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■ Henry A. Kissinger: Opening Remarks

Mr. Chairman and distinguished guests, it is a great honor to have been asked to chair this Forum and to lead the first discussion, which will deal with the "World in the 21st Century." Let me just make a few introductory remarks to the general discussion, and then begin our first topic.

The world in which we live is described as a world of globalization. And that is a correct statement in many respects. About 25% of the world's output goes to exports, as compared to 7% in 1950. And for developing countries it is even higher. It is something like 40%. So in fact, the world has become global economically. But the world is also run politically on a national basis. And the political survival of governments depends in part on their economy, and in part on their domestic consensus. And requirements for those two are not always the same.

A whole new set of complexities has arisen in this globalized system. How to maintain a stable trading system side by side with a stable financial system; how to balance sustainable development with a decent standard of living; how to prevent globalization from being perceived as the benefit of the developed nations, while the developing nations cannot share in it at anything like the pace that the developed nations do. Many of the results of interdependence are the decisions that are taken domestically have global impacts not only on the economic level but also on such issues as environment and human rights. And we must keep in mind that human rights is defined more and more less not only in terms of the protection of the individual vis-a-vis the government but as adequate health standards, comparable labor standards, and a whole host of issues that used to be considered entirely within the problems of individual countries. And recently, there has evolved a concept of 'humanitarian intervention in which, what used to be considered perhaps subject to moral pressure, later graduated to economic sanction, and now includes also military aspects.

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These are all problems that one must keep in mind even as we discuss issues of Korea and the world economy. Fortunately, Korea is at the upper level of the developing countries. And so many of the problems we will be discussing today can be discussed in largely economic terms.

But one must keep in mind that globalization is a process, it is not a system of world order. A system of world order has yet to be created. The Cold War was based on how to manage division. The post-Cold War world has to be geared to how one can manage interdependence. How one can keep crisis from spreading. If one thinks of the impact of a crisis in Thailand last year, what would happen in a recession in the developed countries. So these are some of the issues that perhaps we ought to keep in the back of our minds as we proceed through all of the discussions.

Now my role this morning is not to answer those questions for which my colleagues are much more competent than I am on the economic level. But I have been asked to introduce a panel of the World in the 21st Century. And I will lead off the discussion. I will be followed by Lee Kuan Yew, Senior Minister of Singapore and one of the seminal minds of our period, by Mr. Ryuzo Sejima, Special Advisor to the Itochu Corporation, and by Maurice Strong, Chairman of the Earth Council.

And I will now make a few remarks. Each panelist is encouraged to speak for no more than 15 minutes. And after that there will be opportunity *Agenda for the New Millennium* for discussion and questions from the floor.

## ■ Kissinger: "America and Asia in the 21st Century"

Now the topic that I have been asked to discuss is America and Asia in the 21st Century. And I can frankly tell you, that for America, the transition from the Cold War world to the world of interdependence, from a world of confrontation to a world whose character is not yet defined is a traumatic experience for which we do not yet have an adequate national

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consensus.

Among the major nations in the world, America is unique in a number of respects. It is the only major country that evolved out of a conscious act of creation, whose origin can be precisely dated. And in this sense, it has a very limited history. I keep telling my friends in America that the whole history of America is shorter than that of ten of the fourteen Chinese dynasties, individually, that have existed. And that therefore we have a different perspective for that reason alone.

We are the only major country that has never had a powerful neighbor. We are the only major country that could believe that whether we engage in foreign policy or not is entirely up to us. And that, therefore, any decision we take is irreversible. We are the only major country that believes we can legislate the details of foreign policy by congressional acts and treat foreign policy almost entirely as an aspect of domestic politics. And therefore we also believe that to transfer American institutions both politically and economically to the rest of the world is the key to world peace. All of these elements that we take for granted are unique in America. No other nation has ever no democratic nation for sure has ever made this claim before. And this presents us, then, in the management of foreign policy, with huge problems.

It is conventional wisdom in America that democracies do not have conflicts, for which there is very little evidence because there have never been enough democracies at any one time to test it. But it means that for many in America, foreign policy becomes a way of changing the domestic institutions of other countries, and not a way of balancing the rewards and punishments, which have been the key to foreign policy anywhere else. Whenever I travel abroad, I am asked about American strategy. And I don't want to depress you, but there is no clear-cut American strategy at this moment. And I say this not as a criticism of a particular administration, because it is a bipartisan problem. And the solution has to be a bipartisan solution. It cannot be done by claiming one party has the

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only answers. What there is a series of individual decisions driven by
many domestic constituencies.

—Now I obviously have no time for a review of the entire world situation.
And I would like to focus on Asia, therefore, as far as the United States
is concerned.

I will make only this point about the world situation. We in America think that the world is homogeneous. That all countries are driven by the same imperatives. In reality, if one divides the world into regions, I would make the following argument. In relation of America to Europe, and perhaps of America to the Western Hemisphere, relations are driven primarily by the internal structures of those countries. That is to say they're democratic, market-oriented, and their conflicts are mostly in the economic field. Military conflict between them, or even strategic considerations between them are extremely unlikely. That is one set of problems.

Then we go to Asia. And so I would say maybe Europe, the Atlantic relationship is the world of the 21st century. But in Asia, as all of you around this table know better than I, nations do not think of each other as part of a cooperative grouping. Nations think of each other the way 19th century European nations thought of each other as potential strategic opponents. Nations think of each other as possible threats to each other. So the relation between Asian nations is characterized in part by strategic concerns. For America, this means the management of equilibrium. And that is exactly what we have no experience with, because we have never done it before.

Then there are other parts in the world which I would consider
revolutionary-phenomena like the Middle East and elsewhere. But let me
now turn to Asia. I am often accused in the United States of being
especially friendly to China. And I have written books on the subject of
how one should conceive foreign policy. I believe foreign policy has to be
conceived in terms of the balancing of national interest. I do not believe

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foreign policy is a sentimental, psychiatric or sociological exercise. I think
it is dangerous for nations to make their foreign policy dependent on the
sentimental attachment of leaders to each other, of preference for one
culture over another. But it has to be geared to some objective criteria.

For this reason, I do believe that the Chinese-American relationship is of
great importance for the peace of Asia. China is a huge nation in the
process of development, going through many of the crises of development,
in fact, many of the same crises Korea has gone through, and Japan has
gone through. And for the same reason there is only so far you can go
by state encouragement of various economic enterprises.

The future, therefore, is very dependent on, whether the Chinese society
and economy progress, and whether China can feel it is part of some
international arrangement in which it is respected. In a conflict between
China and the United States, every country in Asia, including especially
countries like Korea, will be driven to take sides that they cannot possibly
want to take. It will destabilize all of Asia. Now, of course, the United
States has a national interest to prevent the domination of Asia by any
single country. And if that were the challenge, we would undoubtedly
resist. But before we would resist, every other Asian nation would resist
also. It is not something we have to organize. It is something that exists,
and therefore, I believe that everybody has an interest in normal
cooperative relations between China and the United States, which are now
under violent attack in the United States for many reasons, including the
fact that so many leaders have gotten used to the world of the Cold War
that they are trying to slide China into the position previously occupied by
the Soviet Union.

If we have to, we will defend our allies. But we should try to avoid
such situations. Korea is an ally whose security we must protect. Japan is
an ally whose friendship remains important. But we should not, on our
own, organize confrontations in Asia. And it is for America to learn that a
nation can emerge that is powerful, but does not have to be resisted just

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because it is powerful. For us to conduct our policy on the basis of challenges and not of permanent enemies that is our challenge in Asia.

Now let me stress, Japan is an ally and must remain an ally. And that is also in the interest of peace in this area. The security of Korea is essential. And there are new players emerging. India will play an increasing role in South Asia and in South East Asia. And all of this may create certain tensions. But our problem is not to avoid all tensions. Our problem is to manage these tensions in the cause of peace and long-term stability.

Now in the interest of time, I will just conclude with a few words about Korea. I, as a young man in my twenties, was in Korea in 1951 during the Korean War as an advisor to the American army for three months. A position for which I was spectacularly unqualified. But I learned a great deal. One thing I learned is, in retrospect, how important it is for a country to have faith in itself. When I look at Korea today, then, I must say, without the self-discipline and courage and faith in themselves of the Korean people and Government, this would never have happened.

Now you have also been fortunate that you have had stable governments, including in the latest, most difficult period, and you did not have to conduct, simultaneously, political and economic reform. But anyone who was here knows, here at the intersection of Russia, China, Japan and America, a particular delicate policy is essential.

In the maintenance of peace, there are always two aspects. One is conciliation, and the other is strength. Without strength, conciliation can look like weakness. Without conciliation, strength feeds on itself and can produce a series of confrontations culminating in a disaster as happened in Europe prior to and concluding in World War I.

In Korea, the problem is particularly complex because the nature of the North Korean regime is so unusual that no standards European, American or Asian really apply to their considerations. It is very difficult to understand what motivates them. So on the one hand, one can only

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welcome any effort that is made that subjects North Korea to the process of historic evolution, and therefore opens up possibilities of conciliation with them. At the same time one has to be careful not to make them believe that blackmail is the most effective form of policy. And therefore there has to be some relationship between concessions we make and returns we receive. I am not saying this about what South Korea does for itself. This is a decision you can make for yourselves. But I refer to what the United States does in relation to North Korea. And I would say we have to be careful, on the one hand, to give North Korea an opportunity to behave responsibly, but avoid a temptation to believe that every few years they can commit some outrage and some threat and are then paid for stopping to do something they should never have done in the first place.

And there is one particular concern I have, that is drawn from my own experience. When I conducted the Vietnam negotiations, I negotiated secretly with the North Vietnamese, without the presence of the South Vietnamese. And there were many good reasons for doing that. I believe, in retrospect, that it was a psychological mistake. The strategy of countries like the North Koreans and the North Vietnamese is to attempt to de-legitimize the opposite members by claiming, or creating the impression, that they are the spokesmen for the whole country. And the others are a tool of the Americans. And I can say this, since I committed the same mistake, so it's not a criticism of a particular administration.

Based on my own experience, I would warn against separate American-North Korean negotiations, unless they have something that really only concerns North Korea and the United States. It needs to be very strictly defined. Normally, I believe anything that even generally concerns South Korea, there should be a South Korean representation. Even though I admit it won't be a great joy, you will contribute to flexibility. But I think it is important not to permit South Korea to be maneuvered into the position of not being a national government. This is the only thing I want

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to say on the Korean thing, but I want to come back to a fundamental
point.

—The first one, I made in my introduction. In dealing with the economic world order, we always talk of globalization as if it were a purely economic problem, as if every nation could follow all these maxims, as if there were no distinctions between developed and developing nations, and as if everything has to follow pure economic principles. And I would simply warn against making sure that globalization doesn't turn into the issue of the 21st century like capitalism did of the early twentieth century. That's something for my colleagues in the economic world to discuss later today.

In the strategic and political world, we in America are going to go through a very difficult period as we adjust our world views to becoming a nation like other nations. We have now got to learn that every problem solved in international affairs is an admissions ticket for a new set of problems ; that history cannot be segmented into electro-units ; that foreign policy has a different time-frame from domestic politics.

So you will see in the next year very strange discussions in America. And you can contribute to help us when we interact by putting your cases in a more general framework than simply the purely national Korean one.

I would not over-estimate some of the disputes you see in America. At the end of the day, the American people are a very strong people. And the American people have one advantage that many other nations do not have. With all the disputes you see in Washington, the American people believe in their leadership. And therefore, all the noise you see in Washington can be healed fairly quickly, and I hope will be healed fairly quickly.

I've tried to present to you some strategic contexts, and I've been a terrible chairman because I have exceeded the time allocated to me, which I will enforce strictly from now on against anyone except my old friend Lee Kuan Yew. Mr. Senior Minister?

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## Senior Minister Lee Kuan Yew: "Korea at the Crossroads"

Mr. Chairman, you have made my task much simpler by laying the geopolitical framework. I think it is important to remember constantly this point: that the strategic, the geo-politic and the economic cannot be separated. And I was reminded how vividly the world would have been different if the United States had won in South Vietnam and not pulled out.

The United States had one consuming ambition. That was to defeat the Soviet Union and all that it represented since the end of the last war. When they started to invade South Korea, Americans poured blood and treasure, fought them to a standstill and helped you rebuild. Without that Cold War, neither Japan nor you, the South Koreans, would be industrial nations today. The United States did not succeed in Vietnam, and Vietnam, both North and South, are poverty stricken and impoverished.

Take the recent example of the financial crisis. It started off in Thailand. The Thai Baht was sold, investors moved out, the United States did not come to the rescue. The Cold War was over.

It spread to Indonesia and we signaled frantically to Washington that you can't allow Indonesia to go down. And between the Japanese and us, we raised the ante and put up some 10 billion dollars—5 billion from the Japanese, 5 billion from us, a very small country. That forced Washington to come in with 2 billion dollars.

But when South Korea was struck, with over 30 thousand troops at the DMZ, the United States came in full force, organized the bankers in Wall Street and got them to roll over the loans.

That made the difference between what happened to Indonesia and what your fate turned out to be. Indonesia, you know, went from bad to worse, and the country has just been torn asunder. Had the Cold War been on, that wouldn't have happened.

Now, I was asked to be a member of this International Advisory Council

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to the Federation of Korean Industries to brainstorm ideas of how they could meet these series of problems that they are facing and Korea is facing. When I was asked for the title of my talk, I said, "a simple one, Korea at a Crossroads." You had a clear chart, a road map of how to become an industrial nation. You watched the Japanese, and you said, why not? The Japanese were able to grow and grew rapidly with the help of the American market. And the Americans were willing to help them in order to have an example of an Asian free-market, democratically-governed country. That is a success. You followed that same pattern.

But that pattern had to undergo certain transformations as the Cold War unwound. America became restive with the huge trade surpluses. And began to demand that Japan open up. So the system that the Japanese built, of a protected closed market, high savings rate, low interest rates, directed by the Ministry of Finance and MITI, to go into certain industries to certain zaibatsus became a phenomenal success. Steel, shipbuilding, petrochemicals, electronics one after another, they were great triumphs.

But the cost was horrendous. The costs were very low standards of living of the Japanese people, a very protected domestic retail and wholesale market that led to flabby, uncompetitive systems. And as the system was opened up step by step by successive American administrations, until finally the American banks and security houses were in Tokyo, the Ministry of Finance and MITI could no longer control the NIKKEI index, and the Japanese found themselves at the mercy of the globalized market. They ran into the bubble, obliging the Americans in 1985 with the Plaza Accord to push up the Yen, helped the Reagan administration, they exported their surpluses to the rest of Asia by transferring the low value-added production capacities overseas to South East Asia, Taiwan and Korea. You followed the same example. But you were late, and Americans were already coming into a different phase.

Now, that phase is over. And as Henry Kissinger said, globalization is not an ordered state of the world, it is a process. And a process in which

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the Americans are ad hoc-ing and making rules and sub-rules as they go along, sometimes with the support of the Europeans and many others, sometimes just on their own by sheer weight in the international money markets, in the WTO, in IMF, in the World Bank.

So what have the Koreans to face? It is exactly what the Japanese are facing. And I was very taken recently when I met a team that Prime Minister Obuchi has brought together to collect opinions from around the world, particularly in Asia, of what they should do for the 21st century. And they have 5 subcommittees. First, Japan's place in the world. Second, Japan's prosperity and dynamism, how is it to be sustained. Third, achieving a satisfying and enriching life. Fourth, beautiful country, safe society. Five, the future of the Japanese.

They have hit a wall. They know that the old paradigm of an uncompetitive domestic sector supporting a highly-aggressive and competitive export sector is no longer tenable.

You are in the same position. You had the advantage of huge savings of your workers and your people, low interest rates. You went for market share, just like the Japanese did, and having cornered a large share of the market, then you were able to price you were price-makers.

That phase is over. If you don't become competitive in using capital, in allocating capital in a globalized financial market, you are in deep trouble, as the Japanese are finding out. They had to open their financial market. The Japanese interest rates will soon, for Japanese bonds, be zero. It's zero at the moment.

Why should any Japanese now - pension fund, insurance company put that money in Japanese bonds when they can go into the US Treasury market? So, they have now to play by American rules. Because the Americans opened up their financial market and insisted that if you want to export to the American market, you will open up your financial market. And this has happened to you.

Supposing in this last financial crisis, you had not been in debt in

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foreign currency, supposing, like Malaysia, your debt was domestic debt. Their domestic debt is about 160% of their GDP. Their banks have just lent furiously. They refused to call in the IMF. They could afford to do because their foreign loans were a very small component. They decided to start lowering interest rates, increase money supply, and have got the economy going.

It does not mean that they have become competitive. But it does mean, for the time being, recovered from a state of collapse. And they would have collapsed, had the market been opened up. Now is the longer-term problem for them. That is they want to rejoin the international market, make use of international capital, get portfolio investments, get direct foreign investments, then they have to lift the foreign exchange controls. Then once again, those uncompetitive companies will be under pressure. So, if they can use this time not only to have these companies recover but get them under better management, make them more competitive, if they can do that, then they would have succeeded. If they can't, when you lift the foreign exchange control, at the next typhoon, the same set of problems will arrive.

You do not have that privilege because you owe US dollars 140-150 billion in foreign currency. So you can't close your market, you have to call the IMF. What do you do?

I thought the easiest thing for me to do to meet the arguments of what the West wants you to do, what the IMF wants you to do, and the Western liberal economies want you to do, is by quoting them, and then we can start the argument.

First, the genesis of your problems. I had this brief from a very well known bank that has been helping your Government. And their analysis was, Korea has avoided Japan's mistakes, and the opportunity to complete reforms has not yet been lost. That's the optimistic note. Like many other economies in the region, Korea was on a bubble prior to the crisis. Economic decisions were increasingly driven by unrealistic growth expecta-

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tions that led to over-investment and financial distortions. Nevertheless, the boom sustained itself for many years, as rising growth expectations led to higher investment, which in turn fueled growth and boosted expectations further. In Korea, the resulting misallocation of resources and loss of efficiency was widespread and affected both capital as well as labor. In contrast, Thailand's bubble was more concentrated around real estate and the finance sector. In Korea, the Government played an active role encouraging banks to lend to the corporate sector, while the Thai Government essentially failed to supervise and regulate the financial sector. Lending decisions were not based on sound cash flow analysis but inflated growth expectations and the illusion, the illusion that real estate and other assets represent safe collateral. The un-hedged foreign currency exposures and the large short-term nature of the debt brought about South Korea's crisis.

