Korean lessons for eurozone
Looking at Europe’s stumbling efforts to deal with the eurozone’s sovereign debt crisis, I can’t help but make comparisons with how Korea dealt with its severe economic woes during the 1997 Asian financial crisis. And I think Korea’s response then offers important lessons now to Greece and Europe’s other debt-ridden countries.
It is important though to understand the economic crisis in the eurozone today and Korea in 1997 had different causes. The eurozone’s problems are largely the result of high levels of government debt, while Korea’s troubles were caused by unsustainable corporate debt.
But the outcome in both cases was the same: a crisis in the banking sector that threatened to trigger massive capital flight by foreign investors (in the case of Korea) or local bank depositors (in case of Greece, Spain etc.) who fear that they will be unable to recover their money.
Pumping money into the financial system can help stabilize the situation as the International Monetary Fund did with Korea and the European Central Bank and the IMF are now doing with Greece and the other periphery eurozone countries. But this represents only a short-term quick fix unless more fundamental reforms are undertaken with strong public support. In that respect, the peripheral eurozone countries ― Greece, Italy, Portugal, Spain and Italy ― have much to learn from Korea.
In 1997, when Korea faced its worst crisis since the Korean War, it astounded the world with a show of national unity. After all, global audiences had grown used to seeing televised images over the previous years of Koreans taking to streets to protest, which often ended with violent pitched battles between demonstrators and riot police.
Suddenly, Korea presented a quite different face to the world. Housewives lined up to denote their gold jewelry, including even their wedding rings, to help bolster the country’s currency reserves and pay off foreign debts. People stopped driving to save on the national oil import bill and refused to buy foreign goods. The government granted amnesty to those who illegally held U.S. cash under the mattress or money overseas if they deposited it with the local banks. The money flowed in as a result.
The country also initiated a national job-sharing program to prevent unemployment from rising sharply. Those who did lose their jobs were served discount noodles by shopkeepers in a display of solidarity.
The Korean establishment had earlier denied that the country was facing a potentially crippling debt crisis. But when it become clearly apparent that such was the case, Kim Dae-jung, the new president who came to power just as the crisis erupted, did not blame "outside forces" for the country’s plight and instead acknowledged that Korea's problems were of its own making.
He then took tough decisive action. Many large business groups, which once enjoyed political favor, were allowed to go bankrupt and some of their owners were sent to prison, including the founder of Daewoo. Other industries were forced to sell off prized assets to keep from going under. Troubled banks and other lenders were quickly nationalized.
These measures were particularly extraordinary since Korea had earlier been seen as a prime example of a dirigiste economy, where the government played a large role in steering development. Suddenly, the government was adopting the core principle of allowing inefficient investments to be punished by the market and not saved by the state.
But the government was only able to carry out these reforms despite the pain they inflicted on society because the majority of the population rallied in support. It was an extraordinary and collective response driven by national pride and shared responsibility. And it was rewarded by a strong recovery from a tough economic blow. In the five years before the crisis, Korea’s average annual growth rate was 7.4 percent and 6.7 percent in the five years afterwards, the best performance among the countries hit by the Asian financial crisis.
The example of Koreans demonstrates the level of commitment needed to undertake reforms and there are doubts whether Europeans will be able to match it. It is hard to imagine, for example, the female fashionistas of Greece and Italy donating their gold. “Seen from Asia, Europe’s biggest problem is that its people seem unwilling to sacrifice,” notes a recent report by securities firm CLSA comparing the Asian and eurozone financial crises.
There are, of course, major social differences that make it hard for Europe to follow Korea’s example. Korea is a homogeneous country, while Europe is multicultural. The eurozone is also much bigger than Korea and cannot easily export its way out of the crisis as Korea did thanks to a devalued currency.
Unfortunately, much of Europe appears more likely to follow the path of Korea’s neighbor, Japan, which has suffered from more than two decades of stagnation due to its refusal to undertake the drastic economic reforms that Korea courageously embraced.
John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant.