"Korean Reunion and its Influence to the Asian Economic Crisis" submitted by Pascal Couchepan Swiss Finance Minister

for the Session of the year 2005

Korean Reunion and its Influence to the Asian Economic Crisis

Foreword 1. The asian economic revolution and its aftermath. 2. The role of the korean "chaebol" in Asia. 3. The carping to the nowadays situation of Korea. 4. Strength and weakness of the korean economic structure. 5. Korean role of the international economy. 6. Reunion or Commonwealth of the two Koreas. Conclusion

Special Lecture of Prof. Chung-Yang Kim after the Asian Economic Crisis of 1997, which was held on 28th of June 1998 at the Grand Conference Room of the Hilton Hotel Zurich. The participants were almost the bankers, financial experts from UBS, Credit Suisse, etc.

Foreword: Ladies and Gentlemen! It is a great honour to hold forth on the "Korean Reunion and its influence to the Asian Economic Crisis". First of all I express my cordial gratitude to the honourable president of the Swiss-Korean Chamber of Commerce, Dr. Peter Widmer and Mr. Keckeis, the CEO-President of CEPAS, who has initiated the whole program for Mr. YOU Jong Keun, the governor and the presidential advisor for the economic affair. Unfortunately he couldn't come to Switzerland because of his urgent duty at the presidential blue house. Many programs for him have to be cancelled, but not the today's annual meeting of the Swiss-Korean Chamber of Commerce because of an important subject regarding the Asian Economic Crisis and the specific role of Korea. As we already know the Northeast Asia of the Pacific Region is most important area for the World Economics. For many economists it was once a dream to come to this region. If somebody says, "an art collector will naturally be drawn to Florence or Paris, a mountain climber to the Himalayas or Alps. In very much the same way a social scientist or economist interested in modernization will have his attention fixed on East Asia." But since last year the core of this area, especially Korea and Japan, became "flea market (Flohmarkt)" of the world. The goods, which are exhibited there, look suddenly like an old style and cheapest one, so that everyone may enjoy their choice and buy very easily. Still many firms and financial institutes of this region are waiting for new buyers. Among them several companies will go to the bankruptcy, if they couldn't meet immediately a new customer. It happens in Asia day by day. What is the real situation of this type of crisis? If somebody raise a question to this proper situation, the answer might be a simple one: it is the deflation situation like 1930s of Europe and America. Everywhere in Asia the voices are to hear: in spite of some risk factors, now is the big chance to own something, now is the big chance to invest!

The famous german social philosopher, Max Weber, has once spoken about the uniqueness of the european development of economies and societies. His wellknown work, the protestant ethic and the capitalistic spirit (Protestantische Ethik und der kapitalistische Geist), corroborated the western phenomenon on the basis of the christian way of life. It was the philosophical prediction immediately after the first world war on 1919. According to this prediction the places, where the non-christian religions dominate like Buddhism, Islam, Confucianism, are seldom to expect a socio-economic development like the european. Thus our 20th century has begun by the initiatives of Europe and America. The socalled "Atlantic Era" has brought the plenty richness and prosperities during the first half of the century on the basis of the "christian ethics" and "the capitalistic spirit". After the second world war a new era has dawned, the "Age of Pacific". This new age has brought another type of social development with extraordinary rapid growth of economics, which could be never seen before. From the 1950s onward Japan, from the 1960s onward South Korea, Hong Kong, Taiwan, from the 1970s onward Singapore, from the 1980s onward China, from the 1990s onward India, etc. Asia is a huge continent in size and population. By the year of 2000, Asians are expected to account for 3.6 billion of the world's 6.2 billion people, nearly half of the whole world's population. Fully a billion of those Asians will be living in households with some consumer-spending power. Unlike the european the richness and prosperities are now concentrated in mega-cities such as Peking, Tokyo, Seoul, Hong Kong, Bombay, etc, where the cultural heritages are not based on the christian religion. It is the quite distinguished form of economic and social development. Those mega-cities are of great importance not only for the economies and finances, but also for the whole cultural and social life of this region. The most interesting place of the pacific region recent is the Special Economic Zone at the delta-area of the North-Korean Duman river, where Korea, China and Russia meet. One of the korean chaebols "Hyundai Group" is working there since a couple of years in order to exploit the Siberia's immense natural resources. A huge scale of