Now what is the solution? I have read in the Korean newspapers that this International Advisory Council has been brought together by the Federation Korean of Industries to try and help the Federation to resist President Kim Dae-Jung's efforts to break up the chaebols. I must immediately declare that I have no interest one way or the other to either preserve the chaebols or to destroy the chaebols.

I will now read you what the West would like you to do, and I will tell you what I would worry about if I wanted to get back on the track but not necessarily follow the prescriptions of the West.

First, their criticism. 'Average Chaebol Equity Ownership'. With only two percent of asset holdings, families of Korea's top 30 chaebols have been able to control 331 trillion won in assets, fully control board and management over investment, divestiture decisions not always business-focused, control the CEO and board appointments and displacements, financial decisions, dividends, borrowing, equity-raising, operational decisions, business contracts, pricing. In other words, it's unjust, it's wrong.

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‘Objectives for Corporate Sector Restructuring Versus Progress of Korean Corporate Sector.’ This is what they would like Koreans to do to become strong and prosperous. Build and maintain sustainable competitive advantage. That’s sensible. Which results in strong and profitable players with orderly market conduct. That’s also good. Which supports real economic value, no sorry, real economic growth and value creation. That’s also good. For which actions are taken quickly and decisively. In other words, the chaebols have been too slow in reacting to the crisis.

The problem, they say, is it is not clear what are the core businesses of the multi-business firms, the chaebols. And over-capacity and fragmentation issues are not yet fundamentally resolved.

If we can pause there briefly, I'll say that is the nub of your problem. You have developed five or six big chaebols and about 20-30 others, and they are like octopuses. They are in any business, in every business that's profitable and almost any business was for over 20 years profitable because you had this enormous, huge domestic dynamo. Hard working population, quick to learn, highly productive, huge savings, and you were in the easy catch-up phase.

What did they do? Make petrochemicals, textiles, and you can do likewise. What else did they do? The Japanese make ships, you can make ships cheaper. Japanese make cars, you make cars cheaper. So it was a win on almost every front. It led to over-capacity, misallocation of resources, and now the painful but very necessary rectification of chopping off the ones least productive and concentrating on the productive, and putting the productive as core businesses of new corporations.

I'm not a great fan of all things Western. You know me, I've had some arguments with your President about Asian values. But, I have watched, and I am convinced by objective evidence that you have only one way to go. In this globalized marketplace, we are either competitive, or we are out of business.

You are playing to WTO rules, IMF, World Bank, and with the added

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threat of a Super 301. So whenever it is uncomfortable for the Americans, they say stop it, never mind what the WTO says. But those are the rules of the game because they maintain peace and order in the world.

The Japanese, I believe, have come to the conclusion that they have to meet this competition. And I was cheered when I read Business Week. And it also accords with my experience of Japan in recent months, that it is no longer a government-driven effort to become competitive and stop the old system of allocating resources by spotting winners.

So I will quote what the chief executive of textile giant Daejin Ltd. said: "The Japanese system of doing business has hit a wall." Executives at the banks, long the most protected of all industries, fear the fail-safe guarantees are gone. "We are restructuring. But we are NOT restructuring, sorry, because the Ministry of Finance is telling us to. We are doing it because we need to survive," says Mr. Kaneo Marumachi, new president of Sanwa Bank Ltd. And the reason is simple. The presence of foreign companies in Japan is casting an even more unfavorable light on Japanese banks and domestic manufacturers. Foreign companies operating in Japan boast an average return on equity of 11%, three times the average of local companies. So the banks will just run out of customers! I am a Japanese, I am patriotic, but if I am going to get one-third of what I can get if I place it with an American or a German Bank, my patriotism must be overridden. And the signs are clear. Nissan has sold 37% to Renault, it's trimming, cutting down, and they are now into the Internet age. Restless energies are causing a stir in official Japan.

In other words, you are up against a new situation. The Cold War is over. Yes, the Americans do not want you to be overtaken by the North. But at the same time, there is no Soviet Union to threaten the Americans, and therefore they say, you shape up and play by my rules. Be democratic, be free-market, or you will be bankrupt.

Now can you be productive? I think yes. There's nothing that the American banker can do that you cannot do. You are not less skillful in

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manipulating figures or using accurate risk-management techniques. It's
from a different system. And you will have to decide how you move into
that new system.

So the real problem, as I see it, is not whether you want to change or
you don't want to change, but how you get from where you are to where
you must be.

Now I'm not sure that you can just break up the chaebols into
individual units and all will be well. I happened to have seen how
companies grow with the driving force of one creator, who is the
entrepreneur. And right or wrong, the founder chaebol, CEO, was an
entrepreneur. The trouble is the son may not be the same driver as
instinctively opportunistic as the father. Therefore, you have to develop a
different system. And the American system is stock-options. CEO doesn't
perform, well and COMPAQ goes down for one year. COMPAQ sacks
him, gets a new chairman who has to perform.

Well I'm not altogether sold on this method. But I think the principle
that you must get your system right cannot be refuted.

My fear for your chaebols is, if you just break them up into individual
units, and you just put managers in charge without an entrepreneurial
drive, they will whither away. But if you have a manager who is also an
entrepreneur, that corporation will thrive.

How do you do it? I don't know. Perhaps you get the headhunters, the
psychologists to run through your staff. I'm told that American
corporations like Mobile employ about 400 psychologists to go through
their staff, get a proper psychometric profile of them and find out if he's
got what it takes. It's not the final proof. The final proof is the
performance. But I was always reminded of Apollo 13, that sometimes
these ground level tests do produce some very viable results. As you will
remember, Apollo 13 ran out of fuel and would have gone lost into space,
had they not pre-tested the three crewmen on board for the stability of
character, the ability to be alert in a dangerous situation. That capsule

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would have gone into space, never to return. But they followed ground control, switched off the heaters, waited for the right around the moon and came safely back to earth.

Now if you can find good entrepreneurs who are also managers in that same way, then you have solved your problem. If you can't, it's bad luck.

But I think that's enough of your problem. If I were you, I would not argue with the President's advisors about whether you should or you shouldn't do it. You say, "yes, of course, but tell me how, if you don't want to break my company and put hundreds of thousands of workers out of jobs." And it's not you versus the President. It's the President and his advisors working with you and getting outside help to try and reshape your corporations into more competitive units. Thank you.

Dr. Kissinger

Mr. Sejima?

Special Advisor Ryuzo Sejima :
"Outlook for the World In the 21st Century"

Thank you, Chairman, for giving me this opportunity to address you. I am over 80 years old and I might not be able to enjoy the 21st century. However, I would like to offer you my wishes and opinions on the topic to the people who will lead in the next millennium. The 20th century was marked by two World Wars, many regional wars and other violent conflicts and a prolonged Cold War which was, in fact, a struggle between communist forces and liberal democratic forces to win the trophy of "World Paradigm."

The Cold War continued for almost 45 years following the Second World War. Economics and technological power were major factors that ended the power games with freedom, democracy and the capitalist market

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economy emerging as the victors.

With the collapse of the Cold War structure, the last decade of the 20th century is witnessing a dramatic historical change with a trend of the so-called *Globalization*. As the Cold War ended, the world exited from an era of power games and entered an age of economic competition. With the mechanisms of market economy, liberalization and democratization and the international standardization of law and accounting principles, we are facing an era of mega-competition, new business paradigms and borderless business structures that will dominate the world market and numerous collaboration and cooperation schemes among a variety of entities.

During the recent chaotic decade, the task for the international community has become clear. The world still faces problems such as localized wars or regional disputes that arise from conflicts between ideological, religious and ethnic groups. The world is still not free from potential threats such as international finance and currency unrest, energy and food shortages and environmental degradation.

The present is an era to prepare for structuring efforts to establish world order in areas such as global security, international finance, currency and environmental preservation.

Now, I will discuss the tasks of the international community for the 21st century.

First is the establishment of a world security assurance system. The past socialist regimes military deterrence capabilities have disappeared and the world is further exposed to the dangers of the possession and development of weapons of mass destruction, such as nuclear and chemical, by countries and regions that are involved in conflicts involving, among others, ethnic disputes. Preventing the spread of weapons of mass destruction and solving regional disputes are utmost tasks in Asia where dangerous tensions continue.

Second is to ensure sustained development of the world economy by stabilizing international finance and currency and by realizing Asia's

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economic recovery. The ramifications of the 1997 Asian currency and finan-
cial crises were felt in countries with weak financial bases including Latin
America and Russia. At that time, conditions were so serious that people
feared another world recession. Now with the Internet and the internationali-
zation of finance, business activities are not hindered by national borders.
Competition(merger and acquisition) and cooperation(joint ventures) are
commonly carried out among American, European, Japanese and Asian
corporations.

The activities of such corporations increased the influence of Asia's currency crisis and financial problems on the U.S. and European economics. Thanks to the efforts of international financial institutions and individual countries, Asian currencies are relatively stable now. However, to reestablish the economies of Asian countries through restructuring of those economies and industries, a foreign currency stabilization system is required.

■ Dr. Kissinger

Thank you. We go to Mr. Strong. Mr. Strong?

■ Maurice F. Strong :

"Opportunities facing Korean Industry in the 21st Century ;
Sustainable Development and peace"

Thank you very much, Dr. Kissinger. Distinguished Korean hosts and
international participants, first, let me say what a singular honor it is to
be in such distinguished company as a member of the International
Advisory Council of the Federation of Korean Industries, and to have the
opportunity of making some remarks at this Seoul Economic Forum. As a
long time friend and admirer of Korea, I have been greatly impressed, but
not at all surprised, at the rapid progress that Korea has made in

26 Agenda for the New Millennium

[L]

recovering from the economic and financial crisis that dealt it such a
sudden and severe blow just two years ago. Thanks to the strong and
enlightened political leadership of President Kim Dae-Jung and the
cooperation of the skilled and experienced industrial leaders of Korean
members of this Federation, I share a growing confidence, reflected by the
other speakers today and the international community, that Korea will
emerge from this crisis even stronger and better prepared to meet the
challenges and take advantage of the new generation of opportunities that
await it in the 21st century. Indeed, Korea's past experience in managing
change, in responding to shocks and setbacks, and in learning and
applying the lessons that arise from these, give Korea the qualities and
the opportunities to become one of the leading societies of the new
century.

And the Federation's new vision 2003 recognizes the need for the
business community, and particularly those who lead it, to become more
socially and environmentally responsive, as evidenced by the priority that
it is according to its social contribution program.

And I believe that this is essential. The system of market capitalism
which is driving the process of globalization and has brought so many
benefits to the world community must learn to be as successful and
responsible in addressing the environmental, social and, as Dr. Kissinger
rightly said, the human rights issues of society if it is to remain the
driving force in our society and is not going to be constrained by
increasing resistance on the part of people at the political, level at the
product level, at the consumer level.

Business everywhere has to be responsive not only to its domestic social
constituency but to an increasingly active and influential constituency at
the global level.

I will concentrate these remarks in two areas in which I am personally
involved that I believe have particular relevance to the opportunities facing
Korean industry in the world of the 21st century. And I am pleased to

The World in the 21st Century 27

LC

note that these have already been referred to in remarks this morning
sustainable development and peace.

The concept of sustainable development has become well-known but is
not yet well understood and, certainly, even less well applied. In its
essence, it is relatively simple creating a positive synthesis of the environ-
mental, social and human rights dimensions with the economic dimensions
of the development process. Or to put it in business terms, running Earth
Inc. with a depreciation, amortization and maintenance account. It is a
means, not an end in itself, the pathway I submit to a secure and
sustainable society. The real challenge is putting it into practice. As Swiss
industrialist, and many of you will know, Stephan Schmidheiny and our
friend Percy Barnevik and others have been making clear, and particularly
so at the Rio Earth Summit, which some of you recall, in 1992, the
important need for a change of course on the part of industry itself to
actually change the nature of industrial civilization, effect a radical
transformation for the current industrial model, which, accumulated
evidence makes it clear, cannot be sustainable.

In many respects, this transformation has already begun. Advances in
technology have driven the movement towards eco-efficiency, efficiency in
the use of materials and energy and in the prevention and reduction and
recycling of wastes. Science and technology have provided the tools and
the techniques to effect this transformation. And public attitudes, competi-
tion and social responsibility will increasingly become its primary drivers.

Korea's experience in transforming its economy from a poor country,
which with Dr. Kissinger I remember from my earlier visits here
beginning around the same time, to one of the world's leading industrial
economies as evidenced by its accession to OECD membership is certainly
instructive.

The dramatic growth of the economy was not always smooth. But Korea
has been adept at learning and recovering from its difficulties. Applying its
lessons and turning them into new opportunities. Still, as the recent crisis

28 Agenda for the New Millennium

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has made clear, Korean industry continues to face major challenges and vulnerabilities accompanied by a new generation of opportunities, and I know from our Korean friends that they are very sensitive to the fact that their remarkable achievements in overcoming these problems has not necessarily meant that the process of fundamental change should be put behind. One of the most important of these opportunities is, I would contend, in the field of environment and sustainable development. Perhaps the single biggest negative consequence of Korea's dramatic economic progress has been its impact on the environment on air and water quality; on the quality of urban life; and on Korea's endowment of natural capital. I am impressed and encouraged at the realization that Korean's now have of the costs that this has imposed on Korea in terms of health, quality of life, and running down the inventory of natural capital. On the positive side, a notable change is the reforestation of the country to the point that some two-thirds – I think approaching 70% now – of Korea is now covered by trees. And this represents a formidable achievement.

The Korean economic renewal provides a unique and timely opportunity to reshape Korean industry around the concept of sustainability and environmental and social responsibility. Experience in other industrialized countries the US, Europe and Japan has made it clear that in addressing domestic environmental problems, industry develops new technologies and skills that provide a basis for opening up of major, new industrial opportunities. In Germany's Ruhr Valley, for example, the need to reduce the environmental impacts of its traditional iron, steel and coal industries, which provided the original foundations of their economy, gave rise to new environmental technology and service industries that now account for more jobs and wealth creation than the traditional industries.

Eco-efficiency, which is the principal instrument of sustainable development, is based on the premise, supported by more and more evidence from practical experience, that industrial efficiency is the key to environmental performance, and that you cannot achieve effective industrial efficiency

The World in the 21st Century 29

over time without correspondingly good environmental performance. That the two are interacting and mutually supportive. And that the drive to improve environmental performance contributes to environmental efficiency.

This is borne out by the fact that the most efficient industrial economies are those that have been most successful in reducing the environmental impacts of their industries.

Two areas in which both the economic and environmental considerations provide a basis for special efforts by Korean industry to develop and apply new technologies and sustainable development principles are those of energy and water both of which issues loom large in the Korean future.

Korea has the technological capability and experience, it has the innovative capacities and the entrepreneurial skills to become a world leader in eco-efficiency and sustainable development. This, I contend, would be good for Korean industry. It would be good for Korean society. And it would be good for Korea's role in the 21st century.

The other area where, I believe, Korea's experience has important application to one of the key issues that we will be facing in the world community in the 21st century is the need to maintain peace and to prevent conflict an absolute precondition to any form of progress in the future. For as Korea knows so well, conflict exacts a heavy human and economic cost and deprives people of the benefits that a technological society produces. And Korea continues to bear the costs of maintaining a strong military capability to guard against the ever-present renewal, the prospect of renewal, of the conflict that has divided the Korean Peninsula. This underscores the importance of establishing the conditions for permanent peace that can only come about through removal of the basic sources of conflict the enlightened object of President Kim Dae-Jung's sunshine policy.

Finally, greater focus on environmental issues will inevitably require more cooperation between North and South Korea, for however divided this peninsula is in political terms, it is intrinsically united as a ecological

30 Agenda for the New Millennium

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entity. Nature does not respect the boundaries that humans have imposed, and the interest of both countries will require to an increasing degree cooperation in dealing with transboundary issues that are critical to their respective interests and well being.

It is encouraging here to see the role that Korean industry is playing in establishing the kind of industrial links with the North that will certainly help to forge and to develop the bonds of common interest on which peaceful reconciliation must be based. And this is particularly important at a time when there is so much difficulty in achieving real progress in developing direct political links, which of course have to be the next logical step. Surely, I would suggest, that this demonstrates that just as peace is an indispensable prerequisite to the flourishing of industry, industry can make an important contribution to establishing and developing the basic foundations of peace. I welcome the opportunity to bring these thoughts to you this morning. Thank you.

## Dr. Kissinger

Well, let me thank the panelists for making such heroic efforts to meet our deadline. Unfortunately, there won't be an opportunity for discussion now, because our group has been invited to meet with the President at the Blue House. So we hope to have an opportunity for discussion among ourselves later in the day. Let me thank the various panelists for extremely thought-provoking presentations, and we will adjourn until this afternoon. Thank you very much.

The World in the 21st Century 31

■ Alden Winship Clausen :

“Leadership and Reform ; Korea and Global Finance”

Good afternoon, gentlemen. I do want to thank the Federati of Korean Industries for the invitation to become a member of the International Advisory Council to the Federation, and for the hospitality that's been shown in the few hours that we have been here already. I thought the luncheon meeting with the President this afternoon was very revealing. Unlike some of you, I had not had a chance to visit with the President until today, and he evidenced, I thought, a wide understanding of the issues that were brought forward by the Council in response to his opening remarks.

Well, gentlemen, as I understand it, the mission of the International Advisory Council to the Federation of Korean Industries is not to criticize, not to tell what anyone should or should not do, because in the case of South Korea, you're doing well. But equally important, you recognize that there's much more to do. And you are well on the road to identifying the issues and the challenges that you face ahead. The deed is not done. But I say with my experience at the World Bank, that the deed is never done. Governments are always trying to improve on the performance through the introduction of new programs, trying things that are new, and fixing the things that go broke. Rather, as I look at the Advisory Council, we are here to learn, to share experiences, the experiences of the members of the International Advisory Council, and to be a sounding board for ideas that the Federation wishes to explore.

I'm going to refer to Dr. Kissinger's panel this morning because I think that the panel, all the members of the panel, provided a stimulating, if not even a provocative discussion of the manner in which the world is emerging into the next century. And all countries must have I'm going to say a clear vision, although it's kind of hard to say that Dr. Kissinger didn't have a clear vision, but no one knows what's going to happen just

36 Agenda for the New Millennium

[L]

around the corner. But we should have some idea and some common
sense of what is going to happen in order to take care of our day to day
activities.

