Post-Crisis Agenda for Korea and Global Civil Society
LEE Chan Keun
I must deliver my deepest thanks first of all to CCA, WCC and WARC for giving me a chance to present some of my ideas related with the latest currency and financial crises in East Asia. As we all know well, international debate has been going on quite intensively regarding the causes and remedies of the crises. Three main lines of argument have been put forth. First, the "internal limitations view" highlights the fundamental weaknesses of the national development model of East Asian economies as the cause of the crises. Second, the "external conditions view" points to massive, unpredictable movements of international speculative capital as the cause of repeated currency crises throughout the world, beginning in the 1980's. Third, the "anti-IMF view" stresses the overly harsh reaction of the International Monetary Fund (IMF) as serving to exacerbate the situation, when a different approach might have resolved the problem in a relatively short period of time. Instead of reviewing the spectrum of views analytically, in this short presentation, I will try to derive several important implications of the crisis to East Asian economies with specific focus on Korea.
1. Is IMF Program Successful in Korea?
Among the crisis-stricken countries, Korea is more or less regarded by the outside world as the case of the successful recovery. There is no doubt that its macro-economy performed very impressively over the year 1999: foreign exchange reserve reached $74 billion; current account surplus recorded more than $20 billion; GDP growth rate rebounded up to 10%; inflation rate was suppressed below 1 percent; stock market resumed booming rally; sovereign credit rating recovered the above - investment grade, etc.
Then, can we say that IMF has done a great job in Korea by implementing its dogmatic turn-around program? Even with such a broad range of positive signs, I must admit that its still too early to judge Whether IMF program has been successful in Korea or not. There are couple of important reasons.
Apparently, the turn-around of Korean Economy over 1999 doesnt seem to be achieved by the fundamental improvement of its competitiveness. Transient favorable external conditions emerged to the benefit of Korea. For example, foreign exchange rates realignment, that is, Japanese yen deeply strengthened while Korean won steeply depreciated relative to US dollar, is helping Korean products to regain price competitiveness. And Koreas staple export item, semiconductor, of which the price fluctuation is very severe, is currently enjoying the booming cycle in the international market. At the same time, it is highly likely that the current rebound of Korean economy took place partly as a natural adjustment from the drastic plunge of 1998.
More importantly, there exists indication that Korea comes to have triple structural diseases that will definitely take long to be cured. They are (1) snowballing debt burden, (2) rampant government deficit, and (3) significant subordination of Korean industry to foreign capital. Lets see the structure of each disease.
According to the official statistics, Koreas total foreign debt amounts to almost $150 billion. It is not insignificant. However, it does not include the important part of Korea external debt burden. For example, Daewoo Group which recently announced near-bankruptcy at the peak of globalization has built up around 600 overseas business entities over the past 20 years and all of those overseas entities are as highly leveraged as their domestic mother companies. But their debt burdens are excluded in the compilation of Koreas debt burden due to the reason that they are affiliated overseas in accordance with the law of the host country. Will the mother company not be claimed by the borrowers in case the overseas affiliate does not be able to service its debt? If not, we must admit that Koreas total external debt burdens are seriously underestimated.
Then how big is the Koreas external debt burden? We dont know exactly. Since Korean companies and financial institutions are not required to report the magnitude of their debt incurred overseas for overseas operations to the monetary authorities, we dont have the all-inclusive figure at hand. Lets assume as an exercise that so-called local financing is around $100 billion. Then, Koreas total debt burden will amount to $250 billion. With average annual interest rate of 10%, total annual interest payment will be $25 billion. Will Korea be able to serve annual interest payment safely with its trade surplus? Wouldnt such a high level of trade surplus engender backlashes from deficit countries? In this respect, we cannot rule out the possibility that Korea will be required to draw additional foreign debt only to serve its interest payment. As a result, snow-balling of external debt burden will follow.
The same story applies to the Koreas budget deficit. In order to implement IMF-dictated corporate and financial restructuring, massive amount of government money is pulled out, automatically ending up with rampant government deficits. If the size of inevitable deficit is Won 200 trillion with the annual interest rate of 10%, Korean government will need to spend roughly 25% of its annual budget only to serve its interest charges. Will it be sustainable?
What kind of solution alternatives are open to Korea to resolve the severity of the debt problems? There are not many. Korean government sees it unavoidable to sell off as much as possible Korean companies and financial institutions to foreign capital. Dont we need to be concerned about the subordination of Korean economy to foreign capital. Of course, in this age of globalization, Korea cannot prevent foreign capital from acquiring its local companies. If Korea is allowed to acquire US companies freely, it must open its manufacturing and agriculture (M&A) market to US capital. But does it imply that Korea doesnt need to be concerned about the fire sale of its strategically important companies? Lets take an example of Daewoo Motor Company. What will happen to Korea if it is sold out to General Motors (GM)? Will GM regard Daewoo Motors Buchon factory as importantly as its Detroit factory? When it faces the restructuring pressures from the market, what will happen to Buchon factorys over 15,000 employees and those of numerous parts & components sub-contractors?
2. Why Should IMF be Criticized?
IMF needs to be penalized for its many mistakes for a number of reasons.
First, IMF revealed lack of impartiality in its handling the crisis. Basically Korean financial crisis took place because private bankers mostly from the developed countries stopped rolling over their short-term credits to Korea. But the debtors in Korea were neither Korean government nor ordinary Korean citizens but were the Korean business conglomerates and financial institutions. So it was not a public default as was the case in Latin American crisis, but a genuine private-private deal, But IMF, immediately after getting involved in Korean situation, stressed that the government had to make a public dollar funding to rescue Korean private sector, "You, the government, must repay or make a guarantee of repayment of private debts". At the same time the creditor banks heightened interest rates from 6 percent to over 18 percent, with the reasoning that Koreas country risk had been aggravated so much that interest penalties or risk premiums had to be added upon. As a result, creditor banks made incredibly high profits out of Koreas crisis. They did not lose any single penny on their loan principals and at the same time earned triple high interest earnings. Isnt it an extremity of moral hazard on the part of creditors?
Second, IMF encroached upon the realm of national sovereignty by applying the drastic restructuring program to Korea beyond its own mandate. In the Articles of Agreement of the IMF, it has the authority of policy recommendation only in the area of macroeconomic management. For example, it can ask for the change in monetary and fiscal policies. They have the right to say "You guys need to reduce money supply and fiscal deficits." But IMF does not have any mandate to demand the total restructuring of the socio-econornic system of the crisis country. In the letter of intent agreed upon by the Korean government, however, IMF specified the necessity to increase the flexibility of labour market, to restructure conglomerates and financial institutions, and to liberalize the whole economy. At this point we must raise the Question, "why do we need to have a nation state if the IMF take care of everything in the field of sovereign responsibility?
Third, IMF stick to its orthodox stringent monetary policy with the reasoning that high interest rate was the only way to stem from the continued withdrawal of foreign capital. At the launch of the program, IMF predicted that the Korean economic growth rate for the year 1998 would be at least 2 percent, but around the end of the year, it fell to minus 6 percent. This is absolutely a total disaster of IMF policy. Why did IMF stick to such a dangerous policy even though Korea was more vulnerable to wide-spread economic recession than the Latin American countries if the interest rate was heightened since Korean companies are far more financially leveraged? Of course, IMF economists are not stupid. They must know well that any economics textbook recommends the expansionary monetary policy to fight against the liquidity crisis. Then, why did IMF economists go against the textbook remedy? In retrospect, they must have been worried very much about the short-term speculative nature of capital and waged to set the priority to retain foreign capital ahead of the economic recovery. At this point, we can suspect that the implicit assumption behind the high interest rate policy is based on the vagaries of the speculative capital movement. Then, why is IMF not seriously considering the measures to contain or relax the volatility of short-term capital movement? Since we have kept observing over the past two years that IMF hesitates to introduce remedying counter-measures, we must doubt the intellectual honesty and fairness of the IMF economists.
Fourth, IMF revealed that it is not capable enough both to prevent and to manage crisis. In the annual report of the IMF which was published in August 1997, that is roughly three months before the occurrence of the Korean financial crisis, IMF praised a lot the Koreas macro economic management. So it means that IMF, such an important international institution, does not have a capability to predict financial crisis at all. More surprisingly, the IMF mission team first came to Korea early December 1997 and the team was composed of only seven specialists. They stayed only a week and then announced a comprehensive restructuring program. Can you imagine how such a small number of economists propose the total disintegration of the existing economic system in seven days? After the announcement of the IMF Proposal, the flight of foreign capital out of Korea became even more serious.
On the eve of the 21st Century, East Asia has become a hostage to Western capital. Korean people, especially the opinion leaders, are so much indoctrinated by American values that they seem to have almost discarded Koreas own economic development model as well as the countrys existing socio-economic systems.
The Koreas submissive stance was fully revealed when the 1997 financial crisis began to unfold. Groundless speculation in international capital markets was a critical factor in exacerbating Koreas foreign exchange crisis, yet Koreans tend to accept all of the blame for the crisis, pointing to the internal weaknesses of the Korean system as the prime cause.
Koreans do not realize the fundamental change of surrounding conditions. During the early phase of its successful drive toward industrialization. Korean products were freely allowed to enter the US market given the strategic importance of Korea for the United States. However, the United States started to treat Korea differently since the end of the Cold War. It urged Korea to liberalize financial market, to deregulate exchange controls, to allow free flow of capital, to disband Chaebols, to privatize government-owned companies, etc. As a matter of fact, the IMF program is exactly the bundling of all US complaints against Korea sprouting after the end of the Cold War.
Then one has to wonder whether Korea will have a promising future if it completes the IMF-dictated reforms literally. Recognizing the dynamic potential of the Korean economy and the need for a preemptive control, the Western capital is trying to capitalize the crisis situation by attempting an assault aimed at depriving Korean corporations of the opportunity to earn substantial profits through economies of scale and brand recognition.