the industrialization at the russian pacific coast is a great ambition of those three countries for the next century. We call it "a new californiazation" of Asia. The reunion of North and South Korea will enhance the exploitation capabilities of this special industry zone, which will shape a large scale of military and economic fortress for China, Russia and Korea. That would be a great competitive pressure especially for America and Japan in coming close future. It seemed, that the center of the world economies might remove to the pacific region. Many scientists, scholars, politicians have forecasted, that the next century will be undoubtedly the "Pacific Era". If Asia's growth continues even under nowadays difficult situation, the Asian economies (including Japan and India) will be in coming decades bigger than the economies of Europe and the Americas put together. A calculation by the International Monetary Fund (IMF) showed that Asia's share of the world economic output in 1990 was 25 percent; that of North America and Western Europe combined was 46 percent. It is a remarkable sign of the Asian prosperities. Then unfortunately it came an economical typhoon in Asia last year beginning with Thailand. This outrageous typhoon-eye has raised terrible crises among all asian countries and now reached to Japan, where its terminal has been founded. The miracle economies of all Asian countries will follow this inevitable trajectory of the declining growth of Japan. The decline symptom of Japan has been seen, however, since 1960s. As Japan matured from the 1960s to the 1990s, for instance, its average decennial growth rate fell from 8-9 percent to some 6-7 percent to about 3-4 percent. But no one has accepted this as a serious phenomenon, because the retrieval could be easily carried on by the Japanese. Now it's very hard to say, that the Japanese as an engine of the Asian growth rally from their economic and financial failure during the past decennials. Then what was the Asian economic revolution and its aftermath?

1. The Asian economic revolution and its aftermath: It's now very important retrospection to follow up, why the world economies grow

in general and why, in particular, the economies of East and Southeast Asia unexpectedly grew faster in the two generations after 1950 than any fairly large economies had ever grown before. Asia has been extraordinarily good at putting together the four elements that make for economic growth. Three of these elements are straightforward. First, Asia's workforce has grown fast and puts in long hours. Second, most of East Asia has been extremely good about improving the quality of its workers through education and training. Third, Asian countries have injected unusually large amounts of capital - of machines and equipments - into their economies at an early stage, something which their exceptionally high savings rates have allowed them to finance. The fourth element of growth - productivity, or the efficiency with which the other three elements are combined - has always been much harder to understand. This is because it sums up many of the deepest influences on the workings of an economy and society. The spread and use of technology, the fit of the society's culture and values with the demands of modern economic life, the country's receptiveness to new ideas and foreign influence. Asia's productivity improved significantly over the years from 1950 to 1990. It's the main reason of improvement, why the Asian countries were so open to the influence of new ideas of all sorts, especially those from abroad - whether brought to Asia through foreign trade, foreign investment, or foreign technology. Now we should raise two big questions: Will it continue once again in Asia to grow as fast as it did in the past decennials? Is the rise of Asia in this style good or bad for the West? Many scholars have predicted, that around the year of 2000 Asia's economic growth will suddenly slow down. However, the stagnation and regression of the asian growth has been occurred previously. Is there a significant element in the slowdown? The biggest flaw in the success stories of modern Asia (including Japan) has been their failure to develop the transparent and objective public institutions needed to run the more sophisticated societies and economies that their fabulous economic growth is producing. One aspect of this failure has been the widespread dawdling in most Asian countries over building the infrastructure of a modern economy until circumstances force them to. Much of Asia will be forced into these

public investments towards the end of the century. No country will be more affected than China, which has the continent's most woeful dearth of the physical infrastructure and the public institutions of a twenty-first-century society. As it struggles to build these things, China's growth rate in the decades between 2000 and 2020 will be some 50 percent lower than its growth rate in 1980-2000. Early in the 1990s Asia's growth began feeding off itself in the sense that the trade of Asian countries (including Japan) among themselves became worth more than their trade with the West. The fate of China first, and India in due course, will begin to sway the economic destiny of the whole of Asia. And as fast-starting China begins to slow down, slow-starting India will begin to speed up. Under this circumstances what will be happened in the korean peninsula?

