Will S. Korean economic woes maximize East Asian crisis?

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.