Subject: apec-L: Re: MULTINATIONAL MONITOR: SE Asian Collapse
From: email@example.com (Gatt Watchdog)
Date: Fri, 03 Apr 98 14:51:21 +1200
Organization: PlaNet Gaia Otautahi
Subject: Re: MULTINATIONAL MONITOR: SE Asian Collapse
From: firstname.lastname@example.org (Gatt Watchdog)
Reply-To: email@example.com (Gatt Watchdog)
Date: Fri, 03 Apr 98 10:12:50 +1200
Organization: PlaNet Gaia Otautahi
From: Jonathan Dushoff <firstname.lastname@example.org>
Subject: MULTINATIONAL MONITOR: SE Asian Collapse
Date: Wed, 1 Apr 1998 18:12:21 GMT
The End of a "Miracle." Speculation, Foreign Capital Dependence
and the Collapse of the Southeast Asian Economies
By Walden Bello,
The Multinational Monitor, Vol. 19, nos. 1 & 2
BANGKOK -- Environmentalists received an early Christmas gift when the
Malaysian government announced in early December that it was suspending
plans to build the controversial Bakun Dam in Sarawak. Constructing the
dam would have resulted in the clearcutting of 70,000 hectares of
forestland in an area that is already experiencing one of the world's
highest rates of deforestation and in the displacement of approximately
9,500 indigenous people.
What years of international and local pressure on and lobbying of the
Malaysian government could not do was achieved by the one message that
the country's strong-willed leader Mohammed Mahathir could understand:
no more dollars. Expected to cost $5 billion, the Bakun Dam -- like
Mahathir's other vision of building a two kilometer-long "Linear City"
that would have been the world's longest building -- fell victim to the
financial crisis that is presently wracking Southeast Asia.
In the several months, the Philippines and Southeast Asia have been
gripped by an economic downturn that has yet to hit bottom. The
Philippine peso, the Thai baht, the Malaysian ringgit and the
Indonesian rupiah have collapsed, falling in value by as much as 80
percent in the case of the rupiah. Stock markets from Jakarta to Manila
have hit record lows, dragging down via a curious "contagion effect"
Hong Kong and even Wall Street, at least momentarily.
Governments throughout the region were paralyzed by the crisis. In
Thailand, the ruling coalition has lost its last ounce of credibility
as people look toward the curious combination of the King and the
International Monetary Fund (IMF) for salvation in these frightening
times. In the Philippines, the administration of President Fidel Ramos
is reduced to telling people to count their blessings because the
crisis is worse in Thailand, Malaysia and Indonesia. In Kuala Lumpur,
Mahathir rails angrily against what he sees as a conspiracy to debauch
Southeast Asia's currencies led by speculator George Soros, also
hinting darkly at a Jewish plot against Islamic Malaysia.
Once proud of their freedom from IMF stabilization and structural
adjustment programs, the Thai and Indonesian governments have run to
the Fund, which has assembled multi-billion dollar bailout funds in
return for draconian programs that pull the plug from banks and finance
companies, mandate deep spending cuts and accelerate liberalization and
deregulation in economies marked by significant state intervention. The
Philippines never left IMF management, and it is now likely to postpone
its "exit." True to form, Malaysia's Mahathir refused to go to an
institution that he sees as part of the problem rather than the
CRISIS OF A MODEL
Many informed analysts, while dismissing Mahathir's conspiracy
theories, have pinned part of the blame for the crisis on the
uncontrolled flow of trillions of dollars across borders owing to the
globalization of financial markets over the last few years.
Increasingly, some assert, capital movements have become irrational and
motivated by no more than a herdlike mentality, where one follows the
movement of "lead" fund managers like Soros, without really knowing
about the "economic fundamentals" of regions they are coming to or
Surprisingly, Stanley Fischer, the deputy managing director of the IMF,
lent support to this interpretation about irrational markets, telling
the recent World Bank annual meeting in Hong Kong that "markets are not
always right. Sometimes inflows are excessive, and sometimes they may
be sustained too long. Markets tend to react late, but then they tend
to react fast, sometimes excessively."
The merits of this analysis notwithstanding, it fails to grapple with a
more fundamental issue: the pattern of development that has rendered
the region so vulnerable to such variations in foreign capital inflows
and outflows. To a considerable extent, the current downspin of the
region's economies should be seen as the inevitable result of the
region's closer integration into the global economy and heavy reliance
on foreign capital.