I want to say before we call on our panel members to make their
presentations on this subject of "Global Economic Order and Korea" the
emphasis is on the international finance area. We've just gone through
what's called an Asian financial crisis. It started out on July 3rd two
years ago by the devaluation of the Thai Baht. If we didn't believe in
globalization, global interdependence, we have to believe it now with the
way that a one time action by an important Asian country, how that
spread, we've not invented a new word, but we've called it back into
common use contagion. We have to believe in global interdependence now
because the evidence is overwhelming.

Even countries with sound economic and financial foundations on which
they had built their economies have been impacted, as far away as Brazil,
Morocco. Maybe not many of you thought that the Thai Baht devaluation
would impact Morocco, but it has, as it has impacted the United States in
different ways and in different degrees.

Last year at this time, at the time of the annual meetings of the World
Bank and the International Monetary Fund, the code word last year wasn't
architecture. Everybody wants to change the international financial
architecture, so as to avoid situations like the financial crisis that we've
been through here in Asia.

What can we do? What should we not do? This morning I wrote down
these words from the discussion "We've got to get the system right,"
"We must have management," "We just can't let it run by itself," "We
must become competitive," "We must adapt the system that now operates,
not throw it out." And on the discussion of what kind of financial
architecture we need going forward to avoid the financial crisis that we've
just been through, there are ideas, extreme ideas from one set of very
prominent people known throughout the world that we don't need the

Global Economic Order and Korea(International Finance) 37

Fund, that we do away with the Fund. That they no longer serve a useful purpose. And to the other extreme, the response is, "what problem? We're all right. Look, even Asia is recovering, and recovering, in some spots like Korea, very well and very fast."

So those are the issues that this panel has been charged to discuss. That sets the stage. That sets the stage as well as I can. Then I'm going to call on the three panelists that we have, and I'll introduce them in a minute, and to leave time for questions and answers and a discussion and a dialogue, and I can assure you that I have a whole string of questions, I've got a great script, but I'm not going to use some things.

I've long had a love affair with Korea. I told the world in 1985, when the Bank and the Fund meetings were here, may I say parenthetically now that Jacques de Larosire, the managing director of the International Monetary Fund, and I, as the President of the World Bank, in about 1983, maybe 1982, but long before the meeting was scheduled, that the next meeting outside the borders of the United States should be held in Korea for a lot of reasons. One, to show the developing countries - other developing countries - around the world how a country can pull itself out of the deep morass, may I say, of being a rather poor country, and in 30 or 40 years, achieve the success that Korea has. To use it as a demonstration, as a hope for other countries developing countries who want to do the same thing. And to see that, for real, Korea had done the right things, they had the right policies, they worked hard, they had good communications, they had good theories. You Koreans won't believe this, but the Koreans are a very bright people, and not just technicians but visionaries, and I think that meeting has proved to be a success.

My reference point, which I picked up from the World Bank, is that in 1960, the early 60s let's not be precise in the early 60s. India had a GDP per capita per annum about the same as South Korea's. And it was around 75 US dollars then. Maybe Korea was a little ahead. It might have been 80. And 30 years later, let's now say 40 years later, 35 Korea is I

38 Agenda for the New Millennium

don't know where it is exactly, it dropped a little bit, but let's say it's
11,000 GDP per capita per annum. And India let's give it every benefit of
the doubt is 500. Why the difference between the two on development and
sophistication? Well, you could say a big critical mass is harder to move,
it takes longer, and India is a huge country, then about 700 million and
today, 35 years later, it's closer to 9 hundred million people. Whereas
Korea is about 45-50 million people. So, the critical mass is one you can
say that there are all these obstacles. You ride elephants, you were born
in the caste system, the touchables and the untouchables All of those
things which hinder and impede the progress of development.

It's a combination of those things that Jacques de Larosire and I wanted
the world to know and see and experience the success and progress that
Korea has expanded.

We've going to start off this afternoon I want to say that Lee Kuan
Yew, the Prime Minister, did not exactly give a Professor Schwab's pitch,
but he certainly gave a straight line to your pitch which Klaus is going to
talk to us about the Competitiveness and Vulnerability. You are going to
be followed by the colleague on my right, Mr. Sato, who is a Senior
Advisor at Dai-Ichi Life Research, and before that, in terms that I
remember him and know him, as the President of the Asian Development
Bank for 6 years as recently as the first part of this year, when he left
that Bank to become a Senior Advisor to Dai-Ichi Life Research Institute.
And our final panelist is Onno Ruding, former Finance Minister of the
Netherlands. I've known Onno a long time. When I was in Washington,
Onno was a stalwart participant in the Development Committee and the
Interim Committee, he is an internationalist himself, and now he is Vice
Chairman of Citibank. One of the reasons that Citibank is doing so well is
that Onno Ruding is there, I'm sure. And with that, shall we turn it over
to Professor Schwab, who is the Founder and President of the World
Economic Forum, 20 years ago in Davos. Klaus? The floor is yours.

Global Economic Order and Korea(International Finance) 39

■ Professor Klaus Schwab: "Competitiveness and Vulnerability"

Mr. Chairman, ladies and gentlemen, let me first express my joy to be a member of this distinguished group and to be useful to the Korean economy and society.

The topic of this Session is actually finance. But what I would like to do is to look at the inter-relationship between competitiveness and financial vulnerability.

Actually, in order to maintain growth in a sustainable way, attention has to be given to three different factors: macro-competitiveness, which is mainly institution and government driven; micro-competitiveness, which is enterprise driven; and vulnerability. My point will be that by bringing the house in order as far as macro-competitiveness and micro-competitiveness is concerned, it doesn't give necessarily the guarantee to be immune against international financial crisis.

Since 1979, the World Economic Forum has published every year its Global Competitiveness Report. And I would like to share first with you some of the key results of the 1999 Report.

If I look at the first 10 positions, we have at the first place, Singapore, at the second place, the United States, followed by Hong Kong, Taiwan, Canada, Switzerland, Luxembourg, United Kingdom, Netherlands and Ireland.

Korea occupies place 21, and even in 1999, is still in front of France with 23 and Germany 26, which shows the mediocrity of the macro-competitive environment in those traditional European countries.

We measure actually competitiveness on the basis of more than 200 parameters aggregated in 8 different factors. And we are constructing these 8 factors relying on statistical data but also on the 4,000 responses to questionnaires that we send out to our members and constituents.

I just want to run rapidly through the 8 factors. It's first, openness, openness of an economy to foreign trade and investment. Second, government.

40 Agenda for the New Millennium

This factor measures the role of the state in the economy, including the overall burden of government expenditure, fiscal deficits and so on. It's finance, number three, the sophistication of the financial system. Number four, infrastructure. Number five, technology, and this factor looks very much at the usage of modern technologies, like computer usage, the spread of the new technologies, the ability of the economy to absorb new technologies, the level of research and development. The sixth factor is the quality of management, the seventh, labor, and the eighth, the quality of institutions.

Now we define competitiveness, a country's competitiveness macro-competitiveness - as those are competitive countries that have the underlying macro-economic conditions to achieve macroeconomic growth for a number of years to come.

But identifying those eight factors that determine the macro-competitiveness of a country is not enough. It also has to be recognized that companies at the end represent the locus of competitiveness in an economy. And as the senior Minister already pointed out this morning, ultimately, a nation's competitiveness mirrors the sum of the entrepreneurial force of its companies. An economy cannot become more competitive unless companies become more entrepreneurial. Increasing a country's economic prosperity must therefore be based on the sophistication with which companies produce and compete.

We at the World Economic Forum, in cooperation with Harvard University, have also developed a microeconomic competitiveness index that measures how well companies perform relative to the macroeconomic environment. And here we measure such things as the quality of corporate strategies, the firms operating practices, the intensity of competitive pressures, the requirement level of demands and all the other conditions that account for rapid and sustainable productivity growth on the company level.

The microeconomic competitiveness ranking is as follows. As you would

Global Economic Order and Korea(International Finance) 41

expect, the United States is in position 1, followed by Finland, Netherlands, Sweden, Switzerland, Germany, Denmark, Canada, France at position number 9, and the United Kingdom at 10. You will see here, for example, that Germany, which ranks 25 in its macroeconomic competitiveness, ranks number 6 in its microeconomic competitiveness, which means German companies do much better than what you expect looking at the environment they are working in. That is underlined, of course, by the success of some companies, and the same is true for France.

Now if you look at the micro-competitiveness of Korea, Korea occupies place 28, which means its macroeconomic competitiveness is better than its microeconomic competitiveness. And microeconomic upgrading is therefore absolutely essential for the future of Korea.

Now let me look at some more future-oriented dimensions that will very much determine microeconomic competitiveness. First, we should be aware that we are changing from a hardware-based economy to a knowledge-based economy. Now, in a hardware-based economy, you could compete, and it was also mentioned by the Senior Minister, by catching up, by just learning to do better than your competitors. In the knowledge-based economy, it's a different game because the company gains its competitiveness from accumulating knowledge or value-added information. And it's very difficult to catch up upon an advantage a company has gained. It's very difficult to compete with Microsoft. So you could say in some way, in a hardware-based economy, you just have to be better than your competitor is. In a knowledge-based economy, you could say you have to be faster than your competitor is. So that's one factor that will determine the future of the economic race.

The second one is the Internet. And here, it's not just talking about the Internet companies that are springing up more or less in the different countries. The Internet is changing the business model of all companies. Let me just give you an example. There's a small company in the United States which was created 2-3 years ago which was the first company to

42 Agenda for the New Millennium

market very successfully automobiles through the Internet. This company has rewritten the business model for companies who want to sell cars today in the United States. And the traditional companies like General Motors, Ford and Daimler Chrysler had to adapt their own business model by adapting the Internet as a sales channel by taking the Internet as a means for their own sourcing. So companies which will not understand the Internet as a means and as an opportunity to change their business model will lose out.

And finally, in this respect, the third I mentioned, which will be of major significance for micro-competitiveness, is the role of the small and medium sized companies. I don't want to go into an analysis of the Korean situation, but it has been mentioned that this may be one of the weaker points of the Korean economy.

And I could say in a catch phrase that in the past, the big fish ate the small fish. In the future, it will be the fast fish which will eat the slow fish.

Ladies and gentlemen, I outlined macro-competitiveness and micro-competitiveness. Now turning to vulnerability. And have you seen that in our score of competitiveness, Singapore and Hong Kong fared and scored extremely well, consistently among the 3 top countries over the last 5 years. And nevertheless, those countries were also hit by the financial crisis.

Now we have to ask ourselves what causes a financial crisis, and I don't want to go into a long explanation, but there are three different I would say generations of models, and I have outlined them in the text that you have available. What is important is that all those three different dimensions or three different explanations for financial crises have one common factor, which could be summarized by the words international illiquidity. Defined as a situation in which a country's consolidated financial system has potential obligations in foreign currency that exceed the amount of foreign exchange it can have access to on a short notice,

Global Economic Order and Korea(International Finance) 43

international illiquidity leads to a high degree of vulnerability, regardless of
how sustainable economic policies appear and how well a country scores
in competitiveness.

Indeed, as many countries have painfully learned, the collapse of the currency, of the financial system, or both, may become inevitable once international creditors lose confidence for whatever reason and stop rolling over and demand immediate payment of existing loans.

That even the most competitive countries with sound economic fundamentals are not immune to sudden reversals of capital flows and abrupt changes in international asset prices is documented, as I mentioned before, by the high-scoring of Singapore and Hong Kong in the competitiveness report.

The lesson is, what we have witnessed was not the last financial crisis in the world. It was not the first one, it was not the last one. And the lesson is that we have to put attention simultaneously on three areas to create sustainable, strong economic growth.

First, fostering macro-competitiveness through the improvement of the eight factors that I mentioned before. Second, fostering micro-competitiveness through the creation of a highly competitive entrepreneurial market space. And third, greater risk awareness is important regardless of how competitive an economy appears. Conceivably, the so-called value at risk approach, which has been developed to assess the degree of market risk individual institutions are exposed to, could play an important role also in examining the vulnerability of entire countries.

Just a last word, competitiveness is a dynamic effort. It's a race where attention has to be given simultaneously to a high number of factors. I mentioned the 200 different parameters. And just as an illustration, on Tuesday evening at our East Asia Economic Summit in Singapore, I congratulated Prime Minister Goh Chok Tong for the first position of Singapore in the competitiveness index, and he told me but you ranked us 35 and I immediately asked my Education Minister to show up to see how

44 Agenda for the New Millennium

[c]

we could improve.

Ladies and gentlemen, I know we are living in a mega it was mentioned this morning in a world of mega-competition. I have been publishing already in 1996 about the so-called backslashes to globalization, making the point that the key in the 20th century was, the battle was, how to make capitalism more social. And the key for avoiding major conflicts in the 21st century will be how to make it was expressed today several times how to make globalization more human. But nevertheless, the key to economic reform is not only to catch up, but also to learn how to run. Every year, it's a competition. To learn every year, compared to last year. It's a double distance in half the time. Thank you.

## Dr. Clausen

In other words, Professor Schwab, no matter how powerful, how strong, how rich a country is, if you can't pay your bills when they're due, you're in trouble. And it's management is also a key issue as you pointed out. Well, so we've got a financial crisis. And the Fund is kind of front and center for criticism, Mr. Sato. And the discussion is, we've got to change the financial system so that we don't have another Asian financial or currency crisis. How about covering that subject for us.

## Senior Advisor Mitsuo Sato :
"Thinking a New International Financial Architecture"

Thank you very much, Mr. Chairman. Good afternoon, ladies and gentlemen, it is my great honor and pleasure to be able to address you all this afternoon.

Before entering into the substance of my discussion this afternoon, let me take a quick look at the essential nature of the Asian currency crisis. Simply stated, ladies and gentlemen, the Asian crisis was an entirely new

Global Economic Order and Korea(International Finance) 45

LC1

type of financial turmoil, as distinguished from the conventional currency crises we experienced many times and many places in the world. Neither was it a result of the Asian cronyism or nepotism as believed by some people, nor was it an outcome of over-valuation of the currencies of countries directly affected by the crisis.

The Asian cronyism and nepotism has so long a history that is it difficult to explain the sudden outbreak of the crisis on this ground. Also, the empirical studies tell us that the over-valuation of the currencies of the crisis countries prior to the crisis was marginal at most and is too weak a factor to account for such a drastic currency turbulence.

Rather, ladies and gentlemen, the Asian crisis was a so-called "capital account crisis," as distinguished from the conventional "current account crisis." Essentially, a combination of the external openness I mean an open capital account and perceived domestic weaknesses in terms of financial policy and institutions were the real culprits, unlike the case of a current account crisis where the villain is fiscal and monetary profligacy, I mean laxity. Because of the openness, massive amounts of foreign private capital flowed into the countries, causing substantial deficits in the current account of the balance of payments and asset bubbles, followed by the subsequent bursting of the bubbles. However, capital quickly flowed out of the countries due basically to the perceived domestic failures to use it productively.

Such a quick reversal of capital flow, amounting to 20% of GDP, has resulted in a serious economic crisis, giving rise to a vicious cycle between the currency crisis and the banking crisis. Banks and other financial institutions, already suffering from non-performing loans on the left-hand side of the balance sheet, were faced with a sudden increase on the right-hand side of it in the form of ballooning domestic currency equivalent of dollar-denominated foreign debt. This triggered a serious credit crunch and brought about a drastic downturn of the real economy. The real-economic fall, in turn, further exacerbated the currency decline.

46 Agenda for the New Millennium

Bet briefly, ladies and gentlemen, and subject to the slight differences among countries, this is what has happened in the course of the so-called "Asian financial turmoil."

Now one of the most important implications of this discussion is that this way of viewing the crisis can provide a consistent picture of what has happened in the Asian countries in the past 2 to 3 decades. In other words, to answer the question why the Asian economies, once called the most dynamic growth center in the world, abruptly plummeted into the crisis and are now recovering rapidly. Because of their very good economic fundamentals, they showed a phenomenal growth and enjoyed massive capital inflows in the recent past, but for some reason, the capital flowed out of them quickly, causing the vicious cycle. The ensuing real-economic fall, much more severe than in the case of a conventional current account crisis, has produced a substantial surplus in the current account through a drastic contraction of domestic demand. This in turn enabled the currency to stabilize, the interest rate to fall and the government to provide fiscal stimulus to the economy. As a consequence, economies in the crisis countries are experiencing rapid recovery, most notably here in Korea.

Now let me turn to the subject matter. Even though the Asian crisis is of an entirely new type, its economic and social damages were really great. For example, Indonesia has lost 14% of GDP in one year 1998 last year, which is really tremendous. You can see how large it is by comparing this figure, 14%, with the incremental economic growth that has been made possible by official development assistance. According to one calculation, Japan's ODA has enhanced the GDP in Indonesia by only 2.8% on a cumulative basis during the past 20 years, not each year, the World Bank by 3.8% and the Asian Development Bank by 0.7%.

Well, four months ago, ladies and gentlemen, G-7 Finance Ministers drew up a comprehensive blueprint on how the new international financial architecture should be shaped in order to avoid the recurrence of a similar

Global Economic Order and Korea(International Finance) 47

crisis, and I have no doubt that the blueprint needs to be implemented as soon as possible.

Major components of the planned architecture are five.

Number one, the international financial institutions, notably the IMF, have to be reformed and strengthened so that they can better perform their central role in the international economic and financial system.

Number two, greater transparency and best practices should be promoted in a number of areas to make the international financial markets work more efficiently.

Number three, financial regulation needs to be strengthened in industrial countries to avoid excessive risk-taking that can magnify the negative effect of any event.

Number four, macroeconomic policy and financial systems should be strengthened in debtor countries as a key to preventing the occurrence of crises. In terms of exchange rate management, financial systems and monitoring the international capital flow as well as in terms of debt management.

Number five and finally, a framework for private sector involvement in crisis resolution needs to be established in view of the fact that a quick reversal of private capital flow triggered the bewildering crisis. If the private sector can maintain its exposures in a country facing financial difficulties, the resolution of crisis will be much easier and the time before the country can regain market access will be minimized. Tools for such private sector involvement include, among others, linking the provision of official support to efforts by the country to seek voluntary commitment of private creditors, the efforts to seek specific commitment to maintain exposure levels and those to restructure or refinance outstanding obligations.

Summing up, ladies and gentlemen, the new international financial architecture set out by the G-7 Finance Ministers consists of 5 major pillars: a better IMF, greater transparency in international financial

48 Agenda for the New Millennium

markets, more prudence on the part of creditors and investors, more robust
financial systems in debtor countries, and involvement of private sector in
crisis resolution.

