Korean Reunion and it's influence to the asian economic crisis

7/27/2019 Korean Reunion and it's influence to the asian economic crisis

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"Korean Reunion and

its Influence to the Asian Economic Crisis"submitted by Pascal Couchepan

Swiss Finance Ministerfor the Session of the year 2005


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Korean Reunion and

its Influence to the Asian Economic Crisis

Foreword1. The asian economic revolution and its aftermath.2. The role of the korean "chaebol" in Asia.

3. The carping to the nowadays situation of Korea.

4. Strength and weakness of the korean economic structure.

5. Korean role of the international economy.6. Reunion or Commonwealth of the two Koreas.

Conclusion

Special Lecture of Prof. Chung-Yang Kim after the Asian Economic Crisis of 1997, which was held on 28th of

June 1998 at the Grand Conference Room of the Hilton Hotel Zurich. The participants were almost the bankers,

financial experts from UBS, Credit Suisse, etc.


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Foreword:

Ladies and Gentlemen!

It is a great honour to hold forth on the "Korean Reunion and its influence to the

Asian Economic Crisis". First of all I express my cordial gratitude to the honourable

president of the Swiss-Korean Chamber of Commerce, Dr. Peter Widmer and Mr.

Keckeis, the CEO-President of CEPAS, who has initiated the whole program for Mr.

YOU Jong Keun, the governor and the presidential advisor for the economic affair.

Unfortunately he couldn't come to Switzerland because of his urgent duty at the

presidential blue house. Many programs for him have to be cancelled, but not the

today's annual meeting of the Swiss-Korean Chamber of Commerce because of an

important subject regarding the Asian Economic Crisis and the specific role of Korea.

As we already know the Northeast Asia of the Pacific Region is most important area

for the World Economics. For many economists it was once a dream to come to this

region. If somebody says, "an art collector will naturally be drawn to Florence orParis, a mountain climber to the Himalayas or Alps. In very much the same way a

social scientist or economist interested in modernization will have his attention fixed

on East Asia." But since last year the core of this area, especially Korea and Japan,

became "flea market (Flohmarkt)" of the world. The goods, which are exhibited there,

look suddenly like an old style and cheapest one, so that everyone may enjoy their

choice and buy very easily. Still many firms and financial institutes of this region are

waiting for new buyers. Among them several companies will go to the bankruptcy,

if they couldn't meet immediately a new customer. It happens in Asia day by day.

What is the real situation of this type of crisis? If somebody raise a question to this

proper situation, the answer might be a simple one: it is the deflation situation like

1930s of Europe and America. Everywhere in Asia the voices are to hear: in spite of

some risk factors, now is the big chance to own something, now is the big chance to

invest!


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The famous german social philosopher, Max Weber, has once spoken about the

uniqueness of the european development of economies and societies. His wellknown

work, the protestant ethic and the capitalistic spirit (Protestantische Ethik und der

kapitalistische Geist), corroborated the western phenomenon on the basis of the

christian way of life. It was the philosophical prediction immediately after the first

world war on 1919. According to this prediction the places, where the non-christian

religions dominate like Buddhism, Islam, Confucianism, are seldom to expect a

socio-economic development like the european. Thus our 20th century has begun by

the initiatives of Europe and America. The socalled "Atlantic Era" has brought the

plenty richness and prosperities during the first half of the century on the basis ofthe "christian ethics" and "the capitalistic spirit".

After the second world war a new era has dawned, the "Age of Pacific". This new

age has brought another type of social development with extraordinary rapid

growth of economics, which could be never seen before. From the 1950s onward

Japan, from the 1960s onward South Korea, Hong Kong, Taiwan, from the 1970s

onward Singapore, from the 1980s onward China, from the 1990s onward India, etc.

