Thank you. It's good to be back in Seoul. The last time I was here -- a little over a year ago -- the light at the end of the tunnel seemed a very long way away. If someone had predicted the developments we have seen in Korea these past 12 months -- the authority which the government has shown in implementing reform; the speed at which foreign reserves have been rebuilt; the signs of output bottoming out in the second half of the year and the return of foreign investors -- it is fair to say that the prediction would have been treated with a good degree of scepticism.
Looking across the region, the impact of the crises of the past eighteen months is still very much apparent. And markets continue to seem worried by the risks and uncertainties facing Japan, China and others. But, to paraphrase Winston Churchill, if we are perhaps not at the beginning of the end of the crisis, here in Korea we may well be at the end of the beginning. Automobile traffic, at any rate, seems to be back to pre-crisis levels.
However, there is an important difference between recovering from a heart attack -- and changing your lifestyle to be sure you never have another one. Whether and how that kind of permanent regime change is going to take place is still perhaps more of an open question.
Let me reflect today on the roots of the recent crisis; the policy response to it; and the key challenges ahead, not merely for governments in the crisis economies but for the United States and the international community. I will concentrate on Korea, because I think that in many respects the problems that led to Korea's crisis, and the way the government has sought to resolve them, carry important lessons for better understanding and resolving crises in other countries.
I. Roots of the Crisis
When a car crashes on the open road, one can usually point to many contributing causes. If the driver had been driving less recklessly -- or wearing a seat-belt -- it might not have happened. If the road had been better designed, and the markings clearer -- it might not have happened. If other drivers had been more attentive, or the weather less treacherous -- it might not have happened. One could point to a similar range contributors in thinking about the crisis here in Korea.
On the one hand, by the time of the crisis there had for some time been widespread concern about Korea's short-term macroeconomic course and the risks it presented: the rising inconsistency between monetary policy and the exchange rate regime; the substantial declines in industrial competitiveness; the speculative bubble channeling large amounts of private capital into unproductive investment; and the mounting, ill-monitored, stocks of short-term private debt.
On the other hand, these problems could be traced to deeper doubts about the underlying structure of the economy and rules by which it operated. Korea's development since the 1960s had been spectacular. To be sure, one needs to be doing quite a lot right to achieve more than three decades of 8 percent growth. But through the 1990s a number of commentators -- most prominent among them Kim Dae Jung himself -- had been warning that time was running out.
Beneath the surface, they argued, was a growing structural crisis in the economy, a crisis that could be traced directly to core parts of the government's long-time recipe for growth: notably the wide scale government coordination of productive activity; the implicit and explicit subsidization of particular industries; the heavy dependence on export-led growth and targeted protection; and the cultivation of nontransparent, relationship-based bank finance.
And yet -- to appeal to the economist's third 'hand' -- it seems clear that the outside environment played its part in these problems combusting in quite the way they did:
- had private institutions been less exuberant in their investments in Korea (and other Asian emerging markets) from the mid-1990s onwards, the macro- and microeconomic imbalances in the economy might not have been able to mount so high -- or for so long.
- equally, if the external economic climate had not deteriorated as sharply as it did during 1997 -- led by the rapid decline in the performance of Japan -- it is fair to say that the crisis might not have erupted at the time that did, or with the same kind of severity.
In the event, all of these elements came together and were then compounded by a crisis of confidence and large-scale run for the exits. The upshot was a situation with many of the features of a bank run, in which the fear that even fundamentally sound institutions might fail, can become a self-fulfilling prophesy.
This, then, was a different kind of crisis -- calling for a different kind of response. It had a common element with almost all financial crises: money borrowed in excess and used badly. But it was also profoundly different because, relative to most of the crises we have seen in the past -- the problems that had to be fixed were much more microeconomic than macroeconomic, and involved the private sector more and the public sector less.
When I met the (then) President-elect shortly before his inauguration last year he handed me his book, The Mass Participatory Economy. He had written it several years before but its solutions were the right ones for the short run and the long run problems that the country faced: transparent, non-inflationary macroeconomic policies; large-scale liberalization and deregulation of the economy; improved governance and an end to government-directed lending to industry; reforming the Chaebol; and opening up the domestic financial system.
II. The Response to the Crisis and Where We Are Today
The program of economic and structural adjustment that the Korean government has worked to implement since the end of 1997 reflected this diagnosis. We saw it in the relatively greater emphasis on regaining investor confidence. And we saw it in the commitment to wide-ranging structural reform.
Policy makers faced an enormous challenge designing such a program in the thick of crisis. Inevitably, especially with 20/20 hindsight, one can question the way in which they settled some of the details. But comparing Korea's situation today with that of a little over a year ago, it seems difficult to question that the broad approach was the right one. Consider:
- in December 1997, the won was at 1800 per dollar. Today it is below 1200. The stock market index is now significantly up from its crisis lows. Net foreign reserves -- at one time below $4 billion -- are upwards of $50 billion. And Korean bonds are once again to be considered investment grade.
- renewed stability and investor confidence, in turn has provided room to loosen policy. Short-term interest rates have now come done to below pre-crisis levels, and fiscal policy has eased substantially.
- and most important, all of this is filtering through to growth -- with manufacturing production now near its level in December 1997, and private forecasters now predicting upwards of 2-3 percent real growth in 1999.
At the same time, the government has started to make progress on the critical tasks of restructuring the bank and corporate sectors -- tasks which the past year has taught needto be addressed together. The vicious cycle is by now all too familiar:
- weak banks balk at making new loans, or undertaking new risks, and charge higher rates to corporate borrowers when they do lend. They are also more reluctant to take part in much-needed corporate workouts that would involve rite-downs of capital they do not have. The upshot is to prolong the problem of corporate insolvency.
- insolvent corporations, in turn, continue to consume precious national savings that could be employed more productively by viable firms -- and may well end up running up further losses for the banks, and further need for banking sector recapitalizations.
As this audience knows well, breaking the cycle is an immense undertaking. And it is fair to say that efforts to address these problems got off to a slow start here. But the government has lately made some important progress.
The first stage of its financial sector program has been completed. Nearly fifty non-viable institutions have been closed and all but two commercial banks have been recapitalized. Only yesterday, one of the largest international banks announced it was buying a major Korean bank and declared that it did plan to exercise its option to buy out the government's share. At the same time, President Kim and the independent Financial Supervisory Commission (FSC) are making determined efforts to accelerate the pace of corporate restructuring -- notably with their new accord with the Top Five chaebol last December.
III. Challenges for 1999
The problems that Korea faced in 1998 were in many ways problems of too little confidence. Lack of confidence show up in bank runs; it shows up in runs on the foreign reserves, it shows up in lack of demand, it shows up in the drying up of foreign investment. All of these clearly have self-fulfilling prophesy aspects, which is why they needed to be addressed as quickly and decisively as possible.
But the government's very success in addressing these problems and restoring economic stability means that to some extent the problems that it faces this year will be more ones of complacency. And complacency, for its part, has a habit of becoming a self-denying prophesy:
- it can put a brake on necessary restructuring;
- it can reduce the pressure for unity that was such a hallmark of the Korean response;
- it can deter moves to increase labor flexibility;
- and it can create macroeconomic problems of its own such as managing sharp increases in capital inflows.
If what Korea had to fear in 1998 was fear itself -- it might be that what it has to fear in 1999 will be the lack of fear itself. Ambitious goals have been set. The challenge will be to persevere in achieving them when the storm clouds appear to be moving on.
The December agreement commits the Big Five chaebol to cutting the number of their affiliates in half and dramatically reducing their debt-equity ratios by the year 2000. But in the end, restructuring that is shallow and gimmicky will deliver a recovery to match. As President Kim said in this context yesterday, when you make a promise, you ought to keep that promise. Companies need to show they are making genuine reductions in excess capacity and changes in the way they operate. That means providing the means for effective monitoring; and it means the creation of transparent, market-based procedures that apply to all.
The government's own commitments to restructuring and renouncing past practices await the same test. President Kim has pledged to end directed lending and hidden subsidies. He has pledged to build and defend a more transparent system of corporate governance. He has pledged to push banks into insolvency that cannot meet their obligations. In the coming months he will need to show that he still means it.
In this context the United States has welcomed President Kim's commitment to openness and to doing away with directed lending, hidden subsidies and other unfair practices that have been such a stumbling block in global trade arena in past years. But as you know, suspicion in this area will often be as damaging as hard proof. In the steel and semi-conductor sectors, especially, it will be vital to put to rest any doubts that subsidies are continuing behind closed doors.
Maintaining a feeling of national unity -- the feeling that was so palpable last December when housewives were bringing their wedding rings to the banks -- is the country's best insurance against complacency. And an important way to support that kind of unity will be moving rapidly to create an effective system for protecting dislocated workers, support retraining and provide for basic social services. To be sure, culture and history matter. It us up to Korea to work out the kind of social safety net that is right for its people and its way of life. But it will be important to ensure that effective protections exist.
The fact that employment and real wages are likely to lag well behind the recovery in output will put enormous pressure on trade unions to return to business as usual. In its early support for tripartite dialogue the government rightly recognized the need to include labor and its representatives in the restructuring process. But that inclusion has to be based on a reasonable bargain.
Despite last year's agreements, a company's right to lay off workers still seems to carry with it a legal obligation to be near death. In the months ahead, the unions need to recognize that Korea will not continue to move rapidly out of crisis while the major segment of its workforce is standing still.
Going forward, rising capital inflows as investor confidence recovers will present macroeconomic policy challenges of its own -- albeit ones that are much easier to address than soaring capital outflows. But in all these challenges it will be important for Koreans to keep their eyes on the long-term prize.
For decades Korea was one the world's greatest development success stories. The key ingredients of that success remain today. And as painful as the past year has been -- and as painful as the next year may be for many people -- it is at least possible to see Korea emerging stronger as a result. In a global economy fueled increasingly by technology and human capital, Korea is a country, after all, with unquestioned technological capacities and a share of high school graduates going on to college that is second only to the United States'.
IV. The Role of the United States and the International Community
Let me conclude today by reflecting briefly on the role of the United States and the international community with respect to Korea and with respect to the problems facing the global economy.
While national policy is always of paramount importance, there is no question that the Korean experience demonstrates the potential difference that conditioned provision of finance -- and the confidence it can engender -- can make. Had Korea been forced into a moratorium or general default at the end of 1997, as looked quite likely for a time, it is very unlikely that industrial production would be at anything like the pre-crisis levels today. And the turbulence in other markets around the world could have been even more severe.
Just as Korea has its part to play in supporting a global recovery in 1999, so has the rest of the international community. Let me highlight just three aspects.
Policies to secure strong growth in the industrial countries
The United States has played its part in supporting global growth over the past five years -- with policies that have achieved a balanced budget, lower interest rates, low inflation and strong growth. These have made and will continue to make a major contribution to supporting global growth and financial confidence. But we cannot carry the burden of global adjustment to the Asian crisis on our own.
Japan and Europe both have critical roles to play in achieving broad-based growth in the major industrial economies and helping curb the development of destabilizing global imbalances. With the Japanese economic situation still very troubling, it is as important as it has ever been for the government to take effective steps to achieve its goal of strong domestic demand-led growth. For their part the European economies need to pursue effective macroeconomic policies and structural measures to ensure solid growth in domestic demand.
Working With the International Financial Institutions to Support Key Remaining Priorities
As the crisis economies start to enter a new phase of the crisis the international community's response has also evolved to respond to key priorities. Notably:
- through the Asian Growth and Recovery Program, part of a multilateral initiative to assist Asian restructuring efforts that was launched by President Clinton and Japanese Prime Minister Obuchi at APEC. The AGRP aims to help governments to tackle this critical barrier to recovery by supporting the implementation of strengthened policy frameworks for restructuring and by helping to catalyze, through use of official credit enhancements, where appropriate, new private funds to finance the fiscal costs of recapitalizing banks.
- through stepped-up support of social safety net programs in the economies worst hit by crisis. Following President's call last autumn, the World Bank has trebled its social lending programs to these economies and the ADB's social lending has doubled.
Helping to Prevent Future Crises
Finally we need to work together -- industrial economies and developing ones -- to find better ways to prevent crises and deal more effectively contain them when they occur. Among the priorities here will be:
- increased transparency and disclosure. If one were writing a history of the American capital market I would suggest to you that the single most important innovation shaping that capital market was the idea of generally accepted accounting principles. We need that internationally, and we need it at the level of individual companies and financial institutions.
- and designing effective systems of crisis response. That means every country having an effective regime for corporate insolvency. And as we saw in Korea, these can often involve an important role for voluntary participation of private sector creditors.
Without in any way minimizing the scale or the enormity of challenges ahead in this country, I think that what has been accomplished here in Korea in the past year points up the key elements of an effective crisis response: the importance of appropriate macroeconomic policies; of transparency, and of structural reforms to let market forces operate. But if there is one lesson above all others in the Korean experience it is the critical importance of political leadership. Looking around the world today I cannot think of another first presidential anniversary I am happier to celebrate. Thank you.