More than in the case of the original newly industrializing countries
(NICs) of Northeast Asia, the Southeast Asian NICs have been dependent
for their economic growth on foreign capital inflows. The first phase
of this process of foreign capital-dependent growth occurred between
the mid-eighties and the early 1990s, when a massive inflow of capital
from Japan occurred, lifting the region out of recession and triggering
a decade of high 7 to 10 percent growth rates that were the envy of the
rest of the world.
Central to this development was the Plaza Accord of 1985, which
drastically revalued the yen relative to the dollar, leading Japanese
corporations to seek out low-cost production sites outside of Japan so
they could remain globally competitive. Some $15 billion in Japanese
direct investment flowed into the region between 1986 and 1990. This
infusion brought with it not only billions more in Japanese aid and
bank capital but also an ancillary flow of capital from the first
generation NICs of Taiwan, Korea and Hong Kong.
By providing an alternative access to tremendous sums of capital,
Japanese investment had another important result: it enabled Southeast
Asian countries to slow down the efforts of the IMF and World Bank to
carry out the wide-ranging "structural adjustment" of their economies
in the direction of greater trade liberalization, deregulation and
privatization -- something the Fund and Bank were successfully imposing
on Latin America and Africa at the time.
By the early 1990s, however, Japanese direct investment inflows were
leveling off or, as in the case of Thailand, falling. By that time, the
Southeast Asian countries had become addicted to foreign capital. The
challenge confronting the political and economic elites of Southeast
Asia was how to bridge the massive gap between the limited saving and
investments of the Southeast Asian countries and the massive
investments they needed for their strategy of "fast track capitalism."
But happily for them, a second source of foreign capital opened up in
the early 1990s: the vast amounts of personal savings, pension funds,
corporate savings and other funds -- largely from the United States --
that were deposited in mutual funds and other investment institutions
that sought the highest returns available anywhere in the world.
These funds were not, however, going to come in automatically, without
a congenial investment climate. To attract the funds, government
financial officials throughout Southeast Asia devised come-hither
strategies that had three central elements:
Financial liberalization or the elimination of foreign exchange and
other restrictions on the inflow and outflow of capital, fully opening
up stock exchanges to the participation of foreign portfolio investors,
allowing foreign banks to participate more fully in domestic banking
operations and opening up other financial sectors, like the insurance
industry, to foreign players.
Maintaining high domestic interest rates relative to interest rates
in the United States and other world financial centers in order to suck
in speculative capital that would seek to capture the enormous
difference from the spread between, say, interest rates of 5 to 6
percent in New York and 12 or 15 percent in Manila or Bangkok.
Fixing the exchange rate between the local currency and the dollar
to eliminate or reduce risks for foreign investors stemming from
fluctuations in the value of the region's currencies. This guarantee
was needed if investors were going to come in, change their dollars
into pesos, baht or rupiah, play the stock market or buy high-yielding
government or corporate bonds, and then transform their capital and
their profits back into dollars and move on to other markets where more
attractive opportunities awaited them.
This formula had the blessing of the IMF and the World Bank, where one
of the key elements of reigning economic doctrine was capital account
The policy was wildly successful in achieving its objective of
attracting foreign portfolio investment and bank capital. U.S. mutual
funds led the way, supplying new capital to the region on the order of
$4 billion to $5 billion a year for the past few years.
THAILAND'S RECORD RISE AND FALL
A close look at two countries -- Thailand and the Philippines --
reveals the dynamic of the rise and unravelling of foreign
capital-driven "fast track capitalism."
In the case of Thailand, net portfolio investment or speculative
capital inflow came to around $24 billion in the last three to four
years, while another $50 billion came in the forms of loans via the
innovative Bangkok International Banking Facility (BIBF), which allowed
foreign and local banks to make dollar loans to local enterprises at
much lower rates of interest than those in baht terms. With the wide
spread -- 6 or 7 percent -- between U.S. interest rates and interest
rates on baht loans, local commercial banks could borrow abroad and
still make a mean profit relending the dollars to local customers at
lower rates than those charged for baht loans.
Thai banks and finance companies had no trouble borrowing abroad. With
the ultimate collateral being an economy that was growing at an average
rate of 10 percent a year -- the fastest in the world in the decade
from 1985 to 1995 -- Bangkok became a debtors' market.
