PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | SPEECHES & EDITORIALS | 1999 | ECONOMIC REFORM AND INTERNATIONAL COOPERATION

Economic Reform and International Cooperation Meeting the New Challenges of the 21st Century Kyu-Sung Lee Minister of Finance and Economy, Republic of Korea Tuesday, May 18, 1999 The Challenges of the Next Century for the Pacific Basin 32nd International General Meeting of the Pacific Basin Economic Council Hong Kong Convention & Exhibition Centre Hong Kong, China May 17-19, 1999 I. Introduction President Helmut Sohmen, Distinguished Business Leaders, Ladies and Gentlemen: Let me first thank the Pacific Basin Economic Council for allowing me the honor to be a keynote speaker at this conference. In the three decades since its inception, PBEC has emerged as one of the most respected private sector organizations in the region. No doubt it will continue to play a vital role in promoting growth and co-prosperity 'in the Asia-Pacific basin. Today I will focus my discussion on Korea's economic reform and future strategy for sustainable growth as we approach the crossroads of centuries. I will then address the importance of the private sector's role in both regional and global economic cooperation. II. Macroeconomic Conditions First, let me briefly update you on our recent financial and macroeconomic conditions, given that they are an isomorphic image of our reform success. Korea's usable foreign reserves have increased to over US$ 56 billion by April, an amount equal to more than 7 times our monthly imports. Our external debt profile has shaped up, with short-term debt accounting for only 21% of the total in March this year, significantly down from 44% in 1997. With these improvements, currency stability has been fully restored while interest rates, which hovered at about 30% at the height of the crisis, have now declined to the single-digit level. And, we have seen a rebound in the stock market, with stock prices more than doubling since last September. The real sector has been positively responding to such improvements in the financial market. Indeed, most business cycle indicators are pointing to a stronger recovery than initially expected. Most notable is the solid growth of 12.3% in industrial production registered in the first quarter of this year. Also, consumption and facility investment indicators are recording a positive increase after having been in decline for 14 consecutive months. Amidst these positive trends in the real sector, inflation has significantly subsided to below 1%, down from around 9% at the beginning of last year. Although recovery to date has been quite remarkable, the Korean government's stance is one of conservative optimism in making projections for this year's growth- Korea expects about 2% growth this year, although there is a possibility it may be higher. Inflation is expected to remain at a stable level of 3%, while the external current account is likely to register a surplus of US$ 20 billion or more. III. Economic Reform Let me now turn my focus to Korea's economic reform by highlighting the recent progress made in the corporate and financial sectors. Our reform strategy is to establish soundness with economic restructuring, and to enhance efficiency with economic liberalization and market discipline- Yet bearing in mind that no reform strategy is complete without measures to ensure its sustainability, Korea's reform package has also encompassed macroeconomic and social stability as overlying mandates. To this end, Korea has aligned its macroeconomic policy with restructuring measures to take advantage of the positive feedback linkage between economic stability and reform. And, in order to maintain social stability, we have seriously addressed the question of the social fallout of restructuring by expanding the social safety net and strengthening job training. As for reform achievements, the financial sector shows the most remarkable progress in terms of soundness and liberalization measures. Most Korean banks cleaned up their balance sheets and were recapitalized to obtain a sound capital base. Currently, greater focus is being placed on the restructuring of non-bank financial institutions, which is scheduled to be completed by the end of this year. To support financial sector restructuring, the Korean government has injected public funds of US$ 41 billion out of a total of US$ 60 billion already mobilized. If necessary, the Korean government will consider injecting additional fiscal resources. However, the rebounded stock market should enable the government to better recycle newly acquired nonperforming assets and equity shares, thus minimizing the need for new money. In tandem with restructuring efforts, Korea has fully liberalized all financial markets, including foreign investment, both portfolio and direct. More recently, we have begun the progressive deregulation of foreign exchange transactions, with full liberalization to be completed by the year 2000. Prudential regulations and market monitoring are being strengthened in order to minimize associated risks. The corporate sector has also witnessed marked improvement in terms of financial health, transparency and corporate governance. Various institutional reforms have been implemented over the past year or so to apply new global standards in the areas of accounting, information disclosure, external auditing and best business practices. More importantly, the top five conglomerates, referred to as chaebols, have paced up their efforts to meet debt restructuring targets as agreed to with their creditor banks in the capital structure improvement plan. Indeed, all related figures for the first quarter of this year show that the top five chaebols outperformed the various targets by a large margin. Creditor banks will enforce the plans by monitoring progress on a monthly basis, while the financial supervisory authority will oversee the creditor banks' enforcement. These encouraging results can be attributed in part to the positive synergy effect that the improved financial and macroeconomic conditions are exerting on corporate restructuring. In particular, the rebounded stock market, as well as the renewed interest shown by foreign investors in Korea, are helping the top five chaebols meet the 25 trillion won target set for raising new equity capital this