When the FCCJ invited me to speak here today, I noticed that the topic of my address would be "Managing the South Korean Comeback." However, I now think that it may be a bit of an incomplete description. The changes now being undertaken in Korea have not been limited to just the restoration of our economic health. From the healing of our nation’s social fabric to the expansion of political dialogue, the Korean recovery will not be about a return to the old, but a celebration of the new.
In The Road to Serfdom (1944), the Nobel laureate F. A. Havek stressed that "If we are to build a better world, we must have the courage to make a new start." In Korea, that new start has begun under the leadership of President Kim Dae-Jung. In a national address to celebrate the Republic of Korea’s 50th Anniversary, he urged the Korean people to come together to overcome the current economic crisis and help build a new era of democracy and prosperity in our country. To do so, he said, "Koreans must be resolute in their commitment to economic restructuring and comprehensive national reform," and that our efforts would help lead to "The Second Founding of the Republic of Korea."
To date, the new administration has launched a series of unprecedented reform and restructuring programs. Therefore, while I firmly believe that this commitment to reform will help Korea return to economic growth and prosperity, I also believe that the reforms will constitute something far more than just a comeback.
It has now been nine months since implementation of the IMF program to overcome the economic crisis in Korea. In that time, our country has steadfastly maintained the course towards implementation of key corporate and financial restructuring reforms.
Restructuring of the corporate sector has not been swift but is making steady progress. At the heart of this reform lies chaebol restructuring. On June 18th, 55 non-viable firms were ordered to shut down and liquidate their assets, including 20 affiliates from the top 5 chaebol. The Financial Supervisory Commission (FSC) has now ordered creditors to form "workout" teams to ensure the smooth exit of non-viable firms, while assisting the recovery of viable ones (June 20th). The FSC is also putting pressure on banks to ensure a prudent and efficient use of capital resources. In addition, a government-led five-point restructuring plan calling on corporations to improve transparency, eliminate cross-debt guarantees, improve financial structure, streamline their operation along core businesses and increase management accountability, is also taking hold, signaling a fundamental change in the way business is, and will be, done in Korea.
In terms of financial restructuring, major steps have also been taken. For instance, we have closed down five commercial banks (June 29th), while seven other commercial banks have been given conditional approval and ordered to submit self-rehabilitation plans to the FSC. In addition, the sale of the two state-run banks, Korea First Bank and Seoul Bank, is now expected to be completed ahead of the original November 15th schedule. The sale is being prepared with strategic advice from Morgan Stanley Dean Witter & Co., and accounting services from Coopers & Lybrand.
In addition, many non-bank financial institutions have been closed down according to the strict guidelines laid down by the FSC. For instance, sixteen insolvent merchant banks and four non-viable lease companies have been shut down in July, while six other lease companies are being liquidated through the establishment of a bridge lease company on July 22nd. In the insurance sector, the FSC suspended operations at four failed insurance companies on August 11th and announced their liquidation through P&A ten days later, while the FSC ordered 16 other insurance companies to submit self-rehabilitation plans. Furthermore, licenses at three failed securities companies have been revoked. In addition, the FSC will be evaluating financial status and management rationalization plans of four other securities companies and take appropriate actions by the end of September.
More than anything else, the foreign exchange market has made a remarkable turn around. The won/dollar exchange rate, which once exceeded the 1,900-level, has been stabilized at around the 1,300-level, even in the midst of the recent worldwide instability. Usable foreign reserves, which stood at $3.9 billion on the day Kim Dae-Jung was elected President last December, has topped $40 billion, partly boosted by a record current account surplus that reached $22.4 billion through the end of June. In addition, stability in foreign exchange markets has allowed a gradual reduction in interest rates (measured by the yield on the benchmark 3-year corporate bond), down from a record 30% several months ago to below 12% today.
Despite this progress, Korea still has many difficulties to overcome. In the first quarter of this year, GDP growth contracted at a rate of 3.8% while unemployment figures soared to 7.6% of the total labor force, or 1.65 million people in June. At financial institutions, pressures to improve their own financial situation in addition to increased market risk have forced them to strictly curtail lending, thus exacerbating an already severe credit crunch. Even worse, external factors are also posing a real threat to our economy, ranging from the illness of the Japanese and Russian economies to the possible devaluation of the Chinese yuan.
As we all know, reform is not built in a day nor completed in one giant step. Often, successful reform in one area brings about a need to reform in another. Thus, reform must be a steadfast and continuous process. Without a map indicating where to go and what to do, even the most ardent reform efforts could be in vain. Fortunately, the Korean government’s reform efforts have been based on an unwavering commitment to three interwoven principles of democratic governance and the free market economy espoused in the philosophies of the reformist President Kim Dae.Jung.
In my speech at the Council on Foreign Relations in New York (April 15th, 1998), I stressed that "We are going to stay focused on the principles of reform and continue our effort to implement necessary policies," and we have maintained that focus to date. And with the government’s continued commitment to these principles in the future, we will provide the international community with a far better and clearer picture of the direction in which our reform efforts are heading.
Now, let me speak to you about these concepts, and offer some specific examples of how we are sticking to the three principles of accountability, fair competition and social responsibility.
2. Steadfast Principles of the Korean Recovery
First, one of the fundamental principles of democratic governance is managerial accountability. In the past, administrators and managers practiced wanton violations of accountability principles in both the public and private sectors. The government ruled over the market with an arbitrary hand, creating distortions and imbalances that helped lead to the present crisis. In the business sector, shareholders suffered through the lack of management accountability. Management, disregarding the shareholders’ rights, were captured by the thinking of "bigger is better," which led to the creation of massive slush funds, and special favors and "cozy" collusive links between government and business became a destructive norm.
