Korea after the Crash (Politics in Asia Series)

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Korea after the Crash

Korea after the Crash analyses the nature of South Korea’s political economy on the eve of, during and in the aftermath of the 1997 financial crisis. Arguing that political factors are integral to the dynamics of this traumatic period for the economy and people of South Korea, Brian Bridges discusses why the economy collapsed and how well it is recovering. He considers the multiple challenges faced by Kim Dae-jung, elected president in the midst of the crisis, of restoring the economy, managing an unusual political cohabitation and coping with an unpredictable northern neighbour. Bridges closely examines the president’s handling of these challenges, following his progress through to the 2000 elections and the historic North–South summit. The book charts the struggle to achieve both economic reform and a ‘second economic miracle’, and concludes that, despite promising an end to the ‘Korea Inc.’ of old, ironically, Kim Dae-jung has had to resort to old methods in order to push forward his agenda and accomplish change. Bridges’ lucid and thorough assessment of this crucial period is essential reading for all students and scholars of South Korean politics and economics. Brian Bridges is Professor in the Department of Politics and Sociology at Lingnan University, Hong Kong. He has written and broadcast extensively on the politics and international relations of the Asia Pacific region. His previous publications include Europe and the Challenge of the Asia Pacific and Europe, China and the Two SARs (co-edited with Miguel Santos Neves).

Politics in Asia series Edited by Michael Leifer London School of Economics ASEAN and the Security of South-East Asia Michael Leifer China’s Policy towards Territorial Disputes The case of the South China Sea islands Chi-kin Lo India and Southeast Asia Indian perceptions and policies Mohammed Ayoob Gorbachev and Southeast Asia Leszek Buszynski Indonesian Politics under Suharto Order, development and pressure for change Michael R.J. Vatikiotis The State and Ethnic Politics in Southeast Asia David Brown The Politics of Nation Building and Citizenship in Singapore Michael Hill and Lian Kwen Fee Politics in Indonesia Democracy, Islam and the ideology of tolerance Douglas E. Ramage Communitarian Ideology and Democracy in Singapore Beng-Huat Chua The Challenge of Democracy in Nepal Louise Brown Japan’s Asia Policy Wolf Mendl The International Politics of the Asia-Pacific, 1945–1995 Michael Yahuda Political Change in Southeast Asia Trimming the Banyan tree Michael R.J. Vatikiotis

Taiwan and Chinese Nationalism National identity and status in international society Christopher Hughes Managing Political Change in Singapore The elected presidency Kevin Y.L. Tan and Lam Peng Er Islam in Malaysian Foreign Policy Shanti Nair Political Change in Thailand Democracy and participation Kevin Hewison The Politics of NGOs in South-East Asia Participation and protest in the Philippines Gerard Clarke Malaysian Politics Under Mahathir R.S. Milne and Diane K. Mauzy Indonesia and China The politics of a troubled relationship Rizal Sukma Arming the Two Koreas State, capital and military power Taik-young Hamm Engaging China The management of an emerging power Edited by Alastair Iain Johnston and Robert S. Ross Singapore’s Foreign Policy Coping with vulnerability Michael Leifer Philippine Politics and Society in the Twentieth Century Colonial legacies, post-colonial trajectories Eva-Lotta E. Hedman and John T. Sidel

Hong Kong China’s challenge Michael Yahuda

Constructing a Security Community in Southeast Asia ASEAN and the problem of regional order Amitav Acharya

Korea versus Korea A case of contested legitimacy B.K. Gills

Monarchy in South-East Asia The faces of tradition in transition Roger Kershaw The Future of North Korea Edited by Tsuneo Akaha

Korea after the Crash The politics of economic recovery

Brian Bridges

London and New York

First published 2001 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2002.

© 2001 Brian Bridges All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Bridges, Brian, 1948– Korea after the crash : the politics of economic recovery / Brian Bridges. Includes bibliographical references and index. 1. Korea (South)–Economic conditions–1960–2. Financial crises–Korea (South) 3. Korea (South)–Politics and government–1988– I. Title. HC467 .B69 2001 338.95195–dc21 2001019463 ISBN 0–415–22326–1 (Print Edition) ISBN 0-203-16205-6 Master e-book ISBN ISBN 0-203-16208-0 (Glassbook Format)

To the memory of Gerry, Wolf and Michael – friends and mentors

Contents

Series editor’s preface Preface List of abbreviations

ix xi xiii

1 Introduction

1

2 Korea’s crisis

13

3 The advent of Kim Dae-jung

32

4 Playing politics

46

5 The road to economic revival

68

6 Dealing with the North

90

7 Korea in the international system

111

8 Post-summit Korea: new beginnings or déjà vu?

122

Appendix I Appendix II Notes Bibliography Index

132 137 139 155 162

Series editor’s preface

The impact of economic crisis from the end of the last century on South Korea was devastating. The fall from international economic grace was felt deeply by a people that had taken great pride in the country’s entry into the Organisation for Economic Cooperation and Development (OECD) in 1996. Economic crisis was also a factor in momentous democratic political change whereby for the first time in South Korean political history, a peaceful transfer of power to the opposition, in the person of Kim Dae-jung, took place. President Kim secured office in December 1997. Two years later, he was able to claim that South Korea had completely overcome the crisis that had laid the country low. Moreover, in June 2000, he attracted international acclaim by visiting Pyongyang for the first ever summit meeting between the leaders of North and South Korea, still technically at war. Professor Brian Bridges has set out to explain the political circumstances of South Korea in the context of the devastating economic crisis and the rise of Kim Dae-jung. He does much more than this in considering the more general causes of the economic adversity that afflicted industrialized countries in East Asia following the devaluation of the Thai baht in July 1997 as well as addressing the particular circumstances of South Korea. He illuminates the nature of the South Korean political process and, with great skill, exposes the limitations of President Kim’s position after assuming high office. He provides a masterly account of the politics of ‘cohabitation’ as well as of President Kim’s valiant attempts to promote economic reform through confrontation with both ‘chaebols’ and unions. Brian Bridges also addresses relations with North Korea and explains how the ‘sunshine policy’ led on to the unique summit in June 2000. He also provides a post-summit view of President Kim’s achievement in which his optimism about sustained economic recovery and Korean democracy is tempered with caution, while noting that the constraints on presidential latitude had not changed, with legislative elections held in the knowledge that a summit meeting had been agreed. This is a lucid and exceptionally well-informed account of South Korean politics and of the country’s international position at the beginning of the twenty-first century. Michael Leifer

Preface

My visit to Seoul in late November 1997, timed in advance to coincide with the expected beginning of the presidential election campaign, took on a completely different complexion from the day that I arrived. I found myself staying, by coincidence, at the same hotel as the delegation from the International Monetary Fund, which had arrived to negotiate a deal to salvage the South Korean economy from the worst crisis in its otherwise spectacular history. As one Korean academic dryly remarked to me at that time: after years of planning what to do when North Korea collapsed, it now seemed as if the South was going to collapse first. Nearly three years later the mood was buoyant; once again it seemed as if the Koreans had displayed their penchant for bouncing back from adversity. What had gone wrong with the South Korean economic miracle? Why had South Korea been able to overcome this traumatic experience and was the recovery as real as it seemed to visitors? Was the euphoria over the unprecedented summit meeting between the leaders of North and South likely to prove a distraction to the ongoing process of economic reconstruction and reform? Many people have played a part in helping me understand more about Korea and its people. Without doubt, the support and advice I have received over the years from Park Jin, Lee Jung-hoon, Choi Jung-il and Kim Jae-gouk have been crucial in encouraging me to keep trying to learn more. I owe a particular debt to Masahide Shibusawa, who during our time together at Chatham House in London first suggested that I study Korean affairs, and to Shinichiro Nagano, who has so many times generously shared his knowledge of Korea with me. I owe a special debt, for his inspiration, to the much-missed Gerry Segal. I have benefited from discussions with a wide range of academics, diplomats, journalists and businessmen, both inside and outside Korea. While I cannot list them all, I do owe them all a debt. However, I would like particularly to thank Ahn Chung-si, Han Sung-joo, James Hoare, Hong Duck Hwa, Nobutake Odano, Oh Jay Hee, Sung Chang-kee, Takabumi Suzuoki, Martin Uden and Yoon Chung-ha. Needless to say, the usual caveat, that they bear no responsibility for any interpretations herein, applies.

xii Preface I must also thank Victoria Smith at Routledge, who first encouraged me to think about writing a book on contemporary Korea, and Craig Fowlie, Milon Nagi and Sophie Richmond who took over the task of seeing it to fruition. Michael Leifer remained a sympathetic counsel as I continued to write. I would like to thank the Lingnan University Social Sciences Faculty Research Fund for a small grant (RES/SOC011/989) which helped me to undertake a research visit to Seoul in June 1999 and David Ji Yanxun, at the University’s Centre for Public Policy Studies, who helped with the formatting of the tables. Being based in Hong Kong, as it too went through the traumas of crisis and recovery, has enabled me to have a better appreciation not only of the costs and burdens of the Asian financial crisis as it affected people in the streets, but also of the realities of the apparent return to confidence. Finally, I would like to thank my family for their patience while this book has been completed and other responsibilities were left unfulfilled. Brian Bridges Hong Kong

Note on the text For Korean, Japanese and Chinese names the usual convention of putting surnames first has been followed, except for a few well-known exceptions such as Syngman Rhee. There are several different methods of transliterating Korean names into English and Koreans themselves sometimes wish to re-order their names in accordance with Western practice. In the body of the book and in the endnotes Korean names are written according to a person’s own preference or as they have been published, but in the bibliography, for ease of reference, the Western bibliographic style is adopted. Unless otherwise stated, all references to dollars ($) are to US dollars.

Abbreviations

ADB AMF ANSP APEC ARF ASEAN ASEM CAGE DP DJP DLP DMZ DP DPP EAEC EPB FDI FKI FKTU FSC FTC G-8 GATT GDP GNP IAEA IMF INF ITC JSP KAI KAMCO KCIA

Asian Development Bank Asian Monetary Fund Agency for National Security Planning Asia Pacific Economic Cooperation ASEAN Regional Forum Association of South-East Asian Nations Asia-Europe Meeting Citizens Alliance for the 2000 General Election Democratic Party Democratic Justice Party Democratic Liberal Party De-militarized Zone Democratic Party Democratic People’s Party East Asian Economic Caucus Economic Planning Board Foreign direct investment Federation of Korean Industries Federation of Korean Trade Unions Financial Supervisory Commission Fair Trade Commission Group of Eight General Agreement on Tariffs and Trade Gross domestic product Grand National Party International Atomic Energy Agency International Monetary Fund Intermediate-range Nuclear Forces Investment Trust Companies Japan Socialist Party Korean Aerospace Industries Korea Asset Management Company Korean Central Intelligence Agency

xiv Abbreviations KCNA KCTU KDI KEDO KWP LDP LG MDP MOFE NCNP NIE NKDP NKP NKPH NLL NPP NPT OECD SK SME TMD ULD UN US

Korea Central News Agency Korean Confederation of Trade Unions Korean Development Institute Korean Energy Development Organisation Korean Workers’ Party Liberal Democratic Party Lucky Goldstar Millennium Democratic Party Ministry of Finance and Economy National Congress for New Politics Newly-industrializing economy New Korea Democratic Party New Korea Party New Korea Party for Hope Northern Limit Line New Party for the People Nuclear Non-proliferation Treaty Organisation for Economic Cooperation and Development Sunkyung Small or medium-sized enterprise Theatre Missile Defence United Liberal Democrats United Nations United States

1

Introduction

From the middle of 1997, the Asian Pacific region was beset with a series of financial crises, as first Thailand, then Indonesia and finally South Korea (as the Republic of Korea will be described in this volume) had to turn to the International Monetary Fund (IMF) and other international financial institutions for assistance to tide them over mounting debt problems. Other regional states succumbed to the knock-on effects; all suffered falls in growth rates, in some cases quite dramatically. In the view of Singapore Prime Minister Goh Chok Tong, this constituted the region’s ‘worst crisis and biggest test since World War II’.1 Malaysian Prime Minister Dr Mahathir Mohamad lamented that ‘the economic turmoil … reduced the [Asian] tigers to whimpering kittens’ and argued that ‘the massive damage to their economies would take decades to be restored’.2 Just as, contrary to perceptions outside Asia, the earlier economic boom and economic ‘miracle’ was not universally and consistently in evidence throughout the Asian Pacific region in the 1980s and 1990s, so too the post-1997 financial turmoil in certain countries did not mean that the whole region without exception was in deep crisis. Nonetheless, although some countries were less severely affected than others, none could escape some impact from the contagion that seemed to be swirling around them. Moreover, both the speed with which the turmoil spread and its regionwide extent were unexpected, even, it has to be said, to the IMF itself, which only a few months before had been praising the sound macroeconomic policies of countries such as Thailand and South Korea.3 Even US president Bill Clinton, attending the Asian Pacific Economic Cooperation (APEC) summit in Vancouver in November 1997, described Asia’s problems as just ‘a few little glitches in the road’ to prosperity.4 In reality, as viewed in retrospect from mid-2000, the Asian financial crisis was certainly more severe than President Clinton had predicted, and yet, judging by the way that several economies have bounced back already, not as fundamentally damaging as Dr Mahathir expected. By June 2000, indeed, some government officials within the region were beginning to argue confidently that ‘the regional rebound is gathering momentum … [East Asia economies are] once again on the march’.5 Nonetheless, it is

2 Korea after the crash true to say that for most of the region’s economies, things will never be quite the same again. The political and socio-economic costs are certain to have a much more long-lasting impact than simple declines and rebounds of relevant economic data might suggest.

Considering crises Views differ widely as to the underlying and proximate causes of these financial crises across the region and clearly the situation was not exactly the same in each country. Blame has been laid on, amongst others, crony capitalism, heavy-handed bureaucratic intervention, partial and lopsided financial liberalization, the greed of international speculators, the ill-timed Chinese devaluation of the yuan, the excessive US push to open Asian markets to US goods and services, and the Japanese failure to get their own house in order. The literature on the Asian financial crisis has been growing rapidly, but there is still no convergence of views on the causes.6 Political scientists inevitably tend to give differing weights to the various factors than economists, but even within disciplines there is no agreement yet. However, it is possible to discern three broad strands of analysis.7 One school attributes the causes to macro-economic structural weaknesses and imbalances. Another school blames external speculative attacks and the psychological ‘domino effect’. A third approach puts greater weight on the policy and institutional inefficiencies. But before examining these three broad schools of thought, it is worth bearing in mind that the Asian financial crisis is certainly by no means the first financial crisis to hit the world. Indeed, the detailed work of scholars such as Charles Kindleberger and Peter Gourevitch reminds us that financial crises can be dated back far beyond the 1994–95 Mexican crisis (which has often been invoked for comparative study with the current Asian financial crisis) and even the Great Depression after the Wall Street collapse of 1929. Describing financial crises as ‘a hardy perennial’, Kindleberger indeed demonstrates that they can at the very least be dated back to the early seventeenth century, and that there are some marked similarities in their provenance and progression.8 It has to be admitted, as François Godement aptly pointed out, that the various schools of thought have done better at ‘retrospective judgements made with the benefit of hindsight’ than at providing either economic or political rationales in advance for the Asian financial crisis.9 First, let us look at the problems with macro-economic fundamentals. To some observers, the Asian economic ‘miracle’ was built on shaky foundations. The impressive numbers for economic growth, exports, capital investment and per capita income masked a series of problems; the assets described by the World Bank and other institutions had a down side as well. Several elements seem to be at play in this type of analysis. First, the heavy hand of government. With the exception of Hong Kong, most governments in

Introduction 3 the region had intervened extensively in shaping industrial policies and managing financial systems in order to promote growth, but at the same time these practices left their economies ‘riddled with rigidities and distortions’.10 Consequently, at least some of the economies proved less than flexible when faced with heightened foreign competition and the overmaturing of home-grown and protected industries. Second, inappropriate investment strategies. High savings and high investment rates were characteristic of many of the region’s economies, but often this investment went into either risky or low-profit projects, or into ventures where ‘connections’ counted more than commercial viability.11 High investment rates in the non-traded sectors, such as property and real estate, became the norm in the mid-1990s in several South-East Asian states. Third, growing current account deficits. Real currency appreciation (particularly because many currencies were effectively pegged to the US dollar which was strengthening after 1995), the long economic recession in Japan from 1991, which slowed down its imports from the region, the effective devaluation of the Chinese yuan by 35 per cent in 1994 which boosted its exports vis-à-vis other regional economies, and declines in global demand (often in the face of supply gluts) of certain key exports all contributed to some extent or other.12 Finally, moral hazard in the banking sector. This implies that over-borrowing and over-lending, primarily by domestic banks and companies but also by overseas banks, occurred because of unwarranted expectations that implicitly or explicitly the governments would come to their rescue.13 The second school of thought, however, puts more emphasis on the role played by international investors and ‘speculators’ in abruptly reversing capital flows and helping to create a ‘self-fulfilling’ prophecy of financial instability. This analytical approach has undoubtedly been the most controversial. Few would deny the workings of psychological transmission mechanisms in international financial markets, whereby, as Kindleberger argued in his survey of earlier financial crises, ‘boom and panic in one country seem to induce boom and panic in others’,14 or, as the Bank for International Settlements noted in one of its recent regular reviews of global financial markets, the crisis in the Asian Pacific region ‘served as a painful reminder that the interconnections between [global] markets are becoming increasingly complex’.15 Nor is there much doubt that financial flows to the region were curtailed drastically during the course of 1997, for, according to Asian Development Bank figures, the five worst affected Asian Pacific states (Thailand, Indonesia, South Korea, Malaysia and the Philippines) received a net capital inflow of about $76 billion in 1996 but a net capital outflow of around $36 billion in 1997; this included a huge drop in the amount that overseas commercial banks were lending to these countries.16 Given that international financial lenders certainly proved unwilling to extend fresh loans to suffering companies and banks, was this tendency the

4 Korea after the crash result of illogical panic, or a more logical suspicion that if one company/country was in danger of becoming insolvent then its closely linked geographical neighbours might be similarly affected, or a conspiracy by Western powers and/or speculators to bring down the Asians? Conspiracy theorists found a powerful advocate in Malaysian Prime Minister Mahathir and an equally outspoken target in global hedge-fund trader George Soros, who publicly exchanged verbal barbs throughout 1997.17 The ultimate Malaysian response was to try to foreclose on the Western predator speculators by imposing capital controls and disengaging partially from the global economic system. Once the crisis had started to spread and the IMF became increasingly involved in rescue solutions, the tough terms and conditions being imposed re-stoked the fires of controversy. For some this was the misdiagnosis and then misapplication of treatment which had been tested on earlier but arguably fundamentally different financial crises (using ‘old medicines for a new disease’), while others argued that the IMF was in fact merely following the agenda of its largest shareholder, the USA, for opening up previously closed Asian markets in both the trade and financial sectors.18 Given the obvious unpreparedness of the USA and the Europeans for the severity and spread of the Asian financial crisis, the longer-term benefits for the West from the postfinancial crisis restructuring of the Asian Pacific economies seem to have been more accidental than intended. Nonetheless, it was and still is undoubtedly true that external investors’ expectations are not always based on a clear analysis of economic ‘fundamentals’ and may indeed display a herd-like instinct once confidence in a region starts to deteriorate. The psychological factors at play – or the influence of ‘psychic mobility’, as it has been called19 – should not be ignored. The final approach moves away from economics per se and draws in the role of policy-making and political and even social institutions. For economic ideas to be translated into policy, they have to have the support of those with political power and that requires an understanding of the nature and dynamics of a nation’s political system and its ability to debate and adapt, both in political and in economic policy terms, to changes in the international system. In the Asian Pacific context, ‘developmentalism’ – the pragmatic search for economic development – has almost without exception embodied the concept of strong government, for the role of the state as the source, inspiration and expression of national development had been largely unquestioned for much of the post-war period. The legitimacy of government rested on the ability to achieve and sustain economic growth, which in turn was posited as depending on stable political systems; this then implied the need for strong authority structures such as powerful bureaucracies, dominant political parties, interfering militaries or charismatic leaders.20 These kinds of systems, while effective in nurturing the economic take-off and sustaining the early periods of high growth, have proved over the longer term less able to cope with the strains of

Introduction 5 increasing involvement in the interdependent and globalizing international political economy and with changing expectations amongst their own societies. Indeed, it has been argued by James Cotton that the origins of the crisis ‘grew out of the necessary characteristics of the development state, which left them with a serious lack of institutional capacity when they were struck by the full force of globalisation’.21 Certain elements of the political economy which in the past seemed to have contributed to economic success, such as close government–business relations, semicompetitive politics, institutionalized industrial relations, and extensive policy reach into economic planning and regulation, gradually came to be seen not only as hampering and inhibiting the various economies’ capabilities to respond to changing international circumstances but also, through corruption, cronyism and lack of transparency, as becoming part of the problem itself. As Peter Gourevitch has argued, ‘economic theory can tell us a lot about policy alternatives, but unless our economics contains an understanding of power, it will not tell us enough to understand the choices actually made’.22 During the following analysis of the course and causes of South Korea’s financial collapse in 1997 and its subsequent recovery over the three years since then, it is intended to demonstrate that, while some elements of all three approaches can be considered as relevant to the South Korean example, nonetheless the importance of political and institutional considerations needs to be stressed. However, before examining how and why South Korea’s economy was brought to such a parlous state in 1997, it is necessary to establish some key characteristics of the South Korean model of political economy.

Newly industrializing … Its geopolitical situation in North-East Asia, surrounded by larger and more advanced states, has meant that Korea has on occasions benefited from importing foreign culture and technology but that it has also been ‘plagued by frequent foreign pressure and interference’.23 It served both as a buffer and as an invasion route for more powerful neighbours. In the past century or so, three wars have been fought on its territory and it spent thirty-five years under a Japanese colonial rule which was harsh and oppressive and left a legacy of bitterness which is still relevant today.24 The Koreans saw the defeat of Japan as the chance to regain their lost independence, but the immediate exigencies of disarming the surrendering Japanese troops and the broader political imperatives of the emerging Cold War between the Soviet Union and the USA saw the peninsula divided along the 38th parallel, some 30 miles north of Seoul. The manner of the creation of the two governments during the 1945–98 period, and the character of the leaders who survived the harrowing events of the Korean War, made a crucial imprint on the political evolution of the two Koreas. The

6 Korea after the crash traumas of the Korean War, the mutual suspicions, the sadness at divided families, and the resentment at foreign intervention (both in the original division and in the later Korean War) have all found their echoes in Korean nationalism and residual popular xenophobia. When Korea was divided in 1945, most of the industrial raw materials and the heavy industry developed by the Japanese fell into the area of the North, while the South inherited most of the strategic harbours, the best agricultural land, considerable light industry and well over half the population. The South’s first president, Syngman Rhee, obsessed with his dual hatred of both the Japanese and the communist North, and preoccupied with manoeuvring to maintain himself in power, paid little serious attention to economic recovery. At the beginning of the 1960s, South Korea was still one of the poorest countries in the developing world. Yet, within two decades, South Korea was to become one of the leaders of that group of countries loosely known as the NIEs (newly industrializing economies) and for three years at the end of the 1980s it was to be the fastest-growing economy in the world. Its per capita gross domestic product (GDP) rose from $110 in 1962 to $5,570 in 1990 and to $10,820 by 1995. There was certainly much truth in the catchy phrase beloved of government promotional campaigns: ‘from poor house to power house’. How was the ‘miracle on the Han river’ achieved? Observers dispute the relative importance of the various factors behind South Korean economic growth, but it is necessary to outline the key elements here as, more recently, some of them have been highlighted and blamed for also contributing to the country’s economic crisis. Simply summarized, the major elements can be suggested as a firm commitment to development; a strong partnership between government and business; a well-educated, disciplined and industrious workforce; a positive, though to a certain extent selective, integration with the global economy; and an ability to learn from Japan.25 Needing to overcome the stigma of coming to power through a military coup in 1961, President Park Chung-hee made concrete economic performance the touchstone of political success and national progress. Although strongly nationalistic, Park nonetheless drew inspiration from the earlier post-war economic take-off in Japan, even though he modified some of the characteristics of the Japanese model both to suit the different character of the Korean people and to justify his own particular military-style governmental system. Adopting what has been termed ‘indicative planning’, he inaugurated a series of five-year comprehensive economic development plans and created the Economic Planning Board (EPB) to act as an economic overload (and with far more power, incidentally, than its Japanese counterpart).26 Although occasionally marked fluctuations did occur from year to year, overall under the first four plans from 1962 to 1981 growth averaged just under 9 per cent per year and the foundations of the modern Korean economy were laid.

Introduction 7 Park fostered close government–business relations with government officials working closely with business leaders in industrial development strategies, in what Mark Clifford has described as ‘a close, if stormy, marriage’.27 The government deliberately encouraged the growth of the large industrial conglomerates, known as chaebols, which resembled strongly the pre-war Japanese zaibatsu in their degree of family ownership and control, and which came to extend their influence throughout the economy through aggressive expansion. The government assisted in channelling investment capital to the chaebols, suppressing trade union activity and protecting their domestic market by stalling on liberalization to external competitors. Initially, the government was able to exert a significant degree of control at the micro-level through the supply of preferential credit from the major banks which were government-run, but the more pervasive the chaebols’ weight in the economy became, the less easy government has found it to direct them. The government encouraged the chaebols to move into the heavy and chemical industries from the early 1970s, but by the 1980s the chaebols, under their own initiative, were actively diversifying into previously unrelated high-tech, consumer goods, real estate and financial services industries. In the first half of the 1980s, the government tried to carry out a number of measures to regulate the economic concentration of the chaebols, but in the second half of the 1980s, as the economy boomed, the restrictive policies weakened.28 As a result, throughout the 1980s and 1990s a kind of ‘see-saw’ relationship between the powerful chaebols and the highly interventionist power of the presidents and bureaucrats continued; both sides needed each other, but at the same time they struggled for autonomy and dominance. In common with the other three Asian NIEs (Hong Kong, Singapore and Taiwan), South Korea’s comparative lack of natural resources inevitably led to a focus on harnessing human resources. Appeals to the Confucian legacies of learning, discipline, thrift and diligence were clearly apparent in the post-Korean War attention to improving educational standards. In addition, by focusing on anti-colonialism and anti-communism at a time of nation-building, the education system also contributed to the political socialization of the young people.29 Illiteracy was virtually eliminated by the late 1970s and secondary and tertiary education became widely available. The rote-learning style of education was undoubtedly conducive to producing an efficient and numerate workforce, though it has been less suited to producing managers with initiative or scientists with innovative skills. In the early 1960s, less than a decade after Japan, South Korea switched from an import substitution policy to an export-oriented strategy. It had begun its development by emphasizing light, labour-intensive manufacturing, but in the 1970s it expanded into heavy and chemical industries, though with mixed results. However, despite the problems, by the early 1980s heavy and chemical industrial products had overtaken light

8 Korea after the crash manufactured goods in their export value. Then, as the 1980s continued, the Koreans increasingly began to focus on electronic consumer and office goods. For example, Korean companies did not start exporting microwave ovens until 1980, yet by 1987 they were the world’s largest exporters, with 30 per cent of the global market. Although South Korea needed to import energy supplies and materials and intermediate goods for the production of these exports, at least until the mid-1980s the domestic market remained heavily protected against foreign manufactured and agricultural goods. Moreover, the Park government was not encouraging to foreign direct investment (FDI) either, preferring to finance development spending through foreign loans; by 1986, external debt had reached a peak of $46 billion, before the emergence of trade and current account surpluses, albeit for only a few years, started to diminish that figure. Although the extent of South Korea’s external debt was a notable difference from the Japanese model, the superficial similarities in terms of both sectorally concentrated exports and protected domestic markets were sufficient to raise the spectre of South Korea as a ‘second Japan’ as far as the outside world was concerned. South Korean growth did not occur in a vacuum. Statistically impressive as it was, it seemed nonetheless to be part of a much broader regional trend for fast economic growth, which, in the analogy much loved by Japanese economists, came to be described as the ‘flying geese’ pattern. Although South Koreans do implicitly compare themselves with – and, paradoxically, invariably at the same time try to distance themselves from – the Japanese, in practice, of the other Asian Pacific economies, it is the Taiwanese record which has most often been taken as the benchmark against which to measure their own economic achievement. Although Taiwan’s per capita GDP levels and its total export values have tended consistently to stay ahead of South Korea’s, it was the latter that was able to push itself closest to graduation from the club of the NIEs by the 1990s. As will be discussed in more detail in the next chapter, for the South Korean government, and indeed for many Koreans themselves, the symbolic representation of that status was to be the entry into the so-called ‘rich man’s club’ of the Organization for Economic Cooperation and Development (OECD) in 1996. Following Japan more than two decades earlier, South Korea was only the second Asian country to be admitted to this organization for advanced economies.

… and newly democratizing Rapid economic growth had significantly changed the nature of the Korean economy and its people’s lives, but the political development of the country has rarely seemed able to keep pace. The political history of South Korea is littered with authoritarian governments, violent overthrows of governments, and, at least until the late 1980s, brief and insubstantial

Introduction 9 periods of democracy. In the words of one Korean academic, ‘bullets, not ballots, and bayonets, not bargains had been the catalysts for political change’.30 In the immediate aftermath of the Korean liberation from Japan, the Americans had hoped to instil democracy into the minds of the South Koreans much as they tried to in Japan. But the Americans found themselves with little alternative but to work with President Rhee, a staunch anti-communist with little time for Western-style democracy. Rhee’s transparent attempts, in the late 1950s, to extend his personal and increasingly dictatorial rule by rigging elections culminated in student-led street demonstrations which forced him into exile in 1960 and gave the students a status as the ‘conscience of the people’. The new cabinet-style government, however, proved indecisive as opinion within the country became increasingly polarized and the military, led by then Major-General Park, staged a coup in May 1961. Park retired from the army, returned the country to a presidential system and tolerated a limited degree of opposition until, using the pretext of national security concerns, in 1972 he introduced the Yushin (revitalizing) Constitution, which gave him sweeping powers and effectively made him president for life. In the succeeding years, Park’s rule became ‘more and more authoritarian’,31 using the perceived necessity for efficiency, growth and security as justification for his repressive government. Differences emerged within the leadership towards the end of the 1970s about how to deal with the rising popular dissatisfaction; the result was that Park was shot dead by one of his associates. A civilian government again briefly held power, but a group within the military led by MajorGeneral Chun Doo Hwan imposed martial law, bloodily suppressed a week-long revolt by students and workers in the southern city of Kwangju, and manoeuvred Chun into presidential office in August 1980.32 The following year, Chun was re-elected president for a seven-year term. Echoing Park’s actions after his 1961 coup, Chun proclaimed a ‘new era’, but in practice his strong-arm tactics of harassing and persecuting opposition politicians and critics seemed little more than an extension of Park’s authoritarianism. Chun shared Park’s tendency to utilize real or perceived threats to national security, from North Korea or supposed pro-communists domestically, as a justification for strong methods of government and limited toleration of opposition. However, in large part due to the socio-political affects of economic modernization, the nature of Korean society in the 1980s was already different from the way it was a decade earlier under Park, and Chun found himself faced with rising demands for democracy which united disparate sectors of society against his rule. By the mid-1980s Chun and his ruling party, the Democratic Justice Party (DJP), were coming under criticism not just from radicalized students and opposition leaders, such as the three Kims (Kim Dae-jung, Kim Young-sam and Kim Jong-pil) who, at least

10 Korea after the crash partially, had had their civil rights restored after being purged in 1980, but also from the Christian Churches – which, in a country where around 20 per cent of the population are Christian, do have an important influence – and disenchanted workers. Chun had tried to dilute the opposition appeal by playing on the middle class’s desire for stability and social order, but he was increasingly to overplay his hand during 1986–87. Chun’s obvious lack of sincerity over constitutional revision and revelations of police brutality against dissidents undercut his support and when the DJP named Roh Tae-woo, a close military crony of Chun, as its presidential candidate, the floodgates opened. In a manner which had strong echoes of the ‘people power’ revolution which had deposed another dictator, President Ferdinand Marcos of the Philippines in 1986, students and workers were joined on the streets by the disillusioned middle class. After two weeks of violent confrontations, on 29 June 1987 Roh himself made a tactical gambit, pronouncing a declaration on democracy which embraced most of the opposition demands, including direct presidential elections.33 In the ensuing presidential elections in December 1987, Roh won by a narrow margin as the three Kims managed to split the opposition vote between them. The following decade saw a gradual, at times frustrating and even painful, transition to democracy. Roh, though exhibiting some of the characteristics of a ‘born-again democrat’ and clearly not devoid of the corrupt tendencies displayed by both Chun and Park, nonetheless presided over an extension of democratic practices, including freeing up the media and the judiciary.34 He even tolerated the results of the 1988 National Assembly elections, when, for the first time in South Korean history, a president’s ruling party failed to gain a majority, though he was able to restore some measure of political control in 1990 through coaxing one opposition leader, Kim Young-sam, into joining what became a dominant supercoalition party, the Democratic Liberal Party (DLP). Kim subsequently ran as the ruling party’s presidential candidate in 1992, winning as once again the opposition managed to fall out between themselves and failed to field only a single candidate. In February 1993 he was inaugurated as the first real civilian president in South Korea’s history (a former bureaucrat, Choi Kyu-hah, who was first acting and then elected president after Park’s assassination, remained in office for only a few months before Chun’s takeover in 1980). Kim started well, with an active and well-publicized campaign to clean out corruption which was to extend subsequently to putting his two predecessors on trial, but he was to find that it was difficult to break out of traditional patterns of patronage and political parochialism. However, despite the rhetoric of the transition to democracy, the authority systems still remained rather traditional. Political parties and even cabinet ministers continued to have secondary importance to political leaders and, above all, the top of that hierarchy, the president, coupled

Introduction 11 with his immediate circle of advisers and bureaucrats, still wielded considerable patriarchal power and political influence.35 The tensions between Western-style democratic structures and aspirations and the traditional political culture were to continue to be a characteristic of South Korean politics in the 1990s and will need to be discussed in more detail later, in the context of Kim Young-sam’s and Kim Dae-jung’s attempts to deal with the financial crisis. This troubled transition surveyed briefly above shows that, not only has South Korea been one of the leading examples of the sustained growth economies of the Asian Pacific region in the past three decades, but it has also found itself part of the trend towards democratization moving across the region since the 1980s. However, just as the economic ‘miracle’ terminology applied to the Asian Pacific region by enthusiasts both within and outside the region did not apply with equal force across the whole region (apart from laggardly cases such as Burma and the Indochinese states, the Philippines, for example, had a very poor growth record in the 1980s), so too interest and involvement in democratization was reflected neither consistently nor universally across the region. It is tempting to fit the democratization movements in the Asian Pacific region in the second half of the 1980s into what Samuel Huntington described as the ‘third wave’ of global democratization.36 However, despite the implications of a kind of ‘snowball effect’ or ‘demonstration effect’ across the region, there were significant differences in both origins and development of these democratic movements. The causal pattern of successful democratization was certainly not uniform:37 in the Philippines in 1986, which is now forever associated with originating the expression and phenomenon of ‘people power’, it was poor economic performance especially compared with its neighbours which compounded dissatisfaction with Marcos’s political abuses and ‘crony capitalism’; in Mongolia in 1990 it was the echoes of East European communist collapse; in Thailand it was exasperation at yet another blatant attempt by the military to manipulate the political system in 1992. Not all such movements were even successful, for in other countries, where governments were prepared to use overwhelming force to protect their entrenched positions, such as Burma in 1988 and China in 1989, the democratization process barely got going before being extinguished. Again, as in its economic development trajectory, it was Taiwan which seemed closer to South Korea’s model, in that socio-economic modernization undoubtedly worked to raise democratic consciousness, but in Taiwan’s case the ‘establishment’ leadership of Chiang Ching-kuo and later Lee Teng-hui from the mid-1980s tried cautiously but carefully to stay ahead of the wave and institute democratization from above rather than be overtaken from below or by the opposition.38 By the early to mid-1990s, then, South Korea was an educated, urban and predominantly middle-class nation. It had experienced the pains and

12 Korea after the crash the pleasures of rapid economic growth, importation of certain Westernrooted values and experiences, and instituted new forms of democracy. Basking in the political legitimacy of his democratic election, Kim Youngsam was to find that life at the top was by no means as easy as he might have expected.

2

Korea’s crisis

Just as they have differed over explaining the causes of the Asian financial crisis, so scholars have suggested different ways to sub-divide the chronology of the crisis for analytical purposes. Here a division of the Asian financial crisis into six broad phases is proposed. The first phase, from July to October 1997, covers the initial impact in South-East Asia, particularly in Thailand and Indonesia but to a lesser extent in the Philippines and Malaysia. The second phase, from October to December 1997 covers the spill-over of the crisis into North-East Asia, specifically South Korea. The third phase, from January to May 1998, saw both a further geographical widening of the impact of the crisis, with economies such as Singapore and Hong Kong, which had seemed to survive the initial shock comparatively better, falling into negative growth, as well as the transformation, at least in Indonesia, of an economic crisis into a major political one. The fourth phase, from June to the end of 1998, was a period of holding the line, as most of the economies tried to prevent themselves from slipping too far into recession, and of early moves to restructure economic systems – or, in the case of Malaysia, to try to insulate its economy from outside influence – beginning to be implemented. The fifth phase, from early to late 1999, saw the first real shoots of recovery, most notably in South Korea and Singapore, with almost all of the regional economies edging back into positive growth. The sixth phase, from the end of 1999 to the time of writing, has seen restored mediumlevel growth in most of the Asian economies and in some cases even high growth again. This chapter deals with the first two of these phases, as the financial crisis of South-East Asia spread to encompass South Korea too.

Crisis in South-East Asia Despite being praised as a developmental model in the World Bank’s seminal study on the East Asian ‘miracle’, Thailand was to emerge as ‘the weak link in the Asian financial chain’.1 In fact, the sustained high level of growth in Thailand in the 1980s and into the first half of the 1990s had earned Thailand the nickname of the ‘fifth tiger’, following on the earlier

14 Korea after the crash successes of the four NIEs. Although Thailand had experienced a financial crisis before, in 1983–85, exports had pulled Thailand out of those difficulties; by the early 1990s the government felt secure enough to begin financial liberalization, designed to boost domestic savings and foreign capital inflows. But it also encouraged careless and unproductive lending, especially to the property sector, and too much offshore borrowing, so that private external debt rose sharply. However, Thailand was beginning to lose its competitiveness in labour-intensive industries to neighbours such as China as wages in key Thai export manufacturing sectors such as textiles rose and in 1996 export growth slowed down to close to zero, while imports continued steadily, so increasing the current account deficit. The inherently unstable coalition government dithered about how to respond. Perceptions, both inside the country and, crucially, increasingly outside the country, of political incompetence and economic mismanagement, contributed to the decline of confidence and stimulated currency speculation. In the early months of 1997 the property bubble burst, finance companies failed under the weight of non-performing loans and the government’s subsequent efforts to impose financial prudence were indecisive and unsuccessful. Attempts to defend the exchange rate peg exhausted foreign currency reserves. Finally, on 2 July, a day after its prime minister had famously declared he would do no such thing, Thailand was forced to devalue the baht by 10 per cent. Appeals to the IMF for assistance led in early August to the IMF rescue package, a $17.2 billion stand-by credit; as part of the conditions imposed, the government had to introduce an austerity programme, including stringent budget cuts, and undertake drastic financial restructuring. However, government indecisiveness hindered implementation and only when the existing coalition collapsed and a new one, headed by the former prime minister Chuan Leekpai, took office in mid-November 1997 did some degree of policy stability emerge. When the Thai crisis erupted both Indonesia and South Korea offered assistance, each pledging $500 million to the IMF rescue package. But they were soon to become victims themselves. During late July and August, the Indonesian rupiah began to come under pressure; the government intervened to support it whilst starting on piecemeal economic stabilization measures.2 But stability was more apparent than real and as the rupiah continued to depreciate (by 30 per cent between July and early October), on 8 October the government felt forced to turn to the IMF and external donors for assistance; the rescue package agreed on 31 October totalled $23 billion. Although some highly indebted commercial banks were closed immediately, confidence was not restored, because the Suharto government appeared reluctant to take on board the IMF austerity programme in its entirety. Suharto’s determination to shield his children’s and his cronies’ vast corporate empires, his toying with the idea of setting up a currency board and the increased political uncertainty (both about Suharto’s own

Korea’s crisis 15 health and his choice of an unpopular running mate for the expected spring 1998 presidential elections) all militated against restoring financial stability. So did the rebound effect of the South Korean crisis in November 1997. When the Suharto government introduced in mid-January 1998 a budget which was interpreted as defying IMF strictures for greater austerity, confidence plummeted and Indonesia was forced to conclude a revised agreement with the IMF which required sweeping economic and financial reforms. Political dynamics then took over, as widespread popular dissatisfaction with both Suharto’s prearranged re-election in March 1998 and with fuel and food price rises (ironically introduced in conformity with IMF demands to end subsidization) found expression in street demonstrations and ethnic riots, until in May 1998 Suharto was forced to step down. Prior to mid-1997 the Indonesian economy, like the Thai one, had seemed to be performing well, with the three previous years all recording growth rates around the 8 per cent mark. Despite a long over-dependence on oil and gas exports, the Indonesian economy had slowly been diversifying into greater manufactured export-led growth. But debt, especially short-term debt, of the private corporate sector and the banking sector had also been increasing, in part stimulated by the financial liberalization enacted during the 1990s and in part distorted by imprudent lending on the basis of political or personal connections. The weakened banking sector proved unable to cope when the Thai crisis began to spill over. Thus whereas the IMF package delivery and the later change in the government assisted Thailand to bring about a measure of stability by the end of 1997, an IMF package, when followed by governmental policy ambivalence and political recalcitrance, could not prevent further deterioration in Indonesia’s socio-economic situation. These lessons were not to be lost on Koreans watching the financial crisis sweeping towards them from South-East Asia.

The Korean economy on the eve of the crisis By the mid-1990s the South Korean economy was undoubtedly one of the major economies of the Asian Pacific region and, by virtue of its extensive trade flows, it was also becoming a major economy in the global context. It was on the edge of the world’s ‘top ten’ trading nations, its per capita GDP passed (in 1995) the magic level of $10,000, it was beginning to become an important overseas investor and had even started its own economic development aid programme (rather than be a recipient of aid, as in the past). Nonetheless, faced with a noticeable slowdown in the South Korean economy in the year before he took office, as part of his efforts to show that he was going to be a ‘new broom’ once in office, Kim Young-sam launched a ‘New Economic Plan’ to revive the economy. One of the key

16 Korea after the crash components of his approach was a new strategy towards the financial system, which had remained under previous administrations tightly monitored, but which was now given a considerable degree of liberalization. In particular, various restrictions on foreign borrowing were lifted, but by also maintaining a tight monetary policy the government was in effect encouraging commercial and merchant banks to turn increasingly to cheaper foreign credit.3 Kim also introduced a number of other policy changes which were to have an impact on the events of 1997. The most important of these, consistent with Kim’s more pro-market ideology, was to abandon the centralized planning and coordination framework (most notably by forcing the Economic Planning Board (EPB) to merge with the Ministry of Finance into a new super-ministry, the Ministry of Finance and Economy (MOFE)), allowing the chaebols to have greater freedom to invest and borrow where they liked.4 In the short term, the Kim Youngsam administration’s efforts to revive the economy seemed to work, as growth rates returned to over 8 per cent in 1994 and 1995. It was against this background, indeed, that the Kim Young-sam administration had pushed hard to achieve South Korea’s entry into the OECD club. This was hardly a new aspiration, since it had been floated early in Chun’s administration with a target date of 1988 then set as the deadline.5 However, both the Chun and Roh administrations, aware that club membership requires obligations and adherence to certain rules (which would upset certain vested economic interests at home) as well as bringing benefits, had balked at entering into serious negotiations. By the time of the Kim Young-sam administration, however, many of the domestic barriers to meeting OECD requirements had gradually been removed. Allied with the political imperative of the prestige expected to accrue to Kim and his administration, this enabled him to push harder for entry than his predecessors. The Kim administration formally applied in March 1995 and received agreement from the OECD the following autumn, despite that organization’s reservations about the pace of South Korea’s financial liberalization and its restrictive labour legislation. There were also serious doubts within South Korea, with opponents arguing that the country was not yet ready for ‘unlimited economic competition’ with the world’s major economic powers.6 But Kim saw OECD entry as conferring political benefits, in boosting South Korea’s international status – and by extension his own personal standing as an international statesman – and in strengthening his party’s platform as it went into the April 1996 National Assembly elections (since at the time that they were held he could report to the nation that entry did seem likely to be approved). Certainly, at the time OECD admission was achieved in December 1996, Korea seemed a worthy and economically stable new member. As shown in Table 2.1, the major macro-economic indicators for Korea during the 1990s had shown reasonably sound trends. Growth rates were good, inflation was at a stable level, a modest budget surplus had been achieved during the

Korea’s crisis 17 Table 2.1 Major economic indicators 1991

1992

1993

1994

1995

1996

1997

6,810

7,183

7,811

8,998

10,823

11,380

10,307

Real GNP growth (%)

9.1

5.0

5.8

8.4

8.7

6.9

5.5

Gross savings rate (%)

37.3

36.4

36.2

35.5

35.5

33.8

33.4

Exchange rate (won/US $) at end of

759.5

786.5

807.2

788.5

775.7

844.9

1695.0

Nominal wage rise (%)

17.0

15.0

12.2

12.7

11.2

11.9

8.1

Consumer price rise (%)

9.3

4.5

5.8

5.6

4.7

4.9

6.6

Current account (US $ bill)

–8.3

–3.9

1.0

–3.9

–8.5

–23.0

–8.2

Export growth (%)

10.5

6.6

7.3

16.8

30.3

3.7

5.0

16.7

0.3

2.5

22.1

32.0

11.3

–3.8

Per capita income (US $)

Import growth (%)

Sources: Bank of Korea (Seoul), Monthly Bulletin , April 2000; Bank of Korea statistics on http://www.bok.or.kr/kb/princep-e/engpei8.html, accessed 8 June 1999; Hak K. Pyo, ‘The Financial Crisis in South Korea: Anatomy and Policy Imperatives’, in Karl Jackson (ed.), Asian Contagion: The Causes and Consequences of a Financial Crisis (Singapore: ISEAS, 1999), p. 153.

previous few years, domestic savings rates remained high and per capita GDP had continued to rise steadily. The current account deficit was rising steadily as a percentage of GDP, and did reach $23.7 billion in 1996 when the monetary authorities ‘adhered to a strong won policy despite market pressures for devaluation’; however, this situation was to turn round in 1997 and the deficit fell as the yen became strong again.7 These generally favourable indicators, however, masked a number of underlying and interrelated problems with the economy, which were to weaken its ability to withstand external shocks coming from elsewhere in the region. First, was the increased financial vulnerability of the economy, particularly due to the high percentage of short-term debts amongst the country’s foreign borrowings. As identified in Chapter 1, the South Korean economic planners had historically preferred to rely on foreign borrowing rather than inward FDI for their country’s industrialization process. Inward FDI was negligible until the mid-1980s and remained comparatively limited, especially when compared with FDI inflows into

18 Korea after the crash neighbouring Asian Pacific countries during the 1990s. Instead the government had utilized external sources of funding through banks and international organizations, even though traditionally Koreans do not like to live beyond their means and being in debt to foreigners above all is disturbing to a nationalistic people. Although external debt reached a level of close to $50 billion by the mid-1980s, making South Korea at that time the fourth most indebted country in the world, in the second half of the 1980s the turn to current account surpluses had helped to reduce that level. Moreover, the Chun and Roh governments worked to extend the maturity of outstanding debts, thereby reducing the proportion of shortterm debt. However, in the early 1990s these trends reversed. There were three factors which contributed to the reversion to reliance on short-term loans. One was the admittedly fluctuating but overall increasingly common current account deficit, which was in turn primarily due to steadily increasing invisible trade deficits. Another was the effect of the partial capital market liberalization measures (some of which were introduced in fulfilment of OECD membership requirements) which encouraged inflows of foreign capital. Finally, new government restrictions on corporate borrowing directly from overseas financial institutions forced the chaebols to borrow abroad through banks and so made it administratively easier to accept short-term rather than long-term loans. In the absence of effective prudential regulation, the chaebols were allowed to go on an ‘orgy of imprudent borrowing’, mostly of unhedged short-term dollar-denominated loans from international banks.8 The result was ‘the accumulation of a large stock of foreign debt and a vulnerable foreign liability structure’.9 As shown in Table 2.2, not only did Korea’s total external debt grow rapidly from 1994, nearly tripling during the course of three years, but the proportion of short-term external debt rose steadily, from less than 45 per cent in 1993 to nearly 60 per cent by the end of 1996. A second problem was the inefficiencies and excesses derived from an industrial structure encouraged and developed by the government and nurtured on close government–business relations. As outlined in Chapter 1, successive governments had fostered the chaebols for purposes of stimulating export-led growth but had in the process created giant companies which it was difficult for them to control. By the mid-1990s the top thirty chaebols produced over half of Korea’s GDP and the top five chaebols’ share actually accounted for one-third of Korea’s total production.10 The chaebols expanded and diversified into every conceivable industrial sector. For many years Daewoo, one of the top five, ran an advert which claimed that it was involved in ‘everything from A to Z’, featuring products or services beginning with every letter of the alphabet. Historically, commercial banks were under the control of the government, through the Bank of Korea, and interest rates had been kept artificially low. In effect, this meant that the government was providing forms of subsidies for the

Korea’s crisis 19 Table 2.2 South Korea’s total external liabilities (in billion US dollars) 1993

1994

1995

1996

Nov. 1997

1997

Total external debt

43.9

56.9

78.4

104.7

161.8

154.4

Mid- and longterm external debt

24.7

26.5

33.1

43.7

72.9

86.0

Financial institutions

13.0

13.9

19.6

27.7

53.2

50.4

Private enterprises

7.9

9.0

10.5

13.6

17.6

17.6

Public sector

3.8

3.6

3.0

2.4

2.0

18.0

19.2 (43.7)

30.4 (53.4)

45.3 (57.7)

61.0 (58.2)

88.9 (54.9)

68.4 (44.3)

Financial institutions

11.4

19.4

29.7

39.0

63.1

43.8

Private and nonfinancial sector

7.8

11.0

15.6

22.0

25.8

24.6

Short-term external debt (as % of total)

Source: Suh Sang-Mok, ‘The Korean Currency Crisis: What Can We Learn from It?’, Korea Journal, summer 1998, p. 43.

chaebols to continue expanding. The opportunities for collusion between politicians and business leaders were great. It also meant that the government had guaranteed the chaebols’ domestic and foreign debt and had to rescue several of them from insolvency (with the notable exception of the Kukje group which was allowed to go bankrupt for mainly political reasons)11 during the 1970s and 1980s. The need to prevent large-scale unemployment, the importance of maintaining international credibility for the chaebols (and by extension South Korea itself) and the greater national need to tap into the chaebols’ research and development skills in high-tech products were invariably cited as reasons for such actions. However, the process of democratization and deregulation that gathered pace during the late 1980s and first half of the 1990s led to the government distancing itself from the degree of overt financial support given to the chaebols in earlier decades. Freed up under democratization, organized labour demanded higher wages and better working conditions and benefits which were new burdens on companies which had grown fat on the basis of exploiting the workers. Deregulation meant that the more direct forms

20 Korea after the crash of governmental subsidy were gradually phased out, thereby increasing the financial burdens of the chaebols.12 At the same time, external competition from the new wave of industrializing Asian economies, who were moving into sectors previously dominated by Korean producers, became more intense. In the face of this competition, however, some chaebols, instead of undertaking prudent restructuring, simply embarked on ‘a series of illfated pre-emptive strategic investments’ in order to satisfy their obsessions with market share.13 Excessive capacity became the norm for many industrial sectors. But trading on the belief that the chaebols could not be brought down because they were simply too big was shown to be an idea whose time had passed. The crunch came with the bankruptcy of the Hanbo group in January 1997, Korea’s second largest steel-maker and fourteenth largest chaebol.14 Hanbo, which had begun as a construction company, had invested heavily in the steel industry by borrowing indiscriminately from banks and continued to do so into the mid-1990s, even while the global steel industry was going into recession. Its high debts and falling sales had brought its problems into the open in mid-1996. Although a series of emergency loans were arranged by creditors, the burden proved too much and, by the time that Hanbo filed for bankruptcy in January 1997, its debts amounted to 5 trillion won ($5.8 billion at the exchange rate of the time). But worse was to follow when investigators began to examine the Hanbo books. It became clear that political lobbying by the Hanbo chairman, Chung Tae-soo, had been the main reason why the banks had been given such large amounts of credit. In the end, more than a dozen politicians from both the ruling and opposition parties were implicated in bribery and influence-peddling activities, including, most damagingly for President Kim Young-sam, his second son Kim Hyun-chul. What had been a financial problem became a political crisis too. The Hanbo collapse certainly sent a strong signal to the international community, but it was not a positive one, for four reasons. First, it exposed vividly the weaknesses of the South Korean economy and especially the over-loaded financial system. Obviously, the major lender to Hanbo, the Korea First Bank, was near bankruptcy itself and in no position to help save its client. Second, paradoxically, it showed that the old assumption that the government would always salvage a struggling chaebol no longer held true. Although subsequently the government did bail out some near-insolvent banks which it had encouraged to continue lending to failing chaebols, the net effect of the new approach from the time of Hanbo’s difficulties was undoubtedly to heighten foreign investors’ concerns about the viability of other chaebols and banks and to increase their uncertainty about which might be saved and which would not. Third, it also fatally damaged President Kim’s own credibility, to the extent that he had to apologize publicly for his son’s actions and suffer personally while his son, popularly called the ‘crown prince’, was put on trial and

Korea’s crisis 21 eventually found guilty of bribery and tax evasion in October 1997, being sentenced to three years’ imprisonment and fined $1.3 million.15 Finally, President Kim’s inevitable preoccupation with his own family’s humiliating problems undoubtedly distracted him from appreciating fully the nature of the emerging financial crisis. It also influenced his senior economic policymakers, such as Deputy Prime Minister Kang Kyung-shik, who had begun receiving worrying reports from his subordinates about the financial situation, to deliberately avoid troubling the president with any warnings since he was already disturbed about the Hanbo case.16 During the months following the Hanbo collapse, a series of the smaller chaebols also went bankrupt: Sammi in March 1997, Jinro in April and Daenong and Hanskinkongyung in May. Other famous names such as Ssangyong, Hanwha and Hanjin were reportedly in trouble. Lending merchant banks were beginning to be saddled with massive nonperforming loans. Altogether, eleven chaebols failed during 1997, but the most important undoubtedly was Kia, the seventh-largest chaebol and a major automobile manufacturer. Like the Hanbo collapse, the Kia case damaged the government’s credibility and external investors’ faith in South Korea. But, in the Kia case, the hesitancy with which the Kim administration approached the problem undoubtedly ‘aggravated’ the situation.17 The death-throes of the Kia group were long drawn out, from July, when it filed for bankruptcy, until October, when the government finally decided to put it into court receivership and effectively turn it into a state-owned company by converting government loans into equity. But by then, with Kia’s debts having reached the 9.4 trillion won level (nearly twice that of Hanbo earlier in the year), the banks had already pulled the plug on Kia by refusing to roll-over loans due. The automotive sector was an extremely competitive one in Korea, with major producers Daewoo and Hyundai at the top, closely followed by companies like Kia and Ssangyong. Despite government attempts to discourage it, Samsung had for some years been trying to get into this sector too, and it soon became the prime candidate to take over the struggling Kia group. However, after three months of haggling between Samsung, Kia management and unions, and the initially rather hands-off Kim administration officials, the deal fell through. The net effect of the Kia collapse, coming on top of the Hanbo and other failures earlier in the year, was as much psychological as it was real: it suggested that ‘Korea Inc.’ might have feet of clay. The third problem was the deterioration in Korea’s competitiveness. Two factors were at play here: rising costs of production, especially unit labour costs, within South Korea, and increased competition from other Asian developing countries. The result was that South Korea was becoming caught in the so-called ‘sandwich trap’. After decades of low wages and poor working conditions, Korean workers were eager to take advantage of their newly won rights after Roh’s June 1987 declaration of democracy. Strikes for better pay and

22 Korea after the crash conditions became commonplace, with employers settling for large raises just in order to get workers back to the factories and offices. Nominal wages therefore increased rapidly during the peak of the labour unrest in 1987–89 (by 21 per cent in 1989 alone) and continued at a high level of growth into the early 1990s. The period of 1986–88 had been one of economic boom for South Korea, when it had been the world’s fastestgrowing economy, benefiting from what the Koreans called the ‘three lows’: low interest rates in the international capital market, low oil prices and lower value of the dollar against the yen, which benefited the won.18 But by the end of that decade those advantages were beginning to disappear. South Korea found itself unable to sustain such large wage increases without losing competitiveness. In 1987 it still had the lowest wages amongst the four rival NIEs, but by 1992 it had the highest. Indeed, across Asia, only Japan, inevitably, had higher wage levels.19 South Korea was not only losing out to its closest NIE rivals, for the newly emerging economies elsewhere in South-East Asia, in particular Thailand and Malaysia, were rapidly moving into those product lines, such as textiles and consumer electronics, on which at least part of the Korean export success had been founded, and these countries had the advantage of even cheaper labour costs. Additional external factors worsened the terms of trade for South Korean exporters. The Chinese yuan was devalued in 1994, undoubtedly helping in the emergence of China as a major world exporter. The yen started to depreciate against the US dollar in 1995, reducing Korean goods’ price competitiveness against similar Japanese products in third-country markets. But of the external factors, the most significant was the global slowdown in trade in semi-conductors and consumer electronics and the following year, 1996, the world prices for semi-conductors (a key high-tech product which accounted for approximately a quarter of South Korea’s exports by value) began to decline steeply due to a world-wide glut.20 Overall, as shown in Table 2.1, export growth plummeted from a very healthy 30 per cent in 1995 to 3 per cent in 1996. Domestically, by the mid-1990s South Korea seemed to be suffering from the ‘three highs’: high wages, high interest rates and high land prices. Korean companies’ attempts to adjust to the rising costs were hampered both by restrictive labour legislation, still largely unchanged from the earlier authoritarian periods, and the trade unions’ desires for greater social welfare. Although the number of strikes dropped in the mid-1990s, annual wage increases were still in double digits (in the 1992–96 period rising at double the average inflation rate). The Kim Young-sam administration’s early efforts to begin to reform industrial relations were well-meaning but ineffective. However, the pending OECD membership meant that something had to be done to make the industrial relations system conform to OECD norms. In April 1996 Kim promised to revamp

Korea’s crisis 23 labour–management relations. Needless to say, both management and the trade unions had very different ideas on what that would mean in practice. The two major trade union organizations, the progressive Korean Confederation of Trade Unions (KCTU) and the more conservative Federation of Korean Trade Unions (FKTU), argued for the right to have more than one trade union in a company and to have third-party intervention in labour disputes. Implicit in their demands was a concern about employment security. The employers, on the other hand, led by the Federation of Korean Industries (FKI), argued instead for the ability to lay off workers (especially important in labour-intensive industries that were losing competitiveness), to hire replacement workers during strikes and to set more flexible working hours.21 With labour–management discussions at a stalemate, the Kim administration decided to take action. It tabled a bill and then, using a tactic well-known in the days of more authoritarian leaders, railroaded it through the National Assembly on 26 December 1996 in a secret predawn session to which opposition parties were deliberately not invited. Drafted under strong pressure from the chaebols and the FKI, the final version of the law was decidedly pro-management, with lay-offs being allowed and the introduction of multiple trade unions delayed until the year 2000. The result was massive strikes and intense protests from workers and also from the opposition parties, which, with a wary eye on the presidential election a year ahead, had been rather neutral in their approach to the legislation when it had been first proposed. However, the method used to pass the legislation gave them a stick with which to beat the Kim administration for its ‘undemocratic’ actions; broader public opinion too was critical of the government.22 The Kim administration was clearly surprised by the extent of popular support for calls for a ‘general strike’ in January and by mid-January was showing signs of backing down. Some politicians within the New Korea Party (NKP), including the aspirant for the presidency Lee Hoi-chang, began to distance themselves from Kim’s rigid approach. In the end, the outpouring of popular feeling was too much for the Kim administration, which caved in and agreed to amend the legislation. In early March 1997, the National Assembly nullified the legislation passed in December and passed revised labour laws, which incorporated some compromises with the opposition’s views, but were nonetheless still more favourable to management than labour. This episode, coupled with the Hanbo scandal, left many ordinary Koreans disillusioned with Kim; ‘the wrongs of December were corrected in March, but the sense of disappointment lasted’.23 Significantly, also, the new legislation did nothing in the short run to alleviate the problem of high wages and inflexible working practices in the manufacturing sector.

24 Korea after the crash

From South-East Asia to Seoul In the second half of 1997, the Kim administration gave the impression that, despite the dramatic shocks being suffered by other Asian Pacific countries since the Thai baht devaluation in July, the fundamentals in South Korea were still sound and that the economic situation was difficult rather than at crisis-point. It was therefore to come as all the more of a shock to the Korean people when, on 19 November, President Kim fired his key economic policy-makers on the grounds of mismanaging the economy and two days later he had to ask the IMF for emergency stand-by funds to avert a complete national economic collapse. Despite a series of inquiries carried out under the later Kim Dae-jung administration, the full picture of what happened during the months from July to November 1997 is still not clear. However, a number of factors can be seen to have been at play during these crucial months, a period which has not received the attention it deserves in accounts of the crisis. External factors, particularly the knock-on effects of the Thai, and later the Indonesian, crises and the particularities of Hong Kong’s setbacks, were important, but there were also internal institutional factors which delayed and weakened the Kim administration’s will and ability to respond effectively to the rapidly changing economic environment. The emerging crises in Thailand and other ASEAN (Association of South-East Asian Nations) countries during July and August 1997 naturally focused international investors’ minds on whether there might indeed be other vulnerable economies in the region. The term ‘international investor’ can cover a myriad of commercial operators: some were representatives of what was soon to become a derogatory term, namely ‘hedge funds’, who were looking for speculative short-term gains to be made from economies with misaligned exchange rate regimes; some were more conventional institutional investors in equity markets; others were commercial banks prepared to lend to Korean banks and corporations; while yet a fourth group can be classified as foreign companies with a longer-term perspective who were prepared to invest directly through establishing manufacturing facilities or trading offices. Regardless of the category, however, international investors were beginning to look closely at the Korean economic situation in the second half of 1997. The direct effects of the South-East Asian crisis on the South Korean economy were comparatively limited, but the indirect and psychological effects were far more significant. Although ASEAN had become an important export and construction market for South Korea from about the mid-1980s and Korean banks had become interested during the 1990s in lending to ASEAN companies (with around $15 billion in loans outstanding in 1997 to South-East Asia, predominantly Indonesia and Thailand), South Korean exposure to and dependence on that sub-region would not on its own have been sufficient to undermine international confidence in South Korea. From 20 October, however, it became clear

Korea’s crisis 25 that the financial crisis could no longer be confined to South-East Asia. Over four consecutive days, Hong Kong found itself subjected to a huge battering, with the stock exchange losing nearly a quarter of its value.24 The dollar peg held and Hong Kong survived, but the shock waves were felt around the region, including in South Korea. Indeed, the OECD’s own analysis of the South Korean crash specifically argues that ‘the actual catalyst for the collapse of the won’ was probably the ‘panic’ in Hong Kong.25 Portfolio investment outflows by foreigners, as they became net sellers of Korean financial assets, added to large-scale short-term capital outflows. The series of large corporate bankruptcies from Hanbo through to Kia during the first half of the year had undoubtedly made international commercial banks more worried about the possible failures of Korean banks. For example, by the end of October 1997, South Korea’s thirty merchant banks had a total of 3.8 trillion won (about $3.6 billion) in nonperforming loans outstanding, more than three times the level at the end of 1996. Foreign creditors became increasingly reluctant to roll over existing loans to Korean domestic financial institutions and instead withdrew their funds; the roll-over ratio for foreign borrowings for the seven largest domestic commercial banks dropped abruptly from 87 per cent in October to 59 per cent in November (and later to 32 per cent in December).26 Ironically, the South Korea government unwittingly added to international concerns on 27 August by making what was ‘probably the error with the greatest consequences’;27 the MOFE stated that it would guarantee all foreign debt. This meant that the Bank of Korea was trying to play the role of lender of last resort in US dollars. The very fact that the government felt moved to offer such a guarantee sent a signal to external observers that there must indeed be something seriously wrong with the chaebols and the financial system. At the same time, the exchange rate for the won against the dollar began to fall significantly. The Bank of Korea had actually begun to intervene in the foreign exchange market from early 1997 in an attempt to prevent a fall in the exchange rate, but these actions of necessity had required expending the country’s foreign exchange reserves. According to government figures, these reserves had reached $33.2 billion at the end of 1996, but they declined slowly to around $30 billion by mid-1997. But the reality was much worse than the published figures suggested. When the international financial news agency Bloomberg estimated in early November that the foreign reserves of South Korea at the end of October were in fact only $15 billion instead of the government’s official figure of $30.5 billion, international financial institutions became increasingly concerned about the real foreign currency liquidity situation in South Korea.28 The lack of timely and credible data from the government and the Bank of Korea added to the uncertainty. Figures subsequently released by the Bank of Korea of usable foreign exchange reserves suggest that in fact the reserves had deteriorated from $29.4 billion at the end of

26 Korea after the crash December 1996 to $22.3 billion by the end of October 1997 and they were then to plummet to $7.3 billion by the end of November.29 From August to the end of November, the Bank of Korea lost at least $8–10 billion through exchange market intervention, but, despite the narrow band of daily fluctuations allowed, the exchange rate could not be held.30 It moved from around 840 won to the US dollar in December 1996 to 929 in October 1997 but then fell quickly to 1,390 by the time of the appeal to the IMF. The government officials tried to play down the severity of the situation during October and November. Indeed, in early November South Korea actually paid out $200 million to the Thai government as part of its pledged commitment of $500 million to the IMF rescue package for Thailand.31 Government officials tried to put on a brave front and through the media tried to kill off rumours already circulating amongst the foreign media about the seriousness of the Korean situation. Deputy Prime Minister Kang remained staunch in his conviction that he would never turn to the IMF for assistance.32 However, a visit to Seoul (which was kept secret at the time) by the IMF Director Michel Camdessus on 16 November tipped the balance. Camdessus, bringing warnings of external observers’ concerns about the financial situation, persuaded a reluctant Kang that there was really going to be no alternative.33 Two days later, after the won had gone through the psychological 1,000-to-the-dollar barrier, the Bank of Korea for the first time directly urged the government to seek assistance from the IMF.34 The same day the National Assembly ended its regular session without passing several financial reform bills which had been aimed at strengthening the supervision of the financial sector. This had been held up by wrangling amongst political parties, particularly as the opposition parties, the National Congress for New Politics (NCNP) and the United Liberal Democrats (ULD), well aware of the upcoming presidential election, withheld approval to try to achieve political kudos. The following day, President Kim sacked Deputy Prime Minister Kang and his own senior economic secretary Kim In-ho, ostensibly for their failure to ensure the passage of these reform bills, and promoted in Kang’s place the Trade and Industry Minister Lim Chang Yuel, who, in his earlier career as a bureaucrat, had dealt frequently with the IMF and other international financial institutions. But Lim was unable to hold the line any better than his predecessor. His public displays of confidence, that the problem was merely a ‘temporary funding shortage’ and the rejection of the ‘idea of IMF aid as unthinkable’,35 were belied by his desperate actions behind the scenes. Informal approaches made to both Japan and the United States for bilateral assistance were unsuccessful as both countries made it clear that they would only consider aid within the context of an IMF programme. Lim’s attempt to play the ‘collapse card’ – that a financial collapse in South Korea would have serious consequences for the US and Japanese

Korea’s crisis 27 economies – failed to carry the day.36 Indeed, Korean officials were to be consistently disappointed during this phase of the crisis in the attitude of the Japanese and the Americans, particularly the latter, which they considered as the ‘first line of defence’. Lim announced the setting up of an emergency presidential economic advisory committee and an emergency package of measures such as widening the band allowed for the won’s daily fluctuations, speeding up the bond market opening schedule and activating new funding to clear up the bad loan problem as a means to encourage inward foreign investment and external confidence, but neither move helped at that late stage. With the won continuing to collapse, on 21 November, with the approval of the president, Lim appealed to the IMF for financial assistance to avoid a debt moratorium. The appeal was being made at a very late stage and only as the country seemed on the very brink of a debt default. Lim said initially that South Korea would need to receive aid of around about $20 billion, but once serious negotiations began between the IMF team and the Korean finance officials on 24 November the sums likely to be required rapidly began to grow as the true extent of the problem became clearer. Differences occurred between the Korean government and the IMF officials. Lim took the line that the Korean situation required ‘a simple infusion of liquidity, rather than policy intervention’.37 Convinced of the correctness of their approaches to the earlier Thai and Indonesian crises, IMF negotiators, however, were determined to insist on tight monetary and fiscal policies as a condition of the aid package. In the middle of the negotiations, on 28 November, Lim flew to Tokyo to meet Japanese Finance Minister Mitsuzuka Hiroshi, to try to get Japan either, at best, to give a $10 billion bilateral loan (so reducing the amount which might be needed from the IMF) or, if Japan could not agree to that step, then at least to positively join in the expected IMF package. He failed to obtain a clear commitment from Mitsuzuka either way, although the Japanese later made it clear that they would join.38 Turning to the Japanese, to whom of all people for historical reasons the Koreans least wish to be in debt, showed what desperate straits South Korea was in. President Kim himself, meanwhile, had flown to Vancouver to attend the APEC Summit meeting on 22–23 November, but although his explanations of his country’s plight gained him sympathetic words there was no action from APEC as an organization to alleviate the problem. Individual bilateral meetings between Kim and the US and Chinese presidents and the Japanese and Canadian prime ministers also drew nothing more than expressions of support. As if to reinforce the point that no special bilateral financial aid would be forthcoming, President Clinton in fact followed up their Vancouver bilateral meeting by telephoning President Kim on 27 November to reinforce the urgency for the Koreans to come to an agreement by 1 December at the latest.39 With no direct bilateral aid and the domestic financial situation deteriorating by the day (the Seoul stock

28 Korea after the crash market fell to its lowest levels for ten years), South Korea had no choice but to accept the IMF terms. Although for a while there had been significant differences of opinion between the South Korean and IMF negotiators over points such as closing down banks and economic growth targets, on 3 December 1997, the day after Camdessus returned to Seoul, the South Korean government and the IMF reached formal agreement. A detailed version of the agreement can be found in Appendix I, but the key terms of the policy commitments can be summarized as follows: • • •

•

• • • •

The current account deficit would be held below 1 per cent of GDP in 1998 and 1999, with inflation at or below 5 per cent in 1998. Real GDP growth would be restricted to 3 per cent in 1998. Tight fiscal policy would be maintained to alleviate the burden on monetary policy and to provide for the costs of restructuring the financial sector. Three financial sector reform laws – to enhance the Bank of Korea’s independence and to improve the supervision of financial institutions – would be passed before the end of the year. Measures would be taken, including closing down, to restructure and recapitalize troubled financial institutions. New timetables would be set for trade liberalization and capital account liberalization programmes. Corporate governance to be improved, especially through greater transparency and better management practices. Labour market practices to be made more flexible.

In return, the IMF agreed to arrange for a package of loans in which its own loan of $20.9 billion would be the centre-piece, but which would in the end total $58.35 billion, with $35 billion from international financial institutions and $23.35 billion from individual countries, as shown in Table 2.3. The sum agreed for the Korean case, therefore, became the largest ever bail-out authorized by the IMF, exceeding the $50 billion arranged for Mexico during its peso crisis in 1994. Even though South Korea was to receive the first emergency tranche of $5.5 billion immediately, the signing of the deal was not the end of the crisis. The positive impact of the agreement on the foreign exchange and stock markets was small and extremely short-lived. The financial situation, indeed, continued to deteriorate. In part this was because new, more accurate data was becoming available daily about the real extent of the crisis, so that markets became concerned about a widening finance gap. In part this also derived from a perception that the Kim administration was still trying to find alternatives and might even try to wriggle out of the deal with the IMF. An IMF official was later quoted as saying that for ‘about ten days … the Koreans were acting as if they were not going to do the

Korea’s crisis 29 Table 2.3 International financial assistance to South Korea (in billion US dollars)

Multilateral aid IMF World Bank Asian Development Bank Bilateral aid Japan United States of America France Germany Italy United Kingdom Australia Canada New Zealand Belgium, Netherlands, Sweden and Switzerland Total

Commitments

Disbursed (as of June 2000)

21 10

19.5 7

4

3.7

10 5 1.25 1.25 1.25 1.25 1 1 0.1

– – – – – – – – –

1.25

–

58.35

Source: IMF and MOFE materials and François Godement, The Downsizing of Asia (London: Routledge, 1998, p. 77). Note Of the IMF commitment, the European Union’s commitment amounted to 30 per cent, the United States’ to 18 per cent and Japan’s to 6 per cent.

program’.40 Camdessus, in fact, had to warn the Koreans that the IMF would immediately suspend its aid if the terms of the agreement were not faithfully carried out. The situation was not helped either by Kim Dae-jung’s initial reaction to the terms of the deal, which was to demand renegotiations of those terms which he felt would undermine the country’s economic sovereignty, a gesture which was quickly criticized by the other presidential candidates as damaging the country’s credibility. Faced with this widespread criticism of his reported comments, Kim backtracked and argued that he had only meant technical adjustments which might be arranged through supplementary negotiations.41 Corporate news continued to be dire. Korea’s twelfth largest chaebol, the Halla group, and the fourth-largest securities company, Dongsuh, filed for bankruptcy. The stock market continued to decline and the exchange rate continued to deteriorate as the won headed

30 Korea after the crash closer to the 2,000 mark against the US dollar. International confidence continued to ebb away. An estimated $1 billion a day was leaving South Korea and the country seemed on the verge of default. Two major international credit agencies, Moody’s and Standard and Poor’s, drastically downgraded their credit ratings for Korea. Lim had publicly apologized for the situation created, but President Kim remained quiet, or, as one observer has commented, ‘nearly invisible’.42 Finally, on 11 December, with what was to be his second public apology of the year, President Kim made a broadcast to the Korean people in which he apologized for the economic collapse, conceded that ‘we have lost our economic sovereignty’ and called on the Korean people to accept this humiliating and ‘bone-carving pain’.43 Two days later he met the three presidential candidates to discuss the IMF commitments and persuaded them to issue a statement that all three candidates, including the previously wavering Kim Dae-jung, would abide by the agreement to ‘enhance the international credibility’ of South Korea and to ‘stabilize the financial market at the earliest opportunity’. Because of the presidential election campaign then taking place, the IMF had taken the unprecedented step of specifically requesting such an undertaking from the candidates.44 A temporary stabilization in the downward spiral did seem to be achieved as the country, external creditors and the IMF waited for the result of the presidential election on 18 December, which is discussed in detail in the next chapter. The shock of the news of the appeal to the IMF hit the Korean public hard. While recriminations over the government’s performance grew, at the same time a sombre mood of resignation that some sacrifices were necessary also spread amongst the population. Phrases such as ‘second national disgrace’, a reference back to the Japanese annexation of Korea earlier in the century which was considered to be the first, and ‘economic trusteeship’, which also had implications of external control, became popular. Kim Dae-jung’s opposition party quickly dubbed 3 December, the day the letter of intent with the IMF was signed, as ‘national economic humiliation day’. The most popularly used phrase eventually became ‘the IMF era’, with its implicit implications not just of a change of governance but also of a loss of national sovereignty. Initial media coverage naturally tended to put the responsibility on to the Kim Young-sam government, but at the same time many media reports included a self-reflective mood that every Korean should also bear a part of the responsibility. Typical of this type of commentary which deliberately tried to avoid externalizing blame was the editorial of a business newspaper, Maeil Shinmun, which concluded that ‘in short, Korea can blame no one but itself for its current economic woes’ and the opinion piece by the chief editor of the daily Chosun Ilbo, arguing that ‘Korea’s problems originate right here in Korea, and the nation should not try to lay the blame on foreigners’.45 However, as the crisis continued to deepen during the first

Korea’s crisis 31 half of December, more nationalistic and anti-foreign reactions were observable. The Korean media carried stories of a girls’ high school burning foreign-made clothing, of civic groups’ campaigns to boycott foreign cars, cosmetics and cigarettes, and of calls for Korean students overseas to return home and stop wasting foreign currency. Airlines were forced to cancel flights during the traditionally busy Christmas–New Year period as Koreans cut back on overseas holidays – not only because travelling overseas had become much more expensive due to exchange rate changes but also as it came to be seen as ‘unpatriotic’. Fila Korea, whose shoes and clothing are almost exclusively manufactured inside Korea, was forced because of its foreign-sounding name to run adverts in the local press emphasizing its truly ‘Korean’ products. Conspiracy theories, which posited the US government and business working in cahoots with international financial speculators and working through the IMF to open up and dominate the Korean market, began to grow in popularity.46 Civil servants’ pay was frozen, as a gesture to show sympathy with workers who were about to suffer not only pay freezes and cuts but in many cases outright dismissal. Company employees switched to bringing lunch-boxes from home rather than eat even in company cafeterias let alone in outside restaurants; downtown restaurants and bars were much emptier than would normally be the case with end of year parties and celebrations cancelled or scaled down. Department stores cut back on the Christmas decorations, many of them doing without the Christmas trees usually found in the stores. CD disks of sad ballads replaced the normal demand for Christmas carols at record stores. The major television stations decided to reduce broadcasting time by two hours and to buy in fewer foreign series, relying more on home-grown movies. But perhaps the most moving of the reactions was the extent to which ordinary Koreans were willing, for the sake of the nation, to donate their gold ornaments to a nationally launched gold collection campaign.47 Kim Dae-jung himself walked into a Seoul bank one day and donated a miniature golden tortoise and four golden ‘good luck’ keys. Parallel campaigns to resell diamonds overseas and to donate more blood so as to avoid buying in expensive foreign blood plasma also began. Overall inflation rates began to rise, because marked cuts in luxury good prices were unable to compensate for even more dramatic rises in some staple foods and consumer essentials.48 One of the few silver linings was the better traffic flow, especially around Seoul, as drivers decided to economize on petrol and parking fees and took to the underground railways and buses rather than use their cars. The Kim Young-sam administration, which had come into office in 1993 with such high hopes and high popular support, seemed destined to end on a very low note indeed. The nation waited to see who would have the task of leading the country back to recovery.

3

The advent of Kim Dae-jung

The two Kims had long been political rivals. Despite sharing a record of prolonged struggle against successive authoritarian governments, their strong personal desires to reach the pinnacle of power – the ‘presidential disease’ as some Koreans call it – meant that their personal relations were often tetchy and distant. The sense of rivalry was intense and the periods when they cooperated within the confines of a single opposition party, such as the New Korea Democratic Party (NKDP) in the mid-1980s, extremely short. They were also caught up within a relationship which Park Jin has neatly described as having the characteristic of ‘competitive interdependence’.1 For example, Kim Young-sam’s success in entering the ruling party in 1990 and becoming its presidential candidate in 1992 certainly owed something to the fact that Roh calculated that he was the only person likely to beat the still active Kim Dae-jung (whose victory would have been extremely discomforting to Roh personally). In turn, Kim Daejung was himself able to draw political sustenance from Kim Young-sam’s continued involvement in politics and his ‘traitorous’ switch to the ruling party.2

Kim the opposition leader Born to a poor family living on a small island near to Mokpo port in the Cholla province of south-western South Korea, Kim Dae-jung has never forgotten his political and familial roots. This region, which has long had a tradition of being anti-establishment or anti-government, in turn has unflaggingly sustained his political career. His political life began in 1954, when he made the first of three unsuccessful bids to gain a seat in the National Assembly. But, within three days of finally being elected in 1961, Park had mounted his coup and dissolved the National Assembly. Kim went on to make a name for himself amongst the opponents of Park. He lost out to Kim Young-sam over becoming the floor leader of the opposition, but, through clever wheeling and dealing had himself put forward as the opposition’s presidential candidate in the 1971 election. He gained 46

The advent of Kim Dae-jung 33 per cent of the popular vote and almost certainly, but for some voterigging by Park, would have won. It was to be another twenty-eight years before he finally entered the Blue House as president. Kim is said often to remind his visitors that he nearly died five times.3 In the years after 1971 he was imprisoned repeatedly, kidnapped from a Tokyo hotel by Korean Central Intelligence Agency (KCIA) agents (and was close to being dumped in the sea afterwards), sentenced to death by a military court in 1980 on charges of sedition (a sentence that was only commuted after pressure from the USA) and forced into exile in the USA from 1982 to 1985. Although Kim Dae-jung invariably found himself on the same side as Kim Young-sam in the confrontations with both Park and Chun, the rivalry between the two did not dissipate, indeed, if anything, it increased as time went on. Roh’s June 1987 democracy declaration and the new constitution ratified three months later allowed for direct presidential elections for the first time since 1971. To the delight of the Roh camp, neither of the two Kims was prepared to give way to the other in order to put forward a single opposition candidate. Roh won with a 2 million vote margin over Kim Young-sam, with Kim Dae-jung trailing in third place. Kim Jong-pil, another veteran politician, who had served under Park but had also been purged by Chun, came in a distant fourth.4 The 1992 presidential election seemed like a re-match of the 1987 campaign, except that, in the meantime, Kim Young-sam had dramatically switched sides, in 1990, to join with Roh’s ruling party in a move which virtually ensured him subsequent nomination as the DLP’s (Democratic Liberal Party) presidential candidate. With the backing of Roh and Kim Jong-pil, who had also joined the ruling party in 1990, Kim Young-sam was easily able to defeat Kim Dae-jung, who was probably also adversely affected by the rogue candidacy of Chung Ju-yung, the founding family boss of the Hyundai corporation.5 Although, as revealed later, Roh’s huge $650 million slush funds were used to help Kim Young-sam’s candidacy, it is not clear whether even without them that Kim Dae-jung would have won amongst a split field. Kim Dae-jung, no doubt calculating that he might be able to embarrass Kim Young-sam more than himself, later made it public that even he had received some money from Roh.6 This election defeat seemed to mark the end of the ‘era of the two Kims’, as Kim Dae-jung announced his retirement from politics and went overseas to Britain to read, reflect and write. But, somehow, the knowledge that Kim Young-sam’s term of office could constitutionally only last five years seemed to have gnawed away at the back of his mind. None of the successor leaders in Kim Dae-jung’s party, the Democratic Party (DP), had either his charisma or his ability to hold the party together. To keep in touch with political developments and at the same time enhance his contacts – and standing – around the world, where he already had an impressive reputation as a fighter for democracy, Kim set up in 1994 the Peace Foundation for the Asia-Pacific, a think-tank organization which

34 Korea after the crash associated him with other democratic leaders such as former Philippines’ president Corazon Aquino. From there it was only a short step back into national politics. In July 1995, aware of the marked inability of the existing opposition groups to take advantage of the difficulties of the Kim government, he announced that he would be returning to the DP. Kim soon fell out with Lee Ki-taek, the then leader of the DP, and split away to form a new party, the National Congress for New Politics (NCNP),7 within a few weeks. Kim apologized for breaking his pledge to renounce politics, but few Koreans were surprised that he was going back to the only kind of life he knew.

Kim Young-sam and the ‘nine dragons’ From the beginning of 1997 the mood of ‘election year’ became increasingly intense. For Kim Young-sam, the race for the nomination in his ruling party, the New Korea Party (NKP), was certain to be a long and difficult one. Kim, unable under the terms of the constitution to run for reelection again, was nonetheless determined to ensure that his successor should be the man – there was no prospect of there being a female candidate – of his choice. Although Kim publicly declared that he was hoping for a successor who would carry on the reform policies of his administration, undoubtedly in reality a more important concern was that that person should not be vindictive towards Kim himself. Former Korean presidents have not had peaceful retirements: Rhee died in exile in Hawaii, Park never lived to see any retirement and both Chun and Roh – thanks to Kim Young-sam’s prosecutions – were still in jail in 1997. Kim had managed to construct a firewall between himself and the incomplete information available publicly on the destination of parts of Roh’s election slush funds, but allegations of corruption had come much closer to Kim himself when his second son Kim Hyun-chul was arrested and then imprisoned for bribery and tax evasion (see Chapter 2). Kim was undoubtedly worried about what might happen to him after he stepped down from office. In order to boost the electoral possibilities of the NKP candidate, for whoever it might be he (extremely unlikely to be she) ought to be favourably inclined towards the outgoing president, Kim had started during 1996 to talk frequently about a ‘generational shift of political leadership’; a shorthand form for trying to discourage presidential electoral bids by the two veterans, Kim Dae-jung and Kim Jong-pil.8 Although this rhetoric had some resonance amongst the broader Korean public, these two Kims showed no sign of bowing out. Kim Young-sam was also concerned that he should not spend the last year of his presidency as a lame duck. He had to balance the need to ensure that whoever would become the NKP candidate should have sufficient time to build up popular political support for the electoral fight which increasingly seemed likely to include the two opposition Kims

The advent of Kim Dae-jung 35 against the inevitable tendency for the designated candidate to steal some of the limelight from Kim himself. In early 1997 the NKP had plenty of aspiring candidates, including the then Prime Minister Lee Soo-sung. Collectively the most serious candidates were known as the ‘nine dragons’.9 The NKP’s problems arose in large part from the nature of the party itself, as the successor party to the earlier Democratic Justice Party (DJP) which had in turn been reformulated as the Democratic Liberal Party (DLP) in 1990. Factions supporting Chun, Roh and Kim Young-sam all coexisted within the NKP; most of Kim Jong-pil’s supporters had left with him in the spring of 1995, when he set up the United Liberal Democrats (ULD). So some of the ‘nine dragons’, such as Kim Yoon-whan and Lee Han-dong, represented the combined Roh and Chun factions (often called the minjong faction), while others such as Kim Deog-ryong were Kim Young-sam’s own supporters, the minju faction. A third group, represented by former Prime Ministers Lee Hoi-chang and Lee Hong-koo, and a maverick politician Park Chan-jong, had been newly recruited into the NKP during the previous year or so and their ‘new image’ had undoubtedly helped the NKP do comparatively well in the 1996 National Assembly elections, when it had remained as the largest party. Kim Young-sam tried to discourage public debate over the presidential candidate’s nomination and to keep his own blessing of any particular person under wraps so as to increase his leverage. But by the early summer of 1997 the intra-party debate competition was becoming intense. Some of the aspiring candidates dropped out, but six contenders went to the NKP’s national convention on 21 July. For the first time in the ruling party’s history, there was an open election for the presidential candidate. But the lobbying beforehand became quite bitter, with libel and slander charges being bandied around. On the second-round ballot, a run-off between the two leading contenders from the first-round ballot, Lee Hoi-chang proved successful, defeating his main challenger, Rhee In-je, quite convincingly.10 Lee, aged 62, was a conservative reformer. Coming from an elite family, Lee had a respected career record as a Supreme Court justice, and then head of the state inspection board (when he exposed a multi-million dollar scam over military weapons contracts), before unexpectedly being appointed prime minister in December 1993. His political reputation, however, was made by his dismissal in April 1994 from the premiership after a row with Kim Young-sam over exercising what he saw as his decision-making rights as a prime minister.11 Although he was coaxed into joining the NKP in 1996, he was often still at odds with Kim Young-sam and his victory in the intra-party struggle was almost certainly due to the support of the anti-Kim minjong faction. Lee’s split with Kim Young-sam came into the open in October 1997 when he demanded that Kim leave the NKP, ostensibly to allow Kim to be ‘neutral’ in the forthcoming campaign but in reality as a punishment for what Lee saw as a lack of positive presidential support for himself.

36 Korea after the crash However, although public opinion polls taken immediately after his nomination showed Lee ahead of his potential rivals including Kim Daejung, as the December 1997 election drew closer his campaign was to suffer from three serious problems. First, his clean image was dented, when it was revealed that Lee’s two sons had been exempted from military service, which is compulsory for all youths in South Korea. Although Lee explained that they had been underweight at the time of their drafting, rumours circulated that they had been deliberately dieting in order to fall below the minimum required weight and Lee’s credibility suffered considerably.12 Second, as NKP party chairman from March 1997 and then the candidate of the ruling party it was difficult for him to distance himself from the government’s economic policy failures. Changing the name of the party to Hannara or Grand National Party (GNP) on the eve of the election did nothing to dilute these linkages. As the campaign progressed and Kim Dae-jung increasingly homed in on the economic collapse and the humiliation of going to the IMF, Lee found himself having to walk a difficult line by promising ‘clean politics and a strong economy’, a slogan which did not in reality differ much from that of Kim Young-sam five years earlier.13 Third, Rhee’s decision to run anyway and Kim Jong-pil’s decision to drop out altered the electoral equation crucially.

The marriage of convenience No-one was more aware of the dangers of splitting the opposition vote than Kim Dae-jung, but the other leading opposition candidate was another old rival, the 72-year-old Kim Jong-pil. For both of them, age almost certainly precluded them from any possibility of running again in later years – 1997 would be their last chance. Both of them publicly emphasized the need for a single opposition candidate but neither of them wanted to give way at an early stage. In this respect, there were strong echoes of the run-up to the 1987 election. Informal talks behind the scenes began between the two parties, the NCNP and the ULD, in November 1996, but these became increasingly drawn out. Public opinion polls in the first half of 1997 suggested that of the two, Kim Dae-jung was the stronger candidate, but Kim Jong-pil held out for a particular deal over constitutional reform which would change South Korea from a presidential to a cabinet form of government and ensure him and his party a role in any future coalition government. Finally, in a private one-on-one meeting on the evening of 27 October 1997, the two Kims sealed the deal for their two parties. Kim Dae-jung would be the sole opposition candidate, with Kim Jong-pil and the ULD supporting him. In return, Kim Dae-jung after becoming president would introduce legislation to change the political system into a cabinet one by the year 2000 and Kim Jong-pil would become prime minister.14 This was clearly an unlikely partnership. These two Kims had long been at opposite

The advent of Kim Dae-jung 37 ends of the political spectrum; one the conservative hardliner who had worked for the authoritarian Park government, the other more radical and a perennial figure of the opposition. Back in the 1970s Kim Jong-pil had run the KCIA for President Park and had actually been responsible for action taken against Kim Dae-jung. Although both had been purged by Chun and both disliked Kim Young-sam, they had had very little else in common. Both Kims claimed that their new alliance was a political necessity, because otherwise there was no way to effect a peaceful transfer of power to the opposition.15 In going to these lengths to ignore their ideological and personal differences, the two Kims demonstrated the primacy of their political calculations. For Kim Dae-jung, the alliance was a means to achieve the presidency at any cost. His party’s support and his own personal support was still strongly concentrated in Cholla province. Comparative analysis of voting support for him in the earlier 1987 and 1992 presidential elections suggested that he had been successful in maintaining his level of popular support between the two elections, but had been unsuccessful at broadening his basis of support.16 Allying with Kim Jong-pil added the support of his home province of Chungchong and ensured that the conservative vote in other parts of the country would not necessarily all go to Lee Hoi-chang. It also precluded Kim Jong-pil from going into an alternative deal with Lee which would have almost certainly finished off Kim Dae-jung’s chances. Kim Dae-jung probably anticipated that some of his long-time supporters would be upset and even feel betrayed by this alliance, which certainly laid him open to charges of political opportunism, but he no doubt calculated that the votes gained would outweigh the votes lost by this step. For Kim Jong-pil, the deal was a realistic political step to prolong his political career, given that his chances of winning the presidency on his own were not strong.17 Kim Dae-jung also improved his chances further by signing up another powerful politician, Park Tae-joon, the founder of the Pohang Steel company who had earlier fallen out with Kim Young-sam. Park had returned from nearly four years’ political exile in Japan in May 1997 and had won a by-election in his ‘home’ town of Pohang as an independent; his support would garner some votes for the Kim Dae-jung ticket in the North Kyongsang area which traditionally had voted strongly for the ruling party. The Kim–Kim–Park relationship became popularly known as the ‘golden triangle alliance’.18 Kim Dae-jung’s prospects were also boosted by what NCNP officials liked to describe as the ‘golden division’: a split in the ruling party. In September 1997, Rhee, breaking the implicit promise of all NKP candidates that they would accept the result of the July party convention, left the party and set up his own party, the New Party for the People (NPP). Only 49 years old, Rhee played up his youth, denigrating the old ‘threeKims’ politics and comparing himself to young leaders overseas such as US president Bill Clinton and British prime minister Tony Blair. A lawyer by training, his rise to political prominence had been closely associated with

38 Korea after the crash Kim Young-sam, who in 1993 had made him Labour Minister, a post where he won public notice for his progressive labour policies. He became governor of Kyonggi province in the 1995 local elections. After the NPP was set up rumours began circulating that Kim Young-sam had even privately donated money to his former aide Rhee’s election campaign.19 Both of them denied this link and Rhee tried to adopt an anti-Kim line in public, but, with the president’s popularity sinking even lower after the IMF bail-out, Rhee actually suffered from being unable to shake off completely the stigma of being somehow associated with Kim Young-sam, whom he once described as his ‘political father’. Rhee justified his decision to leave the NKP on the grounds that public opinion polls taken after Lee’s sons’ military service issue had been publicized showed that he could not possibly win. Rhee’s decision to leave of course only reinforced the possibilities of defeat for Lee. Lee was able to regain some of the ground lost with Rhee’s desertion by persuading the fifth potential presidential candidate, Cho Soon, a former Seoul mayor and an academic with an economics background – which made him the only candidate with acknowledged economic expertise – to bow out of the race and merge his emasculated DP with the NKP in mid-November,20 but the addition of Cho was not enough to compensate for the loss of Rhee and his supporters.

President at last The election campaign therefore turned into a three-horse race, although four other minor figures, including one put forward by the KCTU, did stand. With the traditional large and financially draining outdoor rallies banned under new electoral campaign legislation, and politicians more sensitive to the critical public attitude to fund-raising irregularities in the wake of the slush fund scandals which had been associated with the previous presidential election, the candidates turned to the new attractions of television advertising and of televised debates, which were held for the first time ever. The TV debates worked in favour of Kim, who not only seemed more self-assured (a result no doubt of his much greater political experience) but who was also able to minimize his previous ‘radical’ image and appear as a reliable and moderate politician.21 Unlike the two previous presidential elections in 1987 and 1992, which had been dominated by political issues such as democratization and influenced by regionalism, with economic-related issues being undoubtedly of secondary importance, in 1997 the impact of the economic collapse was profound. As will be discussed below, regionalism still played an important role in voting outcomes, but economic recovery was clearly the main campaign issue and the three main candidates tried to stress their capabilities to pull South Korea out of its humiliating slump. All the candidates, however, were rather vague on exactly what policies that were different

The advent of Kim Dae-jung 39 from their rivals’ they would pursue to resuscitate the economy, given that they all broadly accepted the need to endorse the IMF package. Early in the campaign Kim Dae-jung had briefly talked about re-negotiating the IMF package (see Chapter 2), but he backtracked when this sentiment was widely criticized inside and outside South Korea. Ultimately, however, it was ‘personality politics, not economic prescriptions’ which dominated the campaign.22 As in the recent past, voters were attracted or repelled by the personalities of the candidates rather than the parties, or even the ideologies of those parties, that they represented. Kim highlighted his belief that he was well prepared to become president, based on his long political experience. His strong regional attachment and his previous career as an active dissident both convinced some voters while causing antipathy amongst others. Lee appealed to voters to end the ‘three Kims era’, describing the politics of the three Kims as ‘nothing but the politics of demagoguery, factionalism, regionalism and illicit fortunemaking’,23 hardly language calculated to endear him to his former boss, Kim Young-sam. Although voters were concerned about which candidate would be the most competent in solving the economic crisis in the future, inevitably Lee suffered from association in many voters’ minds with the existing government’s past economic policy failures. Playing up his relative youth, Rhee argued for generational change, which would appeal to the younger voters, but was not necessarily an overall advantage in a society which still retains considerable cultural predilections for respecting seniority. As the campaign continued mud-slinging became more rampant, with accusations and counter-accusations being flung freely. The old bogey of North Korea, which had frequently been utilized in past elections to discredit opposition candidates directly or indirectly, was even introduced, when a letter addressed to Kim Dae-jung, allegedly from a South Korean religious sect leader and former NCNP member who had defected to the North in August 1997, was made public. Kim Dae-jung angrily denounced the letter as a fabrication, as it was later proved to be. Later investigations revealed that it had been concocted as part of a smear campaign codenamed ‘Operation North Wind’ targeted against Kim Dae-jung and directed by the Agency for National Security Planning (ANSP), the successor organization to the KCIA.24 Since public opinion polls are banned during election campaigns, it is difficult to judge what impact if any this revelation had on the voting for Kim; it probably did little to sway the floating voters, who were almost certainly worried most by the implications of the economic crisis and the prospects of finding a leader to take them out of it.25 In the end, Kim Dae-jung achieved his dream. He secured 10,326,275 votes, that is 40.3 per cent of the vote, with Lee gaining 9,934,714 votes (38.7 per cent) and Rhee, whose brief initial surge in popularity faded rapidly as the campaign progressed, coming a poor third with 4,925,591

40 Korea after the crash (19.2 per cent). Analysis of the electoral data shows that regionalism was still an important factor.26 Kim won overwhelmingly in his home Cholla area, with over 90 per cent of the votes in Kwangju, Cholla-namdo and Cholla-bukdo going to Kim. Similarly the GNP’s traditional stronghold, in the Kyongsang area, voted heavily for Lee, though not as overwhelmingly since Rhee also picked up a significant vote (between 13 and 31 per cent of the vote), with between 50 and 70 per cent of the vote going to Lee in Pusan, Taegu, Ulsan, Kyongsang-namdo and Kyongsang-bukdo. The combined level of support for Lee and Rhee in these cities and provinces suggests the anti-Kim Dae-jung (or, arguably, at a deeper level anti-Cholla native) antipathy was still very strong there. Kim was helped by the voting trends in the other areas apart from Cholla and Kyongsang. The Chungchong area voted for him, thanks to the Kim Jong-pil and ULD connection which overcame some natural resistance amongst conservative voters to Kim. In the ‘neutral’ areas of Seoul and nearby Kyonggi province, where regionalist influences are generally assumed to be balanced out, Kim also secured the largest share of the votes; here it has to be assumed that the voters were voting in a more prospective mood, for the candidate that they saw as having the best capability of restoring the economy. Nonetheless, mirroring the successes of Roh and Kim Young-sam who had won over split opposition forces in 1987 and 1992 respectively, Kim Daejung undoubtedly benefited from the split in the anti-Kim Dae-jung forces. Judging from the strong regionalist voting tendencies, if Rhee had not run and Lee had been the only anti-Kim candidate, then Kim would have lost once again.27 Although the final margin of victory was relatively narrow, Kim Daejung’s victory was notable in two respects: for the first time in nearly forty years a president from outside the Kyongsang region had come to power (Park, Chun, Roh and Kim Young-sam had all hailed from that region of South Korea), and for the first time in South Korean political history a peaceful transfer of power to the opposition had occurred.

Managing the interregnum Under the South Korean constitution, almost two months elapses between the presidential election and the formal inauguration of the new president. The passage of time between election and inauguration is not unknown in other countries, with the USA being a notable example, where although the formal electoral college vote for the presidency and inauguration take place within three weeks of each other, the popular vote to decide the composition of that electoral college and so to all intents and purposes decide the presidency takes place two months earlier. However, wherever such a system exists, so too does the potential for an outgoing leader to become a political lame duck in his final weeks or even months. In the US case the convention is for the outgoing president to consult the president-elect

The advent of Kim Dae-jung 41 before making any major policy decisions, but even so there tends to be a mood of policy drift during this interregnum. In the South Korean case, the lengthy interregnum had not been too much of a problem either in 1987 or 1992, since the president-elect came from the same ruling party as the outgoing president. However, the December 1997 election for the first time brought a real political disjuncture, in that the opposition candidate had won. On top of that, urgent decisions were needed on economic recovery measures. Kim Young-sam’s final couple of months in office were to be particularly difficult because of the tensions in his personal and political relationship with Kim Dae-jung. Starting only two days after the presidential elections, the two Kims began regular weekly meetings. At the first one, on 20 December, they reached a basic six-point agreement: a joint economic crisis management committee would be established, political stability would be maintained, the public would be kept informed of developments, the IMF agreement would be faithfully complied with, a smooth transfer of power would be ensured and an amnesty would be given to convicted former presidents Chun and Roh as a gesture for national reconciliation.28 Reportedly made at the specific request of Kim Dae-jung, this last commitment was formalized by Kim Young-sam’s special amnesty granted two days later. Subsequent meetings were less productive, not least because Kim Youngsam resented his successor-elect’s increasingly high domestic and international profile, which left him in the shade. Calls by some newspapers for him to step aside earlier in favour of his successor-elect did not go down well either. Certainly, Kim Dae-jung did act promptly to prepare the way for his formal takeover. He was determined to hit the ground running when he finally reached the Blue House. What the local media was to dub ‘dollar diplomacy’ was to become one of his key activities. On the international front, he telephoned foreign leaders such as US President Clinton and Japanese Prime Minister Hashimoto Ryutaro to assure them that he would be committed to pulling South Korea out of its economic problems and to ask for their support. A senior US Treasury official, who visited Seoul only a few days after the election, was particularly reassured by Kim’s reform enthusiasm and helped encourage US banks to participate in the negotiations to roll over short-term corporate debt.29 When international financier George Soros visited Seoul in early January 1998 he dined at the home of Kim Dae-jung, who encouraged him to invest in Korea, but did not bother to meet Kim Young-sam. In François Godement’s view, this amicable meeting with Soros ‘worked wonders’ in transforming international perceptions of Kim Dae-jung in a favourable direction.30 At home, Kim set up his own transition team, consisting of twelve members of the NCNP and twelve members of the ULD, headed by Lee Jong-chan, a former legislator, to work out policy recommendations on the major economic, political, cultural and reunification issues. This team

42 Korea after the crash came up with a list of twenty-two urgent issues for review, including a reassessment of major state projects such as the Seoul–Pusan high-speed train, the promotion of inward foreign investment and the investigation of the telecommunication licensee selection process. However, his transition team was not without some internal tensions, particularly between the two parties’ members, which slowed down the definition of some policy proposals. At the same time, they also ran up against reticence and even obstruction from Kim Young-sam’s ministers and officials, who resented the way in which Kim Dae-jung’s team seemed to be trying to take over everything, including policy pronouncements to the media, prior to the formal inauguration. Nevertheless, the Kim Young-sam administration had little choice but to cooperate with Kim Dae-jung’s shadow team, particularly when it came to sorting out the details of implementing the IMF package and the associated required legislation. Deputy premier Lim and the ULD’s vicepresident Kim Yong-hwan headed the joint emergency economic measures committee, which was to continue working until the new president’s formal inauguration on 23 February.

Blood transfusions for the economy The most immediate problem the joint committee faced was to prevent national bankruptcy. The same day that the committee had its first meeting, 23 December, the won fell to a record low of 2,067 won to the dollar, as rumours spread of an imminent national moratorium caused by a shortage of dollars. Although the committee agreed on a series of measures to implement the IMF agreement, such as allowing corporate lay-offs, liquidating ailing financial institutions and lifting limits on the share and bond markets, the immediate infusion of external funds to prop up the economy was the top priority, for South Korea had foreign debts of $24.6 billion due by the end of December and a further $14.9 billion due to be repaid by the end of January 1998. Therefore, the Christmas Day present from the IMF and members of the G-7 group was particularly welcome; they announced a decision to extend $2 billion by the end of December and a further $8 billion in early January 1998.31 This lifeline was crucial in preventing an immediate collapse. The same day, an agreement was reached with a large group of private bank creditors to maintain their exposure and begin discussing the voluntary rescheduling of short-term debts. A group of Japanese banks, which held the largest share of the short-term debts, also announced their willingness to consider rolling over many of these. A negotiating team was sent to the USA to discuss extensions to the short-term loans about to fall due and, on 28 January 1998, backed up by some pushing and prodding from the IMF, the US Treasury and the Bank of Japan, it achieved a major breakthrough by concluding a formal roll-over agreement with the major

The advent of Kim Dae-jung 43 international creditor banks.32 Under this agreement, $24 billion of shortterm loans were to be restructured into longer-term debt, with the various loans divided into three categories with differing repayment periods of up to three years (about 20 per cent were extended for one year, the rest for longer periods) and they were to be guaranteed by the Korean government. Three other headaches remained, however: drafting and passing legislation to implement the package of measures agreed with the IMF, persuading the chaebols to undertake serious restructuring and reform, and getting the usually militant trade union movement to accept the need for painful cuts and inevitably rising unemployment. Despite the alliance of the NCNP and the ULD, their combined strength was still well below that of the GNP in the National Assembly. This was to present political difficulties for Kim Dae-jung after his inauguration, but in the immediate aftermath of the IMF agreement and the presidential election, for fear of appearing unnecessarily disruptive at the time of national crisis, all the parties, albeit with some grumbling, were prepared to cooperate in the passage of a package of thirteen financial reform bills at the end of December.33 These new laws, several of which had been drafted already earlier in the year by an advisory body set up by the Kim Young-sam administration, and had been stalled subsequently in the National Assembly, included a revision of the real-name transaction system and the establishment of a new financial supervisory body. The system whereby financial transactions, even something as basic as opening a bank account, could only be done using real names had been introduced early in the Kim Young-sam administration as a way of eliminating corruption, but one of the unanticipated side-effects had been for the purveyors and receivers of ‘black money’ to look for new outlets overseas.34 One of the practical effects of the new amendments was to enable the government to issue unregistered long-term bonds to help ease the nation’s financial constraints. The new financial watchdog agency – the Financial Supervisory Commission (FSC) – covering the banking, securities and insurance industries, was set up under the umbrella of the prime minister’s office rather than under MOFE as had initially been envisaged; this reflected the widespread dissatisfaction with the MOFE’s supervisory role in the immediate past. The other two problems were less easily solved. Early in January 1998, Kim Dae-jung asked the joint government–opposition emergency committee to come up with measures for dealing with financial restructuring, employment and inflation. Then he invited the heads of the four largest chaebols, Samsung, Daewoo, LG (Lucky Goldstar) and Hyundai, to meet him on 13 January (the Daewoo chairman was overseas at the time).35 Kim’s own views on the responsibility of the chaebols seem to have been hardening during the weeks after the election. He had been expected to be tough on Samsung, which had supported his election

44 Korea after the crash opponent Lee Hoi-chang and which had already come under public criticism for trying to break into the crowded car industry, but in reality he took an equally strong line with all the leaders when they met. They agreed to undertake restructuring efforts, as did a second group of leaders of the next rank of thirty conglomerates which Kim met soon afterwards. As he no doubt intended, Kim was able to capitalize on popular sentiments during this period, immediately after the financial collapse, which tended towards ‘chaebol-bashing’ – blaming the chaebols’ apparently indiscriminate expansionary business activities for contributing to the financial and foreign currency crisis. The FKI president Chey Jong-hyon reflected his awareness of this public mood when he admitted to Kim in their meeting that the chaebols were ‘sinners among sinners’.36 Kim also made use of his new political partners, Kim Jong-pil and Park Tae-joon, the latter having himself been head of a major corporation, to utilize their good personal contacts with the chaebols’ bosses. But, although Kim’s intention was to get the chaebols’ leaders to commit to restructuring while they were on the defensive, he was also well aware that it was going to be a hard struggle to convert these verbal promises into the reality of structural change. The past record of successive governments’ attempts to reform the chaebols was not at all encouraging, not least because of the continued importance of the chaebols in Korea’s export-driven economy. Indeed, barely a week after meeting the chaebols’ heads, Kim had to lecture two chaebols, Hyundai and LG, on the inadequacy of their initial proposals for restructuring. Kim Dae-jung tried to combine his approach to the chaebols with a parallel approach to the trade unions, since any restructuring and slimming down of the bloated chaebols would inevitably result in lay-offs of workers. Given the support which he had traditionally received from the unions, Kim was under some pressure to protect their members, but in his New Year message he had warned them that he expected the workers’ understanding of the need for some form of lay-off system. His initial idea was to create a tripartite labour committee with representatives from government, management and the unions, aiming to at least get all sides talking to each other and so hopefully produce compromises. Although the GNP and NPP parties refused to participate, the initial tripartite meeting began on 21 January 1998. The discussions were tense and confrontational at times, with the two trade union federations, the FKTU and the KCTU, both pulling out of the talks at the end of January because of what they saw as a lack of government effort in avoiding unfair labour practices. Kim’s advisers managed to coax them back into the talks and, on 6 February, a broad agreement was reached. The trade unions had also come under some pressure to reach an agreement from the IMF, whose head, Camdessus, met with union leaders on 13 January during a visit to Seoul. To help the unions, he also urged the government to institute a social ‘safety net’ for the workers who would be made redundant.37

The advent of Kim Dae-jung 45 Both the management and the labour unions were forced to back off from some of their original demands. Unions were allowed to engage in political activities and public workers and teachers were for the first time allowed to unionize. A special 6 trillion won employment stabilization fund for the unemployed would be set up and laid-off workers could receive unemployment benefits for at least 60 days at a rate of at least 70 per cent of the minimum wage. But the unions had to agree to the prospect of mass lay-offs in the case of ‘corporate emergencies’, such as sell-offs and mergers, even though the companies were required to make every available attempt to avoid firing employees; management was required to give 60 days’ prior notification of redundancy. The more radical of the union federations, the KCTU, which represents mostly workers in the automobile, shipbuilding and steel industries, indeed expressed reservations over the terms of the agreement, but was forced to sign on as public opinion turned against it.38 The chaebols also had to increase the transparency of their operations by adopting the consolidated financial statement system from 1999 and new laws to hold company executives responsible for corporate mismanagement were to be introduced. A package of eighteen economic-related laws, designed to implement these agreed measures, was passed by the National Assembly on 14 February.39 However, there were a number of unresolved issues left over for future argument and the general approach of the tripartite agreement seems to have been mainly to try to ensure enough ‘flexibility in the labour market’ to satisfy the inevitably watchful eyes of the IMF. Working out the exact implementation procedures and settling on a new form of labour–management relations in practice were going to be much more complicated and time-consuming processes.

Two Kims in harness His final two months in office, therefore, were to be unhappy ones for Kim Young-sam. Not only had the promise of his inauguration turned bitter, leaving his reputation tied to the image and reality of national economic collapse, but, worse than that, he was to be totally overshadowed by the president-elect, his old rival Kim Dae-jung, who was committed to a new agenda and feted by the international community as the man who could deliver it. Kim Young-sam had taken up office in 1993 with opinion poll ratings around the 90 per cent mark, but by early 1997 support had dropped to 18 per cent and it had fallen below 10 per cent by the end of that year. He was spared the humiliation of having to step down early, a demand which Kim Dae-jung diplomatically dropped at their first postelection meeting, but found himself almost totally ignored as the stream of visitors to Seoul headed for meetings with Kim Dae-jung rather than with himself. However, Kim Dae-jung was to find that the pre-inauguration honeymoon was not going to last long, once he himself was fully in power.

4

Playing politics

Wednesday, 25 February 1998, dawned as a special day for Kim Dae-jung. During the morning he was formally sworn in as the eighth president of South Korea in an open-air ceremony in front of the National Assembly building at Yoido, Seoul, thereby achieving his life-time ambition. But, by the afternoon, he had already had his first taste of how troublesome that position might be, as the majority opposition party, the GNP, upset his plan to have his alliance partner Kim Jong-pil accepted as prime minister by boycotting the special National Assembly session called to approve the prime ministerial and cabinet appointments. The two opposition parties, the GNP and the NPP, had allowed the economic reform law package, seen as essential for South Korea’s economic survival, to go through the National Assembly the week before the inauguration, but they had also made it very clear that they were not going to be so easy-going in future. NCNP and ULD officials urged the GNP and NPP to return to the National Assembly, using the argument of the need for ‘national solidarity’ at a time of such economic difficulties and, indeed, proposing a ‘year of cooperation’ to ride out the economic turmoil; but the GNP, which instead argued for a ‘fresh face’ as prime minister trying to discomfort the coalition partners from the outset, held out. On 2 March, the GNP did return to the National Assembly, but the voting was disrupted as some members cast blank ballots while others revealed their ballots, prompting the ruling coalition to declare the voting invalid.1 Losing patience, Kim Dae-jung decided to name Kim Jong-pil as acting prime minister the following day.

Cohabitation Korean-style In fact, Kim Dae-jung found himself faced with real difficulties with this particularly Korean version of what the French call ‘political cohabitation’. In the French context, the term ‘cohabitation’ is applied to the situation whereby the president and the prime minister come from different political parties. In post-war French history this has occurred only three times, in 1986–88 and 1993–95 when the long-serving socialist president François

Playing politics 47 Mitterrand had to appoint conservative prime ministers, because their parties had won control of the parliament through national elections, and since 1997, when the current conservative President Jacques Chirac has found the shoe on the other foot, having to deal with a socialist prime minister. Under the 1958 French constitution, France should conduct prime-ministerial government, but the constitution also allowed sufficient provisions for the first president under that new constitution, Charles de Gaulle, to establish certain patterns of intervention, followed more or less faithfully by his successors, such that in practice a division of political responsibilities occurs: the president has certain policy domains, such as foreign policy and national defence, ‘reserved’ for his/her control, while the prime minister nonetheless has considerable power as far as domestic policy-making is concerned. In practice, the three periods when cohabitation has occurred between political opponents have not been easy ones, though this was most clearly so in the 1986–88 period of Mitterrand and his opposition prime minister Chirac, who were both strong personalities and not above intervening in the other’s domain of policy-making. Although the most recent cohabitation since 1997 has been relatively smooth by comparison, it is nonetheless true that cohabitation in France has been often marked by sharp president-versus-prime minister and/or parliamentary tensions and personality clashes.2 Although the South Korean constitution has been modified or amended nine times in the country’s history, all the versions have shared at least one characteristic: they have given the South Korean prime minister far less policy-making power in reality than any French counterpart would normally expect. Apart from the brief period of 1960–61, the presidential system has prevailed and the history of South Korea since 1948 has shown that there has remained a very strong concentration of power in the president and his office. As Sung Chul Yang has argued, ‘the institutional checks and balances based on the separation of powers do exist, on paper, but the political dynamics favouring the concentration of power in the executive branch, i.e., the president, have constantly overwhelmed the former’.3 Koreans often use the word daekwon – literally ‘great power’ – to describe the president and his office. The prime minister and the cabinet ministers seemed to exist only ‘to amplify and clearly communicate presidential preferences to the bureaucracy’.4 Under the 1987 constitution, the president appoints the prime minister and the cabinet, but only the prime minister’s appointment requires National Assembly approval. In general, the National Assembly’s ability to constrain the president has been extremely limited both by design and by practice,5 even though, since democratization and the constitutional revisions of 1987, there has been a slight diminution of presidential powers. This has not meant any corresponding real increase in the decision-making powers of the prime minister, however, as Lee Hoi-chang had found out when he tangled with Kim Young-sam over this very point in 1994 (as discussed in Chapter 3).

48 Korea after the crash Kim Dae-jung was to find himself faced with what perhaps can be described, in the Korean context, as a peculiar form of ‘double cohabitation’: with an unfriendly National Assembly dominated by the opposition parties and with a prime minister who, while nominally his political ally, was ultimately an incompatible one. First, his own party, the NCNP, was only the second largest party in the National Assembly. At the time that Kim took office, in February 1998, the NCNP had only 78 seats. Even after adding on the 43 seats of his coalition partner, the ULD, to make a combined total of 121, Kim still fell well short of a majority in the 299seat National Assembly. Pushing policy measures through a hostile National Assembly was clearly not going to be easy. Second, he had to deal and cooperate with an ally and prime minister-designate, Kim Jongpil, with whom he had had significant personal and policy differences in the past. A coalition government was anyway unprecedented in South Korean history; that it should be between two parties – or, more specifically, two leaders – between whom there had been little love lost in the past made things doubly difficult.

Creeping co-option Under the Korean constitution, new elections for the National Assembly were not due until the spring of the year 2000, so Kim Dae-jung was faced with the prospect of over two years of parliamentary difficulties. Only once before in South Korean history had a president failed to control the National Assembly through his own ruling party. In April 1988, barely two months after Roh had become president, national elections produced an overall majority for the combined opposition parties.6 This defeat marked a major setback for the Roh administration, which subsequently laboured under significant difficulties in passing legislation and surviving opposition demands for investigations into irregularities in past administrations. Finally, in January 1990 Roh dramatically reversed the situation and reclaimed a parliamentary majority by persuading the two opposition party leaders Kim Young-sam and Kim Jong-pil and the majority of their elected national assemblymen to join with the DJP in forming an enlarged party, the DLP.7 Although some NCNP members believed, correctly as it ultimately turned out, that it might well be possible to tempt over the NPP to join the ruling coalition, that party’s small size (only a dozen seats in the National Assembly) would not on its own have been sufficient to create a coalition majority. NCNP and ULD party managers, therefore, concluded that they had little alternative but to try to encourage defectors from the GNP and, by a slow process of attrition, work towards a parliamentary majority. Party loyalty is not a well-established tradition in South Korea, where politicians tend to move around because of the attraction of certain personalities rather than policies or even principles, and where parties, or,

Playing politics 49 more specifically, party names, spring into life and then disappear regularly. Han Sung-joo has identified a number of reasons accounting for the weakness and lack of institutionalization of the party system in South Korea. At the risk of over-simplifying Han’s detailed analysis, these reasons can be conflated into four key factors, several of which, paradoxically, can be traced back to some extent to pre-division Korean practices: the serious imbalance in power between the bureaucracy and political parties; the limited space available for ideological differentiation; the purges of individual leaders and parties following the frequent changes of regimes and constitutions; and the highly personal and factional nature of politics.8 The practice of bureaucratic supremacy, which had become welldeveloped in traditional and colonized Korea, carried over into the post-division leaders’ preference for relying on the bureaucrats (including the military) rather than the more skittish parties. The confrontation with North Korea has undoubtedly provided an ideological straitjacket which allowed political parties little room for policy differentiation, but the preoccupation with ideological orthodoxy also harks back to much earlier Confucian traditions. The many changes in South Korea’s constitutions and regimes, after which the new leaders invariably proclaim ‘new eras’ and purge and emasculate those parties perceived as being in the new opposition, has resulted in little sense of party loyalty amongst either politicians or the public. Factional and personal ties, whether from regional background, school or university association, military graduation class or a shared past experience, are as important a factor in politics as they are in Korean society in general – and the tendency to form factions can be dated back centuries in origin.9 The result is that the Korean party system has an unstable and fragile nature and, to use the words of another analyst, Lee Manwoo, the parties ‘resemble private organisations … [for] they are created and dissolved too easily’.10 Kim Dae-jung himself has been a member of nine different political parties during his political career, almost all of which have been set up and named by him personally. Many of his current supporters have faithfully followed him from party to party, feeling that their political careers are closely tied to the fate of this particular ‘political godfather’. Other current supporters, however, appear to be more opportunistic, switching from party to party depending on their assessment of the power potentialities of certain leaders. In this respect, the South Korean factional system has differed from the Japanese political faction system, where at least until the early 1990s it was comparatively unusual for politicians to switch allegiances. One constant characteristic of the presidential-dominant political party system in South Korea, however, has been a ‘proclivity of the politicians to gather around two major parties – one for and the other against the government’.11 This characteristic had certainly been less pronounced during the years after 1987, when new political parties proliferated under

50 Korea after the crash democratization and the increasingly open rivalry between the ‘three Kims’, creating three, sometimes four, major parties for periods of time. A form of ‘presidentialism with a multiple-party system’ was created.12 The period 1990–92, after the creation of the mega-DLP, however, had seemed to be a reversion, albeit brief, back to the earlier two-party dominant pattern. As the events of 1998–99 were to show, when the NPP disappeared and the NCNP and ULD discussed a possible merger, this tendency to revert to a two-party system always seemed potentially inherent during the Kim Dae-jung presidency too, and it was to find more concrete expression with the April 2000 general election. As Kim’s aides tried to lure defectors in the spring and summer of 1998, since the political survival of the GNP was at stake, that party’s leadership worked hard to resist the NCNP–ULD blandishments, but the attraction of office, the factional structure of the GNP (reflecting its complex heritage dating back to the DLP of the 1990s and even the DJP of the 1980s), and the lack of a strong party leader hampered their blocking efforts. Cho Soon was re-elected party chairman in April 1998 but he was forced to appoint five vice-presidents who represented the major factions within the party. Later the same month, five GNP national assemblymen defected to the NCNP and another two to the ULD. Party lines generally stayed fairly steady, but as local elections, due to be held in early June 1998, approached, Kim Dae-jung stated more bluntly than at any time previously that he intended to break up the GNP because of its failure to cooperate with his reforms. The results from the June local, mayoral and provincial governorship elections split along fairly predictable regional political lines, but the strongest showing went to the NCNP–ULD coalition.13 However, the tables were turned in late July when seven National Assembly byelections resulted in four victories for the GNP, including one by party president Cho. This comparative success seems to have encouraged the GNP at least to go back into discussions over normalizing the National Assembly’s operations, but further confrontation broke out between the ruling and opposition parties after the ULD’s candidate, Park Jyun-kyu, was elected Speaker by a narrow margin. The GNP leaders suspected that some of their members had voted for Park out of fear that their own activities were going to be investigated by government prosecutors. Finally, on 17 August, nearly six months after he was designated to take up the position, Kim Jong-pil was confirmed as prime minister.14 Before the end of that month, the splinter party, the NPP, which had already broken ranks with the GNP over the prime ministerial vote by giving its support to Kim Jong-pil, had formally been absorbed into the NCNP.15 The GNP leaders proved unable to halt the flow and more than a dozen members defected over the next couple of weeks. By mid-September 1998, therefore, the two Kims had secured a parliamentary majority with the NCNP and ULD holding respectively 103 and 52 seats, while the GNP had only 138. Cho resigned

Playing politics 51 as GNP party president to be replaced by the defeated presidential candidate Lee Hoi-chang.16 With a majority in place at last, Kim Dae-jung had overcome one of his cohabitation problems and he looked forward to being able to introduce various items of legislation either blocked or put on the back-burner during the previous half year.

Politics of revenge In his inauguration speech, Kim Dae-jung pledged that he would not seek ‘political retaliation of any kind’ nor would he allow discrimination against or preferential treatment for any region or province.17 Kim’s officials pointed to his action in asking the outgoing President Kim to pardon the two former presidents, Chun and Roh, as evidence of this new spirit of tolerance and reconciliation. However, in practice, after becoming president he found it difficult to resist the temptation to undertake some settling of scores, especially when so many of his supporters were evidently keen to re-balance what they saw as the pervasive inequities of past decades. The new administration’s approach centred on two aspects: one, the steady introduction of and promotion of officials within the government and other leading organizations who were either associated with Kim in the past or who had been born in Cholla province, and, the other, the holding of parliamentary hearings to establish why and how the financial crisis had occurred in 1997. The first cabinet of Kim’s administration, which was finalized in early March 1998, showed the difficulty that he faced in making a complete break from traditional presidential reliance on associates and appointing the truly ‘non-partisan cabinet’ that he had called for during his presidential election campaign. Twelve out of the seventeen cabinet posts went to politicians from either the NCNP or the ULD. Most of the economic posts went either to the ULD or to people who had been born in the two Chungchong provinces, Kim Jong-pil’s home patch. However, posts connected with security and law enforcement matters went to Kim Daejung supporters, with Lee Jong-chan, who had headed Kim Dae-jung’s transition team, becoming head of the ANSP, and a Cholla-born former general who had turned into a NCNP politician becoming defence minister. Only one minister, Labour Minister Lee Ki-ho, possibly because he was Cholla-born, survived from the outgoing Kim Young-sam administration. In fact, in terms of regional balance, out of the seventeen cabinet members five came from Cholla, five from Kyongsang and five from Chungchong, almost certainly the first time in South Korean political history that such a balance had been achieved. In addition, the new NCNP ministers tended to be comparatively new recruits to the NCNP (from very varied backgrounds) rather than Kim Dae-jung’s long-time loyalists, who,

52 Korea after the crash wanting to avoid providing too much ammunition for opposition taunts of nepotism, mainly stayed out of formal office. Nonetheless, whether in or outside formal office, ‘new’ faces were coming into the policy-making elite with different, more liberal, ideas than many of the ‘old’ officials who had been re-cycled under successive governments since the early 1980s. In that context, the most controversial choice was that of former bureaucrat Lee Kyu-sang as Minister of Finance and Economy, for he was widely blamed for creating financial problems for the Roh administration back in 1989 when he had previously been finance minister. Kim Dae-jung, however, probably expected to balance Lee’s rather conservative approach to economic policy-making with the more liberal and reformist ideas emanating from Kim Tae-dong, who was appointed as senior economic adviser in the Blue House, and former North Cholla provincial governor You Jong-kuen, who became the president’s special adviser.18 Subsequent months were to see inevitably a slow and gradual process of promotion of lower-level officials with a Cholla province background, but, despite criticisms from the opposition parties, in reality this process was no worse than that carried out by previous administrations on the basis of regional loyalties. Aware that they could be accused of acting as nothing better than ‘the kettle calling the pot black’, the opposition tended to ease off on their criticisms as the months passed by. However, as will be discussed in more detail in Chapter 5, by late 1998–early 1999 the opposition was returning to the attack on the issue of favouritism, but on a different tack: namely, that in its restructuring demands the government was unfairly penalizing those chaebols whose owners came from Kyongsang province. Far more conflictual than the regional favouritism issue was the problem of investigating the causes of the 1997 financial crisis. The opposition took a much stronger line on the NCNP–ULD plans to hold hearings, for these raised sensitive issues about whether to call to account not just former officials but even former President Kim Young-sam and whether, if negligence and policy mistakes were to be discovered, any form of punishment should be enacted. Former President Chun had been called before the National Assembly for a hearing in 1988 during his successor Roh’s time and he was later prosecuted in 1995. Roh himself had avoided any hearings but was similarly charged in 1995. The GNP strongly resisted any idea that Kim Young-sam personally should be similarly called to account. The Chun and Roh investigations had dealt with legal and constitutional issues revolving around the abuse of power and the failure to uphold the law, but these new hearings were breaking new ground in extending investigations to the policy-making process and the effects of policy decisions.19 Months of bickering between ruling and opposition parties continued over the format and competence of the proposed parliamentary hearings until finally, on 10 November, Kim Dae-jung met formally for the first time with new GNP head, Lee Hoi-chang, and agreement was reached to

Playing politics 53 open the hearings in early December 1998. However, the GNP subsequently refused to participate and labelled the hearings a partisan show. Kim Young-sam himself called them a ‘witch-hunt’.20 The hearings, which continued until early February 1999, produced some revelations but fell far short of uncovering all the details of the financial crisis, no doubt because some important decision-makers, including former president Kim, refused either to appear or to answer written questions. Kim Young-sam went off hiking in the hills around Seoul on the day that he was due to appear before the hearing. Former Deputy Prime Minister for the Economy Kang and former Senior Presidential Secretary for Economic Affairs Kim seemed to bear the brunt of the parliamentary committee’s attacks; indeed, both had actually been arrested earlier in 1998 on charges of neglect and abuse of power. Kang admitted his economic team lacked international financial expertise and were slow to detect signs of an impending crisis in early 1997, but refused to take all the blame, arguing that ‘I went into a house on fire as a firefighter, but when I came out I was accused of being an arsonist.’21 Although the hearings meandered to a rather inconclusive end, of more immediate significance was the discovery, during the course of the committee’s investigations, that the heads of two chaebols, Hanbo and Kia, had made large illegal donations to politicians. Hanbo’s founder, Chung Tae-soo, was forced to admit that he had given 15 billion won to help finance Kim Young-sam’s 1992 presidential campaign.22

Administrative reform Kim Dae-jung and his advisers had been quick to point to the administrative failures of the outgoing Kim Young-sam government as part of the reasons for the economic crisis and to argue for the reform of government. In a narrow sense, this meant reform of the administrative system and practices, but in a broader sense it denoted a reform of the whole political structure (this involved the thorny issue of constitutional change to a parliamentary system, to be discussed later). Regarding the first issue, Kim came into office committed to undertaking ‘changes in the administrative environment toward increased openness, diversification, decentralization, and independence’.23 In practice, this meant trying to create a ‘small but efficient government’ in terms of both budget and personnel, and trying to break the past collusive links between politicians, bureaucracy and the chaebols. The first step was to cut down the number of cabinet posts from 21 to 17 by merging several ministries and abolishing the two deputy prime ministerships. A presidential commission on planning and budgets was set up directly under Kim Dae-jung to oversee further reforms. Steps were made to rationalize – that meant reduce by round about 10 per cent – the numbers of civil servants and those people occupying positions in

54 Korea after the crash semi-governmental organizations, public corporations and advisory panels. Some efforts were also made to shake up local government, with a view to delegating more responsibilities from the centre to them. Kim did not have everything his own way, however, as vested interests struggled hard against some of his proposed reforms. He had hoped to create a new Office of Planning and Budget, rather similar to a body which exists in the US government, but Finance Ministry officials and the GNP, still with a parliamentary majority, objected. There was also a tug of war between the NCNP, which naturally wanted to enhance the powers of the president’s office, and the ULD, which saw the reform of budget planning as a means to enhance the powers of the prime ministership. As a result this new office was effectively divided in two, with the planning side reporting direct to the president and other functions reporting through the MOFE minister to the prime minister.24 Institutional resistance and the need for Kim Dae-jung to focus on even more troublesome aspects of economic restructuring inevitably meant that after the first two waves of administrative reform measures in 1998, the issue tended to be put on the back-burner. In part, the fact that it remained there was to be a by-product of the various scandals that the Kim administration was to find itself involved in during 1999, as will be discussed below. During 1999, therefore, political reform continued to be a theme which held some resonance with the public, but which in reality did not go much beyond the confines of politicians’ speeches – words not actions.

Coping with Kim Jong-pil The difference of views between the two coalition partners over the proposed Office of Planning and Budget was only the tip of the iceberg as regards the tensions between the two Kims. Kim Dae-jung had had little option but to honour the first part of his political deal with Kim Jong-pil, to install him as prime minister immediately upon his own inauguration, although that plan was frustrated at the very beginning by the GNP’s intransigence. But, being an astute and ambitious politician, Kim Dae-jung has preferred to go slowly on the second part of the deal – revising the constitution. Having spent so long fighting to become president, he was naturally unwilling to sign away his powers too quickly. The pace at which constitutional reform should be introduced was set to become one of the points of contention between the two leaders. Although they had seen eye to eye on the interregnum-period measures to secure a way out of the economic crisis, there were at least two other policy areas where disagreements were likely to occur once they had both settled into their posts: how to lessen the pain of the economic reforms as unemployment and popular opposition rose, and what policy to adopt towards North Korea. These latter two aspects will be discussed in more detail in Chapters 5 and 6 respectively.

Playing politics 55 However, in practice it has been the issue of political reform – of which constitutional reform is the key component – which has most bedevilled personal relations between the two Kims in the ruling coalition and also inter-party relations throughout Kim Dae-jung’s period in office. Throughout 1998 and 1999, until Kim Jong-pil finally became completely exasperated and walked away, Kim Dae-jung walked a difficult line of trying to appear to be endorsing his alliance partner’s political programme, while at the same time stalling on handing over any substantive power to him. Constitutional revision in order to introduce some form of parliamentary cabinet system is an old chestnut in South Korean politics, as invariably in the past opposition politicians have seen it as a means of trimming down authoritarian presidential power. South Korea had had only one brief and unsuccessful experience with a prime ministerialdominant cabinet system, back in 1960–61. Chun had briefly toyed with the idea of introducing the cabinet system as a way for him to stay in power after his seven years’ presidential term expired, but the upheavals of 1987 aborted that plan.25 The idea was revived again after the DLP was set up in 1990, for a move towards a cabinet system was one of the commitments contained in the so-called ‘secret agreement’ between Roh, Kim Young-sam and Kim Jong-pil that set up the party. The DLP leaders seemed to have had in mind a compromise format, largely based on the French dual executive model. But the idea did not develop very far, for although Kim Jong-pil continued to argue for its implementation, Kim Young-sam, no doubt because he began to realize that he would have a very real chance of winning presidential power – and strong presidential powers at that – as the new ‘mega-party’ DLP’s candidate in the anticipated presidential elections two years later, began to go cool on the idea.26 Although Kim Jong-pil continued to argue for the overhaul of the political system throughout the 1990s, Kim Young-sam showed little inclination to move in that direction after he became president. Some revisions to electoral laws were introduced prior to the 1996 National Assembly elections, but no movement was made on constitutional revision. That inaction, in part, accounted for Kim Jong-pil’s decision to leave the ruling party in February 1995.27 Kim Dae-jung had opposed the DLP’s 1990 proposals because he saw it simply as a way for that party’s leaders to maintain themselves in power – for a while he had instead argued for a constitutional revision to create a vice-president, who could take over some responsibilities from the president. However, as the 1997 election approached he was forced to confront the issue again, as it was to become the crux of the NCNP–ULD negotiations for an electoral alliance. The November 1997 electoral pact between the NCNP and the ULD contained the provision that before the year 2000, when the next parliamentary elections were due, the constitution would be revised to create a more balanced system with greater power for the prime minister.28 Until

56 Korea after the crash August 1998, while Kim Jong-pil was only acting prime minister, there was little serious discussion of implementing this pledge. Even the ULD realized that revitalizing the economy had to have a far higher priority and that the peculiar constitutional position of Kim Jong-pil himself, as acting prime minister, precluded any progress. However, from the summer of 1998, as it became clearer from the trickle of defections that Kim Jong-pil would soon receive his official installation, the ULD representatives began to press harder for action from Kim Dae-jung and the NCNP. As a gesture in the ULD’s favour, after the prime minister’s position was regularized constitutionally in August, the NCNP began preliminary discussions with both the ULD and the opposition GNP. Kim Dae-jung had called for concrete proposals on revising legislation on elections and political parties as well as on constitutional change before the end of 1998, but the three main parties seemed to become bogged down in technicalities. Clearly, part of the problem was that the NCNP and ULD could not agree on the exact form of cabinet system – a necessary precondition for a realistic dialogue with the GNP, which held a basically ambivalent attitude about such reform, although its party constitution clearly supported the presidential system. The GNP, naturally, suspected that these constitutional revisions might be designed to prolong its exclusion from power. Moreover, as Lee Hoi-chang consolidated his position as the party’s leader from September 1998 – and therefore almost certainly its presidential candidate in the 2002 elections – he became less enamoured of the idea of reducing his potential future office’s powers. In addition, a revision of the constitution requires at least two-thirds of the National Assembly members to vote in favour, a requirement which means that the opposition has to be brought on board. At the end of November 1998 the heads of the political reform committees of the three parties met, but they could only reach a general consensus on two points: reducing the overall number of national assemblymen from 299 to 250 and lowering the voting age from 20 to 19 years old.29 The ULD, as the party with the greatest vested interest in constitutional change, continued to try to make the running and by early 1999 the party’s draft was beginning to take shape.30 It became clear that the ULD envisaged a German-style system of government, with the president playing a ceremonial role and the prime minister controlling the cabinet and policy-making. The president would be elected to a six-year term by the National Assembly. The electoral system for the National Assembly members would be slightly modified too, to allow one-third of them to be elected by proportional representation, but not with any change to the single-member constituency system for the other seats (this contrasted with the NCNP’s initial position of multi-member constituencies and half of the seats elected by proportional representation). The NCNP, however, continued to stall, arguing that it was necessary to

Playing politics 57 sort out the economy first before embarking on such politically sensitive measures. So little progress was made in intra-coalition talks during the early months of 1999, however, that ULD members decided to force the pace. They took advantage of the conclusion of an investigation into an opposition GNP assemblyman, Suh Sang-mok. After seven months of investigation, government prosecutors had asked that Suh be arrested on charges of using tax officials to raise funds illegally for Lee Hoi-chang’s 1997 electoral campaign. Such action requires approval by the National Assembly itself, but when the crucial vote came in early April, the NCNP–ULD coalition failed to carry the day.31 The reason was that about twenty coalition members had crossed party lines; these were almost exclusively ULD members. While some may have felt sympathy with a former colleague from their time together in the DLP, most were believed to have been registering a ‘protest vote’ against the NCNP’s foot-dragging on constitutional reform. Intra-coalition relations then became even worse, as Kim Dae-jung reshuffled the NCNP leadership after this embarrassing parliamentary failure and the NCNP’s new interim leader Kim Young-bae immediately upset the ULD by calling for a merger of the two parties. The ULD members, who saw this as means for the NCNP to absorb the smaller ULD and so obviate the need for any constitutional reform at all, reacted critically. So, on 9 April, Kim Dae-jung and Kim Jong-pil held an emergency meeting to sort out the problem.32 President Kim called on the two coalition parties to have ‘self-control’ and persuaded Prime Minister Kim that discussion of the constitutional change should be postponed until August 1999 at the earliest. NCNP leader Kim Young-bae apologized for his comment. However, neither his apology nor the hiatus on constitutional reform were satisfactory to the ULD, which continued to grumble about the NCNP behind the scenes. ULD sensitivities were, indeed, further sharpened by comments made by one of Kim Dae-jung’s political aides in late April, that a ‘large-scale political realignment to break the political structure distrusted by the people for extreme regionalism and other outdated practices’ was necessary.33 He seemed to be hinting that, rather than merge with the ULD, the NCNP would do better to merge with ‘reformist’ elements within the GNP. Presidential spokesmen were quick to distance themselves from these comments, describing them as only a personal view, but the public airing of such views no doubt reflected a more intense discussion going on within the NCNP leadership about future policy options.