Asia is a huge continent in size and population. By the year of 2000, Asians are

expected to account for 3.6 billion of the world's 6.2 billion people, nearly half of the

whole world's population. Fully a billion of those Asians will be living in households

with some consumer-spending power. Unlike the european the richness and

prosperities are now concentrated in mega-cities such as Peking, Tokyo, Seoul, Hong

Kong, Bombay, etc, where the cultural heritages are not based on the christian

religion. It is the quite distinguished form of economic and social development.

Those mega-cities are of great importance not only for the economies and finances,

but also for the whole cultural and social life of this region.

The most interesting place of the pacific region recent is the Special Economic Zone

at the delta-area of the North-Korean Duman river, where Korea, China and Russia

meet. One of the korean chaebols "Hyundai Group" is working there since a couple

of years in order to exploit the Siberia's immense natural resources. A huge scale of


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the industrialization at the russian pacific coast is a great ambition of those three

countries for the next century. We call it "a new californiazation" of Asia. The

reunion of North and South Korea will enhance the exploitation capabilities of this

special industry zone, which will shape a large scale of military and economic

fortress for China, Russia and Korea. That would be a great competitive pressure

especially for America and Japan in coming close future. It seemed, that the center of

the world economies might remove to the pacific region. Many scientists, scholars,

politicians have forecasted, that the next century will be undoubtedly the "Pacific

Era". If Asia's growth continues even under nowadays difficult situation, the Asian

economies (including Japan and India) will be in coming decades bigger than theeconomies of Europe and the Americas put together. A calculation by the

International Monetary Fund (IMF) showed that Asia's share of the world economic

output in 1990 was 25 percent; that of North America and Western Europe combined

was 46 percent. It is a remarkable sign of the Asian prosperities.

Then unfortunately it came an economical typhoon in Asia last year beginning with

Thailand. This outrageous typhoon-eye has raised terrible crises among all asian

countries and now reached to Japan, where its terminal has been founded. The

miracle economies of all Asian countries will follow this inevitable trajectory of the

declining growth of Japan. The decline symptom of Japan has been seen, however,

since 1960s. As Japan matured from the 1960s to the 1990s, for instance, its average

decennial growth rate fell from 8-9 percent to some 6-7 percent to about 3-4 percent.

But no one has accepted this as a serious phenomenon, because the retrieval could be

easily carried on by the Japanese. Now it's very hard to say, that the Japanese as an

engine of the Asian growth rally from their economic and financial failure during the

past decennials. Then what was the Asian economic revolution and its aftermath?

1. The Asian economic revolution and its aftermath:

It's now very important retrospection to follow up, why the world economies grow


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in general and why, in particular, the economies of East and Southeast Asia

unexpectedly grew faster in the two generations after 1950 than any fairly large

economies had ever grown before. Asia has been extraordinarily good at putting

together the four elements that make for economic growth. Three of these elements

are straightforward. First, Asia's workforce has grown fast and puts in long hours.

Second, most of East Asia has been extremely good about improving the quality of

its workers through education and training. Third, Asian countries have injected

unusually large amounts of capital - of machines and equipments - into their

economies at an early stage, something which their exceptionally high savings rates

have allowed them to finance. The fourth element of growth - productivity, or theefficiency with which the other three elements are combined - has always been much

harder to understand. This is because it sums up many of the deepest influences on

the workings of an economy and society. The spread and use of technology, the fit of

the society's culture and values with the demands of modern economic life, the

country's receptiveness to new ideas and foreign influence. Asia's productivity

improved significantly over the years from 1950 to 1990. It's the main reason of

improvement, why the Asian countries were so open to the influence of new ideas of

all sorts, especially those from abroad - whether brought to Asia through foreign

trade, foreign investment, or foreign technology. Now we should raise two big

questions: Will it continue once again in Asia to grow as fast as it did in the past

decennials? Is the rise of Asia in this style good or bad for the West?

Many scholars have predicted, that around the year of 2000 Asia's economic growth

will suddenly slow down. However, the stagnation and regression of the asian

growth has been occurred previously. Is there a significant element in the

slowdown? The biggest flaw in the success stories of modern Asia (including Japan)

has been their failure to develop the transparent and objective public institutions

needed to run the more sophisticated societies and economies that their fabulous

economic growth is producing. One aspect of this failure has been the widespread

dawdling in most Asian countries over building the infrastructure of a moderneconomy until circumstances force them to. Much of Asia will be forced into these


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public investments towards the end of the century. No country will be more affected

than China, which has the continent's most woeful dearth of the physical

infrastructure and the public institutions of a twenty-first-century society. As it

struggles to build these things, China's growth rate in the decades between 2000 and

2020 will be some 50 percent lower than its growth rate in 1980-2000.

Early in the 1990s Asia's growth began feeding off itself in the sense that the trade of

Asian countries (including Japan) among themselves became worth more than their

trade with the West. The fate of China first, and India in due course, will begin to

sway the economic destiny of the whole of Asia. And as fast-starting China begins toslow down, slow-starting India will begin to speed up. Under this circumstances

what will be happened in the korean peninsula?

2. The role of the korean chaebol in Asia:

The korean economic structure has been shaped by the chaebols. While the term"chaebol" means "financial clique", it is used to describe a large business group,

originally created by a talented entrepreneur and still largely family controlled, and

spread over many diversified areas. The total turnover of the ten largest chaebol is

equivalent to 58 percent of the Korea's GNP and the total turnover of the 30 largest

chaebol accounts for 83 percent. Among 1993 Fortune 500 were 12 Korean groups

who rival the major Western firms. For instance, Samsung's consolidated turnover

was equivalent to 5 percent of Siemens' in 1975; as the world's fourteenth largest

firm Samsung had overtaken the German giant in 1993.

The chaebols are the offspring of Korea's forced industrialization. In the 1960s the

Korean government identified talented, export-oriented entrepreneurs and

systematically sponsored them by granting the preferential credit, import licences,

tax advantages and domestic protection, etc. With a liberal financial policy and

astute financial engineering based on cross-equity exchange and high leverage, the


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chaebols were able to sustain an average growth rate of about 30 percent a year

during the 1970s and the 1980s.

These groups originally developed from their privileged access to resources: those

granted by the government plus the tapping of managerial talents and of a low-cost,

disciplined, hard working labour force. This allowed the chaebol to gain competitive

advantage in labour-intensive manufactured products, mainly sold on the export

market as OEM goods. The cash flow generated by these activities, amplified by

leveraged financing, was reinvested in modern equipment. This strategy, combined

with aggressive pricing, has generated sufficient volume to achieve globaleconomies of large scale. In the mid of 1980s, the chaebol started to move on to more

value added products, developed their own technology and promoted their own

brand name on the world markets. Korean chaebol are globally significant players in

shipbuilding, construction, steel, semiconductors, consumer electronics and cars.

Korean chaebol are widely diversified, ranging from electronics and shipbuilding

through construction and industrial equipment, but as with overseas chinese firms

their managerial styles reflect the personal style of their founder-chairmen. The

development of the chaebol has followed a marked pattern of gradual upgrading of

competitive advantages.

The strategic development of Korean chaebols hit a crisis point in the late 1980s

when local labour shot up and the Korean currency, the won, rose sharply. The

conglomerates responded by setting up offshore plants in south-east Asia and by

investing in higher value added, knowhow-intensive sectors. During the 1980s the

Korean government attempted to rationalize the business portfolio of the chaebols

by forcing them to concentrate on a limited number of sectors. Similar moves had

failed in the past, but in 1993 the government announced that financial support

would be given only to groups which concentrated on core business. This

rationalization is slowly taking effect, not just because of the government demands

but, more importantly, because of competitive pressures from the world economies.


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Although a genuine Korean management style is still in the embryonic stage, it is

clear that the Korean chaebols, both in terms of managerial culture and corporate

structure, is a hybrid of Confucian values and Japanese group loyalty. The chaebol is

run as an extension of the feudal family network, providing lifetime employment

and a range of benefits which in turn exact a high level of loyalty and sacrifice from

the employee.

