THE IMF KOREA BAILOUT
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
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
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
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
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
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
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
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
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
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
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).
Department of Economics,
University of Ottawa,
Alternative fax: 1-613-5625999
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