Contrary to current IMF and World Bank attempts to rewrite history, the
massive inflow of foreign capital did not alarm the Fund or the Bank,
even as short-term debt came to $41 billion of Thailand's $83 billion
foreign debt by 1995. In fact, the Bank and the IMF were not greatly
bothered by a conjunction of a skyrocketing foreign debt and a
burgeoning current account deficit (a deficit in the country's trade in
goods and services) which came to 6 to 8 percent of gross domestic
product in the mid 1990s. At the height of the borrowing spree in 1994,
the official line of the World Bank on Thailand was: "Thailand
provides an excellent example of the dividends to be obtained through
outward orientation, receptivity to foreign investment and a
market-friendly philosophy backed by conservative macro-economic
management and cautious external borrowing policies."
Indeed, as late as 1996, while expressing some concern with the huge
capital flows, the IMF was still praising Thai authorities for their
"consistent record of sound macroeconomic management policies." While
the Fund recommended "a greater degree of exchange rate flexibility,"
there was certainly no advice to let the baht float freely.
The complacency of the IMF and World Bank when it came to Thailand --
and their failure to fully appreciate the danger signals -- is traced
by some analysts to the fact that the debt was not incurred and
financed by the government but by the private sector. Indeed, the high
current account deficits of the early 1990s coincided with government
budget surpluses. In the Fund/Bank view, since the financial flows were
conducted by private actors, there was no need to worry, as they would
be subject to the self-correcting mechanisms of the market. That, at
least, was the theory.
Turning to the Philippines, Manila's technocrats were in the early
1990s very hungry for foreign capital since the country had been, for
reasons of political instability, skirted by the massive inflow of
Japanese investment into the Southeast Asian region in the late 1980s.
Eager to join the front ranks of the Asian tigers, the Philippine
technocrats saw Thailand as a worthy example to follow and in the next
few years, in matters of macroeconomic strategy, the Philippines became
Cloned by Manila, the formula of financial liberalization, high
interest rates and a virtually fixed exchange rate attracted some $19.4
billion of net portfolio investment to the Philippines between 1993 and
1997. And dollar loans via the Foreign Currency Deposit Units --
Manila's equivalent of the Bangkok International Banking Facility --
rose from $2 billion at the end of 1993 to $11.6 billion in March 1997.
As one investment house put it, with the peso "padlocked" at 26.2 to
26.3 to the dollar since September 1995, "they [Filipino banks] are not
fools in Manila. They were offered U.S. dollars at 600 basis points
cheaper than the peso rates along with currency protection from the BSP
[the central bank]. They took it."
REAL EVENTS VERSUS THE REAL ECONOMY
Had these foreign capital inflows gone into the truly productive
sectors of the economy, like manufacturing and agriculture, the story
might have been different. But they went instead principally to fuel
asset-inflation in the stock market and real estate, which were seen as
the most attractive in terms of providing high yield with a quick
turnaround time. Indeed, the promise of easy profits via speculation
subverted the real economy as manufacturers in Thailand and the
Philippines, instead of plowing their profits into upgrading their
technology or skills of their workforce, gambled much of them in real
estate and the stock market.
The inflow of foreign portfolio investment and foreign loans into real
estate led to a construction frenzy that has resulted in a situation of
massive oversupply of residential and commercial properties from
Bangkok to Jakarta. By the end of 1996, an estimated $20 billion worth
of the residential and commercial property in Bangkok remained unsold.
Monuments of the property folly were everywhere evident, such as
Bangkok Land Company's massive but virtually deserted residential
complex near the Don Muang International Airport and the sleek but near
empty 30-story towers in the Bangna-Trat area. Yet developers were
still rushing new highrises to completion as late as mid-1997.
In Manila, the question by the beginning of 1997 was no longer if there
would be a glut in real estate. The question was how big it would
ultimately be, with one investment analyst projecting that by the year
2000, the supply of highrise residential units would exceed demand by
211 percent while the supply of commercial units would outpace demand
by 142 percent. In their efforts to cut their losses in the developing
glut, real estate developers refrained from major new investments in
office space and condos, pouring billions of pesos instead into tourist
resorts and golf courses.
Oversupply also overtook property development in Kuala Lumpur and
This all spelled bad news for commercial banks and finance companies in
all four countries, since their real estate loan exposure was heavy. As
a percentage of commercial banks' total exposure, real estate or real
estate-related loans came to 15 to 25 percent in the case of the
Philippines and 20 to 25 percent in the case of Malaysia and Indonesia.