Scandals for another Kim Despite having pushed the constitutional revision question on to the backburner, at least temporarily, Kim Dae-jung found himself unable to relax domestically. Apart from the struggle with the chaebols and the unions, to

58 Korea after the crash be discussed in Chapter 5, he began to find himself in a situation that was ominously reminiscent of Kim Young-sam’s later years in office. A series of scandals and incidents began to undermine his popularity with the general public. Echoing the way in which Kim Young-sam, and indeed for that matter even Roh before him, had made much of their ‘clean’ image on entering office and had stressed their determination to get rid of corruption, so too had Kim Dae-jung. Like them, he had had the public on his side in this endeavour, and had achieved some early successes. But, just as their records had become tarnished by scandals involving political colleagues and even, in the case of Kim Young-sam, his own family (as discussed in Chapter 2), so too was Kim Dae-jung to find that reality interfered with the practice of his ideals. By the end of his period in office, Kim Young-sam had apologized several times in public for policy and personal failures. Kim Dae-jung had seemed resistant to that kind of approach, but at the end of June 1999 he felt he had no alternative but to apologize publicly for the ‘recent incidents’ which had tarnished his and his government’s reputation.34 During the previous few months, he had indeed had to deal with a number of scandals. First came a burglary at the home of You Jong-kuen, the Governor of North Cholla province and one of Kim Dae-jung’s most trusted economic advisers, in May 1999. The burglar, who was caught by the police, reported that he had found $100,000 in cash at You’s house, an amount which raised questions about why a public official should find it necessary to have such large sums in his personal possession; the implication was that bribery was somehow involved.35 Second came the ‘boutique scandal’, in which the wives of two ministers were alleged to have acquired expensive dresses in return for trying to influence a court case. The wife of the former Unification Minister Kang In-duck and the wife of the newly appointed Justice Minister and former Prosecutor-General Kim Tae-joung were said to have asked the wife of the Shindongah department store company chairman Choi Soon-young to pay for the dresses, worth millions of won, bought at a company boutique, in return for which they would lobby for Choi to be freed from the embezzlement charges he faced. The two ministerial wives denied the claims, saying it was Choi’s wife who had approached them and that they had refused her attempted bribe. Investigations by presidential aides found no evidence of wrong-doing by the two ministerial wives, but public opinion was antagonized at the idea that ministerial wives could afford to go to such expensive shops at a time when the country was still suffering from the after-effects of the financial crisis and everyone else was being encouraged to practise frugality.36 But worse was to come, as a senior prosecutor revealed that the government prosecutor’s office had actually encouraged a labour union strike as a way to break the influence of radical unions. The plot had revolved

Playing politics 59 around forcing the state-run Korean mint to close down one of its minting plants in November 1998, leading to the mint unionists embarking on a strike which was technically illegal. However, before the police were brought in to break up the strike – and so provide a lesson for other unions in public enterprises not to resort to strike action – the strike fizzled out.37 Although not personally implicated, Kim Tae-joung had been prosecutor-general at the time that this plot was laid, and this second count against him was enough to ensure his dismissal after barely two weeks in office. This case was particularly embarrassing to the Kim administration since Kim Dae-jung had always had good relations with the unions, and had indeed relied on their support in his election campaigns. Also, he had already been asking them to accept massive lay-offs and long-term wage freezes as part of the necessary economic restructuring. Very soon after this, Kim lost another minister; his only female cabinet minister, Son Sook, one of Korea’s most famous actresses and the recently appointed environment minister, was seen to be accepting large cash gifts. Accompanying President Kim Dae-jung on a visit to Russia, she gave a theatre performance in Moscow, after which she received on stage in full public view a gift envelope containing $20,000 from a representative of the FKI. While it is not unusual for Korean actresses to receive such gifts after performances, the amount was considered to be unusually large and also inappropriate for a minister whose departmental responsibilities would involve her with FKI member companies; moreover, on her return to Seoul, Son did not declare the gift to the customs authorities.38 Kim had little option but to dismiss her and replace her with another female minister. Although Kim Dae-jung no doubt hoped that his public apology at the end of June would be sufficient to dampen controversy, he was to be allowed little respite. In mid-July Lim Chang-yuel, the former economic policy-maker who seems to have earned President Kim’s respect for his efforts to deal with the IMF at the height of the financial crisis and had been rewarded by being elected as governor of Kyonggi-do on the NCNP ticket in the June 1999 local elections, was arrested on charges of taking $83,000 in bribes from a former bank president who was desperate to prevent his bank collapsing back in the spring of 1998. When Lim admitted the charges and returned the money, he was given a light sentence of one year in jail. In fact, within three months he was out of jail and back in his post at the governor’s office.39 The opposition charged that the government prosecutors had been unfairly lenient with Lim and through the summer continued to harp on about the succession of scandals, until finally, in September, Kim Dae-jung agreed to set up special investigation panels into the two most serious cases: the ‘boutique scandal’ and the strike-breaking allegations. However, the Kim administration found itself once again under fire for corrupt practices in October, when details began to emerge of a draftdodging scandal, whereby military personnel accepted bribes to allow

60 Korea after the crash young men to escape from having to undertake compulsory military training, usually through ‘failing’ medical examinations.40 Then, in early November, allegations surfaced that the arrest of the president-publisher of the Joong-ang Ilbo, a major Seoul daily newspaper often critical of the Kim administration, on grounds of tax evasion was actually a means of harassing the media. Past Korean governments had indeed resorted to threatening to or actually carrying out tax audits on media businesses as a way of reining them in, though in this case the list of charges against the publisher was certainly extensive. The key point at issue, however, was a letter faxed by a senior Joong-ang Ilbo reporter living in Beijing to the office of Lee Jong-chan, vice-president of the NCNP and previously Kim Dae-jung’s intelligence services head, which was said to set out a formula for controlling the press.41 While not one of this succession of scandals and controversies on its own was sufficient to bring down the Kim administration, they nonetheless had a significant impact on the political atmosphere. First, they diminished Kim Dae-jung’s stature as a ‘clean’ reformer. While neither he himself nor his family was implicated in any of the scandals, at the very least they called into question his judgement in appointing certain individuals to positions of responsibility and his lack of supervision in the implementation of his anti-corruption pledges. Second, they irritatingly distracted Kim from concentrating fully on what he saw as the key policy issues: economic recovery and the ‘sunshine policy’ towards North Korea (see Chapter 6). Third, they were used by the opposition as a means to hamper the ruling coalition’s attempts to push through legislation, some of which were important bills aimed at reforming the financial industry and amending tax laws. The special National Assembly session held in early November 1999 was marred by political wrangling, even after the opposition GNP gave up its threatened boycott of the proceedings. Fourth, they upset two sectors that had proved politically useful to and supportive of Kim in the past: the union movement and the media. Finally, they increased public disillusionment with politicians in general: one public opinion poll in the autumn of 1999 showed that around half the people interviewed said that they would not vote for the incumbent, whichever party he or she represented.42

Party manoeuvres By the autumn of 1999 the parties were beginning to set their targets on the National Assembly elections due in April 2000. This added spice to the bickering amongst the political parties over the various scandals noted above but was also to have a particular impact on the interrelationship between the two constituent parties in the ruling coalition. The ULD had been aggrieved at the agreement in April 1999 to put off constitutional revision and some members were even more incensed when,

Playing politics 61 yet again, later in the summer, the issue was shelved at the insistence of Kim Dae-jung and the NCNP. This, in effect, given the run-up to the April 2000 elections, meant that nothing would be undertaken until after those elections at the earliest. Rumours about the possible merging of the two parties – the NCNP and the ULD – continued to circulate. This became too much for some more conservative members of the ULD, led by a former ULD vicepresident Kim Yong-hwan, who began in early November to talk openly about creating a new party. Based on members with links to the geographical areas of central Chungchong and north Kyongsang provinces, his idea was to draw in some former supporters of ex-president Chun Doo Hwan; his platform was the early introduction of the parliamentary cabinet system and, unusually for a political culture dominated by strong personalities, a collective party leadership.43 By early 2000 his group had become the New Korea Party for Hope (NKPH). The possibilities of an open split within his own party were real enough for Kim Jong-pil, in mid-November, to indicate that he would resign as prime minister in order to return to running the ULD. He changed his mind several times about exactly when to take this action, but finally stepped down on 11 January 2000. His position as prime minister was taken over by his party colleague and ULD president Park Tae-joon. A former general turned industrialist (he had built up and headed the Pohang steel company for years) and politician, 72-year-old Park shared a conservative approach to politics with Kim Jong-pil.44 Although Park’s deep knowledge of the economy would be helpful to the ruling coalition government’s policymaking, he looked set to be in reality a short-lived premier, keeping the seat warm until the April elections. Kim Jong-pil became the honorary president of the ULD. Kim Dae-jung carried out a limited cabinet reshuffle when he installed Park as prime minister, with the most significant move being to bring in the controversial reformist head of the FSC Lee Hun-jai as the new minister in charge of financial and economic policy. However, the relationship between the two coalition parties remained unsettled. Aware of the mounting opposition within the ULD to being absorbed by the NCNP, both Park and Kim turned resolutely against the idea of the ULD’s merger with the NCNP. Finally, therefore, on 24 January, soon after the change of prime minister, Kim Dae-jung went ahead with the revamping of the NCNP into the Millennium Democratic Party (MDP), with himself as the first party president.45 Rhee In-je, the NPP’s former presidential contender, was made head of the new party’s campaign committee for the April National Assembly elections. The party’s Korean name included the character for ‘new’ in front of millennium, but apart from the name, there appeared to be little that was really new about the MDP. The relationship between the MDP and the ULD continued to deteriorate. In part, this was because the ULD had finally understood that there

62 Korea after the crash was to be no constitutional revision in the near future. But the tensions were also aggravated by a radical approach taken by a coalition of civic groups and non-governmental organizations, known as the Citizens Alliance for the 2000 General Election (CAGE), which published a blacklist of ‘unqualified’ politicians in late January. This reflected a high degree of disillusionment amongst some activists that the rival parties had not carried out their promises to produce clean government and clean politicians. Freedom of information laws and increased access to data through the Internet allowed the activists to search out information on criminal, tax payment and military service records. A total of sixty-six serving politicians (later expanded to eighty-six) were named as being unfit to deserve re-election on grounds of being corrupt, incompetent, anti-reform, draftdodgers, tax cheats or involved in past military coups. Although some MDP politicians were listed, proportionally the opposition GNP and the coalition partner the ULD suffered to a greater extent. The GNP leadership described the list as ‘political terrorism’, while Kim Jong-pil, who was one of those named because of his role in the 1961 military coup, angrily denounced what he saw as a ‘political conspiracy’ behind this movement.46 Suspicions certainly were aroused that this citizens’ movement had at least the implicit support of Kim Dae-jung and they certainly were able to obtain personal data on candidates that had never been made public on previous occasions. Lawsuits were threatened, but, even though some of the claims remained unsubstantiated, the blacklist tactic received overwhelming public support. A few of those named dropped out, others offered apologies and, in the end, the political parties had little alternative but to promise to consider carefully these lists when selecting candidates for the April elections.

National Assembly elections Politically, the first months of the year 2000 were undoubtedly dominated by the pending election, required constitutionally to be held before the end of April. Domestic concerns predominated in the campaigning, which began in practice long before the official start. Two issues were the main focus: the economy and political corruption. The MDP clearly expected the first issue to work in its favour, by capitalizing on the resurgence in the economy and the increasingly favourable figures about economic growth, foreign currency reserves, trade balances, etc. which were published during the early months of the year. However, Kim’s continuing problems with the chaebols, the financial sector, the labour unions and the income gap raised doubts as to how far he had been successful in fundamentally changing the country’s economic structure. The second issue was clearly going to be more damaging to the MDP’s chances. For, despite Kim Dae-jung’s claims to have started a new clean era, his opponents were eager to point to the fact that the succession of scandals during 1999 did not gel with that

Playing politics 63 image. They argued that his behaviour – and that of his ruling party – was in fact little different from that of past authoritarian leaders. As the election date, 13 April, approached the rival parties engaged in the usual rounds of mud-slinging and negative campaigning common to elections in the past. The MDP naturally criticized the GNP for its role in the financial crisis, accusing it of being ‘the party which ruined the nation’.47 The GNP responded by playing the nationalist card, calling the MDP ‘the party which sold the nation to foreign investors’ (the planned deal to sell off the huge chaebol, Daewoo, discussed in Chapter 5, was frequently mentioned as an example) and claiming that the cost of the apparent economic recovery was in fact being paid for by a massive increase in the national debt. MDP politicians again brought up the issue of GNP leader Lee’s sons and their alleged military draft-dodging (this issue had first surfaced during the 1997 presidential campaign, as discussed in Chapter 3), and argued that, of all the politicians named on the civic groups’ lists of politicians unfit to stand for office for failing to undertake the legally required military service, by far the largest number were from the GNP. The GNP retorted by accusing Kim Dae-jung of illegally using government funds to support MDP newspaper advertisements. While the two main parties engaged in outright attacks on each other, the ULD was in a more ambiguous position. The ULD clearly wanted to win sufficient seats to enable it not only to survive but also to exercise a decisive role in forming the next government should the MDP fail to gain a majority by itself. The party did have extensive internal discussions about whether or not to collaborate in election strategy with the MDP, through steps such as fielding jointly backed candidates. The MDP, feeling confident of their situation, were not prepared to make any concessions to the ULD and so the two parties ended up with separate candidates. The ULD received no support for its continued advocacy of a cabinet system, for one senior MDP official argued there was no longer any obligation to honour the 1997 deal as that had been made by the now defunct NCNP, while the MDP’s chief election campaigner, Rhee, bluntly announced his clear objection to introducing such a system.48 The ULD, therefore, found itself in the bizarre situation of providing the prime minister, Park, of a coalition government of which it no longer wished to be a part. Indeed, as the campaign proceeded, the ULD found itself increasingly strongly campaigning against the MDP in order to prevent it gaining an absolute majority on its own and thereby eliminating the ULD’s leverage. Nonetheless, Park survived because of a tacit agreement by both parties that he could act as bridge between them should they find that they were to need each other again. The newest party to contest the elections was the Democratic People’s Party (DPP), which had been founded in January 2000 primarily by disgruntled members of the GNP who had not been selected to stand again. Cho Soon, who had been unhappy with Lee Hoi-chang’s selection

64 Korea after the crash of candidates for the April elections, was coaxed into heading the new party, which campaigned on the idea that neither of the two major parties, the MDP and the GNP, were good for Korea’s political future and that it was time for a change. However, the DPP’s biggest weakness was that it itself looked like nothing more than a throwback to the past. Not only did it consist almost entirely of ex-politicians, but it was to be tarred with its apparent association behind the scenes with former president Kim Youngsam. The former president had shown signs in the summer of 1999 of trying to re-engage in politics, reforming his old political ‘mountaineering club’, but he had been warned off by Lee, who felt that it could engender a split in the GNP and would only benefit Kim Dae-jung.49 Hence Kim had initially shown little inclination to become involved in the 2000 election campaign until the DPP emerged, but as time went by he began to make a series of personal attacks on Kim Dae-jung, on one occasion accusing him of being ‘a despot like the Roman emperor Nero, given his endless lies and dictatorial practices’.50 Such a negative campaign approach, however, did nothing to endear him or the DPP to voters. By far the most controversial development during the campaign was the surprise announcement, only three days before polling, that President Kim Dae-jung would be going to Pyongyang during June to meet North Korean leader Kim Jong-il for the first ever North–South Korean summit. The background to this announcement will be discussed in detail in Chapter 6, but here it should be noted that the MDP, which was well aware that the apparent failure of Kim’s ‘sunshine policy’ had come under criticism during the election campaign, was undoubtedly pleased that it could announce this agreement prior to the election. Buoyed by the announcement, one MDP official, recalling that an armed incident in the De-militarized Zone (DMZ) on the eve of the 1997 presidential election (later revealed as part of the ‘Operation North Wind’ discussed in Chapter 3) had cut an estimated 3 per cent off Kim’s vote, declared that the North Korean factor might now work in Kim’s party’s favour to the same extent.51 The MDP argued for the need for strong leadership and a ruling party majority at this time of unprecedented dialogue with the North. The opposition parties, while appreciating the value of talking with the North, were naturally suspicious of the timing of the announcement, suspecting that Kim may have had to make too many concessions, and even given financial inducements, to get the North to agree. The number of seats contested had been reduced by constitutional amendment from the 299 of the 1996 election to 273, making direct comparison rather invidious. Nonetheless, in the elections both the MDP and the GNP increased their share of the total vote quite significantly. Yet, crucially, the GNP managed to retain its position as the largest party in the National Assembly, with nearly 49 per cent of the vote and an overall gain of 11 seats to reach a total of 133 (after the proportional representation seats were included). However, this number fell just four seats short of

Playing politics 65 giving the party an overall majority. The MDP increased its number of seats to 115, from 98 on dissolution. The heaviest losses were sustained by the ULD, which dropped from 50 seats to only 17, below the magic number of 20 which is required for a party to have a confirmed role as a floor negotiating group in the National Assembly, and the DPP, which was all but wiped out, falling from 10 to only 2 seats. The NKPH secured only one seat. The turnout was a record low of 57.2 per cent, which suggested a general apathy and disillusionment with politicians and their petty squabbling. The citizens’ alliance CAGE was pleased because around 70 per cent of those candidates it had blacklisted failed to get elected. This reflected at least a measure of bottom-up pressure for political change. A related phenomenon was that the number of younger politicians elected rose significantly, with nearly 5 per cent of those elected still in their thirties and around 24 per cent in their forties, a five-fold increase over the outgoing National Assembly. Overall, it seems that the impact of economic recovery and the lastminute summit announcement was not as great as the MDP had hoped or the GNP had feared. As an MDP spokesman argued afterwards, the results showed ‘once again that the feet of Korean politics are shackled by regionalism’.52 Indeed, while the MDP did pick up seats in the more cosmopolitan Seoul area, as always it had the strongest returns in Cholla province, taking 25 out of the 29 seats. The GNP polled strongly in its traditional areas in south-eastern South Korea, where, of the 65 seats available in the two Kyongsang provinces, the GNP won 64, with the one remaining seat going to an independent. The GNP would anyway have polled strongly in this area, but the summit announcement probably only served to convince voters in this predominantly conservative area that Kim Dae-jung was moving in a potentially dangerous direction. Neither the GNP nor the MDP succeeded in winning a single seat in the other’s traditional strongholds. However, the pull of regionalist factors may not have been quite as strong as in the previous decade, because the fight for the two Chungchong provinces showed an interesting variation. Long considered the power base of Kim Jong-pil and the ULD, this area attracted strong competition from Rhee, born in the southern Chungchong province, and the MDP. Of the 24 seats contested in the two Chungchong provinces, the ULD won just 11, while the MDP unexpectedly took 8 and the GNP 4. The overall trend of the election suggested, therefore, that, while regionalism still acted as a powerful factor in voting preferences in south-western and south-eastern areas, in other parts of the country there was a return to the appeal of two large pro- and anti-government parties. After a decade or more of a shifting multi-party system, South Korea could now be on the verge of going back to the more established pattern of two large parties which had existed in practice up until the late 1980s.

66 Korea after the crash The failure to achieve an MDP majority meant that Kim Dae-jung himself found himself almost back to square one. Cohabitation was back on the agenda once again. In the aftermath of the election, Kim Dae-jung promised that he would respect the voters’ decision that left him with a minority government and offered to talk with the GNP’s Lee. The MDP’s Rhee even went so far as to propose making the GNP a ‘partner’ in the national administration.53 The GNP initially resisted the temptation to gloat and talked about playing the British-style role of a ‘loyal opposition’. Kim Dae-jung met with the GNP’s Lee on 24 April, in a rare gesture of reconciliation, in which they agreed to cooperate in ensuring the success of the North–South summit, normalizing inter-party relations and creating a joint committee to plot future policy strategies.54 However, it soon became clear that in practice both Kim and Lee were concerned to draw a line between the North–South Korean summit issue and domestic political issues. Indeed, within a week it was back to politics as usual, with both sides criticizing each other over revelations of a lobbying scandal involving bribes and sexual favours being deployed in the securing of a contract by a US company for wire-tapping equipment for the military. The events allegedly took place during the Kim Young-sam administration and so involved GNP politicians, but the GNP also claimed that one of the politicians named, a former environment minister, had actually stood in the recent elections as a MDP candidate.55 With the tentative reconciliation with the GNP evidently extremely fragile and unlikely to produce results, Kim Dae-jung appreciated that, in reality, if he wished to continue with his reform agenda, he had little option but to begin talks with the few independents elected and with the ULD, the DPP and the NKPH to try to re-secure a parliamentary majority. The expressed need to secure broad domestic support for his summit venture gave Kim the opportunity to talk personally with the leaders of the three smaller opposition parties. While the setbacks for the ULD and DPP implied that the older generation of politicians, in particular the two Kims associated with those two parties, were out of touch with the times in Korea, neither seemed willing to fade away completely. In turn, Kim Daejung himself had little alternative but to talk with them or their representatives. So he switched his primary objective from the abortive reconciliation with the GNP to somehow turning back the clock and drawing the ULD into a de facto coalition again. In fact, despite the election results, the ULD’s Park Tae-joon had continued in the post of prime minister. But his personal position soon became tenuous as revelations appeared of his involvement in a tax evasion scandal; he had concealed properties worth over 5 billion won by putting them in his son’s name and allegedly accepted bribes from subcontractors when he headed the Pohang steel company.56 When it became obvious that he would have to resign, Kim Dae-jung was forced to horsetrade with Kim Jong-pil and the ULD again. However, Kim Jong-pil and

Playing politics 67 the ULD were in a weak bargaining position. Far from having the strong swing vote role that they had envisaged, the ULD leaders found themselves severely weakened by the election results. Parties that fail to form a parliamentary negotiating group have shown a marked tendency in the past to disband or disintegrate; Kim Dae-jung was able to use ULD awareness of that to his advantage. Finally, in late May, Kim Dae-jung named as prime minister the president of the ULD, Lee Han-dong. Lee can be described as a political opportunist, who served as a judge and prosecutor in the Chun and Roh periods, was interior minister in the Roh government, and became a senior party official in the DLP, the NKP and then the GNP successively, before suddenly defecting to the ULD in February 2000. He had once been one of the ‘nine dragons’ competing to be the NKP’s presidential candidate to succeed Kim Young-sam. Already concerned that Kim Dae-jung might be indeed planning what they described as an ‘artificial political realignment’, the GNP leaders were, needless to say, scathing about Lee’s appointment, and accused Kim of perpetrating a ‘national deception’ in luring Lee into the government.57 The full terms of the de facto renewal of the MDP–ULD alliance have not been made public, but it is likely to have included a promise, once again, to amend the constitution to a parliamentary cabinet one. Already clear is an agreement to alter parliamentary regulations so as to reduce the limit for parties forming a negotiating block from 20 to 10 to help the ULD. That Kim Dae-jung had done enough to restore his parliamentary majority in practice was made clear when, with the support of four lawmakers from the smaller parties, the MDP candidate was voted in as the National Assembly Speaker at the start of the new session in early June. This undoubtedly strengthened Kim Dae-jung’s negotiating hand as he went in to the summit meeting in Pyongyang the following week.

5

The road to economic revival

When Kim Dae-jung’s new NCNP–ULD coalition administration took office in 1998, clearly the major task facing it was to bring the economy back into shape. For many Koreans, that was the only priority, and the squabbling within the ruling coalition and between it and the opposition described in the previous chapter only served as an unwelcome distraction from what they considered to be the most urgent business at hand. President Kim faced three interrelated problems in the economic area. The first was to restore normal growth and financial stability in accordance with the dictates of the IMF-imposed programme. The second was to address some of the underlying problems of the economic structure, particularly through corporate restructuring. The third was to enable the workers and unions, who would be severely affected both by the economic downturn and by the subsequent corporate restructuring, to survive. Kim began his task at a time when the region as a whole was in the third phase of the chronology suggested in Chapter 1, that is, the period when the Asian financial crisis was still spreading and was yet to have its greatest impact on regional economies such as Singapore and Hong Kong, which had survived the initial phases comparatively well. Indeed, those people in the region who had begun to argue that it was the ‘Chinese’ or ethnic Chinese-dominant economies, such as Taiwan, China, Hong Kong and Singapore, which had proved resilient, whereas non-Chinese economies had fallen by the wayside, were about to have their theories upset. However, the continued downward movement of the broader regional economy and of outsiders’ perceptions did nothing to help Kim in his own endeavours to restore international confidence in South Korea. Immediately after being elected president, in December 1997, Kim Daejung had talked about developing democracy and the economy ‘in parallel’ and creating a ‘democratic market economy’ to protect the ‘common people’s interests’.1 While the precise definition of this concept remained elusive, it undoubtedly implied an attempt to balance government intervention and regulation with market mechanisms in a way that moved away from the strong state model first created by Park Chung-hee back in the 1960s. Kim had developed some of his ideas during his earlier periods

The road to economic revival 69 of imprisonment and exile when, according to all accounts, he was a voracious reader, and began to espouse the concept of a ‘mass-participatory economy’. The key elements of the vision he had come to advocate by the 1990s were the self-regulation of business activities with minimum interference by the government, the liberalization of the financial system (including independence for the Bank of Korea) and the protection of freedom for legitimate labour movements; he also linked to this vision the creation of genuine and complete democracy.2 It has been correctly noted by John Oh that ‘Kim, more than any other president of South Korea, has considered economic matters in concrete detail for decades’.3 However, once in power Kim was to find that implementing his ideas for a ‘democratic market economy’ was to prove considerably more fraught and difficult than he had imagined. Vested interests were to prove formidable obstacles to Kim’s efforts at reform.

Post-crisis policy priorities The IMF programme agreed to by the Kim Young-sam government, and by extension by Kim Dae-jung too, consisted of four broad objectives as far as financial reform and restructuring was concerned: • • • •

to quickly restore stability to the financial system through liquidity support, a blanket guarantee, and closure of unviable institutions; to restructure the financial system, by intervening with banks, purchasing non-performing loans, and recapitalization; to strengthen the institutional framework by bringing prudential regulations and supervision in line with international best practices; to enhance supervisory oversight and eliminate functional and institutional rigidity in the financial system.4

The first two months of the new Kim administration were dominated by the need to focus on the first objective – to restore financial stability – so priority was placed on securing foreign currency liquidity in order to alleviate the immediate liquidity crisis. Including those funds disbursed during the interregnum period, by March 1998 the South Korean government had succeeded in inducing a total of $21.4 billion from the IMF and other international financial institutions such as the World Bank and the Asian Development Bank (ADB). It also made some progress in rolling over short-term external debt of the banking sector, to the tune of $21.8 billion by the end of March. In April, maturity extensions for loans for small and medium-sized enterprises (SMEs) were negotiated and an agreement was reached with the World Bank for the infusion of $1 billion specifically to help such companies with raw material imports. As part of its efforts to raise foreign capital, in April, the government was able issue

70 Korea after the crash foreign exchange equalization bonds, which were in fact oversubscribed, worth $4 billion.5 The slump in all types of imports after November 1997 had, in fact, helped to push the current account back into surplus in the early months of 1998. Imports in the first quarter of 1998 fell by 36 per cent compared with the same quarter a year earlier, while exports were able to maintain at least a modicum of growth at 8 per cent. Consequently, by the end of April 1998, Korea’s usable foreign exchange reserves had risen to $30.8 billion (compared to its lowest point of $3.9 billion in mid-December 1997). The won–dollar exchange rate also began to stabilize around the 1,300–1,400 won to the US dollar range from March 1998, as compared with its lowest point of 2,067 won at the height of the crisis in December 1997. But the IMF’s programme had a downside too – and this has become a target of criticism subsequently – that for a while the IMF medicine actually acted to make the patient even sicker. The key point was the tight quantitative monetary and fiscal performance criteria, which included setting very high money market interest rates. Interest rates rose from 12 per cent just prior to the crisis to 27 per cent by the end of December 1997 and to around 30 per cent by early 1998. The IMF’s intention was to dampen inflation, to attract sufficient capital to correct exchange market fragility and to build up the level of usable reserves. It also hoped to deprive the expansion-hungry chaebols of finance. However, uncertain which companies had genuine needs, the commercial banks tended to lend only money to those that they knew (i.e. the top chaebols), which further undermined bank solvency and left many SMEs starved of funds and facing a severe credit shortage. During the first quarter of 1998 around 1.1 trillion won ($785 million) was extended by commercial banks to highly indebted chaebols in the second rank, mainly because the banks thought that, by keeping them afloat, they could avoid having to reclassify earlier debts as non-performing loans.6 SMEs could not afford the interest rates from the banks nor find suitable alternative sources of credit. Overall, there was a marked decline in corporate activity. The Kim Dae-jung administration was not without differences of views about how to deal with the immediate costs of the IMF programme; in part this reflected the differing philosophies of the various economic advisers and ministers. Even Kim was to admit later that ‘the economic team was a bit confused at the outset’.7 However, there was broad agreement that the IMF programme would have to be continued with, though views differed over the possibility, and wisdom, of some amelioration of the harsher terms. Both the signs of early stabilization of the currency market and the evidence of the severe difficulties faced by banks and companies were, therefore, highlighted by the Kim administration in its ongoing talks with the IMF. In fact, Korean officials held a series of eight formal meetings with the IMF during 1998 to review progress. Of particular importance, therefore, was the IMF’s endorsement of a gradual easing

The road to economic revival 71 of the tight monetary policy initially imposed, and of a steady reduction in the high interest rates imposed early in the year.8 By the summer the IMF had realized that its high interest rate policy was not working and so allowed the Kim administration to loosen the strings.9 In fact, by the end of 1998 market interest rates had fallen below 15 per cent compared with the debilitatingly high rates of around double that level at the beginning of 1998. The degree of initial success enabled the Kim administration to start on the next phase of economic recovery, namely giving priority to financial and corporate restructuring, to be discussed below. It also enabled Kim to feel more confident about dealing with external partners. From April onwards Kim began to visit overseas, to solicit support for his efforts to restore the economic health of his country. In fact, breaking with the tradition which usually sees South Korean presidents visiting Washington as their first overseas call, Kim’s first overseas visit after his inauguration was to attend the Asia-Europe Meeting (ASEM) in London in early April. During his time in London he had bilateral meetings with several European leaders and specifically urged them to send investment missions to Korea. Kim then followed up with a visit in June to Washington, where he and US president Bill Clinton discussed ways to improve their economic relationship; Clinton confirmed that the USA would act as a ‘second line of defense’ behind the IMF.10 For the Kim administration, corporate structural reform involved two aspects: first, reform of the financial sector by broadening the autonomy of financial institutions and increasing competition within the industry and, second, restructuring the bloated chaebols in such a way as to increase efficiency and competitiveness and provide greater opportunities for the SMEs to contribute to economic development. Neither task has proved easy.

Fixing the financial sector In common with the other suffering Asian economies, the new Kim administration faced five main challenges in the financial sector: consolidating the various financial institutions, disposing of non-performing loans, strengthening the internal control systems in the financial institutions, improving financial supervision in general and developing capital markets further.11 The key instrument chosen for carrying out financial restructuring in South Korea – and also more general corporate restructuring – was the Financial Supervisory Commission (FSC), which began work in April 1998 under the leadership of a reform-oriented former bureaucratcum-businessman Lee Hun-jai. Duties and responsibilities which had previously been spread amongst several regulatory bodies, including the MOFE, were now concentrated in the hands of the FSC. President Kim and his advisers gave Lee and the FSC virtual carte blanche to carry out financial restructuring. The first round of the FSC’s drastic restructuring of

72 Korea after the crash the financial sector was completed by October 1998. By then 5 out of South Korea’s 25 commercial banks had been ordered to close, while 16 out of 30 merchant banks, 6 out of 34 securities companies and 4 out of 50 insurance companies had had their licences either revoked or suspended.12 All the surviving commercial banks had surpassed the Bank of International Settlements’ required 8 per cent minimum capital adequacy ratios by that time. However, this was not without cost to the government, which was forced to inject 38 trillion won ($2.7 billion) in order to purchase the ailing banks’ non-performing loans and to sustain recapitalization. The five banks which were closed down in the process of being taken over, at government direction, by five relatively healthy commercial banks in June 1998, were all comparatively small ones. More problematic were the larger banks, some of which ended up effectively being nationalized. The government began what were to become lengthy and convoluted efforts to sell off two of the worst affected, Korea First Bank and Seoul Bank, to international banking corporations, while forcing two others, Hanil and Commercial Bank, to merge into the Hanvit Bank. Neither of the two methods adopted was able to achieve success easily. A majority share in Korea First Bank was finally sold to the American investment firm Newbridge Capital in September 1999 (the Korean government retained a 49 per cent share); this was the first time a foreign investor had taken management control of a Korean commercial bank.13 Equally timeconsuming negotiations were held for the Anglo-Hong Kong banking group HSBC to take over a 70 per cent share in Seoul Bank, but the deal finally collapsed in August 1999 over the terms for dealing with the accumulated bad debts, and the government was left to start all over again to find a buyer. Then, plans in early 2000 for the Small and Medium-sized Industry Promotion Corporation to take over the bank and turn it into a specialist bank serving its member companies rather than the chaebols fell through. The government was still keen to encourage a foreign buyer and, finally, in April 2000 the German Deutsche Bank was hired as an adviser, with the aim of shaking up its management systems sufficiently to sell it onto an overseas buyer during 2001, a time frame well beyond that originally envisaged by the government.14 The alternative route of merging the two local banks also had its problems, with the Hanvit Bank, newly created in December 1998, achieving only a marginal increase in deposits and an actual decline in total assets during the year 1999. By mid-2000, the government was beginning to consider the possibility of encouraging a three-way merger of Hanvit with yet another two state-run banks, Cho Hung Bank and Korea Exchange Bank, by providing a number of financial incentives.15 The financial restructuring process contained several paradoxes. First, despite the avowed intention of the Kim administration to reduce governmental intervention in the financial and economic system, the short-term

The road to economic revival 73 effect of the need to resolve the crushing burdens run up by the financial sector was that the government had no alternative but to assume greater control of the financial system. Where it had injected huge amounts of funds, such as in rescuing certain banks (and, as will be discussed later, some chaebols), the medium-term effect was that the government, or to be more precise its bureaucrats, inevitably became reluctant to give up that control. Second, while the commercial banks had studiously refrained from quantitative expansion during 1998–99, there were few signs of a significant qualitative improvement instead. It seemed as if some change had come to the ‘hardware’ side of the financial sector through closures, mergers and acquisitions, but the ‘software’ side of increasing efficiency and competitiveness in management and operations still left much to be desired. Third, whereas mergers have become commonplace in the global financial community in recent years and are generally considered to have created positive synergistic results, in Korea they were – and indeed still are – treated less as an optimal management strategy than as a last resort to avoid complete insolvency. Fourth, the government had hoped that the commercial banks would act as one of the catalysts for corporate restructuring,16 but, faced with a mountain of non-performing loans, commercial bank managers were reluctant to pull the plug on their indebted corporate clients for fear of making their own balance sheets even worse. The first major wave of restructuring in the financial sector in mid-1998 certainly was not to be the only one. Indeed, if 1998 was seen as focusing on the banking industry, then 1999 saw something of a subsidiary wave affecting the insurance industry. Again foreign companies, keen to enter the Korean insurance market, were involved in some of the restructuring deals. After failing to secure appropriate bids in two auctions for First Life Insurance, the third-largest life insurer and the one in most financial trouble (finally being declared insolvent with negative assets of $2.4 billion in August 1999), the FSC opened bidding for five smaller companies. The German insurance company Allianz finally came to an agreement to purchase First Life Insurance in late 1999 and then followed up in early 2000 by becoming the largest shareholder in Hana Bank, the seventhlargest commercial bank, as a means of extending its network in the banking-insurance sectors.17 Nonetheless, as will be discussed further below, a second round of major restructuring across the financial sector, involving the investment trusts as well as some still under-performing banks, became one of the priorities for the second half of the year 2000.

Challenge to the chaebols In his writings and speeches earlier in the 1990s, Kim Dae-jung had made it clear that he strongly opposed ‘special favours’ for the chaebols.18 He reinforced the point during the course of an interview with a German magazine on the eve of his inauguration, when he bluntly stated: ‘the era

74

Korea after the crash

of the chaebol is over’.19 He was soon to discover that this was a rather premature statement. As discussed in Chapter 3, he certainly had tried to bang some heads together before he formally took office. In mid-January 1998 he had met the presidents and chairmen of the largest chaebols and persuaded them to accept certain measures of corporate reform. They agreed to raise corporate transparency, end cross-payment guarantees amongst affiliates, improve financial profiles, strengthen management responsibility and concentrate on a few core sectors. President Kim’s problem was to get these promises translated into reality. He had to adopt a combination of stick and carrot. At first he was prepared to rely on persuasion, the carrot. In mid-February the middlesized conglomerates in the second rank (i.e. conventionally classified as ranking 6–30 behind the ‘big five’) submitted restructuring plans. Basically they pledged to dissolve their planning and coordination offices that served under the direct orders of the group chairmen, to eliminate cross-debt guarantees amongst subsidiaries, to produce consolidated financial statements and to introduce outside auditing and outside directorship systems. Most of these chaebols had one or more subsidiaries which were to become involved in ‘workout programmes’ under which roll-overs in loans and fresh financial assistance were given in return for restructuring in consultation with the creditor banks. By June 1999 the various forms of financial assistance given had reached a total of 335 billion won ($215 million).20 However, the process was not without teething troubles, not least because the creditor banks, who had previously been ‘intimidated’ by the sheer size and power of the chaebols, now found themselves playing a new and unaccustomed role. The tendency for both the banks and the ailing chaebols to agree on ‘as mild a prescription as possible’ to restore economic health was inevitable. This required some informal pressure from behind the scenes by government officials to introduce stronger medicine. Oh Hogen, the Executive Chairman of the Corporate Restructuring Committee, for example, commented on the necessity to ‘educate’ inexperienced bankers in the techniques of running genuine workout programmes.21 Despite the passive resistance, nonetheless, some well-known middle-ranking chaebols’ names did disappear in the course of the restructuring process. Persuasion was less well suited as a tactic with the largest chaebols. Much of 1998 was characterized by strident calls from the administration for the chaebols to reform and by threats of punitive action. The stick became more evident. On one occasion, in October 1998, the governmentappointed Fair Trade Commission took action to fine the ‘big five’ chaebols for violating fair trade regulations by diverting profits illegally into troubled subsidiaries.22 The following month, the Kim administration was able to add pressure from outside, after US president Bill Clinton had expressed his own ‘impatience’ with the lack of progress in the chaebol

The road to economic revival 75 restructuring programme during his talks with Korean leaders, telling the chaebols that it was certainly time for them to begin real restructuring.23 For the largest chaebols the key issue was to become one of reducing affiliates and concentrating on core industrial sectors. One approach was through the creditor banks, which at the government’s suggestion formed a review committee in May 1998 to assess the viability of client firms showing signs of financial weakness. The following month twenty companies affiliated to the top five chaebols were classified as non-viable.24 Credit lines were cut and financial assistance from other affiliates was prohibited, but more than three months later only about half of them had been liquidated. The ‘big five’ produced impressive targets, at least in numerical terms, for reducing the overall number of their subsidiaries by the end of 1999: Hyundai down to 32 from 63 in 1997, Samsung to 40 from 65, Daewoo to 10 from 41, LG to 32 from 53 and SK to 22 from 49. Despite these apparently clear commitments, there were substantial differences in the speed with which the various chaebols undertook such restructuring, with Samsung being the most progressive and Hyundai and, in particular, Daewoo being much slower. A few subsidiaries were closed down and some were just merged into sister companies, but others were sold off to foreign companies. With the Kim administration liberalizing the regulations for foreign investment to an extent unknown in South Korea’s history, foreign companies eagerly sized up the opportunities. The Swedish car company Volvo bought up Samsung’s construction-equipment division, the US electronics company Fairchild acquired Samsung Electronics’ power integrated-circuit division and British Telecom became LG Telecom’s second-largest shareholder.25 The second approach favoured by the incoming Kim administration was the use of business swaps, or ‘Big Deals’ as they came to be called. This policy was approved in principle at a meeting between the leaders of the FKI and government officials in July 1998, but the proposals initially put forward by the five largest chaebols were deemed by the government to be insufficiently drastic. It needed more pressure from government officials, indirectly through creditor banks and directly through meetings with individual corporate leaders until, in early September 1998, the ‘big five’ chaebols formally agreed to undertake swaps and mergers in seven key industries: semi-conductors, rolling stock, aircraft, petrochemicals, power generation, ship engines and oil refining. The automobile and consumer electronics sectors were soon added to make a total of nine industries due for realignment.26 In all these sectors at least three of the large chaebols were involved in some form or other. Table 5.1 gives the details of the main deals envisaged under the initial programme of ‘Big Deals’ as formulated by the end of 1998, after several months of intense haggling. However, the reconstruction and consolidation of the key industrial sectors proved to be a far more difficult matter than simply shedding

76 Korea after the crash Table 5.1 Big Deals in progress

Semi-conductors

Before Big Deals

After Big Deals

• Samsung Electronics Co.

• Samsung Electronics Co.

• Hyundai Electronics Ind.

• Hyundai and LG merged into one company (Equity share-out to be discussed later)

• LG Semicon Co. Petrochemicals

• Daisan Complex

• Samsung General Chemical Co.

• Samsung and Hyundai merged into one company (introduced foreign capital) • SK, LG may merge into Yoch’on Complex

• Hyundai Petrochemical Co. Aircraft parts

• Samsung Aerospace Industries Co.

• Form a new, joint company and introduce foreign capital

• Daewoo Heavy Industries Co. • Hyundai Space & Aircraft Co. Rolling stock

• Hyundai Precision & Ind. Co. • Daewoo Heavy Industries Co. • Hanjin Heavy Industries Co.

Power-generation equipment

• Korea Heavy Industries & Construction Co. (HANJUNG) • Samsung Heavy Industries Co.

• Unified into one company • HANJUNG takes over Samsung’s business

• Hyundai Heavy Industries Co. Ship engines

• Samsung Heavy Industries Co. • Hyundai Heavy Industries Co.

• HANJUNG takes over Samsung’s business • Two company systems of HANJUNG and Hyundai

• HANJUNG Oil refining

• Hanwha Energy Co.

• Acquired by Hyundai Oil Co.

Autos

• Hyundai Motors, Kia Motors, Daewoo Motors and Samsung Motors

• Daewoo Motors will take over Samsung Motors • Hyundai Motor Co. took over Kia Motor Co.

Source: Lee Jae-Woo, ‘Corporate Restructuring in Korea: Experience and Lessons’, Korea Journal, autumn 1999, p. 252.

