I must first of all offer my deepest thanks to Warc and the WCC for giving me a chance to present some of my thoughts regarding the latest currency and financial crises in east Asia. As we all know well, there has been intense international debate about the causes and remedies of the crises. Three main lines of argument have been put forth:

First, the "internal limitations view", which highlights the fundamental weaknesses of the national development model of the east Asian economies as the cause of the crises.
Second, the "external conditions view", which points to massive, unpredictable movements of international speculative capital as the cause of repeated currency crises throughout the world, beginning in the 1980s.
Third, the "anti-IMF view", which stresses the overly harsh reaction of the International Monetary Fund as serving to exacerbate the situation, when a different approach might have resolved the problem in a relatively short period of time.

In this short presentation, instead of reviewing the spectrum of views analytically, I will try to draw some conclusions regarding the crisis in the east Asian economies, with a specific focus on Korea.

Has the IMF programme in Korea been successful?

Among the crisis-stricken countries, Korea is regarded by the outside world as, more or less, a case of successful recovery. There is no doubt that its macroeconomy performed very impressively over the year 1999: foreign exchange reserves reached $74 billion; there was a current account surplus of more than $20 billion; the GDP growth rate bounced back up to 10 percent; the rate of inflation fell below 1 percent; the stock market rallied and resumed its boom; Korea's sovereign credit rating was restored to above investment grade, etc.

Can we say, then, that the IMF has done a great job in Korea by implementing its doctrinaire turnaround programme? Even with such a broad range of positive indicators, we must recognize that it is still too early to judge whether the IMF programme has been successful in Korea or not. There are two important reasons for this.

As far as we can tell, the turnaround in the Korean economy in the course of 1999 doesn't seem to be due to a fundamental improvement in its competitiveness. Transient favourable external conditions emerged to the benefit of Korea. For example, the realignment of foreign exchange rates: the Japanese yen strengthened considerably, while the Korean won depreciated steeply, relative to the US dollar; this helped Korean products to regain their price competitiveness. And Korea's staple export - semiconductors - where prices fluctuate severely, is currently enjoying a boom in its cycle in the international market. At the same time, it is highly likely that the current rebound of the Korean economy is partly a natural adjustment from the drastic plunge of 1998.

More importantly, there are indications that the Korean economy is now suffering from three structural diseases that will definitely take a long time to cure: a snowballing debt burden; a rampant government deficit; and a significant subordination of Korean industry to foreign capital. Let's examine the structure of each disease.

According to the official statistics, Korea's total foreign debt amounts to almost $150 billion. This is not an insignificant sum. However, it does not include an important part of Korea's external debt. Over the past 20 years, for example, the Daewoo group, which recently announced that it was close to bankruptcy, has built up around 600 overseas business subsidiaries. All of those overseas entities are as highly leveraged as their Korean parent companies, but their debts are excluded in the compilation of Korea's debt burden because they are incorporated overseas in accordance with the laws of the host country. When an overseas subsidiary proves unable to service its debt, will its creditors not turn to the parent company? If so, we must admit that Korea's total external debt burden is seriously underestimated.

How big, then, is the burden of Korea's external debt? We don't know exactly. Since Korean companies and financial institutions are not required to report to the monetary authorities the magnitude of their debts incurred overseas for overseas operations, we don't have an all-inclusive figure to hand. Let's assume as an exercise that so-called "local financing' is around $100 billion. In that case, Korea's total burden of debt will amount to $250 billion. With an average annual interest rate of 10 percent, the total annual interest payment will be $25 billion. Can Korea rely on meeting this annual interest payment from its trade surplus? Wouldn't such a high level of surplus provoke a backlash from countries which find themselves with correspondingly large trade deficits? We cannot rule out the possibility that Korea will be required to take out additional foreign loans simply to meet its interest payments. The result will be a snowballing of external debt.

It is the same story with Korea's budget deficit. In order to implement the corporate and financial sector restructuring dictated by the IMF, a massive amount of government money is required, resulting automatically in rampant government deficits. If the size of the inevitable deficit is, let us say, 200 trillion won, with an annual interest rate of 10 percent, the Korean government will need to spend roughly 25 percent of its annual budget merely to service the interest charges. Will this be sustainable?

