Korean crisis? We've been here before

"What I can't understand about Korea," said a colleague, "is when they are doing well it is bad for us and when they do badly it is bad for us."

So often it is the non-specialist who can score the bull's-eye. For this surely captures the two most important issues that South Korea's difficulties raise for the rest of the world. The first is the extent to which longer- established developed nations face a real long-term threat from the relatively newly industrialised ones: whether the economic, cultural and political values of East Asia inevitably result in superior economic performance. The second is whether the new instability is also a threat: whether the other two economic time zones will be seriously unsettled by turmoil in this one. The apparent further deepening of Korea's plight last week should lead to some rethinking on both counts.

It was certainly a bad week. The Korean currency (the "won") fell on the first four days, and though it recovered a little on Friday, at 1,710 to the dollar it was still only half the value it was at the beginning of the year. Securities prices were back close to the year's lows. The US credit-rating agencies cut the rating on Korean debt, underlining the status of these agencies as a lagging indicator. And most seriously there was a flurry of contradictory stories about the position of the IMF-backed rescue package. Some focused on the supposed inadequacy of the funds available, others claimed the conditions imposed by the IMF were too tough, and others blamed the IMF for not recognising the seriousness of the problem earlier.

With a string of stories like this, things get a bit bewildering, so stand back a moment from the hubbub of the markets and focus on what we are really learning that might be new. I don't think there is anything happening that is unexpected or unusual. When a country seeks help from the IMF there is always a string of stories about the ability of the IMF to cope, the inappropriateness of the measures, the dangers of knock-on effects on other countries, the social strains and so on. This is absolutely standard.

Think back to Britain's most recent brush with the IMF, just 21 years ago. Half the Cabinet did not want to accept the IMF terms. There was a weak prime minister, James Callaghan, who initially did not side with the Chancellor, Denis Healey. Healey warned of "riots in the streets" if public spending was cut too much. The leftist commentators claimed the IMF terms were unreasonable - and once the economy was recovering, that the terms were unnecessary. But now that IMF-required correction of the government's economic policies is rightly seen as the great turning point in Britain's economic fortunes.

Korea is not only less important to the world economy than Britain was or is; the fundamentals are more favourable. Take the financial fall-out: the won may have halved in value this year (left-hand graph) but sterling, admittedly over a slightly longer period, fell from $2.40 to below $1.60. The stock market has fallen sharply (next graph), but by less than the FT index fell a couple of years earlier in response to the first oil shock and soaring inflation. Even the current account deficit, though around 6 per cent of GDP, is no worse than that of Britain at that period. As for public finances, the fiscal deficit is not a deficit at all: the government has been running a surplus of some 4 per cent of GDP for the last three years.

What you have in Korea, however, is a record of great volatility. You can see that in the current account shown below, or in the very high growth rates that were achieved: 8-9 per cent during 1994 and 1995. The IMF is seeking a growth rate of 3 per cent and this is being seen as imposing hardship. Three per cent is hardship? Most of continental Europe would have been thrilled with that over the last five years.

There is a problem servicing foreign- currency debt, nearly all of it in dollars, for if the won halves in value, the servicing cost doubles. Total foreign currency debt has, however, been cut from 50 per cent of GDP in the early 1980s (right-hand graph) to 25 per cent, and though it was actually down below 15 per cent in the early 1990s, this still should be manageable.

So why are people like the New York economist of Deutsche Morgan Grenfell telling the International Herald Tribune, "The truth of the matter is that Korea Inc is already bankrupt ... This is a zombie economy"? For exactly the same reason the Wall Street Journal headlined a story in 1976 "Good- bye Great Britain". It is always at the moment when people start to despair that the turning point occurs.

Actually I think the turning point for Korea may still be some way off, though not because of the macro-economic problem about which everyone seems to be panicking but which only needs three or four years of slowing growth with consumption held down and debts repaid. More serious is that there is a serious structural problem which has to be tackled: the close links between companies and banks and in particular the lack of market transparency about those links.

The so-called "Asian model" has been much admired in the West. Writers have praised the way in which the long-term relationship between companies and banks have forced savings into industrial investment. Meanwhile, the alleged short-termism of Anglo-Saxon finance has come in for plenty of criticism. The mantra "investment" is repeated time and time again by the Chancellor. And left-leaning think-tanks produce papers about "Asian values".

But what we have learnt from Korea (and to some extent Japan) is that too much investment is just as destructive as too little: money is forced into projects which at best never produce a decent return, and at worst lose money. The close links between banking and industry mean that if industry makes a mistake, the banks are dragged down. And the maligned Anglo-Saxon model actually seems to be much better at generating risk capital for start-ups than either the Asian or the continental models. As for "Asian values", well, there are values like hard work and thorough grounding in maths which are enormously helpful to the economy. But there are others which self-evidently are not.

Fixing this structural problem is enormously difficult because it means changing an entire set of attitudes. In fact I don't think the fundamental structure can be changed, so Korea will have to try and patch up its financial system by feeding in greater transparency, allowing a few more bankruptcies (but protecting bank depositors), and gradually establishing market signals as the best way of determining the wisdom of investment projects. This is going to be a 10-year slog: at the end the financial system won't be perfect, but it will be adequate.

Meanwhile, what about the damage to the rest of the world? I wasn't worried until Friday, for this seemed a regional problem rather than a global one. US and European markets certainly take this view: there will be slower growth in one of the three time zones, with some knock-on effect on the others. However, that will be compensated for by lower-than-expected interest rates everywhere. But on Friday Hans Tietmeyer, the Bundesbank president, said it was unlikely the crisis would spread beyond the Asian region. Now that is probably right. It ought to be right. But when central bankers start saying there isn't a problem, that is the time to start wondering if there might be one.

So maybe the best answer to my colleague's question is this. It wasn't too bad for us that Korea was doing well, for Korea was merely moving up the same ladder of economic progress that the developed world has done before it. To fear a country like Korea is to put an unrealistic importance on "Asian values". And it is not bad for us now because Korea will come all right in the end. We too went down that same path 21 years ago.

Start your day with The Independent, sign up for daily news emails
News
Sir David Attenborough
people
Life and Style
Young girl and bowl of cereal
food + drink
News
Comic miserablist Larry David in 'Curb Your Enthusiasm'
peopleDirector of new documentary Misery Loves Comedy reveals how he got them to open up
Arts and Entertainment
Henry VIII played by Damien Lewis
tvReview: Scheming queens-in-waiting, tangled lines of succession and men of lowly birth rising to power – sound familiar?
PROMOTED VIDEO
Sport
football
Arts and Entertainment
'The Archers' has an audience of about five million
radioA growing number of listeners are voicing their discontent; so loudly that even the BBC's director-general seems worried
News
i100
Arts and Entertainment
Ready to open the Baftas, rockers Kasabian are also ‘great film fans’
musicExclusive: Rockers promise an explosive opening to the evening
Life and Style
David Bowie by Duffy
fashion
Arts and Entertainment
Hell, yeah: members of the 369th Infantry arrive back in New York
booksWorld War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
advertisingVideo: The company that brought you the 'Bud' 'Weis' 'Er' frogs and 'Wasssssup' ads, has something up its sleeve for Sunday's big match
Arts and Entertainment
tv
News
i100
Environment
Dame Vivienne Westwood speaking at a fracking protest outside Parliament on Monday (AP)
environment
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Day In a Page

Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

Devil in blue Costa is a reminder of what Liverpool have lost

The Reds are desperately missing Luis Suarez, says Ian Herbert
Ashley Giles: 'I'll watch England – but not as a fan'

Ashley Giles: 'I'll watch England – but not as a fan'

Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness