New team in Seoul seeks to keep growth and prices steady
South Korea's new government will have to move decisively to solve a number of economic problems if the nation is to stay on target with a policy of moderate economic growth and price stability.Skip to next paragraph
Subscribe Today to the Monitor
All the men President Chun Doo Hwan was relying on to carry out an ambitous program of economic reform and liberalization died in the terrorist bomb blast in Rangoon, Burma, Oct. 9.
President Chun quickly formed a new team of American-educated economic technocrats with a wide range of experience in the public and private sector to fill the void.
On the surface at least, everyone was reasonably happy, particularly the business community, that the Rangoon bombing would prove only a temporary interruption and that all the year's targets could still be met.
Government economists and Western analysts say that until the end of September, at least, statistics showing growth of fixed investment and the expansion of exports suggested that the growth of gross national product this year would be greater than the earlier projection of 7.5 percent. Last year, the economy grew 5.3 percent in real terms, fueled by a sharp increase in domestic construction activity.
Paced by work on sites for the 1988 Olympics, new skyscraper office blocks sprouting up all over the Seoul skyline, and roads being ripped up wholesale for the laying of new subway lines, this construction boom appears to be continuing.
The shipbuilding and heavy machinery industries continue to do well. The Koreans now have 23 percent of the world's new ship orders, second only to the powerful Japan.
The electronics industry, becoming more sophisticated and internationally competitive all the time, is doing well. Even while the nation was still in mourning for those killed in the Rangoon bombing, the annual Korea Electronics Show was being held, with local companies predicting they would pick up at least
Such performances are one reason the Koreans are still confident of reaching their target this year of $23 billion in exports, a 10 percent increase over last year (real export growth in 1982 was only 4.4 percent, poor by Korean standards, but still good, since the volume of world trade declined 2 percent).
Although committed under the economic reform program to gradual import liberalization, officials predict inward shipments this year will grow only 8 percent, enabling Korea to continue to narrow balance-of-payments deficits that have been a chronic concern. Last year the current-account deficit was only $2.6 billion, against an earlier government projection of $4.4 billion.
On the debit side are several threats to the stable development of the economic reform program pressed so strongly by the late Kim Jae Ik, President Chun's American-trained special economic adviser, who was killed in Rangoon.
He wanted to reduce the government's past all-pervasive role as much as possible and finally allow the private sector to have greater freedom, less government interference. One key area was financial, involving selling off five government banks into private hands.
But the financial market has been badly shaken in recent months by a series of major scandals involving illegal bank loans. The latest involves the Choheung Bank, whose top management was arrested recently for accepting bribes to make loans beyond government guidelines to two private companies.
Experts explain that this is one of the side effects of the government's tight-money policy to control inflation. There is not enough money to go round the business community, which is then tempted to ''grease palms'' to get needed bank loans.
Although in theory private interests now hold controlling authority in the commercial banks, management in reality is still under strong government influence because of the financial market situation peculiar to Korea, they say.
And the scandals could make it even harder for the government to let go now.
Tight money is also causing problems for the construction industry, where a number of companies are reportedly near bankruptcy because of problems with overseas projects.
Much of Korea's growth in recent years has come from the success of Korean companies in underbidding international rivals for basic construction projects, particularly in the Mideast. But the golden days are over. Last year, contracts totaled $13.3 billion. This year, to early October, they reached barely $4 billion, as oil producers have cut back hard on their spending to compensate for lower oil profits.
But inflation has been brought down from 40 percent in 1980 to 6 percent last year, with hopes of something even smaller this time.
Both the old and new governments have spoken of being flexible in providing funds through the securities market to help the struggling companies survive.
But this creates an ''ideal'' and ''reality'' problem. If they adhere to the current price-stability-first policy, that money will have to come from somewhere else within the economy - setting off an outcry from other industries, Western bankers say. The other choice is to print more money, jolting the hard-won momentum for price stability.
Such issues cannot be separated from perhaps the greatest Korean problem - continued heavy foreign indebtedness. This country is already Asia's largest borrower, with $38.2 billion in external debt at the end of last year. It planned to borrow $6 billion more this year.
Still, most Western bankers believe Korea will not have much problem at present in continuing to attract foreign money, as long as, in one's view, ''the government continues the policies that have recently made it such a desirable customer for major syndicated loans and an attractive place for investment.
''But circumstances exist that might persuade the new government it can't move as fast as the old in implementing Kim Jae Ik's blueprint; it might be harder for them to let go.''