South Korea goes into free fall

By Jamie Miyazaki, Asia Times, 6 December 2003

These are unhappy times for South Korea. Hailed only last year as the most vibrant economy in North Asia, it has quickly entered a period of political and economic free fall. Things started taking a turn for the worse nearly as soon as the World Soccer Cup euphoria had dissipated. And it became evident that the consumer credit-fueled recovery policy following the 1997 financial crisis had gotten out of hand. Matters were made worse by simmering labor disputes, Pyongyang’s shrill nuclear posturing, and a rancorous presidential election - quickly followed by the SARS (severe acute respiratory syndrome) outbreak and a multi-billion dollar accounting scandal at SK, with ensuing revelations of chaebol slush funds.

The political instability appears to be approaching critical mass in the wake of a second vote by a special counsel to investigate corruption in the Roh administration, which originally triggered a shutdown of the National Assembly, and in the run-up to next April’s parliamentary elections. To be fair to the Roh team, some problems it has faced over the last year were beyond its control (SARS, for example), and others would have posed a challenge to even an experienced administration (like the bursting of the consumer credit bubble). Moreover, with such a bitterly close presidential election, the chances of a graceful loser are always slim. Throw in a hostile press, plus an unsuccessful Grand National Party (GNP) lawsuit aimed at obtaining an electoral recount, and the stage was set for acrimony.

But as Donald Rumsfeld pointed out, weakness is proactive; it’s just that Roh has been inept at seizing the initiative. This situation has been exacerbated by the administration’s inexperience. Roh had just seven months of experience as a minor government minister before becoming president, and much of his team is composed of 386 confidants (people in their 30s who attended university in the 1980s and were born in the 1960s), who are frequently criticized by the media for being unprofessional. Roh’s frequent gaffes, especially those that questioned his own competence, and his erratic policymaking style had the opposition GNP soon smelling blood.

For example, take two of Roh’s electoral pledges: to reform Korea’s rigid labor markets and rein in chaebol excesses. Labor unions have taken Roh’s left-leaning tendencies as a carte blanche to gouge as many concessions from employers as possible via industrial action. Meanwhile, unemployment—particularly amongst graduates and youth—remains high, and large sectors of the workforce are employed as contract workers whose contracts are continuously rolled over with few fringe benefits while employers are afraid to take on permanent staff owing to union militancy and rigid labor laws. Nestle’s rumblings that it may close its South Korean factory owing to labor strife does not bode well for Korea’s aspirations to become North Asia’s business hub. Although the government is moving to tighten labor legislation, its credibility has been dented by too often caving in to striking workers’ demands.

Chaebol reform is arguably an even bigger issue considering their central role in the economy. Even after 1998s reforms, chaebol still produce nearly two thirds of South Korea’s exports and attract 70 percent of foreign capital inflows into Seoul’s Kospi index. However, the massive accounting scandal at SK Group earlier this year has revealed that the family-run conglomerates are still up to many of their old tricks. Granted, the fact that SK Group even found itself in trouble is a testament to some degree of corporate reform, but further restructuring of the chaebol has failed to materialize as Roh has caved in to pressure from big business to delay reforms until the economy recovers.

Unfortunately, largely because of the fallout from the SK affair and the resulting political volatility, next year’s predicted economic rebound of 4.7 percent growth is being called into question. As Kim Choong-soo, president of the Korea Development Institute (KDI) put it: Despite the expected improvement in the economic outlook for 2004, uncertainties surrounding the domestic political climate is one of the major risk factors.

The major repercussion of SK’s accounting fraud has been the investigation into slush funds used by SK Group and other chaebol in last year’s presidential election. The funneling of secret chaebol funds to politicians in return for favors has long been widespread. However, Roh was meant to represent a new generation of politicians over which chaebol held less sway. Unfortunately, revelations of a corruption scandal involving presidential secretary Choi Do-sul and other aides have challenged this and undermined Roh’s reputation for integrity. The scandal has snowballed to include other prestigious conglomerates, such as Samsung and LG, and engulfed politicians of all major parties.

