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