December 2, 1997
According to press reports, the Clinton Administration is nearing final approval of a $55-billion International Monetary Fund (IMF) bailout package for South Korea, the world's 11th-largest economy. The record package (exceeding the $50-billion Mexican bailout of 1995) is expected to total $20 billion from the IMF, $15 billion from other international lending institutions (such as the World Bank), and $20 billion from Japan and the United States. The bailout is a response to a string of corporate failures, culminating in crashes both of the Korean stock market -- a 25-percent drop in share prices -- and of the Korean currency, the won, which has lost 15 percent of its value against the dollar this year [Washington Post, 12/1/97].
The Korean bailout follows earlier IMF rescues of Thailand ($17.2 billion) in August of this year and of Indonesia ($40 billion) in September. The Korean package, like those for Thailand and Indonesia, is expected to include IMF-mandated "austerity" measures such as tax hikes (Thailand was required to raise its value-added tax from 7 percent to 10 percent), increases in interest rates to attract more foreign investment, cuts in government spending and cuts in subsidies for favored firms, reductions in imports, and lowering of Korea's growth rate target for 1998.
IMF "Castor Oil": The Wrong Medicine?
Like previous bailouts, the Korean package is less geared to correcting endemic abuses in the Korean economy (similar to those in other Asian economies) that have contributed to the current crisis than to ensuring that foreign, including American, creditors receive full and timely payment on some $110 billion in loans, including some $20 billion due in December 1997 and an additional $50 billion due in 1998 [Los Angeles Times, 12/1/97]. Critics of the IMF contend that "IMF officials are peddling the economic equivalent of castor oil in Asia -- not because it works, but because it is the only cure they know" [Washington Post, 11/29/97].
In particular, the IMF conditions may do little to alter the cozy relationship between the Korean government, large banks, and the "chaebol," which are huge family-run conglomerates that dominate the Korean economy. The favored position of the chaebol -- which include manufacturing giants like Hyundai, Daewoo, Samsung, Hanjin, Doosan, and LG Group -- is seen as a major factor in the Korean predicament: "After years of being cosseted by protectionist governments, the chaebol labor under excessive debt, a critical dependence on cyclical industries, and in a business culture that values size above profit" [Los Angeles Times, 5/13/97]. The chaebol priority of expanding sales and market share is exemplified by investment in new semiconductor production facilities (largely by Samsung, LG Semicon, and Hyundai) at a rate that critics say is not economically viable, as evidenced by the three Korean manufacturers' debt-to-equity ratio of over 350 percent, or 10 times the U.S. average. Korea exports 90 percent of its semiconductor production, with the excess capacity in memory semiconductor production leading Korean manufacturers to sell below cost, thus undercutting competitors and driving down prices globally.
This can be seen as the pattern of the Korean crisis: government-approved investment largely financed through foreign debt, resulting excess production capacity to increase market share despite short-term unprofitability, declining prices for the industry's major export products, leading in turn to an inability to repay the foreign debt. The IMF bailout may address the short-term debt repayment concerns of investors, but it is unlikely to remedy the larger structural problem. Indeed, in demanding reductions of imports and approving currency devaluation, the IMF "medicine" is likely to further the chaebol strategy of relying on a protected domestic market while pursuing aggressive, government-assisted export expansion.
Assistance Should Be Conditioned on Real Market Reforms
The irony is that no IMF or other international bailout could be approved without the agreement of the United States -- many of whose industries have been disadvantaged by chaebol practices -- which not only is expected to make available several billion dollars in direct loans but is the major voice in the IMF, the World Bank, and other international lending institutions. Nonetheless, there is no evidence that the Clinton policy goes beyond "reassuring the markets" (i.e., repaying Korea's foreign creditors) to insisting on remedying Korean trade practices disadvantageous to the United States. At a time when Congress is signaling that U.S. taxpayer support for the IMF and other lending institutions may no longer be unconditional -- witness last month's refusal by the House of Representatives of the Administration's request for a $3.5-billion IMF replenishment -- the Clinton Administration must demand that the following be part of any rescue plan:
An end to the special status of the chaebol. The symbiotic relationship between the Korean government and the favored conglomerates, if not ended outright, must be pruned back drastically. Government subsidies should be cut off. Transparency should be enforced in government/company relationships, including full disclosure of past practices. Perhaps most importantly, chaebol firms -- and in particular, their many, often economically nonviable subsidiaries -- should be allowed to fail.
A prohibition on bailout assistance to overexpanded firms. Korean companies engaged in excessive, often government-sanctioned or subsidized, market expansion should not be eligible for bailout loans, or at least such loans should be contingent on reduction in excess production capacity. This would particularly apply to automobiles, electronics (including semiconductors), and steel.
An end to nonreciprocal trade practices. The 1997 National Trade Estimate Report on Foreign Trade Barriers from the United States Trade Representative contains 19 pages of detailed description of nonreciprocal barriers to U.S. products seeking entry into the Korean market. These include: exclusionary tariffs, quantitative restrictions (i.e., quotas), import clearance (i.e., port of entry inspection procedures), regulatory barriers (such as standards, testing, labeling, and certification requirements), discrimination in government procurements, export subsidies, deficiencies in protection of intellectual property, service industry barriers (notably in telecommunications, advertising, audiovisual, and financial industries), investment barriers, and, perhaps most importantly, a pervasive government-encouraged anti-import bias -- a bias that may be enhanced by the currently-envisioned IMF "austerity" program. Major, specific corrections to these practices must be conditions of U.S. approval of and participation in any bailout program.