Global Policy Forum

KCTU-FKTU Meeting
with Mr. Robert E. Rubin (the US Secretary of the Treasury)

Korea, in her negotiations with the International Monetary Fund last year, had to accept very disadvantageous conditions for the repayment of the IMF stand-by credit. Korea is required to pay an additional interest margin of 3% every year on top of the normal interest rate. Furthermore, this additional rate is to increase by 0.5% every half year for maximum eventual additional payment of 5%. Such terms of the stand-by credit repayment was adopted just prior to Korea's application for the stand-by credit. Korea became the first country affected by the new sets of conditions.

The 3 billion dollar loan from the World Bank as a part of the IMF programme package also requires a higher interest rate. Traditionally the interest rate on World Bank loan has been LIBOR + 0.25%. But the marginal rate applied to Korea is 4 times the traditional practice. As a result, Korea is required to pay LIBOR + 1%. Furthermore, Korea had to pay 60 million dollars, 2%, as 'front-end-fee' service charge. On top of that, Korea also has to pay 'back-end-fee' service charge of 45 million dollars (1.5%) in two years time. In total, the World Bank is set to earn some 105 million dollars in service charge alone, setting a new precedence.

The International Monetary Fund -- leaving aside the substance of the policy prescriptions -- had rather acted in a way that added fuel to the panic run which damaged Korea, instead of calming the psychological reaction. Rather than impressing on the market and investors that the fundamentals of the Korean economy was healthy -- in consistence with its laudatory evaluation produced in September 1997, just two or three month prior to the break out of the crisis -- in order to halt the fall in confidence to prevent the panic run, the IMF came out with virulent denunciation of the always existent -- and widely recognised -- problems. As a result, the fall in confidence and the panic run surged ahead despite the decision to provide a record breaking level of loans. This, in turn, became the source of severe disadvantage for Korea in early 1998 in negotiating with the foreign -- mainly American -- banks for a rollover of the imminently maturing short term loans.

We urge the U.S., as a principal shareholder at the International Monetary Fund, to call on the Fund to undertake a correction of these terms of stand-by credit repayment and the role it had played in the early stage of its involvement in the Korean crisis. This must be done regardless of the debate over the appropriateness of the substance of the IMF programme for Korea.

The Substantial Problems in the IMF Policy Regime and the Precipitous Implosion

The macro-economic policy package -- centred around fiscal and financial austerity and high interest rate in keeping with the Fund's traditional approach -- within the IMF programme for Korea is giving rise to the bankruptcy and closure of more than 100 companies every day, leading to a total collapse of the real economy itself. As a result, an average of over 10,000 people lost jobs a day in the first few month of the IMF policy regime. Unemployment has increased by more than four to five fold, with the government official figure standing at more than 1.5 million. (KCTU's own statistical analysis points to more than 3 million unemployment.)

The demand for structural adjustment in all aspects of the economy, including the financial, corporate, and the public sectors, and the demand for capital account liberalisation -- for which the IMF has no real mandate within the original Articles of Agreement (as admitted by Mr. Lawrence Summers, the U.S Undersecretary of the Treasury), have worsened the crisis, precipitating the collapse of the real economy, and the onset of a serious depression. (The coat-tail addition of the demands for import liberalisation for specific products of specific countries to the general policy demands cannot escape the charge that the Fund was exploiting the crisis as an opportunity to make inroad on some of the long-sought demands made on Korea by some of the Fund's major shareholders.)

The singular application of arbitrary 8% BIS equity ratio on banks have led them to call back loans and resist any new loans, causing a snowball effect of bankruptcy even among the health firms. The bankruptcy, in turn, is causing a further pile of bad loans for the already troubled banks.

High interest rate, fiscal austerity, credit squeeze, and corporate bankruptcies lead to drastic wage cuts, income loss, and job loss for workers. The evaporation of purchasing power, reduction in domestic consumption, and the consequent market contraction, combined with the liquidity crisis, sets in motion a total collapse of the real economy. This, in turn, becomes renewed pressure for higher interest rate, further fiscal and financial austerity, winding up the vicious cycle into a prolonged depression.

The Korean government remains faithful in its pursuit of the IMF prescriptions, hoping to ride out of the crisis through an upward lift of confidence restoration, financial recovery, and resurgence of the entire economy, only to come to face to face with a grim prospect of economy taking a free fall into a 1930s Great Depression-like situation through credit squeeze, corporate bankruptcy, piling up of bad loans and corporate debt, financial collapse, and implosion of the real economy.

If the situation continues on its present course, Korean government and firms will find themselves totally unable to make progress on not only the repayment of principal but payment of interest on (private) corporate debt totaling around ten thousand trillion won, 2.5 times the annual GDP.

