Silviase/jgov_v1.4_full_ann huggingface dataset:
that episode and in response to reform efforts, Korea’s corporate culture started to change gradually. The emergence of a liquidity crisis at Hyundai Engineering & Construction, which was not able to get financial support from other affiliates of the Hyundai Group, reflects Korea’s changing business environment.

## Performance-Based Salary Systems

The introduction of performance-based salary systems has begun to change Korea’s longstanding seniority-based pay system. Under the traditional system, employee wages were established by job position ranking and the number of years of service; promotions were also decided mainly by the employee’s number of years of service. Even those Korean firms that had a bonus system still tended to fix salary levels in direct proportion to the number of years of service, regardless of growth in productivity, making the labor market extremely inflexible. In contrast, western corporations have introduced compensation programs based on workers’ performance, and salary levels reflect the market pricing system for the labor force and the employer’s financial status.

Despite criticism that the traditional system was not suitable for fair compensation or creating incentives, it prevailed in both the public and private sectors until the late 1990s when both sectors began to move to more flexible systems. The details of the new programs vary widely but generally try to introduce mechanisms to adjust base salaries to market levels (annual salary system) and to link individual employee's annual pay increases to their job performance (merit system). Business conglomerates have pushed the spread of the new systems due to concerns that they are increasingly losing superior employees to venture firms that provide more flexible, incentive-based compensation. In answer to the exodus of workers to venture firms, businesses have introduced the yearly salary system along with stock options to discourage superior workers from leaving.

According to a survey conducted by the Ministry of Labor, 32.3 percent of the companies had adopted the annual salary system and 23.4 percent a merit system in January 2002, jumping from 1.6 percent and 5.7 percent respectively in November 1996. Large corporations and the public sector have led the introduction of the new systems where an
employee's wages link payment to performance as opposed to the traditional hierarchical system where salary is based on length of tenure or age. In particular, the financial sector, heavily damaged in the crisis, has played a leading role in spreading the new wage systems and has implemented the new system in about half of the institutions.

Table 7 Trends of Annual Salary Systems and Merit Systems (%)

Nov. 1996	Oct. 1997	Jan. 1999	Jan. 2000	Jan. 2001	Jan. 2002
Annual salary system	1.6	3.6	15.1	23.0	27.1	32.3
-banks & securities	47.5	53.5
Merit System	5.7	7.0	16.0	20.6	21.8	23.4
-banks & securities	45.4	45.3

Source: Ministry of Labor (2002)

## Evidence of Cultural Transition

Changes in public attitudes and behaviors are sometimes difficult to measure, often because such changes can be subtle and gradual over time. In the case of Korea, at least some cultural changes have come about very quick and are reflected in changes in behavior.

## I ncome Inequality

The income gap between high and low-income brackets dramatically widened after the 1997 crisis. According to a household consumption survey by the National Statistical Office, households in the top of 20 percent income bracket earned 6.75 times as much as those in the lowest 20 percent in 2000, shifting from a multiple of 4.49 in 1997. The change indicates a rapid change in income distribution. Korea's Gini index, a measure of income inequality, rapidly grew from 0.283 in 1997 to 0.351 in 2000. This index ranges from zero to one with zero indicating perfect equality in income distribution and one indicating maximum inequality. The change in the index number is interpreted as indication that Korean society is shifting from an egalitarian-oriented to an individualist, profit-pursuing society.
Table 8 Trend of the Gini Index in Korea

1996	1997	1998	1999	2000
Gini Index	0.290	0.283	0.316	0.320	0.351
Income Multiple	4.74	4.49	5.41	5.49	6.75

Note: Income Multiple = the top 20 percent income / the bottom 20 percent income.

Gini index ranges from zero (perfect equality) to one (maximum inequality).

