Global Crisis and the Republic of Korea - In Search of Solutions for Sustainable Development. Nako Stephanov

Global Crisis and the Republic of Korea - In Search of Solutions for Sustainable Development

 

Prof. Nako Stefanov, Dr. Habil.

 

Key words:Global crisis, Model of anti-crisis actions, Sustainability, Innovation paradigm

 

Introduction

Amid ongoing now in 2012 events, which definitely started to crystallize in the form of what we call "second wave of global crisis," the question of finding solutions for sustainable development is more than relevant and important. Therefore, the theme that through these years of crisis there are countries that demonstrate a successful performance, can cause not only academic but also practically oriented interest.

The goal that sets this report is not just a factual awareness of the problem of how the Republic of Korea is coping with the crisis. Our goal is not only to analyze the situation, but also to synthesize certain conclusions. In other words, the key objective is to understand how the solutions made by the Republic of Korea form a pattern. The latter term we understand as "relatively stable set of relations and interactions, forming qualitatively different from other relationships and interactions theoretical or actually existing scheme of creation, functioning and development."

The presence of a model that generates a positive value indicates that there is an opportunity for searching of lessons. The latter means that in spite of all the differences that exist in time, space and conditions there are possibilities to use certain guidelines, approaches and mechanisms of the model to generate also positive values. Clearly these approaches have to be adapted and transformed in a manner consistent with the relevant specific situation and time.

The achievement of that objective is realized by developing the following major tasks:

  • Drawing the basic parameters of the crisis and key reasons for it as well as the
    examination of patterns of action formed in the global crisis;
  • Analysis of the political actions and the socio-economic functioning of Republic of Korea on the eve of and during the global crisis.

Instead of a conclusion a synthesis of major findings on Korean
attempt to tackle the effects of the global crisis, is made.

Basic methodological approaches used in the report are:

 • Systematic approach - under this approach, phenomenon under study must be regarded as a system, i.e. as a set of interrelated factors acting as an one whole;

 • Logical approach – it suggests that it must be revealed the interactions and interdependence between the concerned factors under study, i.e. the logic of interactions;

 • Comparative approach – the comparison is used as a key tool for the analysis of phenomenon under study.

The basic parameters of the crisis, the key reasons for it and
examination of the patterns of actions formed in the framework of the global crisis

The launched in 2008, financial and economic crisis is a classic challenge that the global dynamics brought for the political and economic elites in countries worldwide. We have to say that most of these elites have failed to respond adequately to this challenge. That is why the experience of those countries, which are more or less successful in anti-crisis actions, is more than interesting. Certainly among them is the Republic of Korea, whose economy even in the global crisis demonstrates stable growth.

As to the global crisis, in our opinion it should to be talking about a hierarchy of reasons causing its occurrence. The first type causes are concrete and visible, i.e. those are the immediate factors that create crisis situation. In the case of global crisis, these immediate causes are the followings:

Predecessor of the global financial and economic crisis of 2008 is the U.S. mortgage crisis, the first signs of which appeared in 2006 in the form of a decline in sales of new homes. In early 2007 this crisis grew into a crisis of subprime mortgage loans. Gradually, the mortgage crisis is transformed into a financial and affects not only the United States. Quotes of the stock markets fall. This substantially reduced the opportunities for the companies to obtain capital. In early 2008, the crisis becomes global, and gradually manifests it in lowering of production, reduction in demand, reduced commodity prices and rising unemployment. Today, although there is a "revival", among the expert circles, as well as among the wider audiences, dominate the views that current events are just the first link in a chain of waves, which create the global crisis.

As an essential factor for the credit crunch in the U.S., according the opinions of many experts is a "financial innovation" - the widespread use since the early 90s of the twentieth century of the derivative financial instrument and the aspiration to increase revenues by increasing the risks. Certainly this is not clearly explaining the root causes of the crisis, as there is no analysis to show that the derivatives contributed for the crisis. On the contrary we do not know would not the crisis occur earlier, if the derivatives did not helped the expansion of effective demand for real estate and expensive goods. Anyway, but this is the first type - the specific, immediate causes of the crisis.

It should not be overlooked that there are sets of views that behind every crisis of this magnitude there are reasons that could be called meta-reasons, i.e. fundamental reasons related to the functioning of the system of global economic processes, or at least the dominant ones in key countries of the world economy.

