Social Impact of the IMF Crisis in Korea
Chan Keun Lee
Among the crisis-stricken countries Korea is more or less regarded by the outside world as a case of successful recovery. There is no doubt that its macro economy performed impressively over the year 1999: foreign exchange reserve reached $74 billion; current account surplus recorded more than $20 billion; GDP growth rate rebounded up to 10%; inflation rate was suppressed below 1%; stock market resumed a booming rally; sovereign credit rating recovered the above-investment grade, etc.
Then, can we say that the IMF has done a great job in Korea by implementing its dogmatic turn-around program? Even with such a broad range of positive signs, it is still too early to judge whether the IMF program has been successful in Korea or not. There are a couple of important reasons for such a reservation.
The turn-around of Korean Economy over 1999 doesnt seem to be achieved by a fundamental improvement of its competitiveness. Favorable but transient external conditions emerged to the benefit of Korea. For example, foreign exchange rates realignment, that is, strengthening of Japanese yen and weakening of Korean won vis-a-vis the US dollar, has been helping Korean products to regain price competitiveness in the international market. And Koreas staple export item, semiconductor, of which the price tends to fluctuate widely, is currently enjoying a booming cycle in the international market. At the same time, it is highly likely that the current rebound of Korean economy took place partly as a natural adjustment from the drastic plunge of 1998.
More importantly, there exist dreadful signs pointing that Korea comes to have triple structural diseases that will definitely take long to be cured: they are the snowballing debt burden; rampant government deficit; and substantial subordination of Korean industry to foreign capital. Lets see the structure of each disease.
According to an official statistics Koreas total foreign debt amounts to almost $15O billion. It is by no means a trifle matter. What worries us more, however, is the fact that it does not include an important part of Koreas external debt burden. For example, Daewoo Group which recently announced near-bankruptcy at the peak of its globalization has built up around 600 overseas business entities over the past 20 years and all of those are as highly leveraged as their domestic counterparts. But their debts are excluded in the compilation of Koreas debt burden for the reason that they are affiliated overseas in accordance with the law of the host country. But the question to be raised in this case is: will the mother company not be claimed by the lenders in case its overseas affiliates come to be unable to service its debt? If yes, we must admit that Koreas total external debt burden is seriously underestimated.
Then how big is the Koreas external debt burden? We dont know exactly. Since Korean companies and financial institutions are not required to report to the monetary authorities the magnitude of the debt incurred overseas for their overseas operations, we dont have the all-inclusive figure at hand. Lets assume for an exercise that the so-called local financing is around $100 billion. Then, Koreas total debt burden will amount to $250 billion. Supposing the average annual interest rate is about 10%, the total annual interest payment will be about $25 billion. Will Korea be able to meet the annual interest payment safely with its trade surplus? In case the trade surplus is high enough to do that, wouldnt it engender backlashes from deficit countries? Under the circumstances, we cannot rule out the possibility that Korea will be required to draw additional foreign debt only to meet with its interest payment. And if it happens at all, the snow-balling of the external debt burden will inevitably follow.
The same story applies to the Koreas budget deficit. In order to implement the IMF-dictated corporate and financial restructuring, a massive amount of government money is pulled out, automatically ending up with rampant government deficits. If the size of the government deficit is W200 trillion won with its annual interest rate at 10%, Korean government will need to spend roughly 25% of its annual budget only to serve its interest charges. Will it be sustainable?
What kinds of solutions are open to Korea to resolve the severity of the debt problems? There are not many. Korean Government sees it unavoidable to sell off many Korean companies and financial institutions to foreign capital. But should we not be concerned about the subordination of 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 Manufacturing and Agriculture (M&A) market to US capital. But does it imply that Korea need not be concerned about the fire sale of its strategically important companies? What will happen to Korea if Daewoo Motor Corporation is sold out to General Motors? Will GM regard Daewoo Motors Buchon factory as important as its Detroit counterpart? When it faces a restructuring pressure from the market, what will happen to the over 15 thousand employees of the Buchon factory and those of its numerous parts and components sub-contractors?