What alternatives are open to Korea to resolve the severity of its debt problems? Not many. The Korean government sees no option but to sell off to foreign capital as many Korean companies and financial institutions as possible. Shouldn't we be concerned about the subordination of the Korean economy to foreign capital? Of course, in this age of globalization, Korea cannot prevent foreign capital from acquiring its local companies: if Korea is allowed to acquire US companies freely, it must open its mergers and acquisitions market to US capital. But does this imply that Korea doesn't need to be concerned about the fire-sale of its strategically important companies? Let's take the example of the Daewoo Motor Company. What will happen to Korea if it is sold to General Motors? Will GM regard Daewoo Motor's Buchon factory as being as important as its Detroit factory? When GM faces pressure to restructure from the market, what will happen to the employees in the Buchon factory - currently, over 15 thousand - and the many more who are employed by Korean parts & components subcontractors?

Why should the IMF be criticized?

The IMF made many mistakes in responding to the crisis.

First, the IMF was not impartial in its handling of the crisis. The Korean financial crisis happened essentially because private banks, mostly from the developed countries, stopped rolling over their short-term credits to Korea. But the debtors in the Korean case were neither the Korean government nor ordinary Korean citizens, but Korean business conglomerates and financial institutions. It was not a case of public debt default, as in the Latin American crisis, but of private sector debt. Immediately after getting involved in the Korean situation, however, the IMF stressed that the government had to use public funding to rescue the Korean private sector: "You, the government, must repay or guarantee the repayment of private debts." At the same time, reasoning that Korea's country risk had been so aggravated that interest penalties or risk premiums had to be added to their interest rates, the creditor banks raised their rates from 6% to over 18%. As a result, creditor banks made incredibly high profits out of Korea's crisis. They did not lose a penny of the money they lent, but earned tripled interest on their principal. Isn't this an extreme case of moral hazard on the part of creditors?¹

Secondly, the IMF encroached on national sovereignty by imposing on Korea a drastic restructuring programme which went well beyond its own mandate. The Articles of Agreement of the IMF give it the authority to recommend policy only in the area of macroeconomic management. For example, it can ask for a change in monetary and fiscal policies. It has the right to say, "You guys need to restrict the money supply and reduce fiscal deficits." But the IMF has no mandate to demand the total restructuring of the socioeconomic system of a country in crisis. In the letter of intent agreed upon by the Korean government, however, the IMF specified the necessity to increase the flexibility of the labour market, to restructure conglomerates and financial institutions, and to liberalize the whole economy. This raises the question, "Why do we need to have a nation state at all, if the IMF takes care of everything in the field of its sovereign responsibility?"

Thirdly, the IMF insisted on a stringent monetary policy, reasoning that high interest rates were required to stem the continued withdrawal of foreign capital. At the launch of the programme, the IMF predicted that the Korean economic growth rate for the year 1998 would be at least 2 percent, but around the end of the year, it fell to minus 6 percent - an absolute disaster for the IMF policy. Why did the IMF impose such a dangerous policy, even though Korea was more vulnerable to economic recession as a result of high interest rates than Latin American countries, since Korean companies are far more leveraged financially? The IMF economists are not stupid. They must know that any economics textbook recommends an expansionary monetary policy to fight a liquidity crisis. Why then did the IMF economists go against the textbook remedy? It seems clear in retrospect that they were most worried about the short-term movement of speculative capital and set the priority to retain foreign capital ahead of economic recovery. If the driving force behind the high interest rate policy is concern about speculation, however, why is the IMF not seriously considering measures to reduce the volatility of short-term capital movements? Since we have observed over the past two years that the IMF hesitates to introduce corrective counter-measures, we must doubt the intellectual honesty and fairness of the IMF economists.

Fourthly, the IMF revealed its inability either to prevent or to manage the crisis. In its annual report published in August 1997 - that is, roughly three months before the occurrence of the Korean financial crisis - the IMF praised Korea's macroeconomic management highly. This shows that such an important international institution as the IMF lacks the ability to predict financial crises. More surprisingly, the IMF mission team first came to Korea in early December 1997; the team was composed of only seven specialists, it stayed only a week and then it announced a comprehensive restructuring programme. Can you imagine how such a small number of economists could develop a proposal for the total disintegration and reorganization of the existing economic system in a mere seven days? The announcement of the IMF proposal accelerated the flight of foreign capital from Korea.

