Korea overcomes crises with national solidarity

By Kim Yoon-bai

Professor at University of Kentucky

The history of the Republic of Korea is full of shocks and crises. Most arose from military confrontations and provocations from North Korea. Only two years after its establishment in 1948, the nascent republic was engulfed in an extremely bloody and destructive civil war between South and North Korea for three years. The war was never officially ended, even 60 years after its outbreak as an armistice halted hostilities. North Korea has never dropped its ultimate objective of unifying the peninsula by military means.

The list of major incidents induced by the infiltration of North Korean agents should include:

• In January1968, a 31-member commando team infiltrated within the striking distance of President Park Chung-hee's office/residence complex (Cheong Wa Dae or The Blue House).

• Two days later, North Korea seized the U.S. intelligence ship Pueblo. A crew of 83 American officers and men was released by December but not the vessel.

• In 1968, a group of 130 sea-borne North Korean commandos infiltrated the Ulchin-Samcheok areas.

• The first lady of South Korea was killed during another attempt on President Park's life in 1974.

• In 1976, a group of North Korean soldiers, wielding axes and metal pipes, attacked a U.S.-South Korean tree-trimming work team in a neutral area inside the DMZ at the truce village of Panmunjom, killing 7 and wounding 4 U.S. and South Korean soldiers.

• Since 1974, four infiltration tunnels crossing the DMZ, planned as military invasion route by North Korea, have been discovered.

• In 1983 bomb attacks at the Martyr's Mausoleum in Rangoon, Burma (Myanmar), North Korean agents killed 17 senior South Korean officials and injured 14 who were accompanying President Chun Doo-hwan.

• In 1987, a bomb planted by two North Korean terrorists on a Korean Airline Boeing 707, en route from Baghdad to Seoul with 20 crew members and 95 passengers aboard, exploded in midair over the Andaman Sea off the coast of Burma.

• In the last 10 years or so, the Yellow Sea has become the field of the North-South confrontations and skirmishes. Two battles off the island of Yeonpyeong in 1999 and 2002, and off Daecheong Island in 2009 produced casualties on both sides and gave the lesson that the Korean War was not over yet. The recent surprise attack on and the sinking of the Navy warship Cheonan, killing 46 sailors ― which has been presumed to be an act of North Korea ― caused national grief.

• North Korea's action has become a source of concern beyond the Korean peninsula as it unilaterally withdrew from the Nuclear Non-proliferation Treaty in 2003 and decided to develop its own nuclear weapons. Against the international pressure, the regime has had two nuclear tests in 2006 and 2009. Arguably it has become a "fully fledged nuclear power."

There is no doubt that the above military confrontations and national crises associated with them were painful and costly. The overall impact on the country and its people is difficult to measure. One may have a more objective perspective by examining their effects on Korea's national economy. It is remarkable that, in the past 60 years while Korea maintained an average growth rate of 7 percent, real GDP contracted for only three years: 1980, 1998, and 2009. This suggests that the Korean government has managed numerous national crises provoked by North Korea well, without severe consequences on the economy. It also suggests that the three years of severe economic downturn were due to some other types of shock.

The economic recession of 1980 was unique in that several unrelated major crises hit the country in the previous year. In one of the most chaotic moments in Korean history, the October 26, 1979 assassination of President Park and the December 12 military coup were followed by nationwide student demonstrations in 1980. In addition, Korea and the whole world were shocked by the second major increase in oil prices of the decade provoked by the revolution and the resulting political turmoil in Iran.

The other two economic downturns were closely related to regional and global financial crises. In 1997, in the midst of sustained spectacular growth, almost all East Asian countries were jolted by currency devaluation in Thailand and the accompanying crisis. Several countries quickly became the target of the contagion, which was largely brought about by tremendous amounts of international capital outflows and asset bubbles. This reached Korea in late 1997. Unprepared to deal with the sudden outflow and suffering an enormous loss of foreign reserves, the government had to resort to the International Monetary Fund for its rescue. In return for a record amount of conditional loans from the IMF, Korea had to initiate a number of fundamental reforms in the financial industry, government finance, and the exchange rate regime. In the meantime, the economy went through the worst recession in 60 years. The equities and the domestic currency lost more than half of their values when the crisis hit bottom. In 1998, the Korean economy registered a contraction of nearly 7 percent ― 14 percent below the average growth rate of the previous 5 years.

If the financial crisis and the depth of the resulting recession were shocking, it was equally amazing that the Korean economy came out of the deep recession within a year or so with a V-shape recovery, registering growth of 9.5 percent - the highest since the boom years of the late 1980s. This suggests on the one hand that the Korean government and people had dealt remarkably well with the difficult situation on a united front. But on the other, it suggests that the deep recession and free falling currency were not due to economic fundamentals in the beginning.

The 1997 and 2008 crises are similar in that both were initiated by the financial sector instead of the real estate or manufacturing sectors. In both cases, the immediate cause was the sudden outflow of foreign capital, causing sharp reserve reductions and large currency depreciation. The 2008 crisis was global, originating from the financial center, and thus far more severe. As a result, the large depreciation of the Korean won - which revived export growth and thus became the integral part of recovery during the 1997 crisis - was considered to have minimal effects on the country's export performance and thus ineffectual. Nevertheless, the recovery was quick and V-shaped as in the 1997 crisis. The reduction in the GDP growth was lowest and the recovery fastest among OECD countries. Korea weathered through the global, presumably much worse financial crisis of 2008, more easily with much less pain than the 1997 crisis. There can be many reasons ― but the important ones include government-led reforms of the financial industry, installation of regulatory measures, and above all, a buildup of vast foreign reserves.

It is an undeniable fact that some other countries in East Asia such as China, Japan, and Taiwan experienced the crisis on a much smaller scale and they all possessed a much larger amount of international reserves than Korea did. In the aftermath of the 1997 financial crises, East Asian countries including Korea started amassing huge amounts of foreign reserves. This decision had long been treated as irrational waste of national resources by Western economists. After having experienced another financial crisis induced by international capital movement, even larger scale, economists came to realize the power of "excessive" reserves.

Whether dealing with individual or national crises, domestic or international, it should be remembered that there is no better cure than prevention. In a world of globalized capital movements, the economic impacts of crisis can easily overwhelm any single nation's capacity to protect itself. This would involve a large amount of foreign reserves. Sharp depreciation followed by sharp appreciation as occurred in the 1997 and 2008 crises indicates that the initial depreciation had no fundamental basis. The recent experience also shows that holding sufficient reserves is one of the important means to achieve economic stability. There are other dimensions. An institutional framework needs to be set up carefully. It would be a good time to review whether the government retains a sufficient number of control measures and insurance mechanisms that can be mobilized in times of a crisis like that of 2008.

Once a crisis or a problem with national security, it is important that citizens of the country confront it with a united front. For this, information about the incident has to be shared in a transparent manner as long as national security is not compromised. Changes in policy or environment inevitably involve winners and losers. Transparent and honest discussion between the government and the people minimizes the pain of the losers and leads to national solidarity.

In a globalized world, mutual help from the international community becomes more important than ever. The geopolitical location of South Korea, surrounded by China, Japan, North Korea, and Russia, shows that it would be impossible for the country to solve problems by itself. The key role of the swap lines with the United States, China, and Japan established during the 2008 crisis are an important lesson for the future. The important role of the government cannot be overemphasized. It has been the core of national unity, and it has been the center of efforts to connect the country with the rest of the world. For these purposes, the government has commanded good leadership. It has been respected by the people ― respect that has been earned.