Among the Believers

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DONALD MACINTYRE SeoulLee Hun Jai knew that overhauling South Korea's debt-riddled banking industry would be tough. But he probably didn't count on it being dangerous as well. When the International Monetary Fund late last year demanded the cleanup in exchange for a multibillion-dollar bailout, Seoul picked Lee, a former top bureaucrat, to winnow out the country's sick banks and shut them down. Fearing threats from business and union leaders, he sent his family to the United States. But Lee rashly declined to hire bodyguards. When he dropped in unexpectedly last month to talk with labor leaders camped out in downtown Seoul to protest bank closures, one of the union men took a swing at him, barely missing. He has guts, says Ho Chull Yang, an executive director of Morgan Stanley's Seoul office. He is the only guy in this country who came out and said you have to close banks.As the government's point man in the IMF-led reform effort, Lee won't win any popularity contests. Korea's banks figured the government would never let them fail. The chaebol, or conglomerates, counted on no-questions-asked borrowing to feed their expansion fantasies. The IMF prescription of open markets, deregulation and transparency has thus been the equivalent of electric shock treatment. What's surprising, though, is how well the patient is responding. It's still too early to call Korea an IMF success story--the economy could shrink 7% this year. But despite criticism of its handling of the global economic crisis, the IMF appears to be mostly getting things right in Korea. We needed reform, says Lee Doo Won, an economist at Yonsei University in Seoul. The general direction is correct.Koreans didn't exactly welcome IMF intervention. As the Asia crisis snowballed last fall, Seoul scoffed at suggestions it might need a bailout. But in late November, with their foreign-exchange reserves almost run dry, the Koreans swallowed their pride and called in the suits from Washington. Less than a year later, Korea has pulled back from the brink. Foreign-exchange reserves are back up, and foreign investment is trickling back in. The government is revamping an economy rife with inefficiency and corruption. Taboos have fallen, too. Foreigners can take over Korean companies for the first time. In some cases, Seoul has even gone beyond IMF recommendations--for instance, by easing a ban on foreigners' buying land.PAGE 1  |  
There's still plenty of pain to come, but hope is on the rise that the region's troubles may be waning. Japan's bank-overhaul plan and the Fed's interest-rate cuts bolster the new optimism
Eisuke Sakakibara, Japan's Mr. Yen, emphasizes the need for cooperation
Are the region's troubles waning or is the worst yet to come?
TIME's Asian Board of Economists evaluates the chances for recovery in the region
Thailand has better reviews than returns
Korea accepts a bitter pill
David Roche sees trouble, but no depression
 
Things would have been bumpier if many Koreans hadn't already been convinced that reforms were long overdue. Among them was President Kim Dae Jung, who took office in February preaching the virtues of open markets. Kim was deeply opposed to the crony capitalism that helped land Korea in its current mess. Instead, he wanted a more open, U.S.-style economy. Heading a new administration, Kim had more freedom to break with the bad habits of the past. Many ordinary Koreans supported him, hoping reforms would mean cleaner government. Moreover, pressure from the IMF has given Kim political cover to outmaneuver recalcitrant bureaucrats and push through unpopular moves like bank closures. Says the IMF's representative in Seoul, John Dodsworth: One of the lessons from Korea is that the political will has to be very strong.Seoul and the IMF haven't seen eye-to-eye on everything. Korean financial officials now say the IMF kept interest rates too high too long. The high rates stabilized the won but suffocated thousands of businesses. Rates are now coming down. Korean economists also say the IMF's standard insistence on a balanced budget didn't make sense in Korea, which had been running surpluses and thus could afford to spend more on job creation. The IMF insists that as early as January it was encouraging Korea to run a deficit when the depth of the economic slowdown became clear; both sides say the differences were worked out amicably.But Korea's policies have generated some criticism. Although Lee and the financial regulatory committee he heads have shut down five commercial banks, foreign investors contend that progress has been too slow. And the government came under fire for intervening on the side of the unions during a recent strike at Hyundai Motors, ignoring a new IMF-inspired law that legalizes layoffs. The chaebol had to back down on plans to fire more than 1,600 workers.The World Bank, the IMF's sister institution, prodded Seoul for more progress earlier this month. It asked Korea to set up a bankruptcy court and allow certain class-action suits to give shareholders more power over management. But even if Korea pushes ahead with reform, it could still get swamped by the effects of the crisis elsewhere in Asia. With unemployment expected to hit a record 7% this winter, the real test of Korean resolve is yet to come. Still, when times improve, Koreans may be grateful for the IMF's harsh medicine. Without help from the IMF, what would the situation have been in Korea? asks Kim Tae Dong, a senior presidential adviser. The alternative was frightening. Too frightening for most Koreans to imagine.  |  2
There's still plenty of pain to come, but hope is on the rise that the region's troubles may be waning. Japan's bank-overhaul plan and the Fed's interest-rate cuts bolster the new optimism
Eisuke Sakakibara, Japan's Mr. Yen, emphasizes the need for cooperation
Are the region's troubles waning or is the worst yet to come?
TIME's Asian Board of Economists evaluates the chances for recovery in the region
Thailand has better reviews than returns
Korea accepts a bitter pill
David Roche sees trouble, but no depression