A Tale of Two Countries Coping With Economic Emergency

SANTA BARBARA — The secret to both Japan’s and South Korea’s postwar economic “miracles” was essentially the same: export-led high growth and intensive investment. In both, success was the result of cooperation among a driven leadership, a supportive government bureaucracy and aggressive big business.

Even the best industrial policies, however, ultimately show their downsides. By the 1980s, there were warnings in Japan that government backing of “sunrise” industries in the 1960s and early ‘70s was giving way to an institutionalized subsidy of inefficient “sunset” businesses, with bureaucratic overregulation stifling growth and forcing consumers to pay the world’s highest prices. Similar warnings were heard in Korea. They were all unheeded.

Then the music suddenly stopped. Japan’s enormous bubble of inflated stock and land values burst at the beginning of the 1990s, and recession set in. South Korea’s economic comeuppance came with the Asian economic crisis in 1997. What’s interesting is the contrast in how Japan and Korea have coped with their respective economic emergencies.

Less than two years after disaster, the Republic of Korea’s economy is coming back strong. Foreign-currency reserves now stand at $50 billion, up from less than $4 billion a year ago. Gross national product is estimated to grow about 3% this year, after contracting 5.9% in 1998. Last year’s current-account deficit of $8 billion could become an estimated surplus of $40 billion. Korea has begun to pay back the emergency loans it got from the International Monetary Fund in 1997. Foreign investment, in an economy that used to be something of a Sargasso Sea for outside capital, has jumped to a record $8.9 billion. Interest rates are down to an unprecedented 7%. Most significant, consumer spending over the past year has risen by 4%.

There is a lot of economic sweat behind these statistics. Korea’s trade unions protested the loss of jobs caused by economic restructuring, while government expanded unemployment insurance and retraining programs. The chaebols, huge industrial conglomerates, are unhappy about selling off unprofitable subsidiaries. Yet, public corporations are being privatized and failing banks either shut down or merged. Foreign ownership of banks, once unheard of, is now encouraged. The bureaucracy is being trimmed. Unlike any other nation in East Asia, South Korea has undertaken a massive economic restructuring.

“In the past, a network of intimacies in politics encouraged widespread corruption,” says President Kim Dae Jung. “Our companies lost competitiveness. In a global economy that spells disaster.”

No such notes of urgency sound in Tokyo. Prime Minister Keizo Obuchi talks about a “transition to a new economy” but is nervous about restructuring his economy because it would, in the short run, cost jobs--and votes. Iwao Nakatani, one of Japan’s leading economists, has estimated that a real restructuring of Japan’s overregulated economy might eliminate 10 million jobs.

But as Obuchi thinks about reforming gradually, “in the Japanese way,” Japanese big business is doing the job for him. With a record 3 million already unemployed and more companies downsizing--NEC, Sony and Mitsubishi Electric, among others, announced their new lean and mean posture earlier this month--the old assurances of full employment are evaporating. In 1995, Shoichiro Toyoda, then chairman of Japan’s big-business Keidanren, or Federation of Economic Organizations, declared that “abolition” of bureaucratic regulation was necessary to restart the economy.

Thus far, through eight years of recession, Tokyo’s politician-bureaucrat mix has tried to shore up the economy by costly stopgap stimulus packages, mostly in the form of construction projects, loans to business and bank rescues. The public has been minimally reassured. Consumers, afraid to spend, have been saving their money. Household safes are selling very well. Overall, consumer spending continues to move downward, this year by 4%, despite government pump-priming projects, like giving about $170 in “spending certificates” to Japanese families. Industries are not investing. The banking system remains half under water, despite Obuchi’s approval of a $500-billion government rescue package.

How is it that South Korea can start a major restructuring plan, while Japan dawdles? One reason is sheer necessity. As an industrial trading nation, South Korea has to earn its bread daily as a strong competitive member of a globalized economy. But Japan, with something like $10 trillion in accumulated savings, could keep up its protected hothouse economy for a few more years, living off accumulated fat. But there is a more basic explanation: the difference between government by an energetic “outsider” and by a complacent “insider.”

For more than three decades, Kim was the great outsider in South Korea’s national politics, fearlessly preaching for human rights and free enterprise during the military semi-dictatorships of Park Chung Hee and his successors. When he won the presidency in 1997, at the depth of the Asian economic crisis, he was the one political leader with a program and no interest in perpetuating the old system. He set about a total restructuring of Korea’s economy and polity. Curb the power of the chaebol conglomerates, support small business and the entrepreneurial spirit, make financial dealings transparent, open the “hermit” country to foreign trade and investment, eliminate bureaucratic meddling and crony capitalism--it was a tall order and hard to fill. But he had popular support and a new approach to politics not found elsewhere in East Asia.

By contrast, Obuchi is the ultimate “party man.” His life has been spent tip-toeing through the corridors of power, making friends and doing deals within the scandal-clogged and faction-ridden political party that has ruled Japan, hand in glove with its powerful bureaucrats, for most of the past four decades. He was everybody’s compromise candidate for prime minister. Like his boss and mentor, former Prime Minister Noboru Takeshita, the last of Japan’s crooked “shadow shoguns,” Obuchi works the telephones constantly, just to keep in touch. He has made an art form of self-deprecation, always popular in Japan.

A few Japanese politicians have tried to restructure their nation’s overprotected economy before it prices itself totally out of the world market. Ichiro Ozawa, once a shadow shogun himself, argued eloquently for Japan to become a “normal country” in his “Blueprint for a New Japan,” published five years ago. But Ozawa, the transient Prime Minister Morihiro Hosokawa, even the Democratic Party reformer Naoto Kan, have thus far failed to make a permanent dent in voters’ consciousness. Whenever one of them begins to seem threatening, Obuchi is ready with a compromise deal. The ultimate insider is shrewd enough to know that a real restructuring of Japan’s economy might well be disastrous for a party that has built its power on a pyramid of special-interest politicking.

Which is why he likes to move ahead in small steps. Given, for example, popular discontent with the arrogant mandarins of Japan’s Finance Ministry--more than a little responsible for the bubble and the banking crisis of the past decade--Obuchi decided merely to change the ministry’s name.

What does the future hold for outsider Kim’s country and insider Obuchi’s? Kim will not have an easy time of it. The unions will get tougher, the chaebol will resist settling their debts and losing their clout. The National Assembly will stay fractious. But in all likelihood, Kim will stay the course. He will not compromise on essentials.

Obuchi, if reselected by his party, will continue his work of soothing angry factions, co-opting minority politicians and massaging the voters. He will continue to apply Band-Aid recovery and stimulus plans without addressing the basic problem of restructuring. Meanwhile, consumer prices will stay high, public confidence low. The top tier of global Japanese companies--Toyota-Sony et. al.--will doubtless accelerate the current trend to make more products more cheaply outside Japan’s economy. Inside, the huge nonglobal second tier of economic losers, guarded by a benevolent bureaucracy, may succeed, ultimately, in turning the once powerful Japan Inc. into the world’s biggest mass-production cottage industry.