As I said earlier, the proposed architecture is no doubt helpful to prevent
a similar crisis from occurring again. Particularly, in my view, the private
sector involvement in crisis resolution, if implemented properly, would be
effective in minimizing the intensity of the crisis.

However, a few crucial points seem to have been missed in drawing up
the blueprint. Let me elaborate a little bit on it.

As I suggested at the beginning, the Asian crisis was an entirely new
one that had been caused by a sudden and massive reversal of capital
flow. It was not caused by over-spending at home due to the laxity of
fiscal and monetary policy. In this light, we may wish to continue to ask
if the policy prescription provided by the IMF was entirely satisfactory.
Did it not provide an old medicine for a new disease? While the issue has
been discussed at length among those concerned, clear consensus has not
been reached on what is the most appropriate policy prescription for this
type of financial crisis. The real core of the question is: is it appropriate
to prescribe fiscal and monetary contraction and immediate structural
reforms against a crisis of this nature? Was it not counter productive
because it further exacerbated the vicious cycle already in motion and
made the real-economic fall more drastic?

Let me take the Korean example to make the point clear, or clearer. In
Korea, credit contraction and associated difficulties in the real economy
emerged after, after the foreign exchange market began to stabilize around
early 1998. Bank credit continued to decline until the autumn of 1998.
Manufacturing production reached its trough in the middle of 1998, and
unemployment reached its peak in October 1998, resulting in a 6% overall
loss of GDP last year. Were it not for a high interest rate policy and a
higher capital adequacy requirement as actually adopted, the real economy
in Korea would have suffered much less. One expert argues that it is

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absolutely clear that the original target of increasing BIS ratio-capital adequacy ratio was an absolute failure. Self-aggravating forces of the credit crunch had resulted in unexpectedly severe rates in bankruptcy and unemployment and had brought down the actual BIS ratio itself to 0%. It is like Gyogak Salwoo, meaning, one short correction of the bent horn would kill the cow.

This way of viewing how the Asian crisis actually unfolded would justify an alternative set of policy prescriptions quite different from what was actually used. Such a new policy package would include.

Number one, timely provision of a large amount of financial resources with few conditionalities attached, at an early stage of crisis rather than time-consuming negotiations on tough conditionalities of IMF assistance and resulting delays in disbursements of actual funds.

Number two, neutral, if not expansionary, fiscal and monetary policy rather than fiscal austerity and monetary contraction.

Number three, unlimited and unconditional provision of domestic liquidity to the banking system rather than immediate dissolution of afflicted banks and non-bank institutions.

Number four, temporary suspension of capital adequacy requirement rather than its tightening.

Finally, coordinated demand expansion among the neighboring countries rather than addressing the issues separately in each country.

While I fully admit that the "bent horn" needs to be corrected, like the reforming and restructuring of financial systems and improving of corporate governance which is underway in many countries in Asia including Korea, but I'll say we have to consider keeping the cow alive first of all. Otherwise, such "correction" itself would become difficult to make. In this connection, the Asian Development Bank, on its part, concentrated on providing a historic amount of financial assistance 4 billion dollars to Korea as quickly as possible.

Without going into the different behavior of different financial institutions,

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I would simply say that the international financial assistance cannot but be political, I do admit it. Nevertheless, for the sake of international equity and in view of the large potential damage this type of financial crisis could inflict not just on crisis countries but worldwide, we need to establish the most appropriate set of policy prescriptions and best practices, backed by clear and common understanding of what happened and how we can best deal with it. Otherwise, the G-7 blueprint of new international financial architecture, although helpful, would leave out a most important point. Something like an opera without a primadonna.

Finally, ladies and gentlemen, the Asian crisis has given rise to the more fundamental question of what the human society should be like in the next century. In the aftermath of the crisis, a deep skepticism about the principle of laissez faire and market principle has arisen in the minds of many Asian people.

They say, is it simply right to make money taking advantage of any weaknesses of other people? Isn't George Soros himself admitting that international capital flows need to be controlled to make them sound? J. M. Keynes criticized the "flying" of money across the world as something undesirable to the basic standing of human life, didn't he? In the globalized financial market, people are responding to an incorrect copy of the real world, not the real world as such, creating a so-called virtual capitalism. Given the inherent volatility in such capitalism, are we not facing the serious danger of self-destruction at any time? At the same time, I'd say, it is true that those blaming the free flow of capital have often been its beneficiaries.

Well, the question is very, very fundamental and very much complicated. Time is too short to address these fundamental questions, and I'm not fully prepared to do that at this moment. One thing is quite clear to me, however. That is that we need not just a new international financial architecture, but also we need a new international human architecture, too, in the coming 21st century. Thank you.

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■ Dr. Clausen

I take it, Mr. Sato, that when we need a new human architecture, too, that you are referring to cloning as a way to solve these difficult financial situations. Well, you've raised a lot of issues. And thank you for your provocative solutions to the architecture. There are any number I read in the Herald Tribune yesterday - it might have been the day before a suggestion by Sir Alan Greenspan that, in the case of Korea and other countries as well, that you have to have alternative access to providing the liquidity that one needs. You have to be able to pay your bills, and if you are cut off in one stream, and he's suggesting the use of bonds long-term bonds. Only to allow 15 minutes on a presentation on a subject as complicated as international architecture really is criminal. And I think that you stepped up to the challenge, Mr. Sato. And I thank you for that. There are a lot of questions, and I'm sure that we'll get the time to have a few questions.

Well, we set the stage for you, Dr. Ruding. Now that Korea is on the right path, as I read this morning in the newspaper - thank you for that term, Henry Kissinger and we're on the right course, Korea is, how are we going to continue the growth and the progress and the restructuring in Korea? That's your topic.

■ H. Onno Ruding:

Thank you, Mr. Chairman. I too am very privileged that I can participate in this debate as a member of the International Advisory Council. I will try to give a presentation with pros and contras with respect to the Korean situation.

After the Asian crisis that hit many countries in Asia, including Korea, severely in 1997-1998, several of these countries have made substantial

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progress towards overcoming the crisis and addressing the weaknesses of their economic and/or political systems. Korea, in particular, deserves much praise for the remarkable macroeconomic recovery it has achieved. Most of the macroeconomic indicators now show a substantial improvement. And I want to single out one particular case. The current account of the balance of payments moved from a deficit into a sizeable surplus in 1998. The subsequent reduction of this surplus this year in 1999 is not surprising and, in my view, is actually a healthy development for Korea. Because after the impressive increase in exports and equally impressive reduction in imports in 1998, the Korean economy rightly moved into a more balanced situation this year by increasing the volume of imports towards a more normal level needed for continued economic growth of your country.

However, on the microeconomic side of the Korean economy, the current situation shows mixed results. On the one hand, the Korean business community, as well as the authorities, should be commended for their achievements in restructuring the corporate sector both industrial companies and banks by improving their competitiveness and their balance sheets. On the other hand, as you know, quite a number of Korean companies and banks have gone bankrupt or are today still teetering on the edge of collapse or are being kept alive by major injections of government funds that is taxpayers money or government induced support.

This implies that still more should be done to create a business sector in Korea that is still across the board healthy.

A factor that has played a major role in the Asian crisis was that the national banking system was and, I must admit, still is too weak in most countries in Asia actually all except for Singapore and Hong Kong. This weakness is not only a danger to the continuity of the banks themselves that is obvious but also to the general trust with which the soundness of the economy is held. It will undermine the ability and willingness of the banks to play their traditional and necessary role in financing domestic

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industry as well as financing exports.

Corrective measures were needed to address the underlying factors that caused these weaknesses of many domestic banks, including in Korea. Briefly, under capitalization, weak management, insufficient risk management and control mechanisms, lack of transparency in public information, loss of value of bank assets by a collapse of the domestic real estate market or financial difficulties in the corporate sector or insufficiently strict lending criteria, and, finally, too accommodating or inexperienced national bank regulators.

The business sector of each country benefits from a strong, healthy and active banking system. This is the case today in North America and in most countries in Western Europe. Whereas this is not the case in countries such as Japan, Korea, Indonesia, Russia and many others.

What is needed among other things are independent and powerful national bank regulators or supervisors, with expertise and sufficient policy instruments plus a proactive attitude. The creation of the Financial Supervisory Commission the FSC in Korea and its recent actions are a step in the right direction.

More in general, what is needed in any country is a high degree of independence and separation between the government, the banking sector and the large corporations, so as to avoid the situation where one sector of the society can exercise disproportionate influence over the others, which over time may lead to unbalanced and unsound situations with dangerous risks. In fact, the historic close ties between governments, the banks and the Korean chaebol, while initially critical to accomplishing Korea's rapid industrial growth and economic growth during the 60s and the 70s and the 80s, contributed to the Korean financial crisis in the 90s because the close ties were not properly used by all parties.

Another important aspect is the need to execute ambitious though painful restructuring programs to address unsustainable weaknesses in the industrial and/or banking sectors in many countries in Asia but also, I admit, in

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other parts of the world. The lesson is that lack of timely action now will
lead to even more painful situations later more bankruptcies and
unemployment and/or larger government bailouts with heavy burdens on
the national budgets and taxpayers. However, the actions taken must be
balanced among all sectors, with a realization that true restructuring is
ultimately market driven and is a longer-term process. To think that a
restructuring program of a large business group or bank can be completed
in a matter of weeks or months, is unrealistic and even potentially
dangerous.

Korea deserves praise for the substantial successes it has achieved over
the last two years in the area of restructurings. However, as in several
other countries, the necessary and unavoidable restructuring process of
both the industrial and the banking sector in Korea has not yet proceeded
far enough. Many, outside and inside of Korea, are concerned lest this
process of reform gets stalled as a result of complacency or a feeling of
reduced urgency now that the macroeconomic situation has improved.
Alternatively, there's the other extreme, with the macroeconomic situation
looking healthy, the corporate sector may be pushed too hard or too fast -
with unrealistic financial ratio requirements and target dates - to
restructure. Either outcome would be regrettable and dangerous, not only
for those companies and banks whose financial and/or competitive position
is still weak, but also for the Korean economy as a whole, if adverse
developments in individual Korean institutions affect foreign investors or
foreign banks willingness to deal with Korean companies in general.

Several aspects of this restructuring are still of crucial importance. First, and I start with that, the financial sector. In the case of several severely weakened banks and insurance companies, the Korean authorities and these institutions themselves should be prepared to accept acquisition by a respectable and sizeable foreign institution. This should be done not only to make sure that the weakened Korean institutions receive the necessary financial that is equity capital injections but also, and maybe even more

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important, that they can benefit from the input of foreign expertise in bank
management, in new financial products and in risk management. If
negotiations on those bank acquisitions drag on for too long, this sends a
negative signal to the world. That will be regrettable.

The second area where further action is important, relates to the necessity to improve the financial structure, that is the indebtedness, cash flow and profitability of many Korean companies. Many of them today are still more highly-leveraged than their peers in the United States or in Europe, although there are recent examples of significant progress in terms of improved financial performance and reduced leverage. High leverage could endanger survival, particularly if and when new adverse conditions arise, either in their own industry or country where the company works or in world financial markets in general. It is not surprising that international banks will then be inclined to reduce their exposures, in the first place to those customers whose financial positions are least strong.

A third and quite different factor concerns the need for adapting the prevailing Korean corporate governance and culture in general, towards what is more common in the USA and Europe. And I fully admit that not everything is perfect in these countries either, and there is no ground for copying everything that exists in the United States or Europe or Japan for that matter. On the other hand, experience shows that there is much merit to adopting a corporate governance that gives more attention to shareholder value, to the interest of outside and minority shareholders and to the need it was mentioned already to have more outsiders, both Koreans and non-Koreans, as independent members of the board who offer their own expertise and judgement. And it is also advisable to eliminate the reliance on substantial cross-shareholdings, cross-guarantees and cross-loans between the different companies within one industrial group. These support practices frequently reduce the necessary transparency for outside investors and banks. They also may not be in the best interest of individual companies and their shareholders and creditors.

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That leads me, as a fourth element, to the need for greater transparency and accountability: stricter accounting standards, further, faster and better disclosure of relevant corporate developments both numbers as well as new policies and annual meetings with open discussions to respond to shareholders questions and comments.

A fifth element is the ability to rely on a legal system that can match the standards of other OECD countries, particularly company law, bankruptcy law and the judiciary.

Finally, the willingness to allow a larger role for equity capital, both from domestic and foreign investors. This is related to the need for corporate transparency and reduction of corporate leverage, and particularly related to the traditional too heavy reliance in Korea on bank borrowing. All this, of course, I know, depends heavily on the efficient functioning of the stock exchange, a well developed system of specialized and strong financial intermediaries, and the willingness of the Korean government to liberalize international capital movements.

Further expansion, on a sound and sustainable basis, of Korean industry both large and smaller companies depends on the availability of sufficient equity capital and the willingness of companies to use this source. And it should include both portfolio capital, that is, the public capital markets for new share issues and secondary trading with domestic and foreign investors. It also should include direct investment through joint-ventures with, and acquisitions by, foreign corporations. Such an equity culture rather than a debt-only culture and such an open-door policy rather than a nationalistically focused policy of corporate ownership have nowadays become more and more commonplace in the USA and Europe. I'm happy to note that since 1998, Korea rightly has changed course in this respect by raising substantial amounts of new share capital for many Korean companies.

And this leads me to my final point, foreign capital flows. In the light of today's satisfactory surplus on Korea's balance of payments and Korea's

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ample external monetary reserves, there is now no need for Korea in contrast with many developing countries to aim at an increase of the overall volume of capital import on a net basis. Rather, my point is related to the composition of these capital flows. It is advisable to increase the gross inflow of foreign equity capital, to be invested in the share capital of Korean companies and banks. And this, in turn, is dependant on the successful completion of the necessary restructuring and liberalization process.

The other crucial factor for Korean industry and banks is the continued willingness of foreign banks to lend. This willingness is not primarily determined by the right pricing of bank loans but rather depends on the implementation of the measures that I have mentioned a moment ago as well as on the proper handling of recent cases of defaulted large Korean companies with substantial foreign debts outstanding. An acceptable outcome of these admittedly difficult cases is not only important for the parties concerned in those individual insolvencies. It also serves as a test case for the perception, in the eyes of creditors, of the way in which future problems will be handled. Fair treatment of the various categories of creditors, proper and fast disclosure of information, consistent government policies, willingness to take the necessary corrective measures, and an open dialogue with all creditors, are all of crucial importance to retain or regain a sufficient confidence level among investors and creditors, particularly foreign ones. Resumption of confidence will restore liquidity and normal functioning, with reasonable financing costs, not only of bank lending to Korean companies but also of the domestic corporate bond market in Korea. And this in turn will determine the appetite or the lack thereof-of foreign banks and investors to lend money to Korean borrowers in general.

In conclusion, Mr. Chairman, both the government and the private sector in Korea deserve praise for the substantial recovery in the macroeconomic as well as microeconomic areas they have achieved. However, the Korean

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private sector both corporations and banks has by no means yet done
enough to reach a sustainable and sound condition as the necessary and
credible economic-financial basis for further growth and avoidance of
financial weaknesses. Ultimately, this will be harmful to all parties
concerned. Not only Korean companies themselves, banks and workers and
investors in Korea but also to the Korean government and the Korean
taxpayer, as well as to foreign investors and banks. That means that
further restructuring efforts are needed. After years of successes with a
business model based on Japan, Korea is I think rightly moving away
from this traditional business model, towards a more, what you might call
Western approach. I don't like the word model so I use the word
approach. I think Korea is on the right track, and I support this change.
And the FKI, Mr. Chairman, can and should play a major role in these
efforts. Thank you.

☐ Dr. Clausen

Thank you, Onno, for a very thoughtful and thorough paper. Your
experience as a development banker, as the Finance Minister have served
you well. There was a lot of good solid advice there.

Now I hope we can have some discussion and some questions from the
floor. We passed over capital controls pretty fast. One of the causes of the
financial crisis in Asia was the quick movement, disappearance even, in
some countries, of capital. Does this call for capital controls, Mr. Sato,
such as established by Mahatir in Malaysia? How does one control,
other than in a platonic sense, good, sound financial management, not
over-extending yourself, having reserves, having alternative routes to
access of liquidity when the crisis hits? How do we solve this issue of
capital flight?

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pleased by the remarks by Mr. Schwab that the Asian financial crisis is really an international illiquidity issue. I fully agree with that view. Also, Mr. Sato rightly pointed out that one salient characteristic of the Asian crisis is that it occurred in the capital account rather than the current account. I think the two speakers spoke in the same vein. I think the one thing we should consider in working out some international financial and monetary structure is the availability of the liquidity. As even the Chairman pointed out, even if you're rich, if you can't pay the bills, you will be in trouble. But he can go to the bank. That's what banks are all about, you see. When the bank realizes that he has no trouble in terms of assets and in other capabilities in repaying the debt, then they'll be happy to lend the money. But in the level of international financial transactions that's not the case. That's well illustrated in the Korean experience. The shortage of liquidity really lay at the heart of the Korean crisis. Then availability of funds from international sources was the prerequisite to tide over this financial crisis. If a large amount of funds were available at the right time at the right amount, I think the IMF need not take recourse to the abnormally high rate of interest and the abrupt devaluation of the won, which really brought havoc to the Korean business community and weakened Korea's industrial base.

I, of course, realize that the IMF made its best efforts organizing the consortiums and also rescheduling the private sectors. They did their best. But IMF was constrained by inadequate financial resources and very unrealistic conditionalities imposed upon the borrowers. So the IMF had to take recourse to the very high interest rate and very steep devaluation, and that led to the credit crunch, mass business failures, mass unemployment, and to a 6% loss of GDP. And also, I have to mention, the rapid increase in the non-performing assets of the banking sector.

Now many big chaebols are falling. If you look at their financial situation, their debt abruptly increased right after the financial crisis, mainly because of the credit squeeze and nonavailability of funding, etc. So

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in contemplating the future possible restructuring of the international
financial structure, I fully concur with Mr. Sato's five recommendations.
But I'd like to add two more. One is that we have to reorganize the IMF,
so that it can really serve as the lender of last resort, with adequate
resources. Second, IMF and other advanced countries should refrain from
pressing developing countries to open up their financial markets prematurely
without making necessary adjustments domestically. So this is, I think, one
of the major lessons we learned from the Asian financial crisis. Thank
you. Mr. Chairman.

