- Korea After the Crash
The Asian economic crisis hit South Korea when its nascent democracy was still struggling to take hold. The new president, Kim Dae Jung, elected at the height of the economic crisis in December 1997, faced the formidable challenges of economic reform and democratic consolidation. His predecessor, Kim Young Sam (1993–98), had failed to meet these challenges under more favorable economic conditions. Has Kim Dae Jung fared better in his first year as president?
By most accounts, he has. By February 1999, the first anniversary of his inauguration, it seemed as if the liquidity crisis had been resolved and exchange-rate stability had been restored. A record rise in the current-accounts surplus in 1998 to $40 billion alleviated fears that there would be a shortage of foreign exchange, leading to a recurrence of the currency crisis. By the middle of February, the Korean won, which had reached a low of 1,965 to the dollar, was trading at 1,181, moving closer to the precrisis rate of around 900. In reaction to this news, international credit agencies raised Korea’s sovereign ratings, the risk assessments assigned to the obligations of central governments, to investment grade in early 1999. The domestic economy shows signs of recovery due to falling interest rates. Industrial output began to rise in the fourth quarter of 1998 after four consecutive quarters of negative growth. Korea has carried out the structural reform program that it agreed to with the International [End Page 150] Monetary Fund (IMF). By February 1999, the first stages of labor and banking reforms had been completed, and the first stage of corporate reform was drawing to a close. Barring adverse external developments, Kim Dae Jung may be able to fulfill his promise to pull his country out of the economic crisis after only a year and a half in office.
This remarkable economic performance, however, raises several interesting questions: Have Kim Dae Jung’s economic reforms been accomplished in accordance with democratic principles? To what extent has he abided by his pledge to pursue democracy and a market economy simultaneously? Will continued pursuit of economic reform undermine the process of democratic consolidation? How has the new government tried to ensure compatibility between the two?
Democracy and Economic Reform
Economic crises require institutional measures. In recent years, the remedy of choice has been the neoconservative model of reform, which combines an emphasis on structural reform with more orthodox instruments. This model aims not only at short-term adjustment, but also at a radical transformation of the economy through restructuring industry, liberalizing the financial sector, opening up the economy to free trade, and redefining the role of the state vis-‘a-vis the market. As a rule, such reforms usually alter the existing pattern of incentives and benefits among contending social forces, thereby inflicting substantial social costs on some sectors and eliciting their intense political opposition. By disciplining labor and firms, cutting subsidies, readjusting credit allocation, establishing new rules of fair and open competition, and opening up once-protected domestic markets, these reforms produce new winners and losers and complicate the dynamics of coalition politics. Hence they are often unpopular and hard to carry out.
What is the relation between democracy and economic reform? Political theory gives no clear answer to this question. In a democracy, the process of reform is transparent and accountable, but it is also slow and prone to interest-group politics. By contrast, under an authoritarian regime, economic reform can be decisive and resolute, but it may also be vulnerable to the ruler’s predatory behavior. The problem becomes even more complicated in democratizing regimes. The political instability associated with democratization often leads to a perverse combination of the defects of authoritarianism and democracy alike—unaccountable behavior legitimated by elections, together with rampant rent-seeking freed from the constraints of authoritarian discipline.
Empirical research, at least so far, has also failed to settle the issue [End Page 151] of which regime type is more conducive to economic reform. Economic crisis gave an impetus to democratic transition in many Latin American countries in the 1980s, as prodemocracy groups capitalized...