On July 19, one of South Korea's most festering problems came to a head: Daewoo Group was perched on the edge of a bankruptcy that would have triggered a wave of insolvencies throughout the economy. The government stepped in and asked Korean financial institutions to give Daewoo a reprieve. Creditors rolled over $5.9 billion in loans that were about to come due out of Daewoo's estimated $50 billion in debt. Crisis averted--for the time being. But as Korea's powerful conglomerates, or chaebol, continue to play a dangerous game of chicken with their creditors, what happens next time?
As President Kim Dae Jung grapples with the chaebol, he's finding his honeymoon period over and his reforms just barely taking hold. After 17 months in office amid the worst economic devastation since the Korean War in 1953, Kim is struggling to keep his original objectives in sight--never mind implement them. Kim has made public declarations about curbing the chaebol and rooting out corruption. Yet corruption scandals have roiled the administration. One involves Kim associate Lim Chang Yeul, who helped steer the country out of economic crisis but allegedly took a payoff from a bank executive. And Korea's five largest chaebol have used the downturn to bulk up, not slim down. "The government is weak. The chaebol are very strong," says Seoul National University economics professor Chung Un Chan.
Politically, Kim is fighting to keep off the tarnish as well. Conservatives are attacking his strategy of trying to open up to North Korea. In parliament, Kim is scrambling to keep a shaky domestic political alliance together as jousting intensifies ahead of next April's elections.
Part of the problem is that Korea's bubbling economy seems to have blunted the zeal to reform. The economy is expected to grow 8% this year, compared with a 5.8% drop last year, based on strong exports and surging domestic consumption. That makes Korea the fastest-growing major economy in the world. Meanwhile, stocks are booming, with the Korean Composite Index up 71% so far this year.
Kim is smart enough not to be lulled by the recovery. Korea still has deep structural problems. Although Korean taxpayers have ponied up $54 billion to recapitalize the country's financial system, there's still no sign that banks have been transformed into modern lending institutions. Companies haven't restructured, and their pledges to focus on profitability and transparency remain little more than slogans. The old ways of doing business remain firmly in place.
EMPTY VOWS. Daewoo is a good example. The giant chaebol promised to sell off assets to raise needed cash, and founder Kim Woo Choong pledged to step down from the helm. But so far, Kim Woo Choong has stayed on. And the company has kept expanding while selling off almost no assets. "Nobody can control the chaebol," says a Korean who heads a foreign securities firm in Seoul.
Kim's next steps will show how far he can still push reform. With Daewoo, the President could follow through on pledges to force the group to jettison businesses and force out Kim Woo Choong. So far, these have amounted only to threats. Kim has refrained from acting, fearing that a forced breakup of any chaebol could wreak havoc, create mass unemployment, and cause banks burdened with chaebol debts to fail. But if Daewoo gets away without restructuring, it could bury reform.
As for rooting out corruption, Kim could go beyond moralizing and make practical changes: paying civil servants higher salaries but reducing their individual decision-making powers; insisting on more transparency in the civil service; and ending the routine corporate practice of handing out cash to everyone from journalists to government officials. Finally, Kim could ensure compliance through an independent corruption commission, modeled on Hong Kong's successful minimization of graft in a city that lived on dirty money as recently as the 1970s.
A devout Catholic fired by a zealous sense of what's right, Kim's leadership has been pivotal to restoring international confidence and allowing Korea to tap the international bond market for much needed cash. Having escaped a death sentence and two government-sponsored assassination attempts, Kim has been through worse trials in his four-decade political career. But he can't afford to rest. A new Korea needs a big push of the sort that only a leader of Kim's stature can provide.