Asia's Crash, South Korea, and IMF

Having grown up during 90s in South Korea, I remember my parents promising me that they'd buy the new toy I desperately wanted when 'IMF is over'. As a kid, I vaguely understood that economy was adverse and IMF as some kind of an evil force which everyone hated. Reading Krugman's chapter on Asia's Crash, I realized how little I know about my country's experience during the time of hardship. Therefore, I decided to use this blog post as an opportunity to teach myself about Korea during the Asian economic crisis.


Basically, Kruman argues that the devaluation of Baht in Thailand initiated panic among foreign investors to pull out capital. The shock spread throughout the entire Asia (a phenomenon which economists call 'contagion') and reached as far as South Korea. While all the affected Asian countries faced severe devaluation, Korea actually held back for quite a long time; Korean won was depreciated only by 8% against the dollar, compared to Thai baht by 42% and Indonesian rupiah by 37%.1 However, its relative more highly valued currency put Korea in a competitive disadvantage in export.


Korea had to finally let go of Won's value by October. Interestingly however, it was actually not the depreciation that gained a momentum, but the series of bankruptcy that mainly contributed to the recession1. South Korea suffered from a crony capitalism. Just as in Thailand and Japan, banks in Korea lent too freely to even the riskiest investments.2 Their main customers were corporations called 'chaebols' 재벌. Chaebols refer to wealthy Korean families that own large corporate business and have formidable political connections. A string of bankruptcy that started with Hanbo Steel in January (which also caused the fall of Kia Group, the eight largest corporation in Korea at that time) led to the insolvency of several financial institutions.1. 


In December, South Korea finally agreed to receive a $57 billion support package from International Monetary Fund.3 This bail out package led to what came to be a life long trauma for many South Koreans (Hence the name 'IMF Crisis'). The severe austerity policies that IMF imposed as conditions to be met for additional loans caused major banks and industrial business to close, thus engendering a soaring unemployment rate. However, South Korea was enable to bounce back its economy quickly and therefore 'graduated early' from the IMF programs as many South Koreans say.


Fortunately, South Korea's economy recovered pretty quickly; by 1999, Won had stabilized, inflation slowed, and currency account was in surplus.5 Many economists have praise the South Korea's resilience as 'miracle'. Although there are still controversies regarding IMF's role, I believe that its stabilization of exchange rate and fiscal policy reform did contribute to a long-term growth. However, the nation's economic resilience would not have been possible without the astonishing degree of self-sacrifice among South Koreans. The nationwide "gold collection" campaign in which millions of citizens came out to donate their wedding rings, athletic medals, and other personal treasures, helped the nation sell more than 300kg of gold ingots to in international markets4. My parents were one of these generous donators. In Korea, family friends and relatives give small gold rings for a baby's first birthday. The gold rings traditionally symbolize a charm for the baby's longevity and life-long fortune. Like many families, my parents willingly gave up these rings so that my sister and I can live in a better future. Looking back, I now realize that my parents promised me something much more nobler than a toy: "ending the IMF Crisis".  

Sources 

http://web.stanford.edu/class/e297c/trade_environment/global/hkorea.html

http://fas.org/man/crs/crs-asia2.htm

http://www.nytimes.com/2011/01/07/world/asia/07seoul.html?_r=0

http://news.bbc.co.uk/2/hi/world/analysis/47496.stm

http://graduateinstitute.ch/files/live/sites/iheid/files/sites/political_science/shared/political_science/1849/southkorea&imf.pdf

HK, Corporations, and Democracy

So while reading Wolf and Stiglitz on multinational corporations, I came across a few interesting points.

One of the propositions that Wolf criticizes in this chapter is the claim that "corporates dominate politics"; meaning, transnational corporations are so powerful today as to subvert democracy. Wolf claims that this concern is simply absurd because it incorrectly defines democracy. According to Wolf, the critics of corporations wrongly "think of a democracy as a system allowing an active body of homogeneous citizens to reach collective decisions on all the matters that concern them, through deliberation and, ultimately, voting" (Wolf 244-245). Although this is probably the kind of democracy that most people have in mind, Wolf asserts that this 'democracy of the Greek polis' is highly inefficient and only brings about "exaggeration, misrepresentation or downright deceit" (245). 

Instead, he argues that the governance that we now live is 'pluralist democracy' in which "organizations with the largest interests and the great ability to eliminate free riders dominate" (245), corporations being one of those interests. Based on this claim, Wolf concludes that "corporations have influence...BUT the view that they run contemporary state is nonsense" (245). 

This last sentence actually made me question the validity of it. As we discussed in last week's class, HK has a very interesting political system: 'One Country, Two Systems'. Although officially under Chinese government, HK is run by a chief executive (not to be confused with mayor or governor). Interestingly, this chief executive -though candidates are pre-selected by the Chinese government- is elected by an electoral college composed of business tycoons that represent different constituencies. (If interested in learning more information on this, watch the video attached below. VlogBrothers make succinct but decent recaps of current events). It is not really hard to imagine that an individual chosen by group of business owners will necessarily represent corporate interests.

So HK in my opinion is a pretty solid example to weaken Wolf's point. However, if I were to have one on one with Wolf, he might argue that HK is a special case. As he thoroughly explains in page 246, countries more than often have dominance over corporations (i.e.  EU's decision to prevent General Electric from purchasing Honeywell in 2001). 

However, wealthy multinational corporations still tend to have more resources and influence and thus have comparative advantage in better representing their position, particularly in poor developing countries. As Stiglitz rightfully points out in chapter 7, LDCs find themselves with no choice but to succumb to the corporate interests. For instance, "[in] Thailand and Peru, corporations threatened to move elsewhere if environmental regulations were enforced; in Peru, one mining company went so far as to pressure government not to test children living near their mining operations to see if they had been exposed to health hazards" (Stiglitz, 195). 

In other words, Wolf is right in asserting that corporations are not as powerful as governments of US and other wealthy nations. However, they do have power and resources to control the LDCs' governments that are desperate for foreign investment. The point is, it might not be as nonsensical as Wolf assumes to argue that corporations do run contemporary states in some degree.