Source: National Statistics Office (2002)

Table 9 Gini Index Numbers for OECD countries

0.200-0.300	0.300-0.400	Over 0.400
Sweden	0.250 (1992)	Canada	0.315 (1994)	U.S.	0.408 (1997)
Norway	0.258 (1995)	U.K.	0.368 (1995)	Mexico	0.531 (1998)
Finland	0.256 (1991)	France	0.327 (1995)	Turkey	0.415 (1994)
Denmark	0.247 (1992)	Germany	0.300 (1994)
Belgium	0.287 (1996)	Austria	0.310 (1995)
Luxembourg	0.269 (1994)	Netherlands	0.326 (1994)
Italy	0.273 (1995)	Spain	0.325 (1990)
Czech	0.254 (1996)	Ireland	0.359 (1987)
Hungary	0.244 (1998)	Switzerland	0.331 (1992)
Japan	0.249 (1993)	Portugal	0.356 (1995)
Greece	0.327 (1993)
Poland	0.316 (1998)
Australia	0.352 (1994)

Note: ( ) is year of survey.

Source: WB (2002), World Bank databases: GDF & WDI central

This was the first rise in Korea’s Gini index since it was first calculated 20 years ago (MOFE 2002). Comparison with other OECD countries’ Gini index numbers clearly indicates the transition in Korean society. Before the 1997 crisis, Korea had belonged to the 0.20-0.30 group, with the welfare-state Nordic European counties, former socialist East European countries, and one Asian country (Japan). Following the crisis, Korea
jumped into the 0.30-0.40 group with most western European countries and is approaching the level of the U.S.

The wider income gap could be attributable to mass-unemployment, salary cuts, and the drop in asset values during the financial crisis. But after the recovery this trend did not cease. Increased income inequality has become a general trend stimulated by the spread of the merit payment system and the decline of the lifetime employment system, although the trend is expected to decelerate as the government bolsters the social safety net. Overall, the widening income inequality is one sign that the Korean society is shifting toward individualism from cooperativism/collectivism.

## Reduced Savings Rate

Korea was well known for its high savings rate. Thrift and diligence are two pillars that supported the country's rapid economic growth. The gross savings ratio, total savings over GDP, has been gradually dropping after reaching a peak of 40.5 percent in 1988. The downward trend accelerated following the financial crisis, dropping by 4 percentage points in 3 years from 33.9 percent in 1999 to 29.9 percent in 2001. Between 1990 and 1995 the rate had fallen 2 percentage points, from 37.5 percent to 35.5 percent.

The first signs of changing consumption and savings patterns appeared in 1996 and seemed to be in response to trade and capital liberalization. Koreans started to spend more on luxury imported goods and enjoy travel abroad. At that time, NGOs initiated a nationwide frugality campaign. Middle-aged and older people expressed concerns about erosion of moral values among the younger generation and demanded that they “tighten the belts and save more.” Due to the financial difficulties during the crisis, the rise in consumerism stopped, but after the recovery the patterns started to shift dramatically again. Now Koreans accept the trend in reduced saving and the frugality campaigns have not re-emerged.

The Koreans traditionally valued and emphasized their families. Parents have a duty to protect and help their children by supporting their education, wedding costs, and even
buying a house. Leaving behind assets for their children is a main goal of Korean householders' saving. This ethic tempers current consumption and increases savings for the family. Increasingly there are signs of a shift toward a modern consumer society as Koreans increasingly begin to seek self-fulfillment rather than the future welfare of their family. $ ^{17} $

Figure 8 Trend of the Gross Saving Ratio

Source: National Statistics Office (2002)

## Cultural Change in the Labor, Corporate and Banking Sectors

Some economists suggest that Korean labor-management relations have not changed even though institutional reforms were introduced. Labor tensions are again on the rise as restructuring accelerates. The number of labor disputes has risen, increasing to 250 in 2000 after decreasing dramatically from 322 in 1990 to 78 in 1997 (Figure 9). However, the number of workdays lost in these conflicts is not high compared with the early 1990s. In 2001 there were two joint strikes led by the Korean Confederation of Trade Unions (KCTU), but these strikes were smaller in scale and intensity than expected because the Korean Metal Workers' Federation did not join the strike. This trend suggests movement to promote a new labor-management culture and try to avoid violent and hostile confrontations. Labor relations are still not satisfactory but seem to have improved.
Figure 9 Labor Relations in Korea