Right after the outburst of the currency crisis in Korea, the USA and the IMF demanded of Korea to implement a radical restructuring program across the overall economic management system. Thus, under the name of a comprehensive reform program, the restructuring of Chaebols, of the financial sector and of the government-owned enterprises, have been simultaneously undertaken together with the measures to increase the flexibility of labour market and to eliminate barriers in accessing Korean markets.
The USA and the IMF emphasized strongly that the Korean currency crisis had resulted from Koreas internal structural weaknesses. Such an argument provided them with a rationale for an all-out restructuring of the Korea. Of course there were people who counter-argued that external factors, most noticeably, the volatile or disrupting movement of the short-term investment capital, was an important cause of the Korean currency crisis. It was, however, emphatically denied both by the USA and by the IMF.
As a result Korean Government has been enforcing an all-out, neo-liberal economic reform over the past two years bidding adieu to the late dictator Park s economic model. This model, having led to the much-acclaimed miracle of the Han River over the past 30 to 40 years, was based on the vertical integration straight from the top to the bottom: as is well known the glorious vision of "compression growth" presented by the despotic ruler, effective macro-economic and industrial policies implemented by bureaucratic elite, encroachment into foreign markets by Chaebols, and sacrifices of all kinds for a bright future on the part of the general public. The current neo-liberal economic reform is forcefully applied in Korea, marking really the historic end of the vertically-integrative despotic development model.
During the cold-war era, the USA took the geopolitical importance of the Korean peninsula into account, and conceded strategic considerations for Korea. Since it was very important for the national interest of the USA to keep a pro-American government on the Korean peninsula while the confrontation between the East and the West continued, the USA made an issue of neither the Koreas extreme export-orientation nor chauvinistic Chaebol system.
The rapid debacle of the cold-war over the late 80's and the early 90's, however, deprived the USA of the reason for her continuing to adopt supportive policies towards Korea. In the wake of such historic changes, the currency crisis took place in Korea, giving the USA a naturally proper chance to wipe off at one fatal blow all of its complaints accumulated deep in its bosom against Korea. This is exactly the geopolitical background against which the comprehensive restructuring program was devised and implemented by the IMF.
The core of "Korea bashing" is to break off the strong tripartite alliance among the Korean Government, banking institutions, and Chaebols. The criticism of the USA and the IMF goes that such tripartite alliance based on crony capitalism should be replaced as soon as possible by the Anglo-American stock market capitalism which think most importantly of the maximization of shareholder interest among all. Under the Anglo-American version of capitalism, Korean conglomerates will no longer be allowed to make large-scale investments with high risk assumed. What it ultimately means is that they will be forced to give up their catch-up game by losing their own strategic freedom of prompt and massive investments.
At present, Korean companies are relying on external financial sources, mostly on banks for about 70% of new investments. But the current Anglo-American restructuring requires that Korean companies should follow the US companies funding pattern. In the United States companies draw not less than 60% of new investments from internal financial sources while they are also accustomed to relying more heavily on stock market than banks when they need to tap external funding sources. If it becomes the reality, Korean companies will definitely face severe trouble in making proactive investments. On top of this, if Korean companies are required to expend 40% of their internally-generated money for dividend payment as is the case in the United States, they will surely be left incapable of any catch-up in their competition against western rivals.
Thus, it seems evident Korea is destroying, quite unreservedly, the existing economic success model. But the real problem is that no alternative new model is emerging instead. The current reform program is fraught with an abundance of destruction logic but no creation logic at all. This is why the IMF crisis of Korea is really a historic crisis.
The high-speed economic growth of Korea has been so far functioning as a stabilization buffer that helps conceal various social problems. Despite the fact that Koreas social safety net has been of an extremely low level that falls below those of most South-East Asian countries the continuous creation of new jobs thanks to its high-speed economic growth has been functioning as a kind of built-in stabilizer for Koreas socio-economic system so far. Unfortunately, however, the IMF crisis is now blowing off the past economic success model and, thereby, the stabilization buffer as well. For the current economic reform program based upon the Anglo-American neo-liberalism is likely to engender no more high-speed economic growth in Korea. It is certain that there will emerge a variety of social problems that have so far been submerged under the water.