Korean economy's fall into a depression, combining with the ever present problems of the Japanese economy and the depreciation of yen and the risk of devaluation of Yuan in China, can drag not just the Asian regional economy but the whole world economy, into an unprecedented instability.

The International Monetary Fund, fortunately, has begun recently through the mechanism of quarterly review and the occasion of President Kim Dae Jung's visit to Washington to ease back slightly from the original insistence of austerity programme of high interest rate and strict government spending control. It will not be difficult for the U.S. to agree that this signifies a belated and implicit acknowledgement that the initial prescription was either too severe or inappropriate for the Korean context. The recent changes, however, remains very limited and falls short of an active expansionary policy necessary to resuscitate the economic activity.

Misunderstanding of Labour Market Situation and the Debilitation of Labour

The International Monetary Fund, its formulating its programme, overlooked the reality that there existed in Korea a high level of labour market flexibility steming from the fact that 45% of waged workforce was employed in non-fulltime jobs. The Fund, furthermore, neglected the specific characteristics of the labour relations which has become established in Korea through the unique process of industrialisation. Instead, it remained zealously committed to one ideal type of labour market flexibility: total brut 'freedom to hire and fire'. Such a 'flexibility', it is widely acknowledged, is realised -- or to be found -- in any significant degree or shape, only in the U.S. But, its insistence has -- through its authoritative privileging -- mandated Korean employers to undertake an indiscriminate mass dismissal.

The IMF favouritism has pressured for the abandonment of the social value and goal of employment security. Such an intervention by the Fund has undermined the possibility of a real reform process -- which inevitably involves tension and cooperation amongst the government, labour, and employers -- necessary for joint effort to overcome the crisis and for a constructive structural adjustment.

A Common Interest in Restructuring the IMF Programme and the Real Reform Agenda

The International Monetary Fund programme must be focused on the need to provide active policy assistance to avoid the direct and indirect, internal and external, socio-economic destruction in the course of a irreparable collapse of the Korean economy. Its programme must provide support to the fundamental reform efforts worked out through the legitimate domestic political process. In order to do this, a fundamental restructuring of the current IMF programme is necessary.

The International Monetary Fund, the U.S., the Korean government, and the Korean working people and their families can arrive at a common interest and objective in realising a fundamental reform of root causes of the current crisis.

The Korean crisis is born of the excessive overlapping investment and antiquated managerial practice and corporate governance of the chaebol system. This was cultivated through the corrosive collusion between the economic monopolies and power monopolies and relations of corruption made possible by decades of exclusion and suppression of democracy.

Now, it is clear. The focus of crisis management and reform programme must be on enabling the eradication of the root causes, and in strengthening the cooperation and power of the very agents and forces which are the motivating force and foundation of a fundamental and long lasting reform.

The first step in this direction calls for a principled restraint from the unilateral insistence on unconditional compliance with few arbitrarily adopted criteria. The International Monetary Fund must be reminded that it is not a supranational economic authority, but a international institution designed to organise and provide international support and cooperation to enable a member sovereign state -- which obtains a mandate to develop policy orientation and implementation through a unique domestic political process -- to come to terms with the domestic situation which may -- if left uncontrolled -- lead to a problem of international dimension.

Active and Positive U.S. Role

It is here that the U.S., which regards itself a friend of Korean people and finds "vital national security and economic interest" in Korea, needs to undertake more active role. A social and political destabilisation in Korea due to economic implosion may lead to an aggravation of security situation in the Korean peninsula -- and in East Asia and the whole of Asia. The U.S. shares a common interest with the Korean people in preventing such a possibility.

Renegotiation of Roll-over Conditions:
The International Monetary Fund and the U.S. government -- following the adoption of the Fund's stand-by credit package for Korea -- have facilitated the Korean government's negotiation with the foreign -- mainly the American -- banks for the roll-over of the short term loans. They actively supported to bring the negotiation to a satisfactory conclusion. The terms or conditions of roll-over, however, were extremely disadvantageous or even unfair to Korea. It stands in stark contrast to the conditions worked out amongst the IMF, the U.S. government, and the American banks with Mexico in her recent crisis.

While the IMF or the U.S. government may not have been in position to request the commercial banks to reduce (write down) the principal or interest (re)payment obligations -- as in the Mexican negotiation -- they could have been more alert to discourage the demand for excessively high interest rate and the precedence-setting demand for a government guarantee on (re)payment (of what is mostly private corporate debt). In allowing such an arrangement to stand, the Fund has, by its failure, authorised and approved the 'moral hazard' engaged in by the international creditor banks.

The U.S. government and the Fund need to facilitate and support a re-negotiation process between Korea and the foreign creditor banks to correct the unfair conditions.

