IMF Restructuring and the Crisis of the Korean Economy
(Apr. 2000)
1. The political economy of IMF restructuring
The crisis of the Korean economy, which presented itself in the form of a
financial crisis, led to a record low -5.8% GDP growth rate and a serious
crisis of the real economy. (If one recalls that, with the exception of a
slight negative growth rate in 1980, the Korean economy had averaged a growth
rate of about 8%, it can be understood that 1997 was a crisis that had never
been experienced before) However, the economy has quickly recovered, with a
GDP growth rate of 7.3% in the first half of 1999. A 10% growth of the
economy is expected for the year. The recovery is shown not only by the
increase in growth rate, but also by the decreasing unemployment rate. (The
official unemployment rate for the 4th quarter of 97 was 2.6%, it peaked in
Feb 99 at 8.6% and has since decreased to 4.4% in Nov 99) More importantly,
the enormous trade deficit, which was the main cause for the financial
crisis, has turned into a trade surplus(41.6 billion in 98, 23.6 billion in
99 through Nov.). The fact that the emergency loan from the IMF has been paid
back earlier than expected, and that the foreign reserve has increased from
8.87 billion in late 97 to 74 billion in late 99 also indicate that the
crisis has been overcome.
This escape from the crisis has been achieved through the re-structuring
program/policy which has been forced on by the IMF in exchange for its rescue
pact. On the basis of the recovery, the Korean government has asserted that
the righteousness of the program has been proven and has also announced plans
to continue structural reforms based on this program. Overseas, the Korean
economy's program has been evaluated as an exemplary model of recovery from
financial trouble, and President Kim Dae-Jung is earning fame as the 'reform
President' and the President who overcame the financial crisis. On the other
hand, however, the IMF program and the recovery from the crisis came at a
heavy price. This includes burdening the general public with the costs of the
recovery, increase of the national debt, lay-offs, unstable unemployment, the
deteriorating distribution of wealth, increasing control of the economy by
the 4 chaebol and trans-national capital. In other words, the economic
recovery in Korea has come at an unequal cost to different classes, and the
products of the recovery has also been unevenly distributed.
The chaebol, high ranking government officials, and the upper class, who were
the most at fault for the crisis, were comparatively free from the burdens of
the crisis, while the workers, wage-earners, and the general public took up
the burden; the exact opposite was true as to who reaped the benefits of the
recovery. As a result, contrary to early expectations, resentment and
distrust against this policy from the general public has grown and this is
shown in the dwindling support for the present government(a recent poll
showed a 31% support rate for the president, and a 21% support rate for the
ruling party). Unable to evade this situation, the government has partly
changed its policy, including the implementation of the so called welfare for
work policy, to quell resentment against the government.
The contradiction between the reform President, the President who overcame
the crisis and the President whose support is dropping; the contradiction
between the exemplary model of recovery and the public's resentment against
this policy: these contradictions are a direct result of the neo-liberal IMF
restructuring program and the 2 sides of the contradiction cannot be dealt
with separately. The IMF's neo-liberal policies finds the reason behind the
crisis in the damage of the market system by the government's bureaucratic
control and presents de-regulation and the strengthening of market principles
as the direction for reform. According to this program, (which can be
summarized as re-structuring in accordance to market principles internally
and liberalization, opening of markets externally) strengthening market
principles will be followed by increased competitiveness, which will increase
efficiency and lead to the welfare for all at the national and international
level. However, in reality market competition is, in all respects,
competition under the control of monopolistic capital, competition on unequal
terms between the capitalist class and the wage earning class, and
competition between developed monopolistic capital and under-developed
capital internationally. Therefore, this competition is inevitably
accompanied by subordination, it instigates the unlimited competition between
the weak and the strong, and rationalizes the inequalities between capital,
class, and nationalities which arise from it. Not only this, under the
conditions of modern capitalism, the intervention by the state in the market
is essential, and the demands for de-regulation, de-control, and a market
economy is in reality, an ideology which covertly but forcefully hides state
intervention favoring the socially powerful. In this way, neo-liberal
policies during the recovery in Korea took the direction of increasing the
competitiveness of the socially strong while burdening the socially weak with
the costs of the recovery under strong intervention by the government.
