Will S. Korean economic woes maximize East Asian crisis?

At a late-night press briefing on Nov. 21 the South Korean Finance Minister finally ended procrastination by saying that South Korea would seek a rescue package from the International Monetary Fund (IMF). The next morning President Kim Young Sam confirmed this decision as he appealed for unity and virtually apologized for what he knew was a highly unpopular move. Jakarta Post Asia correspondent Harvey Stockwin analyses some of the factors at work as East Asian economic and political difficulties follow in the wake of those recently experienced by Southeast Asia.

HONG KONG (JP): This past week the current slide in Southeast Asian currency and stock market indices was finally dwarfed by the looming setback in East Asia as South Korea and Japan failed to measure up to the financial markets' declining confidence in their (previously exalted) economic competence.

Slide. Setback. This reporter is still trying to avoid that already overused word "crisis" in relation to current economic difficulties. It is getting increasingly more difficult to do so.

Those involved in financial markets have a curious habit of adopting exaggerated terminology rather than more appropriate English phrases. Stock Markets thus seldom "slide" or "decline" -- they always "crash" or "shatter" as the "bulls" give way to the "bears".

The new "in" word recently has been "contagion". It is not enough to note that in an interdependent world and a rapidly globalized economy what happens in one part naturally affects others. Instead, the inevitable ripple effect from the Southeast Asian slide has been labeled a "contagion".

"Asia's contagion takes a firmer hold" read a Financial Times headline on Nov. 15, rather as if a new flu virus is spreading out of Southeast Asia.

Curiously, no one talked about "contagion" when things were going well, when the investor confidence in Wall Street was clearly buttressing confidence in Southeast Asia, when Southeast Asian growth rates were having a beneficial effect on growth rates elsewhere. Contagion, it appears, comes only from bears, not bulls, and happens when investor confidence is declining but not when it is increasing.

That master of the elliptical phrase, Federal Reserve Board chairman Alan Greenspan has now defined the contagion effect as that of "weakness in one economy spreading to others as investors perceive, rightly or wrongly, similar vulnerabilities".

So, as the South Korean currency recently faded through the 1000 won to the US dollar level, as the Taiwanese carried out a competitive devaluation to keep their currency and exports in tune with those of Southeast Asia, and as the Japanese yen declined below 125 to the dollar and the Japanese Stock Market index slid towards the allegedly disastrous 15,000 level, investors perceived East Asian vulnerability.

But is it contagion? In other words, is the East Asian setback a direct consequence of the Southeast Asian slide? Hardly, except in the sense that just as Southeast and East Asia boomed together, so the loss of confidence appears to be taking place in tandem, too. But the overall economic situation is characterized by differences rather than similarities.

Thus the South Korean troubles clearly relate to the government's almost unique degree of control over bank lending, which was bound to be proved faulty one day, and has now led to several dramatic company failures.

Bureaucratically-derived lending criteria led to overlending which in turn has led to overcapacity and now to excessive indebtedness and painful insolvencies. These failures and failings have inevitably depressed the economy. It might not have happened had the banks been free to scrutinize the purposes for which money was being borrowed via rigorous feasibility studies.

This is but one way in which the South Korean setback was not a simple question of contagion. But events should first be seen as one more example of the Unbelievable Korean Drama at work.

For several years, it has been commonplace to discuss the possibility of North Korean economic collapse, as a result of complete failure. Now some of the more alarmist analysts have mentioned the possibility of collapse in South Korea, the nation which until recently held out as the best example of the misnamed East Asian Economic "Miracle".

This past week, the South Korean government continued to act as if the "miracle" was still working. As the South Korean currency, the won, lost its maximum permitted value on four successive days, including a ten percent decline on Nov. 20, and as the stock market moved in volatile fashion, the South Korean parliament refused to pass a badly-needed package of financial reforms, which some observers regarded as an absolute minimum recovery measure.

Outside Parliament, Central Bank workers demonstrated against the reforms, which they saw as a naked power grab by the Ministry of Finance. The government continued to dither. Even when President Kim Young-sam finally got around to changing his Finance Minister and chief economic adviser, the dithering was not wholly ended.

A new reform was announced -- the bond market was opened up to foreigners. But this palliative was a classic example of too little, too late. Given all that was going on in the South Korean economy, foreigners were rather unlikely to be racing in to buy Korean bonds.

