> Date: Thu, 01 Jan 1998 14:44:16 -0500
> To: (Recipient list suppressed)
> From: Michel Chossudovsky <[EMAIL PROTECTED]>
> Subject: The IMF Korea Bailout
>
> THE IMF KOREA BAILOUT
>
> by
>
> Michel Chossudovsky
>
> Professor of Economics, University of Ottawa, author of "The Globalisation
> of Poverty, Impacts of IMF and World Bank Reforms, Third World Network,
> Penang and Zed Books, London, 1997. The author can be contacted at
> [EMAIL PROTECTED]
>
> Copyright by Michel Chossudovsky Ottawa 1997. All rights reserved.
>
> In late November 1997 following the dramatic plunge of the Korean won on
> the foreign exchange market, an IMF team of economists led by Mr. Hubert
> Neiss was rushed to Seoul. Its mandate: negotiate the terms of a
> "Mexican-style bail-out" with a view to "restoring economic health and
> stability".
>
> An important precedent had been set: the IMF's standard "economic medicine"
> (routinely imposed on the Third World and Eastern Europe) had been launched
> for the first time in an advanced industrial economy... The details of the
> economic reform programme, however, had already been decided in advance in
> consultation with the US Treasury, Wall Street's commercial and merchant
> banks as well as with major banking interests in Japan and the European
> Union.
>
> A Letter of Intent ("Memorandum on the Economic Program") was put together
> in a hurry on behalf of the government with virtually no analysis of the
> broader causes of the financial meltdown. (The "policy solutions" had
> already been decided upon: no analysis was deemed necessary).
>
> A covering letter was drafted with the help of IMF officials dated December
> 3 and signed by the Governor of the Bank of Korea, Mr. Kyung shik Lee and
> the Minister of Finance Mr. Chan yuel Lim. The Memorandum included the
> usual Policy Framework Paper (PFP) imposed by the Bretton Woods
> institutions on indebted Third World nations. (See International Monetary
> Fund, Korea, Request for Stand-by Arrangement, Washington, December 3,
> 1997, The text of the IMF Agreement together with the "Memorandum on the
> Economic Program" was published by Chosun Korea, Seoul, December 1997 at
> WWW.chosun.com).
>
> The Managing Director Mr. Michel Camdessus was in Seoul during the final
> days of negotiation; the IMF's mission was briskly wrapped up on December
> 3d after a one week stint; a "proposed decision" on the stand-by
> arrangement had already been drafted by IMF staff for adoption by the IMF
> Executive Board on the following day (December 4th). In close consultation
> with IMF negotiators, the World Bank and the Asian Development Bank had
> also sent in their own teams. A World Bank package with stringent
> conditionalities on "financial governance" was announced on December 18th.
>
> A Safety Net for the Creditors
>
> On Christmas Eve December 24th, officials from six leading US commercial
> banks including Chase, Bank America, Citicorp and J. P. Morgan were called
> in for talks at the Federal Reserve Bank of New York. The "big five" New
> York merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and
> Salomon Smith Harney) were also involved in these discussions on South
> Korea's short-term debt. (Financial Times, 27-28 December 1997, p. 3).
> Almost simultaneously, some 80 European creditor banks under the
> chairmanship of the Deutsche Bank were meeting behind closed doors in
> Frankfurt while Japan's big ten banks (which account for a large portion of
> Korea's short term debt) were involved in high level discussions in Tokyo
> with Mr. Kyong shik Lee, Governor of the Bank of Korea.
>
> No Capital Inflows under the Bailout
>
> The bail-out (to be financed by G7 governments, the IMF, the World Bank and
> the Asian Development Bank) will evidently not result in capital inflows
> into Korea: it largely serves the interests of the international banking
> community, enabling US, European and Japanese banks to cash in on Korea's
> short term debt. In turn, Korea will be locked into the servicing of this
> debt under the Agreement until the year 2006.
>
> The Macro-Economic Agenda
>
> The IMF programme derogates Korea's economic sovereignty, it plunges the
> country virtually overnight into a deep recession. The social impact is
> devastating. The standard of living has collapsed; the IMF programme
> depresses wages and creates massive unemployment. (Wages expressed in US
> dollars have already been cut in half as a result of the devaluation). The
> Agreement also requires the government to introduce "labour market
> flexibility" including procedures for compressing wages and shedding
> "surplus workers".
>
> The IMF Agreement consists in tearing down Korea's banking system while
> creating conditions which enable the speedy acquisition of the most
> profitable industrial assets by foreign capital. The Agreement lifts the
> ceiling on individual foreign ownership to 50 percent by the end of 1997
> and 55 percent by February 1998. The IMF Agreement requires further trade
> liberalisation as well as the opening up of the domestic bond market to
> foreign capital. It also marks the demise of central banking in Asia's most
> vibrant economy.
>
> Under legislation demanded by the IMF, the Agreement allows for 100 percent
> ownership by foreign merchant banks: "foreign financial institutions will
> be allowed to purchase equity in domestic banks without restriction"
> (Memorandum, para. 32, p. 44).
>
> Derogating Korea's Sovereignty
>
> A de facto "parallel government" has been installed. The Bank of Korea
> (BOK) is to be reorganised, the powers of the Ministry of Finance are to be
> redefined. Under the bail-out, fiscal and monetary policy will be dictated
> by external creditors. Monetary policy under the IMF's stewardship will be
> tightened. Government spending on social programmes and infrastructure will
> be curtailed.
>
> Enforcing Enabling Legislation through Financial Blackmail
>
> During a special session of the legislature on December 23d "lawmakers
> endorsed the four government motions concerning the IMF rescue plans".
