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Korea's Economy Opens Up, Part 3

Part 3

Opening Up a Closed Korea In the past, some observers claimed that while the Korean economy was quite open, its society remained closed. Today the minds of Korean people and society at large are becoming more open. Through the bitter experience of the 1997 financial crisis and the ensuing economic setback, Koreans appear to have developed some appreciation of globalization and begun adapting to it. These same Koreans have come to realize that foreign investment is indispensable to economic recovery, and their attitudes toward foreign business and investment are changing. The fact that foreign retailers have been well received by the Korean public is one example that society is opening up. Once the business environment improves and operations become transparent and more competitive, business practices that rely on networks among Koreans will diminish.

Labour-Market Reform The IMF policy package demands that labour be more flexible, and substantial progress has already been made. The labour laws that were amended in February 1998 have improved flexibility by allowing workforce retrenchment, part-time employment and flexible working hours. For the first time in Korean history, layoffs are allowed in the event of urgent management needs such as business transfers and M&As; caused by extreme financial difficulty. A number of precedents demonstrating the social acceptance of layoffs have also been established, creating a new era for human resource management. Today lifetime employment is no longer taken for granted. This amendment facilitates the restructuring that is necessary and allows firms to be more competitive. The employment adjustment system will also enhance the efficiency of labour management. Whereas in the past labour disputes arose largely over the issue of wage hikes, employment security is set to emerge as a major issue of contention in the future.

The configuration of the Korean labour market has changed remarkably since the revision of the labour laws. From 1996 to 1998, 65 percent of all domestic companies implemented workforce retrenchment. This has changed the proportion of full-time and part-time workers. The number of full-time workers decreased from 81.2 percent in 1996 to 57.7 percent by the end of 1998, while the number of part-timers increased from 18.8 percent to 42.3 percent during the same period.

For the first time in history, the wage rate decreased in 1998. Due to downsizing and reduced wages, the personnel expenses of the 30 largest chaebols in 1998 decreased by 42 percent of what they were in 1997-a feat inconceivable before the crisis. As layoffs and workforce retrenchment become possible, militant union tactics will be mitigated.

Economic Policy: A Paradigm Shift The industrial policy paradigm before the crisis can best be described as one of extensive state intervention, with consecutive five-year economic plans. Although intervention worked well until the late 1980s, it turned out to be the major underlying cause of the 1997 financial crisis.

After the crisis forced policy-makers to realize the limitations of state intervention, the paradigm shifted. A government-led economy slowly began to be transformed into a market economy. This shift has been reflected in the liberalization of domestic industries and the ongoing institutional and structural reform of financial institutions, the chaebols and the labour market. At the same time, the public sector has been reformed to enhance its efficiency.

The government has already abolished about 50 percent of the regulations that served as tools of state intervention. Also, the central government plans to reduce the number of its employees by 11.9 percent by the end of 2000; local governments will cut their employee numbers by 20.2 percent by 2002.

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Part 3

Opening Up a Closed Korea In the past, some observers claimed that while the Korean economy was quite open, its society remained closed. Today the minds of Korean people and society at large are becoming more open. Through the bitter experience of the 1997 financial crisis and the ensuing economic setback, Koreans appear to have developed some appreciation of globalization and begun adapting to it. These same Koreans have come to realize that foreign investment is indispensable to economic recovery, and their attitudes toward foreign business and investment are changing. The fact that foreign retailers have been well received by the Korean public is one example that society is opening up. Once the business environment improves and operations become transparent and more competitive, business practices that rely on networks among Koreans will diminish.

Labour-Market Reform The IMF policy package demands that labour be more flexible, and substantial progress has already been made. The labour laws that were amended in February 1998 have improved flexibility by allowing workforce retrenchment, part-time employment and flexible working hours. For the first time in Korean history, layoffs are allowed in the event of urgent management needs such as business transfers and M&As; caused by extreme financial difficulty. A number of precedents demonstrating the social acceptance of layoffs have also been established, creating a new era for human resource management. Today lifetime employment is no longer taken for granted. This amendment facilitates the restructuring that is necessary and allows firms to be more competitive. The employment adjustment system will also enhance the efficiency of labour management. Whereas in the past labour disputes arose largely over the issue of wage hikes, employment security is set to emerge as a major issue of contention in the future.

The configuration of the Korean labour market has changed remarkably since the revision of the labour laws. From 1996 to 1998, 65 percent of all domestic companies implemented workforce retrenchment. This has changed the proportion of full-time and part-time workers. The number of full-time workers decreased from 81.2 percent in 1996 to 57.7 percent by the end of 1998, while the number of part-timers increased from 18.8 percent to 42.3 percent during the same period.

For the first time in history, the wage rate decreased in 1998. Due to downsizing and reduced wages, the personnel expenses of the 30 largest chaebols in 1998 decreased by 42 percent of what they were in 1997-a feat inconceivable before the crisis. As layoffs and workforce retrenchment become possible, militant union tactics will be mitigated.

Economic Policy: A Paradigm Shift The industrial policy paradigm before the crisis can best be described as one of extensive state intervention, with consecutive five-year economic plans. Although intervention worked well until the late 1980s, it turned out to be the major underlying cause of the 1997 financial crisis.

After the crisis forced policy-makers to realize the limitations of state intervention, the paradigm shifted. A government-led economy slowly began to be transformed into a market economy. This shift has been reflected in the liberalization of domestic industries and the ongoing institutional and structural reform of financial institutions, the chaebols and the labour market. At the same time, the public sector has been reformed to enhance its efficiency.

The government has already abolished about 50 percent of the regulations that served as tools of state intervention. Also, the central government plans to reduce the number of its employees by 11.9 percent by the end of 2000; local governments will cut their employee numbers by 20.2 percent by 2002.