☐ Dr. Clausen

You're suggesting that part of the reason for the financial crisis in Asia, and the fact that it spread and hit almost all of the countries in Asia. Was it because some had opened up their markets prematurely?

☐ Dr. Nam

That's true. I think that even applies to Korea. Let me give you very
concrete facts. Before the crisis, the interest rate in Korea was twice as
high as the international rate. There are many international bank branches
operating in Korea. If they bring in money perhaps at 6-7% interest rate
from home, and lend it here at the interest rate of 13-14%, that makes
good business, right? And so, in 1996 to 1997, there was a rapid capital
flow to Korea, more than 40 billion dollars. Then what happened? It
appreciated the value of the won. It hurt export sectors. It increased the
cost of repayment for loans in terms of local currency. That also hit
businesses who had debt with foreign sources. So this illustrates that
before opening up the market, Korea should have carried out internal
reform. They had to have made the banks more transparent, and they had
to have strengthened their bank supervision, also they should have made

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all kinds of accounting standards more accurate and met the global
standards. My government has been trying that kind of reform since the
middle of 1980s but it's awfully inadequate, so much of the process was
delayed. So once the financial crisis took place, all the foreign investors
started to question the weakness of Korean banks and corporate
governance. But that was well known long before the crisis. It was no
secret in the international community that Korea? Corporate governance
was very obsolete and out of date and the banking sector was not playing
its proper role. This was not new to the international community. But
once the crisis set in, they made explicit issues out of those things,
making the situation worse and worse. So that precipitated the financial
crisis.

☐ Dr. Clausen

I have Dr. Kissinger with a hand up, and Mickey Kantor after that.

☐ Dr. Kissinger

I just have a question to Mr. Sato, whose paper I read with greatest
interest. My impression from reading the paper is that you say the IMF
made many problems worse by fixing problems that were real problems
but hadn't caused the crisis, and therefore, in that effort, compounded the
existing instability. And I would certainly agree with this as far as
Indonesia, at least, is concerned, which I consider a 90% IMF caused crisis
that would never have taken on these dimensions if the reform demands
had been more modest.

The second is, at the end, you have a whole series of proposals that are
very interesting to me and very unusual in the normal set of discussions,
which sort of suggest doing the opposite of what was done, injecting more
capital before the reforms, and a whole series of other things. But how

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LC

would you do this? There would have to be some mechanism to establish
this. You couldn't simply throw I mean, first of all, where would the
money come from? Where would the resources come from? Who would
administer them? And in the name of what? Could you explain that to me,
how that would have worked in this crisis?

☐ Mr. Sato

That's a very, very important point, Dr. Kissinger, and, in a sense, very
difficult questions. How to quickly provide enough liquidity to the banking
system and afterward restructure it. It's a difficult question, I think. The
only way that we can do that, I think, is through very strict conditionalities
imposed on the banking systems. Telling them that this assistance is
temporary and emergency measures not to defend you but to defend the
system, first of all. That means that after the systemic risk is over, you
have to restructure yourself, either by dissoluting yourself, so you have to
go out of the sector, or you have to merge with a more sound institution
or something else otherwise. So that is the only way we can do that.

☐ Dr. Clausen

Dr. Kantor?

☐ Mr. Michael Kantor

I'm not that distinguished, I'm not a doctor. Lawyers have JDs but we're not considered real doctors. I will just go back to the former comment, which was Mr. Nam's comment, that I appreciate. I think we have to be careful. On one hand, we can confuse capital controls or circuit breakers or closing an economy for reform. In other words, you've got to be careful not to run away from the reality, from everything, from

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accountability to strong financial institutions to supervision to accountability, all the other factors that we know are important for a strong financial sector, and mask it by capital controls that only provide for illiquidity and don't provide for reform. And we have to be careful as we go down that road not to go the easy route. The easy route, of course, is always controls, to close your economy, to protect yourself. In the end, that's a loser. Because in the end, that won't draw the kind of outside capital and technology transfer you need to build a modern economy. And so, there is this thing about what comes first. This is a chicken and the egg argument. What comes first? Do we have reform or institutional restructuring first, or do we get the money first in order to rebuild the economy? There has to be some balance, and the IMF may have gone too far one way, in conditionality, but frankly, going too far the other way, and not insisting on institutional reform in order to make sure that you're protected against these kinds of problems in the future, also would be wrong.

Dr. Clausen

It is a valid argument, and the reason why the Fund is not one of the most loved international financial institutions around, is that countries wait too long. They get sick, they don't want to go to the Fund because Dr. Schwab, next to me will know that I went to the doctor, that something is wrong with me, so they wait and wait and wait until they have to. Then they're so sick when they get to the doctor, that is the International Monetary Fund, the International Monetary Fund has to make an amputation, it's got to operate, take your appendix out or whatever, whereas if you had gone earlier, you wouldn't have to go through all that hell. And the point I'm asking, and even giving the answer given the time constraints, is that it's unfair, I think, to be as critical as we are of the Fund. If we didn't have an International Monetary Fund today, we'd want to create one. One with less bureaucracy, but we'd want an independent,

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neutral, non-political entity that's rich and has money in cash that's willing to come forward and help bailout and stabilize massive flight of capital from a country on a short-term basis to stabilize the situation so that a long-term cure can be effective. Now, that's what I believe and that's the way I look at it. And the Fund has made some mistakes, like everyone else in this room. I made three of four myself this morning. And everyone else has, too. But to not wait so long and be too critical of the Fund We need a neutral, more efficient and more effective Fund than we have, so I am against throwing it out with the bathwater. But to, at the margin, and some of the five suggestions that the Group of Seven came up with a few weeks ago when they met in Washington, is a right step. And I think the additions that Dr. Sato made and Dr. Nam, also, would improve it.

So with that, we'll adjourn. There's a break for ten minutes, make sure we come back in ten minutes, so we can finish the last session this afternoon. Thank you very much gentlemen.

66 Agenda for the New Millennium

■ Mr. Isamu Miyazaki :
"The Role of Korea and Japan in the 21st Century"

Ladies and gentlemen, it is my honor to chairman Session III on "Global Economic Order and Korea: Trade and Investment." We have three speakers to lead the discussion. Mr. Barnevik and Mr. Kantor and myself. The purpose of this discussion is to discuss how nations can compete to vitalize economy, trade and investment, and also to find the solution to secure the foundation of the development of Korea and Asia. Now, using the privilege of the Chairman, I will present my remarks first. Now I asked the simultaneous interpreters which is better, for me to speak in Japanese or in English to convey my message to you most clearly. The answer was "in Japanese." So, I will speak in Japanese, but the English translation of my outline has been distributed.

It is a great honor for me to attend this meeting and participate in discussions on the urgent problems facing us. Thank you very much for your kind invitation.

Since the end of the Cold War in the early 1990s, the world economy has experienced three great changes. First, there has been a shift in the people's sense of value from conflict to peace. On the economic side, more people have been focusing on improvement of life rather than on economic expansion.

Second, as a result of expansion and deepening of the market economy in individual countries, the world economy as a whole has been becoming a single market-oriented economy.

Third, the information and communications revolution has been changing the industrial structure, corporate management style and behavior of consumers drastically in individual countries, while on the international front, it has been diversifying and speeding up distribution and monetary transactions, making significant changes to the notion of time, space and distance, which has been characterized as the death of distance.

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Individual nations have been taking various measures in response to the above changes. However, the effects of such measures differ somewhat from country to country, which is a major factor behind the gaps in macroeconomic performances in recent years.

There is a group of countries, including the US and Canada, that has been showing favorable performance. This group accounts for about one-third of total world GDP. The US has been enjoying the most favorable performance. Since the beginning of the 90s, the US economy has been showing continuous stable growth, resulting in a lower unemployment rate, increased corporate earning and a balanced fiscal budget. Ahead of other countries, the US started to undertake deregulation, financial reforms and conversion of military capacity to civilian application, making a strong contribution to the favorable performance of the economy.

The EU, which also accounts for one-third of total world GDP, has been moving forward with its political and economic integration. However, economic reforms in many member countries have fallen behind schedule. Accordingly, the EU economy as a whole is stagnant and the unemployment rate is high. Reflecting these sluggish conditions, the new Euro, which started circulation at the beginning of this year, has been moving to a weak tone.

The Asian currency and financial crises, which broke out in Thailand in 1997, instantly had knock-on effects on Malaysia, the Philippines, Indonesia, Korea, Hong Kong and Japan. Major factors behind the crises were delays in structural economic and financial reforms in the region. Due partly to the lingering aftermath of the bursting of the bubble, the Japanese economy has remained sluggish since the early 1990s.

However, I believe that Asia has not lost the fundamental elements of economic growth, including diligent workers, high savings, high level of education and strength in absorbing new technology.

In the past six months, many Asian countries have been experiencing economic recovery, accompanied by an improved international balance of

Global Economic Order and Korea(Trade & Investment) 71

payments. In particular, in the second quarter of this year, all nine major
Asian countries showed economic growth. Korea's economic growth was
9.8% year-to-year increase over the first quarter. The high growth was
led by domestic demand, but exports also rose.

I believe that Asia will regain its vitality in the 21st century, making
use of these fundamental elements.

Since the beginning of the 1990s, the Japanese economy has remained in
difficulties. Major factors behind this are first, greater-than-expected
impact from the bursting of the bubble, resulting in increase in bad loans
at banks and an unstable financial system, second, delay in structural
economic and financial reforms aiming at responding to globalization of the
market economy, and third, some inadequate economic policies.

In 1998, Japan's economy contracted by 2% and the unemployment rate
reached a record 4.9%. In addition, reflecting poor imports, the current
account surplus expanded, and overseas investment declined, having
negative effects on neighboring countries.

In order to revive the economy, the Japanese government has instituted
packages consisting mainly of domestic demand stimulative measures and
financial system reconstruction measures.

Thanks to these packages, Japan's economy returned to growth in the
first two quarters of this year, and several economic indicators showed
that the economy had hit bottom. In fiscal year 99, which ends in March
2000, the Japanese economy is likely to return to growth in excess of 1%.
Corporate earnings are also expected to recover. Reflecting this outlook,
both stock prices and the yen have been strengthening.

On the negative side, however, the unemployment rate remains high. In
addition, corporate capital expenditure is, at present, very weak.

Consequently, for the time being, the government needs to continue its
economic stimulative efforts while promoting further structural reforms.

The necessary reforms cover a wide spectrum of fields including
industrial structure, fiscal and financial systems, the social insurance

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system, administrative systems and education systems. However, issues
such as timing of implementation and costs remain as difficult problems.

At any rate, Japan must carry out the reforms, although they may be
painful to some. The basic philosophy of the reforms should be as follows.
First, respect for the individual, second, shift to a private sector-led
market economy, third, stronger government accountability for policy and
fourth, more positive economic harmonization with other nations.

Fortunately, Japan, like Korea, seems to still have the fundamental
factors for economic growth: diligent workers, high personal savings,
strong technology development capability and entrepreneurial spirit. As a
result of the reforms, the Japanese economy is likely to take a significant
step on the road to a refreshed and vital economy in the 21st century.

In the 20th century, there were significant advances in technology and
manufacturing. At the same time, however, there were also regrettable
circumstances, including large income gaps within and between countries,
increased protectionism, colonialism, conflict and civil wars. In recognition
of this dark aspect, countries should cooperate with each other in order to
achieve coexistence and prosperity in the 21st century.

In particular, Japan and Korea should make the following efforts: First of
all, both countries must reconstruct their own economies. Japan should
overcome its economic slump and rebuild its financial system. If Japan
succeeds in doing this, it is likely to have a positive impact on its
neighboring countries through such means as increased trade and direct
investment.

Second, both countries should promote free trade under the regime of the
WTO and establish a reciprocal trade relationship.

Third, both countries should strive to stabilize their currencies by
exchanging information and managing the macroeconomy. In addition, both
countries should promote financial cooperation with neighboring countries
such as China, Singapore and Malaysia, and at the same time make efforts
to stabilize Asian currencies against the US dollar and Euro rates. In the

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future, the creation of a common Asian currency should be considered.
Japan should be positive in providing financial support to other Asian
countries.

Fourth, cooperating with neighboring countries, both nations should strive to achieve sustainable economic growth, balancing population increases, conservation of the natural environment and consumption of natural resources on a global scale.

Finally, with non-military solutions to international conflicts, both countries should increase the stability of diplomatic relations in Asia. This is likely to make a significant contribution to economic development not only in Japan and Korea but also in Asia as a whole.

Thank you very much. Because of the time limit, I'll give the floor to Mr. Barnevik.

■ Mr. Percy Barnevik : "Globalization and Growth Opportunities"

Thank you. Dear colleagues and participants, good afternoon. It is a great pleasure for me to be back in Korea again. You heard Henry Kissinger this morning talking about his visit to Korea for the first time in 1951. For me it was 18 years later in 1969. But I'm also 18 years younger than he. It has been an exciting journey to follow South Korea's development. What do you say, Henry, isn't that true?

■ Dr. Kissinger

Indeed so.

■ Mr. Barnevik

Over 30 years I have been here a dozen times. What I will do today is to start by pointing out some dramatic changes in the world economic

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order, seen from an industrialist's eyes. And then comment a little on what I see as challenges for Korea's business. I will focus on the micro level rather than macro level. It is sometimes said that countries compete, but in my mind, the competition should not be between countries. It should be between companies.

Now, there are two big trend lines. The one is the IT revolution that will fundamentally and irreversibly change our world whether we talk about entertainment, education, health care, consumption, communication or how companies are operated. All companies must become IT companies in a way. If I look at my own company, ABB, you see how they build electronics into everything from the smallest ten-dollar product to the biggest plant, and in the global network, you may design things in America or Germany, produce it in Brazil or India and sell it in Malaysia or Turkey. You have an increasingly borderless structure. You also see workbenches with engineers. Thousands of engineers in Ukraine, Russia, Romania, India earning 2 dollars an hour and being hooked up to R&D centers in Houston, Texas or Germany, designing plants for the world.

In Japan, I see similarly that Mitsubishi Heavy is using Chinese content increasingly, so that when ABB meets Mitsubishi in the Philippines or Argentina for a power plant, under the umbrella of the logos of these two companies, East Europe is meeting China. That is the new global competition. And IT has made it possible. In General Motors, bold and dramatic changes in IT have changed how cars are produced, sold, serviced and operated. Neither ABB nor GM is regarded as so-called IT companies. But nevertheless, they will stand and fall as to how they handle the IT revolution.

If I look at a real IT company in our investor group, Ericsson, who has been in telephones for 125 years, they now see mobile telephones integrated with data communications systems, which together with the Internet, is turning their telecom world upside-down in just a few years.

While this is happening, a second, more traditional industrial revolution is

75

happening simultaneously in the emerging world. Most of it in East Asia. The difference from the first industrial revolution is that this time, there are more than two and a half billion people involved, against 200 million a 150 years ago, and the growth rate is 4-5 times faster. The first industrialized country, the UK, took from year 1780 about 58 years to double their real living standard. United States and Germany took about 45 years, Japan 34 years from 1885, but from the mid-60s, it took Korea only 11 years. And big China, in the recent decade, took only 9 years. The later the start, the faster the growth.

Now you may ask, is that speed of development sustainable? And the answer is yes in the medium term. The reason is that these developing countries get access to available technologies and can jump several generations. For example, when you look at the shipyard in Shanghai, building oil tankers. They used hand-held welding from the turn of the century, but they didn't move to the 30s technology of Great Britain. They moved straight to automatic welding of the 1990s. They skipped 4 generations. So this speed of development will be kept up until you hit the technology ceiling. And that, Japan did some 15 years ago, if I may generalize a little. And what happened? Their growth rate went down dramatically to about the level of other industrialized countries.

Now, South Korea may hit the ceiling in 10-15 years. And Thailand, maybe, in 30 years. And big China maybe in 40-70 years, depending upon what region you talk about.

When I ran ABB, I had to reduce 60,000 people just during 5-6 years in Western Europe and North America, while we increased 60,000 people at the same time in emerging markets. You simply woke up and saw that where you had the factories, you didn't need them, but where you needed them, you didn't have them. If you're a global player, it is a matter of a massive transfer of production and technology East and Southwards to stay competitive globally.

On the one hand you have a tremendous job to build it up in the

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emerging markets, on the other hand, you have to handle the painful transformation in the old home countries. For example, in Switzerland, they have the highest wages in the world. There, we had to take out half of the whole assortment and move it to other countries. And you reduce from some 20,000 to 10,000 people, from 25% engineers, it became almost 70% engineers. It was a new company. And the content you have in manufacturing in Switzerland, the labor content, is not more than 3%. Then it doesn't matter so much if wages are high or low.

So this is an example of how you have to in a high wage country climb the technology level to survive. And those in the West who cling to labor-intense sunset industries, lobby for protection, they are doomed and they will get wiped out. The two revolutions I talked about, the IT revolution, the second industrial revolution, they go hand in hand with globalization. Trade grows twice as fast as production, and foreign direct investments grow 4 times as fast as production. And today 40% of all world trade is within subsidiaries of the big multinational groups, which can illustrate the degree of these networks.

Talking about the big multinationals, by the way, Klaus Schwab, he provoked me a little before when he talked about the fast small fishes that would eat the big fishes. Since I represent some big fishes, I have to say something in defense. I have another slogan that I used to say to my people. It was that "the biggest one will not be the future winners, but the fastest ones. But if the big ones become fast, watch out." So, it's not without hope.

Now, in this extremely short overview, I will not talk about social tensions coming from this transformation in OECD countries and emerging countries, I won't talk about the huge environmental issues that Maurice Strong, as usual, eloquently dealt with in his speech ; and I've not mentioned the so-called Asian crisis in the recent years, mainly because I think it is largely irrelevant to the long-term trends that I'm talking about. The crisis, within the long term, is seen as a limited aberration in

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the long term trend.

There are, however, certain threats to this development I have talked about. As regards the IT revolution, the threat is not on the macro level, but more in the individual companies. That threat is caused by the IT generation gap. You have what I call BC and AC people. BC and AC do not mean before and after Christ, which we normally use. But it means, before and after computers.

Those people who grew up with computers, had PCs early on, played with joysticks, games etc., they are the ACs and they are usually below 40-45 years old. But the older BCs, unfortunately, are over-represented in higher management. And with their non-computer background, they have difficulties to perceive the new opportunities, and it takes time until they retire or die off to leave room for the AC people. In the meantime, some of those companies may also die.