Such meta-reasons are rooted in the 80-s of the twentieth century. But its effect is enhanced especially after the "Cold War", as a consequence of the collapse of the USSR. In the time of its complete domination, created after the end of the "Cold War", U.S. and the West in general, began to implement the so-called "Globalization." The latter involves the formation of a peculiar system of international division of labor. In this system the West and particularly the United States are at the top, represented by different financial institutions - banks, funds, insurance companies and others.

Accordingly, production in this system of division of labor is transferred to countries outside the circle of so-called "Golden billion", and especially where there are favorable conditions such as a certain level of education, favorable climate and low labor costs. China and other countries of South-East and South Asia in particular meet the highest level of these requirements. Thus, gradually a significant part of production facilities was transferred namely to China, India and other countries in the Region of South East Asia and South Asia; the region has become a "world workshop". Vice versa process of de-industrialization started in U.S., as well as in a certain part of Western Europe and even in Japan.

Maximization of profits began to look not through productive activity, but mainly through speculation in the stock market. Profit cycle is dominated not by the formula "money-commodities-money prim" but by the formula "money- securities- money prim". This is creating socio-economic functioning of excessive type in which the debt grows in mass accelerated pace and progressive ratio.

The debt begins significantly to exceed revenue. The result is fall into a debt crisis and even more particularly in a debt collapse and there is a failure in short and middle term perspective the problem of the debt to be solved in a positive way. This chain leads to the immediate causes of the global crisis, which undoubtedly raises the question of changing the economic model and its philosophy.

In the conditions of the global crisis were started different mechanisms of actions, dominated by different ideologies of view of the economic reality. There are many varieties of ways of acting in the different countries. But it is possible to classify them into two types:

• Model, in which the orientation to overcome the imbalances created, is based on cuts in public spending, especially in their social part. The latter act creates increased social tension and a tendency to increase social conflicts with an unpredictable outcome. Put in another way, the emphasis in this model is the financial sector. Its alpha and omega can be expressed with the slogan "Reduce costs";

• Model, which is seeking balanced development at the expense of raising the technological level and the formation of an innovative platform of economic and social dynamics. Based on this innovative platform the efforts are reducing costs, offering new products, forming new stimulus for growth. The emphasis in this model is in production sphere. If expressed in one phrase it will be "Expanding the perspectives."

Certainly it is difficult to say that these patterns are present throughout in pure form in any country. Most often there is a mix of elements of the first and the second model, however, definitely one of the two models dominate and thus forms the overall paradigm of action to tackle the crisis.

Political actions and socio-economic functioning of Republic of Korea before and during the global crisis

It should be noted that the Republic of Korea a decade before the "global crisis" has gained experience with the so-called "Asian crisis". The latter happened in the second half of the 90s of the twentieth century. Undoubtedly the nature of this crisis has major differences with the "global crisis", but there are some general points. Does this mean that in a certain sense Republic of Korea has "acquired immunity"?

Let's take a look at this plan, "Asian crisis" and how in the Republic of Korea did it? The financial crisis of 1997 - 1998 left a deep imprint in the minds of many citizens of the Republic of Korea. It began as a purely financial and market crisis, but soon became a socio-economic crisis. Surely to this day continues the discussion in the Korean society about the key factors of this crisis. For some of experts the main reasons are internal. This refers mostly to the mistakes of government, which in an effort to keep the exchange rate of won against the dollar level below 900 won per dollar practically emptied country's foreign reserves, bringing them to the level of 8 billion U.S. dollars at the end of 1997.

Others seek to blame "chaebol" – the giant industrial groups, whose policy of expansion at all costs, conducted at the expense of borrowing by Korean banks and foreign investors (so-called. "Chebol game") failed. Third focus on external factors such as:

  • Fluctuations in international financial markets;
  • The failure of various international lenders and institutions to better assess risk in making loans to "chaebols”;
  • The game of international credit speculators, who pursued the course of the so-called "Quick money". This means seeking only quick profits and at the slightest sign of probable loss "rush out of the game".

