'Korea Inc.' Faces Big-Bang Reform

After a week in America wooing Congress and investors, the new president of South Korea, Kim Dae Jung, goes home to face economic Judgment Day.

The days of sluggish reform in this former "tiger" economy are over after six months on the dole of the International Monetary Fund.

To win back wary investors, South Korea is about to restructure with gusto - through massive bankruptcies and layoffs. On June 20, banks will make public a list of the worst managed, most indebted companies that will lose their credit lines.

"They want to demonstrate to the international community that they can get out there and wield a knife," says Henry Morris, an analyst at Industrial Research and Consulting Ltd. in Seoul.

The country already has a taste of mass unemployment. Hundreds of homeless crowd the Seoul train station every night. Scarier for the government is if the jobless start marching in the streets.

Unions have asked for job-sharing and wage cuts to save jobs, but Korea has an overcapacity in manufacturing and a shortage in service sectors like finance and telecommunications. "These people have to be retooled," says Richard Samuelson, a securities analyst at SBC Warburg Dillon Reed in Seoul.

But excessive regulations, high interest rates, and a nonentrepreneurial culture are big barriers for businesses. Korea is "too hierarchical, oligarchical," says Mr. Samuelson. In the 1970s and '80s, the US economy went through a similar shift to service-sector jobs. Samuelson expects Korea's transition to take five to 10 years.

The complexity of "Korea Inc." - an entrenched bureaucracy accustomed to controling the economy and giant conglomerates that expect special treatment - hinders reform, analysts say. Some fear a new crisis as lumbering government officials and entrenched interests delay recovery. The US could feel the effects if Japan sells US Treasury Bonds to buoy its economy. That could force up US interest rates, depress the stock market, and slow the economy.

Korean banks with too many nonperforming loans will have their own day of reckoning. A special body, the Financial Supervisory Commission, is charged with merging and recapitalizing faltering banks.