Seoul Train COOPERATION AND CRISIS IN SOUTH KOREA by Jenny Christenson Graphic by Michelle Fields As I sat suspended between two continents in a Boeing 747 this winter, I wondered what awaited me in Seoul, Korea. I was on my way to visit my family; my father works at the American Embassy. According to the newspapers, I was returning to a country that had changed much since the summer, a country no longer making headlines for its astounding economic success but for its sudden financial failure. This downturn was unfathomable to me, as the Korea I had seen last summer was awash in consumerism. The economic success of the country had been everywhere flashy and dramatic like the electronic signboards in downtown Seoul. It was all plainly visible in the high-priced Benetton clothing boutiques, trendy night clubs charging $100 a table, and the seemingly endless stream of new cars on the highways. It had been a Seoul in which it was easy for an American college student like me to make a sizable amount of pocket money teaching English. A telling hint of what I was now to find in Seoul was the uncharacteristically blunt email I received from one of my summer students. Mrs. Maeng requested that I not adjust my teaching fee to the new dollar exchange rate if I planned to teach again this winter. My mom gave me her response to that over the phone, "Of course you're not going to charge her the same -- the won has lost half its worth against the dollar, but Mrs. Maeng's paycheck hasn't increased." Unfortunately, foreign nations can't join me in accepting won that have devalued in comparison to the dollar. All around Seoul, construction projects now lay dormant and half-completed. There is talk of cancelling the government's long-awaited project of building a high-speed bullet train down the length of South Korea, sacrificing it because the country must now pay twice as much to foreign building contractors. Certain luxury items that people could do without have been left sitting in Seoul stores -- this well-dressed city wouldn't bite, forcing clothing merchants to hold massive sales. Most of all, entrepreneurs, business people, everyone has shown a growing sense of worry. A traditional singer-turned-restaurant-manager told my family, as we munched on her restaurant's famous kimchee, of not being able to sleep nights because she worried about the future of her restaurant. What happened to this country, which just a year ago was applauded by the world as one of the "Asian Tigers" for its rapid and successful economic development? Could it be that there were forces at work, even before last year, that were unseen by the international eye? Out of the entanglement of domestic factors leading to the Korean financial crisis, MIT economist Paul Krugman has shown that two basic factors are at the heart of the crisis: guarantees and regulations. The government implicitly guaranteed banks and finance companies that it would cover any serious losses. The government also favored certain industries and companies, giving them unconditional support and credit without risk. This informal guarantee was helped to jump-start Korea's economy after the war, allowing banks to finance the often reckless and largely unregulated corporate conglomerates, chaebols, in hopes of yielding high returns. Because of under-regulation, normal standards of corporate accountability and public disclosure were not being met, making it difficult to calculate the seriousness of the problem. The government promised a safety net and didn't impose extensive scrutiny, so the private sector felt secure enough to choose investments based on returns that were often highly speculative. In addition to bold over-investment, the country experienced a "bubble" of increasing asset prices due to the distorted market. What popped this bubble, sending many venerable old chaebols such as the KIA automobile group into default, was the realization that the government guarantee was not quite as reliable as once thought. The government was willing to bail out banks whose investments in the chaebols didn't yield the expected returns at first, but the high cost of these bailouts gradually outstripped the government's ability to compensate investors. What developed was an unhealthy alliance of sorts between government-directed banks and the private sector, a relationship deepened by close political ties between government officials, bankers, and chaebol managers. A full understanding of the source of the financial crisis requires insight into the cultural context of Korea. True to its Confucian roots, Korean society puts a premium on the relationships between people, to a much greater degree than in Western societies. Asking for help within one's group is natural for Koreans, the group being anything from family to friends to co-workers. The Korean appeal "Please, my friend, consider my circumstances," is very difficult to refuse, for doing so would upset the natural dynamics of the relationship. This is partly how chaebols, such as Hanbo Steel, could repeatedly request and receive financing until it amassed an incredible debt-equity ratio of 40 to one when it went bankrupt. In the U.S. when a company's debt-equity ratio approaches four to one, it is on the brink of bankruptcy. In the end, the strong Korean system of loyalties led to the kinds of cooperation that exceeded the bounds of financial good sense. Ironically, these strong ties that Koreans feel for one another are what will also allow the country to unify, survive the tough times of unemployment ahead, and pull out stronger than before. What amazed me was the public call for gold in the belief that gold in private possession would help the country pull out of its debt. Even more remarkable was that Koreans immediately began lining up at city halls to turn in their gold jewelry. Housewives waited for hours in line to turn in their earrings and wedding bands, all in the name of saving their country. People from all ranks of society waited patiently in line, local news stations reporting the amount collected each day. A well-known politician's wife modestly admitted that she, too, had given up her gold jewelry for the cause. I don't know if the collected gold added up to anything, but the call for gold was a valuable exercise in national unity. Even more, it showed the extraordinary lengths to which Koreans will go for their country. Koreans have always shown an ability to make sacrifices for their country in times of crisis. This spirit is what will in the future allow them to resist the cultural urge of personal appeals in the financial world, but perhaps harder for them to brave the repercussions of the painful, yet necessary, financial reforms set out by the International Monetary Fund.

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