The Direct U.S. Support:
The economic crisis -- to a certain extent and in certain aspects aggravated by the inappropriate policy prescription of the Fund -- calls for enormous economic and social cost. Over 100 trillion won needed to finance the financial sector restructuring, resources required to build up sufficient social safety net for the unavoidable unemployment and dislocation resulting from economic restructuring, fiscal burden to keep up with monthly interest payment of more than 6 billion dollars -- virtually made impossible by the collapse of international confidence and implosion of the real economy -- cannot be obtained by normal means.

The Korean government has extended itself virtually beyond its limits to sell off government-owned corporations and all other public and private sellable assets (to foreign buyers) to obtain the necessary financial resources. But, such a asset dumping has only created a bottomless pit in asset price devaluation without any meaningful success in attracting committed foreign capital. The massive price cuts for domestic assets and a wholesale buyout may trigger a distorted and unhealthy anti-foreigner sentiments giving rise to unnecessary tension.

The U.S. government can assist the Korean government in obtaining the necessary resources for social safety net, for example, by providing a government to government loan. This will demonstrate the U.S. support for Korean effort for economic reform, and at the same time, strengthen the traditional friendship and promote a constructive structural adjustment process.

Enhanced Military Cooperation Arrangement as a Means to Support Reform Efforts: The U.S. government, for a set period, needs to take up a greater share of the contribution to KEDO to lift some of the financial burden of the Korean government.

There are other areas where the U.S. can make constructive and positive effort. Korea -- in comparison with 25 to 33% contribution to the cost of maintaining the U.S. troops in their land shouldered by German and other NATO member states' -- provide exorbitantly high proportion of the cost of maintaining the U.S. armed forces in Korea. The contribution currently stands at around 78%. This situation, even in an ordinary situation, requires a change. But, such a need becomes even more urgent in a time like the current crisis. The U.S. government may need, therefore, to act quickly to reduce Korean government's contribution. Furthermore, the U.S. has a unique opportunity to attend to the issue of unpaid use of land for its military bases in Korea. This will help to dissolve the existing discomfort.

Secretary Rubin -- who recognises the enormity of the financial burden faced by the Korean government -- may be the most appropriate person to generate the U.S. government's support for Korea's suspension or postponement of (some of) the new weapons import from the U.S. (The weapons import programme stands at 2 billion dollars a year, This amount can be used to finance the much needed social safety net.) This will be a welcome change from the hasty visit and intervention of the Defense Secretary earlier this year to urge the Korean government to keep hands off the defense budget.

These actions by the U.S. government will not also relieve some of the pressure on the Korean government, but will also promote the much needed process of arms reduction and relocation of military spending for social welfare programmes.

Asian Regional Cooperation Initiatives:
Lastly, there is a need to recognise the unintended ill-effects -- unforeseen aggravation -- of the IMF's traditional prescription and mode of intervention in the Asian crisis. The Asian development model, while containing some of the key elements which gave rise to the current crisis, also contains the very dynamic elements which made the 'miraculous' growth over such a short period. The effort to consolidate on the unique positive elements -- while making efforts to eradicate the negative aspects at the same time -- can contribute to the balanced development in the world economy. The IMF policy regime, however, has overlooked -- or it may lie beyond capacity to handle appropriately -- the positive and dynamic elements in is virtual blanket disavowal of the Asian economy -- especially financial -- system and practice.

In this light, it may be important for Asian nations and peoples to develop and construct a basis of cooperation and mutual assistance and support -- both material and spiritual -- amongst themselves. It may be necessary, therefore, for Asian nations to build a body -- an Asian version of IMF or an Asian regional organisation of the Fund which enjoys significant level of autonomy -- which can serve as an Asian monetary fund.

If the U.S. government supports the idea of a worldwide convergence based on the respect for cultural and regional differences, and futhermore, recognises that the potential of each member in a community can be maximised on the basis of the respect for diversity, then, it will be possible for the U.S. to make a significant contribution -- as she has in building up APEC towards the creation of an "Asian Monetary Fund".

Working Together for the Future of the Korea-U.S Relations: To conclude, we are greatly encouraged by the words of Mr Henry Kissinger, the former U.S. Secretary of the State, that "It is critical that at the end of this crisis, when Asia will reemerge as a dynamic part of the world, America be perceived as a friend that gave constructive advice and assistance in the common interest, not as a bully determined to impose bitter social and economic medicine to serve largely American interests". [Washington Post, Op-Ed, February 9, 1998.]

We believe this meeting initiated by Secretary Rubin is an important demonstration of the spirit of commitment Mr Kissinger has expressed. We look forward, wishing that this does not end just as a symbolic gesture, to concrete material follow-up pursuit of this spirit.

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