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South Korea Déjà VuRichard Westra aa Division of International Area Studies , Pukyong NationalUniversity , Pusan, Republic of KoreaPublished online: 18 Mar 2010.

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COMMENTARY

South Korea Deja Vu

RICHARD WESTRADivision of International Area Studies, Pukyong National University, Pusan, Republic of Korea

The fact that barely one year after the 1997-98 Asian crisis South Korea (hereafterKorea) again began to post steadily rising growth rates amounts to a prima facie caseagainst views that hold the crisis occurred because of a fundamentally brokendomestic economic ‘‘model’’ which closer operational adherence to neo-liberal‘‘market’’ policy prescriptions would fix. It also lends credence to understandings ofthe Asian crisis in terms of predominantly ‘‘external’’ factors; particularly the globalravages of an increasingly predatory phalanx of private banks and financialintermediaries headquartered on Wall Street.

This point on neo-liberal policy is also belied by outcomes of the Asian crisiswhich saw government take a greater role in Korea’s economy and hence itsrecovery. At the time of the Asian crisis, the Organisation for Economic Co-operation and Development Economic Surveys of Korea for 1999 (Paris: OECD)showed that government expenditure as a percentage of gross domestic product(GDP) in Korea was 21.9%. By 2005, further OECD surveys showed it had risen toclose to 30% and, in 2007, it was almost 32%. And Korea represents no anomalyhere as neo-liberal policy the world over including in its United States heartland hasled to the state playing a greater role in economic life. In 2004, after decades of neo-liberal policy, the proportion of US GDP flowing from state economic activity was36%.

Noting the foregoing is not to suggest that as Korea entered the twenty-firstcentury it was business as usual. As David Coates presciently maintains in Models ofCapitalism (Cambridge: Polity, 2000, p. 223), it is impossible for states to freethemselves ‘‘from the generalized logics of accumulation which characterized worldcapitalism as a whole.’’ However, the impacts of these ‘‘logics,’’ euphemised as‘‘globalisation’’ and ‘‘financialisation,’’ have not been well understood in the milieuof Korean political economic studies. We will summarise the key trends of bothbelow en route to examining how each factors into the current travails of the Koreaneconomy caught as it is in the maelstrom of the 2008 US-originated global economic

Correspondence Address: Richard Westra, Division of International Area Studies, Pukyong National

University, 599-1 Daeyeon 3-dong, Namgu, Pusan, Republic of Korea. Email: westrarj@aim.com

Journal of Contemporary AsiaVol. 40, No. 2, May 2010, pp. 329–336

ISSN 0047-2336 Print/1752-7554 Online/10/020329-08 � 2010 Journal of Contemporary Asia

DOI: 10.1080/00472331003600531

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meltdown (for a detailed analysis see the author’s Political Economy andGlobalization, London: Routledge, 2009).

Global Disarticulation of Production

Internationalisation of production tending towards creating a genuine internationaldivision of labour, which was spearheaded in the 1950s and 1960s by USmultinational corporations (MNCs), began as essentially ‘‘tariff jumping’’ foreigndirect investment (FDI) where MNCs sought to capture markets from which theymight otherwise be excluded. MNC activities as such were essentially supplementaryto domestic corporate investment and profit-making. Across the 1970s, MNCinternational activity shifted from tariff jumping to relocating production andassembly to ‘‘export platforms’’ that serviced global markets, commencing a processof replacing corporate capital’s domestic production with MNC internationalactivities. We have to keep in mind here that to the 1970s changes in global MNCactivity largely followed US MNC lead. In 1971, for example, US MNCs had 1337international subsidiaries scattered around the globe while German and JapaneseMNCs had only 80 and 13 international subsidiaries, respectively. The respectivefigures for 1983 are 1339, 241 and 64. By 1998, the number of US MNC foreignsubsidiaries rocketed to 2901, while those of Japan and Germany spiked to 2296 and1764, respectively. Even Korean companies, which in 1991 had no foreignsubsidiaries, maintained 78 of them by 1998. What is important to take from thesenumbers is the question of temporal sequencing: that is, both the hypertrophicinternationalising of US capital and accelerating internationalising of capital ofother powerful OECD states occurs under conditions where the physiognomy ofinternational capital is morphing world-wide.