The only realistic means of immediate economic salvation remained an appeal for a bailout by the International Monetary Fund but the South Koreans went to incredible lengths to try and avoid it. First, they asked the Americans for help. The U.S. offered sympathy and concern but suggested the IMF was the best and indeed the only way out.

Undeterred, the South Koreans went instead to their old rival and hated former colonial master, Japan, seeking massive bilateral help. This was the most amazing development of an amazing week.

On the one hand, here were the South Koreans asking the Japanese to do for them what the Japanese were undecided about doing for themselves. The Japanese stock index oscillated all week precisely because of uncertainty as to whether or not the Japanese government would recapitalize or assist the ailing Japanese banking sector, as foreign critics said it must.

On the other hand, here were the South Koreans, desperately seeking to avoid the likely conditions imposed by the IMF in the vain hope that Japan, the former colonial power would not impose conditions which would be even more politically unacceptable within South Korea.

Additionally, there was South Korea, hoping that Japan would risk a breach in the crucial U.S.-Japan alliance by disdaining the IMF and giving to Seoul what Washington had already refused to give to South Korea.

But the Unbelievable Korean Drama is never one-dimensional. While all these maneuvers were going on, the presidential election was proceeding, with front-runner and longtime oppositionist Kim Dae-jung still leading in the public opinion polls -- another reason for the government's dithering. Kim had the courage to come right out and say that recourse to the IMF was necessary.

He also had the courage to add a truth which most Koreans try to avoid -- that the country needs to open up more to the outside world.

Meanwhile, since old habits die hard, the big news in some Korean newspapers, dwarfing the economic emergency, was the arrest of a North Korean spy ring, including a former professor at Seoul National University who, it was alleged, had been spying for the North for over thirty years. In Korea, there's never a dull moment.

On top of all this, on Nov. 21, it was finally agreed that North Korea, South Korea, China and the United States would start formal talks in December on a Korean peace treaty. Ironically, North Korea appeared to be diminishing its previous intransigence regarding such negotiations in the hope that more aid would be forthcoming from the U.S. and South Korea, --- at the very moment when South Korea reluctantly needed to ask for foreign aid itself.

All these developments pointedly illustrate that South Korea's financial woes are no simple case of East Asia catching "contagion" from Southeast Asia's earlier and ongoing troubles. Every nation in the region has different reasons for its economic troubles. The only "contagion" is that just as investors once gained confidence in the region, so now they appear to be losing it.

That said, and there are remarkable parallels between the initial Southeast Asia woes in Thailand and those now gaining ground in South Korea.

Both countries are democracies. But neither nation has been an advertisement for democracy in the way it has handled the incipient crisis. In both countries, the politicians and the bureaucrats have tended to fiddle while the nation burned.

The Chavalit government worsened the underlying economic crisis by being incredibly incompetent. President's Kim Young- sam's administration in South Korea has made things worse by being incredibly indecisive.

In both countries influential voices have been raised asserting that reality is not what it actually is, that the economic news is not that bad. In both, the image of the economic "miracle" lives on when, rationally, it should have been jettisoned long ago.

Thailand made things worse by delaying a deal with the IMF. Now South Korea has done the same.

But whereas the essential underlying failure in Thailand was insufficient national pride as a result of cronyism and corruption, South Korea is making its problems worse because of excessive nationalism mixed with xenophobia.

The reason the country tried foolishly to avoid recourse to the IMF lies in a perceived loss of face and "economic sovereignty". Such a recourse is seen as a national humiliation.

The loss of face is understandable, given that South Korea, with the world's eleventh largest economy, only recently graduated to become a member of the rich nations' club, the OECD, the Organization for Economic Cooperation and Development.

The sense of national shame is perhaps inevitable in a nation which experienced a harsh colonial period, a brutal civil war, and forty four years of unremitting toil, dragging itself up by its bootstraps.

But beneath the resistance to an IMF-conditioned stand-by facility lies a less admirable xenophobia. South Korea does not want to be told to open up more to the outside world. It has risen to be the 11th largest economy by exporting all manner of goods. It even hopes (naively) to export itself out of trouble now.

But it still resists freely importing all manner of goods in return, from Thai rice to American beef. It does not want to internationalize its weak banking sector. Bluntly, all too often South Korea wants only to get but not to give.

Like Japan, like China (although in different ways), South Korea suffers from a common East Asian contagion: it seeks all the benefits from free trade and market forces but it balks at due reciprocity, at itself giving those selfsame benefits to other nations.

The IMF has the tricky but vital task of telling South Korea that xenophobia must diminish if it wants restored economic health.