As a result, Korea was able to recover from the crisis by strengthening the
socially strong. Of course, minor support for the losers of market
competition is politically necessary. However, such support can slow down the
trend of inequality between class, capital, and states, but it cannot reverse
the trend itself. The welfare to work system, as long as it has the IMF's
policies as its basis, can only be an effort to slow the trend toward
inequality between the classes, and has many limits as a social welfare
policy.
The IMF's programs seeks the neo-liberal reformation of the Korean economy,
and because of the subordinate position of the Korean economy in relation to
developed economies, the neo-liberal liberalization and opening up of markets
greatly increased the dependency of the Korean economy. Because of the Korean
economy's export based development strategy, the dependency on foreign
markets and the proportion of the foreign sector in Korea is already very
high; to the extent that it can be said that the stopping of globalization
and transition toward a more self-reliant economy should be the goal of the
Korean economy, not globalization (the ratio of Imports and exports against
the GDP reaches 60%-80% at times. In 95, it was 57% for Korea, much higher
than that of Japan at 15%, U.S. at 18% and European countries at around 40%).
But the IMF's programs have consolidated the re-structuring process with the
entrance of trans-national capital through the partial opening up of the
goods market, and the total opening up of the capital and finance market.
This has taken away the Korean government's ability to intervene in the
competition between national capital and in cases of crisis at the world
economy level. This globalization program has been in the interests of the
powerful. Above all, trans-national capital's control of Korean capital and
labor has increased to unprecedented levels, and while the globalization
process may have presented new opportunities to the chaebol, it has
threatened the livelihood of the socially weak. For Korean capital as a
whole, reliance on foreign capital and instability has increased, and Korea's
ability to resist new crisis of the economy has been stripped.
The reason the general public feels resentful of the 'recovery' and 'reform'
that the government advertises is because in this 'reform' they see a return
to the old order and the possibility of a new crisis behind the 'recovery.'
They don't see any true reform or recovery from the crisis. The reform the
government advertises has been a neo-liberal, conservative reform, in the
interest of the socially powerful, and the crisis has not been truly
overcome; the Korean economy remains vulnerable to a new crisis.
2. The effects of the Re-structuring Program on the Korean Economy
1) Recovery from the financial crisis at the cost of growth and employment
The crisis of the Korean Economy, which exploded in the form of a financial
crisis, turned into a crisis of the real economy as the IMF's high
interest/tight money policy was accepted. Through high interests and the
tight money policy corporate activity was oppressed and many corporations
were liquidated. This resulted in stagnation of the economy, decrease of
imports/spending and a improvement of the trade balance. On the other hand,
this policy also resulted in the improvement of the capital balance because
the high interest rate attracted foreign capital. As a result, the financial
crisis was overcome, but it came at the cost of growth and many jobs. The
trade balance profit for 98 was at an all time high of 40.5 billion dollars.
However, as can be seen by the fact that export levels have gone down from 97
and that imports have also decreased by 50 billion dollars, the improvement
of the trade balance was achieved not through increased exports(despite
favorable interest rates), but through stagnation, the high exchange rate,
and the resulting decrease of imports. Along with the trade profit, foreign
investment also increased to 8.8 billion dollars in 98 and up to 15.5 billion
in 99. Also, the foreign reserve has, by December 99, been increased to 74.05
billion dollars. These figures indicate that the short-term foreign debt
structure, which was a direct cause of the IMF crisis has been improved and
has enabled Korea to recover from the crisis, for now. However, as economic
growth resumes, the return to a trade deficit is inevitable, and there is
concern that this again will trigger the crisis mechanism in the near future.
