Two Steps Forward, How Many Back?

A backlash against reforms may slow the economic opening SOUTH KOREA

It has been a hectic three years for South Korea's President Kim Young Sam. Since he took office in February, 1993, after campaigning for sweeping reforms, Kim has cracked down on money politics, purged old-guard military leaders, and freed up the economy to new domestic and foreign competition. In response, the country's gross domestic product has soared an average 7.8% annually, pushing per capita income past $10,000.

But Kim is nonetheless facing defeat in National Assembly elections on Apr. 11. Widely seen as a midterm vote on the President's policies, the elections are likely to cost Kim's New Korea Party its majority in the 299-seat legislature--a sign of discontent with his reforms. While observers expect the President to cobble together a coalition to maintain the ruling party's control, Kim's mandate for the second half of his term, which ends in February, 1998, will be seriously weakened.

HOT ISSUE. The result could be a slowdown in the opening of Korea's markets and in its deregulatory reforms. That would be bad news for foreign investors and could delay the country's entry into the Organization for Economic Cooperation & Development, the club of industrial nations. Kim may also be tempted to introduce populist policies that could stoke inflation, which is just over 5%. And as political parties gear up for the 1998 presidential race, economic reform will become a hot campaign issue. Says Jung Ku-Hyun, director of the Institute of East & West Studies at Yonsei University in Seoul: "I anticipate the status quo for another year, then chaos."

Kim has run into trouble over a range of issues. While producing faster growth and greater overall wealth, his moves to open the economy have led to the bankruptcy of record numbers of uncompetitive small and midsize companies. Meanwhile, the 30 family-controlled conglomerates, or chaebol, whose dominance is resented by smaller companies, have been given freedom to spread into new sectors such as telecommunications, and are growing even larger. The widely applauded arrest and trial on corruption charges of two former Presidents--Roh Tae Woo and Chun Doo Hwan--also have a downside: Many see the move as a drastic bid by Kim to score with voters.

The opposition has seized on company failures as a major sore point. Bankruptcies soared to a record 13,992 in 1995 and are expected to rise even higher this year. Many failed companies were in labor-intensive textile and service industries, which have been squeezed by rising wages and growing imports. Kim Dae-Jung, who heads the opposition National Congress for New Politics, told BUSINESS WEEK: "Some bankruptcies are inevitable, but some are policy failures." He is urging more government support for smaller enterprises.

HUMILIATED. But the President also stumbled on his much publicized push to curb the chaebol. In a crackdown on corruption, he exposed the bribery of nine chaebol leaders who had given a total of more than $1 billion to former Presidents Roh and Chun. Using the scandal as a way to push chaebol to bring in more professional managers and outside board members, he humiliated the nine executives in nationally televised trials.

But he quickly let up the pressure for fear of damping business sentiment during a slowdown. Only one of the nine executives indicted was imprisoned, and he has since been released. The rest are expected to be fined but will likely get suspended sentences. Now, few expect Kim to take tough moves against the chaebol over the next two years.

With the New Korea Party slipping, both Kim Dae-Jung and Kim Jong-Pil see their parties--the National Congress for New Politics and the United Liberal Democrats--gaining significantly in the Apr. 11 elections. Meanwhile, the Democratic Party, headed by liberal politician Kim Won-Ki, will seek support among younger voters looking for a generational change in leadership.

To give his New Korea Party the chance to win the presidency in 1998, President Kim must thus temper his reforms to win back votes--but not water them down altogether. "The challenge will be to convince the public of the need for more reforms," says Lee Seo-Hang, professor of international relations at the Institute of Foreign Affairs & National Security in Seoul. As the politicking revs up, foreign investors counting on a faster opening of the country's markets may be disappointed.

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