The Korean Struggle
Aftermath of the IMF takeover

By James Crotty & Gary Dymski

Just a few months after getting a clean bill of economic health from the OECD in mid 1997, South Korea’s economy plunged into a foreign exchange crisis. By December the Korean government had signed a loan agreement with the IMF. The severity of its terms were unprecedented. Koreans quickly spread the bitter joke that the IMF means “I Am Fired.” Given the long tradition of labor and student militancy in Korea, and the election to the presidency just days later of populist Kim Dae Jung (who had called the IMF deal a “national humiliation”), it seemed likely that the virtual takeover of the Korean economy by the IMF would generate resentment and spark resistance in the new year.

But no such resistance appeared. A consensus quickly formed among the U.S., IMF, and Korean political and economic leadership that Korea must dismantle its long-admired model of state-led development, throwing open its borders to overseas goods and money and its asset and banking markets to overseas owners. An embittered, fatalistic acceptance of the inevitability of the Neoliberalization of the Korean economy seemed to infuse the national psyche. U.S. and IMF complicity in this externally imposed revolution was no surprise, but Kim Dae Jung’s quick switch from an anti- to a pro-IMF position, which infuriated his labor supporters, certainly did. After all, the IMF program would mean economic collapse, mass layoffs, and a loss of economic sovereignty. Yet mass protests by workers and students did not take place, and by February Korea’s crisis was pushed off the front pages of Western newspapers.

These events generated a number of questions in the minds of interested outside observers. Why did Kim Dae Jung suddenly change his view? Did most Koreans share his newfound enthusiasm for neoliberalism? Why were Korea’s political leaders willing to walk away from their amazingly successful and long-standing development model and accept its replacement with a Neoliberal model that has brought disaster to labor and the majority of citizens wherever it has been implemented? Where was the expected mass resistance to the IMF takeover of Korea?

We spent the last two weeks of March in Korea at the invitation of Professor Kim Soo Haeng of Seoul National University, Korea’s most respected progressive political economist. We had the opportunity to discuss these and other questions with an unusually broad array of Koreans from diverse social positions—top managers and officials in banking and industry, important government officials, leaders of the more militant of the two Korean labor federations, students, and academics. Days of discussion yielded some tentative answers to our questions.

An understanding of the Korean crisis requires historical perspective. For the past three and one-half decades the Korean economy has been organized according to the general principles of the so-called “East Asian economic model,” an approach often referred to as state-led growth or the state-governed market economy. The Korean government provided temporary import protection for domestic markets introducing new products or technologies, focused the development of high tech production capabilities on a small number of diversified companies termed chaebol, coordinated chaebol investment decisions, allocated credit toward priority industries and technologies, and tightly regulated the cross border movement of money. At the same time, the government selectively opened markets to import competition and imposed export performance criteria in return for government aid to insure that key industries achieved world-class efficiency.

The Korean economic model has been astoundingly successful. Over the past 35 years it achieved an average annual rate of growth of both real per-person national income and real wages of about 7 percent while maintaining full employment and a relatively equal income distribution. Korea’s success was so indisputable that it demonstrated to those not ideologically committed to Neoliberalism that there were practical, superior alternatives to the free market development model. Of course, much of Korea’s growth took place under an authoritarian political system, but in 1987 long-term, heroic struggles by the militant Korean labor and student movements finally toppled the military regime that had ruled Korea off and on until that time.

The East Asia alternative development model has become increasingly important in the last 20 years as more and more countries adopted Neoliberal economic policies, sometimes willingly, more often under external pressure. Under the Neoliberal approach, resource allocation is left to the vagaries of market forces, domestic and international financial flows are unregulated, and foreign ownership of domestic assets is encouraged. These economic policies have created a world of globally mobile capital and disenfranchised governments. Most economies in Latin America, Africa, Eastern Europe, and the former Soviet Union have adopted “market-friendly” policies of this sort, and their people have suffered enormously as a result.

East Asia was the last important area of the globe to successfully resist the encroachment of the Neoliberal regime. Should the current crisis signal the end of this resistance, the effects on the people of Asia and, indeed, the rest of the world may be profound. In the stagnant world economy of the 1990s, East and South East Asia, constituting 25 percent of global GDP, have accounted for half of the growth of world GDP. Were Asia to now shift to the slow growth, high unemployment path of the rest of the Neoliberal world, no country could long escape the consequences.


What caused Korea to experience this system-shaking crisis? We posed this question to everyone we interviewed. The most common answer stressed internal problems—not pressure from the U.S. or IMF, pointing an accusing finger first at the chaebol, then the government. In the late 1980s and 1990s the chaebol began to make their presence felt in such up-scale global industries as semi-conductors and automobiles; Samsung, for example, became the world’s largest chip-maker. By the early 1990s they believed they were positioned for a serious run at the U.S. and European consumer markets. The ambition of Korea’s chaebol to become serious rivals to the most powerful Western and Japanese multinational corporations is thought by most Koreans to have begun the chain of events that terminated in the crisis of 1997.