2) State shifts the costs of re-structuring to the general public
The weakness of the Korean economy which led to the IMF crisis has been
attributed to the corporate debt which totals about 100 trillion won. This
debt makes up the insolvent loans which pressure the management of banks. If
a policy following market principles were put in place, not only these
corporations and banks, but all corporations and banks dependent on and
related to these corporations and banks would go bankrupt in succession and
bring on a complete collapse of the Korean economy. This is why the 'market
principle' was heavily advertised, the policy could not be enforced at face
value. However, if these corporations and banks were to be liquidated or
absorbed by strong companies/banks through the restructuring process, the 100
trillion dollar debt had to be solved, not according to the market, but by
Korean society as a whole. The Koran government absorbed this debt through
public funds by issuing bonds. 6 billion won were used(as of Nov. 99) just in
the re-structuring of the financial sector and several billion more will be
needed in the re-structuring process of the investment companies. As a
result, government liabilities total 11.2 billion won and if the government's
suretyship obligations are added, national liabilities total 20.2 billion
won, which is 40.8% of the GDP: up drastically from 17.3% in 1997. This
national debt and the red figures in finance have to be made up by taxes over
many years, and when taken into consideration that Korea's tax structure is
mainly made up of indirect taxes, this means that the costs of restructuring
will be paid for by the workers/people. In this way, insolvent enterprises
and banks have not been cleared away through re-structuring but rather their
debt converted into the weakness of national finance. On the other hand, the
government has not taken responsibility for the loss of jobs during the
re-structuring process and has left the unemployed to stand for themselves,
spending a minimum (10 trillion in 98, 9 trillion in 99) for the social
safety net.
3) Strengthening of the chaebol structure
The government has sought to liquidate weak corporations and to work-out
corporations that could be revived according to the 5 principles of corporate
re-structuring(transparency of management, mutual payment guarantee,
improvement of the financial structure, selection of key enterprises and the
strengthening of cooperative relations with small/middle size corporations,
and strengthening the responsibility of major stockholders and management).
The government has also driven forward plans for 'big-deals': the exchange of
enterprises for the concentration on main enterprises by the 5 chaebol(4
after the fall of Daewoo). The government's restructuring of the
corporations, much in the same way as in the re-structuring process of the
financial sector, has come under strong state intervention and against market
principles. In other words, both in the re-structuring process of the
financial sector and the corporate sector, social fiscal support for the
revival of corporations and the liquidation of weak corporations was needed
and the cost was burdened by the workers and the citizens.
Corporate restructuring talked of dismantling the chaebol, and despite many
measures to do so in accordance with the 5 principles, the ownership
structure of the chaebol was basically untouched and as a result, what
transpired was the transition to a more rational chaebol structure paid for
by the general public. This was made clear during the big-deal process, when
monopolization of markets were heightened: against the promotion of market
principles and competition increasing the efficiency of corporations and the
economy. Also, the big-deal process also meant that debts and the
overproduction structure would also be big-dealt, not liquidated. The
big-deal was not a solution from the start and this became evident as the
Samsung Motors and Daewoo Motors crisis came. What was clear that huge
government support was needed for the big-deals. This can be seen through the
statutory approval of holding companies. The control by ownership will become
more modernized through the holding companies. As a result, the 4 chaebol
strengthened their control over the market despite the attempts at reform by
the government.
4) Increased control of trans-national capital
Through the agreements with the IMF(abolition of the limit on investment by
foreigners, opening up of the financial market, more liberalization,
promotion of foreign investment, etc) the road was opened up for the
re-structuring policy to be combined with the increased control of
trans-national capital. The control of trans-national capital has increased
drastically in the financial market; to the degree that it would not be an
exaggeration to say that this sector is already under the control of
trans-national capital. Not only this, but as can be seen in the case of the
First Bank of Korea, weak banks were revitalized(the several trillion won
being burdened by the people) and then sold to foreign capital at bargain
prices(600 billion won). Put in another way, this has meant that favors are
being done for foreign capital at the expense of the general public of Korea.
In this way, because of liberalization and opening up of markets in Korea,
control over the economy by trans-national capital has increased to
unprecedented heights and if the planned privatization of the public sector
goes through, key national industries will also be controlled by
trans-national capital. This is a serious problem from the public services
perspective also. Along with giving up the key industries of the country, the
Korean government is also planning to give up the cheap, high quality public
services it provides for the people of Korea and leave it for the profit
principles of the market. Also, the movements of speculative capital in the
Korean stock market have a major effect on it, and this increases the
instability of the Korean economy and can act to amplify an economic crisis
in the case of a new one.