The shift in world production means also an increase of share of trade with manufactured goods coming from emerging markets. In 1970, that was 5%. Mid-90s, it was 25%. And I think in about 20 years time, it will be above 50%. And this represents a threat to certain groups in OECD countries. And those groups, they are the undereducated and overpaid people in these countries who will fight back at the new international competition. And they are well organized, at least in Western Europe. For many labor-intensive products, that fight is doomed to be lost.

You may remember, Karl Marx once said, "Workers in the world, unite." But the new slogan is, "Workers in the world, compete." Books with titles like "The Globalization Trap" are bestsellers in countries like France, and you see protectionism creeping up under different disguises. The level playing field, fair trade, environmental and social concerns often this is just disguised protectionism.

You see more and more abuse of the anti-trust. I see, for example, in the European Union, how a number of cases come up every year, and America has an unfortunate tradition in the same field.

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The traditional trade adversaries like the United States and Japan will be replaced by China and the United States.

Now, where is South Korea in all this? Well, in the past 3-4 decades, we saw a formidable, disciplined and aggressive hardware export machine establishing itself on the world map, often in the low-price segments. Picking up technologies from around the world, and putting them to a highly-productive use. This export machine was complemented in the 1990s by highly-leveraged and growth-oriented investments by the chaebols in many countries. At home the big conglomerates dominated the partly protected domestic market with very broad product programs. Then came the crisis in 1997. And I think enough has been said about it, the courses, what actually happened, Korea's restructuring, how it's coming back now.

There are just two things I want to say. I said one and a half years ago that the first country to come back and to come back the quickest will be Korea, because the mixture of that underutilized modern industrial capacity with the lower currency would be dynamite and an unbeatable combination for a quick, export-led recovery.

Second, I would say that the transformation Korea is undergoing, with financially more stable, transparent companies, privatization etc. will make Korea even stronger, the Korean companies in the medium term.

But it is interesting also to ask, how will Korea in the long term be able to adjust to this new environment that I've talked about. And to be a winner also in the next 2-3 decades. Let me mention a few challenges.

Low-priced volume export will no longer be the winning recipe, as 1-2 dollar per hour countries start to come from below the world market, like China.

I just had an interesting breakfast discussion with the biggest Korean steelmaker, POSCO, yesterday about changes in the Korean steel industry, with higher added-value, quality, higher price per kilo, etc. Western Europe dominated oil tanker production after the War. Then the Japanese took

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over, then the Koreans, and now we see China coming up there, ready to
take an immediate chunk of that business. And this we will see happen in
segment after segment. I inaugurated yesterday a new industrial complex
in Chonan, south of Seoul, and I then realized, when I discussed the
budgets and the future business here, that the time of the large plants is
over. Of course, not completely, but not as it used to be. The new
refineries, the steel plants, the shipyards, the power plants, etc. Now come
service, automation, upgrading of the existing industrial structure. Both
domestically, and in exports, service and knowledge-based products must
increase their share of the industrial activity in Korea, as it has happened,
in particular, in the United States, but also increasingly in Europe.

Another question, will the Korean conglomerates succeed to transform
themselves from broad, domestic-based product programs to be leading,
global players in more focused areas. That happened in my old home
country, Sweden, 50 years ago. Most companies there, the big ones, of
below 5% in Sweden, they are all in the global niches. The last
conglomerate, Volvo, they sold off their food and drink business that was
mainly domestic, and they concentrated on automobiles. And they are now
number two in the world in that particular category. It will be interesting
to see how Korea comes through this.

Personally, I am a bit skeptical of the government-forced restructuring of
these just now very criticized chaebols. They have very different
individual situations, as I know them, and the approach cannot be
standardized. Direct government intervention is seldom a good method.
Instead, I think, the rules and regulations ought to be changed, those rules
that were the breeding grounds for these broad-based conglomerates to
develop, then the market forces will force restructuring on several of these
companies. By a so-called "natural process"

We have seen the big Korean investments abroad in the 90s. Will they
now be able to build a true global network? Can these Korean companies,
who are now represented in many countries with manufacturing and

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engineering, integrate? Can they offer careers for Europeans, for Americans? To fully capitalize, they must build these networks. It's one thing to run a homogeneous Korean export company, and another thing to run a global network with many cultures.

I came here straight from Brazil, and I just want to tell you a story I heard when I was down there that illustrates the difference in cultures. This was a governor of Rio de Janeiro who was fighting an election campaign. Then a rumor came out in the media that he had no less than 16 illegitimate children outside of marriage. And there were rumors that there were even more children. Now, such a politician would, in Europe, be dead, would have to withdraw, maybe except for France. But do you know what this guy did? He changed his election slogan and said, "Vote for me. I may be your father." And he won. Illustrating different cultures.

Finally, a challenge with an improved corporate governance, which several talked about during this conference. The need to eliminate some of the cross-relations between related companies, and to make visible all these many off-balance sheet agreements, which make the true financial status difficult to really see. I have, in my time, bought over 150 companies, but I have to tell you that Koreans due diligence is among the most difficult in the world, including Russia. But I think that increased dependence on foreign loans, credit ratings, more foreign capital will, over time, push that process, and I think that will improve.

The answers to some of these questions I've raised here regarding Korean industry, they will, in my opinion, determine if Korea will become a success story also in the coming 2-3 decades. Korea's ability to adjust to the environment in the past, speaks that it will succeed again. But the recipe is certainly changing. Thank you.

Mr. Miyazaki

Thank you very much, Mr. Barnevik, for a very interesting and

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constructive presentation.

We often use the word competition, and Japanese as well as Koreans perhaps, use this competition as a competition among nations, not among companies. But I think it is an important point in the market economy. Thank you very much.

Now I will give the floor to Mr. Kantor, and this morning Mr. Lee Kuan Yew mentioned in his speech that the US government put big pressure on Japan in opening up our import market. But at that time, I thought that was not pressure. Pressure means that by power you are pressing us to open up our market. But at that time, we Japanese needed to open our market. So it's not the proper word to use pressure. At that time, Mr. Kantor was responsible for negotiation, but I think...

■ Mr. Kantor: "National Economic Security in a globalized World"

Thank you Mr. Miyazaki. I don't know what you're talking about, I've never pressured anyone into doing anything.

I wanted to build on what Mr. Percy and Mr. Miyazaki said so eloquently, and talk a little bit about the reality of what we have talked about the whole day today. The War over globalization interdependence is over, and it has been won by globalization. We are interdependent, we've joined at the hip and it's not going to change. Now, the battles are just beginning. What's fascinating is that it's the strangest war that anyone has ever fought. While we are in the reality of globalization, we will find in our internal politics, markets and institutions, these battles will continue to go on. It will have an adverse effect not only here in Korea, the United States as well and other countries, and Japan as well, as we fight these institutional and political battles over protectionism, isolationism, whether or not we're going to join the world economy, how we're going to do it, whether we're going to open our markets become accountable, transparent, build, secure and supervise financial systems and all the other institutions

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necessary for a strong economy. However, those who recognize interdependence first and react to it, those who are in the words of Mr. Schwab and Percy the quickest, are going to do the best, are going to be the most successful.

What's interesting is how far Korea has come in just a few years. When I first became the United States Trade Representative, the fact is, the Korean economy was mostly closed. It was not only closed to trade, it was closed to investment of course. We all know investment leads trade. The Korean economy today is more and more open. Is it totally open? No, is the answer. Is it opening fast enough? I hope so. Does it need to open more? Of course it does. All of us need to open our economies more because it is in that way you can take advantage of what the global economy has to offer.

Let me make three major points and then expound a little bit more on each and then we ought to go to questions because everyone's been sitting here quite a while. First of all, in order to take advantage of a global economy, interdependency, the end of the Cold War, the rise of technology, you must engage in economic reform. Everything from the rule of law to transparency to financial supervision to international accounting standards, trade facilitation, deregulation, privatization and soon. That must take place and as fast as possible or you can't take advantage of a global economy.

Number two, political reform. As strong as your economic institutions and corporations may be, unless political reform has been achieved, unless your political institutions are operating effectively, you can't be successful in your economic reform. Let me explain why. In a globalized interdependent world where economics has joined the foreign policy table, political, strategic and economic issues are part of a three-legged stool. If any one of which is out of kilter, the stool falls over. And so in order to make sure it doesn't fall over, you have to think three dimensionally all the time politically, strategically and economically. And at any one point in time,

Global Economic Order and Korea(Trade & Investment) 83

any one of the three might be primary or take prime consideration, but all three will be affected. Just look at your relations in Asia or the US relations with China, which Dr. Kissinger and I were talking about earlier, is a very complicated process of trade-offs and considerations as we look at all three of these aspects.

Third, of course, is developing human resources. You can move capital, you can move technology, you can move businesses, you can move 10,000 workers out of Switzerland, and hire workers in India or in Pakistan or in Ireland. People are the hardest asset to move and they are the most valuable. Even in the global economy driven by the information age, there is no more important asset. So as we engage in economic and political reform, the reform of our educational system and developing our human resources becomes the most valuable asset that we have. And unless we do that, you won't be able to compete. You won't be able to win. Winning means higher standards of living, more jobs, and a better quality of life. This was talked about at the first panel here earlier today.

Let me make a couple of more points. More precise. We are about to go into the new millennium round of the World Trade Organization. There will be many differences of opinion over how that should be carried out, what issues should be joined and how they should be resolved. However, none of us should be afraid of not only joining in that round but pursuing more open markets and creating a better more open world trade system. Not a free trading system. That's a misnomer. We don't want free trade. We want regulated trade. We want to manage our problems. We are so interdependent we are in each other's pockets. What the US does with certain laws and regulations affects Korea. What Korea does, in terms of your industry, political or economical forum affects the United States. Profoundly. And so as we look at these issues we have to make sure that we harmonize our approaches. That doesn't mean that we harmonize the way that our cultures operate but harmonize our approaches and directions in order to take full advantage of a global economy, which I indicated

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before, is a reality whether some people like it or not.

What I think we ought to do now, Mr. Chairman, it's about five thirty, I think, let's take some questions because at six o'clock we've supposed to end? I appreciated your listening and your attention. Thank you.

Mr. Miyazaki

Thank you very much, Mr. Kantor. As he said, we have to go to the Prime Minister's residence by six thirty, so that we have to close the session at least by six sharp, so I ask for your cooperation. Now, the discussion is open to the floor. Yes, Mr. Kissinger?

Dr. Kissinger

Could I ask Mr. Barnevik a question and Mr. Kantor a question? If I understood you're correctly, Mr. Percy, you were saying that when your technology is relatively poor, it's possible to make big jumps? But once your people get into the highly-developed areas, then the margins get smaller and the growth percentage - wise - gets more complicated. After that you don't make 10% growth, you make 2, 3, 4% growth. Now, two questions. One, what happens to societies that are used to 10% growth as they slide down to 2 or 3% growth? Secondly, can everybody do it? Or will more and more fall by the wayside as they approach the narrow end of the spectrum? Societies, now, not individuals.

And when we talk of an international system, what then happens to those who lose the competition? I know people say everybody can win in the competition, but that's only theoretically true. Then, what kind of a world order will it be that is so sharply differentiated? These are my two questions to you.

My question to Mickey Kantor. We both served in the American Government. And even though every administration thinks it's widely

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different from the other, the basic problems are more or less the same. What you say is absolutely true, except there's no mechanism in our government to look at it. When you say we are in each other's pockets and we have to take the general view into account, but you know, at least the administrations that I know well, and I have the impression, the one in which you served also, problem is, they solve one problem at a time. And some pressure group gets a hold of you, and you think it's easier to meet their problems than to get rid of it, and the next thing you know, you're in a horrendous crisis. Take the WTO decision. I'm convinced that President Clinton has every intention to have good relations with China. He was advised not to go ahead with the WTO agreement, and in my view, for purely technical, limited, political reasons. And he thought he could do the same thing a few months later when it would be more convenient for him. He didn't realize the impact he was having on the whole Chinese system. And I suppose this is becoming increasingly true as other governments reach the levels of sophistication of their economy that Percy describes. Some thought has to be given as to how these governments get organized, and then how international machinery get organized to take care of this. Those are my two questions.

Mr. Barnevik

Well, should I start? You asked what happens when a company hits the ceiling. But when your technology starts to become state-of-the-art, you don't have any possibility to grab it, to license, to steal it or whatever. You have to develop it yourself. Now, we have a live example, Japan. That's exactly what has happened in Japan. In the 50s, 60s and into the 70, Japan had this tremendous growth, you know, the average was 8-9% per year. Industrial production, even bigger. Then in the mid-80s, they hit the ceiling. They had to develop themselves, and their growth started to go down to 3-4%, still a good growth for a mature country, but down to

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3-4%, less than half of where they were before. Then came the financial crisis with the financial institutions and all that. They were going to the 90s, where they had terrible development, but that has nothing to do with what I'm talking about now. I'm talking about Japan caught up in the mid-80s average, and that led to that country coming down in growth. And that will also happen in Korea. The question is when. And I estimate that 10-15 years or so, Korea will be where Japan was in 1985. And then you have to live in a society that can't grow by 8-9% per year. It will grow by maybe 3-4%, if you mange it well. It's not a very sophisticated theory, but I think we can see around us how that is happening.

Now, your second question was, what happens to the losers. And you referred to Switzerland there. Well, you can ask yourself what happened to the 10,000 people that had to leave, mainly blue-collar workers, mainly clerical people Well it was painful, it was difficult. Some pre-retired, some went into the service industry, some went into the smaller sub-suppliers with lower overhead to survive that way, and some became unemployed. Now this happened rather fast, and then it is always difficult to handle. Switzerland is a rich country, they have a good network, so we could do it there. It is worse in countries that don't have a good network. If you take over a plant in St. Petersburg with 3,000 people, and you only need 1,000, you can't get rid of the 2,000, because they end up on the street. They have no network. But in the Western world, you have a network. But the big challenge for countries in, let's say, Western Europe is to build other sectors the service sectors. We're down now to about 18% industrial employment. That used to be 35% in the 50s. America will be the first country to go down below 10% in traditional industrial employment. And look how that country is developing with the service sector, with the IT explosion you have there. So it's up to the countries now not to protect the coal mines and the steel plants and the metal plants and the cement plant, but realize that they are doomed, and they have to make an orderly retreat. I saw what it cost in Western Europe

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with the shipyards that they kept 20 years too long. I think it cost Europe
Scandinavians, Germany, Great Britain maybe 40 billion dollars in extra
losses, because they did not realize the fact that they were no longer
competitive and that Japan had taken over and, later on, also Korea. So I
think it is a big challenge for the Western governments not to be caught
up in the defensive. And the problem is, people who are on the losing end
are well organized. They are allowed management, unions, they have a
vote. But the people who are coming into the IT industry instead to
export, they are quiet because they're not employed yet. So you have a
tremendous imbalance in the pressure groups on governments.

☐ Dr. Kissinger

But that isn't my question. It's a terrific answer to the present problem,
but I'm asking you what happens 10-15 years from now when you don't
have that growth compensation.

☐ Mr. Barnevik

You mean in Korea?

☐ Dr. Kissinger

Anywhere.

☐ Mr. Barnevik

Well, I said that they would then have to grow at a slower pace. But I
don't see any recipe for Korea for the next 30 years at 8% average
growth. I mean, I don't see that in our society as it operates. I think they
have to be prepared for a lower growth.

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☐ Mr. Kantor

It's a question of demographics, to some degree. I want to try and answer your question, because I think you and I agree on your question, and I think you'll agree with my answer. We are increasing the population of the world at an ever decreasing rate. In fact, some people believe that we're not going to make 9 billion, we're going to be much less than that by the end of the next century. So the answer to your question is, trade and investment worldwide can be a win-win situation. If we curb population, it begins to drop, therefore we're creating more value-added jobs and we can, in fact, increase standards of living while transferring jobs and industries from country to country. At least that's what I believe. Maybe I'm an optimist, but I believe that.

☐ Dr. Kissinger

I'm just trying to look for information, I don't have a fixed view.

☐ Mr. Kantor

Let me try to answer your question. I think this is a question of every country in the world, not just the United States. It's the domestic political necessity versus international realities. Most nations, certainly democratic nations, in fact, non-democratic as well, are driven more by the internal political necessities than their international realities. Let me give you a couple of examples in the US. Look at the steel industry driving the president to do things, which under other circumstances, he may not have done. Rice farmers in Korea have enormous political strength and will drive Korea to take positions in the WTO which may not be strictly in Korea's interest in the future, given the value of rice versus the value of your DRAMs and other industries that you've developed and you're

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among the best, if not the best in the world. In order to square that circle,
it seems to me, what we have to have is discipline and focus, which is
very hard to come by in today's political reality. Frankly, and going to
your question directly, if we had run for office in 1992 on the basis of
international trade and finance and building America's interest in the world
with 4% of the world's population by definition, 96% live outside our
borders therefore, if we're going to build our standard of living in the
United States we must build more, bigger, richer markets outside of the
United States in order to impact those markets in our national interests.
We didn't build that case day after day after day. We built a domestic
economic case that was very compelling, given the results of the election,
which actually was carried out to a great degree and was successful.
However, when faced with international political and economic realities,
because we haven't laid down the foundation politically, and to have the
strength politically, we are constantly pushed towards our domestic
political necessities. I don't know how you found it, but that's the way I
found it in the administration. It makes it very difficult, even in the
world's richest nation with it's most powerful military to move certain
international issues when they're clearly in the US' interests. China's
interest in the WTO can't even be argued on an electoral basis. It's
strictly in the US' national security and economic interests for that to
happen. It's in the interest of Asia for that to happen. In the interest of
the world. Yet President Clinton, who has been as internationalist in his
politics, as was President Nixon, could not move his political agenda, he
believed, while taking on this international reality. Therefore, the
international reality suffered, the domestic political necessity held sway,
and in fact we find ourselves in a much more difficult position than we
would have been in had another decision been made.

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☐ Ambassador Kim Hak-Su

My name is Kim Hak-Su, I am Ambassador for International Economic Affairs. My question goes to Mr. Kantor, and also to Mr. Onno Ruding.

☐ Ambassador Kim

My question is about the speed of adjustment, speed of reform and restructuring. We all agree on the interdependence of the economies and the need to reform, but often, we question ourselves. Perhaps our speed is too fast. Our conglomerates here were asked to restructure within a very short period of time, such as six months, sometimes one year. Is there any adequate speed of restructuring, not to make too much pain or suffering? And in my opinion, maybe the expectation and predictability are also important. If we've asked to readjust or restructure within a reasonably good time, then I think and hope that we can avoid some pains and suffering. What is your opinion about that?

