect logical reasoning, and show the wisdom to take heed to not only his own interest but also that of all others, and once in a while give up a short term gain for a long term benefit. After all, democracy is a tedious and pains taking process. But we are reminded of Winston Churchill who said, as I recall, that  Every precious thing commands high price; freedom is precious thing, therefore, demands high price; the price is patience and tolerance 
  4. The primal economic duty of the government is to establish the rule of game for the market participants and enforce it without compromise. If the law and regulations are compromised for political expediency there would be neither justice nor order.
  5. Finally, political leadership must place national target before his personal target. The leadership does not come from rhetoric but from his ability to define problem, invent a system to solve it, and marshal energy of each organization within the system toward the policy target.

Conclusion

The current economic and social difficulties are passing phenomenon. In a longer term perspective, it is safe to say that Korea is moving in the right direction, achieving significant changes for the better in the areas of information revolution, globalization and democratization, although there remain much to be desired. Given the past experience in which Korea rose from one of the poorest nation in the world thirty years ago to the 13th largest nation in the world today in term of the size of GDP, there is no need to fear the current challenges. I am tempted to quote the famous saying of the U.S. President, Franklin D. Roosevelt at the time of the great depression in 1930s: what is to fear is fear itself- as in Korea today.

Thank you for your attention.