The chaebol resembles the Chinese firm insofar as it is characterized by a top-down

authoritarian style and an extreme paternalism on the part of the chaebol owner, the

Chairman or Whoe-Jang, who is either the founder of the group or his direct

descendent. The Whoe-Jang demands the emotional loyalty of his employees,

recruits executive managers from among family members and passes the company

on to his sons. This loyalty is so extreme that corporate culture in Korea is often

equated with the glorification of the chairman's beliefs and his prescriptions for

conduct.

Cohesion and coordination at the top are enhanced by an elitist recruitment policy

thanks to which alumni from prestigious institutions such as the Seoul National

University or the Military Academy share a common set of values and social

practices. In stark contrast to Western corporate cultures, Korean culture relies

heavily on intangible, abstract concepts such as harmony and challenge. The Korean

chaebol taps virtually inexhaustible resource: nationalism. At least one chaebol,

Samsung, reflects this in its corporate motto: "We do business for the sake of nation-

building". As chaebol like Hyundai and Daewoo make the transition from

companies moulded in the image of their traditional, charismatic founder to more

institutionalized corporations, they are increasingly conscious of the need to provide

more visible symbols of corporate culture, like uniforms, to their employees. Most

observers predict that the critical management challenge will come not from a

abroad, but from home, where a new generation of western-educated Korean

managers finds the authoritarian culture frustrating and demoralizing. High rates of


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voluntary turnover are just one sign that this management style may no longer be

viable. It is interesting to note the managerial evolution of the Samsung group,

which in the early 1990s was promoting a managerial style based on western

concepts, applying the principles of rationalization, de-layering and re-engineering.

Mr. Lee Kun-He, the son of the founder who became chairman after his father's

death, began to rationalize the portfolio of activities by concentrating on three core

sectors. He considerably reduced the size of the chairman's office, trying to push

decision-making down the chain of command.

3. The carping to the nowadays situation of Korea:

Paradoxically, the very diversification of chaebol has led to a problem of identity

and the challenge of instituting a binding, corporate culture. Samsung's business, for

example, ranges from ships to shirts to microchips, and lacks the focus of Toyota, a

name synonymous with cars, or IBM, which for some has come to mean computers.

Even abstract concepts like "self-sacrifice" or "harmony" can no longer be relied uponas effective corporate cement. Lucky-Goldstar's Inwha, or "Harmony among the

people", a slogan which has guided the company for more than 30 years, is now seen

as too insular and has been criticised for serving as a shield to cover personal

mistakes.

The traditional international strategy of Korean firms was to concentrate on exports

and their foreign investments were largely made to support their export drive, either

to circumvent trade barriers or to control distribution channels, particularly in North

America. In the early years of 1990s, 40 percent of Korean foreign investments were

in North America while 38 percent were in South-East Asia. The trend is now

changing and Asia Pacific countries receive more attention as bases for low-cost

manufacturing and markets for Korean products. As latecomer, lagging behind

Japanese and Western firms, Korean firms have targeted their approach by focusing

on key sectors across the region (construction, heavy engineering, chemicals,


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electronics) or by entering emerging markets at an early stage: Vietnam, Northern

China, Mongolia, Myanmar. As competitive tools, Korean firms in Asia use their

traditional low-pricing strategies enhanced by a specific marketing approach concept

highlighting their "non-Japaneseness". All this kind of elements has its limit.

Considering its poor natural resource endowment, limited market size, and the

availability of foreign capital and proven technology, Korea had to look outward to

break the vicious circle of underdevelopment. Korea's success in the last three

decades owes greatly to such international factors as foreign markets, foreign capital,

and imported technology. Unemployed and underemployed workers had to be

absorbed in the manufacturing sector, so foreign markets had to be found. In the

absence of a domestic savings base, however, investment in manufacturing

industries for exports and social infrastructure had to be financed by foreign capital.

