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Wednesday, 27 May, 1998, 18:42 GMT 19:42 UK
South Korea: economic reforms run into difficulty
Fears are growing that economic reforms in South Korea may fail to stave off a financial crisis.

Foreign investors are selling billions of dollars worth of assets as the confidence in the government's economic initiatives begins to wane.

Mass strikes that have broken out around the country are likely to delay South Korea's attempts to claw itself back from the brink.

Investors bail out

The lack of progress in restructuring the economy has lead to dissatisfaction among investors.

The value of the won, South Korea's currency, which had shown signs of stabilising after an encouraging rise in the country's foreign exchange reserves following an IMF rescue package, has begun to come under pressure again.

The currency has faced heavy selling pressure. Foreign investors have off loaded 600 billion won ($428 million) in April and May amid concerns that the crisis is far from over.

South Korean institutional investors were also net sellers of 3.1 trillion won ($2.2 billion) worth of shares in the year to May, or 20% of the total capitalisation of the market.

Analysts are concerned that Chaebols, large family owned conglomerates, may be unwilling to undergo a radical restructuring, preferring instead to make cosmetic changes.

But Lee Kyu-Sung, South Korea's Economics Minister attempted to downplay the crisis by saying the fall in the South Korean stockmarket was only temporary and would recover after September when the labour unrest ends and the country's economic restructuring is completed.

Rapid growth falters

The full extent of South Korea's problems began to emerge in October when the won, the national currency, plunged in value and interest rates rose.

It is a far cry from the South Korea's golden years. The country has long been proud of its dramatic rise from the ashes of the Korean war in the 1950s to become one of the world's largest economic powerhouses.

Growth rates have approached double digits for most of the last three decades, transforming South Korea into the world's 11th largest economy.

But South Korea too succumbed to the contagion afflicting South-east Asian markets. Analysts believe that the gross domestic product could now fall by 2-3% compared to predictions of 1% earlier this year.

South Korea matters because it is so large - as big, in fact, as the battered south-east Asian economies of Thailand, Indonesia and Malaysia combined.

A bleak crisis

When the won plunged in value and interest rates rose, foreign investors scrambled to sell shares. They were alarmed by bad debts of about $30bn in the banking system and snowballing bankruptcies among Korean conglomerates which could no longer service their debts.

The greater the devaluation of the won, the more serious it became for Taiwan, China and, crucially, Japan, whose own economy is stagnating and whose products compete directly with those of Korea in many export markets.

Economic reforms

The South Korean President, Kim Young Sam, sacked his Finance Minister, Kang Kyung-Shik, and another senior economic adviser, Kim In-Ho, in November.

The President appeared on television in December 1997 to apologise publicly for the state of the South Korean economy.

The newly appointed Deputy Prime Minister and Finance Minister, Lm Chang-yuel, recognised the need for financial reform and announced a government plan to help the country's economy. It included a $10bn fund to help banks write off bad debts, and a wider trading range of 10% for the South Korean currency.

Appeal to the IMF

The South Korean government sought aid from the International Monetary Fund to help it out of a growing financial crisis.

The IMF granted its biggest ever loan of 57bn, but imposed tough conditions such as the forced liquidation of banks and the opening of South Korea's financial markets to foreign competition.

These conditions are likely to lead to real economic pain, including many corporate bankruptcies and a rapid rise in unemployment. The package still may not be enough to address the crisis.

Last December, Kim Dae-jung became the first opposition leader to be elected president in South Korea's history. Since then he has been leading his country's efforts to overcome its economic crisis.

Already Mr Kim has faced down the leaders of trade unions who had threatened to organise a general strike in response to threatened layoffs.

In a series of meetings and phone calls with officials from the International Monetary Fund, the United States and Japan, Mr. Kim gained much needed overseas support for his leadership.

The International Monetary Fund has expedited the delivery of relief funds and foreign bankers have rolled over short-term debt.

Mr Kim has also met leaders of the chaebols and warned that they must carry out fundamental restructuring.

See also:

24 Feb 98 | Korean elections 97
05 Mar 98 | Korean elections 97
22 Feb 99 | Korean elections 97
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