The New Korea: Crisis Brings Opportunity
Feb 01, 1999
Hilton Root in collaboration with Mark Abdollahian, Greg Beier, and Jacek Kugler

Our analysis of Korea's prospects leads us to believe that Korea will not be secure against future economic crisis without structural reform of finance, enterprise, and labor markets.

This is a difficult task for any country. Success inevitably creates strong vested interests, deeply ingrained habits, and a tendency to seek salvation in the solutions of the past. Will Korea resist this temptation and undertake long-term structural reform? Under current conditions, we anticipate that:

Reform of the Korean finance system will stop at recapitalizing banks and solving bankruptcies.
Enterprise reform will not be sufficient to restrain family control over chaebols.
Korean labor reform will not proceed beyond the recent agreement to allow layoffs only with government approval.
Given these anticipated levels of reform, the prospects for future sustained growth are fragile.

Structural reforms must be built upon what is politically feasible. The International Monetary Fund (IMF) can work with key stakeholders, identify necessary tradeoffs, and promote broad social consensus so that the reforms are politically durable.

To overcome the deadlock in Korea, we suggest as a solution that international financial institutions, the IMF and World Bank, facilitate a labor reform agreement between President Kim Dae-Jung and the chaebols that would allow a tradeoff of a more open labor market in exchange for opening the financial system. With the political capital gained through this reform, the government can go on to promote minority shareholder rights within chaebols.