How (not) to Run a Nation
"We don't know whether we would go bankrupt tomorrow or the day after tomorrow. I can't sleep since I was briefed. I am totally flabbergasted...This is the bottom. It's a matter of one month, no, even one day. I just can't understand how the situation came to this."
-- Korean President-elect Kim Dae Jung, in the December 23 Chosun Ilbo newspaper
In response to Kim's confidence-inspiring public remarks, stocks plunged a record 7.5 percent, and 772 Korean stocks plunged to their daily lower limit. The won (which had been stable for a few precious weeks) fell to 1,962, less than half of what it was only 18 months ago. Making remarks that crush the confidence of a nation that desperately needs some is no way to run a country. There is no irrational exuberance in Korea this week.
Kim Dae Jung (known as DJ to his friends) was elected last week in Korea's third open elections ever. He was a leader of the democracy movement for decades, landing himself in prison on several occasions for his troubles. In a way, he is like South Africa's Nelson Mandela. Also extremely popular, Mandela was skilled at leading the opposition to a repressive government, but many South Africans have commented that he had little idea how to run a government. Luckily for Mandela, he is surrounded by savvy bureaucrats and economists. Kim Dae Jung may or may not enjoy the same.
Kim Min Seok, senior vice-spokesman for the NCNP, told Reuters that "the president-elect did not mean there was a real possibility of a national bankruptcy but wanted to express his willingness to undertake restructuring." But the spin put out by his advisers failed to stem the hemorrhaging of the markets. Standard & Poor's and Moody's Investor Service downgraded Korea's short-term foreign currency ratings to junk bond status, further stemming the already thins trickle of foreign investment that is necessary to pay the massive short-term debts Korea faces. The World Bank authorized an emergency 3 billion dollar loan to Seoul to help cover the short-term debt.
Even more ominous for the future, Kim, who hails from the minority National Congress for New Politics Party, faces a possibly hostile parliament, as the majority Grand National Party still has three years left of its simple majority in the National Assembly. Given the growing Korean backlash against the harsh conditions set by the IMF, Kim may lack the political power (or will) to enforce the strict and possibly painful rules. In his first news conference after winning, he proclaimed that he would "faithfully abide by agreements between the IMF and the current government." He asked the people of Korea to "prepare yourselves to endure, if needed, hardships together with me." These hardships include slashing government spending, lowering economic growth, raising interest rates, and allowing businesses to fail naturally -- measures which have been forecast to put up to 1 million Koreans out of work.
A Mandela-like attempt at "national healing" also seems to have backfired. President Kim Young Sam and president-elect Kim Dae Jung jointly decided to grant amnesty to former Korean presidents Chun Doo Hwan and Roh Tae Woo, after their convictions and life sentences on treason, mutiny and corruption. The amnesty will be popular with some (mostly rightists), but will be radically unpopular in the southwestern city of Kwangju, where the Chun-led army killed hundreds in putting down unrest in 1980, and where lies Kim Dae-Jung's strongest base of support. If Kim is to enact IMF reform, he will need the support of the people, and cutting into his most faithful base seems like a bad idea.
Lately, bad ideas have not been limited to Korea. In Japan, Prime Minister Ryutaro Hashimoto and his ruling coalition announced on December 17 a 2 trillion yen (16 billion dollar) tax cut in order to "stabilize the financial system." While tax cuts are not always imprudent, this one evoked widespread scorn from the Japanese public, and only slightly more measured disapproval from many Japanese economic analysts.
In a recent nationwide poll conducted by Kyodo News Services, only 8 percent of Japanese surveyed expected the economy to recover in 1998. 44 percent viewed the tax cut plan negatively, and 51 percent viewed it positively -- hardly overwhelming support given the usual popularity of tax cuts. Furthermore, of the 51 percent who approved of the plan, only 27 percent said that it would have a "pump-priming" effect on the economy, with the rest saying it would not jump start Japan's stagnant economy.
The naysayers are correct. The idea behind the tax cut is that the Japanese will use that extra cash to purchase goods in Japan, thus stimulating the domestic demand that virtually everybody agrees must be boosted to push Japan out of the stagnation of the past six years. However, boosting domestic demand is far easier planned than done. In this case, the tax cut will not have the desired effect, for Japanese are likelier to save their money than spend it. The Japanese have a famously high savings rate, but since the economic collapse of the late 1980s, savings rates have been well below their average over the previous two decades. The Japanese, who have been conditioned to save money, are unlikely to throw their tax cuts back into the economy, and more likely to put their cash into bank or postal savings accounts. Only 32 percent of respondents in the Kyodo poll said they would spend the money, while 35 percent said they would save it, and 19 percent said they would use it to repay loans, hardly contributing to domestic demand.
In the bold tax cut plan, Hashimoto all but surrenders the two biggest pledges he made before coming to power: to balance the budget and to reform the system, or "explode into a ball of fire." It may be time to ready the extinguishers. The tax cut plan signals surrender on balancing next year's budget, and reverses the fiscal tightening he enforced last year. And reforming the system? The influential Finance Ministry, leading the bureaucratic charge to avoid deregulation that might conceivably strip their power, announced on December 24 that they were essentially pushing back their requirements for stricter capitalization for at least a year. Harvard professor Steven Vogel has argued that past Japanese deregulations have, counter-intuitively, actually led to increased bureaucratic influence because of the bureaucracy's unwillingness to surrender its power. With an intransigent bureaucracy blocking Hashimoto's promised reforms, his popularity has plummeted to new lows, and spontaneous combustion may be imminent.
the Economist magazine (which, for the record, called the Hashimoto tax cut plan a good first step) has argued that the most important phenomenon of the year was not the Arab-Israeli peace process, nor Saddam Hussein, nor Dolly the sheep, but Asia's financial turmoil. It argued that "deflations and depressions are avoidable. Financial collapses make them possible, because they destroy the confidence on which economic activity depends. But what makes them happen is policy mistakes: closing your economy, blocking capital flows, ignoring banking collapses, blaming foreigners, choking off the money supply." We have seen some of these mistakes in the past year throughout East Asia: North Korea closing its economy, Indonesia ignoring banking collapses, Malaysia blaming foreigners and Jews. These mistakes contributed to a crash signaling the end of an era, the last line of the first act of Asia's economic "miracle." Whether 1998 will bring Act II, or the curtain, is uncertain at best.
This year was one that many in East Asia probably want to forget. They would do well to remember their mistakes, though, and learn from them. Otherwise, this year's painful lessons on how not to run a country may become irreversibly damaging.