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A Tale of Two Countries Coping With Economic Emergency

May 16, 1999|Frank Gibney | Frank Gibney is president of the Pacific Basin Institute and a professor of politics at Pomona College. He is the author of "The Pacific Century: America and Asia in a Changing World."

SANTA BARBARA — The secret to both Japan's and South Korea's postwar economic "miracles" was essentially the same: export-led high growth and intensive investment. In both, success was the result of cooperation among a driven leadership, a supportive government bureaucracy and aggressive big business.

Even the best industrial policies, however, ultimately show their downsides. By the 1980s, there were warnings in Japan that government backing of "sunrise" industries in the 1960s and early '70s was giving way to an institutionalized subsidy of inefficient "sunset" businesses, with bureaucratic overregulation stifling growth and forcing consumers to pay the world's highest prices. Similar warnings were heard in Korea. They were all unheeded.

Then the music suddenly stopped. Japan's enormous bubble of inflated stock and land values burst at the beginning of the 1990s, and recession set in. South Korea's economic comeuppance came with the Asian economic crisis in 1997. What's interesting is the contrast in how Japan and Korea have coped with their respective economic emergencies.

Less than two years after disaster, the Republic of Korea's economy is coming back strong. Foreign-currency reserves now stand at $50 billion, up from less than $4 billion a year ago. Gross national product is estimated to grow about 3% this year, after contracting 5.9% in 1998. Last year's current-account deficit of $8 billion could become an estimated surplus of $40 billion. Korea has begun to pay back the emergency loans it got from the International Monetary Fund in 1997. Foreign investment, in an economy that used to be something of a Sargasso Sea for outside capital, has jumped to a record $8.9 billion. Interest rates are down to an unprecedented 7%. Most significant, consumer spending over the past year has risen by 4%.

There is a lot of economic sweat behind these statistics. Korea's trade unions protested the loss of jobs caused by economic restructuring, while government expanded unemployment insurance and retraining programs. The chaebols, huge industrial conglomerates, are unhappy about selling off unprofitable subsidiaries. Yet, public corporations are being privatized and failing banks either shut down or merged. Foreign ownership of banks, once unheard of, is now encouraged. The bureaucracy is being trimmed. Unlike any other nation in East Asia, South Korea has undertaken a massive economic restructuring.

"In the past, a network of intimacies in politics encouraged widespread corruption," says President Kim Dae Jung. "Our companies lost competitiveness. In a global economy that spells disaster."

No such notes of urgency sound in Tokyo. Prime Minister Keizo Obuchi talks about a "transition to a new economy" but is nervous about restructuring his economy because it would, in the short run, cost jobs--and votes. Iwao Nakatani, one of Japan's leading economists, has estimated that a real restructuring of Japan's overregulated economy might eliminate 10 million jobs.

But as Obuchi thinks about reforming gradually, "in the Japanese way," Japanese big business is doing the job for him. With a record 3 million already unemployed and more companies downsizing--NEC, Sony and Mitsubishi Electric, among others, announced their new lean and mean posture earlier this month--the old assurances of full employment are evaporating. In 1995, Shoichiro Toyoda, then chairman of Japan's big-business Keidanren, or Federation of Economic Organizations, declared that "abolition" of bureaucratic regulation was necessary to restart the economy.

Thus far, through eight years of recession, Tokyo's politician-bureaucrat mix has tried to shore up the economy by costly stopgap stimulus packages, mostly in the form of construction projects, loans to business and bank rescues. The public has been minimally reassured. Consumers, afraid to spend, have been saving their money. Household safes are selling very well. Overall, consumer spending continues to move downward, this year by 4%, despite government pump-priming projects, like giving about $170 in "spending certificates" to Japanese families. Industries are not investing. The banking system remains half under water, despite Obuchi's approval of a $500-billion government rescue package.

How is it that South Korea can start a major restructuring plan, while Japan dawdles? One reason is sheer necessity. As an industrial trading nation, South Korea has to earn its bread daily as a strong competitive member of a globalized economy. But Japan, with something like $10 trillion in accumulated savings, could keep up its protected hothouse economy for a few more years, living off accumulated fat. But there is a more basic explanation: the difference between government by an energetic "outsider" and by a complacent "insider."

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