Asia Times: ANALYSIS: The Comeback Kid



	January 09, 1999	atimes.com

The Koreas

ANALYSIS: The Comeback Kid
By Uwe Partpart
Asia Times Editor

Just over a year ago, Korea signed away much of its economic sovereignty to the International Monetary Fund in return for a standby loan program to rescue it from imminent bankruptcy. Eventually, the Korean won would fall to a low of 1,964 to the dollar, interest rates would rise to 25 percent and the stockmarket would register precipitous collapse.

Those dark days of the first half of 1998 are over and will not return. The stock market's index (KOSPI) has climbed back up to over 600, the highest level since October of 1997; instead of worrying about currency collapse, the Ministry of Finance and Economy (MOFE) is implementing measures to stem the further rise of the won above the 1,150 level and the country has begun to pay back IMF loans.

Is sustainable recovery from a miserable year that saw the economy contract by over 5 percent now in sight? The IMF apears to see it that way.

In a January 5 interview (see link on front page), Managing Director Michel Camdessus told the Korea Herald, ''Korea has made significant progress over the last 12 months in stabilizing the economy and is starting to address structural problems. The exchange rate has stabilized . . . and usable foreign reserves have surpassed $47 billion. Interest rates have fallen below pre-crisis levels. These are hopeful signs that the recession will bottom out in 1999 and we will see some positive growth during the course of this year. . . . For the moment, a powerful sign that the economic typhoon has passed Korea is the government's recent decision to repay $2.8 billion which was due to the IMF last month."

With some cautions attached, international ratings agencies seem to be in agreement and are expected to restore Korea to investment grade ratings soon.

There are indeed numerous macro-economic and financial indicators to back up such judgements. In order of importance and from the standpoint of how the Korean turnaround was brought about and will lead to modest growth (somewhere between zero and 2 percent) in 1999, though, two main factors stand out.

First, consider the current account: Exports contracted by 2.2 percent in 1998. But imports dropped a massive 35.4 percent and, as a result, Korea built up a very large trade surplus of $39.9 billion. With such large foreign exchange inflows, augmented further by a historic high of $8.8 billion in foreign direct investment, the won stabilized and then started its significant current upward movement. Liquidity eased greatly and interest as measured by the benchmark three-year corporate bond yield, fell to 7.7 percent.

Korea, unlike other crisis-ridden Asian economies, has a dozen or so world class companies that can be expected to sustain credible export performance in 1999. An actual small increase in exports is forecast for 1999, while imports will also grow by around 15 percent. But even with such faster import growth the trade account will remain in surplus to the tune of $25 billion.

As foreign direct investment is also expected to continue rapid growth and may reach $15 billion in 1999, the country's external finances will be in good shape and substantial external debt repayment will be possible. Exporters are fretting over the higher won. But since the yen is also expected to be strong against the dollar, such worries are overdrawn.

The second main factor is labor costs. Current account performance and, at least indirectly, Korea's ability to attract sizeable FDI did not come for free and Korean labor took a good deal of the brunt of it. As companies downsized, unemployment climbed to over 7 percent and well over 1.5 million workers are currently without jobs. In dollar terms, wages contracted by 46 percent. The implied productivity gains, of course, greatly helped Korean export competitiveness.

Both the massive drop in imports aiding the current account and the cuts in dollar labor costs were eseential to re-stabilizing the Korean economy. But they are not repeatable. Whether through 1999 and beyond the Korean economy will return to sustained higher growth rates without relapse depends on at least two other big factors: corporate and financial sector restructuring, and continued liberalization to permit foreign entry, under equitable conditions, into all major economic sectors.

On those counts, there are at present more question marks than positive answers. It is not enough for the government to force restructuring upon the country's largest chaebol (conglomerates). Restructuring, to make sense in the longer run, must be driven by market conditions and demands. Financial sector restructuring and recapitalization (expected to cost ultimately an amount equivalent to 20 percent of GDP), in turn, will only produce a healthier banking sector if industry innovates and expands; bank lending must not remain geared toward just the large comglomerates, but must support entrepreneurial initiative in the small and medium enterprise sector - the most effective in new job creation.

Regarding overall liberalization of the economy and foreign access, the reforms introduced by President Kim Dae-jung's government last year (including full liberalization of the property and stock markets) have had their undoubted positive effects. But the devil lies in the details of administrative execution. The most liberal business and ownership laws mean little or nothing if administrators practise deliberate obstruction while business operations continue to lack transparency.

In sum, the one-off factors referenced above have produced an initial turnaround in Korea's fortunes; only sustained reform will permit economic recovery in depth.

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