The impetus for the most significant change was transformation of the USeconomy itself. By the early 1980s the US economy, which had been in a protractedcrisis from the early 1970s, was teetering on the edge of a major fall. Its militaryadventures through the previous decades misallocated resources, negativelyimpacting the civilian economy. US MNCs were also facing growing competitionin the US domestic market in consumer durables with the competition coming fromMNCs of Japan and Germany and from US MNCs producing in Western Europe.Under competitive pressure individual US-based MNCs sought to improveproductivity in order to recapture domestic market share. Yet such efforts takenby individual companies contributed to over-capacity and falling profits across keyindustries and the economy as a whole. Through the Republican administration ofRichard Nixon and the Democratic administration of Jimmy Carter, the USgovernment never wavered from the policy package advanced by economist JohnMaynard Keynes in support of counter-cyclical demand management and the socialwage. However, the coming to power of Ronald Reagan heralded the dawn of theneo-liberal era and intellectual banishment of Keynesianism. Neo-liberal policysanctioned attacks on union power as well as the high-wage economy of massconsumption that US MNCs had battened on for decades. While governmentmounted its frontal attack, MNCs struck strategically in ways that wouldpermanently fragment the US industrial work force and, in turn, create a templatefor fragmentation in perpetuity of the global labour force.

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Through the 1980s and into the 1990s, US MNCs moved from the relocating ofproduction and assembly to export platforms towards the wholesale disarticulating ofglobal production into what has become known in business school circles as ‘‘valuechains.’’ What the latter concept captures is the fact that whatMNCs ‘‘outsource’’ andexport from varying locales around the globe are no longer material goods per se butsub-products or components. The disarticulating of production was paralleled by atransubstantiation of the MNC itself toward ‘‘virtual’’ or ‘‘not-at-all-manufacturing’’in which MNCs divested themselves of the actual making of things, period. Thistendency was enabled by the information and computer technology revolution thatallowed MNCs to exercise Stalinist-like centralised control over vast networks ofsuppliers (mainstream economics dubs this ‘‘flexibility’’). The above transformationsin the edifice of global trade and production were then supported by over 1000 legalchanges occurring internationally from 1991 to 1999 (N. Jensen,Nation-States and theMultinational Corporation, Princeton: Princeton University Press, 2006), whichsmoothed the way for the new MNC activities. All this, of course, does not meanthe ‘‘end of work’’ as some popular accounts suggested. Rather, it means that‘‘someone else’’ is being regimented to labour under degraded, impoverishing andprecarious working conditions and where manufacturing operations are radicallydecoupled from industrialisation and development of whatever country they areoccurring in. The impact on the US economy in which the processes commenced istelling. As early as 1994 the ‘‘temp’’ agency Manpower surpassed the auto giantGeneral Motors as the largest US employer. In the early twenty-first century the retailcolossus Wal-Mart would emerge as the number one US employer.

From Industrial to Dollar Power

Turning to financialisation, what we are dealing with is in its basic essence the flipside of the US deindustrialisation coin. As the US economic engine sputtered,confidence in the US dollar began to erode. This situation was compounded byrampant domestic US inflation and the emergence of a chronic trade deficit by theearly 1970s. In regular circumstances the USA would be compelled to significantlydevalue its currency. However, with the US dollar existing as world money and itsexchange rate linked to gold as mandated under the Bretton Woods MonetarySystem (BWMS), changes in the value of the dollar were sure to have a destabilisingimpact on the global economy as a whole. The path that should have been followedin the light of the US dollar crisis was a strengthening of international institutionsand their democratic governance. Yet, for the USA to maintain global economicpredominance, under conditions of comparatively diminished industrial capacity,the abandoning of BWMS fixed exchange rates and attendant curbs on capitalmobility was the course that had inexorably to be followed.