In the 1950s, the role of foreign aid was important in closing the nation's savings and

foreign exchange gaps. However, coming into 1960s, foreign borrowing started to

become important in closing these gaps. The productive use of borrowed capital was

ensured by tight monitoring schemes. The appropriate development strategy and

effective leadership commitment were bases for those monitoring schemes to

successfully generate debt-servicing capacity.

Perhaps Korea is an exception among developing nations, which traditionally have

relied little on foreign direct investment (FDI). Korea's recent colonial experience

seemed to make Koreans generally suspicious about the motives behind foreign

direct investment, especially Japanese FDI. More importantly, Korea's unique

relative capital cost structure favored borrowing capital, which made Korean

businesses prefer foreign debt as well.

4. Strength and weakness of the korean economic structure:


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Now Korea is at a different stage of development in which sophisticated

technologies must be imported to upgrade its industrial structure. These

technologies are usually bundled with FDI. Consequently, Korea has been

liberalizing its regulations to encourage businesses to rely more on FDI. The recent

FDI trend, however, indicates that more needs to be done in this connection.

Korea's outward-looking development strategy efficiently facilitated technology

transfer. Assistance from buyers of Korean products and sellers of capital equipment

and raw materials has been an important channel of technology transfer in Korea.

Being a late industrializing nation pursuing an outward-looking developmentstrategy, Korea undoubtedly enjoyed more advantages from "learning by watching

and doing" in both engineering and managerial advances than did those countries

that pursued inward-looking strategies.

Now Korea's phenomenal success brought its own problems. As Korea's export

market grew fast, its export share in the world naturally increased rapidly. Tradedisputes and frictions with major trading partners were bound to arise. The United

States, traditionally the most important market for Korean exports, provided more

than one-third of the market for Korea's exports in the 1980s. Furthermore, Korea

began to record a trade surplus vis-a-vis the United States in 1982, when the US was

suffering from its twin deficit problem. Korea became one of the major targets for US

policies to restrict access to the US market while increasing bilateral pressure for

market opening and currency appreciation.

Korea is about to graduate from the World Bank's loan assistance program. Its

relationship with important multilateral institutions such as the International Bank

for Reconstruction and Development and the International Monetary Fund (IMF)

during the last three decades of rapid development have been quite productive. In

addition to valuable financial assistance, Koreans took these institutions' guidance

and consultations seriously; the Korean government fully used its discussions with


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them not only to formulate better policies but to persuade politicians and ministries

with differing views to accept new policies. Korea is now at the stage where it is able

to contribute to these institutions to assist in world development.

5. Korean role of the international economy:

Under the new world economic order, Korea is expected actively to share

responsibility for maintaining world economic stability and prosperity. In particular,

Korea is expected to play an important role in preserved liberal global economic

environment. In order to work toward this goal, Korea should accelerate both

domestic and international liberalization. Korea has benefited greatly from a liberal

global trading system and a table financial environment, and it will have to depend

on such an environment in the future. Thus, for its own good, it is important for

Korea to make positive contributions toward the successful completion of the

Uruguay Round or, on that matter, any multilateral forum aimed at maintaining and

enhancing worldwide free trade.

At the same time, Korea as a "pioneer country" has an obligation to provide positive

contributions for follower nations of the developing world through active economic

cooperation. Korea's recent establishment of the Economic Development

Cooperation Fund for the purpose of assisting developing nations is an important

first step in this direction. For the time being, however, Korea has more to offer in

the area of technical assistance through use of its abundant human resources. The

most recent first-hand experiences of managing developmental efforts at both the

macroeconomic and project level can be used in assisting follower nations. In this

regard, Korea's technical assistance programs might very well be interlinked with

programs at various multilateral institutions.

As an important regional economic power, Korea has roles to play for the region's

continued prosperity. The Northeast Asian region could be an ideal place for


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applying Korea's developmental experiences and tested middle-level industrial

technology. If this effort is closely complemented by Japan's capital and advanced

technology, the region's overall development, will be successfully promoted. Korea

should also actively promote the principle of "open regionalism" in the Pacific Rim.

