IMF Bailout of Korea During East Asian Financial Crisis (Part IV)

[Series Index]

The earlier parts of the series, written by Wangkon936, discussed the international forces that led to the East Asian Financial Crisis and the IMF bailout of Korea. This part, by the Korean, will discuss the social impact of the East Asian Financial Crisis on Korea.

Domestic Economic Impact

The impact of East Asian Financial Crisis on Korea was simply devastating. It is faster to count the large Korean corporations that did not file for bankruptcy. (Here is a decent list of the companies that died versus the companies that survived.) Every day there was a new large company going under. Even those who managed to survive had to face the scalpel of Korean government, as ordered by IMF. On June 18, 1998 alone, Ministry of Finance ordered 55 large companies to shut down. The coup d'grace -- almost in its literal sense, given that the French word signifies the "blow of mercy" that finally kills off the tortured prisoner -- was the disappearance of Daewoo in 1999, at the time the second largest company in Korea. At the time, Daewoo's automobile division was every bit as good as Hyundai's; its electronics, every bit as good as Samsung's and LG's; its shipbuilding, among the world's best along with other Korean shipbuilders. No matter -- Korean government had to show serious resolve that no company was too big to fail, and Daewoo disappeared into history.

One dead big company does not simply mean the employees of that company lost their jobs. A bankruptcy of a big company causes massive ripple effects, causing cascading bankruptcy to other smaller companies that depend on the big company. This is particularly true in Korea, whose economy revolved around a handful of huge conglomerates. (For example, Samsung makes everything from shoes to cars.) Even the companies that managed to stay alive had to undergo massive layoffs -- something that never happened in Korea. Unemployment rate skyrocketed. Previous to East Asian Financial Crisis, the unemployment rate of Korea was 2 percent. By the end of 1998, unemployment rate was 6.8 percent, creating the unprecedented number of 1.6 million jobless people in Korea. Property value plummeted also, with house prices dropping 12.4 percent in 1998.

(More after the jump)

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The Changed Economic Life

It must be said that as far as economic crises in history go, the East Asian Financial Crisis was far from the worst. In fact, Korean economy, taken as a whole, made a full recovery in relatively short order. Korea managed to pay back its loan from IMF in its entirety in August 2001, three years ahead of schedule. Korean economy shrank by 5.7% in 1998, but again grew by 10.7% in 1999 and 8.8% in 2000. Within four to five years since the IMF's bailout, Korean economy was back on track, growing at the rate that most developed nations would envy. There are also well-reported cases of savvy investors who struck gold by counter-cyclically investing in real estate when the property values plummeted. Compared to, for example, the Great Depression for the United States or the Lost Decade for Japan, one might be tempted to say that the East Asian Financial Crisis was not too bad for Korea.

But undergoing the East Asian Financial Crisis put Korean society on a fundamentally different track. For better or for worse, Korea simply was not the same country after the East Asian Financial Crisis, and a fair argument can be made that most post-crisis changes in Korean society were for the worse.

Arguably the most significant social impact of the East Asian Financial Crisis on Korea was that the fundamental change in how Koreans perceived their economic lives. Until 1997, Korea's roaring economy nearly guaranteed a decent life for anyone who tried. As the 2 percent unemployment signified, anyone who wanted a job could get one, and large corporations constantly complained of being unable to find enough skilled workers. As most Japanese companies did in the 1980s, large Korean companies provided what might be called a "full service" employment for their employees -- the employees were given free housing; their children attended the company-provided schools and receive tuition subsidies for colleges; few people were ever fired and everyone's salary rose with seniority until the retirement age; after retirement, there was pension and medical care from the company. South Korea was, in a sense, a better "workers' paradise" than what North Korea could ever achieve.

(Aside: If you want to have a glimpse of what this might have looked like, visit Ulsan. With its huge Hyundai Heavy Industries presence, Hyundai employees still enjoy a semblance of the old school working life in Korea, with subsidized apartments, free top-notch medical care, company-sponsored intramural sports leagues played on grass fields that are nice enough for World Cup teams to practice on, heavily discounted hotels and resorts uses, private cultural events for company employees, etc.)

All of this came to a sudden halt during the East Asian Financial Crisis. Nobody was safe, not even the people who worked for big companies. As discussed above, even the second largest company in Korea vanished into thin air. In the short term, the hardest hit were the people in their 50s, in the management positions -- generally considered the most expendable in a corporate structure. They were given the cruel choice between getting their salaries drastically slashed and their job responsibilities reduced to triviality, or receive a lump sum in exchange for an "honorary retirement" [명예퇴직]. And they had to count themselves as lucky, as even more people witnessed their company and jobs simply ceasing to exist.

For a time, there was a period of true anomie. Hiking trails around Seoul were suddenly filled with middle-aged hikers in a suit and dress shoes with a briefcase. Because these men were laid off but could not quite let their families know, they dressed up in the morning and decided to take a hike instead. Parks similarly filled up with able-bodied men, sitting around with nothing to do. Suicide rate spiked up, as some people simply could not take it any more. In 1995, 11.8 people out of 100,000 died from suicide. In 1998, the same number increased to 16.1.