☐ Mr. Kantor

In my opinion, change can come too fast. You can restructure so quickly that you will not have a basis of support both in your population, your business community and the political community to make it stick, to make it effective. However, your direction has to be clear. If you're moving in the proper direction, and it's clear to your public and your political system and to your other institutions, then, in fact, I think you can have a step-by-step, graduated, consistent move towards reform. I agree with you that reform over a too short a period of time, changing institutions without the kind of support that you need to do it, can be a shock the system can't stand. On the other hand, you've got to show that you're moving towards reform, you've got to be consistent in doing it, it's got to be

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done at an ever-increasing pace.

☐ Audience

You can also go too slowly. Which is better? Too fast, or too slow.

☐ Mr. Kantor

Goldilocks. Just right. Not too hot and not too cold. Just right.

☐ Vice President Sohn Byung-Doo

Mr. Barnevik, would you give us your opinion on the government guideline for companies to reduce their debt ratios to 200% by the end of this year?

☐ Mr. Barnevik

Well, what I said, even if I spoke rather fast here earlier, was that, generally, I don't believe that the government should interfere with individual companies, setting up financial ratios. It is a special situation here in Korea, admittedly, but you have of course very different situations for these companies. Some have written up their assets, so they look better, others have not written up their assets so much. I think that has to be done individually. And I think it is a little dangerous to put 200% across the board for a number of companies as a direct order from the government. Then you're back to a state-ruled economy. And as I said, it's better to change the rules of the market, so that the market forces will force companies who can't borrow money, who can't attract capital, who can't make the necessary investments. They have to sell off, they have to shrink. I've been through many restructurings where you've had

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to cut the investment program in half. We had to sell off part of the company to get a decent cash flow and get back on our feet. So it is a little strange situation where you have this type of government decree per individual company. That's my general view on that. Even if the bankers, I'm sure, are happy that they intervene in that way, but I really don't think it is good for the general economy.

☐ Mr. Ruding

Mr. Chairman, may I come back to the question about the speed of restructuring because Mr. Kim also addressed me about the very important and difficult question for Korea.

Well, first, I would like broadly to underscore what Mickey Kantor has just said. He was quite right that the most important thing for any country, including Korea, is that one shows a credible progress with respect to concrete measures of reform or restructuring of the corporate sector or the banking sector. But life becomes much easier if one starts early. And some countries have started early. And then by definition, you have more time. But when one starts late, that's sad, but then you must move quicker in order to present a credible outcome, because the patience of the international community is rather short. So, for me, it is vital that one, in any country, can show major steps forward. If one is then able to achieve a lot within a reasonable amount of time, but not everything, I think that is acceptable and credible to the markets. Now, to be more precise, because I think that was the background of your question. In Korea, as you better know than I do, the government has put a very precise deadline to all the large chaebols for the reduction of their leverage. If I'm not mistaken, the beginning of the year 2000, which is pretty soon. And we have never said that deadline is holy. I would not mind if it would be a bit later, provided that one really makes rapid progress towards that end of a substantial reduction of the leverage. So

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one should not be too bureaucratic or too formal on these matters. And if a company, to be very concrete, does make progress, and there are several of them here represented in the room, that's fine with me. And if others do not make substantial progress, then one has this warning signal already telling me. And then the ultimate deadline, we all know that it becomes very unlikely that you will make it. So it depends on the individual case, that is my final word, I won't care to generalize too much.

Mr. Miyazaki

Thank you very much.

Mr. Barnevik

Could I say a word about that restructuring? I think when we talk about Korea, we talk about some or a lot of company restructurings. And I would say that the risk if they restructure too fast is almost zero. Very small. The risk to restructure too slow is big. And that's also true for a country. I think you have so many vested interests, so many slowdowns in such a process, it's painful. It's not popular, you have lay-offs, there are all types of reasons why you'd like to defer it and slow it down. So I think the risk of having restructuring too fast, one can almost forget about. But the risk of having it too slow is big. And in companies, we always have the experience, "Get it over with, get it done, and focus on the future." If you tell the conglomerate why you have to sell off 30% of the company, and you have him protracting for 3-4 years, there's a lot of pain, a lot of meetings, a lot of focus on that, you know...... Get it done with, and then focus on the remaining two-thirds, and orient your people to the future, to their competitors, to the customers, rather than the painful internal restructuring. So I would strongly advise, on a company-ground, move fast, and don't be worried about moving too fast.

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☐ Mr. Miyazaki

Thank you very much. Just a short comment please.

☐ Dr. Clausen

Having been there in a regulated industry in the United States, in banking, when I got called back to that little bank on the west coast, every director of that bank had signed a letter to the Federal Reserve, I think this is public knowledge, that they would cause management and the corporation to have a primary capital ratio of at least 6% by December 31, 1966. They signed the letter in 1964 they gave them 2 years from October 1964 until December 31, 1966. And I got called back on October 12 of 1966, another CEO, and only 78 days to get at least a 6% primary ratio. They didn't say what to do. We were in such sad shape - losing money, reporting money - we couldn't go to the equity market to get money, the only thing we could do was to reduce the ratios. And we had it at 6.2% by the end of the year, by our shedding 9.6 billion dollars off the balance sheet, by securitizing assets. And everything was painful, but you don't monkey around with the Fed. The Fed caused management to change, the Fed caused a lot of things, including the Bank to achieve a minimum primary rate capital ratio of 6%. And that's a regulated industry. I would agree to have the government say that if an automobile manufacturing company has got to have an x ratio of a given percent, at least a minimum, the market can determine that. But banks are different. When you're in the public trust, if you don't have trust in the big commercial banks, your whole economy is screwed up. Banks permeate everything. And therefore, I applaud and encourage all other banks to listen to the Fed is the controller of the currency and the regulators. The regulators are not wanting to kill a financial institution and make it worse for them, but to help them do their job better. And one is the public trust aspect, which

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Mr. Kim Kak-Chung

Simultaneous translation is being provided. Korean is no.1, English no. 2 and Japanese no. 3. Thank you for your active discussions yesterday despite the fact that you came such long distances to get to Seoul. We have learned a lot through this Forum. And we would like to conclude this Forum today with a free discussion. Vice President Sohn Byung-Doo will chair today's session.

Dr. Sohn

Good morning. I am Executive Deputy Chairman Sohn of the FKI, and I will be presiding over this final session of the Seoul Economic Forum 1999. We had originally planned to hear a briefing from Mr. Jwa Sung-hee, president of the Korea Economic Research Institute, on Korean Business: Today and Tomorrow. But we decided to just distribute Mr. Jwa's paper to you instead of hearing directly from him, since throughout yesterday's sessions, I believe you have been able to exchange opinions and ideas regarding the Korean economy and also meet with various people representing the Korean business community. Also, since you met with President Kim Dae Jung and Prime Minister Kim Jong Pil yesterday, we don't think it will be necessary for us to brief you again on the situation of our economy. Therefore, I would like to go directly into a session of free discussions today.

First, throughout the previous three sessions, you will have gained an understanding and an opinion of the Korean economy. So I would like to take this opportunity to ask for your evaluation of our economic situation, based on your thoughts before coming to this meeting and the ideas that may have come to you during this meeting. May I first ask Dr. Clausen for your opinion, since as Head of the World Bank, you have continuously helped and assisted the economic development of Korea and you also are

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quite familiar with the underlying potential of the Korean economy.

Dr. Clausen

I think we agreed yesterday that the Korean economy is well on its path to recovery, but it's not reached the goal, the end. Really in many ways the turnaround from the decline that you suffered in 1998 and in the first half of 1999 is nothing short of remarkable. Yet you are not yet back to where you were before the decline. So, I'll say, hold the course steady, you need more restructuring, you need more transparency, and I know that can't happen overnight, but you hold that as a goal. There are many benefits to result from that. Your growth this year is maybe Part of the percentage improvement of the growth in GDP in 1999, whether that is going to be 8%, 7% or 9%, we still don't know at this moment, but what we've been reading in the press and in the materials that have been handed out in this Conference, those are the choices and all of those are very strong and very good. The prediction for next year is that it'll be reduced a bit. But it'll still be very positive, somewhere in the 3 to 4 to 5% range, which is still very good, all things considered. It seems that the policy of the Korean economy has been in the past and is reflected now as being export-led. You need to also recognize that you have 45 million consumers in the country of South Korea, and that as confidence in the government and confidence in the economy continues, that the buying power of the indigenous consumers will also feed the economy, and I read that has already started. So my view is an exterior view. It's been a little over 8 or 9 months since I was last here, and I don't follow the Korean economy on a day to day basis. But if I can presume to represent the view of Korea's economy from the outside, there's much to applaud. You ought to be congratulated. There are some concerns and they were expressed on several occasions yesterday - that the success, may I say the remarkable success that South Korea has made in turning around this

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economy and getting it solidly back on track will lessen the desire and the drive to continue the reform. And we were assured, in talking with the president yesterday at lunch, that the Korean administration is dedicated to sticking to the last, and there is much reform.

I happened to get up early enough this morning to read the paper, and noted that they'd picked up on Senior Minister Lee Kuan Yew's comment yesterday that the chaebols are not the central issue. That is a domestic issue. From the United States view and the history of the economy in the United States, there are occasions where entities get too large. Large institutions, complex institutions, like many of the chaebol, are not always as efficient as those at the command post of the economy would desire. And that has been translated in this country, we read, that there is a market out now for the chaebols and other large institutions to reduce their leverage. My own concern, as also expressed yesterday, is that I think they're asking an awful lot. The goal is fine, but you don't need to accomplish it by next Monday. And the end of the year is kind of like next Monday. We're closing in on the end of the year. And while it's desirable to re-establish the business community on a more sound and more traditional leverage basis, which is the goal of the Korean government and which you in the FKI have adopted and are seeking to achieve, but too much bad is bad. And too much good and fast in accomplishing the good, is also not as good as it ought to be. And those are some of my personal concerns.

All in all, I think the economy is on solid rock, and I want to thank you again for convening this conference, this Forum, to have a discussion. You have friends around the table, and ours is as I said yesterday not here to preach or to tell you what to do, but there's a lot of experience on the International Advisory Council, and for us to learn and to listen and to respond in positive ways. And those are the off of the top of my head remarks. When you shock me so early in the morning, I have a record for never waking up before 10 o'clock in the morning, and I think I lived up

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to that reputation just now. Thank you.

Dr. Sohn

Mr. Ruding, do you have something to say?

Mr. Ruding

Well, thank you Mr. Chairman. I'm very happy that Tom started in the morning and gave me time to get my thinking together. I would not like to speak further about the general situation of the Korean economy, because we have discussed that, I think, in a very convincing way. But the purpose of this session, as you rightly said, is that we should come up with some concrete points of advice because that's why we were called to be here.

I've singled out three points. First, a rather practical point, and I'm picking up on what Tom Clausen just mentioned. Although I'm the strongest supporter for reducing the overindebtedness and high leverage of a number of Korean companies, to bring them more in line with what is customary internationally, I've never said that one should do that in a way that has been now implemented by the government, although I strongly support what the government is doing in general here. But those who know the financial world and the corporate world would agree that stating an average for a reduction of leverage doesn't make much sense, because you should look at each individual company. Somebody who is in banking or somebody who is growing potatoes or somebody who is making computers they are entirely different companies with different standards of debt and risk and leverage. And so, that makes more sense than overall average per group. And secondly, precise time and deadline is helpful from politics. I know from experience that you must have a simple message that everybody can understand. But it's more important that one shows

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concrete action in the right direction than saying that "Well, it must be done precisely on the first of January."

Next, and related to that, - I won't talk about individual companies but when I read that certain companies say that we will be able to achieve that deadline by selling various companies, selling assets, when you make the calculations, it would imply that more than 10 billion dollars of incremental sales, and that is unlikely to be achieved in two months time November and December. So, I think some people are playing games here, either it's realistic or not, so that doesn't help very much. It's better to show some concrete piece of action with affects rather than present a picture that may not be very realistic.

My two main points, Mr. Chairman, are quite different. Just as I ended my prepared remarks yesterday by speaking on the issue of future reform and restructuring, the FKI can and should play a major role, which I do think should happen, because of the importance of the FKI. If you permit me, what has surprised me I really follow the Korean economy very closely because of our large business here and I am here regularly, so I think I followed your various developments was that when you look at the last two years, roughly from the beginning of the so-called crisis, a lot has been achieved, but it was in this country very heavily government-driven. It was Korea Inc., and marching orders given by the government. And the private sector and you are the most important representative at least of the larger companies in the private sector has not been in the driver's seat, has not played a proactive role. And my experience is that it is better, even if you don't like all the developments that are needed and even if you don't like all the things that are being imposed or suggested by the government, is it better to be more proactive and say, "This is what we can do and what we want to do," and then you have more influence over the process of corporate reform and restructuring of the private sector than when you just let it be handled by the government and government-induced bodies, like regulatory bodies. And I think it's better

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that the process, because of the very advanced state of development of the
Korean economy, it becomes more market-driven, more driven by the
private sector itself, which means that you must be more proactive, and
on certain matters like corporate governance, say that "This is what we
want to achieve, others things we like less." My point is that as the FKI,
you can influence the process of further reform and restructuring more to
your liking and more successfully than leaving it almost entirely to the
government and government-controlled bodies. That may be okay for a
very underdeveloped country, but not for a country that has achieved the
state of economic development Korea has. So my call on you but you
know your country much better than I do, of course is that wouldn't it be
wise for the FKI to play a more proactive role, because certain matters
will happen anyway, but it is better that you steer them in a way that
better fits to your liking and the reality as you see it in your companies.

And my third and final point is - I made remarks to that yesterday, and I think other speakers did to what should be our advice going forward to, in very general terms, to the Korean business model, although I do not like the word model, so let's say approach. As we all know, for several decades, the 60s, 70s, 80s and early 90s, it was heavily modeled after the Japanese development and corporate Japan. There were many great results. But we see now the problems in Japan. And you have benefited as rightly from the good developments in the Japanese approach, and now it's better to go for a different approach. The question is - and that would be my conclusion that in the case of Korea, one should of course avoid all extremes. And as I said yesterday, I don't think that you should simply close your eyes and copy all kinds of standards and methods and approaches that are common in the United States and Europe. But it might be deeply useful to say that we must adopt more of what is customary there, partly. And the other part is that you should retain certain elements that are typical for your own country, for there is no need to become Americanized or go the direction of Europe. Even, as I said yesterday,

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inside Europe, there are clear differences among the various countries. So I think it is very wise that Korea retain a number of elements, whether you call them Asian elements or not, I'll stay out of that more theoretical debate although it is important So my suggestion should be: retain some very good elements that are typical for Korea and Korean business which have brought a lot of progress to you, but try to get rid of some other elements that really don't work, and adopt there the proven and tested, market-driven approaches that are now working very well in both the United States and Europe to the benefit of all the companies concerned and to the benefit to the economy as a whole. Thank you.

Dr. Sohn

I understand that Mr. Strong has an appointment with the President shortly, so I would like to give him the floor next so that he has a chance to speak before he leaves us.

Mr. Strong

Mr. Chairman, you perhaps gave me an opportunity to have a final word. I really have appreciated the opportunity to participate in this very important and timely exchange from which all of us certainly on the international side have benefited.

Just a comment reflecting on what we have been hearing the last day and a half. The interesting and important coincidence between the emergence here of a functioning democracy and your recovering economy, have actually been, in my view, a very significant element in your recovery. You've had strong political leadership - not always that with which you could be in full agreement - but nevertheless, a strong political leadership. However, it is important to recall that the stability that has permitted Korea to make such remarkable economic progress in the last 2 or 3

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decades did not come out of a normal democratic process. Democracy is
new here, still fragile despite it's current strengths. And democracy does
not produce instant or sustainable stability. Democracy has many ups and
downs. And I think effective functioning democracies require a significant
social compact to provide the foundations for democratic and labor peace.
And I wonder if we have paid enough attention in these discussions to the
importance of developing in Korea a more extended social compact,
because you are making the changes that the new technological society
requires in the future that are going to be disruptive. And disruptive
changes need to be managed carefully in a democratic society. I think the
process of managing these changes, dealing with the disruptive processes
that can create significant resistance at the level of the constituencies and
people that are affected, and therefore, significant political ramifications
that could, in fact, be a real vulnerability for your economic future. So I
think, perhaps, without giving advice as to how to do this, my
observation may be that perhaps not enough attention has been paid in
our discussions that doesn't mean that you are not paying enough
attention but in our discussions, perhaps there could be more attention
focused on the need to develop a new social contract as the basis for
continued political stability in the democratic society that is essential to
continued economic progress. Thank you Mr. Chairman.

Dr. Sohn

Thank you for participating in this session. Please feel free to leave. Mr.
Strong. We'll now hear from Mr. Sato.

Mr. Sato

Thank you very much Mr. Chairman. Before we are able to give you
something meaningful as advice from this Council, we need some more

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knowledge about how things are going in many respects in this country. As my modest response to this paper entitled Korean Business: Today and Tomorrow, which is a very excellent paper, I'd like to address the question touched upon by Mr. Ruding as his second point, concerning the economic transformation from the government-driven to the market-driven economic system.

I fully agree that eventually the market principle should prevail as a basic mechanism for us to ensure the more efficient allocation of economic resources, no doubt. In other words, the market principle only is a means by which we can achieve the so-called survival of the fittest, not the survival of the fattest. But gentlemen, when it comes to the actual question of how we implement the transformation from government-driven to market-driven, I think we should be more realistic and cautious. I am fully aware that it is ridiculous for me to compare Russia and this country, Korea. But as you all know, the so-called "Big Bang" approach there in Russia and in some other countries has resulted in complete chaos. Of course, there is a big difference between the two countries Russia and Korea in terms of preconditions for the economic transformations, including the legal systems, human infrastructure, most importantly, the entrepreneurial spirit, and the macroeconomic policy, too. In other words, you are much better situated for transforming your economic system to the market-oriented one, I do admit. However, if you take a very, very drastic and quick move toward the market-oriented economic system, there might be some confusion, disruptions and instability, I think. Let me take the example of acquisition of banks by chaebol business groups. Well, I do admit that you are saying that the government has opened up the banking market to foreigners, why not to us? What you are saying is quite right, but there is a difference between foreign acquisition and domestic acquisition in terms of the social reaction, I think, and if you insist on it very strongly, you will be encountering very strong social opposition that might result in social and political

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instability, which is something I do care about. My proposal is a kind of agreement you might wish to conclude with the government on the time schedule of how and when you are dismantling the government intervention and government regulation on the economic activities and the timeframe that should be complied with. As I said at the outset of my discussion, I fully admit that I do not have sufficient knowledge about how things are going in this country, but as modest advice to you, I recommend that you think about it. Thank you.