Koreas traditional manufacturing industry is now undergoing a radical restructuring process. It is not likely that it will create as many new jobs as it used to do even when it returns back to a normal production phase after the completion of the restructuring. Under the circumstances Korean Government is emphasizing the booming venture industry with the new information technology embodied will replace the role of the manufacturing industry as the locomotive of economic growth and as the creator of many new jobs. In this respect, Korean Government is more hopeful than realistic, I am afraid. For too much expectation of the future information industry is not realistic since its basic principle demands the use of as small manpower as possible. In these days of information technology and global competition, furthermore productivity enhancement through organizational restructuring and management rationalization is the indispensable element for the survival of businesses. How can we expect that unemployment will decrease in the future?
Recently, some improvement has been shown in the official unemployment rate. After reaching its peak by fall, 1998, it dropped to 4.4% with 970,000 jobless people as of the end of 1999. Such an official rate, however, belies the reality of Koreas unemployment situation to a significant degree. The following are the reasons why I say the much improved unemployment rate should he interpreted carefully:
First Korean Governments official unemployment statistics is itself problematic and controversial. Especially, the ILO standards used for the statistical compilation of the unemployment rate prescribes that anybody who works not less than one hour per week for the purpose of getting an income should be classified as an employee. Such standards are obviously too loose to reflect the real situation of unemployment. Lots of Korean people complain that the official rate of unemployment is far from the reality they feel in the streets.
Second, the official statistics on unemployment does not include insecurely hired workers, those who are involuntarily on leave, or those who are too disappointed to actively search jobs. As of May, 1999, according to an unofficial document prepared by the Statistics Office, the number of insecurely-hired workers (those who work less than 18 hours a week but desire to work more hours if it is possible at all) is 250,000, those people who are classified as regular employees but are in fact involuntarily on leave is 150,000, and those who are used to work but are now classified as disappointed give-ups is about 500,000 to 600,000. Unmistakably, then, the total number of the semi-jobless in Korea amounts to 1,000,000 as of May, 1999. To this if we add about 300,000 to 500,000 of the public works participants and vocational trainees who are in actuality no different from the jobless, the reality of Korean unemployment is something truly serious.
Third, Koreas economic-activity participation rate, which is now 61%, is remarkably lower than those of advanced countries. Such a low participation rate has so far contributed to the lowering of the Koreas unemployment rate. In case more Korean youths and women decide to participate in the labor market, then Koreas overall unemployment rate will inevitably rise. What the low economic-activity participation rate implies, in short, is the fact that there is a large number of latent or potential jobless people and disappointed people who gave up the idea of seeking for a job because of its hopelessness.
Finally, the informal sector of the Korean labor market consists mostly of highly unstable, low-income, self-employed businessmen, and its rate is two to four times higher than those of advanced countries. It is true that the informal sector plays the advantageous role of absorbing the shock of sudden lay-offs from the formal sector. But taking the increase in the number of the highly unstable, low income, self-employed businessmen as a favorable factor for Koreas employment stabilization is misleading, to say the least.
The Problem of Women Unemployment
The official rate of women unemployment announced by the Statistics Office as of February, 1999 was 7.2%, meaning about 580,000 women were unemployed. But experts in the field, specifically, the Women Unemployment Countermeasures Team as a part of the current ruling political party of Korea argue the more suitable figure is about 12% since it must be taken into account that many women were excluded from the statistics for the reason that they had given up the idea of seeking for a job because of its hopelessness.
Under the IMF crisis, the reduction rate of woman employment turned out to be generally bigger than that of man employment. The reduction rate of employment in January, 1998, for instance shows -1.5% in case of men, and -6.2% in case of women. In view of such figures, the conclusion is inevitable that women are more severely affected than men under an economic recession.
Furthermore, about one fourth of the female jobless turned out to belong to a household with no other person in employment, which means that their unemployment is by no means a trivial matter in social terms. Add to this the fact that about 87.8% of the female jobless is either high-school graduates or below and the fact that the highest rate of job destruction is shown in those women whose education level is below high-school and whose age is below 24. It is clear, then, the problem of female unemployment is overlapped with that of youth unemployment to a significant degree.
