Fix Economy or Else, Seoul Officials Told : S. Korean President Threatens Shake-Up Amid Slower Growth

President Roh Tae Woo on Monday threatened the six economic ministers in his Cabinet with dismissal if they fail to resolve South Korea’s growing economic problems. The threat came as the government lowered its forecast for economic growth and declared war on spiraling wages.

In a meeting of ruling party and government leaders, Roh--whose promise in June, 1987, to transform South Korea from authoritarian to democratic government unleashed demands for large wage increases--ordered the ministers to overcome labor strife, stagnant exports and sluggish investments “with a resolve to resign en masse if you fail.”

“If present economic difficulties persist,” Roh told the group, “grave problems will appear next year . . . and our economic achievements of the past 30 years will burst like a bubble.”

Roh expressed his concern over the economy--the increase in the gross national product fell to 5.7% in the first three months after three consecutive years of more than 12% growth--as Deputy Prime Minister Cho Soon presented lower forecasts for the year.

In a joint news conference with the other five economic ministers, Cho said that since late 1987, wages have skyrocketed 62.5%, far surpassing productivity gains of 32.2%. He said that “the outburst of demands for compensation by workers is reaching a dangerous point.”

Cho, who also heads the Economic Planning Board, said the government is determined to hold future annual wage increases to under 10%. In return, he promised that the government would, in effect, freeze the foreign exchange rate at its present level of about 666 won to the U.S. dollar. Cho said the won, the value of which appreciated 15.8% last year and 2.3% through the first five months of this year, will be stabilized.

A Policy Promise

Although Korean officials, including Cho, have said previously that they would halt the appreciation of the won, which makes Korean exports more costly in dollar terms, Cho’s making the pledge in exchange for wage restraints elevated it to a policy promise to the Korean people.

The freeze promised to exacerbate a continuing dispute with the United States, which had a trade deficit of $8.6 billion with South Korea in 1988. Only last month, Treasury Undersecretary David C. Mulford told the Senate that the United States will pursue negotiations to obtain a commitment for further appreciation of the won.

Washington was also reported to be demanding that South Korea adopt a more market-oriented foreign exchange system in place of its government-controlled calculation of the won’s value based on a “basket” of foreign currencies.

In his speech to party and government leaders, Roh complained that “production setbacks caused by labor disputes may be directly to blame for the difficult economic situation. But the never-ending demands of even doctors, teachers, bankers, clergymen and journalists--not to mention farmers and laborers--have become a key element aggravating the economy.”

Earlier, the Trade and Industry Ministry announced that labor strife had cost the nation $4.7 billion in production losses, including $1.1 billion in exports, through June 12. Between January and May, exports in dollar terms rose only 6.7%, compared to 29.6% in the same period last year. In terms of volume, exports declined 4.1%.

Cho announced that the government will offer businesses a 10% tax reduction for investment in domestically produced factory equipment and a 3% cut for imported equipment for one year starting July 1. More loans to finance exports were disclosed.

Blaming both the wage spiral and the won’s appreciation for diminishing South Korea’s international competitiveness, Cho said the government is lowering its target for real growth to 7.5% this year.

Although the new goal was only half a percentage point lower than the original forecast, it is the first time in four years that the government has been forced to lower the estimate. In 1986, 1987 and 1988, when the South Korean economy grew by more than 12% a year, and again this year, the government had forecast that real growth would be 8%, after subtracting for the effects of inflation.

Cho also lowered estimates for surpluses in trade and in current accounts, the sum of trade and such non-trade transactions as shipping, tourism and insurance. The trade surplus, which amounted to $8.9 billion last year, was expected to fall to $4 billion, while the current accounts balance will decline to $8 billion from last year’s $14.3 billion, he said.

Investment Off Sharply

After rising 12.2% last year, the economy suddenly slumped to 5.7% growth in the first three months of this year. Investment was also off sharply, to 2% growth.

The new goals lowered expectations for exports by $2 billion to a target of $68 billion. That sum still represents an increase of 12% but pales in contrast to a robust 28% spurt last year.

Cho did not spell out how the government would hold future wage increases to within 10%, and he stopped short of reinstituting government guidelines for wages. Until Roh’s promise to democratize South Korea, made to quell violent anti-government demonstrations when he was a presidential candidate, South Korea’s authoritarian governments had actively intervened in labor-management negotiations to suppress wage increases.

Instead, Cho said, a “national wage coordination council” composed of labor, management and government representatives will be established “to suggest reasonable wage increases in line with rises in productivity.” He also pledged that the government this year would restrain to within 10% both the increase in the price it pays farmers for rice and the wage increases it approves for bureaucrats and employees of state enterprises.

Breaking the Cycle

He appealed to South Koreans to cooperate to “break the vicious cycle of high wages, high prices and low economic growth,” and he warned that a continuation of 20% annual pay increases would spur both inflation and unemployment.

In 1984, South Korean workers received wages below those in all three of its major Asian trading rivals. But last year, its average monthly wage of $633 was tops among the so-called Four Tigers. The average was $598 in Taiwan, $547 in Singapore and $544 in Hong Kong, the Economic Planning Board said.

Ro Sung Tae, director of research coordination at the government-financed Korea Development Institute, predicted in an interview that failure of the economy to show significant recovery by the July-September quarter would induce the government to initiate pump-priming measures and devalue the won to promote exports.