Source: Ministry of Labor (2001)

The movement of public attitudes toward individualism also had an impact on the culture within corporations and financial institutions. The relationship among affiliates in a chaebol began to change from that of unquestioning supporters to independent firms pursuing their own interests. For example, Hyundai Asan, which has been in charge of the Mt. Kumgang tours in North Korea, experienced financial difficulties. Politically this project contributed to reducing tensions between the North and the South, but economically the project was a failure and the business continued to lose money. The president of Hyundai Asan, who was also the owner of the Hyundai Group, asked Hyundai Merchant Marine, a profitable and healthy affiliate company of the group, to lend assistance to Hyundai Asan. Surprisingly, the CEO of Hyundai Merchant Marine, Kim Choong-shik, refused. Kim was determined to withdraw from the money-losing Mt. Kumgang tour project in order to focus exclusively on shipping. $ ^{18} $ Until several years ago, it would have been difficult to imagine in Korea’s chaebol culture that a professional manger could refuse the owner’s request. This event is an indication that Korea’s chaebol culture is changing after the crisis.
The move toward individualism has also influenced the relationship between banks and government and is reflected in banks' lending practices. When Hyundai Asan requested help from its main bank, the Korea Exchange Bank also refused to extend further loans to the company. The Korea Exchange Bank was originally a private bank but has become a state-owned bank after the crisis. Before the crisis, it would have been very difficult to imagine that a government-owned bank would refuse to assist a government-supported business due to a lack of profitability. This is an example of the changes in banks' lending practices, even though the overall level of change is not yet satisfactory.

Traditionally, Korea was close to cooperativism/collectivism. Under the influence of Confucianism, Buddhism and Taoism, Korean social values put priority on cooperation rather than competition, and egalitarian ideas prevailed bringing a reluctance to permit large income differences based on personal capacity. After the crisis, the Korean culture shifted toward individualism, which encourages competition and allows more material incentives based on achievements. As a result, individualistic behavior increasingly accompanied “market flexibility.”
### V. Conclusion

It is obvious that some traditional public attitudes that were not consistent with the growing global culture contributed to the amplification of Korea’s financial crisis and obstructed efforts to implement structural reforms. Until now, cultural aspects of Korea’s difficulties have been neglected or passed over in analyzing the causes of the financial crisis with the claim that Koreans were just “victims of their own success.”

Korea’s financial crisis raises three questions: 1) Why did a healthy-looking Korean economy come to a crisis so suddenly? 2) Why did the Korean economy get worse despite the announcement of bailout programs? and 3) Why could Korea succeed in implementing reform plans so quickly? The answers to these questions are closely related to public attitudes. Regarding the last question, reform plans could be implemented so promptly after the crisis because Korea had already prepared and considered reform packages, including financial and labor market reforms, before the crisis. The Korean government had tried to pass the reform packages but failed to get sufficient public support. People were sympathetic to the working class and would not accept the introduction of a system with lay-offs.

As to the second question, when the financial crisis that had been caused by the depletion of foreign reserves and soaring exchange rates hit the economy, the coordinated actions by the IMF and other governments were expected to stop the outflow of funds from Korea. Despite substantial assistance from international organizations and other governments, Korea finally realized - late - that it needed to negotiate with private investors on the basis of individual firms' profits. Koreans had to be convinced that the solution was to focus on individual firms' interests and profits rather than on the cooperative measures of the past.

As to the first question, Korea’s system of mutual support and guarantees that emphasized solidarity among firms proved to be a vulnerability. When companies or
individuals ran into financial difficulty due to the business slump, the tradition of shared burdens set off a chain reaction of bankruptcies that spread throughout the economy.

What kind of public attitudes had obstructed earlier efforts to prevent the crisis? Compared to Western societies, East Asian culture is closer to the concept of cooperativism/collectivism than individualism. East Asian cooperativism/collectivism historically originates from the philosophies of egalitarianism and familism under the logic of harmony. Under familism, based on the Confucian principles of hierarchical order and responsibility, employees were loyal to companies and companies protected employees. This approach gives priority to seniority and led to the lifetime employment systems. Egalitarianism originated from Buddhism and Taoism and functioned as an incentive mechanism to promote self-improvement by its teaching that humans can step up the hierarchical ladder. Harmonization of the two ideologies in Korean culture emphasizes cooperation and collective values.