At the same time, the problem of female unemployment exposes the problem of patriarchal gender discrimination. According to a survey conducted by the Korea Institute of Woman Development towards the end of 1998, 68.8% of the female jobless believe themselves to have been subjected to gender discriminatory practices while being laid off, whereas 27.1% of the women who lost jobs because of the restructuring, say they have been selected as retirement candidates because they were working along with their husbands either at the same or other work-sites, and therefore, they were regarded as having no responsibility for the livelihood of their household. The rate of the men who lost their job for the same reason was only 2.6%.
According to reports on female discriminatory lay-off cases compiled by District Labour Offices nationwide, the types of women-first lay-off practices are as follows: rearrangement of female clerical positions into simple aide positions, reappointment to a strange or distant locality, imposition of a compulsory leave without pay, or compulsory switch into irregular positions such as a part-time, contract-based, or arbeit-type ones etc. Such practices often induce the women concerned to resign themselves.
The number of women working in irregular positions has been on the increase ever since the restructuring process took place in Korea. According to a statistics compiled in February, 1999, the rate of women working in a regular full-time position was 32.9% and combined rate of women working on a temporary or daily basis was 67.1% while the male counterparts were 63.4% and 36.6% respectively.
The Problem of Youth Unemployment.
Even before the IMF crisis, Korean youth unemployment was by no means low. In 1995, the percentage occupied by Korean youths in total unemployment was 52.5%, far exceeding 35.8% of Japan, 25.l% of Germany, or 48.6% of the USA. If we consider further the fact that the economic-activity participation rate for Korean youths is much lower than those of advanced countries, we can easily see the above unemployment rate for Korean youths is inordinately high.
The IMF crisis made it even worse. Under the great premise that the employed in their 30s or 40s should be first protected for the sake of the continuation of the household that constitutes the basic unit of the Korean society, those youths, who just graduated from schools and knocked for the first time on the door of the labour market, could not help but receive cold or even chilly responses. In 1998, the unemployment rate for youths in their late teens rapidly rose from the former not more than 10% to not less than 20%, and that for youths in their 20's, from the former low rate of 3% to 5% to a figure much higher than 10%.
What is more worrying is the possibility that the problem of youths unemployment will take a deep root into our society as one of its chronic diseases with the advent of an age of low growth. In particular, unemployment of less educated youths will lead to an alarming increase in the life-long unemployment. In the event college graduates continue to apply for a job traditionally regarded as below standard, a large number of youths who stopped their education at a relatively lower level, will have to face the ugly reality of their long-term unemployment, or even worse, will be reduced to "a class that has never been given an opportunity for employment". Such an unfortunate class of youths has sometimes been found in western countries.
As it is well known, cognitive capability and behavioral attitude, which constitute the fundamental base for the proper maintenance of human life, can best be acquired and developed during the adolescent period. No opportunity of learning in this period, therefore, will mean complete loss of the most productive period of learning for proper human life. Those youths who have never been given any opportunity to work in their adolescent period are likely to miss the most opportune training needed for the acquirement of cognitive, emotional and psychological resources, the absolute requisites for their growth into a properly-functioning social being.
First, polarization is deepening in Korea after the crisis. There are several different methods of measuring the degree of inequality in income distribution, among which the Gini coefficient is the most widely used. Korean Gini coefficient which remained stable at the level of 0.28 over the 1990s dramatically rose to 0.31 in 1998. Worse, the Korean Gini coefficient is based on raw data of urban wage earners, excluding urban entrepreneur households, self-employed households, rural agricultural households, etc. Therefore, it leaves a high possibility of being underestimated. According to a survey conducted by the UNDP, furthermore, the number of the Korean poor who lived on an amount lower than the minimum living expenses exceeded 10 million.