In Thailand, where the exposure in real estate was grossly
underestimated by official figures and calculated by some to come to as
high as 40 percent of total bank loans, half of the loans made to
property developers were said to be "non-performing" by early 1997.
Unchecked by any significant controls by governments that had
internalized the IMF and World Bank theory about the self-correcting
mechanisms of the financial market, the frenzied flow of capital had
led to the creation of a giant speculative bubble over the real economy
that would explode in a highly destabilizing fashion.
STAMPEDE AND SPECULATION
It as the massive oversupply in the real estate sector that underlined
to foreign investors and creditors that, despite creative accounting
techniques, many of the country's finance companies that had borrowed
heavily, floated bonds or sold equities to them were saddled with
billions of dollars worth of bad loans. This led them to reassess their
position in Thailand in the beginning of 1997. They began to panic when
they saw the real estate glut in the context of the country's
deteriorating macroeconomic indicators, like a large current account
deficit, an export growth rate of near zero in 1996 and a burgeoning
foreign debt of $89 billion, half of which was due in a few months
Of these figures, the current account deficit loomed largest in foreign
investors' consciousness, because it was thought to indicate that
Thailand would not be able to earn enough foreign exchange in order to
service its foreign debt. Nevertheless, during the boom years,
investment analysts shrugged off deficits that came to 8 to 11 percent
of gross domestic product (GDP) and continued to give Thailand A to AA+
credit ratings on the strength of its high growth rate. However, the
combination of the massive buildup of private debt and the real estate
glut put the country's "macroeconomic fundamentals," to borrow
investors' jargon, in a new, and to many, scary light in 1997.
Thailand's deficit in 1996 came to 8.2 percent of GDP, and this was now
emphasized as roughly the same figure as that of Mexico when that
economy suffered its financial meltdown in December 1994.
It was time to get out, first, and with over $20 billion jostling
around in Bangkok, parked in speculative investment in Thai companies
or nestled in nonresident bank accounts, the stampede was potentially
catastrophic. It meant the unloading of hundreds of billions of baht
for dollars. The result was tremendous downward pressure on the value
of the baht, making it difficult to maintain the now-sacrosanct
The scent of panic attracted speculators who sought to make profits
from the well-timed purchases and unloading of baht and dollars by
gambling on the baht's eventual devaluation. The Bank of Thailand, the
country's central monetary authority, tried to defend the baht at
around 25 baht to one dollar by dumping its dollar reserves on the
market. But the foreign investors' stampede that speculators rode on
was simply too strong, with the result that the central bank lost $9
billion of its $39 billion reserves before it threw in the towel and
let the baht float "to seek its own value" in July.
Speculators spotted the same skittish foreign investor behavior in
Manila, Kuala Lumpur and Jakarta, where the same conjunction of
overexposure in the property sector, weak export growth and widening
current account deficits was stoking fears of a devaluation of the
currency. Speculators rode on the exit of foreign investors, which
accelerated tremendously after the effective devaluation of the baht on
July 2. Central bank authorities attempted the same strategy of dumping
their dollar reserves to defend the value of their currencies, with the
only result being the massive rundown of their reserves. By the end of
August, the "fixing" of the dollar value of the Malaysian ringgit,
Indonesian rupiah and the Philippine peso that had been one of the
ingredients of the Southeast Asian "miracle" had been abandoned by all
the region's central banks, as the currencies were let go to seek their
own value in the brave new world of the free float.
Seldom in economic history has a region fallen so fast from economic
grace. From being one of the world's hottest economic zones, Southeast
Asia now faces a bleak future marked by the following likely
First, despite statements made by some Southeast Asian governments (as
well as by professional Asian miracle boosters like Harvard's Jeffrey
Sachs) that the crisis is a short-term one -- a phase in the normal ebb
and flow of capital -- there is a strategic withdrawal of finance
capital from the Southeast Asian region. Capital movements may indeed
be dictated by a mixture of rationality and irrationality. But one
thing is certain: foreign capital is not so irrational as to return to
Southeast Asia anytime soon. For in most investors' minds, the most
likely scenario is one of prolonged crisis. The current instability
will last from seven to 12 months, if the earlier experiences of
Mexico, Finland and Sweden were any indication, says the chair of
Salomon Brothers Asia Pacific, during which there will be weak domestic
demand and "severe contraction in GDP in some of them."
