IMF’s Bitter Medicine Brought Growth, But Also Inequality

SEOUL: During the height of the 1997-98 Asian financial crisis, the South Korean capital was engulfed in protests with demonstrators holding signs that read “IMFired” and “Re-negotiate the IMF agreement.” Their anger was targeted at largescale layoffs that followed restructuring reforms imposed by the International Monetary Fund. Two decades later, the crisis has retreated and growth has returned for the South Korean economy, but inequality has widened.  

The crisis started in Thailand and quickly spread throughout Asia. South Korea was hit hard with over-borrowing and mismanagement by several companies. In making his first budget proposal as South Korean president, Moon Jae-in recalled the dark days that, in his words, “upended the lives of all Koreans,” and he pledged to address the rise of inequality in the wake of that event. Although South Korea has long since recovered from the crisis, Moon argues that effects are still felt today: “the socio-economic structure that was transformed by the foreign exchange crisis has damaged the fabric of people’s everyday lives.”

The terms of the IMF bailout, accepted by South Korea, stipulated tight fiscal policy to manage government debt, opening the economy to foreign investment and ownership, and perhaps most significantly, labor market reforms making it easier for firms to hire and fire workers.

Before then, South Korean jobs had typically been lifelong arrangements that were nearly impossible for employers to terminate. Since the crisis, the South Korean employment market has seen a huge rise in the number of temporary positions, which last for a maximum of two years, pay lower salaries and provide less-generous benefits. Many South Korean workplaces are therefore divided, with secure, well-paid permanent employees on one side and their precarious colleagues on the other, and little to no solidarity between the two.

Moon is South Korea’s first left-leaning president after nearly a decade of conservative rule and has made addressing inequality a lynchpin of his presidency. He is responding to a growing despair in South Korea that ordinary people cannot get ahead, small- and medium-sized companies cannot compete with the few large conglomerates dominating the economy, and the small number of well-paid, stable jobs mostly go to young adults from well-connected families who could afford to attend expensive private schools.

Real wages in recent years for most South Koreans have stagnated, and corporate profits for the large conglomerates have grown handsomely. The president is therefore plotting ambitious moves to redistribute wealth and level the playing field of South Korea’s business landscape. Debate is taking place domestically over whether Moon’s policy plans will undo the inequality and other lingering effects of the 1997-98 crisis, fail to accomplish their stated end, or make life worse for the most vulnerable members of a South Korean economy stuck for years in low-growth conditions.

The immediate economic outlook for South Korea is not all gloom. The Organization for Economic Co-operation and Development projects a solid, if unspectacular, 3 percent rate of growth through 2019. The Bank of Korea puts growth for this year at a similar level while keeping its key interest rate steady at 1.5 percent, citing lower-than-expected inflation and a strong currency. But the news isn’t all good either. Household debt stands at nearly 160 percent of household income and is growing, suggesting that more families are borrowing to maintain their standards of living. As of December of last year, the country’s youth unemployment rate stood at 9.9 percent, the highest it has been since 2000 and representing more than triple the overall unemployment rate, according to Statistics Korea. One sign of the jitteriness many South Koreans feel about the job market is the popularity of the civil service as an employment destination. Due to perceived stability – the government is unlikely to go out of business after all – and a generous pension system, more than 163,000 applicants applied for 4,120 available positions in 2016, a ratio of 54 applicants for each job.

With this in mind, and given Moon’s relative lack of influence over hiring practices in the private sector, the president has pledged to create 30,000 jobs in the civil service and hire 12,000 new social workers in the areas of childcare and care for the elderly. The plan is also intended to ease the burden on people of working age, many of whom in this aging society must care for both elderly parents and children. Moon also pledged to implement financial incentives for small- and medium-sized firms for hiring young people and convert workers on temporary contracts to regular employee status. 

The most hotly debated of Moon’s policy plans is a steep rise in the country’s minimum wage, which he hopes will be a core part of what he describes as “income-led growth,” the assumption that boosting incomes for low and medium-earners will spur consumption and lead to increased economic growth. Critics of the increase, which went into effect at the start of this year, argue that higher wages will be an unmanageable burden on small businesses relying on minimum-wage workers and that the wage hike will lead more businesses to simply lay off staff, thereby harming the fortunes of the economy’s most vulnerable workers.

Globalization requires institutions that can help maintain financial stability in crisis-stricken countries, and the precise extent to which South Korea’s increased inequality can be directly attributed to the IMF bailout is debatable. Industrialized countries all over the world have recorded similar challenges with waning growth and widening income gaps after transitioning from developing to developed economy. In a survey of 1,000 South Koreans by the Korea Development Institute, about 60 percent said that the crisis had negatively affected their lives. IMF data show that South Korea’s post-war economic boom took place with equitable income distribution, with a significant rise in inequality since the 1990s.

The IMF defends its policies against charges by critics that it has contributed to inequality. The IMF describes its programs as medicine countries must swallow during times of economic illness and that, while bitter for a short while, in the long run can have a rejuvenating effect. In South Korea’s case, by pumping sorely-needed liquidity into the economy in early 1998, the IMF made it possible for South Korea to return to growth faster than expected and pay its debt to the IMF ahead of schedule. Nevertheless, the long-term legacy of the crisis has been harmful to many South Koreans. The IMF noted last year that while inequality has eased on a global level, individual countries, particularly advanced economies, have seen widening gaps between high- and low-earners. Last year the organization identified three policy areas – increased tax rates on high earners, a universal basic income, and public spending on education and health – as possible ways for governments to ease inequality.

Corruption is another area that warrants attention as a contributor to inequality. South Korea ranked 51st out of 180 countries in the most recent Corruption Perceptions Index, published by Transparency International, which said that the ranking remained fairly stable despite the country having passed a landmark anti-corruption law in late 2016.

Moon is the first South Korean president to make tackling this legacy a major policy objective, striving to tame the effects of the market and the global economic ties that find increasing numbers of people claiming an ever-shrinking slice of the economy. There is no guarantee that a set of top-down government initiatives can create a sustainably more level economic playing field.