South Korea is the latest country to succumb to Asia’s spreading economic turmoil. It has asked the International Monetary Fund for emergency loans, and the IMF has arranged a credit–with the help of the World Bank, the United States, Japan and other nations–totaling $55 billion. But even with this large loan, South Korea is hardly home free. Its crisis is now as much political and psychological as economic.
The same is true of almost all the countries caught in the present economic downdraft. Governments in these “emerging economies” have, to a large extent, earned popular approval based on their ability to deliver economic progress. The rapid rise of living standards has fanned expectations and muted opposition. Now economic growth will slow and may reverse. Governments will operate in a different climate and face unpopular decisions. No one knows how well political leaders will cope.
South Korea exemplifies a common dilemma. Rapid economic growth has overwhelmed traditional ways of doing business and politics. Remorseless financial markets and multinational firms guide the global economy. Strict economic calculation reigns. Meanwhile, emerging economies play by their own rules. Political connections often determine who wins and loses; financial information is often unreliable or dishonest. Local culture and global economics collide.
Countries may have to heed global dictates or sacrifice economic growth. For South Korea, vulnerability arises from the country’s estimated $120 billion in foreign debt. This consists mostly of dollar loans made to South Korean banks and companies. About $66 billion of these loans mature in less than a year, says the Bank of Korea. If none of the loans are renewed, South Korea could plunge into depression. Its foreign exchange reserves (now less than $30 billion) might be depleted: It would have to curb imports sharply. Or borrowers–including big banks and companies–would be forced into bankruptcy.
Or both.
An IMF loan aims to avert this large calamity by imposing a smaller calamity. International creditors would be reassured or paid off with the new credit; but South Korea would be forced to make basic changes in its traditional approach to economic growth. This has involved using banks to make generous loans to the nation’s largest companies: the “chaebol.” These large conglomerates (the best-known of which are Hyundai and Samsung) dominate the economy. Generous loans were intended to promote strategic industries, from shipbuilding to computer chips.
But lax loans also promoted huge overinvestment. Computer chips–now South Korea’s largest export–are the latest example; the present crisis started with the collapse of prices for memory chips (down 70 percent from a year earlier) in late 1996. This crippled exports and widened the trade deficit. As a result, South Korea isn’t earning enough abroad to cover its overseas debt and its banks are saddled with bad loans to the chaebol. Private estimates of bad loans range as high as $50 billion.
The reckoning has arrived. South Korea’s growth will drop because new credit–foreign and domestic–has evaporated. The chaebol will shut some operations, fire workers at others. The IMF is pressing South Korea to close its weakest banks. Some others will survive only if their losses are absorbed and new capital is supplied. A public bailout would be costly. Although South Korea’s economy is one-sixteenth the size of America’s, its bank losses may be a third of the losses in the U.S. savings and loan crisis of the 1980s.
For ordinary South Koreans, the prospect is for higher taxes, lower employment and more insecurity. Whether South Koreans will quietly stomach all this is a good question. Whether South Korean politicians can summon the will to enact all the new laws needed to satisfy the IMF and global investors is also a good question. South Korea is now in the midst of a campaign for a Dec. 18 presidential election. None of the three major candidates has candidly addressed the economic crisis.
Similar uncertainties plague other Asian countries. Until recently, Japanese politicians were scared to shut the weakest banks or discuss using public funds to shore up others. In Thailand, bad bank loans resulted from inept or corrupt lending to favored insiders. China’s economic growth will slow, and this could expose huge problems in its banking system. It has lent heavily to state-owned enterprises that employ more than 100 million Chinese. Many of those loans can’t be repaid, and streamlining the state-owned companies would raise unemployment. To cut costs, unneeded workers would be fired.
With booming economies, Asian societies managed to reconcile local customs and global commerce. This accommodation is now breaking down. Perhaps the crisis will jolt Asian societies to abandon corrupt and outdated practices. But the pressure of events could also prove a seedbed of social unrest and nationalism. Economic crisis could breed political crisis; and these twin crises would be more unpredictable and explosive than either alone.
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