> (Choe Seung chul, Assembly Opens to Legislate Key Financial reforms",
> Korea Herald, 23 December 1997). Legislation following IMF guidelines was
> approved which dismantles the extensive powers of the Ministry of Finance
> while also stripping the Ministry of its financial regulatory and
> supervisory functions.
>
> South Korea's Parliament has been transformed into a "rubber stamp".
> Enabling legislation is enforced through "financial blackmail": if the
> legislation is not speedily enacted according to the IMF's deadlines, the
> disbursements under the bail-out will be suspended with the danger of
> renewed currency speculation.
>
> The IMF had also demanded the speedy passage of legislation which will
> provide for "central bank independence". The latter provision will thwart
> the financing of economic development "from within" through monetary policy
> --a process of State supported credit which has largely been instrumental
> in Korea's dynamic industrial development over the last 30 years.
>
> The central bank has been crushed. Its foreign exchange reserves have been
> pillaged by institutional speculators. In late November, the Bank of
> Korea's reserves had plunged to an all time low of 7.26 billion dollars.
> Under the IMF Agreement which freezes the supply of domestic credit, Korean
> corporations will increasingly rely on foreign lending institutions (para.
> 28) (The latter are also routinely involved in speculating against the
> Korean won).
>
> The Newly Elected President Supports the IMF
>
> President elect Kim Dae-jung had warned in a press conference during the
> electoral campaign on December 5th (following the IMF Executive Board
> decision of December 4th) that "...now foreign investors can freely buy our
> entire financial sector, including 26 banks, 27 securities firms, 12
> insurance companies and 21 merchant banks, all of which are listed on the
> Korean Stock Exchange, for just 5.5 trillion won,' that is, $3.7 billion".
> (Michael Hudson, "Draft for Our World", Dec. 23, 1997). But upon winning
> the election on Dec. 18th, Kim announced his unbending support for the IMF:
> "I will boldly open the market. I will make it so that foreign investors
> will invest with confidence".
>
> The IMF's Bankruptcy Programme
>
> The devaluation of the won has generated a deadly chain of bankruptcies
> affecting both financial and industrial enterprises. The devaluation has
> also contributed to triggering sharp rises in the prices of consumer
> necessities.
>
> Ironically, rather than restoring "economic stability", the IMF programme
> has served to heighten the impact of the devaluation leading to a further
> string of bankruptcies. A so-called "exit policy" (ie. bankruptcy
> programme) has been set in motion: the operations of some nine "troubled"
> merchant banks were suspended on December 2 prior to the completion of the
> IMF mission. In consultation with the IMF, the government is to "prepare a
> comprehensive action programme to strengthen financial supervision and
> regulation..." (Agreement, para. 25).
>
> Dismantling the Chaebols
>
> The IMF Agreement has created conditions which facilitate so-called
> "friendly" mergers and acquisitions by foreign capital. The automotive
> group Kia, among Korea's largest conglomerates declared insolvency. A
> similar fate has affected the Halla Group involved in shipbuilding,
> engineering and auto-parts.
>
> The IMF programme contributes to fracturing the chaebols which are now
> invited to establish "strategic alliances with foreign firms" (meaning
> their eventual control by foreign capital). In turn, selected Korean banks
> will "be made more attractive" to potential foreign buyers by transferring
> their non performing loans to a public bail out fund: the Korea Asset
> Management Corporation (KAMC).
>
> The freeze on central bank credit imposed by the IMF prevents the Central
> Bank from coming to the rescue of "troubled" enterprises or banks. The
> agreement stipulates that "such merchant banks that are unable to submit to
> appropriate restructuring plans within 30 days will have their licences
> revoked (Agreement, para. 20, p. 8).
>
> Crippling Domestic Enterprises
>
> The freeze on credit demanded by the IMF has contributed to crippling the
> construction industry and the services economy: "banks are increasingly
> reluctant to provide loans to businesses while bracing for the central
> bank's tighter money supply" ( Sah Dong seok, "Credit Woes Cripple Business
> Sectors", Korea Times, 28 December 1997). According to one observer, more
> than 90 percent of construction companies (with combined debts of $20
> billion dollars to domestic financial institutions) are in danger of
> bankruptcy" (Song Jung tae, "Insolvency of Construction Firms rises in
> 1998", Korea Herald, 24 December 1997).
>
> The contraction of domestic purchasing power (ie. lower wages and higher
> unemployment) has also sent "chills through the nations perennially
> cash-thirsty small businesses". The government concurs that "quite a number
> of smaller enterprises [which rely on the internal market] will go under in
> the coming months". (Korean Herald, 5 December 1997). Some 15,000
> bankruptcies are expected in 1998.
>
> Western Business Goes on a Shopping Spree
>
> Korea's high tech and manufacturing economy is up for grabs. Western
> corporations have gone on a shopping spree with a view to buying up
> industrial assets at rock-bottom prices. The devaluation has already
> depressed the dollar value of Korean assets, the IMF sponsored reforms
> should contribute to a further slide.
>
> Already, the Hanwha Group is selling its oil refineries to Royal
> Dutch/Shell after having sold half its chemical joint venture to BASF of
> Germany."( Michael Hudson, op cit). "Samsung Electronics, the world's
> largest producer of computer memory chips, has seen its market value fall
> to $2.4 billion, down from $6.75 billion at the beginning of October before
> the crash was engineered... It's now cheaper to buy one of these companies
> than buy a factory -- and you get all the distribution, brand-name
> recognition and trained labor force free in the bargain"... (Michael
> Hudson, op cit).
>
>
>
>
>
> Michel Chossudovsky
>
> Department of Economics,
> University of Ottawa,
> Ottawa, K1N6N5
>
> Fax: 1-613-7892050
> E-Mail: [EMAIL PROTECTED]
>
> Alternative fax: 1-613-5625999
>