But they are those who combine the two main reasons and thus seek a more fundamental explanation. For them, this crisis reflects the inability of the economy of the Republic of Korea to adapt to the institutional standards as well as to the requirements of the globalization. Such an understanding certainly deserves our attention in an attempt to seek not just one reason or another, but to create a complete conceptual basis to the ways and means to overcome the crisis.

In the Republic of Korea, globalization has become one of the main goals of the administration of Kim Yun Sam in 1995. The policy led to the idea of a borderless market paved the way for deregulation of the financial sector. Many are those however who believe that deregulation led to financial crisis of 1997-1998 years.

The Administration of Kim Chung, which inherited that of Sam Kim Yun, also adheres to neoliberal globalization and the relevant type of thinking. The core of this thinking is that rather than hold an active interventionist industrial policy, which characterized the state in the Republic of Korea since the early 60-s to mid of 90-s, the government should leave everything to market forces and let they decide what and how the thing happen. Arguments for pursuing of such a policy are that the industrial policy of the state requires a tremendous amount of information in today's complex environment, which is difficult and expensive to be obtained. And despite its acquisition there is no guarantee that it will "bear" the desired solutions. In this sense as a response to globalization, rather than oppose this process, the state should act to leave free play of market forces to "find optimal business structures"[1].

The conditions that put the International Monetary Fund (IMF), when it signed the agreement with South Korea on December 3, 1997 providing 21 billion dollar loan is placed as follows: The Government of the Republic of Korea should implement some structural reforms and to agree to absolutely free market guiding principles in the conduct of its macroeconomic policy. Structural reforms can be grouped into four sectors:

• Public sector;

• Labor market;

• Financial market;

• Corporate sector.

Guiding principles include the relationship between business and government. They suggest the introduction of an Anglo-American model of macroeconomic policy, which relies on capital markets and emphasis on transparency with a minimal role of government in economic structure.

It must be said that the achievement of some success in overcoming the crisis does not mean that they are the result of the accurate and unconditional following of the recommended by the IMF policy. If you look at the dynamics of economic growth after the "Asian crisis" there are the following numbers:

 

Year

1996

 1997

 1998

 1999

Economic Growth        

 6.8

  5.0

- 6.7

 10.7

 

 

In other words the economy of the Republic of Korea returned to the highway of rapid economic dynamics. It should also be given other data to confirm this conclusion. For example the won is stabilized and exchanged at 1200 won per dollar. The export again sharply increased. Foreign exchange reserves in the spring of 2001 reached the astronomical figure of 90 billion U.S. dollars.

Beyond the specific data for the economic recovery of the Republic of Korea it should probably be asked a critical question. Did all this create a new economic policy in South Korea, which replaced the industrial policy, pursued until mid-90s?

Experience here seems to contradict the applications of the market without frontiers policy, which was propagated by IMF. The outcomes makes us think that the Republic of Korea formed a new type of economic policy, significantly different from traditional industrial policy implemented till 90-s. In conditions, when the country has no resources to oppose the globalization process, it has to "enter" into this process and to constitute within its own place. The state is seen in the role of an active integrator. At the same time it takes precisely this role that will minimize the negative impacts of globalization in cooperation with local authorities and civic groups.

As one way of reducing the negative impact of globalization, regional cooperation is considered. This approach seeks to maximize the benefits of globalization while at the same time this is done by protecting the socio-economic polarization of society. Certainly the power of the state is weakened by the ongoing course of globalization. But this power is still significant. The state remains the only centralized resource of force that can ensure justice, to implement reforms and to be responsible for social interactions [2].

Undoubtedly the greatest interest provokes the question of how this new model of interaction has to copy with the "global crisis". It should first be mentioned the anti-crisis program "New Growth Engines Initiative". The latter is focused on 22 priority areas of development (projects) that are grouped into 6 groups:

A. Energy and Environment.

2. Transport systems.

3. New information technology (IT).

4. New developments in the integration industry.

5. Bio industry.

6. Research.

To the first group relates the following fields:

• «Increasing the consumption of clean coal";

• «The development of biofuels from the ocean living resources";

• «Solar energy and its use";

• «Hydrocarbon emissions, separation and treatment";

• «Creating a new generation of electricity power stations, capable of operating on alternative fuels";

• «Development of nuclear energy";

In the field of energy and biofuel production program includes investment of $ 22.9 billion and $ 16.5 billion, respectively, within 5 years. Expected result - the creation of facilities for production of 80 million barrels of biofuel a year, 150 thousand new jobs, reduce consumption of petroleum products with 13.4% in 2008 to 43.3% by 2018. [3]

In the 2-nd group are included areas such as:

• «Biology clean transport" (Green Car) ";

• «Shipbuilding and marine systems."