To achieve their objectives the chaebol had to undertake major new investments in Korea and elsewhere that were so large they could not be financed through profits or equity issues. To help raise the needed funds, the chaebol successfully pressed the government to deregulate domestic financial markets, then proceeded to increase domestic borrowing dramatically. Of particular importance, the government licensed 24 new merchant banks between 1994 and 1996—some with substantial chaebol ownership interests, and in a shocking reversal of tradition, left these banks virtually unregulated. The chaebol also needed assured access to foreign markets, which led to a Korean bid to enter the OECD. The price of entry included a promise to accelerate the deregulation of cross border capital flows as well as domestic financial markets. This suited chaebol interests because their credit needs exceeded the capacity of domestic markets and Korea’s interest rates were much higher than global rates. Once capital inflows were deregulated, short-term foreign money—especially bank loans—poured into the country. The new merchant banks proceeded to borrow heavily from foreign banks, relending most of the money to the chaebol. Total foreign bank loans doubled from 1994 to 1997 to about $120 billion, an astounding 60 percent of which had to be repaid within one year.

The stage was now set for the outbreak of a financial crisis. The chaebol had financed a risky long-term capital boom primarily with short-term loans, a large part of which were in foreign currency. Any set of events which led to chaebol profit problems and\or disappointing export earnings—an overvalued won, sluggish export markets, rising foreign interest rates, or a domestic recession—would lead to delayed interest payments and eventually to defaults on foreign loans, triggering a run on the won, a collapse of the Korean stock market, and a mass refusal by foreign banks to roll their loans over.

The government helped them do it. In contrast to the near universal opinion expressed in the Western press, most Koreans correctly understand that their crisis was not caused by too much government regulation, but by too little. It was excessive liberalization, not the traditional East Asia model that failed.

As the Korean financial situation deteriorated, Koreans prepared to vote for a new president. Kim Dae Jung’s fortunes rose as he attacked the IMF in public forums. But just days before the election the U.S. and IMF threatened to create economic chaos in Korea unless all three presidential candidates vowed their commitment to an IMF agreement over which two of them had no control and whose provisions they did not even understand. They all capitulated to this extortion. Following his election and thereafter, Kim consistently argued that IMF-mandated neoliberal restructuring would be the salvation of the Korean economy. This position reflected a theme Kim has stressed for 30 years—to break the power of the families who own the chaebol and end their repressive alliance with authoritarian Korean governments, it is necessary to liberalize Korean markets. Kim believed that chaebol domination of the economy, government, and even civil society was the deep seated cause of Korea’s current crisis. Most academics, students, government officials, and bankers we talked with echoed this theme—everyone in Korea, we discovered, hates the chaebol.

We were stunned to learn that even many progressive Koreans welcomed IMF intervention, believing it would provide them with weapons they could use to bring about the downfall of the chaebol and the disciplining of the government. They hoped that increased foreign ownership of Korean firms and banks and the breakup of the chaebol empires would drastically reduce the concentration of economic and political power in Korea. As economic power became more dispersed, they argued, labor would become stronger and the government more amenable to democratic control. Meanwhile, the entry of foreign banks and Western banking standards would end the wholesale abuse of the banking system that characterized the mid 1990s.

Conversations with representatives of the chaebol revealed a different perspective on the origins of the crisis. They trace Korea’s current problems back to the political struggles that culminated with the end of the military dictatorship in 1987. In the chaebol’s view, labor used the increased power gained through these struggles to obtain real wage gains that exceeded productivity growth, causing a secular crisis of profitability and international competitiveness for the chaebol and thus for the Korean economy. And the government’s power to regulate chaebol activity hindered their attempts to respond to this profit crisis. The chaebol were thus forced to undertake their overly ambitious capital accumulation program of the mid 1990s and attack government regulation of financial markets. They sought lower costs by shifting operations overseas and adopting advanced, often labor-saving, technology at home. As the chaebol see it, then, the long-standing conflict between Korean capital and labor was the most deep-seated cause of the current crisis.

These same conversations unearthed an incredible irony: like the progressive academics we spoke with, the chaebol believe they can use the provisions of the IMF agreement to defeat their internal enemies—labor and the government.


The IMF agreement has a number of key demands with profound consequences for the Korean economy: austerity macro policy, very high interest rates plus restrictive fiscal policy, which will cause recession, raise unemployment, and force a tidal wave of bankruptcies, especially among small and medium businesses; the imposition of stringent banking regulations in a financial crisis, when most banks cannot possibly meet them, forcing both bank failures and a drying up of credit for Korea’s beleaguered businesses; labor law “reform” which, for the first time, will allow firms to fire workers at will; the removal of all restrictions on foreign ownership of Korean firms and banks; the elimination of restrictions on imports (including Japanese cars, a provision the chaebol fear); and the elimination of all forms of government influence over both domestic and international capital flows, including even the short-term capital inflows that led to the current crisis.