That involved a three-step process. The first was the USA cajoling major OECDallies to accept a US Treasury Bill IOU (T-bill IOU) standard of global reserves asNixon closed the gold window in the early 1970s. The second was the way US foreignpolicy treated dollar inflation by instigating price rises of key internationally tradedgoods such as oil. Nixon’s ‘‘coup’’ here was not only his support for the formation ofthe Organisation of Petroleum Exporting Countries (OPEC) but his earlymanoeuvring to ‘‘deregulate’’ finance so that dollar-denominated OPEC surplus

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funds would be recycled through US-based global banks and the (at that point)rising coterie of private financial intermediaries headquartered on Wall Street. Thethird step was the ‘‘Volker coup’’ where then Federal Reserve Chairman Paul Volker(who it may be noted is now a key economic advisor to President Barack Obama)unilaterally raised US interest rates. This stifled dollar inflation and rapidly drewglobal savings into dollar-denominated assets. But it quashed the remnants of the USconsumer goods production economy, rendered government borrowing for publicinvestment in the US untenable and fomented the first global ‘‘debt crisis’’ thateffectively ended the dream of indigenous industrialisation across the Global South(except, of course, for those states like South Korea on the frontline of US globalanti-communist Cold War strategy).

However, the most far-reaching impact was the pattern the coup created for globalfinance. The primary element here was that with capital markets the world overincreasingly liberalised, as economic crises struck however and wherever, channelswere created for the US dollar as the hub currency to retreat to the ‘‘safety’’ of UScapital and credit markets to the benefit of Wall Street-based financial inter-mediaries. Second was the spawning of a plethora of new fangled financialinstruments, a process dubbed ‘‘securitisation’’ in which global lending would beconducted in terms of bonds (these then often ‘‘repackaged’’ to sell as stockportfolios or ‘‘options’’ and ‘‘hedged’’ through the use of ‘‘derivatives’’). Third, andthis is the crux of current US global dollar ‘‘seigniorage,’’ with the USA emerging asthe worlds’ foremost debtor nation dependent upon the world for producing theconsumer goods its populace demands, funds for its government policy endeavoursand private business investment, a rigged global game had to be formulated insupport of such a skewed international edifice. Because the dollar is world moneystates gained access to it by way of an external orientation of their economies wherethey either sold more goods for dollars than they imported or borrowed dollarsthrough machinations of securitisation. The central role of the dollar in internationalinvestment meant also that the dollar was the key ‘‘traded’’ currency on worldmarkets requiring states’ participating in the global economy to hold increasinglylarger dollar reserves to defend their own currencies against speculative attacks.

The Past is the Future for South Korea

Placing the post-1997 Asian crisis Korean economy in the above context it may bepointed out that paralleling the process of democratisation in Korea from the late1980s was the commencement of tripartite state-capital-labour relations throughwhich workers were able to exact wage increases in line with productivity gains ashad occurred elsewhere across the OECD decades prior. In the aftermath of the 1997crisis, as the Korean economy again began to manifest rising growth rates it did sounder conditions where Korean workers, though unshackled from politicalauthoritarianism, nevertheless found themselves subjected to high rates of part-time, insecure contract work and limited wage gains. Within the OECD in the earlyyears of the twenty-first century, Korea had the longest working hours, lowest payand highest rate of ‘‘irregular’’ work (OECD Economic Surveys: Korea 2004). Bymid-2005, as pointed out by a Korean Confederation of Trade Unions official, thenumber of workers experiencing insecurities, harassment and violation of labour

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laws in Korea was approximately 8.5 million (Le Monde Diplomatique, 1 July 2005).Post-Asian crisis economic conditions in Korea also reinforced deep-seated genderdiscrimination in Korean society, leading to a gender wage gap in Korea of 38%, thehighest in the OECD (Korea Times, 9 July 2009).