2. The role of the korean chaebol in Asia: The korean economic structure has been shaped by the chaebols. While the term "chaebol" means "financial clique", it is used to describe a large business group, originally created by a talented entrepreneur and still largely family controlled, and spread over many diversified areas. The total turnover of the ten largest chaebol is equivalent to 58 percent of the Korea's GNP and the total turnover of the 30 largest chaebol accounts for 83 percent. Among 1993 Fortune 500 were 12 Korean groups who rival the major Western firms. For instance, Samsung's consolidated turnover was equivalent to 5 percent of Siemens' in 1975; as the world's fourteenth largest firm Samsung had overtaken the German giant in 1993. The chaebols are the offspring of Korea's forced industrialization. In the 1960s the Korean government identified talented, export-oriented entrepreneurs and systematically sponsored them by granting the preferential credit, import licences, tax advantages and domestic protection, etc. With a liberal financial policy and astute financial engineering based on cross-equity exchange and high leverage, the

chaebols were able to sustain an average growth rate of about 30 percent a year during the 1970s and the 1980s. These groups originally developed from their privileged access to resources: those granted by the government plus the tapping of managerial talents and of a low-cost, disciplined, hard working labour force. This allowed the chaebol to gain competitive advantage in labour-intensive manufactured products, mainly sold on the export market as OEM goods. The cash flow generated by these activities, amplified by leveraged financing, was reinvested in modern equipment. This strategy, combined with aggressive pricing, has generated sufficient volume to achieve global economies of large scale. In the mid of 1980s, the chaebol started to move on to more value added products, developed their own technology and promoted their own brand name on the world markets. Korean chaebol are globally significant players in shipbuilding, construction, steel, semiconductors, consumer electronics and cars. Korean chaebol are widely diversified, ranging from electronics and shipbuilding through construction and industrial equipment, but as with overseas chinese firms their managerial styles reflect the personal style of their founder-chairmen. The development of the chaebol has followed a marked pattern of gradual upgrading of competitive advantages. The strategic development of Korean chaebols hit a crisis point in the late 1980s when local labour shot up and the Korean currency, the won, rose sharply. The conglomerates responded by setting up offshore plants in south-east Asia and by investing in higher value added, knowhow-intensive sectors. During the 1980s the Korean government attempted to rationalize the business portfolio of the chaebols by forcing them to concentrate on a limited number of sectors. Similar moves had failed in the past, but in 1993 the government announced that financial support would be given only to groups which concentrated on core business. This rationalization is slowly taking effect, not just because of the government demands but, more importantly, because of competitive pressures from the world economies.

Although a genuine Korean management style is still in the embryonic stage, it is clear that the Korean chaebols, both in terms of managerial culture and corporate structure, is a hybrid of Confucian values and Japanese group loyalty. The chaebol is run as an extension of the feudal family network, providing lifetime employment and a range of benefits which in turn exact a high level of loyalty and sacrifice from the employee. The chaebol resembles the Chinese firm insofar as it is characterized by a top-down authoritarian style and an extreme paternalism on the part of the chaebol owner, the Chairman or Whoe-Jang, who is either the founder of the group or his direct descendent. The Whoe-Jang demands the emotional loyalty of his employees, recruits executive managers from among family members and passes the company on to his sons. This loyalty is so extreme that corporate culture in Korea is often equated with the glorification of the chairman's beliefs and his prescriptions for conduct. Cohesion and coordination at the top are enhanced by an elitist recruitment policy thanks to which alumni from prestigious institutions such as the Seoul National University or the Military Academy share a common set of values and social practices. In stark contrast to Western corporate cultures, Korean culture relies heavily on intangible, abstract concepts such as harmony and challenge. The Korean chaebol taps virtually inexhaustible resource: nationalism. At least one chaebol, Samsung, reflects this in its corporate motto: "We do business for the sake of nationbuilding". As chaebol like Hyundai and Daewoo make the transition from companies moulded in the image of their traditional, charismatic founder to more institutionalized corporations, they are increasingly conscious of the need to provide more visible symbols of corporate culture, like uniforms, to their employees. Most observers predict that the critical management challenge will come not from a abroad, but from home, where a new generation of western-educated Korean managers finds the authoritarian culture frustrating and demoralizing. High rates of

voluntary turnover are just one sign that this management style may no longer be viable. It is interesting to note the managerial evolution of the Samsung group, which in the early 1990s was promoting a managerial style based on western concepts, applying the principles of rationalization, de-layering and re-engineering. Mr. Lee Kun-He, the son of the founder who became chairman after his father's death, began to rationalize the portfolio of activities by concentrating on three core sectors. He considerably reduced the size of the chairman's office, trying to push decision-making down the chain of command.

