Greeks wondering how to get out of this nightmare could do worse than look to South Korea.
One of the most moving things I’ve ever witnessed was the gold donations in Seoul in 1998. The Collect Gold for the Love of Korea campaign had millions voluntarily turning over the family jewels to the government to help the economy.
Rarely has modern history seen such a powerful grassroots effort to pull out of a crisis. Korea did just that faster than peers in Asia. Its economic growth rate is 7.8%.
Korea has its problems, not least of which is the need to raise interest rates to avoid asset bubbles. A handful of huge family-owned conglomerates tower over the economy and stifle entrepreneurship. The nation is too reliant on exports at a time when competing with China is a losing strategy.
The deadly protests in Athens suggest Greece has some lessons to learn from South Korea. Here are three of them.
One, sacrifice is inevitable. Okay, so a Korea-like gold drive in Greece is a reach, nor would such a gesture on the part of its 10 million people be enough. Korea was extraordinarily adept at encouraging its population to share the burden of its debt crisis. A similar tighten-your-belt campaign is needed in Greece and elsewhere in the euro area.
Europe’s debt woes are too monumental to think a few bailouts will do the trick. Higher taxes are needed, and in Greece’s case, more aggressive tax collection is required. Korea attacked tax dodgers by encouraging consumers to use credit cards for most purchases. Cash transactions were too easy to hide from authorities.
There was a dark side. For a time in the mid-2000s, Korean consumers got in over their heads in debt. There were concerns that the nation’s troubles had merely been shifted from companies to households. The risks were identified early enough, though, and the problem was addressed.
Two, bite the bullet sooner, not later. Even after last week’s €110 billion (around Rs6.4 trillion) bailout, there’s a good chance Greece’s debt woes will still be on an unsustainable trajectory. It will probably have to restructure debt because the strains placed on the economy will be too great. It’s better to get it over and done with.
If you restructure now, markets won’t spend every moment of the next two or three years wondering when the inevitable will happen, says Barry Eichengreen, economics professor at the University of California, Berkeley. Just do it.
After South Korea received a $57 billion bailout from the International Monetary Fund (IMF), little time was wasted. Weak companies were allowed to fail. Several banks were closed and their employees were fired. The government was transparent about its debts and reduced them.
There’s much griping about how the terms of Greece’s IMF package are far less stringent than those forced on Korea, Indonesia and Thailand. I got an earful about it on a recent trip to Seoul. Eisuke Sakakibara, Japan’s former top currency official, says the institution should change its name to European Monetary Fund.
IMF learnt lots from its missteps in Asia. Yet, is Europe being well served by easy bailout terms? Probably not. Nor will it help IMF’s credibility to become an automated teller machine for Europe’s worst debtors.
Greece’s population would clearly disagree. There, opinion polls suggest the nation is now the subject of unprecedented shock therapy. That suggestion engenders giggles among Korean officials, who know a thing or two about radical change. The Confucian ethics of personal and governmental responsibility have served Korea well.
Three, the future could be bright. While easy for us foreigners to say, many Korea observers argue that the economy’s collapse left it better off. It shook things up like nothing else could have, forcing a restructuring of industry and the government’s role in it. Greece needs a similar overhaul.
Make no mistake, Europe’s debt crisis is going global. As investors such as Loomis, Sayles and Co. LP’s Dan Fuss and Pacific Investment Management Co. Llc’s Mohamed El-Erian astutely point out, it’s merely the first wave of worries that governments borrowed too much to revive economies. Markets are now plunging.
To many, Korea is a developing economy, a label that no longer fits in my opinion. Its challenges have far more in common with Japan than China. It still needs to create a more flexible labour market, improve corporate governance and move further up the value chain away from manufacturing. It was hit hard by the chaos in global markets. The stock market plunged 41% in 2008.
Korea is getting there, though. Not as fast as some investors would like, but economic change is afoot.
We live in a world devoid of obvious economic role models. The US used to be one. Officials in Asia, Latin America and Africa once looked to the euro as something to aspire to. Not so much anymore.
It’s time to begin looking at less obvious examples. Korea, for all its problems, is as good a place as any to start.
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