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June 1998 Insights Issue #26Korea - a crisis of under-regulation?Is the current Korean economic crisis an upshot of under-regulation or over-regulation? Changes in three policy areas are identified here as key faultlines: financial liberalisation, exchange rate management and investment co-ordination. All three were introduced in Korea in the past five to ten years but have not been well ordered. Though structural ills made some liberalisation inevitable, poor strategic choices and ideological prejudice overruled caution. Against this misunderstood backdrop, what are we to make of the International Monetary Fund's proposed institutional reforms for long-run development? When Korea's economic crisis struck in November 1997, many commentators argued that the cause was the country's inefficient and corrupt state-run economic system. It followed (if this thinking was right) that the cure lay in creating a 'genuine' market economy. Yet the crisis was largely a financial crisis, not a crisis in the real economy. Compared with Mexico and with other East Asian economies in crisis, Korea had a:
Korea also had a foreign debt that - though rising - was not unsustainable by World Bank standards. That debt was not structured in Korea's favour in terms of maturity prospects but even this mismatch had begun to right itself by the eve of the crisis. This was the background against which two high-profile corporate bankruptcies tripped a collapse of confidence in Korea's economy in 1997. Both failures signalled a fundamental transformation in relations between business and the State. They meant that the major manufacturers were no longer insulated from corrupt political dealings. But more deep-seated causes lay behind the loss of confidence. They boil down to ill-managed financial liberalisation, faulty exchange rate management and the abandonment of investment co-ordination. Rapid liberalisation of foreign borrowing and failure on the part of government to supervise the financial institutions involved in such borrowing, meant the authorities were unaware of the mismatch in terms of the maturity structure of foreign debt that was beginning to store up future troubles. A vogue in policy circles for monetarist ideas and Neo-Liberal ideology during the late 1980s and early 1990s gave rise to:
As a result, traditional currency adjustment measures to avoid currency over-valuation were abandoned while, in the absence of systematic 'plans', it became easier to 'bend the rules' for political reasons. In this light, where does Korea's future solvency now lie? Strict IMF conditionality has already been abandoned. Higher inflation targets and extra credit for exporting firms now apply. But the dash towards the Anglo-American institutional model commended by the IMF does not seem desirable in Korea's case, given the poor record that such reforms have had in many developing and transition economies. More domestic and international takeovers could lead to inefficient corporate raiders taking over small, efficient companies. Easier redundancies will require sea changes in the culture and institutions of employment, while the ending of 'crony capitalism' requires moves to strengthen, not undermine, the State's ringmaster role. Ha-Joon Chang Based on an extended article scheduled to appear August 1998 in World Development vol. 26, No. 8 |
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