In a dramatic attempt to restore his authority and engineer a political turnaround before April’s parliamentary elections, Roh proposed a national referendum on his leadership and promised to resign if he loses. He also dangerously asserted that moral authority, not his electoral mandate, was the sole asset I have in administering state affairs. Less than a year into his tenure this high-risk and unorthodox tactic has increased political volatility and raised doubts about Roh’s judgment.

Adding further uncertainty to Korea’s problems is whether the vote will even occur (owing to its dubious legality and Roh’s characteristic procrastination). But even if it were to proceed, it is unlikely to give Roh the fresh mandate for reform he desires. Polls suggest he would win—despite 30 percent approval ratings—if only to preserve some semblance of (a rapidly disintegrating) political stability. However, all the divisions in society between his young and liberal supporters and older, more conservative people would be re-exposed.

Opposition parties’ implication in the slush funds scandal has not prevented them from exploiting the situation. Largely for self-serving reasons, they are opposed to a referendum and instead proposed the creation of a special counsel to investigate corruption in the Roh administration. Roh’s vetoing of the proposal on November 25 triggered a GNP walkout from parliament, impeachment threats and the surreal hunger-strike one-upmanship by GNP leader Choe Byung Yul, as well as a protest hunger strike at Choe by a Roh loyalist. The parliamentary paralysis also hit the 1,198 items waiting for parliamentary deliberation, including the 117 trillion won ($97 billion) budget plan for next year and the Korea-Chile free trade agreement.

The resubmitted special counsel bill has now passed with the necessary two-thirds majority to prevent a presidential veto, the first time that a presidential veto has been overridden since 1961 thanks to backing from the number-two opposition party, the Millennium Democratic Party (MDP). Ironically, Roh was an MDP member up until September when it split into a pro-Roh faction (the Uri Party with 47 seats) and an anti-Roh faction (the MDP). As with many of the current problems, Roh could hardly have been surprised at this turn of events - the MDP split had been apparent since Roh’s nomination as MDP presidential candidate last year. However, Roh made little effort to calm the bad blood between the two factions and the acrimonious break-up has added to the disharmony and further eroded his parliamentary influence.

Having already squandered the narrow window of opportunity to push through reforms following his inauguration (the president’s approval rating after 100 days was below 50 percent, compared to his two predecessors who had achieved 60-80 percent support by the same point), the necessary momentum required to re-establish his agenda will be difficult in light of recent developments. By dividing his own support base (of 101 MDP seats), turning the MDP into a resentful opposition party and reducing his prospects of winning a parliamentary majority in the April elections, Roh has created more headaches for himself. If he wishes to avoid becoming the president of paralysis for the next four years, the Uri party and MDP need to reunite to overturn the GNP majority. Unfortunately, now that the MDP has thrown its weight behind the special counsel bill, this looks remote.

If the Uri party fails to earn at least one third of the assembly seats in the elections, then the prospect of the three other parties blocking Roh’s reform agenda and ramming home constitutional amendments becomes unavoidable. As it stands, the GNP has a strong chance of retaining control of a parliamentary majority until the end of Roh’s second term in February 2008. This is not good news for political stability and much-needed political and economic reform, which include jump-starting the nation’s stalled per capita income and propelling the nation further up the development ladder. As a result, more than a few eyebrows were raised when Roh said in a recent television debate that few countries have as much hope as Korea.

Perhaps in the face of widespread dissatisfaction with political corruption and democratic paralysis, Roh’s indicted aides might take a leaf from the pages of Francois Leotard, a former French defense minister who is currently being tried for corruption relating to slush funds in France. When asked by the presiding judge: If I follow your defense correctly, these ’special funds’ contributed to democracy? Monsieur Leotard, without a hint of irony, replied Of course.