Crisis, Restructuring, and Recovery in Korea -- Remarks by Michel Camdessus
December 2, 1999President Kim Dae-Jung, Excellencies, Ladies and Gentlemen,
I am extremely grateful for your invitation, on the eve of the International Conference on Economic Crisis and Restructuring in Korea, for this is an occasion that has great significance, not only for Korea, but for the rest of Asia, and indeed for the whole world. Two years ago, Korea stood on the brink of a potential disaster, a situation that came as a shock, as it became the latest, and perhaps the most unexpected, country to be caught-up in the tide of contagion that was sweeping through global financial markets and economies. One year later, the global economy, shaken by new crises in other corners of the world was in precarious condition. But by that time, in the midst of the worries of many observers, it was already becoming possible to detect a glimmer of hope, and quite plausible that Korea and its neighbors could show the way out of crisis. That is proving true beyond expectation.
With each passing month, we see ever more encouraging indicators of the speed and vitality of Korea's recovery, clear evidence -- Mr. President -- that the policies you adopted in response to the crisis were the right ones and that they are working. Well over a year ago, once the currency had stabilized, short-term interest rates fell below pre-crisis levels and now long-term rates have also done so. At the same time, the country's usable reserves were already climbing to record levels, and exports had begun a strong rebound. During 1999, unemployment has fallen sharply, and recent statistics show that Korea is well on its way to realizing 9 percent growth this year. This looks very much like the V-shaped curve of growth I promised you two years ago, if you were to persevere with your program. I mentioned to you the experience of Mexico. You told me you would do better. You did it.
These facts point to a broad-based recovery with output now above its pre-crisis levels. What is more, thanks to the reforms that have been initiated during the past two years, the people of this country have a far better prospect of continued strong progress. And if Korea is setting the pace, other countries in Asia are also on the mend. For Asia as a whole, we now estimate that growth for this year will be 4 percent, up by 1½ percent from the mid-year estimates.
President Kim, I should like today to salute the government, the institutions, and the people of Korea for the remarkable courage and determination with which you met the crisis. For if this was a Korean crisis, you have met it with a Korean response, and now the rewards are Korea's to build upon for the future. Of course, the IMF stepped forward as soon as Korea requested help and we are gratified to see that the program that was initiated immediately, and which is now entering its third and final year, has contributed to such a quick and strong recovery in Korea, which couldn't be explained without the spirit of sacrifice, the sense of community and solidarity, the capacity for renewal which are distinctive values and quality of your people.
The gains you have made have created a golden opportunity for further action to sustain and consolidate the recovery. For you know well that since the task of reform is still far from complete, the current favorable macroeconomic environment makes this is a fitting moment for a gear-shift in the reform process to ensure that the recovery is sustained. The conference that opens tomorrow can provide valuable suggestions on the priorities for this very important period in Korea's recovery. Also it can provide insights into some key questions. What has been learned that will help Korea and the rest of the world avoid such crises in the future? And what should be done next by Korea and the other crisis-struck emerging markets?
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The crisis arose after three decades during which the world watched with admiration as countries in this region experienced extraordinary economic growth. Even if, in retrospect, the experience does not quite live up to the description of "miracle," it was certainly not a mirage, since tremendous social and economic progress was made. Against this background, some countries, including Korea, suffered from a "denial syndrome," not recognizing that the globalized market-place brought with it new demands of excellence in policy -- financial sector soundness, transparency, and governance for instance -- and the risk of a new breed of crisis. The quick turnaround points to the underlying potential of the economy and the "zeal for reform" that took hold immediately the problems were finally acknowledged.
President Kim, in reflecting on these questions, I wanted to refer to a reliable source, so I turned to your speeches, confident of finding some nuggets of wisdom to guide our thoughts tonight. In fact, in your inaugural address in February 1998, I found a gold mine. There you called for economic reform that was comprehensive -- as might be expected -- but which was also integrated with the social and political processes of the country. Macroeconomics was prominent; so too was social welfare and education reform, together with corporate reform and the promotion of foreign investment. But what was most striking was the emphasis on national unity inspired by dialogue and participatory democracy as an equal, indispensable companion to durable economic reform.
Your thoughts echo my own conviction and experience, which has deepened during my years at the IMF, that policy making cannot be divided into different compartments -- macroeconomics is part of an integral whole. This crisis, and the measures that together we have designed and you have implemented, remind the world about the multidimensional nature of economic management. Let me reflect briefly on five of these dimensions.
First, the virtues of sound macroeconomic policies cherished by the IMF are essential but they are not enough to prevent crisis. This being recognized, we have now seen amply demonstrated in the response to the crisis, the power of flexible macroeconomic policy implementation to kick-start an economic recovery.
Second, the promotion of the free market and an outward orientation of economic policies -- what are sometimes called the first generation of reforms -- are essential. So too are high rates of saving and investment in both physical and human capital. But on their own these factors are not enough, especially if financial systems are weak and the country relies excessively on short-term external borrowing. Now we know that the process of financial sector and corporate reform is well underway, but with a great deal remaining to be accomplished; and we all know that you will not allow any sense of complacency an early success could generate to dilute or postpone a program of reform essential for the future of the country.