3. The carping to the nowadays situation of Korea: Paradoxically, the very diversification of chaebol has led to a problem of identity and the challenge of instituting a binding, corporate culture. Samsung's business, for example, ranges from ships to shirts to microchips, and lacks the focus of Toyota, a name synonymous with cars, or IBM, which for some has come to mean computers. Even abstract concepts like "self-sacrifice" or "harmony" can no longer be relied upon as effective corporate cement. Lucky-Goldstar's Inwha, or "Harmony among the people", a slogan which has guided the company for more than 30 years, is now seen as too insular and has been criticised for serving as a shield to cover personal mistakes. The traditional international strategy of Korean firms was to concentrate on exports and their foreign investments were largely made to support their export drive, either to circumvent trade barriers or to control distribution channels, particularly in North America. In the early years of 1990s, 40 percent of Korean foreign investments were in North America while 38 percent were in South-East Asia. The trend is now changing and Asia Pacific countries receive more attention as bases for low-cost manufacturing and markets for Korean products. As latecomer, lagging behind Japanese and Western firms, Korean firms have targeted their approach by focusing on key sectors across the region (construction, heavy engineering, chemicals,

electronics) or by entering emerging markets at an early stage: Vietnam, Northern China, Mongolia, Myanmar. As competitive tools, Korean firms in Asia use their traditional low-pricing strategies enhanced by a specific marketing approach concept highlighting their "non-Japaneseness". All this kind of elements has its limit.

Considering its poor natural resource endowment, limited market size, and the availability of foreign capital and proven technology, Korea had to look outward to break the vicious circle of underdevelopment. Korea's success in the last three decades owes greatly to such international factors as foreign markets, foreign capital, and imported technology. Unemployed and underemployed workers had to be absorbed in the manufacturing sector, so foreign markets had to be found. In the absence of a domestic savings base, however, investment in manufacturing industries for exports and social infrastructure had to be financed by foreign capital. In the 1950s, the role of foreign aid was important in closing the nation's savings and foreign exchange gaps. However, coming into 1960s, foreign borrowing started to become important in closing these gaps. The productive use of borrowed capital was ensured by tight monitoring schemes. The appropriate development strategy and effective leadership commitment were bases for those monitoring schemes to successfully generate debt-servicing capacity. Perhaps Korea is an exception among developing nations, which traditionally have relied little on foreign direct investment (FDI). Korea's recent colonial experience seemed to make Koreans generally suspicious about the motives behind foreign direct investment, especially Japanese FDI. More importantly, Korea's unique relative capital cost structure favored borrowing capital, which made Korean businesses prefer foreign debt as well.

4. Strength and weakness of the korean economic structure:

Now Korea is at a different stage of development in which sophisticated technologies must be imported to upgrade its industrial structure. These technologies are usually bundled with FDI. Consequently, Korea has been liberalizing its regulations to encourage businesses to rely more on FDI. The recent FDI trend, however, indicates that more needs to be done in this connection. Korea's outward-looking development strategy efficiently facilitated technology transfer. Assistance from buyers of Korean products and sellers of capital equipment and raw materials has been an important channel of technology transfer in Korea. Being a late industrializing nation pursuing an outward-looking development strategy, Korea undoubtedly enjoyed more advantages from "learning by watching and doing" in both engineering and managerial advances than did those countries that pursued inward-looking strategies.

Now Korea's phenomenal success brought its own problems. As Korea's export market grew fast, its export share in the world naturally increased rapidly. Trade disputes and frictions with major trading partners were bound to arise. The United States, traditionally the most important market for Korean exports, provided more than one-third of the market for Korea's exports in the 1980s. Furthermore, Korea began to record a trade surplus vis-a-vis the United States in 1982, when the US was suffering from its twin deficit problem. Korea became one of the major targets for US policies to restrict access to the US market while increasing bilateral pressure for market opening and currency appreciation. Korea is about to graduate from the World Bank's loan assistance program. Its relationship with important multilateral institutions such as the International Bank for Reconstruction and Development and the International Monetary Fund (IMF) during the last three decades of rapid development have been quite productive. In addition to valuable financial assistance, Koreans took these institutions' guidance and consultations seriously; the Korean government fully used its discussions with

them not only to formulate better policies but to persuade politicians and ministries with differing views to accept new policies. Korea is now at the stage where it is able to contribute to these institutions to assist in world development.

