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Crisis of Confidence
Koreans were supposedly enjoying the region's best economic recovery. So why have they suddenly become so pessimistic?

When Kim Sung Hee wants to gauge the state of the South Korean economy, she surveys the expansive lobby lounge of the Grand Hyatt in Seoul where she works as a waitress. "When the economy is strong, this place is really crowded," she says, looking over a near-empty room that is normally jammed on a Tuesday morning. Next door at the Terrace coffee shop, manager Lee Jae Ho notices the same thing. He says daily sales have dropped by about 20% in recent weeks from even a month ago. Combining a magnificent skyline view of southern Seoul with reasonable buffet prices, the Terrace had been a popular place among Seoul's middle class. But recently Lee has sensed a mood shift: "From what I have overheard here, I am worried that a new economic crisis is for real," he says.

You won't find "coffee-shop attendance" on any list of leading economic indicators, but it's nevertheless key. Average South Koreans, beneficiaries of what has been widely hailed as Asia's strongest economy coming out of the economic Crisis, are nervous. Less than two weeks ago, Samsung Research Institute's widely respected consumer attitude survey found that optimism has declined more than 10% in the last six months. A couple of newspaper surveys published recently found that bearish sentiment was widespread. In a poll of 1,200 Koreans conducted by the Kyunghang Daily, 82.2% feared that South Korea could suffer from another major economic crisis in coming months. Indeed, nearly two out of three respondents in an opinion survey conducted by Maeil Economic Daily in late September said they think the country is facing a real economic crisis.

What is probably most surprising about these poll results is that the economy, at least on the surface, seems to be chugging along rather handsomely. It grew by 12.8% in the first quarter and 9.6% in the second. And although most economists expect further slowing as the year goes on, growth in 2000 is nevertheless expected to total 8.8%, according to the International Monetary Fund's latest estimate released last month. Inflation is expected to be a tame 2.2% this year and the unemployment rate should average 4.2%.

While average South Koreas have turned decidedly pessimistic on their economy, the numbers comparing the situation in 1997 versus today are mixed
1997 2000
Current-account balance: -$20.35 billion $14.7 billion
Foreign debt $180.5 billion $142 billion
Corporate debt (debt-equity ratio) 360% 205%
Bank lending (growth) 49% 3.3%
Price of oil $21.5 $30.50
Non-performing loans (% of total) 5.5% 11.1%
Source: Asiaweek Research
But while the headline economic numbers seem good, it isn't hard to find where the gloom is coming from. A recent fall in semiconductor prices threatens a key Korean export. And the stubbornly high cost of oil will be a further drag on both manufacturers and consumers with a heavy reliance on imported petroleum. The continued fall in stock prices is both the result of negative sentiment and a reason for more pessimism. The Seoul Composite stock index is down more than 40% this year.

Less easy to calculate but just as depressing, especially for the markets, is the growing feeling that economic reforms have ground to a halt. First, Ford backed out of its commitment to buy Daewoo Motors and then, last week, a consortium of foreign buyers announced they would not fulfill an earlier commitment to buy bankrupt Hanbo Iron & Steel. Hanbo has been in bankruptcy almost four years and now must start the hunt for a buyer all over. On Wednesday, the top 135 executives at Daewoo all sent in their resignations to creditors running the company as a way to take responsibility for the Ford fiasco.

The failure of those deals is also revealing a profound ambivalence among South Koreans. They know that such setbacks will only worsen foreign sentiment about how committed the nation really is to change, which will have a ripple effect on the stock market and foreign direct investment. But they perceive that, often, reform is just a euphemism for pain.

Lee Jae Han may soon lose his job as an assistant bank branch manager (in hopes that he might yet keep it, he doesn't want to reveal which bank he works for). The branch is being closed. At 45, Lee says he isn't sure what he'll do if he finds himself out of work. "I have a big mortgage and two teenage children I won't be able to put through college." Korean banks, in the midst of an industry shakeout in which at least some institutions are likely to fail, have made announcements that they will lay off a combined 3,000 employees in November alone. One Korean union official bewails the prospects for these people: "Thousands of those who were laid off in 1998 by banks still haven't found a reasonable job," says Lee Nam Ki, chairman of the Korean Federation of Trade Unions.

Consumer fear is already translating into less spending — especially among average Koreans. This time of year is normally a prime season for soon-to-graduate college job-seekers to buy smart new business suits for interviewing. "But not this year," says a sales clerk in the Lotte Department Store in Seoul. "They come, check prices and leave without buying." Hyundai and Kia report that consumer purchases of popular and pricey recreational vehicles is down by about 15% in September from a year earlier. On the other hand, the sale of Daewoo's 800-cc Matiz minicar is up 32% in September — frugal consumers, at least, are buying.

Many Koreans have come to blame the government in general and President Kim Dae Jung in particular for their unhappiness. Critics say Kim has been so focused on relations with North Korea and lofty dreams of eventual reunification that he has neglected the nitty-gritty of economic performance. But the criticisms have started to go beyond that. "People in general are feeling that the government is not able to manage the economy properly and this has created a sense of crisis," says Park Jin, a research professor in political science at Yonsei University.

The government's response has been to staunchly deny any problem: "The economic fundamentals are excellent," newly installed Minister of Finance and Economy Jin Nyum told the press Aug. 8. He has since retreated from that see-no-evil attitude, but the government still doesn't instill confidence in a battle-hardened Korean populace. "Back in 1997, the government was saying that economic fundamentals were good," says Park. "But you know what happened. [Accurate] psychological assessment of the mood is very important."

Shin Hoo Shik, Daewoo Securities' chief economist, says the slump may have been overblown a few months ago, but it is all too real now. "The economy has been in a decline after peaking in late 1999 and the consensus is the economy will continue to weaken," he says. "The volatility in the semiconductor market also negatively affects . . . about 15% of Korea's exports."

Kim Dae Jung vows to keep the nation's reform on course. But with economic numbers looking better, many of Korea's biggest corporations have stopped moves to improve efficiency, unwind complex intra-group shareholding relationships, and focus on core businesses. One economist who's been studying South Korea says many chaebol seem to have gotten off track of what's really important. Hilton Root, a former world bank economist and now with the Milken Institute, says the parochial attitude tends to pit one company or region against another. "When people start thinking that way, it may take another crisis before they change," he says. Perish the thought. The shame is that as more time goes by without real reform, the options start to become limited.

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