year. Business restructuring, including mergers and business swaps among chaebols, which are referred to as big deals in Korea, has also picked up new momentum. In the areas of semi-conductors and oil refinery, the big deals are close to completion. For aerospace and power generator manufacturing, progress is being advanced according to schedule. In remaining areas, including the automotive sector, negotiations are being accelerated or expected to be finalized soon. At this juncture, I would like to draw attention to the stepped up efforts by Korea's business community to induce foreign investment as part of their restructuring program. Currently, Korean and Japanese business communities are actively developing under their own initiative the idea of business alliances in the form of equity participation or cross-border workouts between firms. This cooperative drive is reflecting the positive sentiment shown by Japanese firms to Korea's immensely improved investment environment. I believe that once this new initiative takes solid form, both countries will be in a better position to resolve problems of excess capacity. I hope that the members of PBEC will contribute to promoting the application of this idea throughout the region. Finally, let me touch upon developments in the labor market. Korea is upholding the principle of labor market flexibility that was legally instituted last year. This commitment was put to test recently by labor strikes, but resolution was found without tarnishing the legal standards. With a precedent for enforcement now established, labor market flexibility is becoming a norm in Korea. IV. New Economic Paradigm All these reforms that Korea has undertaken are just the beginning of our journey to a new economic paradigm - one in which efficiency gains and soundness constitute the primary source of sustainable growth, and whereby flexibility and openness in both social and economic realms enable us to embrace all dimensions of the new globality. We recognize that traditional sources of growth, such as the quantitative expansion of capital and labor, are likely to diminish in terms of growth accounting. For this reason, knowledge-based productivity growth must be Korea's new business zeitgeist for our times. We are now building upon the newly established institutional hardware to expand human capital and utilize untapped growth potential. Market liberalization and increased foreign participation in Korea's domestic market are providing excellent opportunities for learning and the adaptation of global standards at the operational level. At a practical level, we also see that unrealized growth potential lies in technology development, especially in the sector of SMEs. As you know, small open economies are increasingly subject to frequent shifts in market demands arising from globalization and rapid progress in technology. Give this trend, Korea needs greater industrial and technological flexibility, while preserving the benefits of economies of scale. Our reform policies on capital market development and deregulation, among others, reflect this new emphasis. Development of the capital market will open up a more efficient source of direct financing for large corporations, thereby providing SMEs better access to traditional lending. Comprehensive deregulation and improved financial incentives will promote the growth of technology-based SMEs and venture businesses, thus providing the new flexibility that Korea needs. V. Economic Cooperation in the Asia Pacific Region Ladies and Gentlemen: The notion of globality is extending the well-known adage -- no man is an island -- to the international level. Given this, enhanced regional cooperation is becoming a mandate if individual countries hope to utilize cross-country economic linkage to the fullest. PBEC has already shown initiative in this regard in its agenda for expanding the role of the private sector in the framework of liberalization, transparency and leadership. And, I should say that Korea fully recognizes and supports PBEC's efforts along these lines. Increased financial linkage has led as well to new cooperative efforts at the international level, as seen particularly in the current discussions on anew international financial architecture. In fact, I have just returned from the APEC Finance Ministers Meeting held in Malaysia, where the question of how to best design the new architecture was taken up by government leaders from the region. This is a matter that obviously extends itself beyond international financial institutions and individual governments, in that the new global architecture will greatly impact private business practices, particularly with respect to investment financing and corporate governance. Therefore, not only governments but also the private sector must reposition themselves to embrace this new dimension of international finance. I say this because without active participation by the private sector, the new architecture cannot be truly operational. What's more, with increased cooperation between the private sector and international bodies, the private sector can better ensure that their business practices run consistent with the changes being made at the supranational level. VI. Conclusion Ladies and Gentlemen: It is said that adversity strengthens one's character. I believe this truth can be applied to the Pacific Basin nations in the wake of the financial crisis. By taking difficult but necessary steps now to bolster financial systems and improve corporate governance, I am sure that soon we will all be better positioned to tap the very rich potential that continues to exist here. In this regard, Korea will continue its restructuring efforts in order to achieve durable recovery and sustainable growth in the future. We recognize that although we have already accomplished a great deal, we still have much work ahead of us. Our efforts, and for that matter, those of any individual country, will no doubt be enhanced by the contribution made by private sector organizations, such as the PBEC. At the same time, regional and international cooperation will certainly speed up our resolution of borderless economic problems. In this regard, I am sure that this conference will prove productive as we rise to meet the new challenges of the coming 21st century. Thank you for your kind attention.