Another festering problem of the post-crisis Korea has been the burgeoning of theKorean black market economy, including ‘‘legal,’’ so-called ‘‘informal’’ economicactivity, where it is solely a problem of taxes being evaded, as well as the actualillegal economy where laws and taxes are being evaded. The total value of theKorean black market economy has been estimated to represent 27.6% of Korea’sGDP in 2005; the largest black market among the 22 OECD states (Italy’s blackmarket economy, for example, comes in second at 23.2% of GDP). The existence ofa burgeoning black market impacts negatively on the lives of working people as itforces the government to raise taxes on workers and self-employed and devaluesgoods and services produced in the private and public sectors of the ‘‘formal’’economy (Korea Times, 7 October 2008).

To grasp the impact of vicissitudes in internationalised production for Korea it isvital we briefly revisit questions of Korea’s pre-Asian crisis development trajectory.Major Korean MNCs, referred to as chaebol, powered up in key global consumerdurable production sectors such as automobiles and electronics during the 1980s and1990s. This was the period where MNC activity the world over had alreadycommenced the shift away from tariff jumping FDI and relocation of assembly toexport platforms toward the increasing disarticulation of production into valuechains. Rather than FDI, favoured devices of this bout of internationalisation ofproduction were international subcontracting and licensing agreements. There arethree elements to such agreements. Original equipment manufacturing (OEM), withlocal firms producing to order for foreign MNCs under controlled technical andmanagerial prerogatives, nevertheless provided nascent domestic capital withvaluable experience. Original design manufacture (ODM), where local firmsmeet all production requirements themselves on the basis of design layouts offoreign MNCs, gives local firms the opportunity to ‘‘reverse engineer’’ importanttechnical competencies. Original brand manufacture (OBM) is where the local firmpotentially emerges as a ‘‘lead’’ MNC in its own right. Korean electronics giantSamsung is an exemplar of successful OBM.

Select Korean chaebol rose up the technological ladder to OBM status, as alludedto above, in circumstances where the Korean domestic market was protected underauspices of US global anti-communism. Their rise also occurred in the global MNCcompetitive environment shaped by early MNC disarticulating of production wherelead firms continued to maintain high-wage employment generating core productioncompetencies ‘‘in house’’ to the benefit of their domestic economies. The formativeliterature on so-called value chains conceptualised this in terms of ‘‘producer-driven’’vs. ‘‘buyer-driven’’ chains; the latter capturing the patron-client relationshipscultivated in the retail sector and in manufacturing in the meeting of lead MNCdemands by suppliers through OEM and ODM. What studies carried out under theauspices of the Massachusetts Institute of Technology reveal is that the time periodof the lead up to the Asian crisis and its aftermath witnessed the disarticulating ofproduction towards not-at-all-manufacturing, where today value chains are allincreasingly structured along the lines of what had been dubbed the buyer-driven

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chain with lead firms divesting themselves of even their treasured core competencies(T. Sturgeon and R. Lester, ‘‘The New Global Supply Base: Challenges for LocalSuppliers in East Asia,’’ IPC Working Paper Series, October 2003).

The impact on Asia has been quite devastating: first, because of the general trendin key consumer durable and electronics industries towards consolidation in thesupplier sector. Lead MNCs are accommodated by the international outsourcingprowess of global contract manufacturers based in the USA and Europe butcontrolling vast networks of producing suppliers that actually do the work.Secondly, while most global supplier networks pass at some juncture through China,the support for regional ‘‘trade’’ arrangements such as the European Union (EU)and North American Free Trade Agreement (NAFTA) has resulted in theconsolidating of production in the East Asian region in China. Beginning in theearly 1990s with a relatively minor investment by Korean chaebol LG, by 2008 therewere over 40,000 Korean companies investing in China to the tune of US$100billion. As a result, China is the largest trading partner of Korea, importing with avalue of US$103.75 billion in 2007 while exporting US$56.14 billion worth of goodsto Korea in that year (China Daily, 23 June 2008).

