The Korean crisis

The Korean crisis

The world's financial community has come to South Korea's
rescue -- again. The International Monetary Fund already rode in
ostensibly to the rescue once, yet the stock market and currency
continued to slide; both lost more than half their value in less
than a year. Estimates of economic growth worldwide have been
adjusted downward in part to account for South Korea's drag.

It remains true today that many of South Korea's fundamentals
are in good shape: an educated and motivated workforce, a high
savings rate, an impressive industrial base. The nation's
structural problems, particularly its outmoded form of crony
capitalism, are very real, but a psychology of panic had set in,
with investors reacting out of proportion to those problems.

The South Korean government helped create that crisis of
confidence by waiting too long to seek help and by failing to
fully disclose the extent of its difficulties, although in truth
probably no one -- not the IMF, not the South Korean authorities
-- knew the size of South Korea's short-term external debt. Mr.
Kim did not reassure anyone when he pronounced himself "totally
flabbergasted" by the depth of the problems.

Now, though, the South Korean legislature seems set to approve
a series of reforms, some of which it rejected only a few weeks
ago; Mr. Kim has pledged to fully implement needed reforms; the
IMF, the World Bank and others are rushing in with more loans;
and private banks are prepared to roll over loans that are coming
due soon.

These steps, along with the underlying strength of Korea's
economy, should be enough to restore confidence. If not, South
Korea will go deeper into default. That would have the advantage
(to South Koreans) of spreading the pain to the U.S. and other
foreign creditors.

But it would cost South Korea for many years in damaged
credibility and higher interest rates. In any case, there seems
to be no option now that would spare ordinary South Koreans a
great deal of hardship.

-- The Washington Post