The wave of market liberalization along with the political
democratization since 1987 ignited strong and violent labor disputes as well
as tremendous wage hikes which have far exceeded the rise in productivity. Entering
the 1990s, wage hikes averaged 18% annually. In addition to such excessive wage
hikes, high financial costs, excessive administrative regulations on business
activities, and low social overhead capital investment have afflicted industrial
competitiveness and entrepreneurship.
Furthermore, the sudden increase in disposable income among Koreans has induced
excessive private spending and speculation. The balance of payments deteriorated
and inflation soared. The current account balance, which had shifted from chronic
deficit to surpluses after 1986 again reverted to a deficit in 1990. Inflation
reached nearly 10% in the early 1990s.
Internationally, the 1990s witnessed growing regionalization as economic trade
blocs were formed among countries of Europe and America. With the Uruguay Round,
a new regime in international trade was formed that increased pressure to liberalize
previously protected markets in agricultural goods and financial services. The
government increasingly felt the need to change its economic strategy, as the
previous strategy that promoted exports using cheap labor as comparative advantage
while keeping domestic markets protected from foreign competition showed its
limit.
The government began to tear old regulations apart and reform irrational procedures.
At the core of the government efforts in the early 1990s was the reform in the
financial sector highlighted by the real name financial transaction system.
The real name system was the government's effort to do away with corruption
that was prevalent under the old system in which it had been possible to open
accounts and conduct business transactions under false names, directly and indirectly
fostering institutionalized corruption and illegal financial dealings.
Under the comprehensive policy theme of segyehwa (globalization), the government
took an active role in participating in international economic activities through
the Uruguay Round of trade talks through the launching of the World Trade Organization,
and its membership in the Asia-Pacific Economic Cooperation. The government's
effort culminated in Korea's accession to the OECD in 1996, which seemed to
signal Korea's entry into the rank of advanced countries.
The Korean economy made a remarkable comeback in the first half of the 1990s.
With increased investment and export, economic growth rate increased from 3%
in 1992 to 8.6% in 1994 and 8.9% in 1995. The GNP per capita surpassed the US$10,000
in 1995, and in 1996, the unemployment rate recorded the unprecedented 2%. With
such high economic growth, inflation remained relatively stable at a 4% level
throughout the 1990s. |