What has to be remembered here, however, is that, as Robert Wade has put it,‘‘China’s biggest export is deflation’’ (cited in Richard Westra, Political Economy andGlobalization, London: Routledge, 2009, p. 185). Korea-China trade started withKorea clinging to high value-added production in its domestic market and exportingmaterials to China for production of lower value-added goods which Koreancompanies in China would export. Over time, Korean companies operating in Chinabegan to source inputs in-country. The auto industry is a case in point where, at theoutset of the twenty-first century, when Hyundai andKia started production in China,components exports from Korea jumped. Yet, by 2006, they had fallen, adverselyaffecting Korea’s trade surplus in transportation equipment (Samsung EconomicResearch Institute,Korea Economic Trends, 13, 6, 2008). The endgame of this trend forKorean chaebol and the Korean auto industry should be clear. The two sides to thisstory, of course, are the deflationary wage pressures on companies producing in Koreaand the employment dearth in Korea as maintaining chaebol competitiveness forcesdomestic production further up the capital intensity ladder.

The above refers to ongoing trends apart from impacts of the current financialmeltdown originating in the USA in 2008. On this question it is well to be remindedhow in international business forums Korea was praised following the 1997 Asiancrisis for the way government aggressively transformed the financial sector. Bankswere rapidly merged and non-performing assets liquidated at fire-sale prices tovarious buyers including foreign ones. Yet, it is due to the imbibing by Korean policymakers of calls for greater ‘‘transparency’’ (opening to global financial flows asdeemed necessary for optimal resource allocations by International Monetary Fund(IMF) wizards) that Korea finds itself in the classic deja vu situation.

The obvious point with respect to 1997-98 has been recent economic activitiesexploiting the interest rate differential vis-a-vis the Japanese yen. What is dubbed the‘‘yen carry trade’’ involves yen borrowing at extremely low interest rates to fundinvestments in high interest rate currencies. In the run up to the 2008 meltdown andthrough its continuing aftershocks, the Japanese yen has significantly strengthened invalue. Behind this has been the unwinding of the yen carry trade and the moving of

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funds out of securities and other investments to pay back yen-denominated loans.The Bank of Japan’s loans toward Korea stood at US$34.4 billion just prior to thefinancial crisis, with interest rates at 2-3% as opposed to 6% interest on won-denominated loans. With the onset of the current crisis Korean finance exposure tointerest rate arbitrage and the yen carry trade is but one factor in the build-up ofKorean banks liquidity crunch in meeting foreign liabilities.

As to be expected, given the predominant role of the US dollar in global markets,it is dollar liabilities, and again short-term liabilities, that struck Korea in the 2008economic meltdown that began in the US housing market. That Korea holds overUS$200 billion in foreign currency reserves and had even been projected to maintaina significant current account surplus in 2009 did not halt the Korean won going intofreefall against the dollar following major investors ditching won positions. Amongso-called emerging market currencies the fall of the Korean won was second only tothe South African rand. Remember, though, the recent global meltdown originatedin the USA and US interest rates dropped dramatically to spur lending to salvage theflailing US economy, the dollar seigniorage pattern nevertheless asserted itself toensure that world money will flood back into the safety of US T-bills and otherdollar-denominated assets.

The much-lauded transparency of Korean financial markets following the Asiancrisis made Korea a favoured financial investment destination. But our classic deja vuhere is that, though in neo-liberal terms Korea’s post-Asian crisis economy wasrelatively ‘‘sound,’’ the programmed retreat of major investors to the safety ofdollar-denominated assets had reverberating economic effects. In global creditmarkets we noted ‘‘loans’’ imbricate in complex webs of new-fangled financialinstruments. With the high export dependence of Korean companies, including smalland medium-sized firms (SMEs), hedging against currency fluctuations has been acentral aspect of doing business. The gaining in strength of the Korean won againstthe dollar from 2005 through 2007 saw widespread forward-exchange selling inKorea, forcing banks to borrow dollars in foreign capital markets to meet reserverequirements. As the US-engendered meltdown spread, Korean banks were saddledwith liabilities combining short-term foreign debts and long-term debt withmaturities of less than one year equal to 90% of Korea’s total foreign exchangereserves, just below the 100% IMF-deemed risk level (Samsung Economic ResearchInstitute, ‘‘Assessment of External Soundness and Improvement Measures,’’ 5 June2009). The Korean won weakened further and the banks’ position became moreprecarious in 2009 as dollar-denominated loans provided by the Korean governmentto banks and businesses in late 2008 began to mature. With the Korean wonplummeting in value, many previously successful Korean SMEs now foundthemselves on the wrong side of foreign exchange derivatives contracts (withoutteams of business school graduates on their staff they could barely understand these)and are now courting bankruptcy (Bloomberg, 25 March 2009). Finally, whileKorean exporters did benefit from the lower value Korean won, their majormarkets – the USA, Japan and China – seized up; this all putting further pressure onthe financial system which still teeters on the brink of catastrophe.