So, what does the Korean economy need to do in the face of such arrogant neoliberal doctrine, which is in fact to further the interests of Western capital? The propaganda that all industries and corporations regardless of nationality should be welcome to Korea in order to boost production, create employment, and increase tax revenue is somewhat misguided. It will effectively force Korean industries to succumb to Western capital and related interests.
History tells us the ironic lesson. Even the United States, the self-proclaimed free market leader, was a protectionist country for a long time. Indeed, until the early part of the 20th century, it applied various protectionist measures such as high tariffs, countervailing duties and anti-dumping duties especially against imports from Britain to help its fledgling industries to survive. It even refused to sign the Bern Convention and did not hesitate to infringe on British copyrights.
Given this background the critical stance of the globalization should not be regarded as old-fashioned protectionists. No one today would dare argue that local industries can be developed competitively based on a closed domestic economic environment. However, if advocates of globalization push too far, their arguments should be met with resolute counter arguments.
As the term "globalization trap" literally signifies, globalization brings with it many hidden pitfalls, in particular those related to multinational corporations and globalized capital multinational corporations naturally seek hegemony in the world market. Indeed, no sooner had Korea shown its weaknesses than these companies demanded, under IMF pretenses, that Korea remove every barrier to doing business in Korea.
On the other hand, globalized capital often wages a "confidence game" in which international financial speculators seek to take advantage of minor misalignment in a countrys foreign exchange rate. Once a speculative attack is unleashed, countries must gain the confidence and trust of international investors by adopting so-called anglo-american standards or Washington consensus in their economic management.
To be sure, direct confrontation with the United States is out of the question. The power and influence of the United States must be duly acknowledged, while Washingtons role of promoting global norms and standards should be accommodated. Small Asian countries do not seem to have either the right or the power to formulate international rules, though they seem obliged to adhere to them. Nonetheless, it is a serious mistake for the Asian people to indulge in sugarcoating the reality of globalization, which is not necessarily for everyones benefit. Instead, Asia should ensure room for its own leeway in order to improve the regions competitiveness, enhance quality of life and brighten future prospects. In short, globalization can only be adopted with critical scrutiny it must not be pursued with blind, total acceptance.
Facing the currency and financial crises starting from 1997, Korean people have inclined to seek its causes and remedies only in terms of shortcomings of the domestic economic systems of the individual countries, and thereby, to overlook problems inherent in the current international financial order. Of course, such an approach is partial and dangerously biased indeed. Therefore, civil activists, religious groups, trade unions, etc., formed Taegu Round Korea Committee in June 1999 to address the issue of reforming the existing international financial order. Taegu Round Korea Committee understands that the current international financial order has the following problems.
Along with the rapid liberalization of financial markets and unfettered movement of international capital, tremendously large amounts of financial capital accumulated in advanced countries have transformed into international speculative money and have aggravated the volatility of the exchange and interest rates worldwide. As an unavoidable result of the disturbing movement of the international speculative money, many countries are now suffering from deep economic recession, high unemployment, and social disintegration while the governments concerned are left with few policy tools to cope with them. While the burden of foreign debts in developing and poor countries is getting heavier deepening the disparity between rich and poor countries, the IMF has not been playing the role of an impartial mediator, facilitating rather speculative transactions of international capital markets -- that is, helping creditors paid back, all the principal and interest, no matter how much they have contributed, through their speculations, to the destabilization of the economy concerned. As a result, the economic base of civil societies, in Korea and in the world as a whole have started to collapse.
For a proper solution of such problems caused by the international speculative capital flows and growing foreign debts of developing and poor countries, an all-out change in our thinking paradigm is urgently called for. It is important, of course, for debtor countries to reform their economic systems so that they can be kept from incurring moral hazard. It is equally important, however, for the G-7, the IMF, and creditor countries to overcome the moral hazard by rectifying the existing one-way international financial order. Globalization implies there is no longer separate existence of the inside and the outside, the precarious situation of the outside inevitably affecting the inside. Therefore is required a simultaneous reform of the inside arid the outside together.
The Taegu Round Korea Committee, believe both creditor and debtor countries should sit together at a new Round to discuss on reforming the current international financial order. This new Round must represent both parties equally, based on a two-way principle aimed at creating a sound international debt order as well as a sound international capital order. There is no doubt that the final agreement should be reached at a government-level Round. But to urge on the creation of such a government-level Round, and to complement it once it comes into being, we hereby propose to inaugurate a Pan-Civil Round on world level in advance.
The Taegu Round Korea Committee calls for the citizens of the world to understand that they are the first hand victims of international financial turmoil and that they are the one who should take the initiative to establish a democratic control system on the globalized financial market. They should convince themselves they have the ability to do this.
Taegu Round Korea Committee held a Global Forum from October 6th to 8th, 1999 by inviting one hundred progressive people from more than twenty countries and arrived at the following resolution.
To meet the above goals, we support the creation of the Taegu Round Global Network for Social and Economic Justice, which will bring together Korean and Global NGOs in a common endeavor.