Second, the middle income class is being destroyed. According to a survey conducted by the Hyundai Economic Research Institute, supposing that income brackets from 4 to 7 out of the total 10 brackets of the wage-earning households belong to the middle class the weight of the Korean middle class which was 52.3% in 1997 decreased dramatically to 45.8% in 1998. But the subjective perception of the Korean people turned out much worse. The response of the people who perceived that they used to belong to the middle class but the IMF crisis reduced them to a class of a lower level amounted to 20% of the total responses. Speaking in plain terms, 6 out of 10 Korean people used to think that they belonged to the middle class, but the IMF crisis reduced the number from 6 to 4.
Third, the most important reason for the disintegration of the Korean middle class can be found in its lack of competitiveness. The main target for the employment adjustment since the advent of the IMF crisis has been the middle management positions. The majority of which was occupied by the majority of the Korean middle class. For, in comparison with the blue collar, Koreas white collar has manifested in general a lower level of productivity, leaving thereby a bigger room for the so-called management rationalization. The continued organizational expansion of most Korean companies in the period of high economic growth directed them towards the securing of white-collar workforce even when it is not absolutely necessary. Such a practice inevitably lowered the productivity of white-collar workforce. In addition, the lifetime employment practice and the "generalists brooming" practices had their own part in the deepening of the Koreas irrational management practices which became very problematic since the occurrence of the IMF crisis.
Fourth, the gap in asset income widened between different classes of Korean society. The prices for land and houses plummeted. And the composite stock market index plummeted as well from the 700 points before the IMF crisis to lower than 300 points by September, 1998. Such property depreciation affected the rich, of course. The rich, however, could restore a significant part of their loss in property value by means of their financial income much increased thanks to the high interest rate during the IMF crisis. As for the majority of the Korean middle class, however, the high interest rate correspondingly increased the interest payment burden on their existing loans, but without any means for compensation of their loss. (The interest rate of household loans, for example, increased from about 10% before the IMF crisis to somewhere around 20% by 1998.) They were forced to experience their property value reduction much more severely.
Fifth, the gap between the high-skilled and low-skilled has been widening ever since the IMF crisis. According to a study conducted by the KDI, the benefits of the economic recovery since 1999 were not equally distributed to different classes, producing the phenomenon of the rich becoming richer, and the poor, poorer. As for the first quarter of 1999, the average income of the top 20% of the population increased by 9.2% compared with the previous quarter, while that of the lowest 20% decreased by 3.3%. It was because employment conditions for such skilled workforce as professionals or technicians had been improving rapidly while those for unskilled, low-income labourers deteriorating.
Sixth, the quality of employment has been deteriorating rapidly. Ever since IMF crisis, companies have been transforming the former employment practices by reducing the rate of full-time regular positions while greatly increasing part-time, temporary or daily positions. In April, 1999, the number of full-time regular positions decreased by 9.3% while that of temporary or daily positions increased by 2.2% or 38.9% respectively, compared to the corresponding figures in April of the previous year. At the same time, the number of employees whose weekly working hours are not less than 36 decreased by 4.0% while that of employees whose weekly working hours are less than 18 or in between 18 and 35 increased by 47.1% or 33.4% respectively. Accordingly, temporary and daily positions came to occupy more than half of the total number of the payroll, and the number of part-timers whose weekly working hours were less than 36 doubled from 6% in 1995 to 12% in 1999.
Finally, the long-term unemployed, that is, those whose unemployment period exceeds 1 year, has been greatly increasing. The KDI pointed out the number of the long-term unemployed increased from 1% in 1998 to 8% in 1999, and predicted that similar long-term unemployment problems observed in OECD countries would appear in Korea. One of the important reasons is that companies preference to hire new entrants of the labour markets, in particular, renders the laid-off into the long -term unemployed. In April 1999, the number of the new jobless workforce decreased by 7.7% while that of the laid-off increased by 42%, compared to the corresponding figures in April of the previous year.
The more developed a capitalistic economy, greater the possibility for a crisis, or for rise in unemployment and poverty. This is why all the advanced countries cannot reduce their budget for public aids and other social services despite strong conservative resistance.
