South Korea Braces For Restructuring
Its membership in the club of rich nations is expected to serve as a catalyst for a fundamental restructuring of the Korean economy. Adherence to the OECDs liberal standards will promote a shift from state-guided capitalism to an economy dominated by market forces.
However, the difficulty of accomplishing that transformation was reflected in the contentious negotiating process that involved Koreas OECD application over the past 18 months. OECD members pressed Korea to accelerate financial liberalisation and economic deregulation as the price for membership.
But results fell short of expectations despite several key concessions by Seoul. Korea accepted only 65 per cent of the OECD codes on financial liberalisation against an 89 per cent acceptance rate by the average OECD member.
Although it promised to open the stock market fully to foreign investment by 2000, Seoul failed to set a firm date for opening the bond market and abolishing controls on the borrowing of overseas funds by Korean companies. Seoul argued that rapid financial liberalisation would stoke inflation and destabilise the financial system because of a sudden inflow of speculative foreign funds, attracted by Koreas high interest rates.
Instead, Korea offered to proceed with full financial liberalisation once the gap between Korean and international interest rates fell to 2 percentage points from its current 6-7 percentage points, and inflation fell to below 3 per cent.
Korean officials admit these economic preconditions are unlikely to be achieved until after 2000. In trade, Korea promised to end its import ban on Japanese goods by 1999, while it managed to retain developing country status for agricultural imports, as well as environmental standards, until at least 2000.
Although OECD members expressed disappointment about the lack of immediate progress in Korea meeting OECD criteria, they said there were good political reasons for accepting Seoul. Korea is the worlds 11th largest economy and its per-capita income of $10,000 already exceeds that of OECD members as Hungary, Mexico and Turkey. We are near the bottom when it comes to OECD standards on capital markets, but we are determined to do our best, said Ju Chul-ki, head of the foreign ministrys international economic affairs bureau in Seoul.
However, there is considerable domestic opposition to some measures as shown by the National Assemblys reluctance to approve membership. The two main opposition parties have criticised the governments push for membership as being too hasty, claiming the economy is not ready to withstand strong international competition. This reflects fears market liberalisation will lead to industrial disruption and social inequality.
Nonetheless, the National Assembly is likely to approve OECD membership next month because it does not want to be blamed for harming Koreas international prestige and efforts to acquire greater influence abroad. It is necessary to reconsider (our opposition) now that the OECD admission is a fait accompli, said the biggest opposition party, the National Congress for New Politics, recently.
President Kim Young-sams government is also touting benefits of OECD membership, such as improved access to overseas markets and better credit ratings for international loans. Kim will claim most of the credit for getting Korea into the OECD, his term ends in early 1998 but it will be up to the next administration to do most of the work in implementing the promised reforms.