Over the longer term, the unemployment rate abated. Bu in a key area, the crisis-level unemployment rate still persists -- that is, youth unemployment. Currently, Korea's unemployment rate is at 3.3%, but among young Koreans between the ages of 15 and 29, the unemployment rate stands at 7.6%. In addition, more and more young Koreans delay entering into job market by studying abroad or attending graduate school. Having seen researchers at large companies losing their jobs in droves, young Korean college students avoid majoring in science and engineering to an alarming degree.

Another major change (per IMF's demands) was a major deregulation of the finance industry. Specifically, Korean government substantially deregulated the credit card business in order to boost the domestic consumption. For instance, restrictions on who may receive a credit card and the restrictions on the amount of cash advance disappeared. The result was that even the homeless could take out a credit card. For a time, cash service under the credit card constituted more than half of the credit card use -- for which credit card companies duly charged nearly usurious rates. In 1997, approximately 500,000 Koreans were individually bankrupt. In 1998, understandably, the number increased to 1.93 million. But even in 2004 -- when Korean economy as a whole made full recovery from the crisis -- 3.82 million people were individually bankrupt, and two-thirds of the bankrupt individuals were so because of credit card debt.

All this led to something with which current-day Americans should be very familiar -- income polarization. According to Bank of Korea, Koreans in the top 20% income bracket increased their savings by 13% in 1998, while the bottom 20% income bracket decreased their savings by astounding 426.8%, i.e. became heavily indebted.  In 1997, Korea was one of the most egalitarian nations in the world, with the Gini coefficient percentage of 28.2. (0 means everyone has exactly the same amount of income; 100 means only one person has all the money.) By 2009, Korea's Gini coefficient percentage was 32.5, and the increasing wealth gap in Korea shows no signs of slowing down regardless of the overall state of Korean economy.

Accordingly, the middle class squeeze is on. "Middle class," defined as those who earn within 50 to 150% of the median income, decreased from 75.4% to 67.5% in the 20 years from 1990 to 2010. In the same 20 years, the average age of the middle class head of household increased from 37.5 to 47 years old -- in other words, it is taking nearly a decade longer to accumulate enough wealth to qualify as a middle class. Also, in the same 20 years, the proportion of middle class households with negative cash flow went from 15.8% to 23.3%.

Political Unity and Disunity

These economic changes, in turn, exerted significant influence on Korean politics. Perhaps the most obvious of such changes is the rekindling of Korean nationalism. Korea's economic rise from the ashes of Japanese Imperialism and Korean War has been a great source of pride for Koreans. This made the bailout by IMF extremely humiliating. Some Koreans went so far as to hatch conspiracy theories that essentially said the currency speculators, IMF and American private equity funds were working in coordination to choke the lifeblood of Korean economy, devalue Korean companies and scoop them up in a speculative bid. Even though the conspiracy theory did not survive for very long, IMF's harsh austerity demands (which, recall, IMF later itself recognized to be excessive and unnecessary) reminded many Koreans of Imperial Japan's invasion of Korea. News media did not hesitate to call the day of the bailout as "the second National Day of Shame" [국치일], a term usually referring to the day when Korea officially fell to the Japanese rule. Although the official term for the East Asian Financial Crisis in Korea is 외환위기 [foreign exchange crisis], the more commonly used term is IMF 사태 ["IMF crisis"].

This rise in nationalism was indispensable for Korea's relatively smooth recovery from the East Asian Financial Crisis. The perception (held rightly or wrongly) that foreign forces were threatening Korea awakened what is perhaps Korea's greatest national strength -- a gritty sense of unity that accepts bone-cutting sacrifice for the greater good. Corporations and labor unions, usually prone to extremely bitter disputes, came together to form a super committee along with the government, termed 노사정 위원회. ["Labor-Corporation-Government Committee"] In just 20 days after formation, the LCG Committee came out in a grand bargain encompassing large-scale corporate reforms, greater flexibility in labor market (i.e. mass layoffs and the end of tenured employment) and new policies for the jobless.

Korean nationalism also minimized the social unrest that inevitably follows an economic turmoil. Despite the harsh austerity plan, Korea faced very few anti-austerity protest like the kind that happened in Italy, Greece or other parts of Europe. Instead, Koreans voluntarily organized a gold collection drive, for which people lined up to donate their wedding rings, medals and family heirlooms made of gold so that they may be sold and used to repay Korea's national debt. Not surprisingly, the organizers were inspired by an earlier gold collection drive in 1907, when Koreans donated gold to pay back Korea's national debt owed to Imperial Japan as colonization loomed on the horizon.