Third, establishing efficient and stable markets requires sound economic, social, and political institutions, by which I mean the web of laws, regulations, standards, codes, and norms of conduct that support the functioning of markets. Thus, two key concepts have entered the everyday vocabulary of macroeconomists -- transparency and good governance. And the portfolio of economic decision-makers has come to include the so-called second generation reforms that promote these values. But a very clear lesson is that the first and second generations of reform must overlap: Asia's experience highlights the risks of liberalizing capital flows without the support of sound financial systems and high standards of transparency and governance.
Fourth, we have learned that, when crisis strikes and a response is formulated, it is not just the content of a program that matters, but the degree of support for it. It need hardly be said that a program will work only if the country wants it to work; not just the Government, but the people and organizations within the society. In short, we have seen the value of national "ownership" of the policies, through a participatory approach that engages civil society in a constructive dialogue. The tripartite accord agreed by labor, business, and government in February 1998 was a landmark event in Korea's recovery. Equally the unity that was established across interest groups and across regions in the early stages of the response to the crisis is an invaluable asset that should not be given up easily.
Fifth, the experience has reinforced that the ultimate objective of all economic policy is human development, and that sound social policies, centered on poverty reduction, must be an integral part of policy formulation. The programs in Asia have demonstrated clearly the circular linkages among strong monetary and macroeconomic management, high quality growth, and poverty reduction. Without the first two, there is little chance of reducing poverty. Without the latter, then the essential broad-based support for policy implementation will be absent. These principles were key components in Korea's program, which was characterized by a major expansion of social safety nets early in the crisis.
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What challenges lie ahead for the Asian countries, including Korea, as they emerge from crisis and enter the uncharted waters of the new century? Well prudence suggests that each country, not least Korea, should be prepared for the unexpected. What does it require? Many things indeed, that you are better qualified than I to define. But at least the following -- maintaining stability, strengthening institutions, raising efficiency and promoting equity.
Maintaining stability may, for a little while longer, mean a relatively relaxed stance for macroeconomic policies. But soon you will face more familiar challenges, such as the risk of overheating in economies where key players are anxious to "make up for lost time" yet where reform is incomplete. For those countries, like Korea, that do not maintain hard currency pegs this will mean using monetary policy to preempt pressures on prices, with the aim of keeping inflation in check close to global rates. It will also entail an eventual return to traditionally prudent fiscal policy once the need to sustain domestic demand is no longer so pressing. We are probably approaching that moment.
Strengthening institutions -- together with the development of mature relationships among market participants -- is one of the key goals of structural reform. Korea and others now face the task of turning from principle into practice what is recognized in this country and elsewhere as essential: a new set of attitudes; an arm's length relationship between government and corporations; and the expectation that private investors are responsible for assessing opportunities and risk, and that they accept the consequences of their decisions -- rewards or losses. A sound financial sector -- well regulated, well supervised, well managed, and competitive -- will be key to sustaining the recovery satisfying your economic ambitions and reducing the risk of new crises. Impressive steps have been made already, and augurs well for the implementation of the full program for bank consolidation. And we salute your efforts now to improve decisively your extensive agenda to improve the financial condition, competitiveness, and governance of the corporate sector.
Raising efficiency, or productivity growth, is likely to become the key to sustained high growth in the long-run, unlike the old model of relying on very high rates of investment and debt accumulation. It will involve fostering competition through steady, progress toward more open financial, goods, and labor markets, and more open trade and exchange systems. The objectives of higher investment, growth, and employment creation are more likely to be sustained where active domestic and international participation is encouraged -- including in the financial sector.
Finally, promoting equity suggests an ambitious social agenda that is associated with sensitivity to national culture, with poverty reduction as a core consideration. And for countries throughout Asia, it will involve active consideration of how to extend an already impressive record of investing in human capital, how to develop social insurance policies that do not create disincentives to work, and how to address the long-term needs of aging populations. Here the contribution of social partners to the assessment of the prevailing situation and policies, as well as to the preparation of new steps will be critically important.
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Mr. President, Ladies and Gentlemen, Korea has now entered a truly challenging and promising period. Your response to the crisis has precipitated a remarkable rebound, has set an example for the world and, I hope, has strengthened the Korean people's confidence in their own future and how they could contribute to a better world. It has been, this evening, my distinct privilege to be with you, remembering the circumstances where we were asked to work so closely with you, in a dramatic context for your country, and became witnesses to your unity, your patriotism, your leadership, your commitment. This has been for me an honor and experience I will always cherish. Let me conclude by sharing with you my confidence that you will continue amazing us by the way you will combine Korea's tremendous potential with the great opportunities of globalization to produce a new period of prosperity, better living standards and readiness to share it as much as possible, in the opening decade of the new millennium.