Why did East Asian behavior and values that seemed to work well until the 1980s produce problems in the 1990s? Before globalization, the Korean tradition of burden sharing through solidarity was an effective solution to overcome economic slumps. During the crisis some cooperativist/collectivist attitudes even helped to save nation. The gold collecting campaign was one example. Most citizens participated in this campaign by selling gold and items such as rings and gift keys to earn foreign currency. When the won/dollar rate was skyrocketing just after the crisis, selfish behavior would have been to purchase dollars to realize personal gain, but most Koreans sold dollars to help to stabilize won rate. When several merchant banks abruptly collapsed and two out of six major nationwide banks came close to bankruptcy, a financial panic did not happen because many depositors cooperatively controlled their withdrawals.

However, the extremely cooperativist/collectivist approach of solidarity, emphasizing human relationships, was not well suited to coping with the new era of globalization. Globalization creates opportunities for growth and efficiency gains by stimulating competition and rapid technological innovation, but it produces increased risks and
volatility at the same time. In a more competitive market economy, though, collective/collectivist linkages within the economy can amplify the spread of financial difficulties from a company to a whole business group, from a bank to the whole banking sector and eventually to the national level. As the importance of foreign factors in the national economy increased, Korea could not neglect foreign investors' reactions. Foreign credit rating agencies did not appreciate the Korean approach. Koreans started to realize that the country needed to introduce more individualistic approaches to reassure foreign investors and to maximize the vitality of the market mechanism. This does not mean that traditional cooperativism/collectivism was wrong or bad but that it is not particularly compatible with the modern global market. Membership in the contemporary global market calls for a new balance between traditional cooperativism/collectivism and western-style individualism.

Changing public attitudes is very important to fully implementing Korea’s reforms. For western countries, “reform” often entails simply implementing new legal and institutional mechanisms or supplementing the existing framework. For Korea, reform will also require changing long-standing practices and mindsets. These cultural issues must be included in the reform process. Although Korea has implemented a new legal and institutional system, these reform efforts will be in vain if cultural practices are not changed. For example, because of the tradition of familism, managers rarely use layoffs, even if they are permitted. Further, the chaebols seem to find it difficult to refrain from helping their subsidiaries, just as bankers seem to find it difficult to stop helping friends who work for particular businesses. Additionally, because Korea is a small country, most managers in the supervisory authorities, external auditors, banks, and corporations graduated from the same schools or otherwise feel a personal relationship with those they supervise or work with. If supervisors, auditors, and corporate decision-makers emphasize friendship rather than professionalism, it will be very difficult to develop a viable system of supervisory oversight, even if Korea has an appropriate system of checks “on paper.”
With the success of economic development and the emergence of globalization, Korea has begun to assimilate some of the individualistic aspects of western economies, although it is difficult to change public attitudes and mindsets and the evolution often takes time. Reforms in the labor markets, including the introduction of lay-offs and the merit and contract-based salary systems, and revisions of the cross-guarantee system have contributed to the spread of individualism and its emphasis on individual performance and competition. Korea's Gini index numbers indicate that egalitarian ideology has been rapidly breaking down and Korean society is moving closer to an individualistic society. The rapid drop of the savings ratio suggests a change in household behavior from saving for the family's future to increased current consumption.

But changing culture is tremendously difficult and can lead to social problems. Although Korea has moved from cooperativism/collectivism toward individualism in a short period, Korean society has to face two new shocks that are caused by a clash between traditional and new cultures. The first shock is an education problem. Many parents have started to send their children abroad for study at an early age. The number of children studying abroad as early as elementary, middle and high school reached 20,145 in 2000, nearly twice the number from the previous year. As the economic paradigm shifts from an industrial economy to a knowledge economy, many Korean feel that the domestic educational system is not providing the education necessary to succeed in global markets. Although the Korean elite work hard and face extreme competition, their education will not be as useful if they are not familiar with English and western terminology. In addition, there is a clash between the new education system based on the market mechanism and traditional education based on Confucian values. The policy of uniform education introduced in 1974 is thought to have caused a significant decrease in scholastic abilities, and extreme competition for college admission led to a significant increase in spending for private tutoring. In addition, the curriculum reforms introduced in 1998 are widely thought to lead to a devastation of traditional Korean education.