Throughout the IMF crisis, Koreans have learned an important lesson - that Koreas capability to cope with an emergency situation of mass unemployment, such as, Korean social safety net, is highly insubstantial, though Korea is entering into a period of low growth. With respect to its social safety net, Korea has revealed the following problems
First, the social welfare budget spared by the Korean Government has been just about one fourth or one third of the corresponding budget of advanced countries or newly industrialized countries. The campaign promise of the current Korean Government for a significant increase in the social welfare budget has been nullified because of the recent economic crisis. Except for the budget of unemployment countermeasures, there is a possibility for the degradation of the budget for social welfare services in general.
Secondly, the current Korean Government has already used a significant amount of money, for example W5.6 trillion won in 1998, for redressing the problem of unemployment, which has been the focus of attention by the general public. Except for the expansion of the unemployment insurance which covers unemployment allowances, vocational training, etc., however, most of the unemployment countermeasures such as public works temporary livelihood protection, unemployment loans etc. are of a non-institutional and temporary nature.
Third, the reason for such non-institutional and temporary countermeasures coming into the foreground is that the existing social-security system for the low-income group who have been laid-off has been insubstantial to a highest degree. The unemployment insurance system that started only in 1995, has had an extremely narrow scope of application, and the livelihood protection service has been basically for subsidizing living expenses of the disabled people. Therefore, most of the low income group who have been laid-off have been in fact left in a black zone unreachable by the social security system. Additionally, the public works program, having been pursued with little prior preparation, has not been channeled into productive public works.
The results of these problems are clear enough. The newly unemployed, such as the daily labourers, those who have outlived their unemployment allowances, those who have engaged themselves in household chores, the self-employed businessmen who went into bankruptcy, etc., the total number of whom amounts to 1 million, are now existing in a death angle of the social security system. Accordingly, many people are now arguing that the Government should expand or strengthen its social welfare system, and at the same time, help facilitate the establishment of a civilian welfare system as a complement to the governmental one. This is why the creation of new jobs by the third sector has emerged as an important social issue.
The labour-market and unemployment policies adopted by the current Korean Government are based upon the neo-liberal approaches which think importantly of the flexibility of labour markets. The neo-liberalism is fundamentally against welfare services beyond the level the market agrees upon. It emphasizes, instead, the importance of the creation of new jobs by the market.
Right after its official launching, the current Korean Government established the Tripartite Commission, through which it adopted neo-liberal labour policies such as redundancy dismissal system, labour dispatch system, etc. Thus institutionalizing mass unemployment, the Government argued that, only through efficient business restructuring and labour-market flexibility, the corporate world will become strong and competitive, and then, generate lots of new working positions. This is the most effective unemployment countermeasure, therefore, the mass unemployment for the time being must be endured as a necessary evil for a brighter future.
At the same time, the Government argued that the European approach which tries to restrain redundancy lay-offs and to focus on the securing of livelihood of the unemployed helped high unemployment to take a deep root in their society, weakening international competitiveness to a significant degree; but the Anglo-American approach that allows redundancy lay-offs and facilitates the labour-market flexibility let them suffer from a temporary mass unemployment, but ultimately, solved the unemployment problem and increased the international competitiveness.
Following the same logic, the Government refused to introduce the working-hour reduction system, a European anti-unemployment measure. Regarding mass unemployment as unavoidable for a while, the Government stood their ground against the European anti-unemployment measure, and instead, tried only to provide such temporary measures as the livelihood protection of the unemployed,
This governmental position triggered an explosion of the Tripartite Commission, which had been proudly propagandized by the Government as an important sign of the national harmony. The legitimization of the redundancy lay-offs and labour dispatch, which were proposed by the Government and the corporate representatives, was rapidly processed once the necessary agreement was reached in February, 1998. But the reduction of working-hours, the joining of the unemployed in a cross-company labour union, the participation of labourers in the business management, etc., which were much wished for by the representatives of labour unions, were not carried out because of the breach of faith on the part of the Government. As a result, a nationwide labour union named Korean Confederation of Trade Unions(KCTU) dismembered itself from the Tripartite Commission towards the end of 1998 and another nationwide labour union named Federation of Korean Trade Unions(FKTU), which had been traditionally more obeying to governmental policies, turned their hack to the Government. Now, the general public seems to be critical of the Government as well.
