Some Good News From South Korea

It's beginning to look as though the South Korean economy--an anachronistic amalgam of huge industrial combines known as chaebol, powerful unions, and insular government agencies--will probably be remade in coming months. The process will be wrenching and painful, as there will be numerous corporate casualties--and not a few individual ones, too. Unemployment will rise, and sovereignty will seem threatened by foreign lenders and foreign buyers of corporate assets. Eventually, though, a new and more vibrant South Korea should emerge, able to sustain healthy and balanced economic growth. In time, it may become a model for Asia.

In some ways, it already is. That reform appears to be happening is nothing short of remarkable. In the space of a few weeks, after the Korean won tumbled and the Seoul stock market tanked, dramatic steps were taken to revolutionize the way the Korean economy functions. It was long known that the chaebol, unprofitable and burdened with debt, had to be broken up. But the shock that financial markets dealt Korea is accelerating the process. Leading the charge, by a stroke of good fortune, is the political outsider who won the recent elections, Kim Dae Jung. Assuming he follows through in reforming the export-driven, crony-ridden economy, it could become a more powerful global player. The government has O.K.'d up to 100% foreign ownership of Korean assets, and the unions seem to be going along with changes.

Once those pieces fell into place, it was only right that the U.S. and European banks acceded to rolling over Korean debt and advancing additional financing. With that money and $57 billion from the International Monetary Fund, Korea should have a cushion as it deals with the economic crisis and handles upcoming debt payments. It's important that U.S. and European banks, in better shape than they've been in a long time, be forced to take some losses: The point of the IMF-led rescue is not to make whole Western bankers and investors who misjudged the risks, but to avert large-scale Korean bankruptcies while launching the restructuring.

Remaking Korea is a tricky balancing act, but the chances of success today look far better than they did only a couple of weeks ago. The big question, of course, is how the restructuring will play out over the next few months. For Korean workers, the closed economy has long offered security. Now, joblessness is rising. How will lifetime employees react when their employers cut them loose? What will they think as foreign companies swoop in and buy assets at fire-sale prices? It's something Americans, and to a lesser extent, Europeans, have had to face as competitive pressures ravaged entire industries and communities. First comes denial, then anger, and, eventually, acceptance. But foreign competition had a salutary effect on U.S. managers and forced widespread productivity improvements. The same could happen in Korea. What's more, deregulating the economy will spur entrepreneurship and business creation, which should enliven the economy even more than the reform of moribund companies will. If Koreans can withstand the painful restructuring ahead, there's likely to be much economic gain later on.

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