However, the era of unaccountable management is over. With the elimination of collusive links between government and business and by holding itself wholly accountable to the people, the Kim Dae-Jung administration is setting the example for reform. In the private sector, directors now find themselves legally accountable for the management of their firms, as a result of government-led measures that have strengthened the rights of minority shareholders.
In the most recent example, on July 24th five former executives at Korea First Bank were held financially responsible for shareholder losses brought on by recklessly extending loans to financially unsound Hanbo Iron and Steel Co., and ordered to repay 40 billion won ($31 million). The decision marked the first-ever successful class action suit in Korea and signaled the dawning of a new era of management accountability to the shareholder in Korea by bringing an end to the unstated rule that "Businesses may perish but their owners prosper.
Secondly, the market system can yield efficient outcomes only if free and fair competition is guaranteed. Regrettably, however, free and fair competition was not allowed in Korea. The government protected big businesses with various entry and exit barriers and obstacles blocking the free flow of foreign capital as well as foreign goods and services.
In the new administration, establishing transparent "rules of the game" has been a central goal of the reform drive. From the beginning, the new government has been working to level the playing field in the domestic market For instance, upon completion of their recent investigation (May 8th—June 20th), the Fair Trade Commission (FTC) imposed 72.2 billion won in fines against 18 subsidiaries of the top 5 business groups after discovering that they engaged in unlawful intra-group transactions. The unexpected extent of the companies’ violations led the FTC to launch an unplanned second round investigation into 40 other affiliates of the five business groups (June 29th—July 24th). The FTC will expand its surveillance of the lest of the thirty largest business groups in order to eradicate the problem of intra-group transactions.
Through a series of market liberalization measures, Korea is following through on its pledge to create a truly investor-friendly environment for foreigners. These measures include the abolishment of foreign ownership ceilings in most individual stocks (May 25th) along with the expansion of ceilings in state-run firms, including Pohang Iron and Steel Corporation (POSCO) and the Korea Electric Power Corporation (KEPCO). In addition, along with the complete opening of the domestic bond market to foreigners, foreign investors can now invest in short-term financial products, including CDs, RPs and money market funds.
These measures contributed to a significant reversal in foreign investment figures in Korea. Foreign investment into Korea stands at a total of US$3.7 billion in July. Of the total, 60 percent has been invested in the manufacturing sector, which marks nearly a 34 percent increase from last year. EU member nations and the U.S. each account for about 40 percent of the total, while Japan takes up about 11 percent.
Finally, in Korea, we are now confronting the shift from private sector safety nets of lifetime employment to the creation of a publicly funded social safety net. This transfer has been, and will be, painful. Already, our unemployment rolls have risen to record levels and are expected to continue to soar before the current crisis is over. But in order to successfully restructure our economy and introduce a viable free-market system, flexibility in the domestic labor market is an absolute necessity. Indeed, the Korean government lacked the foresight to see beyond the years of double-digit growth, and the current crisis exposed the inherent flaws of lifetime employment conventions.
But now, with the end of private safety nets, the government has the opportunity to build Korea’s first true social safety net. The signing of the historic Tripartite Agreement between government, management and labor on February ~ paved the way for comprehensive labor market reform, highlighting our country’s urgent need to establish an adequate social safety net. For this, the government solemnly pledged to aid those displaced during the current crisis, and we are sticking to our promise.
For instance, the government initially slated 5 trillion won to create programs to help ease the pain of unemployment. However, that figure has since risen to more than 10 trillion won, money which will not only cover unemployment benefits, but will help build comprehensive social safety net programs in Korea. This will range from providing unemployment insurance and job training to information clearing houses and various job creation programs, preparing our workers for the 21 St century economy.
Of the total, the First Supplementary Budget directed 1.1 trillion won, which was raised by slashing the wages of government employees, in addition to the initial 5 trillion. An additional 1.8 trillion won was specifically raised to help minimize potential unemployment and towards the creation of new jots. Most recently, on August 19th the Second Supplementary Budget was submitted, making the total 10.17 trillion won, from which about 1.2 million unemployed people have received benefits through July and which will cover benefits for up to 3 million people through the end of this year.
But while the creation of an adequate social safety net is of critical importance, nothing can be more important than restoring the overall health and vitality of our economy. While a safety net means temporary help for those looking for work, a strong economy means new and better jobs, and greater opportunities for everyone. That, I believe, is the best social safety net of all.
3. Advancing into the World
We have a popular saying in Korea that I feel relates quite well to our current situation. It says that "the ground hardens after a rainstorm." The hardships that Koreans have endured throughout the history demonstrate a social unity and iron will of a people accustomed to overcoming great challenges.
As we move into the 21st century, I expect that the combination of foreign capital and managerial know-how with Korea’s highly-educated labor force will help form the rock-solid foundation of a far more competitive economy. For this, we will continue to need the concerted effort of the international community, without which Korea would not have been able to achieve the progress towards economic recovery that you have witnessed since last December.
As I mentioned, however, the tasks are far from finished. First and foremost, we will act surely and resolutely to restructure and revitalize our economy. Second, I would like to urge your continuous and further cooperation in aiding our economy. And for those who do, I can assure them of two things: Koreans will overcome this crisis! And those who participate in our current recovery process will be fully rewarded in the future!
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Added September 2, 1998