Popularization of Part-time Workers
Part-timers are those employed based upon an one-time contract. Most of them are assigned non-skilled tasks, and have to accept short working hours, bad working conditions like low salary, and unstable employment positions. Part-timers are spreading out as a new type of employment. It spreads out not only to such irregular work positions as sales force, housekeepers, shop-assistants, etc., but also to such regular work positions as department store assistants, clerk aides, and even bank tellers.
The prospect is that the part- time working is to increase even further. There seems to be no problem on the side of the supply of part-time labour. For the desire for economic activities is increasing in youths, women and the aged by dint of the wage raise, the valorization of economic independence and social participation. On the demand side of labour, on the other hand, the automation and computerization made business works as well as personnel management simpler and easier than ever, and therefore, made temporary employment of part-time workers more attractive. On top of that, the intense competition in business management and the general uncertainty for the future made the corporate world prefer part time workers as a convenient means of cutting the operating cost and executing frequent employment adjustment.
Popularization of Annual Compensation System
Parallel with the Governments neo-liberal labour policies, the corporate world is hastening to introduce the annual compensation system. According to a survey of companies with not less than 100 employees conducted by the Central Research Institute of FKTU as of January, 1999, 15.1% of the respondents have already adopted the annual compensation system and 51.3% are now in the process of introducing, or are planning to introduce, the system.
As it seems, the annual compensation system has the benefit of changing the traditional personnel management system based on long service or seniority into a new system focused on capability. More importantly in social terms, however, it has the indirect effect of employment adjustment. Those employees who are allotted a relatively lower annual compensation may take it as a silent message for lay-off coming from the employer. If such a low evaluation of their capability continues despite their effort to perform well, they will certainly take it as a sure message for lay-off. Thus, the annual compensation system transforms itself into a quiet method for employment adjustment that is as effective as the redundancy lay-off.
The annual compensation system will also bring about a change in the wage negotiation traditionally performed by labour unions. So far, the negotiation included not just the basic salary but also various allowances, bonuses, fringe benefits, and any other items included in the total wage. The annual compensation system, however, dictates about two thirds of the total wage to be determined by individual capability, leaving only one third of it negotiable.
Reduction of Working-Hours
The average working hours of Korean labourers are 2,500 a year, at present. This is extremely long hours compared to those of the western, American or Japanese labourers, which are 1,500 to 1,900 a year. It is in fact the longest working hours in the world.
In 1989, the legally standardized working hours in Korea were changed from 48 hours a week to 44. In comparison, the International Labour Organization adopted 40 working hours a week as a standard long time ago in 1935; France legitimized 35 working hours a week some time ago; Other European countries including Germany adopted a standard weekly working hours similar to France.
Anticipating the age of low growth and high unemployment, Korea should pursue the legitimization of the working-hours reduction as one of fundamental anti-unemployment measures.
The history of capitalism shows us that the shortening of working hours did not entail the curtailing of either nominal or real wages. What is absolutely necessary for the shortening of working hours without impairing the real wage, however, is the governments securing of necessary financial resources. For governmental subsidies are essential if the real income of laborers is to he protected in face of a reduction of their working hours or the additional expenses of the companies are to he shared without too much burden imposed on them.
For the securing of the necessary financial resources, Korea needs to go through a tax reform. Koreas current tax rate is about 20% of its GDP, approximately a half of the average tax rate of advanced countries and its structure shows a heavy dependence on indirect taxes of a retrogressive nature. The reform, therefore, should be carried out in such a way as the current tax rate is raised to the level of advanced countries. Direct taxes of a progressive nature are created or strengthened with respect to the property class, and special measures are devised for the prevention of the tax evasion of self-employed businessmen.
