[OUTLOOK]Halfway down road to reformSome Koreans called it the second National Humiliation Day, when the International Monetary Fund decided to bail out the nearly bankrupt Korean economy on Nov. 21, 1997. Japan's annexation of Korea in 1910 was the first humiliation of the nation. It seems meaningful to look back on what we have done and how the economy has been managed during the last five years to handle the crisis.
Our own faults and mistakes caused the two national humiliations. On the two occasions, Koreans were not prepared for the changes that had been going on around the world. We did not wish to confront the changes and developments outside Korea. It was already too late to keep up with what was happening and, therefore, Japan, which had been watching for an opportunity to make Korea its subject state, forcefully occupied Korea for 35 years, and then 52 years later, a foreign economic power robbed the nation of its financial sovereignty.
On the other hand, there have been positive outcomes in that both the Korean government and private companies have made great strides toward reforming and streamlining, which made both the public and private sectors far healthier and much stronger. Graduating from the IMF program pushed ahead economic reform, if not for the IMF, reforms would not have happened.
The structure of Korea's economy has changed dramatically since 1997. Above all, financial institutions, including banks have turned from simple institutions distributing or supplying money, to individual enterprises that invest and trade more effectively.
Local conglomerates used to concentrate on expanding their business territories by borrowing money from banks. They have changed their strategies completely, however, focusing on competitiveness and transparency in corporate governance to survive the harsher business conditions.
The labor market has become more flexible with the introduction of provisions that allow layoff and privatization of inefficient public organizations. They now make more profits than before the economic crisis.
But there are still a number of problems that have not been solved.
Insolvent firms and financial agencies would have been restructured sooner if the government had supported their reorganizations through the legislation of new economic bills. In addition, the Korean government was so short-sighted that it promoted unreasonable business mergers. Hyundai Electronics Industries Co. and LG Semiconductor Ltd., for example, merged in 1999, swapping their less profitable subsidiaries, forming the troubled Hynix Semiconductor Inc.
The government, furthermore, failed to reform the economic structure swiftly because of weakened government function for the coordination of economic activities and the frequent reshuffle of cabinet ministers in charge of major economic policies.
Procedures for closing insolvent firms should be established through revising regulations, including the Bankruptcy Law, and insolvent banks should be privatized. Both the public administration and labor relations have been reformed to a much lesser extent than the financial industry since 1997.
Illegal labor strikes are still obstacles to more secure economic development, even though the number of strikes has decreased over the last five years. In this sense, Korea as the business center of East Asia seems like an impossible dream. The Tripartite Commission of labor, management and government has to be reorganized; it has resulted in making labor part of the political issues, instead of focusing on solving labor unrest.
Some economists and financial experts worry about the possibility of a second financial crisis hitting Korea. It might be absurd to fear another bailout from foreign financial institutions, considering the fact that Korea has increased the amount of its foreign exchange holdings and the nation has a reputation for successful economic restructuring.
But financial institutions have increased their exposure to foreign capital over the last five years, which means the nation is much more vulnerable, even to slight outside shocks.
The government, including economic ministries and institutions, should concentrate further on completing unfinished reorganization plans. Otherwise, the possibility of Korea suffer from a second and then a third financial crisis will grow bigger, bringing disaster to the nation.
* The writer is the chairman of the Institute for Global Economics.
by Sakong Il