From May 2008 to May 2009 219,000 ‘‘formal’’ market jobs disappeared. FromJanuary 2007 to January 2008, 267,000 temporary and daily workers were removedfrom the just over 7 million total of this shrinking cohort of vulnerable workers (and

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let us be clear, these workers are not transitioning to ‘‘good’’ labour jobs but to nojob). And there are almost 1 million workers labouring under contracts of less thantwo years who, under current labour laws, may be dismissed without benefit andhave their contractual period ending in summer 2009 (Korea Times, 16 February2009). However, the government is seeking to take advantage of the economicmalaise to extend the contractual period up to four years in which workers canremain with companies before they must be given what in Korea is dubbed ‘‘full-time’’ secured and benefited work. Think-tanks in Korea have thus estimated thatthe unemployment fallout from the current crisis will be nearer to 500,000 workers(Le Monde Diplomatique, 7 July 2009). Youth unemployment has also spiked to itshighest level since 1999 following the Asian crisis.

The US-sparked economic meltdown is also contributing to a widened gapbetween rich and poor in Korea. The rich have benefited from low interest rates thathave spurred property market investments. The poor have suffered from this as theproperty bubble thus generated has pushed up rents and deposit fees leading toincreased homelessness. The poor suffer as well from the weakened won which haspushed up the price of food staples like packaged noodles. Finally, household debt,which in other major OECD states like the USA is stagnant, in Korea (driven bycredit card debt and mortgages) has increased steadily from the Q2 2008 to Q2 2009to 700 trillion won (JoongAng Daily, 26 August 2009). This has engendered a boomfor legal loan sharking activities in Korea as so-called ‘‘registered’’ and‘‘unregistered’’ lenders are permitted to charge interest on loans of up to 49% and30% respectively to the most vulnerable who do not have sufficiently secure jobs toapply for loans from banks (Korea Times, 11 June 2009).

The ultimate in deja vu, however, relates to the main Korean stock market index,the KOSPI. In 2008 alone the KOSPI plunged by 40%. In 2009 it jumped 39%,though is still far removed from the 2007 high point. What is of the greatest interestin this is that the stock market leap has been spurred by foreign buying returning tograb devalued assets under conditions of a weakened Korean won. From April toJuly 2009, net purchases by foreign investors represented the single largest four-month buying spree since the Korean stock market opened to foreigners in 1992(JoongAng Daily, 7 August 2009). In early June 2009 alone, at the height of thespending binge, stock market buying by foreigners in Korea was US$1.56 billionwhile that in India was US$973.9 million, Japan US$933.6 million and ThailandUS$352.8 million (Korea Times, 12 June 2009).

Concluding Remarks

Much to the chagrin of Korea’s neo-liberal President Lee Myun Bak, who waselected in 2008 on a ‘‘747’’ pledge (that Korea would rank 7th in world GDP ranking,attain a per capita income of US$40,000 and achieve annual growth rates of 7%), theeconomic ranking of Korea has plummeted to 15th in the world and per capitaincome dropped to lows not seen since the Asian crisis. Does news in mid-September2009 of the KOSPI and other stock markets in the region rebounding mean that theKorean economy has ‘‘recovered’’ and is now progressing toward substantive healthin the foreseeable future as the mainstream press is suggesting? From what has beendiscussed above about ‘‘logics’’ of the current globalisation and financialisation, thefact is that there is likely more to deja vu in South Korea.

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