This principle has been endorsed by a promising regional cooperative body, Asia

Pacific Economic Cooperation (APEC). Korea should work to ensure that APEC

becomes a better institutionalized, cooperative body for promoting regional stability

and prosperity.

As an important international economic player, Korea needs to participate moreactively in major international organizations and forums where important policies

are discussed and coordinated. By doing so, Korea could take advantage of valuable

opportunities for sharing information on world economic and technological

advances and on future policy directions of major economic and technological

leaders. Korea has to make difficult structural adjustments before it can join the

ranks of the industrially developed. These politically difficult but necessary

adjustments could be implemented faster and possibly easier in a multilateral

context. Korean membership in the Organization for Economic Cooperation and

Development (OECD) might serve this purpose as well. The Korea's role of the

world economy is so important, that the establishment of the peace regimes on the

Korean peninsula should be secured and guaranteed.

6. Reunion or Commonwealth of the two Koreas:

There are four categories of changes we have to make to build a peace regime on the

Korean peninsula. The first is the formation of treaty that establishes a normal

diplomatic relations among the related parties. In this regard, there has been some

continuity and change in diplomatic relations among the countries in this region.

The simultaneous entrance of the two Koreas to the UN in 1991 signifies a

meaningful departure from the past. On the other hand, the North Koreans are still


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in a state of diplomatic isolation, due to the lack of normalized relations with the

West, particularly the United States and Japan. In case of the Korean peninsula,

American recognition of North Korea's independence and territorial integrity may

precede the establishment of full diplomatic relations between the two countries, or

the two developments can take place all at once. This means that the international

society, including the United States, agreed to recognize the independence and

territorial sovereignty of North Korea. Therefore, a peace treaty involving the U.S.

and the two Koreas is likely to be one that contains a timetable for fuller diplomatic

relations between the U.S. and North Korea.

Second, a peace regime includes, as one of its integral parts, the ongoing

commitment of the related parties to arms limitation and arms control. A shift from

an armistice to a peace regime involves efforts to scale down the trend of arms

buildup. If a peace regime does not simply mean a suspension of fighting but a

framework for permanent peace, it should include an institutionalized forum to

discuss and implement security confidence building and turn back the continuing

trend of military armaments. One of the crucial elements of Willy Brandt's ostpolitik

(east policy) which became the actual starting point of the peace process in and

around the two German republics in the early 1970s was just that. It was clearly

expressed in his vision of "venturing more disarmament" which he discussed on the

occasion of being awarded the Nobel Peace Prize in December 1971: "We rather have

to create and maintain between the nations and groups of nations a balance in which

the identity and security of each of them can safely exist. A balance of this type must

be more, however, than merely a well-balanced system of military means of power -

over and above the - bilaterally or multilaterally expressed - renunciation of force we

can achieve a higher degree of security by Europe's participation - on a basis of

equality - in special agreements on arms limitation and arms control."

In late 1991, with the American decision to withdraw tactical nuclear weapons from

Korea, the two Koreas managed to reach "the Agreement on Reconciliation, Non-

Aggression and Exchanges and Cooperation". Although this document contained


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some agreements on the need to establish a military confidence building regime, it

has never materialized. Another flaw in the Agreement is that it is not aimed at a

comprehensive confidence building and arms control regime on the Korean

peninsula. In addition, it was only an inter-Korean agreement. The most critical

military party to the Korean conflict, the United States, was not included. Given the

continuing preponderance of the American influence in security affairs in this region,

the Non-Aggression article of the Basic Agreement between the two Koreas did not

have much more than a symbolic meaning.