Credit starvation and high interest rates have already launched a self-feeding cycle of bankruptcies, bank failures, declining production, and rising unemployment, which is expected to reach at least 10 percent and perhaps 15 percent or more—in an economy with the flimsiest of social safety nets. The chaebol (as well as foreign investors) expect labor law “reform” and massive unemployment to smash the union movement, while other structural changes will eliminate the government’s ability to regulate the private sector. Accelerated liberalization will assure free access to global capital and credit markets. In addition, chaebol family personal wealth will now be free to roam the world in search of high returns. It is thus easy to see why the chaebol see the IMF as their ally. And chaebol support for much of the IMF program in turn helps explain why the Korean government offered so little resistance to its harsh terms.

But though they will terrorize labor, defang the government, and demoralize the people, the IMF agreement will not assure victory to the chaebol. The chaebol are weak and over indebted, even their trading capacity is severely compromised by a lack of credit. They are in desperate need of financial assistance from foreign companies and foreign banks, forced to offer their assets at fire sale prices to others much bigger and more powerful. It is unlikely they will be able to gain the financial support they desperately need without losing control of their empires to their foreign rivals.

But the likelihood that the people can use the IMF to obtain their objectives is smaller yet. The IMF agreement is designed to permanently destroy the institutional foundations of the Korean developmental model—that “East Asian” mix of government strategic planning, industrial ingenuity, high productivity growth, and worker security that spread prosperity so widely across Korea. Regulation through market whimsy, footloose relations between industry and workers, high unemployment, rising inequality, and labor insecurity will become the new norms in Korea, as they are in the rest of the neoliberal world. Many Koreans with whom we spoke held out hope that after the IMF program had reduced the power of the chaebol and the government, they could proceed to reconstruct an even better “East Asian” economy reflecting deep-seated Korean values such as community and labor solidarity. When pressed, however, no one could explain to us how this could be done when foreigners controlled their firms and banks, their economy was fully open to global forces, and the government had been stripped of all power to regulate the economy.

The only people we spoke to who fully appreciated the severity of the threat to the Korean economy posed by the IMF agreement were labor union representatives. They understood that the preservation of Korea’s development path would require a fierce and prolonged fight to resist full and permanent implementation of the IMF program. They were preparing for a sustained period of massive and disciplined social protest against the IMF and all the external and internal forces supporting it. At the time of our visit, however, no significant public opposition to the agreement had yet taken place. Confusion, fatalism, passivity and the false hope that the IMF could be used to win domestic battles ruled the day. But as the damage caused by the agreement increases, with unemployment and bankruptcies setting new records with each passing month, the preconditions required for the organization of a mass protest movement are in the process of creation.

There are indications that serious resistance has started. Lee Kap Yong, the newly elected head of the militant Korean Confederation of Trade Unions (KCTU), threatened massive strikes in late May or June to prevent the chaebol’s planned massive layoffs (estimated to be at least 500,000 or one-third of their work force). Since his election was understood to be a repudiation by the rank and file of their former leaders for accepting February’s labor law “reform,” Lee immediately demanded that Kim Dae Jung negotiate a new, more worker-friendly, labor law. This demand, which has the support of the larger, less militant union federation, infuriated Kim, the chaebol, foreign investors, and the IMF. Hyundai Motors union leaders threatened to strike if the company attempted to carry out its layoff plans. Large numbers of unemployed demonstrated in Seoul and Pusan in April; and while the government declared unions of unemployed workers illegal in March, People’s Victory 21, a political organization affiliated with the KCTU, organized a national alliance of the unemployed. And 22,000 demonstrators organized by the KCTU gathered in Seoul on May Day to protest the IMF program and the government’s role in its implementation. The government reacted to this renewed popular resistance with repressive tactics familiar from the days before Korea’s democracy was secured, threatening resistors with imprisonment.


The problem facing the militant labor union movement, the only force presently capable of organizing an effective protest movement, is if they fail to effectively resist the mass layoffs which the chaebol say will begin shortly, they will be severely weakened, perhaps destroyed. But successful resistance to such powerful adversaries in these dangerous conditions will require the creation of a united coalition linking the majority of workers and students, one that has the sympathy of the broad middle class. Unfortunately, the creation of such a coalition may take more time to secure than the unions have available to them. We can only hope that, as on so many occasions in their history, the Korean people will find the courage and strength needed to sustain themselves in this struggle, a struggle of monumental importance to the eventual outcome of the undeclared, ongoing global war between national autonomy, community, and worker security, on one hand, and the privileges and power of Neoliberal capital and global elites on the other.