Outlook: Korea will accept IMF's conditions - probably

On the IMF package, the National Grid plan and the Liberty Bunfight
The pendulum of international attention swept away from Japan yesterday and back to South Korea, where the government seems to be limbering up for outright rejection of the terms of the International Monetary Fund's $20bn bail-out package. If this occurs, it will profoundly deepen this already serious crisis. The Koreans would be saying no to the necessary package of austerity measures and structural reforms that go with the IMF's aid.

The consequences of rejection, for Korea, the region and the world, would be so disastrous that it is hard to think of the present manoeuvrings as anything other than political posturing, for which there is an obvious need with an election coming up. Denis Healey tried the same thing during our own humiliating negotiations with the IMF in the mid 1970s; in the end the British government caved in.

Whether God's chosen people are prepared to do the same is anyone's guess. It may be that, looking over the precipice, they are indeed prepared to jump. The Korean economic miracle is almost certainly over in any case, but refusal of all aid would sink the South Korean economy into a potentially disastrous recession.

Despite the obvious parallels, the South Korean economy is very different from that of Japan. Japan is in a dangerous, downward deflationary spiral, true enough, but it is not bust. It is a big mature economy, with a burgeoning trade deficit, untold riches in terms of reserves and overseas investments, and a very large number of powerful, world-class, international companies. The problem lies in its overprotected and regulated service, property and financial sectors.

Korea's economic miracle, by contrast, has been largely built on debt and is highly dependent on a tight relationship between government and the big conglomerates that dominate its industries. Furthermore, it has an even deeper distrust of anything that smacks of foreign capital and competition than Japan. In other words, South Korea is desperately in need of IMF reform but because of the protected, corrupt and cronyish nature of its economic establishment, it will fight like an alley cat to resist change.

Unfortunately for Korea, the alternative is too ghastly to contemplate - a series of spectacular bankruptcies, not just in the financial sector, but because of the highly geared nature of her companies, spreading into the industrial heartland. The knock-on effects in the Asia Pacific region and the world economy would be equally disturbing. At this stage, the balance of probability must still be that Korea will eventually accept the IMF's terms, for it needs a lot more than the $20bn so far offered. But don't bet on it.