Democracy Adds to Strife Over Korean Economy

South Koreans are worried that their economy is in deep trouble. It is, but the real challenges are more complex than just the economy. The process of transforming a rigid and inflexible social and political system with a matching economic structure into a democratic one that depends on compromise, flexibility and accommodation is producing increasing tumult and unease at all levels of Korean society.

The economic symptoms are declining growth (from 12% in 1988 to 6%-7% this year) and rising unemployment (3.4% in the first quarter from 2.5% a year earlier), and inflation (officially 7% but almost certainly double-digit according to both private and some official observers in Seoul). Wage increases averaged nearly 20% in 1988 and will be well above that in 1989. New investment in manufacturing facilities and output was virtually zero in early 1989, and the current account balance appears likely to fall by 40% this year. A broad June, 1989, survey showed 63% of foreign buying offices in Korea considering procuring elsewhere because of price rises.

President Roh Tae Woo has privately described South Korea as being on the way to becoming an Asian Argentina. In mid-June he told his economic ministers that “our economic achievements of the past 30 years will burst like a bubble” if the slide toward stagflation is not halted, and threatened to fire them all. His principal economic manager, Deputy Prime Minister Cho Soon, complained to a group of key economic advisers at the end of May, “Someone has to find a solution!” “But,” said one of those present, “the ‘someone’ has got to be you, sir.”

Cho’s mid-June “solution” was a 10% ceiling on wage increases, a freeze of the won to prevent further deterioration in export competitiveness, plus more loans for exports and incentives for Korean industrialists to “buy Korean.” But the wage ceiling is currently unenforceable, and holding the won in place, pushing exports and encouraging “local purchasing” are not only old policies, but are likely to increase trade frictions with the United States.

Even if the proposed package did help brace the economy, much more is needed than tinkering with tax or monetary or trading rules. The longer-term challenge is to reallocate wealth and benefits from the enormous growth of the economy over the last three decades in a way that will support non-inflationary increases in consumption. Further, it is to formulate and pass legislation that readjusts fundamental Korean relationships among producers, workers and consumers in ways that will cut across the grain of most politicians--including the opposition--and bureaucrats who have grown up on the economic patterns of the past.

During a June visit to Seoul, I found striking agreement among politicians, businessmen, opposition leaders and economists that inequitable distribution of wealth is becoming a central and increasingly explosive issue, and that Roh and the National Assembly are failing to face up to this. It is not that annual income disparities are that uneven or out of line with other Asian countries but that the distribution of total assets is horrendously so. This has grown, as a senior corporate executive acknowledged, to a point where it is “corroding the moral order.” The five largest Korean chaebol (conglomerates), still overwhelmingly controlled by their founding families, hold assets equaling nearly 45% of the gross national product.

A Presbyterian minister active in opposition politics and a senior corporate executive describe the entire society--led by more than one-third of the population that lives in the huge greater Seoul metropolitan area--as desperate to consume more. The poorer sectors, seeing the rich consume, strive for more money.

A former government official agrees with the minister that traditional moral values in Korea are changing rapidly to demand greater equity, more concern for the environment, more attention to the health and welfare of the individual.

The conservative director of a major government economic research institute bitterly complains that workers don’t care whether their company can pay or their skills justify the wage levels they demand. A liberal labor mediator confirms that this is true from recent conversations with striking Daewoo Shipyard workers.

There is a nationwide movement by workers to take advantage of their rights to bargain with management for a bigger share of the pie. They see press reports that 1988 corporate profits were up an average of 38%. They are unimpressed by explanations about the meaning of “average.”

One Korean commentator sees an effort to catch up all at once with every social and welfare benefit that workers in other countries have won over decades. There is no long-term government labor policy that is looking at how to respond to this. The chaebols , with only rare exception, are resisting adjustment to the new mood in labor. They insist on year-by-year labor contracts, thus assuring unrest each year. They are determined to fight any change in antiquated labor or tax laws and want the police to be used to support their interests.

Land prices have skyrocketed, some say doubling in the last six months, driven by a search for inflation-resistant assets. A senior government economic manager criticizes the flow of huge corporate assets into land and stocks. A rapidly rising proportion of corporate profits now come from these investments, rather than from productive assets. Huge assets are disguised in under-assessed land, which is taxed at a tiny fraction of real value. This is spreading corruption more widely than ever before and breeding new political cynicism. It is no surprise that everyone accepts, and government officials privately admit, that official inflation figures seriously underestimate the real rate of inflation.

At the very least, there is a growing perception gap between Americans, who perceive Korea as flourishing even if it has some temporary problems, and South Koreans who see a more serious crisis looming. In this atmosphere, tough U.S. pressures on Korea to continue to open its markets, even if technically well-based, will inevitably become progressively abrasive unless we take full account of the internal changes taking place.

Koreans have claimed in the past that they were approaching economic crises and each time emerged stronger and more economically competitive. This could happen again. But we may now be witnessing the emergence of a new and real crisis of social change, generated to a considerable degree by the very democratic pressures we have strongly urged.