In this security area, building a peace regime in Korea must involve a set of broadefforts to transform the Demilitarized Zone (DMZ) from a high-powered military

confrontation site toward a Zone of Exchange and Cooperation. As long as the two

Koreas remain divided, the level of military tension along the DMZ will continue to

be a litmus test of whether a peace regime exists or not on the Korean peninsula. The

DMZ is the barometer of the peace regime. The idea of "common security" for the

two Koreas requires a change in the present South Korean mode of thinking on

security in which the politics of military alliance occupies central importance.

Another crucial dimension of any peace regime on the Korean peninsula is

international politics in Northeast Asia. The international system of Northeast Asia

defines the structural possibility of a peace regime on the Korean peninsula. First of

all, the two Koreas exist in a web of alliance systems involving major powers -

particularly the United States and China - which were among the direct participants

in the Korean conflict. The level of tension and cooperation between the two major

powers is one of the critical variables that will decide the feasibility of a peace

regime. It depends on the converging interests of the two powers, which are actually

patrons for the two Koreas in a respective manner. Again, a compromise is needed

between an alliance system-centered security regime and a multilateral security

forum.

In the years of the Cold War, the rigid alliance systems led by each of the two


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superpowers left no room for a multilateral peace institution around the Korean

peninsula. After the end of the Cold War, the European international system

successfully evolved toward a peace regime that produced, among others, "the

Conference for Security Cooperation in Europe (CSCE, KSZE)". It is not surprising

that the process of establishing this international peace regime was intermixed with

the process of the peaceful German reunification. Although this unification was

precipitated by the implosion of the East German polity, it is also important to

remember that it proceeded through a series of peaceful measures taken by both

parties of Germany.

The co-development of a national unification and multilateral security forum in

Europe was not reproduced in Asia. The twofold changes in the Warsaw security

system - the collapse of the Soviet Empire and the internal political changes in the

Warsaw Pact countries, including Russia itself - could bring a total change to the

international relations of Europe. In Northeast Asia, however, the impact of such

changes in the Soviet empire was a limited one. The relative decline in Russian

influence restored a classical type of power political rivalry among major countries

in the region. The survival of the old communist social-political systems of China

and North Korea also limited the effect of the end of the Cold War. In the eyes of the

two remaining socialist nations, the power politics of the tripartite military alliance

among the three countries - the U.S., Japan and South Korea - remains unchanged

and continues to constrain their vision and willingness to experiment with new

international arrangements in the region.

This state of affairs in Northeast Asia suggests limitations as well as possibilities for

international cooperation among all related parties for the support of a peace regime

on the Korean peninsula. We need to learn from the West German experience of

ostpolitik (east policy), which paved the way for a peace regime in the uncertainty of

the unstable detente between the superpowers in the 1970s and engineered a

"German mini-detente" even in the bleak international environment of the 1980s. The

present international situation in Northeast Asia is in a far better condition to


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accomplish a peace regime on the Korean peninsula, than Europe was when the two

German states managed to establish a mini-detente between themselves during the

period of the "new Cold War".

Finally, a peace regime here involves efforts, in both parts of Korea, to seek a new

consensus on a vision of good national community as well. A multilateral security

forum among different sovereign nations can be an end in itself. A peace regime on

the Korean peninsula goes further than that. It is not only of great value in itself, but

also a means to achieve a higher value, i.e., the peaceful unification of the divided

nation. It is also true that the goal of the peace regime will ultimately be completed,only when the two Koreas are peacefully united. A peace regime short of a political

commonwealth will be something incomplete.

In that sense, a peace regime on the Korean peninsula is a preparatory stage for

building a political commonwealth, not by force but by peaceful integration,

whether it be an unitary state or a federal form of state. The peace regime will be one

in which both Koreas make conscious efforts to reach more and more common

ground with the other in terms of social, political and economic styles of life. While

there must not be a compromise on basic human rights, both parts of Korea may

engage in a mutual process of change. A process where communism, prevalent in

the North's social system, and individualism, dominant in social and economic life in

the South, can find a mode of checks and balances against each other.Both internal and external environmental changes dictate that Korea have a renewed

leadership commitment to economics. It is critical that Korea not allow its economy

to continue losing its competitive advantage. Only with a strong leadership

commitment to economics and a national consensus on the primacy of economics

can a more disciplined macroeconomic policy stance be restored. Such a stance

requires maximum insulation of economic policymaking from political influences. If

the government fails to give top priority to economics and does not set an example,

other tough policy choices will not be possible. Without economic preparedness,

even the valuable unification opportunity may be wasted.