The road to economic revival 77 subsidiaries, for the prestige, pride and financial resources of the larger chaebols and their owners were closely tied up with their earlier expansion into certain sectors. Some deals were carried out relatively smoothly. For example, in the oil-refining sector, SK’s take-over of Ssangyong and Hyundai Oil’s of Hanwha Energy were easily achieved. So too was the consolidation of the railway rolling stock manufacturers Hyundai, Daewoo and Hanjin. The formation of a new company, Korea Aerospace Industries (KAI), in the aircraft parts sector between Samsung Aerospace, Daewoo Heavy Industries, and Hyundai Space and Aircraft companies also worked well, at least in its initial conception, but began to come unstuck when the negotiations for the projected strategic alliance with a foreign partner – with Boeing, Lockheed Martin-Aerospatiale and British Aerospace as the rivals for the role – became complicated by a legal dispute between Hyundai and Boeing. However, other projected ‘Big Deals’ proved remarkably difficult to consummate. In particular, the projected merger of two of the three giants of the Korean semi-conductor industry, LG Semicon and Hyundai Electronics, and the proposed business deal between Daewoo and Samsung, in which the latter’s automobile business would be swapped for the former’s consumer electronics business, soon ran into difficulties.27 The problems in the semi-conductor merger arose when LG refused to accept the evaluation by US financial consultants Arthur Little that Hyundai staff would be better equipped to run the new company; LG even filed a suit against the consulting firm. LG argued that it should stay in the semi-conductor business, offering to give up other core businesses if it were to be allowed to keep its affiliate going. It seemed to become a battle of will between the government and the chaebols, as the Kim administration took this as a test case of its resolve to push through restructuring. Finally, in early January 1999, after pressure from creditor banks, threats of financial sanctions and personal intervention by President Kim with the LG group chairman Koo Bon-moo, the LG group gave way and agreed to give up its semi-conductor operations. Kim Dae-jung also found himself having to intervene in the Daewoo–Samsung dispute, though in this case with less success. Samsung Motors’ problem lay with its newly opened but under-utilized state-of-theart high technology car factory in Pusan, in south-east South Korea. Although Daewoo and Samsung agreed in principle to the swap, the negotiations broke down over the small print of the deal, in particular the valuation of this expensive new car manufacturing plant at a time when the true extent of the Daewoo group’s own massive financial debts were becoming increasingly widely known. In July 1999, Samsung group chairman Lee Kun-hee broke off all talks with Daewoo and announced that he would rather put Samsung Motors into court receivership. In return, he would personally contribute 2.8 trillion won of his own money to pay off part of the estimated 4.6 trillion won debt run up by Samsung

78 Korea after the crash Motors. However, it soon became apparent that he proposed to raise his contribution by selling 400 million shares in the Samsung Life Insurance company, after its proposed listing on the Korean stock exchange. Naturally, media and public criticism of this intended windfall profit for chairman Lee arose rapidly. At the same time, since Samsung’s plant employed, through related companies, as many as 50,000 people in the Pusan area, local politicians and union leaders lobbied hard for the plant to remain open. With no wish to further alienate an area which traditionally voted for his opponents, Kim Dae-jung felt he had no alternative but to give way to popular sentiment and intervene. He cancelled Samsung Life Insurance’s listing permission, but reassured everyone that the car plant would not be scrapped. As Daewoo’s own financial problems increasingly came to light and Daewoo Motors itself was shown to be no longer viable, the Kim administration began to consider the possibility that, instead of the deal with Daewoo, there might be opportunities for a deal with foreign investors. The overall impression during much of 1998 was that the chaebols were dragging their feet, trying to resist complete restructuring by arguing that the costs of creating higher unemployment would be unacceptable and that, over time, market forces would anyway deal with the loss-making units. With unemployment levels still rising, the chaebols thought that they would be able, if not to obtain sympathy, at least to deflect some of the criticism and pressure. In criticizing what he described as ‘blind attacks’ on the chaebols, Kim Woo-chong, chairman of both Daewoo and the FKI, speaking in November 1998, added another argument against rapid restructuring. He argued that, as in the past, not only were the chaebols essential for the economic strength of the country, but that, if anything, they would be even more valuable in pulling South Korea into the new information age, for ‘with respect to the growing importance of knowledge-based and financial industries, the role of the chaebols should not be ignored’.28 During 1998, the Kim Dae-jung administration had focused on talking loudly and critically at the chaebols. Hopeful that the signs at the end of that year that the chaebols were at last genuinely moving towards restructuring reflected a genuine change of heart, the government edged towards a policy of trying to achieve a balance of sticks and carrots to achieve its restructuring objectives. For example, when meeting the top chaebol leaders in June 1999, Minister of Finance and Economy Kang Bong-kyun praised the chaebols for their efforts in the area of ownership and governance structural reforms but told them that they had fallen short of expectations in restoring their financial health and concentrating on core businesses. He tempted them, however, with the prospect that if restructuring were successfully completed within the year, then they would be allowed to branch out into new business lines in the following year.29 The government also tended to compensate the forcibly restructured companies

The road to economic revival 79 with some forms of preferential treatment such as tax exemptions and new loans under preferential terms. While some chaebols complained that these tax incentives were insufficient, they nonetheless constituted incentives not available to smaller companies. As the Kim administration continued to argue with the chaebols and try to push through the ‘Big Deal’ programme, the political costs also began to rise. Kim found himself being criticized for what the opposition and some chaebol leaders – and, most worryingly for Kim, trade unions at affected companies – perceived as a bias against those chaebols which were based in the Kyongsang region.30 In a sense, since the chaebols had grown up with the help of Kyongsang-born presidents and most of the ‘top five’ had key manufacturing operations or even headquarters in the region, it was inevitable that any moves against the largest chaebols by the Kim administration would be seen as being ‘anti-Kyongsang’. The GNP, with its strong regional base in Kyongsang, naturally tried to exploit such anti-government sentiment. Although previous presidents had generally adopted relatively equitable policies towards the individual chaebols, it was inevitable that there had been some chaebols which were better connected than others to a particular president. For example, Ssangyong had been seen as wellconnected to President Roh. Kim Dae-jung had been expected to be harsher on Samsung, which, as discussed in Chapter 3, had had close links to Lee Hoi-chang; in fact, Kim was no harder on it than other chaebols. Indeed, the Samsung leadership, no doubt aware of the company’s potential political vulnerability, in order to avoid confrontation with the government actually acted faster in accomplishing management restructuring than some of its rival companies. Taking the example of the group’s flagship company, Samsung Electronics, about a third of the employees were sacked, half of its managers were reshuffled, plants were temporarily closed down and marginal businesses were disposed of; in the words of its chief executive, the ‘three years of changes were much greater than the changes Samsung Electronics had seen during the previous three decades’.31 Although it resented some of the consolidation moves being undertaken by Kim, the chaebol which seemed to benefit most, or at least to be given the greatest benefit of the doubt by the government, was Hyundai. This seemed to be primarily because of that company’s founder, Chung Ju-yung, and his close personal involvement in developing contacts with North Korea, which tied in extremely well with Kim’s desire to promote his ‘sunshine policy’ towards the North (see Chapter 6). However, as events in the year 2000 were to show, even Hyundai was not immune to government and market pressures to reform. It was a measure of Kim Dae-jung’s continued frustration with the chaebol restructuring issue that, in his annual Liberation Day speech on 15 August 1999, he specifically branded the chaebols as ‘the most problematic element in our economy’ and warned them once again that times had

80 Korea after the crash changed, for ‘the concentration of economic power in the chaebol is no longer accepted by the market’.32 ‘Pour encourager les autres’, he chose as a test case, to show his determination, a chaebol which was anyway teetering on the edge of bankruptcy. The following day, he approved decisive action to restructure the Daewoo group, which had remained stubbornly reluctant to trim its subsidiaries and to take serious steps to repay its debts, which were claimed to have reached 57 trillion won ($47 billion). When the financial crisis hit Korea, Daewoo had been particularly exposed because of the short-term nature of many of its loans (more than half its total borrowing). Although FSC Chairman Lee Hun-jai had bluntly told Daewoo’s chairman back in 1997 that ‘the world is changing and you have to change too’,33 the political implications of breaking up such a huge chaebol had made the FSC rather reluctant to force the pace. However, by 1999 the group’s problems were just too great to ignore. Given the crosslinkages between its subsidiaries, Daewoo’s whole group was in danger of crumbling as creditors were forced to call in short-term loans. In July the government had acted to provide a short-term package of financial aid to Daewoo, to enable it to extend some of this short-term debt, but that did not alleviate the crisis at the company. The government’s August plan called for Daewoo to be pruned back from 25 to 6 units by the end of 1999; the electronics and securities companies would be sold off, while ship-building and construction would be given independent status in preparation for later sale.34 Domestic Korean creditors entered into a complicated series of discussions and investigations into the group’s affairs. By including debts from overseas operations and other financial obligations, in November the auditors finally came up with a total debt of 87 trillion won ($73 billion), well over the total amount that Korea had sought at the national level for its bail-out by the IMF in late 1997 and equivalent to one-fifth of Korea’s GDP. Aware on investigation that a complete Daewoo collapse would seriously undermine the nascent economic and stock market recovery, the government had actually stalled on revealing the worst. But, in early November 1999, it finally bit the bullet and admitted what everyone already suspected – that Daewoo was insolvent. Founder and group chairman Kim Woo-chong resigned.35 About $7 billion of the debt, in unsecured loans and bonds, was owed to foreign banks and companies. A war of nerves resulted between Daewoo and its domestic and foreign creditors over how much was owed and by what means it might be recovered. Finally, in January 2000 the way to a final solution to the Daewoo problem was achieved through acceptance in principle by the foreign creditors that they would not be able to regain more than an average of 40 per cent of their outstanding loans, although it took another four months before the precise details of the debt restructuring for the four largest component companies of the Daewoo group could be formally offered to

The road to economic revival 81 the foreign creditors. Domestic creditors said that they would form an ad hoc corporation to buy Daewoo’s debt, but the implicit understanding was that the government would be prepared to step in if Korean banks suffered a cash crunch as a result.36 Two years on from coming into office, therefore, Kim Dae-jung still found himself troubled by the issue of the chaebols’ restructuring. While some progress has been made with medium-sized chaebols, the largest five have proved the most difficult. The ‘Big Deal’ approach, launched with such a fanfare in 1998 has turned out to be a long and politically sensitive road to travel. As both Lee Jae-woo and Jung Ku-hyun have pointed out, there is a fundamental problem with this approach.37 Primarily, it requires the government to take an active role, at the very least behind the scenes and often through public rhetoric too, in pushing these supposedly ‘voluntary’ deals through. This may be both non-conducive to economic fairness, through the infringement of the property rights of the participating companies and the creation of monopolistic or duopolistic market concentration, and contradictory to the government’s avowed aim to stay out of business more than past collusive administrations had done. The Kim Dae-jung administration’s efforts to ‘force’ restructuring were certainly not the first attempt at industrial rationalization, and he himself referred to previous efforts having failed due to the ‘resistance and sabotage’ of the chaebols.38 Arguably, such attempts had begun as early as the company rationalization campaign of the late 1960s, less than a decade after the chaebols had first come into existence. Even the concept of encouraging ‘core businesses’ was not new, as that had been tried, albeit unsuccessfully, in the early 1990s.39 However, for a government such as Kim Dae-jung’s, that wanted to pride itself on ‘economic democracy’, such intervention opened it up to accusations that it was in practice no different from its predecessors.

Joining the jobless The other serious and even potentially socially destabilizing problem for Kim Dae-jung to deal with was unemployment. This socio-economic issue inevitably brought Kim into conflict with the trade unions, which in general had been key supporters of his own presidential bid. Down-sizing and increasing the flexibility of companies in the name of restructuring inevitably led to harder times for Korean workers. The chaebols and other companies forced to restructure considered that they had only two options open to them: one was to lower wages and economize on benefits and welfare, the other was to resort to layoffs. As discussed in Chapter 3, the trade unions had reluctantly come to an agreement legalizing layoffs in February 1998 under the auspices of the newly established tripartite labour committee of management, union and government representatives. Public opinion, still shell-shocked by the

82 Korea after the crash whole financial collapse, had tended to support such an agreement in principle. However, when reality began to bite, in the form of a massive rise in the level of unemployment, neither the unions nor the public were fully prepared. In early February 1998 the Ministry of Labour had forecast that unemployment could reach 5 per cent or about 1.09 million people by the end of that year.40 This was to prove a significant underestimate. In reality, the unemployment rate rose sharply from 2.1 per cent in October 1997 to 5.9 per cent at the end of February 1998, reaching a thirty-year high of 7.6 per cent (or 1.65 million people) by the end of July 1998, before levelling off, though that phenomenon was probably due to a decrease in those actively seeking work rather to an increase in employment opportunities as such. These official figures almost certainly did not reflect the true extent of unemployment, which could easily have been at least another half million higher if those who worked fewer than 18 hours a week or who had temporarily given up looking for work were included. Indeed, the rate began to rise again in the autumn and winter to reach a peak of 8.6 per cent, or 1.78 million people, by February 1999.41 For Koreans, used to a continually growing economy and unemployment rates of around 2 per cent during most of the 1990s, this sudden sharp rise was devastating. While not as well known for, nor indeed quite as strongly wedded to, the practice of life-time employment as neighbouring Japan (though it should be noted that even in Japan this practice has for a long time applied primarily to the large companies and not to the SMEs), South Korea nonetheless had developed in its post-war economic drive a form of life-time employment. As such Korea shared ‘the East Asian employment culture [which] is not used to layoffs’.42 Although the post-war Korean management style often seemed to alternate between bullying and coddling, many workers felt a strong degree of loyalty to their companies, especially where there existed jong (the Korean word for deep feelings amongst people).43 At the same time, there was no wellestablished social welfare ‘safety net’, so that people had tended to rely on family support at times of trouble. Used to this ‘traditional’ employment system, for many Koreans the layoffs in the financial sector and amongst the middle-ranking chaebols came as a shock. As the numbers rose the two main labour unions, the more progressive KCTU and the more conservative FKTU, became increasingly disturbed. In their view the sacrifices appeared to be being made only by the workers, while the bosses of the influential chaebols simply remained at the helm. Moreover, in practice, only about a quarter of the displaced workers were eligible for any compensation from the government. Fierce demonstrations held on May Day forced the government to include a new plan for $6 billion unemployment compensation in the budget.44 By July 1998, the two unions were sufficiently disillusioned by the work of the tripartite management–labour–government committee,

The road to economic revival 83 which they said had ‘degenerated’ into ‘rubber-stamping government-led restructuring programmes’, to take the step of boycotting its meetings and threatening to organize a series of large-scale protest rallies and one-day strikes during that month.45 Although the two unions did agree to return to the tripartite committee at the end of July, they remained unconvinced about the utility of its increasingly intermittent operations, and, indeed, early in 1999, the KCTU once again threatened to withdraw from the tripartite committee over the layoffs (although it ultimately withdrew the threat). The biggest test of the new labour legislation was to come at the traditionally militant Hyundai Motors plant in Ulsan, at which the management tried to establish the principle that layoffs could occur. It had planned to lay off 5,000 workers, but a bitter month-long strike during August 1998 forced the management to back down and introduce only a considerably watered-down version of its original proposal. In the end, only 277 employees (most of them from the staff canteen) were sacked, with another 1,200 given a promise of a return to work after what amounted to 18 months’ unpaid leave.46 As discussed in Chapter 2, prior to 1987, restrictions on labour activity had been severe, with strikes quickly and often forcibly broken up, but in the aftermath of democratization labour militancy had grown markedly. However, such activity, at least as measured in terms of working days lost, had tailed off during the early and mid-1990s and, despite the intense but brief flurry of activity associated with the Kim Young-sam administration’s efforts to introduce new labour legislation in January 1997, remained at a comparatively low level into 1997. However, 1998 saw a resurgence in labour unrest and a total of 1.45 million working days were lost during the year; more than three times the total for the previous year. Labour relations continued to be difficult through 1999, even though the resurgence in economic growth promised better times. A few companies began to re-employ laid-off workers and, with the creation of some new enterprises, especially in high technology and internet-related fields, unemployment levels began slowly to decrease, falling to 6.2 per cent or 1.35 million people by June 1999 and dropping below the million mark for the first time for two years in November 1999. Of the two umbrella trade unions, the FKTU reverted to its normal low-key approach of legal protest actions but the KCTU continued to be active in demanding better job security for its members. Early in 1999 it tried to organize a ‘spring offensive’ of a series of rolling strikes in various industrial sectors. The government responded by taking a strong line, warning union workers taking part in illegal strikes that they risked arrest and the sack. At one stage, during a week-long strike in April 1999 by subway workers, the government went so far as to apply for arrest warrants for sixty-six subway union officials, before the union backed down. The KCTU’s strike

84 Korea after the crash tactic had only mixed results, especially since the public sector unions refused to join in.47 However, the bifurcated union movement was reunited at least temporarily by the revelations in June 1999, discussed in Chapter 4, of the involvement of the government’s prosecution service in fomenting a strike at the official mint the previous November, allegedly with the specific aim of allowing the government to show its strength in suppressing an illegal strike as a way of discouraging other public sector unions from striking. Both the FKTU and KCTU held protest marches and rallies and they threatened to call a general strike. Prime Minister Kim Jong-pil had to order a full investigation and offered to resuscitate the dormant tripartite committee as a means of taking the steam out of this mounting labour unrest.48 During the second half of 1999, as the economy began to show increasingly strong signs of recovery, the unemployment rate dropped slowly, reaching a post-crisis low of 4.4 per cent in November. The rate rose again slightly in December 1999 and January 2000, but that was explained away by government officials as being due to seasonal factors, namely the severe Korean winter, which always sees construction and agricultural workers laid off temporarily and university students attempting to find winter vacation work. Nonetheless, sensitive to the approaching April 2000 elections, the government wanted to avoid the appearance of doing nothing to help the unemployed. So, in January 2000, it announced a new medium-term plan to reduce unemployment, to create 2 million new jobs and cut the jobless rate to under 3 per cent by the year 2003. In particular, the government proposed creating 700,000 new jobs in the tourism and information technology sectors and encouraging the creation of venture capital companies during that period.49 International media depictions of workers fighting their way through clouds of tear-gas notwithstanding, the union movement has not achieved a strong formal position in Korean society. Unionization rates, which reached a peak of 18 per cent in 1989 and thereafter slowly declined to around 13 per cent by the late 1990s, are low by comparison not only with most of the West European states (in Britain unionization rates are around 40 per cent and in Sweden close to 100 per cent) but also with Asian neighbours such as Japan (around 25 per cent) and Taiwan (about 50 per cent).50 With the rising number of bankruptcies during 1998 in the textile and other manufacturing sectors which were unionized, the number of union members continued to decline in that year. However, the union movement has had an influence far wider than simple numbers would suggest. Once freed from the shackles of authoritarianism, the unions did prove effective in forcing up wage levels from the late 1980s, not only in those industries in which they are well represented but also, by a demonstration effect, in other industrial sectors. The unions’ aspirations for

The road to economic revival 85 better working conditions and wages were quite naturally shared by many non-unionized Koreans. In retrospect, the January 1997 general strike, which admittedly was more about labour regulation than wages per se, proved to have been a high point of union activity in South Korea. Once the financial crisis struck, the unions found themselves and have continued to find themselves in a difficult position. While accepting that economic restructuring, as required by the IMF, was an inevitable process and welcoming attempts by the government to bring the chaebols’ management to heel, they were also faced with the reality that the preferred route to achieve these aims involved reducing labour forces. The unions argued for freezing or even reducing wages, and for reducing working hours as viable alternatives to outright dismissal, but they rapidly found themselves losing the argument. Efforts to show resistance, in the summer of 1998 and the spring of 1999, brought only limited success, especially as it became clear that the Kim Dae-jung administration was increasingly prepared to take a tough line to maintain industrial stability and avoid international investors, seen as being so crucial to economic resuscitation, being frightened off by renewed visions of worker militancy. The collapse of Daewoo in mid-1999 also effectively dampened the hopes of unions for wage rises in the newly recovering economic environment. As the deputy minister at the MOFE commented: the myth that ‘a big horse [chaebol] cannot die’ had in fact been shattered and the unions were in no position to ask for wage increases.51 But this realization did not lessen the hardship that many ordinary Koreans continued to face in their personal life.

Towards a second ‘economic miracle’? During the second half of 1998, as its growth remained negative, South Korea was no different from most of the other suffering regional economies that were also trying to hold the line during this fourth phase of the Asian financial crisis. However, in 1999, South Korea became one of the leaders of the regional recovery in the fifth phase, as signs of economic recovery began to show around the region, although in several cases the modest statistical rises in growth rates were helped to look better purely by the poorness of all the comparable indicators in 1998. The first quarter of 1999 showed a 5.4 per cent growth in GDP rate, but it reached double digits for the remaining three-quarters of the year. The particularly sharp rebound in many of the economic indicators for South Korea in the second half of 1999 was reflected above all in the final figures for real GDP growth that year, a massive 10.7 per cent. This was a far cry from the minus 6.7 per cent of the previous year and it was indeed the highest growth rate of any of the Asian Pacific countries in 1999. Other figures tended to support the Kim administration’s claims that the economy was on the fast track to recovery. Bolstered by brisk shipments

86 Korea after the crash of semi-conductors, computers and communication equipment, exports rose by 16 per cent and a trade surplus of $24 billion was recorded (though this was less than the previous year’s $39 billion when imports had collapsed dramatically). Foreign exchange reserves, which had dwindled to less than $4 billion at the height of the crisis, stood at $76.8 billion in January and $84.6 billion in April 2000. Inward foreign investment in 1999 grew to $15.4 billion, a record high and nearly double the amount in 1998. Prices had been stabilized with the annual inflation rate in 1999 at only 0.8 per cent, well below the 7.5 per cent of the previous year. The emergency loan of $13.5 billion from the IMF was repaid in full and, on 16 December 1999, the IMF’s board of directors announced that Korea had graduated from its emergency bail-out plan.52 Indeed, a MOFE promotional video, produced in March 2000, opened by describing the recovery from the financial crisis as the ‘second miracle’ for the Korean economy, following on its earlier fast growth in the 1970s, 1980s and 1990s, often popularly described as the ‘miracle on the Han River’.53 However, this success was not without some blemishes: one a general concern, but also four specific worries. The Bank of Korea and economists at research institutes like the Korea Development Institute (KDI) expressed some concerns that the economy might be in danger of over-heating. The sharp rebound during 1999 tended to give the impression of a ‘v’-shaped pattern to key indicators such as GDP growth rate – a sharp downward stroke in 1997–98 and an almost equally steep upward stroke in 1999. Some Korean economists worried that, without restructuring fully completed, companies and individuals might at best become complacent and at worst again over-stretch themselves and push the economy into another downward crash, which in turn would require yet another recovery, so creating a ‘w’ shape. The MOFE and Kim’s closest economic advisers, however, seemed less worried and tried to play down the potentialities of another crash.54 More worrying for the pessimists were four specific problems. One was the change in the monthly trade figures in early 2000. The immediate effect of the financial crisis in late 1997 had been to dampen consumption, both by companies and by individuals. Import growth had dropped and imports, after reaching a level of $144.6 billion in 1997, plunged by 35 per cent to $93.3 billion in 1998, before recovering by 28 per cent to $119.8 billion in 1999, on a customs clearance basis. Exports had also suffered, particularly where Korean exporters were unable to buy in necessary components and raw materials for the manufacturing sector in the postcrisis credit crunch, but to nothing like the same extent. Exports registered a small fall of 2 per cent in 1998 to $132.3 billion but recovered by 9 per cent to $143.7 billion in 1999. These divergent trends meant that South Korea, after running trade deficits every year during the 1990s, managed to achieve a trade surplus of nearly $40 billion in 1998 and a slightly reduced surplus of about $24 billion in 1999. However, as import values

The road to economic revival 87 began to rise significantly towards the end of 1999 on the back of recovering domestic demand and rising international oil prices (which effectively tripled during 1999), the trade surplus began to narrow, actually falling into a deficit of $400 million in the month of January 2000, before edging back into a slight surplus in February.55 The second problem was the state of the investment trust companies (ITCs), one part of the financial industry which had not been dealt with as vigorously as other parts, but which particularly came in for punishment from the Daewoo collapse and subsequent workout programme. Their losses stemming from the Daewoo collapse alone were estimated at 2 trillion won. The government tried to clean up their funding situation by injecting 3 trillion won of funds into the two most exposed ITCs, Korea Investment Trust and Daehan Investment Trust, and then planning to split them up, by the sale of Daewoo bonds to the Korea Asset Management Company (KAMCO) and the issuance of collateralized bond obligations. The ITCs have continued to be the weakest link in the financial sector, however, and in May–June 2000 the MOFE had to inject a further 4.9 trillion won to keep the ITCs afloat.56 The third problem was the rising level of government debt. This became something of a political football in the months preceding the April elections, as the opposition attacked the government figures as being a gross under-representation of the true situation. Government officials argued that it had tightened up its data compilation processes under the IMF tutelage and that the official figure of total debt of both central and local governments combined, at 108.1 trillion won as of the end of December 1999, was accurate. The opposition claimed that the true figure, if contingent liabilities were included, should be closer to 400 trillion won. Even the government conceded that the debt burden had increased from the 65.6 trillion won at the end of 1997, but argued that, given that its debt ratio to GDP was only 22 per cent, this amount was still manageable and indeed much lower than the average for OECD countries.57 Nevertheless, the Kim administration could not avoid being on the defensive on this issue. The final problem was the emergence of difficulties with the Hyundai group. Since many of the Hyundai units, such as ship-building, cars and electronics, were actually making money, and the liquidity crunch seemed to be confined to only a few companies within the group, in particular in the construction industry, the financial concerns were less serious than with Daewoo. Rather the problem lay with the restructuring of corporate management and a family feud which emerged between elderly founder Chung Ju-yung and two of his sons showed that old practices died hard. After months of resisting government attempts to improve corporate governance, and ignoring new legal requirements about consulting shareholders and even other board members, Chung finally decided to take action and tried to force both his sons to drop out of their managing

88

Korea after the crash

positions after they had argued over which one of them should become chairman for the whole group, but the son in charge of Hyundai Motors refused to step down.58 Hoping that Chung’s gesture would encourage other family-controlled chaebols to take similar steps, the Kim administration welcomed his move to a more professional management but undoubtedly was concerned that the unresolved family feud would only serve to cast doubts on the credibility of the proposed Hyundai restructuring. While playing up the favourable economic data and playing down the lurking problems in the early months of 2000, the government’s response to economic problems was increasingly conditioned by two factors: Kim Dae-jung’s personal interest and preoccupation with promoting his ‘sunshine policy’ towards North Korea, which was to culminate in the dramatic announcement of an unprecedented summit, and the approaching parliamentary elections. This meant that although Kim himself may have been personally less involved in the day-to-day supervision of economic policy-making, senior party officials, concerned about the prospects for the MDP in the forthcoming April 2000 election, did try to intervene more forcibly. For example, interest rates were raised by the Bank of Korea in February 2000 for the first time for two years in order to head off signs of emerging inflation, but MDP and government officials discouraged the Bank of Korea from taking any more steps in that direction before the election.59 A more blatant attempt to avoid losing potential votes was the swift reversal of policy on petrol prices in early March. The Deputy Minister of MOFE suggested that the government would not intervene in preventing the recent rises in international oil prices being passed on to domestic petrol and petrochemical companies, but when this was quickly picked up by the media as inevitably implying price rises, MOFE reversed course within a matter of hours and announced that domestic petrol prices would be kept at their existing level by reducing the import duties imposed on petrol and oil products.60 By stating that domestic prices would be kept stable regardless of the international price the government was once again reverting to old-style ‘interventionist’ practices and again raised doubts amongst external observers about the commitment to market reform. In part because there had been strong resistance from both management and unions in the financial sector – both of which have tended to equate restructuring simply with job loss – to the initial wave of restructuring, and in part because of the sheer size of the financial problems left over from the pre-1997 excesses, a second round of major restructuring across the financial sector has become one of the priorities for the second half of the year 2000. In part that will be stimulated by the example set by the growing foreign involvement in the financial sector. While some businessmen and politicians have complained about the foreign presence, the Korean press has often commented favourably on the ‘aggressive business

The road to economic revival 89 style’ of the Korea First Bank now that it is under US control. In part it will result from the need to finally square all the non-performing loans, which have remained a substantial problem through into the year 2000. In part the process will also be influenced by new technological developments in electronic commerce and e-financing.

6

Dealing with the North

Apart from managing the economic recovery and coping with political cohabitation, the other major problem facing Kim Dae-jung when he took office was how to deal with the South’s neighbour, North Korea. The Kim Young-sam administration had had a traumatic time in its relations with the North, reaching a particularly low point during the 1993–94 nuclear weapons crisis, when, as is now known, the situation came close to war, and failing to make any significant progress in the bilateral search for real peace and accommodation on the peninsula. Kim Dae-jung, who had often been criticized for being ‘soft’ on the North, came into office determined that he should adopt a more open and more consistent policy than his predecessor had done towards the North. His approach, encapsulated in what he called the ‘sunshine policy’, brought him into conflict not just with the outgoing GNP but at times with his own domestic political ally, Kim Jong-pil, and involved a complicated series of negotiations with external partners, particularly the USA and Japan. It certainly had indirect connections with the politics of economic recovery and, in as much as it became an important issue in the April 2000 elections, was to have a bearing on Kim’s own political future.

Conflict and competition on the Korean peninsula In order to analyse the basis of Kim Dae-jung’s new policy and the degree to which it was successful, it is necessary to understand something of the complex situation which has existed on the peninsula since 1945, when the arriving US and Soviet armies divided up the peninsula along the 38th parallel and created the division and the ‘Cold War’ frontier which still exists today. Through military, economic and political means, North and South Korea have been waging a competitive struggle for prestige, legitimacy and survival for more than five decades. Since the 1980s the balance of advantage had been shifting increasingly in favour of the South, but that had not meant any lessening in the complicated manoeuvring for advantage between the two rivals. Both sides maintain large military forces, such that the Demilitarized

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Zone (DMZ) created after the end of the Korean War in fact has become, if the immediately surrounding areas are included, one of the most heavily militarized borders in the world. Memories of the Korean War play strongly on both sides – for the South the ruthlessly effective North Korean advance to the capital Seoul and beyond at the start of the war, for the North the carpet bombing suffered at the hands of the US/UN forces later in the war and, for both sides, the legacy of divided families and feelings of vulnerability about their capitals ever since.1 While in quantitative terms the North would appear to be well ahead in the military field, a more qualitative assessment would suggest that the South’s more modernized military was superior to the North’s, even without the additional factor of the presence of US troops and weaponry on South Korean soil. The two Koreas have also developed along different political and economic premises. Both created highly centralized political systems, but the faiths underlying them and the forms developed have increasingly diverged.2 The North, while initially espousing Marxism-Leninism, gradually established a particular familial form of socialism, which was summed up in the philosophy of juche (usually translated as self-reliance) and found expression in a pervasive cult of personality. The founder Kim Ilsung ruled North Korea until his death in July 1994, when he was succeeded by his chosen heir, his son Kim Jong-il. The two Kims, by promoting juche in theory but in practice allowing some degree of flexibility, have tried to reconcile two not totally compatible goals – modernizing the Korean economy and society, and maintaining revolutionary and nationalist zeal. In contrast to the apparent political stability and continuity in the North, the South’s history, as discussed in more detail in Chapter 1, has been an unstable and traumatic road through civilian and military authoritarianism, interlaced with brief periods of democracy, to people power-induced constitutional democracy from the late 1980s. The two Koreas both succeeded in transforming backward economies ravaged by war into predominantly industrial ones, but again the systems have increasingly diverged. Although truly comparable economic data is not available, it is likely that the North’s heavily statist Soviet-style command economy actually kept it ahead of the South in terms of per capita GDP until the 1970s, but since then, while the newly industrializing South continued to power ahead (at least until 1997), the North began to suffer from the rigidities of central planning.3 Reluctant to embrace the reform approach adopted by its East European allies and by neighbouring China, North Korean growth stuttered and in the 1990s fell into negative growth, industrial stagnation and agricultural shortages, before finally slumping into what has come to be called a ‘food crisis’ (or ‘famine’ by the more dramatically inclined foreign media) in the mid-1990s. Accurate statistical data are hard to obtain, but one indication of the economy’s hardship is that North Korea announced no state budget details for the

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years 1995–97 and when it resumed supplying overall details in 1998, the income and expenditure levels were barely half those of 1994. Relations between the two Koreas themselves have been insubstantial and intermittent. Official dialogues have been spasmodic and frustrating, characterized by the ‘one step forward, two steps backward’ syndrome. There have been brief dialogues in 1972–73, 1979–80, 1984–86, 1990–92 when an unprecedented series of eight prime ministerial-level talks took place and, at a quasi-official level, in 1998–99. Apart from a joint declaration back in 1972, the most significant breakthrough was the signing of two documents in December 1991.4 Under the first, the Agreement on Reconciliation and Non-aggression, the two Koreas guaranteed noninterference and non-aggression and agreed to promote economic and personal exchanges. In the second, the Declaration on a Non-nuclear Korean Peninsula, both sides pledged the peaceful use of nuclear energy, no nuclear weapons and no nuclear reprocessing and uranium enrichment facilities. Although working-level meetings were held during 1992 to try to work out mechanisms for implementing these agreements, progress was not achieved and the talks ran into the ground when the so-called ‘nuclear crisis’ occurred. From the late 1980s the US and South Korean governments had become suspicious that North Korea might be secretly reprocessing nuclear fuel and even producing nuclear weapons. North Korea prevaricated over opening up its nuclear reactor sites to the International Atomic Energy Agency (IAEA), threatened in the spring of 1993 to withdraw from the Nuclear Non-proliferation Treaty (NPT) and practised brinkmanship coupled with the occasional inflammatory statement (such as threatening to turn Seoul into a ‘sea of fire’) during a long series of negotiations with the USA during 1993–94. Talk of sanctions and even pre-emptive military strikes against the suspect sites hovered over the negotiations, and, at one stage in mid-1994, certainly the situation did come close to war. But a US–North Korean framework agreement was finally signed in October 1994 after the personal intervention of the former US president Jimmy Carter. This agreement provided for international assistance from a newly created consortium for North Korea to build and develop two nuclear power plants and to supply much-needed oil in the interim.5 The Korean Energy Development Organization (KEDO), as the international consortium became known, was formally inaugurated in January 1995, with the USA, South Korea and Japan as the three initial members of the ‘board of governors’ or executive committee. A series of further negotiations to fill in the details about the site of the nuclear reactors, their type, design and construction schedule dragged on through 1995–96, but construction of the first reactor did begin with the formal ground-breaking ceremony in August 1997. The nuclear issue and the complicated diplomacy involving the powers most interested in the solution of this issue, in fact, were to be a major

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problem faced by the Kim Young-sam administration from the opening weeks of its term in office. Kim Young-sam, who felt himself less beholden to external supporters including the USA because of his own democratic legitimacy,6 wanted to achieve a breakthrough in relations with the North on his own account. In the early months of his administration he returned an imprisoned North Korean war correspondent as a goodwill gesture and spoke of his hopes for a summit meeting. However, the emergence of the nuclear weapons crisis threw him off balance at a very early stage. Although his foreign minister, the well-respected academic Han Sung-joo, wished to pursue a policy of sticks and carrots, the conciliatory approach came under strong domestic criticism – and, indeed, from some within the administration – as the crisis dragged on through into 1994. When the Americans began to edge towards the solution eventually brokered by Carter, Kim Young-sam was accused of being too soft and letting the Americans make the running. In order to defuse domestic opposition he took a harder line, with much more talk about sticks. His most forthright statement in this mode was in his interview with the New York Times, in early October 1994, when he argued that the North ‘was on the verge of economic and political crises that could sweep it from power’ and that the USA was being ‘naïve and overly flexible’ in its negotiations with the North.7 Yet, a month later, his government announced a relaxation of restrictions on South Korean companies going to undertake business in the North. This in fact became the pattern for most of the Kim Young-sam administration; a kind of zig-zagging in policy-making, in which domestic political concerns – and public mood swings – became paramount. The result was the impression that ‘the government vacillated between cooperation and hostility’.8 When Kim Il-sung died, the Kim administration pointedly did not offer condolences (though the Americans did) and showed no enthusiasm for a summit-level meeting with Kim Jong-il, but found itself with little option but to support the US–North Korean framework agreement and to agree to bear most of the costs under the KEDO programme. The Kim administration looked desperately for a silver lining – at least the KEDO programme might be a way of opening up the North – but the negotiations over supplementary agreements to implement the 1994 framework agreement were protracted.9 The North turned its back on the South, while trying to maintain a form of dialogue with the USA. To counter this tendency, US president Bill Clinton and Kim Young-sam, at their April 1996 summit meeting, invited North Korea to join with China and their two countries in unprecedented four-power talks.10 North Korea stalled, but finally agreed to participate; the first four-power meeting (or fourparty peace talks as some sources described them) finally took place in December 1997. As the economic crisis began to emerge in the South during 1997, Kim Young-sam no doubt would have liked to achieve some form of breakthrough with the North in order to end his presidency on a

94 Korea after the crash high note, but the North was not willing to play ball, preferring no doubt to wait and see who emerged as the new president rather than deal with the lame duck Kim Young-sam. Even the four-power talks produced little more than agreement to meet again. Kim Young-sam’s policies towards the North therefore ended in frustration with very limited progress achieved.

Sunshine policy The term ‘sunshine policy’ originated from the Aesop fable in which the sun and wind compete to see which can make a traveller take off his coat; with its warm rays the sun naturally wins. Adapting this analogy to his policy towards North Korea, Kim Dae-jung argued that by providing economic and other benefits to the North it could be induced to change its anti-open door and anti-reform policies and generally become a ‘nicer’ place because it would recognize that the South was acting out of goodwill and not out of a desire to overthrow it. This policy was not something conceived on the eve of achieving power, but had in fact been mentioned publicly by Kim several years before.11 The foundation of Kim’s policy towards the North was not just to adopt this more conciliatory attitude but also to carry it out consistently, even though it came under criticism domestically or appeared ineffective in preventing North Korean transgressions. Kim Dae-jung followed up his inaugural speech calling for reconciliation by outlining his ‘three principles’ for policy towards North Korea. First, in order to show that he was not ‘going soft’ on the North, he made it clear that ‘no armed provocation by North Korea will be tolerated’. Second, to try to alleviate the North’s fears, he stated that ‘a takeover or absorption of North Korea will not be attempted’. Third, in order to reduce hostility and promote understanding, he argued that ‘reconciliation and cooperation will be expanded’; in particular he advocated going back to the 1991 North–South agreement and reactivating it.12 In terms of strategy, Kim Dae-jung made it clear that he wanted to separate business from politics and, at the end of April 1998, the government announced a series of measures to make it easier for South Korean businessmen to do business with the North. It abolished most restrictions on visits to the North by businessmen, expanded the list of goods allowed to be traded, lifted the ban on moving production facilities to the North and repealed the ceiling limit on investment in the North.13 Kim also tried to encourage cultural and humanitarian contacts with the North. Although, in parallel with these initiatives, Kim tried to re-open the inter-governmental dialogue, the implication of his strong emphasis on private sector contacts was that they ‘would be encouraged regardless of what occurred in the governmental track’.14 As Kim was to find out, even though the improved business contacts were by no means easy to achieve,

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getting the inter-governmental dialogue re-started was to prove even more frustrating.

Hyundai’s hopes One of the ironies of Kim Dae-jung’s attempts to bring the chaebols under control (discussed in Chapter 5), was that one of the largest chaebols, Hyundai, was to become one of the key instruments of his own ‘sunshine policy’. Hyundai’s past development and direction had owed much to the efforts of its energetic and often controversial founder Chung Ju-yung. Born in Kangwon province in North Korea, Chung in later life admitted that he felt a personal debt to the North in the sense that as a young man he had stolen his parents’ cattle from their farm and used the proceeds to flee southwards and set up his first business, which in due course expanded into the massive Hyundai group. He was the chairman of the Hyundai group from 1971 to 1987, after which he became the honorary chairman; even though first his younger brother and then his sons took over much of the day-to-day business, he remained actively involved in the major decision-making. As a businessman he enjoyed considerable success, but his first venture directly into the political world, in 1992, when he founded a political party, won election to the National Assembly and achieved a poor third place in the presidential elections of that year, was short-lived and not long-lasting in its impact.15 He went back to business, but suffered under Kim Young-sam’s anti-corruption campaign through being implicated in Roh’s slush funds. The advent of Kim Dae-jung, however, presented new opportunities for him and his group. In advancing a number of initiatives to utilize the newly found freedom in contacts with the North under the ‘sunshine policy’, Chung seems to have had three objectives. One was a purely commercial interest, a belief that the potentiality of cooperation with the North could help to revive the fortunes of the Hyundai group, which, like the other Korean companies, was suffering under the financial crisis. A second one can be described as strategic in the sense that he no doubt hoped that by so closely cooperating with the Kim administration’s policy moves on North Korea his chaebol might be spared some of the harsh restrictions and tight deadlines imposed on other chaebols under the restructuring programme. Finally, he hoped to settle his own conscience about the North. Chung was not one to go for half measures. On the morning of 16 June he became the first civilian to cross the DMZ at Panmunjom since the end of the Korean War. A few moments later a fleet of fifty trucks carrying a total of 500 head of cattle began crossing over. He met senior North Korean officials (though, to his disappointment, not Kim Jong-il) and concluded a number of agreements for tourist development in the Mt Kumgang area near to the eastern sea coast, and for projects such as a car

96 Korea after the crash manufacturing plant, ship scrapping, oil exploration and telecommunications development.16 Further talks on the implementation of these projects were not helped by the discovery of a North Korean spy submarine off the east coast of South Korea a week later, and by the North Korean launch of a missile at the end of August. However, another delivery of 500 cattle and another visit to Pyongyang by Chung in October, when he did finally manage to meet Kim Jong-il, put the tourism project back on course. Finally, after several technical delays, the first project began in midNovember 1998 when a cruise ship carried just over 1,400 South Korean tourists to the small North Korean harbour of Chanjon, from where the tourists went to visit Mt Kumgang. Although a few South Koreans, apparently journalists and government officials who were accused of holding ‘unfavourable attitudes’, were rejected by the North Korean authorities, a second cruise trip followed soon after, before the winter weather curtailed operations. The tourists were kept in carefully controlled groups and were allowed no real contact with ‘ordinary’ North Koreans, but, nonetheless, their visits did represent a notable step forward in contacts with the North.17 They also proved financially beneficial to the North, which is expected to receive around US $940 million by 2005 in return, but these payments are yet another financial drain on the Hyundai group. Although there was a hiccup in June 1999, when one female South Korean tourist was arrested and held for several days by the North Koreans on the grounds of being a spy, a charge which she vehemently denied, the tourist visits continued at regular intervals during 1999. By early April 2000, a total of around 210,000 South Koreans had visited Mt Kumgang.18 More purely commercial contacts between North and South have proved less successful. Undoubtedly jealous of Hyundai’s inside track, a number of other chaebols also tried to initiate projects with the North. But, although some agreements were made on processing goods manufacturing, primarily textiles, food and footwear, both Hyundai and its rivals have had mixed results in the implementation of these projects. Hyundai has been upset that the large-scale export zone which it planned to build in the North close to the DMZ and southern ports has been switched, at North Korean insistence, to a more remote area close to the North’s border with China. North–South trade remains low-level, having fluctuated between $200 and $300 million per year since 1994. After dropping down in 1998, undoubtedly in part due to the financial difficulties that South Korean companies were suffering from, it rose again in 1999 to $333 million, although that total includes components and supplies being provided to the KEDO project. Whereas these amounts are important for the North, making the South its third largest trading partner after China and Japan, they represent about 0.1 per cent of South Korea’s total international trade. Nonetheless, however low-key such trade and economic cooperation might be initially, to Kim Dae-jung the prospect that

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expanding business with the North could act as yet another means for South Korea to escape from its economic problems was undoubtedly a factor in his thinking.

The North’s diplomatic offensive Kim Jong-il had inherited from his father a state that was diplomatically isolated, with few friends except for China and even relations with Beijing were not as cordial as they had been in the past. It was also a state in a serious economic condition. As the economic situation continued to deteriorate in the second half of the 1990s, the North had begun to employ the ‘food card’ as judiciously and as effectively as it had used the ‘nuclear card’ in the early 1990s. The North’s centrally planned economic system, which proved beneficial in the early decades of post-Korean War development, has become afflicted by structural rigidities which prevent it from adapting to changes in the global economy and to the collapse of its important trading partner and significant aid supplier – the Soviet Union. Despite its much-vaunted self-sufficiency (juche), North Korea has long needed external sources of oil, but these supplies became more uncertain (even from China) during the first half of the 1990s. Additionally, crop failures caused by structural inefficiencies in the agricultural system, compounded by natural disasters,19 resulted in the North becoming heavily dependent on food aid from outside. Given the shortfalls in the annual harvests from the early 1990s and the limitations on Chinese food supplies, by the mid-1990s the North had no option but to call for assistance from international food agencies and nongovernmental organizations. According to information that these agencies have been able to obtain, in part from their own on-the-ground activities inside North Korea, it is clear that the domestic food production situation has continued to prove dire and that some parts of the country are suffering from malnutrition and possibly even famine. External estimates of those who have died due to starvation vary from 200,000 to 2 million, but international aid agencies do have clear evidence of child malnutrition.20 Nonetheless, during the late 1990s the North proved adroit at bargaining for some food aid by promising to adhere to various agreements on nuclear/military matters and by carefully projecting its appeals for humanitarian assistance by stressing natural disasters. However, although external aid undoubtedly helped prevent the food supply system from collapsing completely, it did not bring any real diplomatic advantage to the North. Therefore, in late 1999 the North adopted a new strategy, which might be described as a ‘diplomatic offensive’ or the ‘recognition card’. It decided to capitalize on the conclusion of a wideranging review of US policy – and, by extension, Japanese and South Korean policies – towards the North which had been conducted by

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William Perry, the former US defence secretary. Perry’s report in October 1999 proposed a step-by-step process of engagement and reconciliation.21 As far as can be determined from those parts of the Perry Report which have been made public (part has been kept classified), the first stage would involve North Korea stopping all missile test-firings while the USA would relax its economic sanctions; in practice this had been agreed and implemented a month before the publication of the Perry Report. The second, mid-term stage envisaged the North forswearing the development of all weapons of mass destruction in return for economic assistance, and suspension of all remaining US sanctions. The final stage would involve conventional weapon disarmament negotiations and the creation of a genuine peace regime on the peninsula. During the six months following the Perry Report’s publication, therefore, North Korea continued intermittent discussions with the USA, re-started normalization negotiations with Japan for the first time for seven years, signed a new friendship treaty with Russia, sent its foreign minister to China, negotiated diplomatic recognition from Italy (the first of the original Group of Seven powers to so do) and began low-level dialogues with several other European, Australasian and South-East Asian states. Finally, early in April 2000, it agreed to host the inter-Korean summit. The individual dynamics of the relationships with the USA, Japan, Russia and China will be discussed in more detail hereafter, but it is necessary to consider here the underpinnings of this change of strategy by North Korea. The economic situation of the North can be considered to be the major factor prompting the North’s moves to improve relations with various external powers. Despite the international food aid that probably helped to avert mass starvation in 1998 and 1999, the continued deprivation and the running down of the economy began to make a real impact on everyday life. There is no solid evidence of unrest, but the leadership certainly was well aware of the deprivations of the general population. For example, the January 2000 New Year’s Day joint editorial of the three major party and military newspapers admitted that ‘economic conditions remain difficult’ and advocated ‘radical improvements’ in agricultural methods, light industry and the power and coal-mining sectors.22 In February 2000 the official news agency, KCNA, was more blunt about the impact of difficulties with energy supplies: ‘never before in the history of Korea has there been such a power shortage as today … this is adversely affecting overall economic life’.23 In terms of obtaining necessary food aid, the North’s new strategy implied moving away from utilizing international aid agencies, who intrusively demanded access to the worst-affected parts of the country, to instead seeking government-to-government economic assistance, which might be obtainable with less stringent monitoring requirements. By appearing to act as a more ‘normal’ state willing to engage in responsible diplomatic dialogue, the North expected to be able

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to induce policy change amongst its external interlocutors. But this does not mean that the North has changed its fundamental belief in protecting its own system from debilitating external influence.

Three and a half powers The most important external power is a country that had barely been involved in Korean affairs at all until the end of the Second World War, the USA. A close ally of the South, with 37,000 of its troops still located on South Korean soil, the USA had virtually no contact at all with the North until the nuclear crisis of the early 1990s. From the US perspective, North Korea has been a ‘terrorist’ regime which not only has threatened South Korea directly and Japan indirectly, but, through its missile and suspected nuclear weapons programmes, has also undermined US weapons nonproliferation objectives on a global scale. From the North’s viewpoint, the USA is of course the sole superpower, whose influence over the South is pervasive and whose armed forces, still deployed on South Korean soil, represent a major obstacle to reunification; for these reasons the USA has become the external power with which the North most wants to interact.24 Since the time of the nuclear crisis, however, the USA has found itself heavily involved in a series of negotiations with the North, over the 1994 framework agreement and its implementation, over other aspects of the North’s nuclear programme, over missile development and export, and over missing-in-action soldiers from the Korean War era. These talks have had a pronounced on-off character, with the North bargaining for food aid and for more formalized diplomatic links in return for allowing inspections of specific facilities (such as a large underground construction site at Kumchang-ri, which US inspectors visited in May 1999) or freezing its missile programme.25 Progress has been tortuous. Paradoxically, if food aid and energy-related supplies through KEDO are considered, the USA’s largest aid programme to an Asian country is in fact to the only one with which it has no diplomatic relations, North Korea. China had of course developed close ties with its communist neighbour, North Korea, from the time that it intervened to save it during the Korean War. However, interested in maintaining a peaceful balance on the peninsula and increasingly benefiting from its expanding economic links with the South, China switched in the early 1990s from strong ideological support for the North to a more balanced approach, recognizing the reality of the two Koreas.26 While steadily building up its economic ties with the South during the second half of the 1990s, China tried to encourage the North to adopt the Chinese model of economic reform as a means of resuscitating its economy. Although it reduced grain and oil supplies to the North because of its own internal needs, China remained prepared, when it came to the crunch, to provide food aid when it felt that that was unavoidable in order to prevent a complete economic collapse in

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the North. Hungry refugees began to escape across the border into China, raising the prospect of extremely destabilizing outflows should the food situation inside the North deteriorate even further. South Korea, in the meantime, has become a major economic partner for China, with bilateral flows of trade, technology and investment that dwarf Sino–North Korean economic links.27 There were also subtle but nonetheless unmistakable signs in the mid- to late 1990s of China tilting politically slightly more in the South Korean direction, with regular exchanges of senior politicians, including presidents and prime ministers, and even visits by senior military officials. Moreover, the Chinese were certainly unhappy with the North Korean missile test in August 1998 of a new Taepodong missile which flew over Japanese territory and landed in the Japan Sea. The net result was to galvanize the Japanese, who had previously been undecided, into joining the US-led theatre missile defence (TMD) programme,28 and to raise the prospect that a successfully developed TMD programme might ultimately be expanded to include Taiwan as well. The Chinese subsequently proved more receptive to South Korean requests for them to do more to halt the North’s missile programme. However, by mid-1999, it seems that the North was becoming increasingly aware that there was little to be gained from antagonizing the Chinese any further, especially when it still needed Chinese food aid so badly. At the same time, the Chinese were probably calculating that they could not afford to lose all influence in the North and that it might be time to make a gesture or two in its direction; the Chinese also saw the utility of a more proactive approach to Korean affairs as a bargaining chip in the far more important but invariably fluctuating Sino–American relationship. Both sides therefore edged towards improving their relations. In June 1999 Kim Yong-nam, the ‘number two’ in the North by virtue of his position as president of the Supreme People’s Assembly presidium, led a large delegation to Beijing and received 150,000 tonnes of food aid for his pains, but also a lecture about the urgency of economic development.29 Rumours began to circulate about a long-awaited visit to China by Kim Jong-il sometime in the year 2000 and, in early March 2000, Kim made the symbolic gesture of appearing at a Chinese Embassy reception in Pyongyang, something he had never previously done. Visits by the respective foreign ministers were exchanged, in October 1999 and March 2000, and, to the chagrin of the South, in January 2000 China handed back to the North a group of refugees who had fled from the North into Russia from where they had been deported to China.30 Sino–North Korean relations were still far from being back to the friendlier mood of the Kim Il-sung era, but at least this series of moves represented a degree of improvement from which the North could draw solace. As will be discussed later in this chapter, however, the most dramatic step was Kim Jong-il’s ‘secret’ visit to Beijing in May. For both the Japanese and the Koreans, whether living in the North or

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the South, the past has a strong influence on how the present is perceived. Memories of the harsh Japanese colonial period act as an emotional backdrop to Japan’s involvement in contemporary Korean affairs. It took twenty years after the end of the Second World War for Japan to establish diplomatic relations with South Korea and it still has not recognized the North.31 Deep economic links have been established between Japan and South Korea, but issues such as trade imbalances, tariffs and market access restrictions, aid and technology transfer have often become politicized. Anxieties about Japan’s future military role and its tentative links with the North have often made the South Koreans feel disgruntled and suspicious. Even under Japan’s well-known policy of separating politics from economics, it has had little success in developing any kind of relationship with the North. Although some politicians friendly to the North – usually from the opposition Japan Socialist Party (JSP) but also including a few from the ruling Liberal Democratic Party (LDP) – tried to act as a pipeline between Japan and North Korea, the results were not substantial and often served only to exacerbate Japan–South Korea tensions.32 However, the Kim Dae-jung administration has altered the dynamics of the Japan–South Korea relationship in two ways. First, he has translated some of the oft-repeated rhetoric of improving the bilateral relationship into reality. By progressively lifting the bans on many items of Japanese popular culture and also on certain Japanese manufactured goods, as well as by using the opportunity of his visit to Japan in October 1998 to show a willingness to put aside the habit of continually referring to the legacies of the past and to think more about the future potentialities, Kim has adopted a more positive view of Japan than many of his immediate predecessors. His approach was reciprocated by the Japanese, who proved willing to give him a form of written apology on his visit, a concession which was not accorded to the more abrasive Chinese president Jiang Zemin on his visit to Japan one month later.33 Second, as a logical extension of his ‘sunshine policy’, Kim has not only expressed no reservations about Japan developing closer links with North Korea but has even positively welcomed such a tendency. President Roh, back in July 1988, had announced a policy in which he expressed support for any improvement in the North’s relations with countries friendly to the South,34 but in practice the South Koreans had continued to watch with extreme caution any Japanese moves in the North’s direction. Kim adopted a much more relaxed approach. Not that there was much change immediately after Kim took up office. Japan–North Korean normalization negotiations, which had begun in 1990, had been on hold since 1992 as a result of disputes over a number of issues, including the fate of a dozen or so Japanese who, according to the Japanese police, had been abducted by the North’s agents.35 Official Japanese views only hardened as a result of the missile test in August 1998, when a North Korean missile flew over Japanese territory and landed in the Pacific, and the brief incursion of some North

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Korean spy ships into Japanese territorial waters in March 1999, during which Japanese coastguard ships for the first time in the post-war era had to open fire.36 In fact, while Perry was trying to coordinate relations between the USA, South Korea and Japan in the months before completing his report, it was invariably the Japanese who adopted the most hardnosed approach. However, the North Korean commitment to suspend missile test launches as part of the Perry initiative gave some room for manoeuvre. After several postponements, in December 1999 former JSP prime minister Murayama Tomiichi led an all-party delegation to the North, the Red Cross associations of both sides began to meet and, finally, after Japan had agreed to drop sanctions and resume food aid and the North had agreed to at least search for any possible Japanese ‘abductees’, full-blown governmental-level negotiations began in early April 2000, the first time for more than seven years. That leaves the one major power that has lost its status, or at least a large part of it, in Korean affairs. The Soviet Union used to be a strong ally of the North, but after 1991 the new Russia’s political and economic links with the North all but disappeared.37 In the late 1990s, Russia, which resented being counted out as a player on the Korean peninsula and excluded from arrangements such as the four-power talks, began to reactivate some of its old links with the North. In February 2000, a revised version of the old, lapsed Soviet–North Korean friendship treaty, minus the obligation for military support, was signed when the Russian foreign minister, Igor Ivanov, visited Pyongyang, the first such visit for a decade. Although both sides found common ground in criticizing the USled TMD programme, this revised treaty does not presage either a return to a close alliance or a revival of the old pre-1991 Sino–Soviet rivalry for influence in the North. It is doubtful whether the North has any real expectation of extensive Russian assistance and it has been happy enough just to register another diplomatic credit. The economically straitened Russia may have difficulties repaying its debts to the South (mainly for loans extended at the time of mutual recognition in 1990), but it appreciates which of the two Koreas is the one it is most important to court.38 Russian moves towards the North appear to have more to with salvaging wounded pride and are unlikely to be expanded to the extent that they would damage the far more important commercial and technological links developed with the South. Although Kim Dae-jung has been more sensitive than his predecessor to Russian concerns, and indeed did visit Russia in May 1999, the South, like the North, shows little sign that it considers the new Russia to have regained its past status as a major player on the Korean peninsula.

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The road to the summit The North’s diplomatic offensive seemed to exclude the South. During 1999 Kim Dae-jung had found it a frustrating experience trying to get an official dialogue going. In February 1999 the North had proposed that ‘high-level political talks’ be reconvened, but laid down preconditions, such as abolition of the South’s National Security Law, which meant that the preliminary negotiations barely started. Eventually, in June viceministerial level talks were held, with the South’s intention being to bargain an exchange of visits for separated families against supplies of fertilizer to the North. The talks stalled in the aftermath of a naval clash in the Yellow Sea, below what the United Nations Command and the South Koreans call the Northern Limit Line (NLL) – an extension out to sea of the land demarcation border. Whether desperately seeking crabs and fish or deliberately designed to test the limits of South Korean patience, the North’s fishing boats, accompanied by small naval craft, crossed the NLL. When the South’s navy tried to push them back, one northern torpedo boat was sunk in the confrontation. This incident marked the worst naval conflict since the Korean War.39 Kim warned that his policy of engagement did not include tolerance of aggressive behaviour, but the net result was to scupper any tentative hopes of North–South talks. It was at times such as the June 1999 naval clashes that Kim Dae-jung found his policy towards the North coming under domestic criticism not just from the opposition party, the GNP, but even from members of his own coalition partners, the ULD. In private Kim Jong-pil voiced his concerns to Kim Dae-jung, although in public he was always careful not to show outright dissent from the ‘sunshine policy’, emphasizing only that it was necessary to be prepared for any eventuality. However, other senior ULD members were less restrained. One ULD senior policy-maker, Chung Woo-taik, for example, bluntly stated that he disagreed with certain aspects of the ‘sunshine policy’: ‘I have the feeling that the more we give, the less we get or the less the North Koreans are willing to talk.’40 While the criticisms of Kim Jong-pil and the ULD did not deter Kim Dae-jung from his policy, they did provide yet another issue on which he and his NCNP colleagues had to spend time massaging ULD egos in order to keep the coalition together during 1998–99. The year 2000, however, was to bring dramatic change to North–South relations. Three days before the National Assembly elections in April the Kim Dae-jung administration surprised the South Korean public by announcing that agreement had been reached by emissaries from both sides on a historic North–South summit meeting to be held in Pyongyang on 12–14 June 2000. Although a very select few knew that some behindthe-scenes contacts had been taking place in China and elsewhere over the previous months, the announcement came as a shock to most Koreans. Well aware that constitutionally he would have to call elections in April 2000 (and no doubt expecting the opposition to raise the lack of achievement

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on the ‘sunshine policy’ as an election issue), and also noting the North Korean attempts to improve relations with a range of countries in the postPerry Report period, Kim Dae-jung had evidently decided to raise the tempo of his efforts for possible North–South dialogue in the early months of the year 2000. When he launched the MDP in January 2000, Kim had indeed spoken of his desire to realize a summit meeting after the April elections.41 This was amplified into the idea of creating a North–South ‘economic community’. Koreans inevitably have taken and continue to take a special interest in the case of German reunification, the dynamics behind its achievement and its results. Kim Dae-jung’s tour of Western Europe in early March 2000, therefore, took on special symbolic significance when he visited the refurbished and re-designated German capital city of Berlin. In a major speech there on 9 March, he reiterated his willingness to enter into government-to-government dialogue and spoke in more detail about his desire to help the North’s economic reconstruction through collaborating in social infrastructure projects and agricultural reform.42 Although the North Korean media criticized his speech as containing nothing new, its government made contact with the South through Panmunjom and secret North–South talks actually began a week later in Shanghai.43 Culture and tourism minister Park Jie-won was the South’s special envoy; Song Ho-gyong, the vice-chairman of the AsiaPacific Peace Committee, represented the North. Using various spurious reasons to explain his repeated absence from his usual office, Park travelled secretly three times to China, before agreement was finally reached at a meeting in a Beijing hotel on 8 April. Apart from the designation of 12–14 June as the dates for Kim Daejung to visit Pyongyang, the text of the agreement included only one important article, namely that the discussions would be based on the three principles of the July 1972 North–South joint communiqué, that is, selfreliance, peace and grand national unity. By reverting to this declaration, rather than the 1991 joint declaration, the South was making a marginal concession to the North’s position. The texts, announced the same day, 10 April, by both North and South, contained only one significant difference in language. The South Korean version stated that Kim had been invited to Pyongyang by the National Defence Commission Chairman Kim Jong-il (technically there is no ‘president’ in North Korea, as, since the constitutional revision of September 1998, the dead Kim Il-sung has occupied the post of ‘state president in perpetuity’), whereas the North’s version states that the summit was taking place at the ‘request’ of Kim Dae-jung. Asked about this difference in wording, the chief negotiator Park said that the two versions were in line with precedents of ‘mutual convenience’.44 According to Russian sources, who had had contact with the North Koreans, the South had first proposed a neutral place for meeting, such as Panmunjom or a third country such as China, but the North Koreans, no

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doubt keen to draw on the symbolism of being the host and also wishing to control arrangements, insisted on Pyongyang.45 While not explicitly covered by the agreement, Kim Dae-jung did agree that South Korea would provide some food aid prior to the summit as a gesture of goodwill. The shipping of 200,000 tons of fertilizer and food aid began in May 2000. Domestic critics claimed that money was also changing hands, but no concrete evidence has yet appeared to support these allegations.46 Why was Kim Dae-jung so intent on a summit meeting? First, and most importantly, was the desire to ensure credibility and kudos for his ‘sunshine policy’. After a frustrating two years, a summit would be taken as a sign of real progress. While the conclusion of the agreement depended equally on the North’s own willingness, the timing of its public announcement clearly had much to do with the election campaign. Recalling the manner in which the North Korean-related ‘North Wind incident’ had been introduced during the 1997 presidential election campaign to the detriment of Kim Dae-jung, an MDP official was quick to express the belief that this announcement would work to his party’s advantage, especially in picking up votes in those provinces where many people originally from the northern part of the peninsula had settled.47 The opposition inevitably denounced the move as an election ploy. Yet, as discussed in Chapter 4, primarily because of the strong influence of entrenched regional voting loyalties, in fact the announcement did not make as significant an electoral impact as Kim had evidently hoped. In addition, two other factors were probably at play in Kim’s mind. One was that since the coalition with the ULD had effectively broken down anyway, even though the ULD still supplied the prime minister, there was little to be lost by taking this step which was out of tune with the ULD’s far more suspicious attitude towards the North. The ULD’s leader Kim Jong-pil, reflecting his conservative views and his former intelligence background, had always been reluctant to endorse fully Kim’s ‘sunshine policy’, even from the early days of their coalition government, and it came as little surprise when ULD officials joined the GNP in questioning the possibility of financial back-handers to ensure the summit agreement.48 The other factor was that the visible signs of economic recovery were easing, at least to a certain degree, Kim Dae-jung’s concerns about domestic economic restructuring and this enabled him to have both the time to devote to his policy towards the North in a more focused manner and, potentially, the financial resources which might need to be made available to promote economic cooperation with the North. If domestic, in particular electoral, dynamics were the key determining factor on the southern side, what was motivating the northern side to agree? Both internal and international factors could have been at work. First, the state of the North Korean economy and the shortage of food. By the end of the hard Korean winter, North Korean food supplies would

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have been dwindling and, with the degree of ‘aid fatigue’ amongst international donors mounting, and even the withdrawal of some international aid agencies, the North almost certainly had a significant shortfall which needed urgent replenishment.49 Second, the North may have calculated that the South might be the only place willing to provide that aid promptly, since neither the USA nor Japan seemed eager enough. Negotiations with the USA had become difficult during the early months of 2000 over the terms for the visit by a senior North Korean official to the USA, with the US side refusing to accede to the demand that North Korea be removed from the US list of ‘terrorist’ states. In fact, after the announcement of the summit, US–North Korean relations if anything became even more difficult, with the US side hinting that sanctions, softened the previous autumn, might have to be reinstated after evidence of renewed missile exports to Iran were discovered; and, on 1 May, the annual State Department report on global terrorism again listed the North as a terrorist state.50 The presidential election looming in the USA was likely to distract interest from Korean affairs and even President Clinton, no doubt on the look-out for some diplomatic triumphs to cement his place in history, was showing far more interest in Middle Eastern affairs. So the prospects of an early breakthrough in US–North Korean relations appeared increasingly dim. The first round of Foreign Ministry official talks with the Japanese in early April in Pyongyang also suggested that Japan would not be an easy touch, with again the prospect of protracted negotiations before any agreement that might bring economic aid to the North. The North pushed for settling the legacies of the past (a shorthand for financial compensation) and establishment of diplomatic relations within the year, but the Japanese wanted to deal with outstanding issues such as the kidnappings and missile development prior to establishing relations. The negotiators barely went beyond agreeing to meet again at the end of May in Tokyo;51 this meeting was subsequently to be postponed until after the Pyongyang summit. Neither had any of the other countries with which the North had begun talks showed any particular inclination to be generous aid providers. For example, although the Italian Foreign Minister, Lamberto Dini, visited Pyongyang in late March to celebrate the establishment of diplomatic relations, he had concentrated on trying to encourage the North Koreans to open up and reform their economy.52 Apart from an agreement to continue limited humanitarian aid, he brought virtually nothing with him as a ‘gift’ to the North Koreans. Given the conciliatory tone of Kim Dae-jung’s Berlin declaration, well aware of his domestic political needs and knowing that the fast recovery in the South’s economy during 1999 from the depths of the financial crisis made giving aid more feasible, the North calculated that a deal could best be done with the South. This represents a tactical rather than a strategic change.

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Calls for a summit or high-level meetings have long been part of the Korean scene, acting, at least up until the 1990s, as yet another example of the propensity of both Koreas to indulge in making proposals that they knew the other side would reject. Only once before had there been any real prospect of actually holding a summit meeting. In 1994, as part of his efforts to broker a solution to the nuclear weapons crisis, former US president Jimmy Carter secured agreement for a North–South summit to be held in Pyongyang in July that year. However, before the preparations could be finalized, Kim Il-sung died – and with him died any immediate prospect of a summit.53 The history of North–South relations is littered with the debris of proposed meetings which were aborted because of bickering over apparently minor logistical and procedural details. The run-up period to the June 2000 summit also contained a series of complicated preliminary negotiations at the working level over the logistical and security arrangements, as well as over issues such as titles to be used and the type of communiqué or final statement to be issued. How were the external powers involved in this summit proposal? All the four major powers have given broadly welcoming comments to the proposed summit. China would have exerted some influence, no doubt during the heightened Sino–North Korean contacts in the early months of 2000, to persuade the North to accept the South’s proposal, and, of course, it acted as the site for the secret contacts prior to the April agreement. Nonetheless, as Kim Dae-jung explained to his cabinet immediately after the announcement, while external partners had been helpful, the aspect which gave him the greatest pride was that the summit agreement ‘was achieved independently by ourselves’, the Koreans.54 In this respect, Kim was harking back to the traditional Korean view that unification was a matter for Koreans themselves to solve. Significantly, the two previous breakthroughs in North–South relations in 1972 and 1991 had occurred when the two sides felt that they should try to regain the initiative at a time when international relations were in a state of flux and their own fate looked likely to be discussed and determined by external powers. On this occasion, however, there has been no major international shift to parallel the Sino–American rapprochement or the end of the Cold War, which respectively were in the background of two earlier North–South agreements. Precisely because this time, externally, there is a lack of such an obvious mood of flux, the situation augers well for a inter-Korean dialogue where neither side is busy looking over its shoulder at what is happening amongst the major powers. Nonetheless, both sides looked to boost their diplomatic positions prior to the actual summit by demonstrating their close links with their traditional supporters. The first surprise was Kim Jong-il’s three-day visit to Beijing at the end of May, when he met all the senior Chinese leaders including President Jiang. Apart from expressing their support for the summit initiative and giving him the almost obligatory food aid hand-out,

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the Chinese did also try to get across the message, which they had tried to pass on several times in the past to North Korean representatives, that it was possible to open up the economy without necessarily disturbing political order; Kim was taken to see the Legend company’s computer factory as an example of what the future might hold if the North could embrace some liberalizing tendencies.55 Then, Kim Dae-jung found that he was able to take advantage of the state memorial service for former Japanese prime minister Obuchi the following week, to making a flying visit to Tokyo, where he was able to arrange bilateral meetings with both the new Japanese Prime Minister Mori Yoshiro and with US President Clinton, who was also attending the memorial.56 Finally, Kim Jong-il tried to trump that by announcing that Vladimir Putin, the new Russian president, had agreed to visit Pyongyang in July on his way from Beijing to Japan for the G-8 Economic Summit; this would be the first visit to Pyongyang by a Russian president, and, indeed, none of his Soviet predecessors had been either.57

Summit euphoria The month of May saw intensive exchanges between officials of the two Koreas on issues of protocol, security, communications, media coverage and size of delegations. It was agreed that, to avoid unnecessary friction, national flags, national anthems and national markings would not be used.58 Neither would Kim Dae-jung be asked to pay homage to the giant statue of Kim Il-sung in the centre of Pyongyang, to which foreign visitors are invariably taken. The North Koreans asked for one day’s delay in Kim Dae-jung’s arrival in Pyongyang, citing logistical and security concerns, but probably more due to a desire to psychologically unbalance the South’s side, who briefly wondered whether the summit would indeed be aborted at the last moment. Finally, on the morning of Tuesday 13 June Kim Dae-jung flew into Pyongyang’s Sunan airport, to find himself, unexpectedly, being greeted on the tarmac by Kim Jong-il himself. Although they talked together for only 27 minutes on that first day and Kim Jong-il did not attend that evening’s banquet, they had a much longer negotiating session on the second afternoon, after a morning session involving Kim Dae-jung and Kim Yong-nam, the ceremonial head of state. At the end of the day the two leaders signed the five-point Joint Declaration. Kim Jong-il accompanied Kim Dae-jung back to the airport the following day and they embraced each other before parting.59 The full text of the Joint Declaration is included in Appendix II, but the key points covered the reuniting of families split by the Korean War, economic cooperation, the promotion of social-cultural exchanges, and even inter-governmental discussions on reunification. Without fixing a date, Kim Jong-il agreed to visit Seoul. It was a good summit for Kim

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Dae-jung, who could convincingly argue that his policy was paying off, since there now seemed real prospects of dialogue and progress towards reconciliation, but undoubtedly it was an even better summit for Kim Jong-il. The northern Kim made his first real appearances before South Korean and by extension the international media; this enabled him, as he joked with Kim Dae-jung, to be ‘helped … out of seclusion’. As the host and therefore able to run the show and the agenda to his satisfaction, Kim Jong-il appeared confident, relaxed and articulate.60 At his main negotiating session with Kim Dae-jung, he had shown a good grasp of detail and argument. The successful summit meeting was inevitably greeted with euphoria in the South,61 but the record of past North–South interactions means that caution in interpreting the results is required. This is actually the third ‘breakthrough’ in North–South relations, following the 1972 and 1991 agreements, neither of which were implemented; follow-up discussions had broken down in acrimony within a year or so in both cases. This time, however, the Joint Declaration has been signed by both leaders, so there is much more political credibility on the line. Nonetheless, the declaration is much vaguer than the more detailed 1991 accords and so there could be scope for differing interpretations in the subsequent follow-up talks. Moreover, although sensitive issues such as the presence of US troops in South Korea, the North Korean nuclear and missile development programmes, and even the creation of a new peace mechanism on the peninsula were raised in the talks, there was not sufficient meeting of minds for them to be included in the text. They will remain issues which will be difficult to resolve, as indeed will the differences in approach to the conceptualization of the reunification process, despite the efforts in the Joint Declaration to search for common ground. How will the summit impact on the two Koreas’ international relationships? From the North’s perspective, by participating in the summit – and in North–South dialogue – it has gained further credibility in the international community and so it encourages other states around the world also to develop better relations with it. The USA soon followed up by lifting certain sanctions on economic intercourse with the North and dropping the category of ‘rogue state’ to describe regimes such as North Korea. In certain specific cases, the North will probably try to use the South’s agreement to give food aid and economic cooperation as leverage to obtain similar benefits in other negotiations. For example, Japanese Foreign Ministry officials are already concerned that one effect of the North–South deal would be to tempt the North to ask for greater amounts of compensation during its continuing normalization negotiations with Japan. Given that the South already has diplomatic relations with all the major states in the world and is involved in major international organizations, it has gained little additional diplomatic advantage from this summit. Nonetheless, indirectly it can help to enhance the international image of

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the South, which suffered from such a battering due to its spectacular economic collapse in 1997. Needless to say, it has also done no harm to Kim Dae-jung’s personal image overseas as a doughty fighter for democracy and now for peace. In the short run, the relationships between the two Koreas and the four interested powers will not change substantially. More positive will be the impact on the North’s relations with other countries around the world and on its attempts to join regional bodies such as the ASEAN Regional Forum (this was agreed by ARF members soon afterwards and North Korea did attend the July 2000 meeting). In the medium term, however, the US and Japanese governments would certainly move to normalize relations with the North; these steps will not come immediately, but they would certainly come sooner if the North–South dialogue continues after the June summit. Despite the rhetoric which is already beginning to be employed, this summit will not result in early reunification. However, the fact that the two Kims did actually meet was significant in itself and it was thus a step along the road to reconciliation. Stability on the peninsula is undoubtedly of real importance to the four major external powers and to friends and neighbours in the Asian Pacific region and the wider global system. The process of eventual reunification and the political nature of the united Korea may be more problematic to the external powers, but for the moment they cannot but welcome any signs of a wider opening of the door of the North. Such an opening will slowly and inevitably bring change to that society. By taking the first step, Kim Dae-jung may yet earn his place in history not solely for his lengthy struggle for democracy but also for enabling a ray of sunshine to pierce the clouds that so often cover the peninsula.

7

Korea in the international system

South Korea’s relations with the North and with the key major powers interested in the Korean peninsula represent an important part of the country’s external relations, but they do not cover the complete picture. The competition for political and diplomatic legitimacy carried on between the North and the South during the post-Korean War period found expression in the rivalry to enhance their respective international status, not least through achieving diplomatic recognition and membership of regional and international organizations. Until the early 1970s, the South put ‘little effort’ into developing its linkages with Third World countries,1 but, after abandoning its version of the West German ‘Hallstein doctrine’, the South undoubtedly worked hard at diversifying its links away from solely the USA and Japan, important though those two partners remained. In this endeavour, the growing economic power of South Korea, and the dilution of some of its anti-communist rhetoric outside the immediate confines of policy towards the North, undoubtedly helped. Indeed, in the 1980s ‘economic diplomacy and diplomatic pragmatism’ became the ‘defining characteristics’ of South Korea’s foreign policy and this trend was carried over into the 1990s as increasingly South Korea seemed to be winning the diplomatic struggle with the North.2 In the late 1980s and early 1990s, this pragmatic foreign policy approach began to find expression in two new, but not totally compatible, ways. The first of these was an aspiration to be recognized as an equal of the Western advanced countries, including Japan, and, to use the words of President Roh in his inaugural speech in 1988, no longer to be a ‘peripheral country’, but one which occupies ‘a central position in the international community’.3 Writing in the late 1980s, one Korean scholar felt able to argue that, by contrast with its situation in the 1950s, South Korea had been ‘transformed from being a burden to being a partner of the West’.4 Arguably, by the 1990s some in the West had taken this further, seeing increased Korean export success as implying that, just as Japan had seemed to do a decade or two earlier, South Korea was moving on to a different stage, as a ‘threat’ to the West. The second was to try to play a ‘bridging role’ between developed and developing countries, both in

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international organizations such as the long-running Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations and in setting up its own economic cooperation fund for developing countries. However, the 1990s were to show that the nearer South Korea came to joining the ‘top club’ of the world’s economies, the more difficult it was to fulfil the second role, and, by the time of the Kim Young-sam administration, the rhetoric of the ‘mediating’ or ‘bridging’ role had all but disappeared. Kim instead emphasized the first dimension, advocating that South Korea become ‘a first-rate nation in the coming century’.5 This chapter will examine the impact of the Asian financial crisis on the South’s activities and aspirations in the broader regional and international context, and demonstrate how far the crisis was to affect the capability and willingness of South Korea to be an actor of importance outside the North-East Asian region.

Regional aspirations South Korea’s economic linkages with the Asian Pacific region, particularly the resource-rich countries of South-East Asia, had grown considerably as Korean industrialization had continued apace in the 1980s. Although it had been the principal sponsor of the short-lived anti-communist grouping, the Asia Pacific Council, in the late 1960s, South Korea had played a rather low-key role in the subsequent development of regional cooperation concepts and organizations. A proposal by President Chun, in 1982, for a summit of regional leaders received nothing more than polite but non-committal responses, so South Korea had to content itself with participation in business-related regional organizations, such as the Pacific Basin Economic Council. This relatively passive approach was to change when his visit to Seoul in early 1989 was used by Australian prime minister Bob Hawke as the means to launch his proposal for an Asia Pacific Economic Cooperation (APEC) forum. While drawing on earlier regional initiatives and organizations, APEC marked a qualitative shift in the level of official involvement, as it was intended to be the first regionwide inter-governmental organization. South Korea proved enthusiastic, assisting the Australians in lobbying for its realization and becoming one of the eleven countries to attend the founding ministerial meeting of APEC later that same year. Apart from fitting in with the perceived need gradually to diversify external links while keeping the US connection, according to Chung Lee and Charles Morrison, APEC benefited South Korea in three other ways.6 First, it helped to accord political legitimacy to South Korea. Second, it allowed South Korea to develop ties with China, for South Korean officials adroitly negotiated with the Chinese, Taiwanese and Hong Kong governments to ensure that all three were able to join APEC at the Seoul ministerial meeting in 1991 (South Korea and China finally recognized each other in

Korea in the international system 113 1992). Third, South Korea believed that it could gain bargaining leverage in its negotiations with its larger trading partners through association with other medium-sized or smaller nations. In the early years of APEC’s existence, South Korea found little difficulty in following the general trend, which was for setting up general principles and more talk than action. However, in 1993 APEC entered a second phase in its development; under the impetus of the Americans, who were the lead country that year, the level of governmental representation was raised with the first ever summit meeting of leaders (a practice that has now become the norm) and more concerted efforts were made to transform the organization into a more powerful force for trade and investment liberalization.7 South Korea moved from an attitude of enthusiasm to a more mixed one. The Koreans had little difficulty either with the summit idea, as it gave yet another opportunity for Kim Young-sam to meet foreign leaders or with APEC being utilized as a forum with which to beat the Europeans into coming to a deal on the long-winded Uruguay Round of the GATT talks, but they were less sure of the implications of the full-blooded liberalization targets which were implied by the declarations which came out of the 1994, 1995 and 1996 APEC meetings. Although the APEC vision of trade liberalization fitted in with the gradual trend in that direction which the South Korean economy was taking anyway, South Korea also had special reservations about its highly protected rice market, the peculiar nature of its specific bans on a large number of Japanese products, its general resistance to foreign investment and its fears that its own market might be flooded by lower-cost manufactures from China and South-East Asia.8 However, as was to become clear in the subsequent years, South Korea was not alone in being cautious about embracing the US-style liberalization agenda for APEC; indeed it was far from being the most worried. The APEC liberalization target plans were split into two categories, with the year 2010 as the completion date for advanced countries and 2020 for developing countries. Since South Korea was on the verge of achieving OECD membership, its claims that it should have the later deadline were not convincing and it was placed into the ‘advanced’ category. However, the Asian financial crisis and South Korea’s own particular troubles were to make the Koreans more disillusioned with APEC, in what can be described as the third phase of APEC’s development, a stage in which the organization has seemed to be losing its way. Kim Young-sam had already committed himself to attend the Vancouver APEC meeting in November 1997 when the crisis hit South Korea. Even within his administration, opinions differed about whether he should attend in those circumstances, but he decided to go anyway and use the opportunity to appeal to the member countries for assistance. His appeals, however, largely fell on deaf ears. The other APEC leaders listened sympathetically, but did little else other than offer words of ‘moral support’.9 Kim returned

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home disappointed, faced with no alternative but to do a deal with the IMF. Of course, South Korea’s case was not the only problem for APEC to face in 1997; it proved singularly inept at offering collectively anything much to help other suffering members either.10 Kim Dae-jung subsequently attended the next two summits, in Kuala Lumpur in 1998 and Auckland in 1999. He used these opportunities to stress that the South Korean economy had switched to becoming genuinely open, for he saw foreign investment as a crucial part of his recovery plans, but having wholeheartedly joined the group of countries strongly favouring liberalization, he found that this group was if anything in an even smaller minority within APEC as many members clearly saw the Asian financial crisis as evidence of the dangers of excessive openness. For Kim, the APEC meetings therefore served more as a means to hold bilateral meetings with leaders of key partners than as a forum which would bring substantial and speedy benefit to the Korean economy. Some Korean scholars have argued that South Korea’s level of economic development and its overall economic size put the country in the ‘middle’ of APEC, with the consequent potential to ‘mediate’ the North–South economic relationship within APEC.11 However, the financial crisis, by undermining the country’s credibility, wiped out any immediate possibility of South Korea playing that kind of role within APEC. In the 1990s, however, South Korea became involved in two other regional groupings, which also not only marked recognition of the country’s international status but also provided avenues for diversification: the ASEAN Regional Forum (ARF) and the informal ASEAN+3 leaders’ meetings. The end of the Cold War had provoked a debate in the Asian Pacific region about the future ‘security architecture’ of the region. Echoing in a lesser key the much more intense European debate, Asian Pacific regional policy-makers and an active ‘second-track’ academic network discussed alternatives. Rejecting models too closely drawn from the European experience, the initially reluctant ASEAN decided to build on its existing external dialogue arrangements to create the ASEAN Regional Forum, which met for the first time in 1994.12 It had seventeen members, including South Korea (but not the North). Its annual meetings, and occasional working-level sessions in between, have tended to move at a pace which is comfortable for the most cautious members – China and some of the ASEAN members – but its significance lay in being the first ever such organization to bring so many regional states around the same table to discuss security issues. Although the focus has tended to be more on South-East Asian-related issues, South Korea has been able to raise Korean issues from time to time. Nonetheless, it is true that even at the July 1994 meeting, when the ‘nuclear crisis’ on the Korean peninsula was at a crucial stage, ARF did not take a concerted position which would be of real value to South Korea. Successive chairmans’ concluding statements made at the annual ARF

Korea in the international system 115 meetings have tended to be limited to rather anodyne expressions about the ‘importance of peace and security on the Korean peninsula’, the need for dialogue and the support for KEDO’s activities.13 At the time of ARF’s formation, North Korea did approach ASEAN to enquire about membership, but was told that until it had shown better behaviour over nuclear site inspection, it would not be considered.14 Subsequently, some ARF members felt that ‘its participation should be a reward for conducting better relations with South Korea’.15 Under Kim Dae-jung’s ‘sunshine policy’, however, the South has been more positive to the idea of North Korea joining ARF, and, with other states in the region noting the North’s diplomatic offensive in early 2000 and the June 2000 North–South summit, the North was allowed to join ARF at the July Bangkok meeting. However, although that meeting welcomed the positive dialogue emerging on the Korea peninsula, with ASEAN continuing to insist on its diplomatic centrality within ARF, it seems unlikely that the organization will devote significantly more time to considering North-East Asian security issues. Of more utility to the South Korean government in terms of the prestige attached, however, has been its participation in a new informal format, called the ASEAN+3 summits, which have been held annually since late 1997. This new format is an evolution out of the concept for an ‘East Asian Economic Group’, soon modified to the name ‘East Asian Economic Caucus’ (EAEC), put forward by Malaysian prime minister Dr Mahathir Mohammad in 1990. Designed as a counter-balance to the Australianproposed APEC, EAEC would exclude both the North American and the Australasian states. South Korea was one of the intended participants, but, well aware that the Americans were strongly against the concept (the US Secretary of State James Baker actually used the 1991 APEC meeting in Seoul as venue for strongly lobbying against it), the South Koreans were non-committal.16 With other ASEAN members lukewarm, the concept remained quiescent, until fortuitously the creation of a new inter-regional dialogue grouping with Europe in 1996 – the Asia-Europe Meeting (ASEM) – resulted in an Asian participation which strongly resembled those countries originally envisaged as EAEC participants. Emboldened by this precedent, and drawing on Asian defensiveness against the West as the Asian financial crisis took its toll, Mahathir succeeded in persuading his ASEAN colleagues that the planned 1997 summit of ASEAN leaders, designed to consolidate the organization in the face of new membership and economic challenges, should hold a separate meeting to which the Japanese, Chinese and South Korean leaders should be invited. A Japanese prime minister had been invited to a previous ASEAN summit, in 1987, but it was the first occasion for China and South Korea to be so invited. With Kim Young-sam caught up in the IMF negotiations and the presidential elections, Prime Minister Koh Kun represented South Korea at the December 1997 summit. Kim Dae-jung attended the 1998 and 1999 meetings in what now seems to be becoming an annual affair. The December

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1999 ASEAN+3 summit in Manila was memorable for some lofty rhetoric from the Philippines’ president Joseph Estrada about moving to ‘an East Asian common market … one East Asian community’ and, on a more practical level, an agreement to strengthen trade and investment and information technology cooperation.17 However, also important for Kim was the first ever three-way summit talks with Japan (Prime Minister Obuchi) and China (Premier Zhu Rongji), after the initially cautious Chinese agreed to join in. Sensitive security issues were avoided, but economic and environmental issues were covered during the breakfast talks.18 It is tempting to argue that, despite its financial crisis, South Korea was still considered important enough to be invited as an equal participant with China and Japan. A more cynical approach would be to say that, since the peculiar political status of Taiwan and Hong Kong excluded them, there were no real alternatives if the hosts wanted to include some other country to balance the two giants of Japan and China. A more charitable analysis might be to argue that, paradoxically, because of South Korea’s and Asia’s financial collapse this opportunity presented itself. Richard Higgott had predicted, at an early stage of the Asian financial crisis, that one of its net effects would be to increase interest in East Asian, as opposed to Pacific-wide, regionalism.19 The relative inactivity of APEC and the emergence of the new ASEAN+3 format would support that contention, even though members have tried to play down Estrada’s overly ambitious rhetoric subsequently, for fear that it might give rise to unwarranted expectations about the pace at which they might proceed. South Korean participation in this as yet informal arrangement of ASEAN+3, coming at a time when the country was at one of its lowest ebbs in economic terms, has nonetheless proved a welcome boost to Kim Daejung’s diplomacy, though translating this symbolic presence into concrete economic advances may prove a slow process. In this sense, then, South Korea’s status has not been diminished markedly by the Asian financial crisis. There was one further related regional initiative which posed special questions for South Korea, namely, the idea of creating an Asian Monetary Fund (AMF) or similar form of regional ‘self-help’ financial organization which was not dominated by the Western powers. Japan had originally floated the idea of setting up a $100 billion Asian fund in September 1997, but it had been dropped after strong opposition from the USA – particularly at the 1997 APEC meeting in Manila – which was clearly worried about undermining the IMF. The Kim Young-sam government had initially supported the Japanese proposal, but after it had to turn to the IMF for assistance its attitude cooled. The Kim Dae-jung administration, wedded to the IMF package, had not pursued the idea further. Indeed, while the new government did join in the calls for a new international financial architecture, it also made it clear that one of the objectives should be that ‘the IMF and the World Bank’s role in both managing and preventing

Korea in the international system 117 crises should be strengthened’ and argued that any regional cooperative scheme would ‘require a more long-term approach’.20 However, during the course of 1998, various Asian countries continued to refer intermittently to the idea of some form of Asian fund and, at a meeting in Manila, a group of regional finance ministers from those countries broadly included within the EAEC concept called for a cooperative financing arrangement to supplement IMF funding. At this stage differences began to appear between the South Korean coalition partners. By participating in the Manila Framework meeting, as it became known, Kim Dae-jung and his advisers had shown that they were becoming more positive towards some form of Asian financial fund, but they also made it clear that they saw it as complementary to the IMF, not replacing it, and as being a medium- to long-term task. But Prime Minister Kim Jong-pil took an even more positive attitude; on a visit to Japan he advocated ‘creating a regional monetary fund’ and added ‘we are ready to throw our full support behind it if Japan, as an Asian leader, pushes for the fund’.21 The Kim Dae-jung administration, nonetheless, repeated its more cautious approach and the AMF issue became yet another on which the two Kims were not to see eye to eye. The idea of something like the AMF has continued to float around the region, but, despite the optimistic pronouncements of the 1999 ASEAN+3 summit, it has still not received an endorsement sufficient to lead to implementation. South Korea has been able to continue its rather ambivalent attitude without being forced to take a definite position.

International actor South Korea’s efforts to raise its involvement in the broader international system in the 1990s can be measured by reference to three aspects: its membership of the United Nations and subsequent role in UN security and peace-keeping issues, its membership of the OECD and its membership of ASEM. For many years the South had tried to secure exclusive membership of the United Nations, but its applications continually ran up against a Soviet veto; in the mid-1970s growing Third World support for the North, however, resulted in the passing of two irreconcilable resolutions by the UN General Assembly and an effective stand-off between the two Koreas on membership.22 The South returned to the issue again in the late 1980s after the successful Seoul Olympics and the breakthrough in diplomatic relations with Eastern European states and the Soviet Union in 1989–90. Seeing the way the wind was blowing, and keen itself to develop economic ties with the South, in the summer of 1991 China informed North Korea that it would not veto a South Korean application. Deserted by all its former friends, the North had no option but to back down from its longheld objection to both Koreas entering the United Nations. In October

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1991 both formally joined the United Nations, with their international status thereby de facto recognized as being equally legitimate. Since then, however, it is the South which has been able to profit most from its membership. Only four years after gaining admission, South Korea was elected as a non-permanent member of the UN Security Council, for a two-year term 1996–97. At the same time, it has been taking up a low-key but nonetheless symbolic role in a series of UN peacekeeping operations around the globe. The first operation was in 1993, when a group of military engineers were sent to Somalia.23 Since then, South Korean military and civilian engineers, medical teams and military observers have contributed to UN peace-keeping operations in Angola, Western Sahara, Georgia and Kashmir. The financial crisis impacted on all aspects of the South Korean military budget (which dropped by 13 per cent in 1998), but Kim Dae-jung tried to ensure that participation in UN peace-keeping operations continued. Most notably, despite some, ultimately unfounded, domestic criticism that Korean businessmen working in Indonesia could consequently come under attack from irate Indonesians, he agreed to send troops to the UN operations in East Timor at the end of 1999.24 Domestically, the most controversial membership of an international body during the 1990s was the entry into the OECD, which was discussed in Chapter 2. The triumph of entry was to prove short-lived. During the 1997 election campaign, domestic critics of the Kim Young-sam administration were to make great play of what they saw as unnecessary strains put on the economy by this commitment to financial liberalization as part of OECD membership. However, once he came into office, Kim Dae-jung was careful to distance himself from overt criticism of the OECD membership, not least because many of the financial measures that he came to introduce as part of the reconstruction endeavour were either actually in line with OECD requirements or even more severe. The final area in which South Korea took on a higher international profile was in the newly created inter-regional forum, ASEM.25 Derived from a Singaporean initiative to diversify ASEAN’s own links away from the USA, but fitting in neatly with a new West European interest in Asia, which had been crystallized in a new ‘Asia strategy’ announced by the European Union in 1994, ASEM also proved a useful vehicle for South Korea to develop further its own links with Western Europe. Indeed, compared to Japan, worried about what signals might be sent to its close ally the USA, and China, fearful that it might turn into yet another forum for criticizing its actions, South Korea was much more open to the proposal.26 Indeed, at the opening meeting, in Bangkok in March 1996, President Kim Young-sam was successful in persuading the participants that Seoul should host the third ASEM in the second half of the year 2000. ASEM 2, in London in April 1998, came at a particularly convenient time for new President Kim Dae-jung. Taking it as his first overseas trip –

Korea in the international system 119 in itself talked up by his officials as heralding a new departure from the usual obligatory visit to Washington by new Korean presidential incumbents – Kim embarked on what he and his officials openly admitted was ‘sales diplomacy’. Both in the ASEM forum itself and in bilateral meetings with various European leaders, Kim spent much time and effort trying to argue that Asia in general, and South Korea in particular, should not be written off, and pushing hard for commitments by the Europeans to send commercial and governmental delegations to South Korea to see for themselves the new trade and investment opportunities. Kim was fortunate in that his personal reputation as a fighter for democracy had preceded him, and, indeed, in that respect found himself ideologically closer to European norms than several of his Asian colleagues. Nonetheless, the spectacular way in which his country had collapsed in late 1997 left him with much ground to make up. In this respect, the financial crisis clearly did impact on the way in which South Korea approached this international forum. By contrast with the comparative defensiveness of the Asian participants in the face of the damaging Asian financial crisis, Kim came across as one of the more forthright contributors (Malaysian Prime Minister Mahathir qualified as another in that category, though for different reasons).27 The special pleading which characterized the mood of the Korean contributions to ASEM 2 is now set to be replaced by a much more positive and relaxed approach to ASEM 3. With economic recovery seemingly well under way, the Kim administration saw ASEM 3, in Seoul in midOctober 2000, as a way to showcase the extent of that recovery. ASEM 3 was heralded by government officials as the most important international summit meeting ever held in Korea.

Globalization and nationalism The desire to improve South Korea’s international status during the Kim Young-sam administration was to become increasingly intertwined with his concept of segyehwa (globalization). Kim’s attendance at the APEC Summit in Indonesia in November 1994 convinced him that South Korea really needed to add some substance to its role if it was be a fully rated player in the Asian Pacific and beyond.28 By the time he reached the next stop on his tour, Australia, Kim was ready to float the idea of globalization, a term which became the key point of his policy initiatives over the next two years. Unsatisfactory to the South Koreans as it may have been, the North Korean framework agreement with the USA in October that year freed the South from the immediate threat from the North and allowed Kim an opportunity to broaden its diplomatic focus. The term ‘globalization’, however, seemed to mean different things to different people. For some, it meant liberalization and de-regulation of the economy. For others it implied a more thoroughgoing renovation of the whole socio-economic system of Korea, encouraging ‘political, cultural

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and social open-mindedness’.29 But the transformation of South Korean internal and external structures and policies was bound to be a massive and long-term exercise. Vested interests in the economy and society, not least the chaebols and various ministries’ bureaucrats, as well as the legacy of past inertia acted to slow down the process. Earlier ‘internationalization’ efforts by some of South Korea’s neighbours, including Japan, had run into the ground. Although Kim achieved some partial successes, the complexities of this process were to be exposed as the economy moved towards collapse in 1997. The term segyehwa slowly dropped out of official usage. Kim’s televised address on the occasion of the fourth anniversary of his inauguration on 25 February 1997 failed to mention that word or even the concept of ‘globalization’ at all. Ironically, Kim Dae-jung did use the word segyehwa in his victory speech to the nation on 19 December 1997, the day after he won the presidential election, by arguing for Koreans to adjust, faithfully and seriously, to the ‘spirit and substance of globalization’.30 However, by the time of his inauguration in February 1998, he and his advisers had decided to drop the term; he talked only of ‘openness and cooperation’. By the time that Kim launched his ambitious ‘second nation-building’ campaign in August that year, he and his advisers were talking instead of ‘open globalism’. Definitions of ‘globalism’ were stronger on what it was not – rejecting cronyism, monopolies of resources, collusion between business and politicians, nationalistic practices and so-called ‘Asian values’ – than what it was. Its focus was predominantly internal, on seeking a ‘social consensus based on universalism and international norms’ and discovering and appreciating ‘both the adversities and triumphs in a nation’s past’.31 Kim Dae-jung therefore has adopted a concept which is no less vague than his predecessor’s, but which, like Kim Young-sam’s approach, relies heavily on changes to South Korea’s socio-economic system. However, while Kim Young-sam adopted segyehwa as one of the key slogans – certainly from 1994 onwards the key slogan – of his administration, ‘globalism’ for Kim Dae-jung was only one component of his particular key slogan – ‘second nation-building’. South Korea is not alone in finding difficulties in reconciling internationalization or globalization with nationalist tendencies. Traditional Korea had always been aware of its vulnerability to the two neighbouring giants of China and Japan, and both benefited and suffered from its geographical location sandwiched between them. Modern Korean nationalism, initially developed as an ideology to fight against Western encroachments in the nineteenth century and Japanese colonialism in the twentieth century, came to be utilized by both North and South as a means to rationalize their respective desires for unification. Such nationalist feelings continued in the post-war period consistently to find expression in the South against Japan, even though at times there was both conscious and unconscious borrowing from Japan, and, in a more fluctuating manner,

Korea in the international system 121 against the USA, as bouts of anti-Americanism alternated with a desire to rely on US capitalist and military strength. This meant that South Korean concepts of ‘international’ or ‘global’ or even, it has to be said, ‘Asia’ were conditioned heavily by the nature of the two relationships with the dominating forces of Japan and the USA. Traditional Korean thoughts of resistance to the outside, even of xenophobia towards the outside, are deeply embedded in the Korean psyche,32 so that through the post-Korean War period, South Korea remained only a partially opened country in much of its mentality and economic practice, at least until the late 1980s and the 1990s. The reactions to the Asian financial crisis, therefore, were also conditioned in part by such considerations of national identity, pride and suspicions of foreign intrusions.

8

Post-summit Korea New beginnings or déjà vu?

In November 1999, two years after it had begun, President Kim Dae-jung declared that Korea had ‘completely overcome’ the financial crisis.1 But was it really over and, if so, what, if anything, had changed as a result of the collapse and recovery? Sceptics suggested that Asia’s – and Korea’s – much-hyped ‘new beginning’ was nothing more than a ‘mirage’,2 while the IMF’s head, Camdessus, argued the contrary position, that: ‘Asia is now starting again on a sounder basis. It is perhaps a blessing in disguise.’3 Which view expresses the reality as viewed from Seoul?

The collapse re-considered The evidence presented in this volume suggests that the sudden and dramatic collapse of the South Korean economy cannot easily be explained solely by either of the main economics-based theories outlined in Chapter 1. A convincing explanation would have to encompass some elements of both competing theses but also contain an understanding of the role that politics and political institutional weaknesses played in affecting the course of the crisis at critical stages in its evolution. The South Korean economy in the mid-1990s was undoubtedly in a stage of transition, slowly moving from a system which had been an archetype of the so-called Asian ‘developmental state’ to a more hybrid form of market economy. However, this process of adaptation or adjustment was not fully completed at the time the financial crisis struck other parts of the region and, indeed, this partial transition, particularly where it involved partial liberalization, left the financial system particularly exposed. Kim Young-sam had introduced liberalization as a key policy objective. In part, this policy was driven by his own personal ambitions to bathe in the ‘glory’ of having South Korea accepted as an OECD member for which certain liberalization measures were a necessary prerequisite, but, in part, it reflected a wider regional trend towards liberalization and internationalization, in which Japanese endeavours in the 1980s, admittedly under heavy US pressure, had led the way. As shown in Chapter 2, however, the

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net effect of the policies adopted was to encourage the chaebols and the commercial and merchant banks to look outwards in the sense of borrowing overseas and borrowing on short- rather than long-term conditions. The result was a rapidly worsening debt profile from 1994 onwards which left both the chaebols and the financial institutions vulnerable when currency risks increased, foreign currency reserves were being depleted and foreign investors’ sentiments were becoming increasingly volatile during 1997. However, as Demetriades and Fattouh have argued, ‘the weaknesses in the banking system cannot by themselves explain the scale and the speed of capital flight from Korea’.4 In this context, the impact of the Thai crisis and its successor crises across the region has to be considered. Although through loans, investments and construction activities, the Korean banks and companies were exposed to the South-East Asian turmoil, it was not those direct effects which caused the greatest concern. Rather, the fact that the IMF had to be called in to help bail out Thailand and Indonesia inevitably focused international investors’ and speculators’ attentions on neighbouring economies; when Hong Kong also seemed to be wobbling, investors’ sentiments became increasingly less confident about the whole region, including North-East Asia. Reassessments of the creditworthiness of the South Korean banks and companies by foreign investors, therefore, began to create self-fulfilling expectations of problems ahead for South Korea too. This was not a ‘conspiracy’ but rather reflected the natural tendency of investors to look for vulnerabilities and opportunities which they thought needed to be exploited for financial gain or avoided in order to reduce financial loss. However, the South Korean problems were exacerbated by policy and institutional failures. For Kim Young-sam and his officials and advisers, domestic political pressures not only provided unwelcome distractions from concentrating on the economy but even acted as a severe constraint on facing up to the realities of the deteriorating situation. The failure to detect and predict the extent of the mounting problems – and the spillover effect of the South-East Asian crises – has to be laid, in part, at the door of the bureaucrats and economic officials. The MOFE’s capabilities for spotting and curing financial problems had anyway been constrained by the diminution of its regulatory powers under liberalization and by rapid turnovers in ministerial and advisory posts (Kim Young-sam went through seven finance ministers in five years), but there was also to a certain extent a tendency to adopt a ‘keep one’s head in the sand’ attitude by senior officials. Former Deputy Prime Minister Kang Kyong-shik, indeed, later admitted: ‘I didn’t realise that the international financial markets have changed so much. … The world is more open and interrelated than I thought.’5 According to one minister who had served in an early cabinet of Kim Young-sam’s, the bureaucrats grossly underestimated the growing

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current account deficit; ‘this disregard stemmed from ignorance, inaction and prejudice, characterized by a tendency for not spotting the obvious’.6 But some of the blame must also lie with Kim Young-sam himself, who, while not an expert on economic matters, had taken a direct and active interest at the start of his presidency but in the later years did not stay sufficiently involved in economic policy-making. Indeed, the problems which he encountered with his own son’s involvement in corruption scandals only served to make Kim more distracted and, if anything, more withdrawn from economic affairs. In fact, he faced a form of ‘quadruple crisis’ in 1997: political, through the manoeuvring within the NKP to find a successor and a presidential candidate who would ‘protect’ him after stepping down; economic, the troubles that chaebols such as Hanbo and Kia were undergoing; financial, the pressures on the currency which led to a huge drain on the country’s foreign exchange reserves; and personal, the arrest and trial of his son. When the continual underlying concern about North Korea is added in to the equation, the result was that Kim was not able to give the strong presidential direction needed or expected. Indecisiveness on the part of the government, most notably seen in the handling of the Kia collapse, generated market uncertainty and made the crisis deeper and more costly.

Plus ça change? Kim Dae-jung came into office as a politician whose reputation outside the country was undoubtedly higher than within it, for, despite his presidential election victory, many within South Korea, and, it has to be said, this included his political ally Kim Jong-pil, remained unsure and even suspicious about his policy agenda. More than two years later that relative assessment of his domestic and international popularity remains valid. He faced three major problems on coming to power: the economic crisis, the power-sharing or cohabitation arrangements, and relations with North Korea. However, Linda Weiss has argued that he had at least two important factors favouring him: ‘a strong social constituency for economic recovery and renewal and for national economic independence’ and ‘a domestic and international situation favouring the curtailment of chaebols’ power and realignment of the government–business relationship’.7 She overstates the extent to which antipathy to the IMF regime has become ‘almost universal’ as there has remained, despite the undoubted pain of some parts of the IMF programme, a significant body of opinion within South Korea which, for political as much as for economic reasons, sees advantage in following the IMF prescriptions. Nonetheless, it is true that there was a form of ‘unity in adversity’, at least amongst ordinary Koreans in the early months of 1998, which was not found universally across the Asia Pacific region (least of all in Indonesia). This amounted to strong domestic political support at the beginning for Kim’s efforts to drag

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the economy out of its disastrous state and for taking on reconstructing the chaebols and the financial system as the symbols of the problems which had helped to cause the crisis. However, Kim was to find that this social consensus had its limits. As the number of unemployed started to rise, the chaebols indulged in footdragging exercises and the opposition GNP began to snipe, he found that his political honeymoon was indeed short-lived. Faced with recalcitrant chaebol owners and rising discontent from the unemployed and the labour unions, during 1998 and 1999 Kim was forced to tread a difficult line between the demands of the IMF programme, which actually chimed in well with some of his predilections for economic policy priorities, and the political need to keep his coalition partners on board and to prevent his opponents, the GNP, from benefiting from any anti-IMF or anti-Kim backlash. Since late 1998, the economy has seemed to be operating on two levels: on the surface, dramatically fast recovery, while underneath serious problems still remained unresolved. In purely numerical terms, the Koreans once again seem to have achieved a spectacular recovery, with GDP growth, foreign trade, foreign currency reserves, inward foreign investment, industrial output, unemployment and exchange rates all showing marked positive changes during 1999 after plumbing the depths in 1998. Kim’s advisers began talking about the ‘second economic miracle’. In a recent MOFE promotional video, the current minister, Lee Hun-jai has tried to get over this message, by emphasizing ‘out with the old and in with the new’ in the economy.8 But, in reality, how successful have he and his president been in this endeavour? More difficult, however, has been dealing with the fundamental problems of economic structure. Kim has had to move slowly, certainly slower than he had originally envisaged, in restructuring and reforming the South Korean economic system. He has tried to use a new independent agency, the FSC, whose effectiveness owed much to the personality of its first head Lee Hun-jai (who, now that he has become MOFE minister, has continued to have a strong personal role in policy-making); the FSC responds to criticism of its slowness in completing restructuring by pointing out not only the huge nature of the task involved, but also the desire to ensure that its measures could not be reversed by making them comprehensive and wellgrounded.9 Despite arguing that restructuring is a matter of survival not choice, Lee’s successor has not taken such a high profile and doubts remain about how ‘independent’ the FSC can be when the government is heavily involved in the economy through its buying into the troubled financial sector. On the financial side, Kim tried to deal first with the commercial banks, then with the insurance companies and merchant banks, leaving the investment trust companies for last. With the chaebols, he moved against the medium-sized ones first, while nonetheless trying to persuade the ‘top five’

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that it was a case of all ‘sink or swim together’. It has been a frustrating exercise, for although the first waves of financial industry and chaebol restructuring did produce a whittling down of unviable companies and subsidiaries, there were still sufficient problems remaining for him to have to plan a second wave of financial restructuring in mid-2000 and the big chaebols still left much to be desired in their attitude to the ‘Big Deals’ and their own restructuring. Kim had to resort to both the stick and the carrot to try to induce change amongst the largest chaebols, at least until the Daewoo collapse served to concentrate some minds. Kim’s dilemma was that, much as he wished to encourage the financial institutions and the chaebols to initiate their own reforms (and, at a more theoretical level, to allow market forces to determine competitiveness and survival), in practice he found no alternative but to prod, cajole and even intervene forcibly to push forward what he considered as necessary restructuring. Government intervention in economic management, such a characteristic of the South Korean developmental model, continues to have a role to play. Moreover, the government has in effect become the largest shareholder in the financial sector, for by mid-2000 it had majority shares in ten commercial banks, eight insurance firms and two investment banks. Another irony of the process was that, even with the collapse of Daewoo and the shedding of subsidiaries by the other four top chaebols, Samsung, LG, Hyundai and SK, these four continued to dominate the economy and, at the end of 1999, they actually held a 58 per cent share of the total assets of all the top thirty chaebols, compared with only 51 per cent at the end of 1997.10 Restructuring inevitably meant down-sizing and job loss, in simple terms, and this also proved a difficult problem for Kim to deal with, especially as he had been the workers’ champion in the past. His initial success in persuading the unions to accept the pain of rising unemployment could not be sustained, especially when it was widely perceived that the workers at the companies were suffering far more than their owners and the ‘social safety net’ was still so rudimentary. Labour disputes became more politicized during 1999. By trying to strengthen trade union rights to partially compensate for the restrictions imposed in the immediate post-crisis labour legislation and by maintaining at least the semblance of a dialogue with the unions, the government remained relatively in control of the labour situation. Although, in April 2000, the total number of unemployed dropped below 1 million for the first time since the crisis began to bite, ironically, the perceived failure of the benefits of the new economic recovery to percolate down to the workers began to generate new tensions and new resistance to proposed new phases of restructuring. Kim’s efforts to push through legislation which would assist his economic reform programme were also hindered by the difficulties of his party’s situation within the National Assembly. Even with the coalition with the ULD and Kim Jong-pil, it took him six months to tempt over

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enough opposition politicians to get Kim voted in as prime minister. Cohabitation was truly troubling, as Kim Dae-jung had several areas of distinct policy difference with Kim Jong-pil: the ‘sunshine policy’, chaebol reform and the Asian monetary fund proposal, but most significantly constitutional reform. In fact, political reform has lagged consistently behind endeavours for economic reform. Some limited administrative reforms, such as slimming down the government ministries and agencies and amending electoral procedures, were carried out, but in that respect there seems to be some back-sliding evident, as, since the beginning of the year 2000, the government has begun talking about reconstituting the deputy premierships, one for the MOFE minister (which could once again expand that ministry’s role) and one for education.11 More crucially, Kim Jong-pil’s number one priority, changing the constitution to make the premiership more powerful, was repeatedly stalled as Kim Dae-jung and the NCNP managed to find one excuse after another for delaying. Relations between the NCNP–ULD coalition and the GNP often deteriorated into partisan squabbling, and there were times during 1999 when relations within the coalition, between the NCNP and the ULD, seemed little different. The consensus on national unity in the face of the economic crisis had been remarkably short-lived. Disputes over parliamentary procedural matters, prosecutors’ investigations of opposition national assemblymen and journalists, and a series of scandals involving the government, led to parliamentary boycotts and bitter words being exchanged. In politics, therefore, despite the new image that Kim Dae-jung brought – and undoubtedly the peaceful change of government to an opposition candidate did mark a new maturity in South Korea’s democratic transition, while he himself was widely seen as honest and upright – there seemed to be less drastic change than in the economic sphere. Indeed, Kim was not averse to showing ‘some of the characteristically authoritarian tendencies of his predecessors’ in dealing both with his own ministers and the opposition;12 reshuffling ministers, instigating tax evasion probes, offering sweeteners to wobbly politicians, resuscitating old skeletons in the cupboard and breaking up ‘illegal’ strikes with police force were certainly reminiscent of earlier governments’ practices. In the first half of the year 2000, all thoughts of political reform and, for that matter, any particularly harsh proposals for economic restructuring, were pushed into the background by the domestic party manoeuvring in the run-up to the April National Assembly elections. Personalities and regional preferences once again dominated the campaign and the voting. The result satisfied none of the major parties. Indeed, there was a terrible sense of ‘back to square one’, as the MDP still found itself without a majority and once again had to start talking again to the ULD, which had broken out of the formal coalition a few months before. Cohabitation was back on the agenda.

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Although its announcement had surprisingly little impact on the election result, there was one area of apparently quite dramatic change which should go to the credit of Kim Dae-jung, namely, the breakthrough with North Korea, resulting in the first ever summit between the leaders since the end of the Korean War, in Pyongyang in June 2000. Kim had dropped talk of ‘unification’, which was not only not feasible politically in the short run, but also the last thing that the country wanted to contemplate in an economic and financial sense immediately after its own crash, and instead emphasized peaceful coexistence and cooperation. Although both North and South became more adept at separating economics from politics, which allowed Hyundai in particular to set up tourist and business deals (non-profit-making in practice), there was little else for Kim to report after his first two years in office. He had at least been consistent, but his efforts to hit the ball over into North Korea’s court brought no real response. However, following on its change of tactics towards more positive relationships with the outside world towards the end of 1999, North Korea finally agreed to Kim’s initiative. The Pyongyang summit was eagerly watched by the world and by South Koreans, who became gripped momentarily by euphoria and emotion. The follow-up meetings, at the official, ministerial and eventually presidential level again will have to be watched carefully, as the past record is not encouraging, but at least Kim Dae-jung’s trip north was a step on the road of reconciliation. Trade and investment deals with the North are unlikely to bring huge economic benefits to the South in the short term, but at the very least a milder and more conciliatory North, if that is what is really emerging, can help to relieve some of the multi-faceted pressures on South Korean society.

The new agenda The April 2000 elections were taken both by Kim Dae-jung and the opposition as a form of mid-term referendum on his performance. However, Kim’s disappointment at the result was quickly subsumed by the energy which he put into, and the domestic and international media coverage given to, his historic visit to Pyongyang. Nonetheless, he would do well not to be carried away by this breakthrough and ignore a number of important issues which await resolution during the remaining two and a half years of his presidency. First and foremost is the economy. Amongst Kim’s advisers, there are indeed beginning to be differences of opinion about what macro-economic policy should be pursued, particularly as it becomes clear that not all of the economic numbers are remaining quite so favourable, despite the talking up of the economic record which inevitably took place prior to the elections. In April, the country posted its first current account deficit for the first time in 30 months as its banks had to make interest repayments on foreign loans which had been rolled over, but in May the current

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account went back into surplus. Both the trade surplus and the current account surplus in the January–July 2000 period were running well below the equivalent figures from the previous year, but overall government economists still expect favourable balances in both respects over the whole year. Moreover, there have been some concerns that a new ‘bubble’ was emerging in high tech companies and stocks. The high degree of interest aroused since the beginning of the year 2000 in the information technology-related ‘new economy’ in South Korea has been no different from that in other Asian Pacific countries, except that, if anything, it has been even more advanced. Some economic advisers to Kim argue that this could become the ‘third miracle’ for the Korean economy, by developing the knowledge-based economy. The use of internet and related e-commerce technologies has been a new boom industry in South Korea and its ecommerce market is already second only to Japan’s in the Asian Pacific. The determination to enter this new market certainly has echoes of the aggressive launch into manufacturing decades earlier, but this time, given the nature of the fast-moving technological skills needed, it may be the swift-footed SMEs rather than the lumbering old chaebols who are able to take advantage.13 This could be a factor which over the medium term will help to accelerate changes to the way business is done in South Korea. In the short term, however, Kim Dae-jung himself is now well aware of the need to go back to the economic restructuring programme and revive the momentum lost in the first half of the year. Indeed, in early June 2000 he specifically stated that he would again take charge of economic affairs in order to implement the structural reform programme,14 and in early August he again reshuffled the economic ministers in his cabinet. These steps mean adding presidential clout to efforts to launch the next wave of financial restructuring, to which banking unions have already begun to voice opposition since one of the key components would have to be merging more banks to make them more competitive, and to continue with a tough line towards the larger chaebols in particular on corporate restructuring and management transparency. In this respect, the government has received strong support from the IMF and the OECD. The opposition GNP, however, remains opposed to financial restructuring and privatization (certain government corporations are due to be privatized in the near future) which involves significant inflows of foreign capital and ownership. Unlikely to win the argument on purely economic terms, the GNP has resorted to the politics of patriotism. The political tensions over economic policy-making, apart from other issues such as corruption and North Korea policy, are certain to continue. More worrying is the resurgence of a certain degree of complacency amongst the business community and even the general public that, now that the economy seems to be booming again, there may be no need to continue with pushing forward with painful restructuring policies.

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The second most important issue will be the changing relationship with the North. North–South ministerial-level meetings were held in July and August 2000 and, from 15–18 August, 100 separated families on both sides were emotionally, but briefly, reunited, giving rise to hopes that such reunions might become a regular event. Business missions from the South have been heading north, with Hyundai being given permission to develop further the Mt Kumgang area as a free trade zone, and the other chaebols trying to catch up. Kim Dae-jung now faces three problems in his ‘sunshine policy’: how to tell whether the North is genuinely opening up and changing; how much time and effort to spend on this particular policy, if it means that his attention span for other issues is limited; and how to make sure that expectations amongst the ordinary Korean people do not run too far ahead of reality. The third issue is the political structure. It has been argued that the creation of ‘enduring power bases for socio-economic reform would require changing the nature of the game in Korean politics’.15 In other words, there cannot be a complete separation of economics from politics. Yet it is difficult to see much change in the political structure, so politics are, at best, going to continue to lag behind economic reform and, at worst, actually act as a drag on economic reform. As a result of the April 2000 elections Kim Dae-jung has had to resort to the kinds of tactics he used in 1998: on the one hand, talking nicely enough to the ULD to keep them on board in some form of ‘coalition’, such as by forcing through the National Assembly in July an amendment to parliamentary rules reducing the number of members necessary for a party to act as a floor group to below the numerical level achieved by the ULD and by including two ULD members in the August cabinet reshuffle; but, on the other hand, leaving the much more crucial older promise to introduce a parliamentary cabinet system to be honoured more in the breach than the observance. Trading on his enhanced post-summit prestige and standing, Kim will undoubtedly try to lure yet more defectors from the GNP. Although Rhee In-je believes that he has the inside track for nomination as the MDP’s candidate for the 2002 presidential elections, nothing is yet decided. Given that the GNP seems fairly firmly set on Lee Hoi-chang, those within his party who calculate that they have no chance whatsoever of winning the GNP nomination might decide to bolt now. With Kim Dae-jung finally bowing out of politics in early 2003, inevitably there will be generational change and new politicians, less beholden to the old collusive government–business links, will emerge, but there is little prospect in the foreseeable future that they will be operating in anything other than a presidential-dominant political system. Finally, Kim has to make South Korea count again in regional and international affairs. This has been a slow process of resuscitation after the blows to its prestige and pride in 1997, but his efforts have produced some degree of reward in ASEAN+3 membership and the international attention

Post-summit Korea

131

focused on the Pyongyang summit. The ASEM 3 summit of October 2000 adds to the image of a Korea back on its feet again. Consequently, although Kim Dae-jung came into office promising an end to the ‘Korea Inc.’ of old, the processes of economic recovery have shown that even just chipping away at the old structures, let alone undertaking major rebuilding, takes time. His dilemma remains how to carry on with change and, at the same time, resist the temptation to resort to old methods in order to achieve it.

Appendix I: IMF stand-by arrangement for the Republic of Korea Summary of the Economic Program, December 5, 1997 Macroeconomic policies 1

Objectives

The program is intended to narrow the external current account deficit to below 1 percent of gross domestic product (GDP) in 1998 and 1999, contain inflation at or below 5 percent, and – hoping for an early return of confidence – limit the deceleration in real GDP growth to about 3 percent in 1998, followed by a recovery toward potential in 1999. 2

Monetary policy and exchange rate policy

•

To demonstrate to markets the authorities’ resolve to confront the present crisis, monetary policy will be tightened immediately to restore and sustain calm in the markets and contain the impact of the recent won depreciation on inflation. In line with this policy, the large liquidity injection in recent days has been reversed, and the call rate has been raised from 12.5 percent on December 1, 1997 to 21 percent today, and will be raised further in the next few days. Money growth during 1998 will be limited to a rate consistent with containing inflation at 5 percent or less. A flexible exchange rate policy will be maintained, with intervention limited to smoothing operations.

•

• • 3

Fiscal policy

•

A tight fiscal policy will be maintained in 1998 to alleviate the burden on monetary policy and to provide for the still uncertain costs of restructuring the financial sector. The cyclical slowdown is projected to worsen the 1998 budget balance of the consolidated central government by about 0.8 percent of GDP. The present estimates of the interest costs of financial sector restructuring is 0.8 percent of GDP. Offsetting measures amounting to about 1.5 percent of GDP will be taken to achieve at a minimum budget

•

Appendix I 133 balance and, preferably, a small surplus. This will be achieved by both revenue and expenditure measures to be determined shortly. These may include, among others: • • • • • •

increasing VAT coverage and removing exemptions; widening the corporate tax base by reducing exemptions and certain tax incentives; widening the income tax base by reducing exemptions and deductions; increasing excises, luxury taxes, and transportation tax; reducing current expenditures particularly support to the corporate sector; and reducing low priority capital expenditures.

Financial sector restructuring 1

The following financial sector reform bills submitted to the National Assembly will be passed before the end of the year:

•

A revised Bank of Korea Act, which provides for central bank independence, with price stability as its main mandate. A bill to consolidate supervision of all banks, including specialized banks, merchant banks, securities firms and insurance companies in an agency with operational and financial autonomy, and with all powers needed to deal effectively with troubled financial institutions. A bill requiring that corporate financial statements be prepared on a consolidated basis and be certified by external auditors.

•

• 2

Restructuring and reform measures

•

Troubled financial institutions will be closed or if they are deemed viable, restructured and/or recapitalized. The government has already suspended nine insolvent merchant banks (on December 2, 1997). These banks have been placed under the control of the Ministry of Finance and Economy and required to submit a rehabilitation plan within 30 days. These plans will be assessed in consultation with Fund staff and, if not approved, the institution will have its license revoked. A credible and clearly defined exit strategy will include closures as well as mergers and acquisitions by domestic and foreign institutions, provided the viability of the new groupings is assured. Clear principles on sharing of losses among equity holders and creditors will be established. The disposal of nonperforming loans will be accelerated. The present blanket guarantees which will end in three years will be replaced by a limited deposit insurance scheme. A timetable will be established for all banks to meet or exceed Basle standards. Prudential standards will be upgraded to meet Basle core principles.

•

• • • •

134 • •

•

•

•

•

•

Appendix I Any support to financial institutions will be given on strict conditions. All support to financial institutions, other than BOK liquidity credits, will be provided according to pre-established rules, and recorded transparently. Accounting standards and disclosure rules will be strengthened to meet international practice. Financial statements of large financial institutions will be audited by internationally recognized firms. Manpower in the unit supervising merchant banks will be sufficiently increased to make supervision effective and to allow proper handling of troubled banks. The schedule for allowing foreign entry into the domestic financial sector will be accelerated, including allowing foreigners to establish bank subsidiaries and brokerage houses by mid-1998. Borrowing and lending activities of overseas branches of Korean banks will be closely monitored to ensure that they are sound. Nonviable branches will be closed. BOK’s international reserve management will be reviewed with the intention to bring it closer to international practice. Deposits with overseas branches of domestic banks will not be increased further, but gradually withdrawn as circumstances allow. Financial institutions will be encouraged to improve their risk assessment and pricing procedures, and to strengthen loan recovery; actions in these areas will be reviewed as part of prudential supervision.

Other structural measures 1

Trade liberalization

Timetables will be set, in compliance with the WTO commitments, at the time of the first review, to: • • • •

eliminate trade-related subsidies; eliminate restrictive import licensing; eliminate the import diversification program; and streamline and improve the transparency of the import certification procedures.

2

Capital account liberalization

The present timetable for capital account liberalization will be accelerated by taking steps to: •

liberalize foreign investment in the Korean equity market by increasing the ceiling on aggregate ownership from 26 percent to 50 percent by end-1997 and to 55 percent by end-1998. The ceiling on individual foreign ownership will be increased from 7 percent to 50 percent by end-1997.

Appendix I 135 •

•

effective immediately, for foreign banks seeking to purchase equity in domestic banks in excess of the 4 percent limit requiring supervisory authority approval, the supervisory authority will allow such purchases provided that the acquisitions contribute to the efficiency and soundness of the banking sector; legislation will be submitted to the first special session of the National Assembly to harmonize the Korean regime on equity purchases with OECD practices (with due safeguards against abuse of dominant positions.) allow foreign investors to purchase, without restriction, domestic money market instruments. allow foreign investment, without restriction, in the domestic corporate bond market. further reduce restrictions on foreign direct investment through simplification of procedures. eliminate restrictions on foreign borrowings by corporations.

3

Corporate governance and corporate structure

•

Timetable will be set by the time of the first review to improve the transparency of corporate balance sheets, including profit and loss accounts, by enforcing accounting standards in line with generally accepted accounting practices, including through:

• • •

• • • •

• • •

•

independent external audits, full disclosure, and provision of consolidated statements for business conglomerates.

The commercial orientation of bank lending will be fully respected, and the government will not intervene in bank management and lending decisions. Remaining directed lending will be eliminated immediately. While policy lending (agriculture, small business, etc.) will be maintained, the interest subsidy will be borne by the budget. No government subsidized support or tax privileges will be provided to bail out individual corporations. The ‘real name’ system in financial transactions will be maintained, although with some possible revisions. Measures will be worked out and implemented to reduce the highdebt-to-equity ratio of corporations, and capital markets will be developed to reduce the share of bank financing by corporations (these will be reviewed as part of the first program review). Measures will be worked out and implemented to change the system of mutual guarantees within conglomerates to reduce the risk it involves.

4

Labor market reform

•

The capacity of the new Employment Insurance system will be strengthened to facilitate the redeployment of labor, in parallel with

136

Appendix I further steps to improve labor market flexibility.

5

Information provision

•

There will be regular publication of data on foreign exchange reserves, including the composition of reserves and net forward position with a two weeks delay initially. Data on financial institutions, including nonperforming loans, capital adequacy, and ownership structures and affiliations will be published twice a year. Data on short-term external debt will be published quarterly.

Source: http://www.imf.org/external/np/oth/korea.htm (accessed March 2001).

Appendix II: South–North Joint Declaration

In accordance with the noble will of the entire people who yearn for the peaceful reunification of the nation, President Kim Dae-jung of the Republic of Korea and National Defense Commission Chairman Kim Jong-il of the Democratic People’s Republic of Korea held a historic meeting and summit talks in Pyongyang from June 13 to June 15, 2000. The leaders of the South and the North, recognizing that the meeting and the summit talks, the first since the division of the country, were of great significance in promoting mutual understanding, developing South–North relations and realizing peaceful reunification, declared as follows: 1

2

3

4

5

The South and the North have agreed to resolve the question of reunification independently and through the joint efforts of the Korean people, who are the masters of the country. Acknowledging that there is a common element in the South’s proposal for a confederation and the North’s proposal for a loose form of federation as the formulae for achieving reunification, the South and the North agreed to promote reunification in that direction. The South and the North have agreed to promptly resolve humanitarian issues such as exchange visits by separated family members and relatives on the occasion of the August 15 National Liberation Day and the question of unswerving Communists who have been given long prison sentences in the South. The South and the North have agreed to consolidate mutual trust by promoting balanced development of the national economy through economic cooperation and by stimulating cooperation and exchanges in civic, cultural, sports, public health, environmental and all other fields. The South and the North have agreed to hold a dialogue between relevant authorities in the near future to implement the above agreement expeditiously.

President Kim Dae-jung cordially invited National Defense Commission Chairman Kim Jong-il to visit Seoul, and Chairman Kim Jong-il decided to

138

Appendix II

visit Seoul at an appropriate time. Kim Dae-jung Kim Jong-il President Chairman The Republic of Korea National Defense Commission The Democratic People’s Republic of Korea (Signed) June 15, 2000 Source: Cheong Wa Dae, Office of the President, Republic of Korea, http://www.cwd.go.kr/cgi-bin/php/englib/view.php3?f_item_num=846&f_ srchcat=&f_srchcon=&f_PG=1&f_f_LL=1&f_FL=1&f_OP=2 (accessed March 2001).

Notes

1 Introduction 1 2 3 4 5 6

7

8

9 10 11

12 13 14 15

Korea Herald, 14 January 1998. Straits Times, 3 March 1998. International Herald Tribune, 19 December 1997. Asian Wall Street Journal, 25 November 1997. The words of Donald Tsang Yam-kuen, Hong Kong’s Financial Secretary. South China Morning Post, 9 June 2000. See, amongst others, the Asia crisis homepage of Nouriel Roubini, http://www.stern.nyu.edu/~nroubini/asia/asiahomepage.html, accessed 8 May 1998; K.S. Jomo (ed.), Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia (London: Zed Books, 1998); François Godement, The Downsizing of Asia (London: Routledge, 1998); H.W. Arndt and Hall Hill (eds), Southeast Asia’s Economic Crisis: Origins, Lessons and the Way Forward (Singapore: ISEAS, 1999); and Karl Jackson (ed.) Asian Contagion: The Causes and Consequences of a Financial Crisis (Singapore: ISEAS, 1999). Panicos Demetriades and Bassam Fattouh suggest the first two competing categories, but there is enough literature available now to suggest a third broad explanation. ‘The South Korean Financial Crisis: Competing Explanations and Policy Lessons for Financial Liberalization’, International Affairs, October 1999, pp. 779–792. Charles Kindleberger, Manias, Panics and Crashes: A History of Financial Crises (New York: John Wiley, 3rd edn, 1996), especially Chapter 1. Peter Gourevitch draws on comparisons dating back into the nineteenth century. Politics in Hard Times: Comparative Responses to International Economic Crises (Ithaca, NY: Cornell University Press, 1986). Godement, op. cit., pp. 20–21. Economist, 7 March 1998. Giancarlo Consetti, Paolo Pesenti and Nouriel Roubini, ‘What Caused the Asian Currency and Financial Crisis?’, paper, dated March 1998, http://www.stern.nyu.edu/~nroubini/asia/asiahomepage.html, accessed 8 May 1998. See also the comments by a Singaporean politician-cum-economist, Augustine Tan, in Straits Times, 23 January 1998. Consetti et al., op. cit. Ibid. Godement, op. cit., pp. 29–30, is sceptical of the proposition that China, even unconsciously, wrecked the Asian miracle. Kindleberger, op. cit., p. 109 Bank for International Settlements, ‘Quarterly Commentary and Statistics on Recent Developments in International Banking and Financial Markets: Press

140

16 17 18

19

20 21 22 23 24 25

26 27 28 29 30 31 32 33 34

Notes

Summary’ (Basle, 9 March 1998), http://www.bis.org/press/p980309.htm, accessed 11 June 1998. Cited in Demetriades and Fattouh, op. cit., p. 785. See quotations in Asiaweek, 3 October 1997. Godement, op. cit., pp. 98–99 likens them to St George (Asian values) and the dragon (market forces). For summaries of the former and the latter argument respectively see K.S. Jomo (p. 17) and Nicola Bullard, Walden Bello and Kamal Malhotra (p. 123), in K.S. Jomo (ed.), Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia (London: Zed Books, 1998). For a more sympathetic interpretation of the limits to what the IMF could do, see Shalendra Sharma, ‘Asia’s Economic Crisis and the IMF’, Survival, summer 1998, pp. 27–52. The phrase is used by Y.Y. Kueh, ‘Weathering the Asian Financial Storm in Hong Kong’, in James Hsiung (ed.), Hong Kong the Super Paradox: Life after Return to China (New York: St Martin’s Press, 2000), p. 242. However, Kueh goes on to argue (p. 255) that ‘the speculative attacks on the Hong Kong currency in 1997–98 seem … essentially a matter of premeditated attempt made by international hedge funds to coerce Hong Kong to be the next Asian financial domino’. Masahide Shibusawa, Zakaria Haji Ahmad and Brian Bridges, Pacific Asia in the 1990s (London: Routledge, 1992), pp. 52–65. James Cotton, ‘The New Insecurity in Asia’, Quadrant, December 1998, pp. 17–21, available online: http://www.pol.adfa.edu.au/resources/insecurity.html, accessed 4 July 1999. Gourevitch, op. cit., p. 17. Doh Jin-soon, ‘Deduction of the National Division and the Premise of Reunification of the Korean Peninsula’, Korea Journal, winter 1998, p. 180. For a balanced assessment of the Japanese colonial period see James Hoare and Susan Pares, Korea: An Introduction (London: Kegan Paul International, 1988), pp. 50–64. The following four paragraphs draw heavily on my earlier work, Korea and the West (London: Routledge & Kegan Paul, 1986), pp. 22–30, as well as on Mark Clifford, Troubled Tiger: Businessmen, Bureaucrats and Generals in South Korea (New York: M.E. Sharpe, 1994), Chapters 3, 4 and 8. Byoung-Lo Philo Kim, Two Koreas in Development: A Comparative Study of Principles and Strategies of Capitalist and Communist Third World Development (New Brunswick: Transaction Publishers, 1992), pp. 116–118. Clifford, op. cit., p. 39 Yeon-ho Lee, The State, Society and Big Business in South Korea (London: Routledge, 1997), pp. 24–45. For a detailed discussion of the role of moral education in political socialization at schools, see Geir Helgesen, Democracy and Authority in Korea: The Cultural Dimension in Korean Politics (London: Curzon, 1998), pp. 143–189. Sung Chul Yang, The North and South Korean Political Systems: A Comparative Analysis (Boulder, CO: Westview Press, 1994), p. 686. Hoare and Pares, op. cit., p. 82. For a detailed examination of the Yushin constitution period, see Hak-kyu Sohn, Authoritarianism and Opposition in South Korea (London: Routledge, 1989). Clifford, op. cit., pp. 143–169. For detailed analysis of the events of 1986–87 see Lee Manwoo, The Odyssey of Korean Democracy (New York: Praeger, 1990), pp. 19–92. For an assessment of Roh’s record see Sung Chul Yang, ‘An Analysis of South Korea’s Political Process and Party Politics’, in James Cotton (ed.), Politics and Policy in the New Korean State (Melbourne: Longman, 1995), pp. 6–34. Yang

Notes

35

36 37

38

141

concludes that Roh ‘tried, by and large, to fulfil these [1987 democracy declaration] pledges, notwithstanding occasional setbacks and retractions’, p. 8. For further discussion see Helgesen, op. cit., pp. 191–248; Yeon-ho Lee, op. cit., pp. 96–97, 166; and Sung Chul Yang, The North and South Korean Political Systems: A Comparative Analysis (Boulder, CO: Westview, 1994), pp. 493–494. Samuel Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Oklahoma Press, 1991). For more details on individual Asian Pacific countries see Edward Friedman (ed.), The Politics of Democratization: Generalizing East Asian Experiences (Boulder, CO: Westview Press, 1994); and Anek Laothamatas (ed.), Democratization in Southeast and East Asia (Singapore: ISEAS, 1997). For the democratization of Taiwan, see Steve Tsang (ed.), In the Shadow of China: Political Developments in Taiwan since 1949 (Hong Kong: Hong Kong University Press, 1993).

2 Korea’s crisis 1 Laurids S. Lauridsen, ‘Thailand: Causes, Conduct, Consequences’, in K.S. Jomo (ed.), Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia (London: Zed Books, 1998), p. 137. This discussion of the Thai crisis draws on analyses by Lauridsen, op. cit. and by Bhanupong Nidhuprabha, ‘Economic Crises and the Debt-Deflation Episode in Thailand’, in H.W. Arndt and Hall Hill (eds), Southeast Asia’s Economic Crisis: Origins, Lessons and the Way Forward (Singapore: ISEAS, 1999), pp. 67–80. 2 This description of the Indonesian crisis draws on Manual F. Montes and Muhammad Ali Abdusalamov, ‘Indonesia: Reaping the Market’, in Jomo, op. cit., pp. 162–180 and Mohammad Sadli, ‘The Indonesian Crisis’, in Arndt and Hill, op. cit., pp. 16–27. 3 Panicos Demetriades and Bassam Fattouh, ‘The South Korean Financial Crisis: Competing Explanations and Policy Lessons for Financial Liberalization’, International Affairs, October 1999, pp. 788–789. 4 Chang Ha-joon, ‘South Korea: The Misunderstood Crisis’, in Jomo, op. cit., pp. 227–229. 5 Brian Bridges, Korea and the West (London: Routledge & Kegan Paul, 1986), p. 93. 6 John Kie-Chang Oh, Korean Politics: The Quest for Democratization and Economic Development (Ithaca, NY: Cornell University Press, 1999), pp. 150–152. For further details of the internal arguments see Yeon-ho Lee, ‘The Failure of the Weak State in Economic Liberalization: Liberalization, Democratization and the Financial Crisis in South Korea’, Pacific Review, Vol. 13, No.1 (2000), pp. 125–128. 7 Suh Sang-mok, ‘The Korean Currency Crisis: What Can we Learn from It?’, Korea Journal, summer 1998, pp. 40–42. 8 Shalendra Sharma, ‘Asia’s Economic Crisis and the IMF’, Survival, summer 1998, p. 40; Demetriades and Fattouh, op. cit., p. 788. Linda Weiss argues that the MOFE’s loosening of controls on access to short-term money markets was ‘a calculated choice’, ‘Developmental States in Transition: Adapting, Dismantling, Innovating, not “Normalizing” ’, Pacific Review, Vol. 13, No. 1, 2000, p. 31. 9 Jwa Sung-hee and Huh Chan Chuk, ‘Korea’s 1997 Currency Crisis: Causes and Implications’, Korea Journal, summer 1998, p. 12.

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Notes

10 Hak K. Pyo, ‘The Financial Crisis in South Korea: Anatomy and Policy Imperatives’, in Karl Jackson (ed.) Asian Contagion: The Causes and Consequences of a Financial Crisis (Singapore: ISEAS, 1999), p. 159. 11 Yeon-ho Lee, The State, Society and Big Business (London: Routledge, 1997), pp. 2, 171. 12 Jwa and Huh, op. cit., p. 14. 13 Pyo, op. cit., pp. 159–160. 14 For details of the Hanbo case see Robert Garran, Tigers Tamed: The End of the Asian Miracle (Honolulu: University of Hawaii Press, 1998), pp. 123–125 and Suh, op. cit., pp. 44–46. 15 South China Morning Post, 14 October 1997. The dramatic fall in President Kim’s popular standing after suspicions arose about his son was neatly encapsulated in an article written by Shim Jae Hoon for the Far Eastern Economic Review (13 March 1997) which was given the headline ‘Hero to Zero’. 16 Oh, Korean Politics, op. cit., p. 223. 17 Suh, op. cit., p. 45; Far Eastern Economic Review, 6 November 1997. It is said that Japanese car company Mazda, which held an 8 per cent share of Kia’s stock, was not told in advance of the government’s final move. http://www. chapmanspira.com/htms/korea/koreanotes.htm, accessed May 2000. 18 Bong Joon Yoon, ‘Labor Cost Increases and the Currency Crisis of Korea’, Korea Observer, autumn 1998, pp. 562–563. 19 Yong Cheol Kim, ‘Industrial Reform and Labor Backlash in South Korea’, Asian Survey, December 1998, pp. 1147–1148. 20 Jwa and Huh, op. cit., p. 20. The price of the 16-megabit memory chip had fallen from a high of more than $50 to under $7 by mid-1997. Sharma, op. cit., p.39. By mid-November 1997, the world price was around $5, less than the manufacturing cost of $5.50, Korea Newsreview, 22 November 1997. 21 Yong Cheol Kim, op. cit., pp. 1149–1150. See also Johngseok Bae, Chris Rowley, Dong-Heon Kim and John Lawler, ‘Korean Industrial Relations at the Crossroads: The Recent Labour Troubles’, Asia Pacific Business Review, spring 1997, pp. 148–160. 22 Yong Cheol Kim, op. cit., pp. 1150–1154; Bae et al., op. cit., p. 159; Scott Snyder, ‘Patterns of Negotiation in a South Korean Cultural Context’, Asian Survey, May–June 1999, pp. 406–409. 23 Oh, op. cit., pp. 204–205. A comparison of the key terms in the various versions of the legislation is to be found in Yong Cheol Kim, op. cit., p. 1157. 24 The Hong Kong stock market fall was greater than in the October 1987 crash. It had survived two other ‘attacks’ earlier in the year comparatively well. See Y.Y. Kueh, ‘Weathering the Asian Financial Storm in Hong Kong’, in James Hsiung (ed.), Hong Kong the Super Paradox: Life after Return to China (New York: St Martin’s Press, 2000), pp. 239–241. 25 Organization for Economic Cooperation and Development, OECD Economic Survey 1997–1998: Korea (Paris: 1998), p. 31. Demetriades and Fattouh, op. cit., p. 790, emphasize the importance of events in Hong Kong in exacerbating ‘pessimistic expectations’ about Korea too. An IMF official has also noted the pressures put on Korea from the Hong Kong events: Kunio Saito, ‘Korea’s Economic Adjustments Under the IMF-Supported Program’, speech in Seoul, 21 January 1998, http://www.imf.org/external/np/speeches/1998/012198A. htm, accessed February 2000. 26 Changkyu Choi, ‘Speculative Attack Theory and Currency Crisis in Korea’, Bank of Korea Economic Papers, March 1999, p. 91. 27 Demetriades and Fattouh, op. cit., p. 790. See also OECD, op. cit., pp. 32, 35. 28 Changkyu Choi, op. cit., p. 84.

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29 Young Back Choi, ‘On Financial Crisis in Korea’, Korea Observer, autumn 1998, p. 486. 30 OECD, op. cit., p. 32. 31 Young Back Choi, op. cit., p. 487. 32 Oh, op. cit., p. 223. 33 Snyder, op. cit., p. 412. 34 Oh, op. cit., p. 223. 35 Sharma, op. cit., p. 37. 36 Garran, op. cit., p. 125; Snyder, op. cit., p. 412. 37 Korea Herald, 25 November 1997. 38 Ibid., 29 November 1997. 39 Snyder, op. cit., p. 413. Korean officials were particularly disappointed with the much cooler attitude displayed by Clinton in this phonecall, as compared to his more friendly approach in Vancouver; they attributed this to advice to Clinton from his Treasury officials. Information from a former member of Kim Young-sam’s staff, June 1999. 40 Snyder, op. cit., p. 412. 41 Oh, op. cit., p. 225; Korea Herald, 15 December 1997. 42 Oh, op. cit., p. 225. 43 Sharma, op. cit., p. 38. 44 Oh, op. cit., p. 225. François Godement, The Downsizing of Asia (London: Routledge, 1998), p. 97, argues that Kim Dae-jung ‘railed against the external humiliation of IMF requirements [but that] once elected he immediately set out to ratify his predecessor’s agreement with the IMF’, but in reality he had no room for manoeuvre, having already committed himself prior to the election. 45 Korea Focus, November/December 1997, pp. 122–123. 46 Ibid, March–April 1998, p. 141; Korea Herald, 6 December 1997. A sociology professor at Seoul National University, Song Ho-kuen, argued in his book published in early 1998 that the IMF agreement represented ‘Korea’s surrender to the invincible armada of US Wall Street capitalism’. Korea Herald, 3 March 1998. 47 According to Oh, op. cit., p. 227, in January 1998 Korea was able to export $698 million worth of gold, making it the second largest export item behind electronics. There was a precedent in a 1907 civic campaign to collect gold to pay off the country’s then large debts to Japan. Korea Newsreview, 28 February 1998. 48 Godement, op. cit., p. 159.