Organization of Social Consensus
The Tripartite Commission turned out to be a failure. It failed because of the conflict of sectarian interests, hut more fundamentally because it could not construct a comprehensive discussion structure by focusing on only a few narrowly defined issues, like employment adjustment, on which sectarian interests widely diverge. Normalizing the Tripartite Commission, therefore, requires breaking from its narrow discussion structure. It should adopt a broad range of issues concerning the national management as its discussion topics, meet as often as possible to discuss them, and thereby, try to establish a relationship of understanding and trust among its members from different sectors. Once such a relationship is established, sectarian interests will not impede too much in arriving at an agreement concerning even such sensitive issues as employment adjustment, wage negotiation, etc. As an example, it may think of an idea of connecting employment policies with industrial policies. Though the Government is now advocating only the venture and high-tech industry, it may think of the fostering of a medium-tech or low-tech industry as a spearhead of economic growth and foreign market penetration. If it succeeds in persuading the Government, it may expect an expansion of employment in that direction.
Activation of the Third Sector
A civilian welfare system may complement an insufficient public welfare system. The role should be expanded of the third sector which renders public services through its non-profit activities. A few good examples are various environmental protection activities, and voluntary services for the aged, the handicapped, the insane, the homeless, the needy and unfortunate children.
It is highly likely that the unemployment problem will become more acute because of the development of information/communication technology and the rapid globalization of financial markets. But resisting technological development or returning back to the former closed economy are not a realistic alternative. What is necessary, under the circumstance, is some good measures in anticipation of "a society without sufficient jobs". If such good measures cannot be provided by the market economy, the role of voluntary services may he valorized by the society and the unemployed may be given a valuable role out of various voluntary services. It can be one way of solving the unemployment problem.
Before the outburst of the financial cdsis, Korea was broadly regarded as a successful development model for the countries in the south. World Bank in its World Development Report, for example, referred frequently to the Korean model to urge less developed countries to adopt outward-looking, market-opening policy measures. After experiencing severe financial cŮsis recently, however, the Korean model does not seem to be appealing any longer to the countries in the south. It has shown how detŮmental it can be to liberalize capital account when the economys financial infrastructure is not strong enough. At the same time, it is also put into doubts whether Korea, in retrospect, really took current account liberalization measures as literally as required by the level playing field principle of the current world trading system.
The reality less developed countries are facing today is much more complicated or multi-dimensional than in the past. Over the past, Korea managed to meet its development needs by adopting mercantilist trade policy. It could utilize trade policy as a toot of industrial development. The western world on the other hand acquiesced it due to their security concerns during the days of the Cold War. In other words, western capital relaxed their profit motive to the extent that Korea could enjoy its policy sovereignty.
But todays world is very different. The economic linkage between the western and the less developed world has been diversified. Besides trade, finance has become more and more important. Foreign direct investment, cross-border M&A, and speculative portfolio investment flows are interlinking the two different world tightly. Even more than that, strategic concession is not available any longer from the north. The principle of level playing field is requiring the south to allow equal market access as well as to achieve equal degree of liberalization in a short period of time.The north is singlemindedly intent on maximizing its profit motive.
This is not the end of the story. Both environmental concerns and social concerns must be addressed duly in the development equation. Development-first approach is not acceptable any longer. Trading partners in the west are trying to set environmental and social standards as defensive protectionist measures while the civil society of the world requests that those concerns should not be left in a lower priority.
Let me draw a simple map to illustrate the complicatedness of todays equation relative to the pasts.
Now what is left to us for action is to derive a workable solution to the complicated equation drawn above. It has two objective variables, two conditional variables and two instrumental variables. Two objective variables are profit motive of the western world and development needs of Asia while two conditional ones are environment concerns and social concerns. To maximize one objective variable at the expense of the other or to address less adequately the conditional variables is not sustainable and will engender otherwise avoidable tensions and instabilities. But leverages available for satisfying the objective and conditional variables are quite limited. In the international economic context, instruments available are only two: world trade and international finance. This is why the architecture of the world trade and international finance draws so much attention these days.
Globalization which is currently driven by the technological progress has a lot of potential to allow us to solve the complicated solution in a mutually acceptable way. History warrants that new innovation opens new opportunity to solve conflicting goats harmoniously. But the solution which depends a lot on the political compromise of different interest groups doesnt come out neither quickly nor automatically. We should redesign both the world trading system and international financial architecture with a strong political will to resolve the complicated equation.