Friday, January 07, 2011
South Korea Makes Quick Economic Recovery
By MARTIN FACKLER
SEOUL, South Korea — When the global financial crisis struck more than two years ago, customers disappeared from the Dongdaemun market, a cramped maze of clothing and fabric shops in the shadow of a medieval city gate. But in contrast to the economic conditions in the United States and Europe, business quickly rebounded here and in the rest of this vibrant, technology-driven nation, a resilience that many South Koreans attribute to their bitter experience of having survived an even worse downturn, the currency crisis of 1997.
“This time didn’t feel so much like a real crisis,” Kim Soon-nam, 70, said as she surveyed customers from her small stall, which is filled with running pants and brightly colored dress shirts. “It was hard back then, but that hardship made me stronger.”
The Asian currency crisis is known popularly here as the I.M.F. crisis because the danger of economic collapse forced South Korea to swallow a tough bailout package from the International Monetary Fund that closed big banks and industrial companies, led legions of workers to be laid off and prompted citizens to donate their gold to the national treasury. It was a collective trauma that is remembered here on the scale of the Great Depression in the United States.
But South Korea was able to bounce back and resume the soaring growth rates that have enabled its gross domestic product to double since 1998, catapulting South Korea into the ranks of the world’s wealthiest nations. The latest surge began within months of the financial panic of late 2008 and has continued in every quarter since, according to the Bank of Korea, with the South Korean economy now ranking as the 15th largest in the word. The nation’s capacity to emerge from not one but two debilitating financial crises without prolonged stagnation is drawing attention in a world that suddenly needs economic role models.
“Korea has many differences with the United States, but they certainly did financial reform right,” said Barry Eichengreen, a professor of economic history at the University of California, Berkeley. “Korea under the I.M.F. did radical surgery.”
Economists are quick to caution against making sweeping comparisons between South Korea and the United States. In the late 1990s, South Korea suffered from a “crony capitalism” in which banks lent too freely to corporate customers, while the United States’ financial troubles are rooted in excessive borrowing by individuals. South Korea remains a developing, manufacturing-led nation that is still catching up to the postindustrial economy of the United States.
The dollar’s status as the world’s reserve currency also gives American policymakers options that were not available in 1997 to South Korean officials, whose most immediate problem was a collapse in the value of their currency, the won.
Still, economists say, South Korea’s hard-landing approach can offer pointers to the United States, especially at a time when Republicans have taken over the House of Representatives with vows of “restoring fiscal sanity.” One such lesson, they say, is to avoid relying too much on stimulus spending and to make painful structural changes so that the economy can find its natural bottom and resume its growth. Another is to make the changes quickly and decisively to restore the public’s faith.
“Sooner or later, the U.S. must make some cruel choices,” said Chung Duck-koo, who was a Finance Ministry official during the 1997 crisis and is now a professor at Korea University. “Making them sooner is the best way to restore confidence.”
In 1997, the Korean economy almost collapsed under the weight of profligate corporate borrowing and a growing trade deficit and was forced to accept a $60 billion bailout from the I.M.F. The package pushed South Korea to shut down excess production capacity, causing the collapse of 14 of the nation’s large industrial conglomerates, like the once formidable Daewoo group. The survivors, like Samsung Electronics, emerged with less debt and healthier balance sheets.
Mr. Eichengreen and other experts said the most noteworthy changes came in South Korea’s then-crippled banking industry. The government closed or restructured 12 of the 32 largest banks and spent about $60 billion to write off bad loans and replenish the cash reserves of the remaining banks. The Korea Asset Management Corporation, a public fund, bought about two-thirds of the problem loans on the banks’ books, freeing up capital to restart a virtuous cycle of lending.
By contrast, analysts fault Washington for keeping many struggling banks afloat after the subprime-lending fiasco and for failing to clean up enough of the mortgage-related securities that are clogging the American financial system.
“Korea did a better job of moving quickly to clean up its banking system once and for all,” said Naoko Nemoto, a banking analyst in Tokyo for Standard and Poor’s. Ms. Nemoto, who wrote a book on the South Korean reforms, compared the South Korean response with that of her native Japan, where officials’ reluctance to close “zombie” corporate borrowers contributed to the country’s economic stagnation since a financial crisis in the early 1990s.
Ms. Nemoto and other analysts say that the United States should resist the temptation to mimic Japan’s reliance on quick fixes. South Korea’s central bank was forced to raise interest rates during the 1997 crisis to shore up its currency and restore investors’ confidence.
The higher rates were unpopular because they helped cause the hard landing that forced 1.4 million Koreans, about 7 percent of the work force, out of their jobs. But South Korea’s ability to endure such hardships and bounce back points to another lesson: the need for a sense of shared national purpose and willingness to sacrifice. South Koreans rallied to help their nation, spending less, saving more and learning to be more competitive.
“Nobody was buying back then, so I slept less, worked harder,” said Ms. Kim, the stall owner in the Dongdaemun market. “And I saved and saved and saved.”
Economists say the United States needs a similar national consensus to reduce borrowing and to invest more in education and other ventures that will raise productivity, which they say is the only way to regain a sustainable growth rate. Some worry that the United States may have missed its best chance, now that the worst of the public’s crisis-inspired worries have subsided.
“Our commitment to education and our diligence were what helped Korea in 1997,” said Kang Man-soo, who served as vice minister of the Finance Ministry during the 1997 crisis. “The U.S. needs to get back to basics.” ◦