A second likely development is that foreign investors will follow the
lead of the banks and portfolio investors and significantly decrease
their commitments to the region.
General Motors is now said to be regretting its 1996 decision to set up
a major assembly plant in Thailand to churn out cars for what was then
seen as the infinitely growing Southeast Asian market.
How Japanese direct investors who dominate the region will react is,
however, the decisive question. Some analysts say that new investment
flows from Japan are not likely to be reduced much since the Japanese
are continuing to pursue a strategic plan of making Southeast Asia an
integrated production base. More than 1,100 Japanese companies are
ensconced in Thailand alone, they point out.
However, there are new wrinkles that make the situation different than
the early 1990s. Japanese investment strategies in the last few years
have targeted Southeast Asia not just as an export platform but
increasingly as prosperous middle-class markets to be exploited
themselves -- and these markets are expected to contract severely.
Diverting production from Southeast Asian markets to Japan will be
difficult since Japan's recession, instead of giving way to recovery,
is becoming even deeper. And redirecting production to the United
States is going to be very difficult, unless the Japanese want to
provoke the wrath of Washington.
The upshot of all this is that Japan is likely to be burdened with
significant overcapacity in its Southeast Asian manufacturing network,
and this will trigger a significant plunge in the level of fresh
commitments of capital to the region. Already, nearly all of the
Japanese vehicle manufacturers -- Toyota, Mitsubishi and Isuzu -- have
either shut down or reduced operations in Thailand.
A third likely development that will lengthen the shadow of gloom in
the region is that the United States and the IMF are likely to take
advantage of the crisis to press for further liberalization of the
ASEAN economies. While many Asian economic managers are now coming
around to the position that the weak controls on the flow of
international capital has been a major cause of the currency crisis,
U.S. officials and economists are taking exactly the opposite position:
that it was incomplete liberalization that was one of the key causes of
the crisis. The fixing of the exchange rate has been been identified as
the major culprit by Northern analysts, conveniently forgetting that it
was the Northern fund managers who had emphasized the stability that
fixed rates brought to the local investment scene and not even the IMF
had advocated a truly free float for Third World currencies owing to
its fears of the inflationary pressures and other forms of economic
instability this might generate.
But the agenda of U.S. economic authorities goes beyond the currency
question to include the accelerated deregulation, privatization and
liberalization of trade in goods and services.
Formerly, the economic clout of the Southeast Asian countries enabled
them to successfully resist Washington's demands for faster trade
liberalization. Indeed, they were able to derail Washington's rush to
transform the Asia-Pacific Economic Cooperation (APEC) into a free
trade area. But with the changed situation, the capacity to resist has
been drastically reduced and there is virtually no way to prevent
Washington and the IMF from completing the liberalization or structural
adjustment of the economies where the process was aborted (with the
significant exception of financial liberalization) in the late eighties
owing to the cornucopia of Japanese investment.
Indeed, as part of the package of reforms agreed with the IMF, Thai
authorities have removed all limitations on foreign ownership of Thai
financial firms and are pushing ahead with even more liberal foreign
investment legislation to allow foreigners to own land. Even before it
sought the help of the IMF, Jakarta abolished a 49 percent limit for
foreign investors to buy the initial public offering (IPO) shares in
publicly listed companies.
Because of depressive effects of severe spending cuts, currency
depreciation and the channeling of national financial resources to
service the foreign debt, structural adjustment programs in Latin
America and Africa brought a decade of zero or minimal growth in the
1980s. It is likely that with the resumption of structural adjustment
that was aborted in the mid-eighties by the cornucopia of Japanese
investment, Southeast Asia's economies will see the recession induced
by the current crisis turn into a longer period of economic stagnation,
possibly leading to political instability.
FLOTSAM AND JETSAM
All this has translated into a pervasive feeling throughout the region
that an era has passed, that the so-called "Southeast Asian miracle"
has come to an end. Increasingly, some say that the miracle was a
mirage, that high growth rates for a long time put a lid on what was
actually a strip-mine type of growth that saw the development of the
financial and services sector at the expense of agriculture and
industry, intensified inequalities and disrupted the environment,
In Thailand, where the crisis in the real economy is spreading most
quickly, with unemployment rates fast approaching double digits, the
balance of costs and benefits of the last decade of fast-track growth
is painfully evident. The legacy of this process is an industry whose
technology is antiquated, a countryside marked by continuing deep
poverty and a distribution of income worse than it was more than two
decades ago. Indeed, inequality has reached Latin American (or U.S.)
levels, with the income going to the top 20 percent of households
rising from 50 percent in 1975 to 53 percent in 1994, while the income
of the bottom 40 percent declined from 15 to 14 percent.