5. Korean role of the international economy: Under the new world economic order, Korea is expected actively to share responsibility for maintaining world economic stability and prosperity. In particular, Korea is expected to play an important role in preserved liberal global economic environment. In order to work toward this goal, Korea should accelerate both domestic and international liberalization. Korea has benefited greatly from a liberal global trading system and a table financial environment, and it will have to depend on such an environment in the future. Thus, for its own good, it is important for Korea to make positive contributions toward the successful completion of the Uruguay Round or, on that matter, any multilateral forum aimed at maintaining and enhancing worldwide free trade. At the same time, Korea as a "pioneer country" has an obligation to provide positive contributions for follower nations of the developing world through active economic cooperation. Korea's recent establishment of the Economic Development Cooperation Fund for the purpose of assisting developing nations is an important first step in this direction. For the time being, however, Korea has more to offer in the area of technical assistance through use of its abundant human resources. The most recent first-hand experiences of managing developmental efforts at both the macroeconomic and project level can be used in assisting follower nations. In this regard, Korea's technical assistance programs might very well be interlinked with programs at various multilateral institutions. As an important regional economic power, Korea has roles to play for the region's continued prosperity. The Northeast Asian region could be an ideal place for

applying Korea's developmental experiences and tested middle-level industrial technology. If this effort is closely complemented by Japan's capital and advanced technology, the region's overall development, will be successfully promoted. Korea should also actively promote the principle of "open regionalism" in the Pacific Rim. This principle has been endorsed by a promising regional cooperative body, Asia Pacific Economic Cooperation (APEC). Korea should work to ensure that APEC becomes a better institutionalized, cooperative body for promoting regional stability and prosperity. As an important international economic player, Korea needs to participate more actively in major international organizations and forums where important policies are discussed and coordinated. By doing so, Korea could take advantage of valuable opportunities for sharing information on world economic and technological advances and on future policy directions of major economic and technological leaders. Korea has to make difficult structural adjustments before it can join the ranks of the industrially developed. These politically difficult but necessary adjustments could be implemented faster and possibly easier in a multilateral context. Korean membership in the Organization for Economic Cooperation and Development (OECD) might serve this purpose as well. The Korea's role of the world economy is so important, that the establishment of the peace regimes on the Korean peninsula should be secured and guaranteed.

6. Reunion or Commonwealth of the two Koreas: There are four categories of changes we have to make to build a peace regime on the Korean peninsula. The first is the formation of treaty that establishes a normal diplomatic relations among the related parties. In this regard, there has been some continuity and change in diplomatic relations among the countries in this region. The simultaneous entrance of the two Koreas to the UN in 1991 signifies a meaningful departure from the past. On the other hand, the North Koreans are still

in a state of diplomatic isolation, due to the lack of normalized relations with the West, particularly the United States and Japan. In case of the Korean peninsula, American recognition of North Korea's independence and territorial integrity may precede the establishment of full diplomatic relations between the two countries, or the two developments can take place all at once. This means that the international society, including the United States, agreed to recognize the independence and territorial sovereignty of North Korea. Therefore, a peace treaty involving the U.S. and the two Koreas is likely to be one that contains a timetable for fuller diplomatic relations between the U.S. and North Korea. Second, a peace regime includes, as one of its integral parts, the ongoing commitment of the related parties to arms limitation and arms control. A shift from an armistice to a peace regime involves efforts to scale down the trend of arms buildup. If a peace regime does not simply mean a suspension of fighting but a framework for permanent peace, it should include an institutionalized forum to discuss and implement security confidence building and turn back the continuing trend of military armaments. One of the crucial elements of Willy Brandt's ostpolitik (east policy) which became the actual starting point of the peace process in and around the two German republics in the early 1970s was just that. It was clearly expressed in his vision of "venturing more disarmament" which he discussed on the occasion of being awarded the Nobel Peace Prize in December 1971: "We rather have to create and maintain between the nations and groups of nations a balance in which the identity and security of each of them can safely exist. A balance of this type must be more, however, than merely a well-balanced system of military means of power over and above the - bilaterally or multilaterally expressed - renunciation of force we can achieve a higher degree of security by Europe's participation - on a basis of equality - in special agreements on arms limitation and arms control." In late 1991, with the American decision to withdraw tactical nuclear weapons from Korea, the two Koreas managed to reach "the Agreement on Reconciliation, NonAggression and Exchanges and Cooperation". Although this document contained