Over the long term, however, the stress from the economy would translate to Korea's politics as well. The most significant political buzzword in Korea for the last decade was "polarization" and the means with which to alleviate it. Every aspect of Korean society -- including income, educational opportunity, retired life, etc. -- was critically re-examined for the signs of polarization. Currently the main political discourse in Korea revolves around establishing a more universal welfare system, in response to the concern over the polarization. Very recently, Seoul's mayor resigned over a political dispute about providing free school lunch to Seoul's school children. Next year's presidential election will almost certainly revolve around the debate about the proper level of welfare program in Korea going forward.

Systemically, the most significant political effect was a formation of political group comprised of pissed-off young people, who found themselves jobless despite undergoing the famously grueling Korean educational system. Reflecting their station in various aspects, these young people (more young men than women) are intelligent (almost to the degree of being sophistic,) tech-savvy, activist, and above all, really freakin' angry. As Korea has turned itself into the most wired country in the world in the late 1990s, this group of the young began to wield an influence over Korean politics that is quite disproportionate to their numbers. They would become the "keyboard warriors," lashing out at any convenient target that appears to have caused their deprivation. This group achieved its height in the infamous candlelight protests against importing American beef in 2008, in which it played a crucial role in fanning the public fervor.

The Psychic Impact

Personally to the Korean, the most interesting aspect in the fallout from the East Asian Financial Crisis is the psychic influence in Korean minds. By the beginning of 1990s, Korean society was already engaged in a self-reflection about what it was losing by driving itself so hard in order to achieve its miraculous economic growth. The title of the one of the best selling movies in 1989 declared, "Happiness is not in the order of [school] grades." [행복은 성적순이 아니잖아요.]  The lyrics of a hit song "Anti-Green Life" [敵 녹색인생] in 1992 pointed out, "In the apathy and selfishness that we threw away, we can no longer breathe clean air." After all, a generation had passed from the war and poverty of the 1960s. Was it so necessary to study so hard in school, work till death in the offices, chasing money over happiness?

Just as a substantial fraction of Korea was ready to say "No" to that question, the tempest of East Asian Financial Crisis swept the nation and crushed the budding idea. It seemed that, after all, it was too early for Koreans to relax and rest on their achievements. All the wealth that Koreans have built could be instantly destroyed by currency speculators, and then the IMF -- a foreign body over which Koreans had no say -- could swoop in and demand Korea to essentially cut of its limbs and reduce millions of people into the same poverty that they just escaped. The bad memories of the dire poverty came rushing back. Anxiety set in the minds of Koreans. The survivalist drive, which appeared to be finally subsiding, came back with a vengeance.

A survey conducted in April 1998 is very interesting for the purpose of getting a glimpse at this anxiety. The survey gave a series of statements to young people between the ages of 16 and 20, who would reply with 5 for "Very much so" and with 1 for "Not at all." Here are some of the results:

- "I am concerned about how I will make a living after graduation" (received 3.91).
- "It is difficult to find a full time job." (4.1)
- "It is difficult to find a part time job." (3.92)
- "Only the talented will get a job." (3.93)
- "Stability is an important factor for a good job" (3.84) versus "Prestige is an important factor for a good job." (2.85)
- "To be promoted, you have to have a good resume." (3.71)
- "High positions go to those who went to good colleges." (3.45)
- "Most people who lost the job are middle class people who have worked diligently." (3.63)
- "To live a life, there is nothing more important than money." (3.59)
- "There is nothing that can't be done with money." (3.38)
- "One needs money to live like a person." (4.37)
- "People work diligently in order to earn money." (3.38)
- "Parents want their children to attend good colleges in order to get a job that pays well." (3.64)
- "Dating a rich person entails an expectation for monetary help." (3.47)
- "Wealth is an important consideration for selecting a spouse." (3.53)

These young people have seen their parents swiftly driven into ruin, which resulted in the trends easily identifiable here -- fear of the collapsing economic life, anxiety over the possibility of earning a living, the perceived necessity to survive in a competitive economy with more education, and most importantly, a rise of vulgar materialism. It has been a little over a decade since the East Asian Economic Crisis, which means this generation of young Koreans are now in their late 20s to early 30s, forming the mainstream culture of Korean society -- which means the fear and anxiety formed in their formative years now constitute a strain within contemporary Korean culture.

The Korean remembers the East Asian Financial Crisis to be the moment when suddenly, everything in Korea became a lot more vulgar. Traditionally, Koreans avoided discussing money in a polite company. At no time in the Korean's childhood did the Korean Parents spoke of money in front of him. (Even to this day, the Korean hates talking about money.) But all of a sudden, Korean people were comfortable -- too comfortable -- talking about earning and spending money. The traditional New Year Day's greeting, 새해 복 많이 받으세요 [May you receive much new year's fortune], gave way to the new phrase, 부자 되세요 [May you become a rich person]. Women's skirts and shorts get shorter, and plastic surgery craze went into overdrive. It might yet take another generation of sustained prosperity before Koreans began asking themselves the same questions they asked 20 years ago.

Got a question or a comment for the Korean? Email away at askakorean@gmail.com.