The development of the transport system is planned in two directions:

• Development of automated systems and technology;

• The interaction of marine vessels with coastal infrastructure.

The direct investment in transport would be $ 1 billion for 5 years. It should be noted that the shipbuilding and automobiles remain priority areas for government economic policy. South Korea intends to continue to lead in the shipbuilding industry – South Korea share is 40% of the world shipbuilding market.

For support of shipbuilding and maritime industry government plans to spend $ 551 million by 2013 for construction of heavy mobile deep waters docks. In the automotive sector, the program envisages investment of about $ 500 million

The third group includes:

• «Semiconductor Systems";

• «New generation displays";

• «New generation mobile phones";

• "New lighting technologies" (LED lighting);

• «New logistics systems" (RFID / USN).

 Information systems and electronics are among the main sectors of the economy. The development of new technologies in these industries is the subject of attention by the government. It plans to invest $ 21.2 billion over 5 years. The main direction is the development and manufacture of semiconductors and chips, which provide the bulk of the funds - $ 10.1 billion

The fourth group includes "Robotics", "New Materials and Nanotechnology", "Innovative technologies, new products and processes", "Development and consolidation of the telecommunications and broadcasting." Investments in this sector will be $ 25.9 billion. For the development and implementation of new materials will be spent $ 9.5 billion over 5 years. $ 14 billion are provided for the development of radio-telecommunications. The estimated economic effect only by the introduction of automated lines (robotics) is $ 420 billion by 2020. In general the plans are the achievement of a higher level of manufacturing.

In the fifth group are the directions - "New medicine and medical equipment." Investments in biotechnology amounted to $ 677 million for 5 years. Development will focus on developing new medicines and medical equipment to increase exports of manufactured products. In 2007, imports of medical products in South Korea amounted $ 2.2 billion, and exports - total $ 1 billion.[4] The task that sets the government is to provide a breakthrough in the production of high quality medical products.

In the sixth group research directions are included:

"Design", "Soft Materials", "Health Care", "Culture and heritage."

  In the light of the abovementioned models of coping with the crisis it is clear that the proposed and pursued by Republic of Korea anti-crisis policies should be included in the mode of action, focused not so much to cut costs as to the expansion of perspective. The result of such a model is as follows [5]:

 

2009 г.     

2010 г.    

2011 г

0.3%

6.2%

3.6%

 

 

Instead of a conclusion - a synthesis of key findings on the Korean experience to tackle the effects of global crisis

The synthesis of key moments from the experience of Republic of Korea is necessary for the attempt to answer the question is there anything in the policy and in the model of Republic of Korea which is possible to serve us a lesson. These key moments in our view are the following, ranked according to their importance:

• The action of the state as an initiator, integrator and coordinator of the anti-crisis actions. Without the implementation of such roles is impossible to provide synergy to combat the crisis phenomena;

• The formation of an innovative platform for development as a key component of anti-crisis policy;

• Regional cooperation as a way to reduce the impact of "global crisis";

• Efforts to avoid social polarization as an important condition for the formation of sustainable development;

• Establishment of an international cooperation network, which is becoming an important channel for acquiring excellence in science and technology.

Finally, it remains to ask the question, which already has become permanent – may be it is time to use the experience Republic of Korea as a lesson for us?

 

 

 

[1] Korea Journal, Vol.37, N4, Winter 1997, р.13.

[2] Korea Focus, 1999, Vol.7, No3, р.75.

[3] See here and further in http://www.morvesti.ru/anons-file/index.php?news=3622

[4] Ibidem.

[5] See in https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html

 

 

 

Main sources

  1. Korea Journal, Winter 1997,Vol.37, N4;
  2. Korea Focus, 1999, Vol.7, No3;
  3. http://www.morvesti.ru/anons-file/index.php?news=3622
  4. https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html

 

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