some agreements on the need to establish a military confidence building regime, it has never materialized. Another flaw in the Agreement is that it is not aimed at a comprehensive confidence building and arms control regime on the Korean peninsula. In addition, it was only an inter-Korean agreement. The most critical military party to the Korean conflict, the United States, was not included. Given the continuing preponderance of the American influence in security affairs in this region, the Non-Aggression article of the Basic Agreement between the two Koreas did not have much more than a symbolic meaning. In this security area, building a peace regime in Korea must involve a set of broad efforts to transform the Demilitarized Zone (DMZ) from a high-powered military confrontation site toward a Zone of Exchange and Cooperation. As long as the two Koreas remain divided, the level of military tension along the DMZ will continue to be a litmus test of whether a peace regime exists or not on the Korean peninsula. The DMZ is the barometer of the peace regime. The idea of "common security" for the two Koreas requires a change in the present South Korean mode of thinking on security in which the politics of military alliance occupies central importance. Another crucial dimension of any peace regime on the Korean peninsula is international politics in Northeast Asia. The international system of Northeast Asia defines the structural possibility of a peace regime on the Korean peninsula. First of all, the two Koreas exist in a web of alliance systems involving major powers particularly the United States and China - which were among the direct participants in the Korean conflict. The level of tension and cooperation between the two major powers is one of the critical variables that will decide the feasibility of a peace regime. It depends on the converging interests of the two powers, which are actually patrons for the two Koreas in a respective manner. Again, a compromise is needed between an alliance system-centered security regime and a multilateral security forum. In the years of the Cold War, the rigid alliance systems led by each of the two

superpowers left no room for a multilateral peace institution around the Korean peninsula. After the end of the Cold War, the European international system successfully evolved toward a peace regime that produced, among others, "the Conference for Security Cooperation in Europe (CSCE, KSZE)". It is not surprising that the process of establishing this international peace regime was intermixed with the process of the peaceful German reunification. Although this unification was precipitated by the implosion of the East German polity, it is also important to remember that it proceeded through a series of peaceful measures taken by both parties of Germany. The co-development of a national unification and multilateral security forum in Europe was not reproduced in Asia. The twofold changes in the Warsaw security system - the collapse of the Soviet Empire and the internal political changes in the Warsaw Pact countries, including Russia itself - could bring a total change to the international relations of Europe. In Northeast Asia, however, the impact of such changes in the Soviet empire was a limited one. The relative decline in Russian influence restored a classical type of power political rivalry among major countries in the region. The survival of the old communist social-political systems of China and North Korea also limited the effect of the end of the Cold War. In the eyes of the two remaining socialist nations, the power politics of the tripartite military alliance among the three countries - the U.S., Japan and South Korea - remains unchanged and continues to constrain their vision and willingness to experiment with new international arrangements in the region. This state of affairs in Northeast Asia suggests limitations as well as possibilities for international cooperation among all related parties for the support of a peace regime on the Korean peninsula. We need to learn from the West German experience of ostpolitik (east policy), which paved the way for a peace regime in the uncertainty of the unstable detente between the superpowers in the 1970s and engineered a "German mini-detente" even in the bleak international environment of the 1980s. The present international situation in Northeast Asia is in a far better condition to

accomplish a peace regime on the Korean peninsula, than Europe was when the two German states managed to establish a mini-detente between themselves during the period of the "new Cold War". Finally, a peace regime here involves efforts, in both parts of Korea, to seek a new consensus on a vision of good national community as well. A multilateral security forum among different sovereign nations can be an end in itself. A peace regime on the Korean peninsula goes further than that. It is not only of great value in itself, but also a means to achieve a higher value, i.e., the peaceful unification of the divided nation. It is also true that the goal of the peace regime will ultimately be completed, only when the two Koreas are peacefully united. A peace regime short of a political commonwealth will be something incomplete. In that sense, a peace regime on the Korean peninsula is a preparatory stage for building a political commonwealth, not by force but by peaceful integration, whether it be an unitary state or a federal form of state. The peace regime will be one in which both Koreas make conscious efforts to reach more and more common ground with the other in terms of social, political and economic styles of life. While there must not be a compromise on basic human rights, both parts of Korea may engage in a mutual process of change. A process where communism, prevalent in the North's social system, and individualism, dominant in social and economic life in the South, can find a mode of checks and balances against each other. Both internal and external environmental changes dictate that Korea have a renewed leadership commitment to economics. It is critical that Korea not allow its economy to continue losing its competitive advantage. Only with a strong leadership commitment to economics and a national consensus on the primacy of economics can a more disciplined macroeconomic policy stance be restored. Such a stance requires maximum insulation of economic policymaking from political influences. If the government fails to give top priority to economics and does not set an example, other tough policy choices will not be possible. Without economic preparedness, even the valuable unification opportunity may be wasted.

The government now has to try even harder to persuade the general public and politicians to accept tough economic policy choices. Regular public forums should be used fully to build consensus on these policies. A presidential council that sets national priority on economics might well be established for consensus-gathering as well as for public education. The government's leadership role also should be strengthened in order to provide a clear vision of the nation's economic future. The primacy of economics and the leadership commitment to it should be reflected in the consistency and predictability of major economic policy directions, and this consistency, in turn, will facilitate policy implementation. The chaebol issue is one of the most controversial in Korea today. Essentially, the chaebols are characterized by two interrelated problems, in addition to the traditional economic efficiency problem: legitimacy and distributional equity. The legitimacy issue stems from perceived or actual unfairness or injustice involved in the emergence and growth of chaebols. The latter arises from the concentration of economic power, which is a consequence of the chaebols' rapid growth. The legitimacy problem arises primarily from chaebols' privileged access to the bank loan market. Another source of contention is the chaebols real estate holdings. In other words, the general perception is that they grew fast at the expense of others the weak and taxpayers in general - and that they got richer through socially unproductive, rent-seeking activities. Problems of legitimacy aggravate those of distributional equity to the extent that the chaebols' evergrowing portfolio of assets is concentrated in the hands of a few individuals and their family members. If the equity shares of chaebols were widely held, the distributional equity issue would be substantially resolved because even "illegitimate" wealth transfer could be shared by the general public. Many have rightly pointed out that Korea's phenomenal economic success owed a

great deal to its superior general level of education. Korea's new competitive strategy calls for more active human resources development and higher-quality education. Koreans are still fervent believers in education, and there is a strong demand for quality education. The government should not allow this valuable attribute of the Korean people to be wasted.

Conclusion: Korea's future survival and enhanced position in the world now depend more on economics than ever before. It is natural, therefore, for Korea to earmark part of the "peace dividends" released from the defense budget for investment in human capital formation, which is the competitive foundation for the Korean economy. It is also important, that both public and private educational institutions be allowed to use private financial resources to augment limited public resources for quality education. It should also be emphasized that the overall educational reform of the future should fully reflect Korea's new economic competitive strategy. The system of education should properly accomodate the needs of a changing industrial structure. More incentives should be provided to the private sector for the vocational training of workers, and existing laws and regulations regarding vocational training should be effectively implemented. Vocational training programs should be properly incorporated into the nation's adaptive industrial policy as well as the industrial relations system. Korea's future depends on how Koreans face the critical challenges. It is not going to be easy, but if history is any guide, Koreans will learn fast and adapt to the new situation quickly. The Korean economy in recent years has been showing macroeconomic imbalances and structural abnormalities. Chaotically rapid political evolution and shifts in national policy priorities have prevented Koreans from putting in place needed structural adjustments to adapt to changing domestic and

international environments. Prevailing populist demands not only forced the government to put off politically unpopular structural adjustments but to accomodate some of these demands. For the first time in recent Korean history, Koreans have allowed politics to dominate economics. However, this situation will not prevail for long in Korea. Koreans already have begun to realize that even the nation's unification depends on its economic capability, as is well illustrated by the recent German unification experience. Therefore, it will not be too long before the primacy of economics is reestablished. In an intermediate to long-term perspective, therefore, optimism still is the watchword for Korea's future in spite of the Asian Economic Crisis.