As the World Bank admitted in a recent study, this pattern of growing
inequality has marked most of the other "tiger" economies.
But it is probably the rapid rundown of natural capital and the massive
environmental destabilization that will serve as an enduring legacy of
the miracle that has vanished.
In Indonesia, deforestation has accelerated to 2.4 million hectares a
year, one of the highest levels in the world. Industrial pollution is
pervasive in urban centers like Jakarta and Surabaya, with about 73
percent of water samples taken in Jakarta discovered to be highly
contaminated by chemical pollutants. In the East Malaysian state of
Sarawak, 30 percent of the forest disappeared in 23 years, while in
peninsular Malaysia, only 27 percent of 116 rivers surveyed by
authorities were said to be pollution free, the rest being ranked
either "biologically dead" or "dying."
In this dimension, too, Thailand is the paradigm. According to
government statistics, only 17 percent of the country's land area
remains covered by forest, and this is probably an overestimate. The
great Chao Phraya River that runs through Bangkok is biologically dead
to its lower reaches. Only 50,000 of the 3.5 million metric tons of
hazardous waste produced in the country each year are treated, the rest
being disposed of in ways that gravely threaten public health, like
being dumped in shallow underground pits where seepage can contaminate
aquifers. So unhealthy is Bangkok's air that, a few years ago, a
University of Hawaii team measuring air pollution reportedly refused to
return to the city.
"I ask myself constantly what we have been left with that is positive,"
Professor Nikhom Chandravithun, one of the country's most respected
civic leaders, recently told a public meeting. "And, honestly, I can't
think of anything."
Walden Bello is professor of sociology and public administration at the
University of the Philippines and co-director of Focus on the Global
South, a research program at Chulalongkorn University in Bangkok,
Thailand. He is author of the forthcoming A Siamese Tragedy:
Development and Disaster in Modern-Day Thailand.
THE KOREAN COLLAPSE (Sidebar)
PERHAPS AN EVEN BIGGER surprise than the collapse of the economies of
Southeast Asia has been the implosion of the Korean economy. The coming
of the IMF has only triggered an even greater loss of confidence, with
the nation's currency, the won, dropping even more relative to the
dollar and the Seoul stockmarket plunging to near its low for the year
after the inking of a rescue agreement with the Fund in the first week
Even as the economies of Southeast Asia were collapsing in dramatic
fashion over the summer, things were building up to a climax in Korea,
where over the last year, seven of the country's mighty chaebol or
conglomerates had come crashing down. The dynamics of the fall in Korea
were, however, distinct from that in Southeast Asia.
The Korean Path
Unlike the Southeast Asian economies, Korea, the classical "NIC" or
newly industrializing country, had blazed a path to industrial strength
that was based principally on domestic savings, carried out partly
through equity-enhancing reforms such as land reform in the early
1950s. Foreign capital had played an important part, no doubt, but
local financial resources extracted through a rigorous system of
taxation plus profits derived from the sale of goods to a protected
domestic market and to foreign markets opened up by an aggressive
mercantilist strategy constituted the main source of capital
The institutional framework for high-speed industrialization was a
close working relationship between the private sector and the state,
with the state in a commanding role. By picking winners, providing them
subsidized credit through a government-directed banking system and
protecting them from competition from multinationals in the domestic
market, the state nurtured industrial conglomerates that it later
pushed out into the international market. In the early 1980s, the
state-chaebol combine appeared to be unstoppable in international
markets, as the deep pockets of commercial banks that were extremely
responsive to government wishes provided the wherewithal for Hyundai,
Samsung, LG and other conglomerates to carve out market shares in
Europe, Asia and North America. The good years were from 1985 to 1990,
when profitability was roughly indicated by the surpluses that the
country racked up in its international trade account.
In the early nineties, however, the tide turned against the Koreans.
Two factors, in particular, appear to be central. The first was the
failure to invest significantly in research and development. The second
was the massive trade blitz visited on Korea by the United States.