3 The advent of Kim Dae-jung 1 Jin Park, ‘Korean Democracy in the Vortex: The Challenge of 1992’, in Keith Howard (ed.), Papers of the British Association for Korean Studies, Vol. 4 (London: BAKS, 1993), p. 77. 2 Ibid. 3 Lee Manwoo, The Odyssey of Korean Democracy (New York: Praeger, 1990), p. 55. 4 On the 1987 presidential election see Okonogi Masao, ‘South Korea’s Experiment in Democracy’, in James Cotton (ed.), Korea under Roh Tae-woo: Democratisation, Northern Policy and Inter-Korean Relations (Canberra: Allen & Unwin, 1993), pp. 7–21. 5 On the 1992 presidential election see Lee Manwoo, ‘South Korea’s Politics of Succession and the December 1992 Presidential Election’, in James Cotton (ed.), Politics and Policy in the New Korean State (Melbourne: Longman,

144

6

7 8 9 10 11

12 13 14 15 16 17 18 19 20 21

22 23 24

25 26 27 28 29 30

Notes

1995), pp. 35–65, and Bae Sun-kwang, ‘Continuity or Change: The Voter’s Choice in the 1992 Presidential Election’, in ibid., pp. 66–82. For a discussion of the Roh slush fund case and its revelations, see John KieChang Oh, Korean Politics: The Quest for Democratization and Economic Development (Ithaca, NY: Cornell University Press, 1999), pp. 170–181, 186. Investigators later cleared Kim Dae-jung of receiving any illegal funds through intermediaries from Roh during the 1992 election; the $2.5 billion he received was declared to be legitimate political donations. Oh, op. cit. p. 183. Ibid. p. 187. Korea Herald, 1 January 1997. Korea Newsreview, 26 July 1997. Far Eastern Economic Review, 5 May 1994. Lee and Kim fell out specifically over whether the former should be included in a new security policy coordination council set up under the president’s chairmanship to agree policy towards the North Korean ‘nuclear weapon crisis’, Foreign Report, 19 May 1994. In a country so concerned about defence against the North, dodging the compulsory military service is seen as a major offence. Korea Herald, 27 November 1997. South China Morning Post, 29 October 1997. See comments by political scientist Hahm Chaibong, quoted in Oh, op. cit., p. 228. Bae Sun-kwang, op. cit., p. 70. Aidan Foster-Carter, ‘In Korea, Politics Outweigh Economic Issues’, Asian Wall Street Journal, 26 November 1997. Korea Newsworld, November 1997. Korea Herald, 28 November 1997. Korea Herald, 14 November 1997. Won-Taek Kang, ‘Ideology and Voting: The 1997 South Korean Presidential Election’, Korea and World Affairs, spring 1998, p. 76. Three TV debates were held. For the reduced influence of ‘money politics’ in this election, see Shin Myung-soon, ‘An End to Costly Election Campaigning’, Korea Focus, January–February 1998, pp. 8–14. Aidan Foster-Carter, ‘In Korea, Politics Outweigh Economic Issues’, Asian Wall Street Journal, 26 November 1997. Korea Annual 1998 (Seoul: Yonhap News Agency, 1998), p. 111. Despite leaks of certain internal ANSP documents, exact details of this operation remain unclear. It seems to have involved over twenty intelligence officers of various ranks as well as a young Korean-American businessmen with close links to the North. Kwon Young-hae, the ANSP Director under the Kim Young-sam administration, attempted to commit suicide while under investigation by the police in March 1998, Korea Newsreview, 14 March 1998; South China Morning Post, 3 April 1998. One analyst argues that this letter ‘did not affect Kim’s popularity’, HyeonWoo Lee, ‘Economic Voting in Korea: Analysis of the 15th Presidential Election’, Korea Observer, winter 1998, p. 643. The detailed data can be found in Nam Young Lee, ‘Regionalism and Voting Behaviour in South Korea’, Korea Observer, winter 1998, pp. 611–633 Ibid., p. 630. Korea Newsreview, 27 December 1997. Ibid.; Scott Snyder ‘Patterns of Negotiation in a South Korean Cultural Context’, Asian Survey, May–June 1999, p. 414. François Godement, The Downsizing of Asia (London: Routledge, 1998), p. 81.

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31 Korea Newsreview, 27 December 1997. 32 Shalendra Sharma, ‘Asia’s Economic Crisis and the IMF’, Survival, summer 1998, p. 47; Oh, op. cit., p. 225. 33 Korea Newsreview, 3 January 1998. 34 On the rationale for the real-name system, see Oh, op. cit., pp. 140–142, and Jongsoo Lee, ‘The Real Name Financial System and the Politics of Economic Reform’, Pacific Focus, spring 1995, pp. 101–128. 35 Korea Herald, 14 January 1998; Korea Newsreview, 17 January 1998. 36 Kim Chung-soo, ‘How the Chaebol can Survive’, Korea Focus, January–February 1998, p. 42. 37 Korea Newsreview, 17 January 1998. 38 Yong Cheol Kim, op. cit., pp. 1159–1160; Ahn Byung-joon, ‘Prospects for Korea under the IMF and Kim Dae-jung’, Korea Focus, May–June 1998, p. 5. 39 Korea Newsreview, 21 February 1998.

4 Playing politics 1 Korea Newsreview, 7 March 1998. 2 For analyses of the French political system and the concept of cohabitation, see William Safran, The French Polity (New York: Longman, 4th edn, 1995), especially pp. 162–172; and Robert Elgie and Howard Machin, ‘France: The Limits to Prime-ministerial Government in a Semi-presidential System’, West European Politics, Vol. 14, No. 2, pp. 62–78. 3 Sung Chul Yang, The North and South Korean Political Systems: A Comparative Analysis (Boulder, CO: Westview Press, 1994), p. 463. 4 Hahm Sung Deuk, ‘Structural and Rational Foundations for ExecutiveBureaucratic Politics in Korea’, Korea Journal, summer 1999, p. 122. 5 Ibid., pp. 464–469. 6 See Hong Nack Kim, ‘The 1988 Parliamentary Election in South Korea’, Asian Survey, May 1989, pp. 480–495. 7 On the creation of the DLP see Jin Park, ‘Political Change in South Korea: The Challenge of Conservative Alliance’, Asian Survey, December 1992, pp. 1154–1159. 8 Han Sung-joo, ‘South Korea: Politics in Transition’, in Larry Diamond, Juan Linz and S.M. Lipset (eds), Democracy in Developing Countries: Asia (Boulder, CO: Lynne Rienner, 1989), pp. 295–296. 9 Mark Setton, in his introduction to his translations of key works on politics in traditional Korea, notes that ‘from the late sixteenth century on factional conflict increasingly shaped the political life of Korea’, Peter H. Lee (ed.), Sourcebook of Korean Civilisation, Vol. II (New York: Columbia University Press, 1996), p. 14. 10 Lee Manwoo, The Odyssey of Korean Democracy (New York: Praeger, 1990), p. 143. 11 Han Sung-joo, op. cit., p. 296. 12 Tun-jen Cheng and Eun Mee Kim, ‘Making Democracy: Generalizing the South Korean Case’, in Edward Friedman (ed.), The Politics of Democratization: Generalizing East Asian Experiences (Boulder, CO: Westview Press, 1994), p. 130. 13 Korea Newsreview, 6 June 1998. 14 Ibid., 22 August 1998. 15 Korea Herald, 31 August 1998. The NPP’s very poor showing in the local elections convinced Rhee In-je and the other leaders that there was little real alternative but to join the NCNP.

146 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

37

38 39 40 41 42 43 44 45

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Ibid., 1 and 30 September 1998. Ibid., 26 February 1998. Korea Herald, 4 March 1998; Korean Newsreview, 14 March 1998. Robert Fauser, ‘Learn from the U.S. Partisan Show’, Korea Newsreview, 5 December 1998, p. 9. Korea Herald, 12 February 1999, http://www.koreaherald.co.kr, accessed 15 February 1999. Ibid. Korea Annual 1998 (Seoul: Yonhap, 1998), p. 124. Korean Overseas Culture and Information Service, The New Administration’s Directions for State Management (Seoul: February 1998). Economist, 28 February 1998; Kim Kwang-woong, ‘A Critical Reflection on the Reform of the Kim Dae-jung Government’, Korea Journal, summer 1999, pp. 27–35. Robert Bedeski, The Transformation of South Korea (London: Routledge, 1994), p. 43. Ibid., pp. 42–46. Korea Herald, 13 May 1995. Young-kwan Yoon, ‘South Korea in 1999: Overcoming Cold War Legacies’, Asian Survey, January–February 2000, p. 170. Korea Newsreview, 5 December 1998. Korea Herald, 1 February 1999, http://www.koreaherald.co.kr/kh0201/ m0201104.html, accessed 5 February 1999. Korea Newsreview, 10 April 1999. Korea Herald, 10 April 1999, http://www.koreaherald.co.kr/kh0410/0410102. htm, accessed 10 April 1999. Ibid., 23 April 1999, http://www.koreaherald.co.kr/kh0423/m0423106.html, accessed 23 April 1999. South China Morning Post, 28 June 1999. Chosun Ilbo, 28 May 1999, http://www.chosun.com, accessed June 2000. Korea Herald, 31 May and 10 June 1999, http://www.koreaherald.co.kr/news/ 1999/05/_03/19990531_0322.htm, accessed 31 May 1999. There were also rumours that the jailed businessman had also bought $6 million worth of paintings for the ministers’ wives. Korea Herald, 10 June 1999, http://www.koreaherald.co.kr/news/1999/06/ _02/19990610_0228.htm, accessed 9 January 2000; Korea Times, 14 June 1999. The information had been leaked by a prosecutor while drinking whisky with reporters and the government had at first tried to dismiss it as a ‘slip of the tongue’. Korea Times, 23 June 1999, http://www.koreatimes.co.kr/14_home/199906/ t401423.htm, accessed 24 June 1999. Korea Times, 16 July, 18 October 1999, http://www.search.korealink.co.kr/ search/s, accessed 12 November 1999; Far Eastern Economic Review, 29 July 1999. South China Morning Post, 20 October 1999. Korea Times, 4 November 1999, http://www.search.korealink.co.kr/search/s, accessed 12 November 1999; Young-kwan Yoon, op. cit., pp. 169–170. Ibid. Ibid. On Park’s background, see Mark Clifford, Troubled Tiger: Businessmen, Bureaucrats and Generals in South Korea (New York: M.E. Sharpe, 1994), pp. 67–75. Korea Now, 29 January 2000.

Notes

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46 Korea Times, 25 January 2000, http://www.hk.co.kr/14_8/200001/ t200001252458485148.htm, accessed 25 January 2000; International Herald Tribune, 25 January 2000, http://www.iht.com, accessed January 2000. After the election, Lee Hoi-chang accused the civic groups of having ‘openly violated the laws of the land’ in carrying out their campaign, Asiaweek, 28 April 2000. 47 These and subsequent campaign-related quotations and arguments in this paragraph are drawn from various Korea Times and Korea Herald online editions in March–April 2000, but especially Korea Times, 23 March 2000, http://www.hk.co.kr/14_1/200003231656434151307.htm, accessed 23 March 2000. 48 Korea Herald, http://www.hk.co.kr/14_8/200002/t20000201184854810.htm, accessed 3 February 2000. 49 Korea Newsreview, 31 July and 7 August 1999. 50 Korea Times, 23 March 2000. 51 Chosun Ilbo, 10 April 2000, http://www.chosun.com/w21data/html/news/ 200004/200004100358.html, accessed 11 April 2000. 52 South China Morning Post, 15 April 2000. 53 Asiaweek, 28 April 2000. 54 South China Morning Post, 25 April 2000; Korea Now, 6 May 2000. 55 Korea Times, 3 May 2000, http://www.hk.co.kr/kt_op/200005/t20000503165 40748119.htm, accessed 4 May 2000. 56 Ibid., 24 May 2000. 57 South China Morning Post, 23 May 2000; Far Eastern Economic Review, 1 June 2000.

5 The road to economic revival 1 Choi Jang-jip, ‘Korea’s Political Economy: Search for a Solution’, Korea Focus, March–April 1998, p. 9. 2 The English-language version of his economic ideas were published as MassParticipatory Economy, first in 1985 and then in revised version in 1996. For an analysis of this work, see John Kie-Chang Oh, Korean Politics: The Quest for Democratization and Economic Development (Ithaca, NY: Cornell University Press, 1999), pp. 235–239. 3 Ibid., p. 238. 4 International Monetary Fund, Republic of Korea: Economic and Policy Developments (Washington: IMF Staff Country Report No. 00/11, February 2000), p. 69, http://www.imf.org, accessed March 2000. 5 Timothy Lane, Atish Gosh, Javier Hamana, Steven Phillips, Marianne SchulzeGhattas and Tsidi Tsikata, IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment (Washington, DC: IMF Occasional Paper No. 178, 1999), pp. 6–7. 6 IMF, op. cit., pp. 98–99; Tong Whan Park, ‘South Korea in 1998: Swallowing the Bitter Pills of Restructuring’, Asian Survey January–February 1999, p. 135. 7 Korea Herald, 29 September 1998. 8 Organization for Economic Cooperation and Development, OECD Economic Survey 1997–1998: Korea (Paris: 1998), pp. 41–42. 9 An IMF assessment in early 1999 (Lane et al., op. cit., p. 6) still claimed that the monetary tightening was ‘not extreme (in degree or duration) in relation other crises elsewhere’, while agreeing that ‘disruptions in credit allocation … are of concern’. 10 Korea Herald, 3 April 1998; Korea Newsreview, 13 June 1998.

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11 Kimihiko Eto, Financial System Reform in East Asia, and the Role of Japan and the US (Tokyo: Institute for International Policy Studies, 1999), p. 5. 12 Ministry of Finance and Economy, The Year in Review: Korea’s Reform Progress (Seoul: November 1998), pp. 28–29. 13 Asian Wall Street Journal, 20 September 1999. 14 South China Morning Post, 29 June 2000. The bank’s new president, a former Deutsche Bank executive, commented that ‘It’s like trying to turn a tube radio into a very good transistor radio. The circuits and control system need to change.’ 15 Chosun Ilbo, 1 February 2000, http://www.chosun.com/w21data/html/mews/ 200002/200002010301.html, accessed 2 February 2000; South China Morning Post, 8 June 2000. Through its original component banks, the new Hanvit Bank was heavily exposed to the Daewoo group, racking up a 2 trillion won loss on that group alone. 16 In April 1999 Kim Dae-jung warned the chaebols that if there were not ‘visible reform efforts’ then ‘financial sanctions through banks’ would be necessary, Hongkong Standard, 15 April 1999. 17 International Herald Tribune, 3 July 1999; South China Morning Post, 30 August 1999 and 29 February 2000. 18 For example, Oh, op. cit., p. 238. 19 Quoted in Su-hoon Lee, ‘Crisis in Korea and the IMF Control’, in Eun Mee Kim (ed.), The Four Asian Tigers: Economic Development and the Global Political Economy (San Diego: Academic Press, 1998), p. 215. 20 Lee Jae-Woo ‘Corporate Restructuring in Korea: Experience and Lessons’, Korea Journal, autumn 1999, pp. 255–258. 21 Oh Hogen, ‘What Market Mechanism?’, Asian Affairs (Hong Kong), summer 1999, pp. 67–69. 22 Korea Newsreview, 17 October 1998. 23 Ibid., 28 November 1998. 24 Lee Jae-Woo, op. cit., p. 232. In fact a total of fifty-two companies associated with the top thirty chaebols were declared to be non-viable. 25 Economist, 10 July 1999. 26 Jung Ku-hyun, ‘Asian Economic Crisis and Corporate Restructuring’, Korea Focus, May–June 1999, p. 85. 27 The following account of the two disputes is based on Korean daily newspaper sources and an interview with John B.D. Sohn, the Executive Deputy Chairman of the FKI in Asian Affairs (Hong Kong), summer 1999, pp. 49–60. 28 Korea Herald, 24 November 1998. 29 Ibid., 11 June 1999. 30 Far Eastern Economic Review, 25 February 1999. 31 South China Morning Post, 4 February 2000. 32 New Straits Times, 16 August 1999. 33 South China Morning Post, 14 January 2000. 34 Far Eastern Economic Review, 26 August 1999. 35 Financial Times, 5 November 1999, http://www.ft.com/hippocampus/ q2cd052.htm, accessed 8 November 1999. Former MOFE minister Kang Bongkyun later described the Daewoo case as the biggest problem of his period in office, a ‘time bomb’ which he did not want to explode, Korea Times, 15 February 2000. 36 Sunday Morning Post, 23 January 2000; Asian Wall Street Journal, 4 May 2000. 37 Lee Jae-Woo, op. cit., pp. 253–255, and Jung Ku-hyun, op. cit., pp. 85–88. 38 Korea Herald, 8 December 1998.

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39 On these earlier attempts see Yeon-ho Lee, State, Society and Big Business (London: Routledge, 1997), pp. 46–77, 158–160. 40 Kim Sang-kyun ‘Measures to Cope with Protracted Unemployment’, Korea Focus, May–June 1999, p. 33. 41 National Statistical Office, Monthly Statistics of Korea, March 2000 (Seoul: 2000). 42 Su-hoon Lee, op. cit., p. 221. 43 Dong-ki Kim, ‘The Impact of Traditional Korean Values on Korean Patterns of Management’, in Dong-ki Kim and Linsu Kim, Management Behind Industrialization: Readings in Korean Business (Seoul: Korea University Press, 1989), pp. 133–160. 44 François Godement, The Downsizing of Asia (London: Routledge, 1998), p. 159. 45 Korea Herald, 11 July 1998. 46 Economist, 10 July 1999. 47 Hongkong Standard, 28 April 1999. 48 Korea Herald, 11, 15 June 1999. 49 South China Morning Post, 23 February 2000. 50 Bong Joon Yoon, ‘Labor Cost Increases and the Currency Crisis of Korea’, Korea Observer, autumn 1998, pp. 564–565. 51 Chosun Ilbo, 1 November 1999, http://www.chosun.com/w21data.html/news/ 1999/11/199911010577.html, accessed 12 November 1999. 52 Korea Now, 26 February 2000. 53 Ministry of Finance and Economy video ‘A New Economy for a New Age’. 54 A MOFE spokeswoman, Ms Kang Yeoun-san, interviewed by the author in June 1999, admittedly before the recovery had become so dramatic, said that, despite some criticisms that the recovery was already too fast, the Ministry was not considering a ‘w’ pattern as a possibility. 55 National Statistical Office, op. cit. 56 Asian Wall Street Journal, 26 April 2000; MOFE statement, ‘Structural Adjustments in the Financial and Corporate Sectors: Present and Future’, 21 June 2000, http://www.mofe.go.kr/cgi-pub/content.cgi, accessed June 2000. 57 Ministry of Finance and Economy, Korea Economic Update, 30 March 2000 (Seoul: 2000). 58 South China Morning Post, 31 March, 1 June, 2 June 2000; International Herald Tribune, 10 June 2000. 59 Korea Times, 9 March 2000, http://www.hk.co.kr/14_3/20003/t20000309/ 724424351111.htm, accessed 11 March 2000. 60 Ibid.; Far Eastern Economic Review, 30 March 2000.

6 Dealing with the North 1 There is a huge literature on the Korean War, its causes, course and effects. See especially Bruce Cumings, The Origins of the Korean War, Vol. 2 (Princeton, NJ: Princeton University Press, 1990); David Rees, Korea: The Limited War (London: Macmillan, 1964). 2 The best comparative study of the two political systems is Sung Chul Yang, The North and South Korean Political Systems: A Comparative Analysis (Boulder, CO: Westview Press, 1994). 3 On the North Korean economy see Young-sun Lee, ‘The Kim Jong Il Regime and Economic Reform: Myth and Reality’, in Chung-in Moon (ed.), Understanding Regime Dynamics in North Korea (Seoul: Yonsei University Press, 1998), pp. 175–193; Eui-gak Hwang, The Korean Economies: A

150

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5

6 7 8

9 10 11

12 13 14 15

16 17 18 19 20

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Comparison of North and South (Oxford: Clarendon Press, 1993), pp. 26–239. On the history of the North–South dialogue see Aidan Foster-Carter, Korea’s Coming Reunification: Another East Asian Superpower? (London: Economist Intelligence Unit, 1992). On the 1991 agreements see Young Whan Kihl, ‘Democratisation and Foreign Policy’, in James Cotton (ed.), Politics and Policy in the New Korean State: From Roh Tae-woo to Kim Young-sam, (Melbourne: Longman, 1995), pp. 128–134. On the nuclear crisis, see in particular Leon Sigal, Disarming Strangers: Nuclear Diplomacy with North Korea (Princeton, NJ: Princeton University Press, 1998); and John C.H. Oh and Ruth Grubel, ‘The North Korean Nuclear Weapons Crisis: The USA and its Policy Options’, Korea Observer, spring 1995, pp. 97–116. Oknim Chung’s unpublished paper ‘U.S. Policy toward the North Korean Nuclear Issue, March 1993–October 1994: A Case Study in Multi-level Bargaining’. Chong-sik Lee, ‘North and South Korean Confrontation in the Nuclear Age’, in Dae-Sook Suh and Chae-jin Lee (eds), North Korea after Kim Il Sung (Boulder, CO: Lynne Rienner, 1998), pp. 235–236. Sigal, op. cit. p. 124. Foreign Report, 19 May 1994, commented that ‘in contrast to his strong views on political reforms, [Kim] has a tendency to take up the views of whoever he has listened to last on foreign, economic and security issues’. On the history of KEDO see Ono Masaaki, ‘KEDO as a Security Institution: A Firsthand Report’, Japan Echo, October 1999, http://www.japanecho.co.jp/ docs/html/260513.html, accessed 23 May 2000. For the four-power talks see the five contributions to Korean Journal of National Unification, Vol. 6 (1997). Yong-Sup Han, ‘The Kim Dae-jung Government’s Unification Policy’, Korea and World Affairs, fall 1998, p. 335. The analogy had also been used by a senior North Korean negotiator in a meeting with a Korean-American intermediary at the height of the nuclear weapons crisis, Sigal, op. cit., p 168. Ministry of Unification, Republic of Korea, The North Korea Policy of the Kim Dae-jung Administration (Seoul: n.d., 1998?). Korea Newsreview, 15 August 1998. David Brown, ‘North Korea in 1998: A Year of Foreboding Developments’, Asian Survey, January–February 1999, p. 131. Yang Gil-hyun, ‘Liberalisation and the Political Role of the Chaebol in Korea: The Rise and Fall of the Unification National Party’, in James Cotton (ed.), Politics and Policy in the New Korean State (Melbourne: Longman, 1995), pp. 83–108. Korea Herald, 4 November 1998. Korea Newsreview, 15 August, 21 November 1998. Korea Now, 26 February 2000 and information from the Republic of Korea Consulate-General in Hong Kong, April 2000. Some parts of North Korea were subject to flooding in 1996 and 1997 and to drought in 1998. North Korea has itself admitted to 220,000 deaths through malnutrition, but the North’s own official population figures as declared to UN organizations showed a missing 1 million in the totals between 1998 and 1999. A rare random survey conducted in the North in 1998 by UN medical experts showed that 16 per cent of the children surveyed suffered from severe malnutrition and more than 60 per cent had stunted growth (South China Morning Post, 15 December 1999).

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21 Kim Jae-hong, ‘Political and Economic Implications of the Perry Report’, Korea Focus, November–December 1999, pp. 25–33. 22 Joint editorial of party and military newspapers, ‘Ushering in 2000 with a Resolve to Build a Military-based “Powerful Nation” ’, 1 January 2000, reprinted in Korea & World Affairs, spring 2000, pp. 95–99. Kim Jong-il has not carried on the tradition of his father’s annual New Year’s message and instead the annual joint editorial has become instituted. 23 Cited by Don Kirk, writing in International Herald Tribune, 2 March 2000. 24 For the background of US–North Korean relations see Ralph Clough, ‘North Korea and the United States’, in Jae Kyu Park, Byung Chul Koh and Tae-hwan Kwak (eds), The Foreign Relations of North Korea: New Perspectives (Boulder, CO: Westview, 1987), pp. 255–273; B.C. Koh, ‘North Korean Policy Toward the USA’, in Dae-Sook Suh and Chae-jin Lee (eds), North Korea after Kim Il Sung (Boulder, CO: Lynne Rienner, 1998), pp. 85–100. 25 See Patrick Morgan, ‘New Security Arrangements Between the USA and North Korea’, in Dae-Sook Suh and Chae-jin Lee (eds), North Korea after Kim Il Sung (Boulder, CO: Lynne Rienner, 1998), pp. 165–189; Aidan Foster-Carter, ‘North Korea: Making Up Lost Ground, Pyongyang Reaches Out’, Comparative Connections, 4th Quarter 1999, http://www.csis.org/pacfor/cc/ 994Qnkorea.html, accessed 3 March 2000. 26 For the background of Sino-Korean relations see Ilpyong Kim, ‘Sino-Korean Relations’, in Jae Ho Chung and De Piao Tang (eds), The Emergence of East Asia (Hong Kong: Hong Kong University of Science and Technology, 1995), pp. 68–87. 27 See Brian Bridges, ‘China and the Two Koreas: Searching for a New Balance’, in Maurice Brosseau, Kuan hsin-chi and Y.Y. Kueh (eds), China Review 1997 (Hong Kong: Chinese University Press, 1997), pp. 89–91, 94–98. 28 Nikkei Weekly, 28 September 1998; Gary Klintworth, ‘Theatre Missile Defence for Japan and its Allies’, Asia-Pacific Defence Reporter, February–March 1999, pp. 30–31. 29 Foster-Carter, ‘North Korea: Making Up Lost Ground’, op. cit.; Far Eastern Economic Review, 23 March 2000. 30 The refugee repatriation fiasco led to the sacking of the South Korean foreign minister, South China Morning Post, 17 January 2000. 31 On the background to Japan–Korea relations see Brian Bridges, Japan and Korea in the 1990s (Aldershot: Edward Elgar, 1993). 32 The most controversial move was the September 1990 visit to North Korea by a joint LDP–JSP delegation headed by Kanemaru Shin, a former deputy prime minister, which issued a joint declaration with its Korean Workers’ Party (KWP) hosts stating that Japan should apologize to and compensate the North for its actions and that normalization negotiations should begin. Upset at this step, the Roh administration insisted on proposing ‘five principles’ that Japan should follow in subsequent Japan–North Korean talks, ibid. pp. 146–148. 33 Korea Herald, 8, 9, 10 October 1998; Nihon Keizai Shimbun, 8, 9, 10 October 1998. 34 Park Sang-seek, ‘Northern Diplomacy and Inter-Korean Relations’, in James Cotton (ed.), Korea under Roh Tae-woo: Democratisation, Northern Policy and Inter-Korean Relations (Canberra: Allen & Unwin, 1993), pp. 234–235. 35 Bridges, Japan and Korea, op. cit., pp. 151–153, 157. 36 On the impact of these two incidents on Japanese policy-making, see Nikkei Weekly, 28 September 1998; Nihon Keizai Shimbun, 25 March 1999. 37 On the background of North Korean–Soviet and later Russian relations see Alvin Rubinstein, ‘Russia and North Korea: The End of an Alliance?’, Korea and World Affairs, Vol. 18, No. 3, fall 1994, pp. 486–508 and Kang Bong-koo,

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38 39 40 41 42 43 44 45 46 47 48 49

50 51 52

53 54 55 56 57 58

59 60

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‘South Korea–Russia relations and Presidential Summitry’, Korea Focus, May–June 1999, pp. 54–65. Foster-Carter, ‘North Korea: Making Up Lost Ground’, op. cit. Korea Times, 15, 16, 17 June 1999. Chung, a Senior Deputy Chairman of the ULD Policy Committee, was interviewed in Asian Affairs, summer 1999, p. 35. Tim Beal, ‘Window of Opportunity: Progress towards Détente and Normalisation on the Korean Peninsula’, New Zealand Strategic Review 2000 (forthcoming), p. 20. Korea Now, 25 March 2000. Details of the secret negotiations remain sketchy, so this discussion is based on the South Korean side’s account, available in Korea Now, 22 April 2000. The two texts are available in Pyongyang Report, Vol. 2, No. 2, May 2000; for Park’s comments at a press conference, see Korea Now, 22 April 2000. Center for Nonproliferation Studies, Monterey Institute of International Studies, DPRK Report, No.23 (March–April 2000), http://www.nyu.edu/globalbeat/asia/CNS0400html, accessed 3 July 2000. One GNP politician reported rumours that $3 billion had been paid to the North. Chosun Ilbo, 10 April 2000, http://www.chosun.com/w21data.html/ news/200004/200004100358.html, accessed 11 April 2000. Ibid. Ibid.; South China Morning Post, 10 June 2000. A January 2000 report by the UN’s World Food Programme suggested that if further food donations were not received, their emergency food operations would have to cease in May, which would have ‘serious consequences for North Koreans during the lean season’, Beal, op. cit. Pyongyang Report, Vol. 2, No. 2, May 2000. Nihon Keizai Shimbun, 8 April 2000. The Italian initiative was not out of line with an Italian predilection for trailblazing diplomatic links with other isolated states such as Libya and Iran in recent years. Reuters report, 5 January 2000, as posted on http://www. CNN.com/2000/ASIANOW/east/01/04/italy.kore.reut/index.html.On Dini’s visit to Pyongyang, see Nihon Keizai Shimbun, 30 March 2000. On the 1994 summit plan, see Chong-sik Lee, op. cit., pp. 234–236. Chosun Ilbo, 11 April 2000, http://www.chosun.com/w21data.html/news/ 200004/200004110263.html, accessed 12 April 2000. South China Morning Post, 2, 3, 12 June 2000. Ibid., 9 June 2000. Mori had also met Kim at the end of May for talks on North–South Korean relations and Japan–North Korean relations. Nihon Keizai Shimbun, 30 May 2000. Nihon Keizai Shimbun, 10 June 2000. It was later revealed that apart from the formal official negotiations, the South Korea Director of the National Intelligence Service (the successor to the ANSP), Lim Dong-won, who had been a close adviser to Kim Dae-jung on his ‘sunshine policy’, twice visited Pyongyang secretly to finalize the agenda, Korea Times, 20 June 2000. Fuller descriptions of the three days’ events can be found in Korea Now, 17 June 2000, Time, 26 June 2000 and Far Eastern Economic Review, 22 June 2000. Former foreign minister Han Sung-joo, describing Kim Jong-il’s approach as ‘his own attempt at a “sunshine policy” ’, argued that Kim ‘may have deduced that the goodwill earned by being publicly magnanimous could be used at the bargaining table to avoid concrete concessions’, Han Sung-joo, ‘North–South Korea Summit Reflections’, http://www.nyu.edu/globalbeat/asia/Pacnet062300

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.html, accessed 3 July 2000. 61 See for example the account by a South Korean political scientist, Moon Chung-in, who accompanied Kim Dae-jung in Time, 26 June 2000: ‘For me, the visit was like being in a surrealist movie. … On several occasions, I was emotionally overwhelmed. … The first step to peaceful coexistence and unification has proven amazingly successful.’

7 Korea in the international system 1 James Hoare and Susan Pares, Korea: An Introduction (London: Kegan Paul International, 1988), p. 189. 2 B.K. Gills, Korea versus Korea: A Case of Contested Legitimacy (London: Routledge, 1996), p. 204. For details of the relative diplomatic successes of the South see Chapters 7 and 8 of Gills’s book. 3 See Brian Bridges, ‘South Korean Foreign Policy: From Periphery to CentreStage’, in D.S. Lewis (ed.), Korea: Enduring Division? (London: Keesings, 1988), p. 120. 4 Byung-joon Ahn, ‘Korea: A Rising Middle Power in World Politics’, Korea & World Affairs, spring 1987, p. 7. 5 Far Eastern Economic Review, 22 June 1995. 6 Chung H. Lee and Charles Morrison, ‘APEC and two Koreas’, Pacific Focus, spring 1996, pp. 32–33. 7 On the US ambitions and the intra-APEC debates of 1993–96, see Donald Hellmann, ‘America, APEC, and the Road Not Taken: International Leadership in the Post-Cold War Interregnum in the Asia-Pacific’, in Donald Hellmann and Kenneth Pyle (eds), From APEC to Xanadu: Creating a Viable Community in the Post-Cold War Pacific (New York: M.E. Sharpe, 1997), pp. 70–97. 8 Lee and Morrison, op. cit., pp. 37–38. 9 Korea Times, 28 November 1997. 10 In Mark Beeson’s view, ‘when confronted by its first major test, APEC has been revealed to be ineffectual at best and completely irrelevant at worst’, ‘Reshaping Regional Institutions: APEC and the IMF in East Asia’, Pacific Review, Vol. 12, No. 1 (1999), p. 18. 11 Yong Chool Ha and Taebyon Kim, ‘Reflections on APEC: A Korean View’, in Hellmann and Pyle, op. cit., p. 169. 12 On the creation and development of ARF see Michael Leifer, The ASEAN Regional Forum (London: International Institute for Strategic Studies, 1996). 13 See, for example, the 1996 and 1997 ARF chairman’s statements at http://www.aseansec.org/politics/pol_arf3htm and /pol_arf4.htm, accessed 31 October 1997. 14 Interview with South-East Asian diplomat, 12 July 1994. 15 Leifer, op. cit., p. 48. 16 Lee and Morrison, op. cit., pp. 34–35. 17 South China Morning Post, 29 November 1999. 18 Ibid. 19 Richard Higgott, ‘Shared Response to Market Shocks?’, World Today, January 1998, pp. 4–6. 20 MOFE policy statement on ‘The New International Financial Architecture’, http://www.mofe.go.kr/english/data/E_News/b042202.htm, accessed 15 June 2000. 21 Korea Herald, 1 December 1998.

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22 On the UN diplomacy of the two Koreas, see Gills, op. cit., pp. 174–189, 232–233. 23 Korea Herald, 15 October 1995. 24 International Institute for Strategic Studies, Strategic Survey 1999/2000 (Oxford: Oxford University Press, 2000), pp. 215–216. 25 On the background to the formation of ASEM, see David Camroux and Christian Lechervy, ‘ “Close Encounter of a Third Kind?”: The Inaugural Asia–Europe Meeting of March 1996’, Pacific Review, Vol. 9, No. 3 (1996), pp. 442–453. 26 Ibid., pp. 443–444. 27 A British Foreign Office official has commented that Kim Dae-jung ‘contributed actively and made a considerable impact’, Hilary Synnott, ‘The Second Asia–Europe Summit and the ASEM Process’, Asian Affairs, February 1999, p. 9. On Mahathir’s views, see ibid., pp. 9–10. 28 Information from a member of Kim Young-sam’s staff, March 1995. 29 Far Eastern Economic Review, 22 June 1995. 30 Text printed in Korea & World Affairs, spring 1998, pp. 80–86. 31 Text printed in Korea & World Affairs, fall 1998, pp. 435–446; for the February 1998 inauguration address, see ibid., spring 1998, pp. 93–99. 32 See for example Shim Jae Hoon’s thoughtful article, ‘Koreans Turn to the West’, Far Eastern Economic Review, 12 February 1987.

8 Post-summit Korea: new beginnings or déjà vu? 1 Korea Newsreview, 11 December 1999. 2 Enzio von Pfeil, ‘The Mirage of Asia’s Change’, Far Eastern Economic Review, 18 May 2000. 3 South China Morning Post, 4 February 2000. 4 Panicos Demetriades and Bassam Fattouh, ‘The South Korean Financial Crisis: Competing Explanations and Policy Lessons for Financial Liberalization’, International Affairs, October 1999, p. 789. 5 Korea Herald, 20 April 1998. 6 Ibid. 7 Linda Weiss, ‘Developmental States in Transition: Adapting, Dismantling, Innovating, not “Normalizing” ’, Pacific Review, Vol. 13, No. 1, 2000, p. 39. 8 Ministry of Finance and Economy video, ‘A New Economy for a New Age’ (March 2000). 9 Interview with Sandy Park, FSC spokesperson, June 1999. 10 Daiwa Institute of Research, Kankoku: sosenkyo-go no keizai kadai (Seoul: 21 April 2000), p. 6. This share rise was, of course, caused in large part by the more drastic pruning and/or collapse of the medium-sized chaebols. 11 Chung Jang-ryul, ‘Fading Promise of a Small Government’, Korea Focus, January–February 2000, pp. 30–36. 12 International Institute for Strategic Studies, Strategic Survey 1999/2000 (Oxford: Oxford University Press, 2000), p. 215. 13 Far Eastern Economic Review, 23 March 2000. 14 Korea Times, 9 June 2000. 15 Young-kwan Yoon, ‘South Korea in 1999: Overcoming Cold War Legacies’, Asian Survey, January–February 2000, p. 170.

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Index

Agency for National Security Planning 39, 51 Agreement on Reconciliation and Nonaggression 92, 109 Aquino, Corazon 34 ‘ASEAN + 3’ 115–17 ASEAN Regional Forum 110, 114–15 Asia-Europe Meeting 71, 115, 117–19, 130 Asian financial crisis: causes 2–5; periodization 13, 68, 85 Asian Monetary Fund 116–17 Asia Pacific Council 112 Asia Pacific Economic Cooperation 27, 112–14 Association of South-East Asian Nations (ASEAN) 24 Baker, James 115 ‘Big Deals’ 75–9, 126 Blair, Tony 37 ‘boutique scandal’ 58–9 Camdessus, Michel 26, 28–9, 122 Carter, Jimmy 92, 107 chaebol : role in economy 7, 16, 18–29, 129; ‘Big Deals’ 75–9, 126; restructuring 43–5, 52, 73–81, 125–6; see also names of individual chaebol Chey Jong-hyon 44 Chiang Ching-kuo 11 China: devaluation of yuan 1–2, 22; relations with North Korea 97–100, 107, 117; relations with South Korea 99–100, 112, 117 Chirac, Jacques 47 Cho Soon 38, 50, 63 Choi Kyu-hah 10

Choi Soon-young 58 Chuan Leekpai 14 Chun Doo-hwan 9, 34, 41, 51–2, 55 Chung Ju-yung 33, 79, 87, 95–6 Chung Tae-soo 20, 53 Chung Woo-taik 103 Citizens Alliance for the 2000 General Election 62, 65 Clifford, Mark 7 Clinton, Bill 1, 27, 37, 71, 74, 93, 106, 108 ‘cohabitation’, political 46–8, 66, 127 Cotton, James 5 Daewoo 18, 21, 63, 75–7, 80–1, 85, 87, 126 Declaration on a Non-nuclear Korean Peninsula 92 Demetriades, Panicos 123 Demilitarized Zone 90, 95 Democratic Justice Party 9–10, 35, 50 Democratic Liberal Party 10, 35, 50, 55 Democratic Party 33–4, 38 Democratic People’s Party 63–6 Democratic Peoples’ Republic of Korea see Korea, North developmental state 4, 68, 122 Dini Lamberto 106 Dongsuh 29 East Asian Economic Caucus 115, 117 Economic Planning Board 6, 16 Estrada, Joseph 116 European Union 118 Fattouh, Bassan 123 Federation of Korean Industries 23, 59 Federation of Korean Trade Unions 23, 44, 82–4

Index 163 Financial Supervisory Commission 43, 61, 71, 125 First Life Insurance 73 four-party peace talks 93–4 France, political cohabitation 46 General Agreement on Tariffs and Trade 111, 113 globalization (segyehwa) 112, 119–21 Godement, François 2, 41 Goh Chok Tong 1 Gourevitch, Peter 2, 5 Grand National Party 36, 46, 50–2, 62–7, 79, 127, 129 Halla 29 Hallstein doctrine 111 Hanbo 20–1, 53, 124 Han Sung-joo 49 Hannara see Grand National Party Hanvit Bank 72 Hashimoto Ryutaro 41 Hawke, Bob 112 hedge funds 24 Higgott, Richard 116 Hong Kong 24–5, 53, 124 Huntington, Samuel 11 Hyundai 21, 44, 75–7, 87–8, 95–6, 126, 128, 130 Indonesia 14–15, 24, 123 Intermediate-range Nuclear Forces Treaty 92 International Atomic Energy Agency 92 International Monetary Fund: implementation of agreement with South Korea 69–70, 125; negotiations with South Korea 26–9, 41–2, 114, 132–6; policies towards Asian financial crisis 1, 4, 122; policy towards Indonesia 14–15; policy towards Thailand 13–15 investment trust companies 87 Italy 98, 106 Ivanov, Igor 102 Japan: colonization of Korea 5; relations with North Korea 98, 100–2, 106, 109; relations with South Korea 100–2, 108, 117 Japan Socialist Party 101 Jiang Zemin 101, 107 Joong-ang Ilbo 60

Kang Bong-kyun 78 Kang In-duck 58 Kang Kyong-shik 21, 26, 53, 123 Kia 21, 124 Kim Dae-jung: administrative reform 53–4; attitude to chaebol 43–5, 73–81, 125–6; attitude to IMF 29–31, 39, 41, 116; attitude to Japan 101; constitutional reform 54–7, 60–1, 130; early career 9, 32–4, 124; economic policies 68–89, 124–6, 128–9, 131; first cabinet 51–3; links with workers 44–5, 58–9, 81–5, 126; presidential election (1997) 36–40; relations with Kim Jong-pil 36–7, 48, 54, 57, 103, 105, 126–7; relations with Kim Young-sam 32, 40–2, 45; scandals 57–60, 62–3; ‘sunshine policy’ 64, 79, 88, 94–5, 103–10, 127–8 Kim Deog-ryong 35 Kim Hyun-chul 20, 34 Kim Il-sung 91, 93, 104, 107–8 Kim In-ho 26, 53 Kim Jong-il 64, 91, 93, 97, 100, 104, 107–9 Kim Jong-pil: acting prime minister 46, 50, 56, 126–7; early career 9, 33, 37, 55; presidential election (1997) 36; relations with Kim Dae-jung 36–7, 44, 48, 54, 57, 62, 103, 105, 126–7; resigns as prime minister 61; supports Asian Monetary Fund 117, 127 Kim Tae-dong 52 Kim Tae-joung 58–9 Kim Woo-chong 78, 80 Kim Yong-hwan 42, 61 Kim Yong-nam 100 Kim Young-bae 57 Kim Young-sam: attitude to North Korea 93; early career 9–12, 53, 55; financial crisis 30, 52–3, 113–14, 123–4; globalization (segyehwa) 112, 119–21; president 15–16, 20–3, 38, 45, 93; relations with Kim Dae-jung 32, 34, 40–2, 45, 64; relations with Lee Hoi-chang 35, 47, 64; son’s arrest 20, 34, 58, 124 Kindleberger, Charles 2–3 Koh Kun 115 Korea, North: diplomatic offensive 97–8; economy 91–2, 98–9, 105–6; food shortages 91, 97–8, 105–6;

164

Index

nuclear crisis 90, 92, 114; political system 91; relations with China 97–100, 107–8, 117; relations with Japan 5, 98, 100–2, 106, 109; relations with Russia/Soviet Union 97–8, 102, 108; relations with South Korea 90–4, 96, 103–11, 119, 128; relations with United States 91–2, 98–9, 106, 109 Korea, South: agreement with IMF 28–9, 41, 69–70, 114, 124, 132–6; appeal to IMF 24, 26–8; constitutional reform 54–7; current account deficit/surplus 16–17, 70, 128–9; democratization 8–12, 91; economic development 6–8, 15, 68, 82, 91; economic recovery 68–89, 124–6, 128–9, 131; economy on eve of crisis 15–23; external debt 17–19, 25, 42–3, 69–70, 122–3; factionalism 49; financial sector 70–3, 125–6; foreign reserves 16–17, 70, 86, 125; labour relations 21–3, 44–5, 81–5, 126; parliamentary elections (2000) 60–7, 88, 103, 127–8, 130; party system 49–50; presidential election (1997) 34–40; relations with China 99–100, 112, 117; relations with Japan 5–6, 100–102, 108, 117; relations with North Korea 90–7, 103–11, 119, 128; relations with Russia 102; relations with United States 74; UN peace-keeping 118; unemployment 81–5, 125–6 Korea First Bank 20, 72 Korean Central Intelligence Agency see Agency for National Security Planning Korean Confederation of Trade Unions 23, 38, 44–5, 82–4 Korean Energy Development Organisation 92–3, 96, 99, 115 Korean War 5–6, 91 Kumchang-ri 99 Kwangju 9, 40 Lee Chung 112 Lee Han-dong 67 Lee Hoi-chang 23, 35–6, 39–40, 44, 47, 51–2, 57, 63–4, 130 Lee Hong-koo 35 Lee Hun-jai 61, 71, 125

Lee Jae-woo 81 Lee Jong-chan 41, 51, 60 Lee Ki-ho 51 Lee Ki-taek 34 Lee Kim-hee 77 Lee Kyu-sang 52 Lee Manwoo 49 Lee Soo-sung 35 Lee Teng-hui 11 Liberal Democratic Party 101 Lim Chang Yuel 26–7, 30, 42, 59 Lucky Goldstar (LG) 44, 75, 126 Malaysia 13 Marcos, Ferdinand 10–11 Millennium Democratic Party 61, 63–7, 88; relations with ULD 61–7, 105, 127 Ministry of Finance and Economy 16, 43, 86, 123 mint, illegal strike 58–9, 84 Mitsuzuka, Hiroshi 27 Mitterrand, François 46–7 Mohamad, Mahathir 1, 4, 115, 119 Mongolia 11 Mori, Yoshiro 108 Morrison, Charles 112 Mt. Kumgang 96, 130 Murayama, Tomiichi 102 National Assembly elections see Korea, South, parliamentary elections National Congress for New Politics 26, 34, 48, 50; relations with ULD 36–7, 43, 48, 50, 54–7, 60–1, 103, 127 nationalism in Korea 6, 120–1 New Korea Party 23, 34–6, 38 New Korea Party for Hope 61, 65–6 New Party for the People 37, 46, 48, 50, 61 Newbridge Capital 72 ‘nine dragons’ 35–6, 67 Northern Limit Line 103 North–South Korean Summit (2000) 64; preparations 66, 103–8; results 108–10, 130, 137–8 Obuchi, Keizo 108, 116 Office of Planning and Budget 54 Oh, Hogen 74 Oh, John 69 ‘Operation North Wind’ 39, 64, 105

Index 165 Organisation for Economic Cooperation and Development: Korean entry 8, 16, 18, 22, 113, 117–18, 122 Pacific Basin Economic Council 112 Park Chan-jong 35 Park Chung-hee 6–7, 9, 32–4, 68 Park Jie-won 104 Park Jyun-kyu 50 Park Tae-joon 37, 44, 61, 66 Perry, William 98, 102 Philippines 11 presidential election (1997) 34–40 Putin, Vladimir 108 regionalism: in Asia Pacific 116;in South Korea 40, 51–2, 65 Republic of Korea see Korea, South Rhee In-je 35–40 Rhee Syngman 6, 9, 34 Roh Tae-woo 10, 32–4, 41, 48, 51–2, 55, 101, 111 Russia 102, 108 Samsung 21, 43–4, 75–9, 126 segyehwa see globalization Seoul Bank 72 Son Sook 59

Song Ho-gyong 104 Soros, George 4, 41 Soviet Union see Russia Ssangyong 21, 77 Suh Sang-mok 57 Suharto 14 Sunkyung (SK) 75–7, 126 ‘sunshine policy’ 64, 79, 88, 94–5, 103–10, 127–8 Taepodong missile 100–1 Thailand 11, 13–15, 24, 26, 123 Theatre Missile Defence 100, 102 trade unions see Federation of Korean Trade Unions; Korean Confederation of Trade Unions United Liberal Democrats 26, 50; relations with MDP 61–7, 105; relations with NCNP 36–7, 43, 48, 50, 54–7, 60–1, 103, 127 United Nations 117–18 United States: relations with North Korea 91–3, 98–9, 106, 109; relations with South Korea 74, 93 You Jong-kuen 52, 58 Yung, Sung Chul 47 zaibatsu 7 Zhu Rongji 116