South Korea: another Asian economy in trouble
By Eva Cheng
Seoul's November 21 call for assistance from the International Monetary Fund is the latest sign that the South Korean economy, the 11th biggest in the world, is in deep trouble. Only last month the IMF issued a report claiming that the long-term outlook of South Korea was "very bright".
Given South Korea's economic weight in Asia, its current problems will have much wider ramifications than the crises in other economies in the region.
It has been reported that Seoul is requesting US$60-80 billion of emergency credit, dwarfing Mexico's 1994 rescue package of US$50 billion. Given South Korea's already enormous foreign debt and the plunge in the value of the won (by more than 30% this year), servicing the debt will be a crushing burden.
South Korean businesses are highly concentrated in the hands of a small number of conglomerates, chaebols, which relied heavily on debt for export-driven expansions. Plunging export income last year already forced a chain of them to go under this year, pulling with them their banks.
President Kim Young-sam's November 19 sacking of finance minister Kang Kyung-shik and the accompanying emergency measures to halt a further slide of the won were a desperate last attempt to window-dress the economy, in view of the presidential election on December 18.
The economy's structural problems were thrown into the limelight last year by the plunge in the price of computer chips, South Korea's key export, which spurred a near tripling of its 1995 current account deficit to a record US$23.7 billion.
After profiting from attacking south-east Asian currencies and stocks in recent months, international money dealers shifted their attention to South Korea in recent weeks, spreading enthusiastically the tip that Seoul was negotiating for an IMF bail-out to maximise nervousness and price movements.
For financial dealers, volatility is king. Price movements, bet on correctly, are the key to profits.
In Washington, there has been growing concern about South Korea. In a special sitting of the House of Representatives Banking Committee on November 14 to assess the impact of the Asian financial crises, at least two witnesses expressed grave concerns that South Korea was vulnerable to a major crisis.
The US administration obviously shares this concern. Washington could afford not to lift a finger for Thailand's US$17 billion rescue package, and pledged only US$3 billion to Indonesia's US$40 billion bail-out. But it can't stand on the sideline in South Korea. Too much is at stake.
Dominated by US and Japan
South Korea provides the key US military base in Asia and plays a critical role in Washington's intervention in the region. Massive US aid and generous access to the US market, though much reduced in recent years, were decisive in transforming South Korea, devastated by the 1950-53 Korean War, into a high-growth manufacturing economy.
Although the US has absorbed the bulk of South Korean exports, that shrank from 36% in 1985 to 19% in 1995 as the US moved to cut its trade imbalances.
South Korea was in continuous surplus in its trade with the US between 1982 and 1991, but last year the US registered a trade surplus with South Korea of US$11.6 billion, more than any of the yearly surpluses South Korea registered with the US. That $11.6 billion accounted for 76% of South Korea's overall trade deficit last year.
The US's far more advanced technology is decisive. Its capital products fetch much higher prices than its imports from South Korea, which are dominated by consumer goods whose prices are depressed by rival Third World producers. The same pattern applies to South Korea's trade with Japan and the European Union.
Many of South Korea's key industries — most of them geared to export — have relied on the technology, capital, equipment and often crucial components from these imperialist centres. According to the Korea Industrial Technology Association, since 1962 South Korean firms have spent more than US$13 billion on technology imports alone.
Overlapping product lines with Japan, notably in car and ship production, have brought the two countries into direct competition. Since the late 1980s, some Japanese suppliers have withheld their latest technology and designs, making it difficult for South Korean producers to upgrade their products and compete.
Although South Korea is now stuck with second-class technologies, these aren't cheap. Mobile phone handset producers, for example, pay a whopping 5.5% of sales revenue as royalties to transmission chips supplier Qualcomm.
In the seven years to 1996, South Korean firms more than doubled their royalty payments to US$2.3 billion. In 1986, nearly 90% of South Korea's imports from Japan went straight into its export industries.
Japan played a direct role in shaping South Korea's industrialisation and helped plan its 1972 and 1977 five-year plans, which began the push to heavy and chemical industries.
South Korea was assigned a supporting role in an integrated production process structured around Japan's needs. South Korea depends on Japan for crucial technology and capital, and supplies it with low cost components, supported by cheap labour.
The reintegration of South Korea into Japan's economic sphere was enhanced by Japanese aid following the 1965 normalisation agreement (which freed Tokyo of any debts it owed the Korean people from the period of colonial rule).
Foreign debt
Made worse by food imports and the plunge in export income, South Korea's trade deficit more than tripled in 1995-96 to US$15.3 billion. Despite decades of "miraculous" export-driven growth, South Korea recorded its first postwar trade surplus only in 1986.
The aid money previously used to bridge the trade gap was drying up, and little other non-trade income was available, so South Korea has increasingly been relying on borrowing.
Foreign debt has escalated since the mid-1960s and exploded in 1980 to US$27 billion, making South Korea the world's third biggest debtor. In 1985, the debt level doubled to US$46.7 billion, then stayed at a marginally lower level until peaking at US$49.3 billion in 1993.
Debt servicing relies critically on exports, but South Korea's export income is falling fast. One of Seoul's strategies is to speed up capital concentration through nurturing a handful of chaebols which rely heavily on debt and capacity growth. While this worked on the back of the postwar expansion, it has run into trouble since the early 1970s.
To help the chaebols extract the maximum from workers, successive military dictatorships, backed by the US, brutally ruled South Korea following Korea's partition in the late 1940s. Martial law was lifted only in 1987, and a civilian government was installed in 1993 under Kim Young-sam.
Workers' exploitation was appalling. In 1983, when South Korea was experiencing "magic" economic growth of 12%, two workers were injured per minute on the job, and the average work week was 54.3 hours. In 1978, 38% of manufacturing workers were paid below the government-defined subsistence wage.
An IMF credit line never comes free of strings. Austerity has been forced on the troubled economies. Workers and the poor are forced to shoulder the biggest load. More attacks will come.
The 1996-97 strike, a response to legislation to increase big business's profits by squeezing workers, was led by Korean Confederation of Trade Unions militants created during the struggles of the 1980s. The KCTU is now trying to capitalise on the presidential election to organise, consolidate and extend its base, with plans for a workers' party.