On the one hand, failure to invest significantly in research and
development (R&D) during the 1980s translated into continuing heavy
dependence on Japan for basic machinery, manufacturing inputs and
technology, resulting in a worsening trade deficit with that country.
Government spending on R&D in the late 1980s came to only 0.4 per
cent of gross national product, and reforms needed so the country's
educational structure could mass produce a more technically proficient
work force were never implemented. By the end of the decade, there were
only 32 engineers per 10,000 workers in Korea, compared to 240 in Japan
and 160 in the United States.
Management took the easy way out, with many firms choosing to continue
to compete on the basis of low-cost unskilled or semi-skilled labor by
moving many of their operations to Southeast Asia. Instead of pouring
money into R&D to turn out high-value-added commodities and develop
more sophisticated production technologies, Korea's conglomerates went
for the quick and easy route to profits, buying up real estate or
pouring money into stock market speculation. In the 1980s, over $16.5
billion in chaebol funds went into buying land for speculation and
setting up luxury hotels. In fact, as of the early 1990s, a single U.S.
corporation, IBM, was investing much more on R&D than all Korean
Not surprisingly, most of the machines in industrial plants continue to
be imported from Japan, and Korean-assembled products from color
televisions to laptop computers continue to be made up mainly of
Japanese components. For all intents and purposes, Korea has not been
able to graduate from its status as a labor-intensive assembly point
for Japanese inputs using Japanese technology. Predictably, the result
has been a massive trade deficit with Japan, which came to over $15
billion in 1996.
As Korea's balance of trade with Japan was worsening, so was its trade
account with the United States. Fearing the emergence of another Japan
with whom it would constantly be in deficit, Washington subjected Seoul
to a broad-front trade offensive that was much tougher than the one
directed at Japan, probably owing to Korea's lack of retaliatory
capacity. Among other things, the United States:
Hit Korean television manufacturers with anti-dumping suits;
Forced Korea to adopt "voluntary export restraints" on a number of
products, including textile, garments and steel;
Forced the appreciation of the won, the Korean currency, relative
to the dollar by 40 per cent between 1986 and 1989 to make Korean goods
more expensive to U.S. consumers, thus dampening demand for them;
Knocked Korea off the list of countries eligible for inclusion in
the General System of Preferences (GSP), which grants preferential
tariffs to products from Third World countries in order to assist their
Threatened Korea with sanctions for a whole host of alleged
offenses, ranging from violation of intellectual property rights to
discriminatory tax treatment against large-engine U.S. car imports;
Forced Korea to open up its markets to U.S. tobacco products and to
increase imports of beef and rice;
Forced Seoul to open an estimated 98 percent of industrial areas
and 32 percent of service areas to foreign equity investments and
stepped up the pressure for liberalization in telecommunications,
maritime services, banking, government procurement and many other
Hemmed in on all fronts, Korea saw its 1987 trade surplus of $9.6
billion with the United States turn into a deficit of $159 million in
1992. By 1996, the deficit with the United States had grown to over $10
billion, and Korea's overall trade deficit hit $21 billion.
In a desperate attempt to regain profitability, management tried to ram
through parliament in December 1996 a series of laws that would have
given it significantly expanded rights to fire labor and reduce the
work force, along the lines of a U.S.-style reform of sloughing off
"excess labor" and making the surviving work force more productive [see
"Democracy on Trial: South Korean Workers Resist Labor Law Deform,"
Multinational Monitor, March 1997]. When fierce street opposition from
workers defeated this effort, many chaebol had no choice but to fall
back on their longstanding symbiotic relationship with the government
and the banks, this time to draw ever greater amounts of funds to keep
money-losing operations alive. The lifeline could not, however, be
maintained without the banks themselves being run to the ground.
By October, it was estimated that non-performing loans by Korean
enterprises had escalated to over $50 billion. As this surfaced,
foreign banks, which already had about $200 billion worth of
investments and loans in Korea, became reluctant to release new funds
to Seoul. By late November, on the eve of the APEC summit in Vancouver,
Seoul, saddled with having to repay some $72 billion out of a total
foreign debt of $110 billion within one year, joined Thailand and
Indonesia on the IMF queue. The Korean government was able to get a
commitment of $57 billion to bail out the economy, but only on
condition that it would not only undertake a harsh stabilization
program but also do away with the key institutions and practices that
had propelled the country into "tigerhood."
The miracle was over.
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