Inflation Shakes Up S. Korea : Commerce: With elections facing Roh Tae Woo’s regime, 1991’s 10% rise is a political as well as consumer issue.

In South Korea, inflation generates strange reactions.

Police, for example, run around town closing down all bars and restaurants at midnight. Government bureaucrats are ordered to trade in mid-sized cars for smaller models. High-ranking officials are told to reduce the size of their offices. Consumption, especially of imported consumer goods, becomes a social sin.

All are elements of President Roh Tae Woo’s “austerity campaign” to contain South Korea’s first serious bout of inflation since the early 1980s. The inflation rate was 10% last year, and some experts predict a 14% to 15% rate this year.

Facing a National Assembly election Tuesday, Roh is attacking conspicuous consumption, along with rampant wage increases, in an effort to cool down an overheated economy that has grown an average of 10% a year under his administration. The major opposition party, led by two-time presidential contender Kim Dae Jung, has singled out inflation--and government spending--as one of its principal issues for the election.

Roh’s goal is to restrain growth to 7% a year to ensure that consumer price increases fall below 9%. But few believe that he will achieve it. Moreover, Roh’s critics see the president himself as a major culprit in the inflationary spiral.

They blame his decision to press ahead with a 1987 campaign promise to build two million housing units during his term. After the program began in 1988, housing starts that had averaged 300,000 a year soared to 500,000--expanding the money supply, driving up land prices and inflating construction wages, said Chai Kyu Dai, head of the Hanil Bank’s Chungbu regional headquarters.

“Workers quit jobs in manufacturing to go into construction, creating a labor shortage at factories too,” he said.

Roh’s decision was “a serious policy mistake,” said Lawrence Krause, director of the Korea-Pacific Program at UC San Diego. “It couldn’t have come at a worse time. Just when labor and management were working out how to deal with each other (after years of a ban on union activity), the government created a labor shortage and sparked inflation.”

To many, the issue runs deeper than merely a policy mistake. It involves the ability of South Korea, which abandoned authoritarian government under Roh, to manage its new democracy.

Krause, for example, said he thought that Roh, “uncomfortable with democracy,” was unable to explain to voters why his housing promise wasn’t such a good idea after all and thus felt “compelled” to carry it out.

Roh may have also been reluctant to intervene while wages spiraled upward for three years because, as he once explained, “democracy cannot be imposed from the top.”

Now, Deputy Prime Minister Choi Gak Kyu, who runs the Economic Planning Board, has vowed to contain wage increases. Government officials have instructed 1,528 large corporations to hold wage increases to 5%, or less, this year, he said. For smaller firms, the target is below 10%.

Choi also assured Roh that enforcement of midnight-closing for entertainment establishments would be continued to curb “excessive consumption.”

Hanil Bank’s Chai insisted that wages constitute such a small proportion of manufacturing costs in South Korea that they cannot be blamed for inflation. In addition, productivity gains since 1987 have eliminated the bulk of the higher wage costs to producers, he said. Korea’s distribution system, which allows countless middlemen to raise prices “by whatever margins they wish,” has been a far bigger source of inflation, he added.

Kim Soon, a housewife, said she started keeping a record of household expenses for the first time in January because of rising prices. Nonetheless, she said she thought the standard of living “is much better” than when Roh took over in February, 1988.

“But the people’s complaints are louder. Maybe, it’s because of freedom of speech (that is permitted now),” she added.

Many South Koreans, who have grown up linking prosperity with exports, are as troubled by trade deficits that have re-emerged under Roh as they are by inflation. And their tendency is to blame rising wages for making South Korean exports uncompetitive.

Last year, the trade deficit reached $9.7 billion, up from $4.8 billion the year before. South Korea even had a deficit--$335.1 million--with the United States, the first time that has happened since 1981.

Manufacturers blame not wages, but tight money and high interest rates--imposed by the Bank of Korea to fight inflation--for their problems generating products for export. Businessmen as diverse as Kim Woo Choong, founder and chairman of the giant Daewoo Group, and Cho Kyu Gon, a director of Namil, a 600-employee company that manufactures stainless steel kitchenware, complain that adequate funds, at any rate, are unavailable.

For conglomerates like Daewoo, banks offer loans at 18% a year. Small firms like Namil pay an average of 25% interest--about 4% more than last year--with some borrowing at more than 30%, Cho said.

“How can you make a profit when you have to pay 30% a year in interest?” he complained.

South Korea’s Overheated Economy

South Korea’s government has begun an aggressive campaign to contain inflation by limiting wage increases. But some experts argue that wages are not a major factor in inflation because Korean manufacturers have increased productivity to offset the effect of higher labor cost on their prices. Instead, they say that consumer price increases in recent years result from unrestrained price hikes in the distribution system.

1987 1988 1989 1990 1991 Wage increases, all industries 10.1% 15.5% 21.1% 18.8% 16.9% Labor productivity gains 10.8% 18.9% 11.7% 17.5% 18.0% Consumer price increases 6.1% 7.2% 5.1% 9.4% 9.5%

Source: South Korea Economic Planning Board