The second shock is the middle class’s enervation and disillusionment. Most Koreans think they belong to the middle class and should enjoy the fruits of a stable society and
dynamic economy. For many years they devoted themselves to their jobs under the lifetime employment and seniority-priority system. During the boom years of the late 1980s and early 1990s they enjoyed additional income from bank deposits, stocks, and real estate investment. But now companies have moved to the new salary system, jobs are no longer secure, and returns from deposit, stock and real estate are substantially reduced. This new economic environment has led to a degree of hopelessness among many middle class people and reduced incentives to work hard. In the new economy, only few highly educated knowledge workers have attained great wealth. The middle class adjustment to the new economy has proven to be a challenge.

The 1997 crisis proved to be a watershed event for Korea. After the crisis, Korea appeared to become a different society. Public attitudes surprisingly and dramatically shifted toward individualism from cooperativism/collectivism, moving much closer to western culture. During the 1990s, Korea had been undergoing a number of profound changes in several areas. Its economy emerged as a leading industrial power, reflected in Korea's inclusion in the OECD in 1995. Many traditional practices and attitudes, such as life-long employment and mutual support among businesses, had come under pressure in the face of global economic competition and finally collapsed in the wake of the crisis. Increasingly, Korea's business practices and culture are converging toward an international culture disseminated by globalization while seeking a new balance between the new and traditional cultures.
## References

Arrow, Kenneth J. (1994) “Methodological Individualism and Social Knowledge,” The American Economic Review, Vol. 84, Issue 2, May, pp1-9.

Bank of Korea (BOK) (2002), Regional Venture Industry Promotion and Its Task, Seoul, Korea: Author.

Baily, Martin N., Cuong V. Do, Yong Sung Kim, William W. Lewis, Victoria Lee Nam, Vincent Palmade and Eric Zitzewitz (1998), “The Roots of Korean Crisis,” The McKinsey Quarterly, Spring.

Balino, Tomas J.T. and Angel Ubide (1999), The Korean Financial Crisis of 1997—A Strategy of Financial Sector Reform, IMF Working paper WP/99/28.

Ball, Richard (2001), Individualism, Collectivism, and Economic Development, Annals of the American Academy, Vol. 573, January.

Bank for International Settlements (BIS) (1997), International Financial Statistics, www.bis.org

Barber, Benjamin R. (1995), Jihad vs. McWorld: How Globalism and Tribalism Are Reshaping the World, Ballantine Book, New York.

Chow, Gregory C. (1997) “Challenges of China’s Economic System for Economic Theory,” The American Economic Review, Vol.87, Issue 2, May pp. 312-327.

Demirguc-Kunt, Asli and Enrica Detragiache (1998), “The Determinants of Banking Crisis in Developing and Developed Countries,” IMF Staff Papers, Vol. 45, No. 1.

Earley, P. Chrispher, and Cristina B. Gibson (1998), “Taking Stock in Our Progress on Individualism-Collectivism: 100 Year of Solidarity and Community,” Journal of Management, 24 (3), pp.265-304.

Franke, Richard H., Geert Hofstede, and Michael H. Bond (1991), “Cultural Roots of Economic Performance: A Research Note,” Strategic Management Journal, Vol. 12, 165-173.

Frankel, Jeffrey A., and Andrew K. Rose (1996) “Currency Crashes in Emerging Markets: An Empirical Treatment,” Journal of International Economics, 41 (3-4), pp351-66

Furman, Jason and Joseph E. Stiglitz (1998) Economic Crisis: Evidence and Insight from East Asia, Brookings Papers on Economic Activity, 2, pp. 1-135.