The Korean government, however, under the understanding that foreign capital
is no different as long as it helps employment figures and economic growth,
is going beyond the liberalization policy accepted from the IMF and is
actively attempting to find a way for the expansion of the chaebol through
the opening up of markets. The Korean government, with plans to finalize the
Korea-U.S. bi-lateral investment treaty by the end of 98, had voluntarily
proposed talks/negotiations with the U.S. and is attempting to conclude the
Korea-Japan bi-lateral investment treaty. The government is envisioning going
further and plans to advance into the Japan/U.S. centered world market by
establishing a Korea-Japan, Korea-U.S. free trade area. In the case these
liberalization treaties are concluded, the Korean government's control over
international and national policies will be stripped and the Korean capital's
ability to control foreign capital(the support of Korean capital and the
regulation of foreign capital), as well as ways to protect
workers(employment, wages, workplace standards, basic rights of trade unions)
will cease to exist. According to the U.S. bi-lateral investment treaty,
which was the basis for the U.S.-Korea bi-lateral investment treaty, all
investment will be liberalized(including the portfolio investment which
wreaked havoc during the past crisis). All sorts of safeguard regulations
which impede foreign investment will be outlawed(such as the screen quarter
or the obligatory use of domestic tobacco) and the destructive affects of
such measures are beyond imagination.
3. World-wide structural crisis and the Korean economy in crisis
The above programs of the IMF make it impossible for a true recovery for the
Korean economy and has rendered recovery contradictory and unequal. The
problem in relation to the Korean economy's recovery is not the short-term
cycle but the structural crisis. This is because the financial crisis in
Korea was not a short-term cycle crisis but a structural crisis. The recovery
of the Korean economy is not surprising since short-term cycles occur within
the structural crisis as well. The problem is just what kind of process the
recovery comes from and if this process and recovery can pave the path for a
new growth. It is very hard give an optimistic answer to this question. Not
just because the government recovery program has yet to run its course, but
because if the program is completed the Korean economy will lose all
self-reliance and be fully exposed habitual danger. Even if new growth is
reached, it will be the sort of growth that is habitually connected to the
crisis mechanism, as seen in the South American growth model.
The reason it is so hard to speculate on the prospects of the Korean economy
is because, as it has been in the past, the economy is highly dependent on
foreign markets and the world economy has a major effect on its prospects.
This is to say that what will make or break the Korean economy's future is
whether the Korean chaebol, through the government's re-structuring program,
can successfully adjust to the world economy's re-structuring process and the
division of labor process. The world economy has been mired in a systematic
depression since 1980 and seems unable to overcome it. As speculative capital
roams the world at an unprecedented rate, the crisis has been spreading, as
seen in the fall of East Asia's economies, and only the boom of the American
economy is holding up the world economy. However, after the 1991 depression,
the American economy is in the last step before a new cycle and a depression
seems hard to avoid. The Dow Jones mark, over 11000, is the most significant
sign of an upcoming depression. Not only the stock market, but other signs of
depression have already appeared. For example, despite Japanese stagnation of
the inner market, Japanese merchandise have remained competitive in the world
market and this resulted in a 120 billion dollar profit in trade. On the
other hand, the U.S. suffered from a 233 billion dollar trade deficit. As a
result, the dollar should have weakened in relation to the Japanese Yen.
However, based on relatively high interest rates, a booming economy and
prospects for the boom to continue, the U.S. has succeeded in continuously
attracting capital, and along with the bubble of the stock market, is
maintaining the strong dollar. Such unbalance, the bubble of the stock
market, and the strong dollar are conditions for a new depression. With the
depression, the crash of the stock market, the weakening of the dollar, the
unbalance of the world economy will be correct itself. At that time,
America's liberalists, who have asserted that the IMF's neo-liberalism and
American neo-liberalism are the only alternative for the world on the basis
of European and Japanese stagnation, will lose their voice. Of course, no one
can predict exactly at what time and in what part the depression will start.
But it seems certain that the cycle started in 1991/93 is heading toward a
disastrous end. The escape route for the world economy in the 21st century
not being clear, it is hard to project optimistically on the Korean economy,
which has bet everything on the future of the world economy.
By Kim Sung-Goo(professor of economics at Han-Shin University, Korea)
* This paper was initially posted on the PICIS Newsletter, Apr. 2000.