The meaning of the IMF crisis for Korea and Asia

On the eve of the 21st century east Asia has become a hostage to western capital. People in Korea, especially the opinion leaders, are so indoctrinated by American values that they seem to have almost discarded Korea's own economic development model as well as the country's existing socioeconomic systems.

Korea's submissive stance was fully revealed in 1997 when the financial crisis began to unfold. Groundless speculation in international capital markets was a critical factor in exacerbating Korea's foreign exchange crisis, yet Koreans tend to accept all of the blame for the crisis, pointing to the internal weaknesses of the Korean system as the prime cause.

Koreans do not seem to realize that there has been a fundamental change in surrounding conditions. Korean products were allowed to enter the US market freely during the early phase of Korea's successful drive towards industrialization, because of the strategic importance of Korea for the United States. After the end of the cold war, however, the United States started to treat Korea differently. It urged Korea to liberalize financial markets, to remove exchange controls, to allow free flow of capital, to disband the chaebol, to privatize government-owned companies, etc. As a matter of fact, the IMF programme is an exact summary of the demands that the United States began to make on Korea after the end of the cold war.

One has to wonder, then, whether Korea will have a promising future if it implements the IMF-dictated reforms to the letter. Recognizing the dynamic potential of the Korean economy and the need for a pre-emptive strike, western capital is trying to capitalize on the crisis by attempting to deprive Korean corporations of the opportunity to earn substantial profits through economies of scale and brand recognition.

So what does the Korean economy need to do in the face of such arrogant neoliberal doctrine which serves in fact to further the interests of western capital? The propaganda that all industries and corporations regardless of nationality should be welcome to Korea in order to boost production, create employment, and increase tax revenues is somewhat misleading. It will effectively force Korean industries to submit to western capital and related interests.

History teaches the opposite lesson. Even the United States, the self-proclaimed free market leader, was a protectionist country for a long time. Indeed, until the early part of the 20th century, it applied various protectionist measures such as high tariffs, countervailing duties and anti-dumping duties especially against imports from Britain to help its fledgling industries to survive. It even refused to sign the Bern Convention and did not hesitate to infringe on British copyrights.

Given this background, criticism of globalization should not be regarded as old-fashioned protectionism. No one today would dare argue that local industries can be developed competitively by creating a closed domestic economic environment. If, however, advocates of globalization push too hard, their arguments should be met with resolute counter-arguments.

As the term "globalization trap" signifies, globalization brings with it many hidden pitfalls, in particular those related to multinational corporations and globalized capital. Multinational corporations naturally seek to dominate the world market. Indeed, no sooner had Korea shown its weakness than these companies demanded, through the IMF, that Korea remove every barrier to doing business in Korea.

On the other hand, globalized capital often wages a "confidence game' in which international financial speculators seek to take advantage of even a minor misalignment in a country's foreign exchange rate. Once a speculative attack is unleashed, countries must gain the confidence and trust of international investors by adopting Anglo-American standards - the so-called "Washington consensus" - in their economic management.

To be sure, direct confrontation with the United States is out of the question. The power and influence of the United States must be duly acknowledged, while Washington's role in promoting global norms and standards must be accommodated. Small Asian countries do not seem to have either the right or the power to formulate international rules, although they are expected to adhere to them. Nonetheless, it is a serious mistake for the Asian people to sugar-coat the reality of globalization, which does not necessarily benefit everyone. Instead, Asia should ensure that it has sufficient leeway to improve the region's competitiveness, enhance its quality of life and brighten its future prospects. In short, globalization must be subject to critical scrutiny; it cannot be pursued blindly or with total acceptance.

The Taegu round

Koreans have been inclined to seek the causes and remedies of the currency and financial crisis which began in 1997 only in terms of the shortcomings of the domestic economic systems of their own and other individual countries and, consequently, to overlook problems inherent in the present international financial order. Such a partial approach is dangerously biased. In June 1999, therefore, civil activists, religious groups, trade unions and others formed the Taegu Round Korea Committee to address the reform of the international financial order, which the committee sees as having the problems described below.

Along with the rapid liberalization of financial markets and the unfettered movement of international capital, huge amounts of financial capital accumulated in advanced countries have been turned into international speculative money, increasing the volatility of exchange and interest rates worldwide. As an unavoidable result of the unsettling movements of international speculative money, many countries are now suffering from deep economic recession, high unemployment, and social disintegration, while the governments concerned are left with few policy tools to cope with them. While the burden of foreign debt in developing and poor countries is getting heavier, deepening the disparity between rich and poor countries, the IMF has not played the role of an impartial mediator. Rather it has facilitated the speculative transactions of the international capital markets - that is, helping creditors to get paid back all their principal and interest, no matter how much their speculation may have contributed to the destabilization of the economy concerned. As a result, the economic base of civil societies, in Korea and in the world as a whole, has started to collapse.

A proper solution of the problems caused by international speculative capital flows and the growing foreign debt of developing and poor countries calls for a fundamental change in our intellectual paradigm. It is, of course, important for debtor countries to reform their economic systems to protect them from moral hazard. Equally, however, it is important for the G7, the IMF, and creditor countries to overcome moral hazard by rectifying the existing one-way international financial order. Globalization means that no country, however rich or powerful, can think in terms of the separate existence of the inside and the outside, the domestic and the external. The volatility of the outside inevitably affects the inside, and a simultaneous reform of both together is required. The Taegu Round Korea Committee believes that creditor and debtor countries should sit together in a new round to discuss a reform of the current international financial order. This new round should represent both parties equally, based on two-way dialogue aimed at creating a sound international debt order as well as a sound international capital order. There is no doubt that the final agreement should be reached at a government-level round. But to stimulate the creation of such a government-level round, and to complement it once it comes into being, we propose to inaugurate beforehand a pan-civil round at the world level.

The Taegu Round Korea Committee calls on the citizens of the world to understand that they are the direct victims of international financial turmoil and that they should take the initiative to establish a system of democratic control of the globalized financial market. They must realize they have the ability to do this.

The Taegu Round Korea Committee held a global forum from October 6 to 8 1999, with 100 progressive people from more than 20 countries participating. The forum passed the following resolution:

We demand that all global economic institutions, particularly the IMF, the World Bank and the WTO, be held accountable to internationally agreed human rights standards in conformity with their member governments' UN treaty obligations.
We declare our support for the Jubilee 2000 campaign and related activities such as the November 1999 Johannesburg south-south meeting and the July 2000 Okinawa initiative, with their goal of third world debt cancellation, and promise to put organizational resources behind this enterprise.
We urge the immediate adoption of global, regional, and national controls on short-term speculative capital in order to reduce its destabilizing impact on our economies.
We demand that the IMF be brought to account for the destructive impact of its programmes on the social and economic rights of the Korean people and other peoples around the world.
We support the Korean Federation of Bank and Financial Labour Unions in their effort to take legal action against the IMF for activities injurious to the welfare of the Korean people.
We support a moratorium on the millennium round of the WTO pending a full evaluation of the impact of trade liberalization policies on people and the environment.
We support the creation of an Asian social and economic institute that, with the full participation of civil society, would study and try to solve issues of regional trade, investment, short-term capital controls, and foreign debt management with a view to formulating concrete action to promote sustainable regional development.

To meet the above goals, we support the creation of the Taegu Round global network for social and economic justice, which will bring together Korean and global NGOs in a common endeavour.

Lee Chan-Keun is a professor of economics at the University of Inchon and director general of the Taegu Round Korea Committee.

Notes

1. Moral hazard is the risk that where agents or institutions are protected against the consequences of their actions, normal constraints vanish. In this case, foreign lenders - primarily international banks, who lent short-term to Korean conglomerates (chaebol) - should have known the risks; but IMF funds were used to bail them out. Creditors incur moral hazard when they lend recklessly, expecting to be bailed out; debtors likewise incur moral hazard when they borrow recklessly, expecting not to be called to account.