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The government now has to try even harder to persuade the general public and

politicians to accept tough economic policy choices. Regular public forums should be

used fully to build consensus on these policies. A presidential council that sets

national priority on economics might well be established for consensus-gathering as

well as for public education. The government's leadership role also should be

strengthened in order to provide a clear vision of the nation's economic future. The

primacy of economics and the leadership commitment to it should be reflected in the

consistency and predictability of major economic policy directions, and this

consistency, in turn, will facilitate policy implementation.

The chaebol issue is one of the most controversial in Korea today. Essentially, the

chaebols are characterized by two interrelated problems, in addition to the

traditional economic efficiency problem: legitimacy and distributional equity. The

legitimacy issue stems from perceived or actual unfairness or injustice involved in

the emergence and growth of chaebols. The latter arises from the concentration of

economic power, which is a consequence of the chaebols' rapid growth.

The legitimacy problem arises primarily from chaebols' privileged access to the bank

loan market. Another source of contention is the chaebols real estate holdings. In

other words, the general perception is that they grew fast at the expense of others -

the weak and taxpayers in general - and that they got richer through socially

unproductive, rent-seeking activities.

Problems of legitimacy aggravate those of distributional equity to the extent that the

chaebols' evergrowing portfolio of assets is concentrated in the hands of a few

individuals and their family members. If the equity shares of chaebols were widely

held, the distributional equity issue would be substantially resolved because even

"illegitimate" wealth transfer could be shared by the general public.

Many have rightly pointed out that Korea's phenomenal economic success owed a


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great deal to its superior general level of education. Korea's new competitive

strategy calls for more active human resources development and higher-quality

education. Koreans are still fervent believers in education, and there is a strong

demand for quality education. The government should not allow this valuable

attribute of the Korean people to be wasted.

Conclusion:

Korea's future survival and enhanced position in the world now depend more on

economics than ever before. It is natural, therefore, for Korea to earmark part of the

"peace dividends" released from the defense budget for investment in human capital

formation, which is the competitive foundation for the Korean economy. It is also

important, that both public and private educational institutions be allowed to use

private financial resources to augment limited public resources for quality education.

It should also be emphasized that the overall educational reform of the future shouldfully reflect Korea's new economic competitive strategy. The system of education

should properly accomodate the needs of a changing industrial structure. More

incentives should be provided to the private sector for the vocational training of

workers, and existing laws and regulations regarding vocational training should be

effectively implemented. Vocational training programs should be properly

incorporated into the nation's adaptive industrial policy as well as the industrial

relations system.

Korea's future depends on how Koreans face the critical challenges. It is not going to

be easy, but if history is any guide, Koreans will learn fast and adapt to the new

situation quickly. The Korean economy in recent years has been showing

macroeconomic imbalances and structural abnormalities. Chaotically rapid political

evolution and shifts in national policy priorities have prevented Koreans from

putting in place needed structural adjustments to adapt to changing domestic and


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international environments. Prevailing populist demands not only forced the

government to put off politically unpopular structural adjustments but to

accomodate some of these demands. For the first time in recent Korean history,

Koreans have allowed politics to dominate economics.

However, this situation will not prevail for long in Korea. Koreans already have

begun to realize that even the nation's unification depends on its economic capability,

as is well illustrated by the recent German unification experience. Therefore, it will

not be too long before the primacy of economics is reestablished. In an intermediate

to long-term perspective, therefore, optimism still is the watchword for Korea'sfuture in spite of the Asian Economic Crisis.

Documents

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