Tuesday, December 13, 2005

Economic Performance in Post-Crisis Korea: A Critical Perspective on Neoliberal Restructuring

Contributed by Eric

This paper evaluates the neoliberal economic restructuring process implemented in Korea following the 1997 Asian financial crisis. The paper concludes by arguing that Korea should reject radical neoliberal restructuring and instead adopt reforms designed to democratize and modernize its traditional state-guided growth model:

  • As a result of financial crisis that broke out in Southeast Asia in 1997, foreign banks demanded immediate repayment of their loans that were used to fund long-term investment projects.
  • Korean firms were unable to repay their debts that force the Korean Government to accept an IMF loan to repay foreign debt in return for effective IMF control of Korean economic policy.
  • Simultaneously, the IMF ordered President-elect Kim Dae Jung to drastically accelerate the transition of the Korean economy from its traditional state-guided model to a neoliberal model – like the US and UK.
  • After falling near 7% in 1998, real GDP growth was almost 11% in 1999 and 9% in 2000, which was described as a resurgent economy.

However, this paper questioned the success of neoliberal restructuring with a careful examination of relevant data from 1991 to 2000:

  • It has created neither a health financial sector nor a profitable industrial sector. Instead, it triggered a vicious circle that keeps financial institutions perpetually weak – i.e. not able to provide necessary fund to industrial firms.
  • It has failed to restore Korea to a sustainable high-growth path – the economic recovery of 1999 and 2000 was imbalanced and unsustainable and the economic condition of the majority of the population has deteriorated.
  • The imposition of restrictive prudential regulation and large-scale bank closings in the midst of the 1998 collapse create a vicious credit supply crunch, while the requirement to drastically reduce leverage ratios left Korean corporations unable to demand desperately needed external finance.
  • Korea’s major corporations remain debt-burdened and unprofitable, while the attempt to break insider control of chaebol decision-making has yet to succeed.
  • If the government continues to force large numbers of unprofitable firms and banks to close, a new financial and economic crisis is likely to occur. But if it continues to use public funds to prop up weak enterprises, restructuring will fail.
  • Neoliberal restructuring has led to increased inequality and economic insecurity.
  • Contrary to the neoliberal ethos, it was the state, not the market system that designed and executed the restructuring process. Three and one half years into the neoliberal revolution, the state continues to exercise substantial power over market processes and outcomes.

Pre-crisis liberalization plus radical post-crisis neoliberal restructuring have dismantled or badly weakened many of the policy tools the government traditionally used to impose social control over the Korean economy. Indeed, contrary to President Kim’s belief that free-market systems promote democracy, neoliberal restructuring requires the replacement of at least potentially democratic political control over the economy with market processes dominated by rich individuals and powerful companies.

1 comment: