South Korea’s Bitter Medicine

The International Monetary Fund has put together the biggest loan package ever arranged for a nation in financial distress, up to $55 billion to rescue South Korea from the follies of its own excessive reliance on government direction of the economy. In return, Seoul has been forced to agree to a spectrum of reforms that over time should revivify the world’s 11th-largest economy. But in the short term things are likely to be tumultuous.

Details of the commitments made by President Kim Young Sam’s government to the IMF, the World Bank and other lenders, including the United States, are expected to be revealed today. Leaks to the Korean media give a clear sense of the belt-tightening that impends. Economic growth in the coming year is to be held to 3%, this in a country where the last 20 years have seen average annual gains of 8.6%. Inflation is not to exceed 5%. In an action that should help pry open the too-long-protected domestic economy, foreign ownership of stocks in Korean companies--now limited to 26%--will be allowed to rise by next year to 55%.

One-third or more of Korea’s shaky merchant banks, which provide loans to small and medium-size businesses, may face liquidation. Among the probable consequences of these and other austerity measures are a sharp jump in unemployment, higher taxes and falling property values. Some of the chaebol, the giant conglomerates that dominate the Korean economy and that have been so favored by the government for so many years, have already declared bankruptcy.

In two weeks South Korean voters will elect a new president. Longtime opposition figure Kim Dae Jung, who currently leads in the polls, has joined with other candidates in promising to implement the IMF’s conditions, even while complaining that the agreement “violates national pride.” No doubt others in Korea share that feeling of humiliation, just as many seek foreign scapegoats for a crisis that is largely home-grown.

Government policies that helped spur monumental growth over the course of a generation also fostered shameless cronyism and corruption, while buffering too much of the economy from the realities of the market. With the rescue operation that has been mounted, South Korea can be expected before long to resume its march toward greater prosperity, thanks in good part to its educated and hard-working labor force. But Koreans already know that the first leg of that march is sure to be painful.