Far Eastern Econ Review
Koreans grow impatient with the pace of reforms
By Charles S. Lee in Seoul
May 21, 1998
I t was a familiar message. On May 10, appearing on a nationally
televised "town-hall meeting" for the second time in four months,
President Kim Dae Jung once again lectured the audience on the need
for sacrifice and unity to overcome South Korea's economic crisis.
"We have to accept pain this year," he said. "If we don't, we'll suffer
for 10 years; but if we do, things will get better next year."
Most of Kim's countrymen applaud him for his frankness and for
pushing sweeping economic reforms. But with his presidency almost
three months old, there is growing impatience for action rather than
words. Worse, some jittery foreign investors and Kim's political
opponents say his administration has yet to put together an economic
master plan with substance.
Indeed, confidence is draining from the financial markets. The won
recently tumbled to around 1,700 to the dollar on offshore forward
markets, much weaker than the spot rate of about 1,400. The local
stockmarket has given up all the gains it had made since the beginning
of the year. "People are disappointed," says Dan Harwood,
Northeast-Asia director at ABN Amro Asia in Seoul. "Foreign
investors are voting with their feet."
President Kim is struggling against daunting odds. Even as the
economy slips deeper into recession, South Koreans of all stripes are
digging in. The biggest headache comes from labour activists, who
have rejected Kim's plea for dialogue and seem determined on an
all-out confrontation with the authorities over lay-offs.
On May Day, the country was rattled by a demonstration of militant
unionists and radical students that ended in violence. Riot police
battled for hours in downtown Seoul with some 22,000
stone-throwing and pipe-wielding former pro-democracy comrades of
Kim.
Taming the country's giant family-owned business groups, or
chaebols, isn't proving any easier. Kim has been exerting pressure on
the chaebols to restructure, not the least of it to show angry workers
that the burden of reform will be shouldered equally. Finally fed up
with foot-dragging, Kim ordered five of the largest groups--Hyundai,
Samsung, Daewoo, LG and SK--to put forward convincing
restructuring plans before his May 10 TV appearance. These were
dutifully handed in, but failed to impress. Many analysts dismissed
them as reworked versions of earlier plans that continued to lack
details.
Meanwhile, Kim has been forced to walk a tightrope in the National
Assembly to maintain the delicate alliance between his liberal National
Congress for New Politics and a small conservative partner, the
United Liberal Democrats, in the face of a massive opposition. The
coalition is holding, but the opposition Grand National Party has
ignored Kim's plea for cooperation in the first year of his
administration. In response, the ruling coalition recently began to court
fence-sitting GNP members in a bid to secure a parliamentary
majority.
But as urgent reforms show little progress, a growing chorus of
critics is also second-guessing the president's own resolve. The
kindest fault Kim for failing to better coordinate his own fractious
ministries; others accuse him of putting politics before economics.
"The government hasn't produced any results yet," says a South
Korean economist at a Western investment firm. "The extent of
restructuring needs in Korea is frighteningly large, but we're
squandering quite a bit of time in executing them."
For instance, even as the administration preaches the gospel of
restructuring to corporate executives, it's telling them to postpone or
limit lay-offs. The reason: The government is clearly worried about a
public backlash stemming from the country's exploding
unemployment. The number of jobless at the end of March passed 1.4
million, or 6.5% of the workforce. During his TV appearance, Kim
reiterated his earlier call for companies to first pursue wage cuts and
job sharing before resorting to lay-offs.
In the same vein, the government is turning a blind eye on banks'
continued practice of making "cooperative loans" to their ailing
corporate clients. Most recently, creditor banks of the Dong Ah
group, the country's 10th-largest chaebol, agreed on May 8 to extend
to the company more emergency funding to the tune of 30 billion won
($21 million). It was the third bailout loan this year for the troubled
construction giant, bringing the total so far to 390 billion won.
Dong Ah's creditors said the money amounted to a bridge loan to keep
the company afloat while it finalized negotiations on a $500 million
loan from Credit Suisse First Boston. But many analysts suspect the
government encouraged the banks to intervene in order to prevent
Dong Ah's collapse, which would have led to more unemployment.
From Kim's perspective, there may be a compelling reason to hold off
on the most painful reforms: The June 4 provincial elections. With no
other nationwide balloting scheduled until 2000, the administration
may feel that it is crucial to pull off a decisive win now to secure a
national mandate for reform. But if the public links the government's
populist election strategy with business as usual or weak leadership,
the strategy could backfire.
The opposition is doing its best to fan such doubts. At a recent
parliamentary session, opposition members heaped abuse on the new
cabinet, which they say is incompetent. Blasting the government probe
to determine responsibility for last year's currency crisis, one
opposition assemblyman derisively compared the Kim administration
to a fire department more obsessed with finding the arsonist even
before it has extinguished the flames.
For their part, Kim and his officials counter that critics are
overlooking what has already been done. From the suspension of
insolvent merchant banks to increasing support for the jobless,
numerous reforms have been made, they say. The Kim administration
has also laid the regulatory framework for reforming the chaebols,
forcing them to reduce their debt, abandon cross-subsidiary loan
guarantees and face stiffer foreign competition at home. Also, Kim
unveiled a three-year economic-recovery plan during the televised
meeting.
Drafted by the prestigious state-funded think-tank, the Korea
Development Institute, the plan designates 1998 as a "year of
restructuring," to be followed by "a year of IMF graduation" and the
"year of a new take-off." KDI targets the quick restructuring of the
nearly bankrupt financial sector as key to the Korean economy's
structural adjustment, urging the government to mobilize 67 trillion
won over the next five years to buy back bad loans, fund a
deposit-insurance programme and recapitalize banks.
Yet Kim said nothing about how to raise such a huge sum. And
perhaps it was only an inauspicious coincidence, but on the day of his
TV appearance, Moody's lowered its ratings on 19 Korean commercial
banks. "Significant doubts remain over the feasibility of restructuring
the banking system," the rating agency said.
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