Korea: Can President Kim Make Reform Happen?

The hardest changes remain undone

He has been in power less than 100 days. And so far, President Kim Dae Jung has won unadulterated praise from the International Monetary Fund and other Western leaders for preventing a total collapse of the South Korean economy. The won has stabilized against the dollar. Thanks to the IMF's $60 billion bailout, a successful $4 billion global bond offering, and improved export performance, the country has rebuilt its foreign exchange reserves to $31 billion, from $3.8 billion in December. "This government is firmly determined and committed to reforms," Kim told BUSINESS WEEK in a May 22 interview.

The question is whether Kim can push those reforms through before another financial crisis erupts. As of May 27, the Korean stock market had lost 12% of its value in just three days of trading. Investors know Kim is trying, but they also know what he's up against. The Japanese are signaling that a major slide in the yen is on the way. That means cheaper competition that could stop the Korean export recovery in its tracks. Meanwhile, the banks are holding $85 billion in problem loans, credit is getting scarce, and many small companies are folding. Joblessness is already at 6.7%. Suicides have reached an alarming average of about 25 per day--up 36% from a year ago.

"TRICKY GAME." In this season of despair, any politician would be tempted to loosen credit, prop up companies, and backpedal on reforms. Critics already see signs that Kim is feeling the pressure. Especially worrisome is the government's tacit approval to save Dong Ah Group, Korea's 10th-biggest chaebol. Dong Ah's flagship construction company is struggling to service debts of $3.5 billion--equal to its entire annual revenue. A free-market purist would let Dong Ah go under. But on May 21, its creditors agreed to $430 million in emergency financing. Lee Hun Jai, chairman of the financial supervisory commission overseeing finance reform, said Dong Ah's failure would "cause the collapse of the financial system."

The previous government of Kim Young Sam used similar logic to avoid painful measures when the economy started to slide last year. One reason, says Sogang University economics professor Kim Pyung Joo, is that Kim's economic policy team is full of advisers who actually designed the nation's command-and-control economy under the military regimes of Park Chung Hee and Chun Doo Hwan. "I doubt their mentality will change easily," he figures.

It had better. A dozen banks cannot meet international standards for capital adequacy ratios. That's a major warning sign. The government hopes to force a wave of bank mergers, shore up the survivors' capital bases with bond financing, and place the bad loans into a public workout fund. That's O.K.--but only if the chaebol restructure dramatically. Otherwise they still won't be able to pay off their debts to the banks, the banks' bad loans will keep mounting, and sound companies will be starved of desperately needed credit. If the banking crisis and credit crunch are not resolved soon, the economy could be pushed into a "severe depression," says Na Dong Min, a fellow at the Korea Development Institute, a government think tank.

To be fair, the government needs to move gingerly. "This is a tricky game," says one senior Kim adviser. Push too hard to restructure the banks, and the resulting upheaval could trigger a massive run on deposits. And Kim's advisers insist that banks getting public money will be required to sack top management, cut costs dramatically, and revalue their loan portfolios. The decision on which banks will merge is expected in July.

HISTORIC CHANCE. Pulling off such major change in an orderly way is going to take plenty of nerve by Kim's government. The outbreak of violence during labor demonstrations on May 1 suggests that the unions won't yield to layoffs without a fight. Yet Kim, a survivor of decades of conflict with the Korean Establishment, is something of a fighter, too. This set of challenges is different from Kim's political struggles in the past, but they will require the same kind of intensity that has served him so well. Hanging in the balance is his legacy as the man who saved Korea from economic ruin--or who lost a historic chance to change his country.

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