Dr. Sohn

I'd like to ask Chairman Hyun for a few words.

Mr. Hyun Jae-Hyun

Regarding the transformation of society and economy in Korea Actually, looking back, what has happened in the last two years in Korea, profound transformation of the society, the economy and even the political scene has occurred. If some of you have been very familiar with the situation of Korea and have been in Korea many times, just take a moment to sit back and think about yourself in Korea three years ago, just before the crisis, and yourself now in Korea. I think there has been a tremendous change. Just to take some examples in the economy, here years ago, it was almost unthinkable for foreigners to own land or real estate in Korea or for foreigners to take control of financial institutions or even industrial companies it was almost unthinkable. Korea was a pretty-much closed economy toward the world. But now, we are completely opened up, maybe too much that can be a subject of debate. But in my opinion, the real big change or transformation that has taken place in Korea is the profound change of mindsets of economic principles, from government, business management, labor and the public. From the government, before,

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everything was kind of controlled by the government through various regulations and directives, but the basic position of the government is to open up the economy and to bring the economy or system up to the level of global standards. This is a tremendous change. Also, about the mindset of business management, or the managers of big corporations before, the revenue, sales, or the size of the corporation was regarded as the top priority, not only because we believed in that but also the whole system and the society was encouraging us to pursue that way. If you have large sales or large assets, you'll be ranked as one of the largest and praised and rewarded in that way. But because of and maybe thanks to the crisis, the top management of all major corporations are paying more attention to the bottom line of the balance sheet the profitability or the cash flow management. It's a completely different mindset. And also about labor. Before, we could not lay people off, and there was a huge imbalance in the labor market. Maybe when we look back much further in history upon the labor movement in Korea, during the previous authoritarian rules, a kind of balance was maintained in that the labor unions were not practically allowed to make collective movements or go on strikes. In return, they were guaranteed lifetime employment. So there was a kind of balance in the labor market. But during the democratization process, somehow, the balance was broken. While the labor unions were allowed to go on strike freely, the businesses were not allowed to fire them or lay people off. So it created some kind of imbalance in the power of the labor scene, which resulted in a 3-5 fold increase of wages in 5-10 years, which is one of the causes of the crisis we had in Korea. But, as of now, although we have some debates and arguments on that, flexibility of the labor forces has been introduced. It is a tremendous change. Maybe without a crisis of this magnitude, this would not have been able to be introduced in Korean society. Politically, it was almost impossible. So maybe that is one of the blessings this crisis has brought. Also, the general public, the mindset of the public has also changed. The way they

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look at corporations, the way they look at the responsibility of corporations has changed. Now, corporations are kind of for-profit organizations. Before, somehow, corporations were required to make some contribution to society in a non-economic way, a kind of social responsibility. I think that is still true, but the magnitude, or the extent of that responsibility has changed. So there has been tremendous, profound change taking place, and also, when we put all these things in a kind of big picture, there is almost no doubt or debate on the main direction in which the economy or country has to be heading. Nobody is arguing about the fact that we have to take the market-driven economy system and we have to reform, especially the big businesses have to reform... There is no doubt about that. But how we do it and in what timeframe, at what pace, these are at stake, I think. So, maybe my question is to Senior Minister Lee or some other guest. We are in a kind of big transitional period from the old system to a new system. And the old system has been developed in Korea for the past 30 years. So it may take longer time than is widely expected to undo the old system and to get prepared for the new system. How can we mange this transitional period. Actually, the transitional nature of the current situation can be seen in the fact that, at the moment, the role of the government has been on the highest level, although we are talking about a market-driven economy, as we don't have a really well developed market at the moment. So in this transitional period, actually the role or the responsibility of the government has been on the highest end. So the government can practically decide who will be allowed to remain alive and who will be forced to shut down. So that's the transitional nature. We don't have a really well operating market. Then the question would be: how can this transitional period be managed wisely and productively, so that, at the end of the day, all of us can have a kind of win-win situation. I think it goes beyond a simple economic or business policy type of question. I think it takes real philosophical thinking and a lot of experience and wisdom of the magnitude that Senior Minister Lee would

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have. Thank you.

Dr. Sohn

Senior Minister Lee?

Senior Minister Lee

I found what Mr. Hyun has said very moving, because you have seen it as a total society problem. I would also refer to Mr. Sato's approach. It resonated with me because I have always compared the Soviet Union to China. Mr. Gorbachev was a good man, but he has not seen a revolution. He inherited a society 70 years after a revolution. Deng Xiaoping fought and created a revolution. And he knows what a revolution is, and if China goes into another one, that's another 50 years down the drain. So I understood him when he said, "If I have to shoot 200,000 students, I will shoot them," because millions died in the fight, in the civil war against the Japanese. So his timeframe, his dimensions are different. As a result, Gorbachev went for Glasnost before Perestroika, freedom before restructuring, and Deng went for restructuring, opening up his coastal economic zones, see how they work, opened up his agriculture on a contract basis first, great success, then increased it step-by-step in a very graduated and controlled way. This left China with big problems: very inefficient state-owned industries, which they would tackle; banks that are heavily weighed down by non-performing loans by the state-owned enterprises. But if you take China, on it's way up, and Russia, unlikely to get out of it's hole for another 20 years, I think Deng knew what it was about, and Gorbachev, good man though he may be, just didn't see what he was doing. So I, instinctively, found Mr. Sato's approach one which I would myself prefer. There is, in every society, before you become productive, a certain consensus, or if you like to use Western socioeconomic terms, a

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social contract or a social compact, of what is fair. In a completely free-market reward system, the winners get large prizes, the losers get nothing or very little. So if you watch, whether it's tennis, golf, the price you pay for footballers or basketball players, it's out of this world, I mean, what contribution have they made to society apart from entertainment of hundreds of millions on the tube. But that's the market. And then, having won one Wimbledon or three or four or five Grand Slams, all the sports companies descend on you, and you are a multi-millionaire every year. But in a society, you take Singapore, and we run a free-market system. Where if we did not, through judicious taxation and subsidizing of health, housing, education to level the playing field for the next generation, we wouldn't have continued. I wouldn't have won election after election. But there was an understanding that, yes, the companies must be profitable, yes, Singapore Airlines must be made the most competitive and produce the best dividends, but the workers will be looked after a little bit better than other airlines, but the government will see that every air hostess, every steward, every chandler, every forklift truck driver has a home, has a good school for his children that is equal to millionaires' children's schools, hospitals, playing fields, recreational centers, so on and so on and so on. So when the unions go on strike, I am able to call them up and say, "Do you want to close this company down? Why not open the books, go to arbitration, middleman completely neutral, your representative 1, 2, employers representative 1, 2 and to decide." And that system has now worked for nearly 40 years, but a social contract was arrived at. So, you mentioned a sudden liberalization of the unions. I watched it, too. And I said, "Gosh, this is a loss of competitiveness." Because you moved so rapidly, you did not have a system to moderate the gush that will immediately spout forth and exist. We are the bosses now, not the management. Now in Singapore, when we moved from what the British had - completely total control during an emergency fighting against the communists - to what we have now open unions the

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British left in place a whole series of subsidiary legislation, to say that, if you want to have a strike, you must have a secret ballot. You can't just have an agitator shouting away, people pumping fists into the air, and then the next day nobody comes to work. They said, let's be democratic secret ballot. And so a series of mechanisms were put in place that moderated the power of the union leaders, and on the employer's side, moderated their power by insisting that they have to go to arbitration and open up their books. So every argument leads to a determination of the facts and equity of fairness on both sides.

I'm not a Korean; I've not lived here. I've visited occasionally, but I visit here less than Mr. Ruding who comes here for business. My knowledge of Korea is gained from reading the news reports and my embassy reports, giving me summaries of what the direction is. And there's just a limit to what the human mind can comprehend. So I've got to first concentrate on my region, then beyond my region, China, Japan and Korea. So I think what I can tell you is broad principles, how I would approach it, and you have to work out how you get to A to B.

First, you know where you are better than any member of the International Advisory Council. Second, where do you want to go? Well, here, the International Advisory Council can give you many options. Each one of us has a different reference point. Mr. Ruding doesn't like to call them models, just approaches. I would try and defuse it and strip off the emotional connotations by differentiating between a culture and a system. A culture, people cannot change rapidly. This evolved over generations hundreds of thousands of years. But a system can change. How you set about doing things, like a cockpit manual. So if you look at how the so-called tigers have progressed, you can see a clear division. Japan influenced Korea and Taiwan. The British influenced Hong Kong and Singapore. So your system and Taiwan's system was based, both in culture and in system, on the Japanese model. That has given you the strength of the Japanese, and also the inherent weaknesses. Once that

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system had to open up under Western pressure and WTO rules...
Singapore and Hong Kong, we are Chinese societies, and the culture can't
change. But the difference was, the British ran a certain system. You
want to give a contract, to build a building? You call in a tender. It's
secret. There are certain forms to fill ; you put in a deposit. It's opened
at the same time, with all the bidders or their representatives present, and
it goes, not necessarily to the lowest, maybe the second lowest or the
third lowest... But a panel is there to say that given the reputation and
capabilities of Hyundai versus Samsung or Tajima Corporation versus
Samsung or Hyundai, we will give it to the third lowest, because we
think they have the expertise, they will do it. But there is a certain
system, a certain transparency, a sense of "nothing under the table." So
when the crisis struck, Korea was hurt. Taiwan would have been hurt but
for the many new venture capital companies. They are big companies.
Steel, shipbuilding, the old ones which were started by the KMT, they
would have gone down. But the new high-tech businesses, people who
returned from America, having spent time with Texas Instruments,
Hewlett Packard they were nimble, they had learned American systems:
bottom-line, source from cheapest. They learned it when they worked for
these companies. They survived. So you have Acer, still surviving, now it
has given up a fight as a brand name and is a supplier for the big ones.
But he's in the business. If I were a Korean, I would say, "How do I
adopt the best system?" American? European? If European, is it Anglo-Saxon,
the British, or the German? Because there are differences. But as I
observe the Europeans, once the Cold War was over, they're gone for a
European Union and an integrated market to get the size, the critical mass
to eventually compete against the United States. There is a very
significant shift in favor of the Anglo-Saxon model. So by the time you're
got Daimler-Benz listing its shares in New York and putting out quarterly
returns and taking over Chrysler or merging with Chrysler, than I say
that it is an admission that the Germans have decided that as far as the

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company returns are to be calculated, it has to be on the basis of rate of return on equity. How you then distribute your profits between management, shareholders and workers, that is a different question. That is a question of your equity of social contract. So I do not know how Koreans can reach that social contract between management and workers. I think you will need the intermediation of the government because the government has played such a dominant role, and you can't suddenly say, "We will settle it with the workers." I think you may have a lot more trouble than if you had the government also sitting there and calculating the total loss of the GDP if this strike goes on for another 6 months. In short, you decide, where it is you want to go, which model you have to follow, or you want to follow. And maybe you'll pick parts of different systems.

Now I have been reading. Most of them of course are Western banks, Western agencies, mainly Americans, but I'll give you an illustration of what they think would restore their confidence in you. What needs to be done? If you do this, they will have confidence. Build the right infrastructure and enforcing mechanism for corporate sector restructuring. Remove counterproductive regulations that impede competition. Enforce functioning corporate governance. "Functioning" meaning, not just in words, but actually proper corporate governance. In other words, if you're a bank, every loan is hands-off at arm's length, not personal connection or family connection. Build a flexible labor market with a proper social safety net. Develop market-friendly social and fiscal policies. Facilitate venture capital industries, because that's going to be the next wave. You read about all of these Internet companies, how from zero, they're millionaires in a matter of 18 months. Now, let me run through a few more and you'll know exactly just what their wish list is. Effective bankruptcy procedures and write-off policies which result in reduction of overcapacity. Then they know that the remaining industries have a chance of survival. Transparency in information. Right environment for mergers and acquisitions and leverage buyouts. Remove restrictions on products, services and pricing, especially on service

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industries. Remove implicit and explicit barriers to foreign direct investment. Dr. Mahatir suspended foreign exchange in order to prevent the take-over of many of his broken companies, because they were his special Malay-companies, Malay-entrepreneurs that he has helped to build. And they were broke. And this is a no-no. If he had followed the IMF, they'd be under better management, but they're not mine anymore. He can't point and say, I have successful Malay entrepreneurs. So he blocked it. You do not have that choice, because you had to approach the IMF. You borrowed 140-150 billion dollars in foreign exchange. Had you not borrowed, had you borrowed in Korean won, like the Japanese did. They don't have to go to the IMF. So they are allowing foreigners to buy into their companies. Renault into Nissan, Ford into Mazda, on a selective basis. They are always making sure that Toyota will be Japanese controlled, Japanese-owned, and will lead the pack. But no harm learning from the foreigners the advantages of a slightly different system, maybe improving theirs. I don't know how strong your nationalistic fervor is. In a crisis, probably more pronounced than not in a crisis. But if I were a Korean entrepreneur, what I would be. Let me finish this first, and I'll come back to that.

Relax zoning laws and simplify approval process. Rationalize and enforce competition law. And this goes on ; it's a long wish list.

What would I do if I were running a small conglomerate, and I want to survive? How do I suddenly switch from what was a closed system with probably two or three books, one for income tax, one for myself, one for my partners? How, from that system, do I run a masterbook and everything is there? It's not an easy switch. But assuming that you want to make your company competitive, and you are now forced to run in a race where the laws have been fixed, principally, as I say, by the Americans, supported by the Europeans, and the Japanese have gone along, and therefore, all of us have got to go along? Well, I would look for a joint venture. But no really good company let's say you're running an

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automobile plant. Do you think GM or Chrysler or Daimler or Volvo or
BMW will come in and give you all the management know-how
techniques and you will be prosperous and you say thank you very much,
handshake and good-bye? No. I've tried it. I've tried to get my banks to
learn how to operate like American banks. And I said, "Look, I'll give you
a majority share." We offered it to Citibank. Citibank said "No thank yo
u." Why? Because they are already there. What they want is for us to
liberalize, and then they'll beat our banks. Well, so we said, "Okay, let's
hire some top-rate bankers. It's going to cost us a pretty penny. But we
hired them, and not one person, but one person brought in a team. And
that team is transforming one of our banks, and if it succeeds within 5
years, as we liberalize our banking sector, we will be able to withstand
the inroads of Citibank, ABM, whatever it is. If we can't, then we deserve
to be flat on the floor. And I think we have enough confidence in
ourselves, and if I were a Korean, seeing what you are capable of doing,
you are not stupider, you are not lazier, you are not less resourceful or
ingenious than the average American on the East Coast or the West
Coast. But what you did not have was the experience, the accumulated
know-how of what to do, instinctively. That is not to be found in a book
of rules. It's passed on by on-the-job training. So, one way would be to
say, alright, I'll give you management control, 40% or 30%, and then we
list it. In other words, we're giving him a stock option. After 10 years,
you're going to buy him back. But you're going to buy him back at what
it is listed on your stock exchange. Then he's got the incentive. I'm not
sure if he's going to part with all his know-how and all his knowledge
he's always going to reserve something for himself so he can do better
than you can. But that way you will learn faster than if you try to go to
a three-month crash course in Wharton or Stanford or whatever. You just
need to get each particular specialist sector to come in with their
knowledge and their systems. But your work culture, which has served
you well, and which you cannot change rapidly, anyway, I would not give

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up. That's what made you tick. That's what made your labor more
productive.

As has been said, the FKI can play a better role. But from my experience, I would bring the unions into this exercise. You have a real problem with your unions. They are the most militant, almost anywhere in the world. You know, when I watch Korean television when they are on strike, it's as fearsome as if two Roman armies were going to collide. Shields, plastic helmets, latest equipment, and they are almost as well equipped as your riot police. So get them on board, there has to be a change. If a company collapses, they will collapse. That message must be quite clear. Daewoo has gone down, there will be a loss of jobs, loss of all the benefits. Do you want to bring your company down? If not, why don't we sit down and work out a new arrangement. And I would say that, with your bureaucrats in the process, anyway they have always been involved...... But you're setting out your problems, and saying, "If you ask me to do that, these are my problems. If it fails, will you take the responsibility?" And go public on it. Have debates. You have now gone public whether you like it or not. You can't settle it in smokey closed rooms. Get it out on television. Your bureaucrat, your union leader, your FKI point of view...... And you have to strike that balance, that agreement on how to move forward, so that the big companies will succeed, will get the big prizes, but the taxes they pay will go into housing, schools, education, health, in which everybody has a stake. So that the worker's child and the millionaire's, the chaebol chief's children will have an equal start in life. You can convince them of that as I have convinced my workers. Everybody hopes that when his child starts school that he's going to be a superstar, he's going to pass the imperial exams at the top. It's like starting a marathon. You know, they fire a gun and thousands start. After the first five kilometers, you realize that you're not going to reach the end. Halfway, more than half have dropped out. Towards the end, there's only five or six who have any chance of winning. That's the way it is

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with companies.

They have calculated that in the automobile industry, for maximum efficiency, maximum productivity, you must produce at least 4 million cars to stay in a global automobile market. Very few companies can hope to do that. But surely between all the Korean companies, if you combine your resources, you will stay in the game. You have to take a very rational approach because you are now in a different age. The Cold War is over.

When the Cold War was on, the Americans had an interest to make sure that South Korea was a success to prove to the North and to the rest of the world that the communist system didn't work. So they opened their markets and encouraged you. But once they have proven their point, they say, "Well, the point's proven, and now you've grown up, you pay your dues." And you are going to compete with the rest of them lined up at the starting line. That's what's happened. So I cannot tell you how you can make it less painful. But I suggest you get together, think your problems through, where you want to get to, get your unions, get your government behind you. And you have to amend and adjust as the discussion goes on. But there is no other way to get everybody on board.

Dr. Sohn

Thank you. We'll next hear from Mr. Sejima.

Mr. Sejima

I have indeed found this forum valuable. Being from Japan, which has close relations with Korea in many respects, I found it very useful. With this in mind, I would like to express my gratitude as well as respect to the staff of the Federation of Korean Industries (FKI) who organized this forum.

Now, I will be frank about what sprang to my mind while sitting in this

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forum. I hope that it will be of some use to you. One is a matter of
immediate concern and the other one is that which has to be dealt with
on a long-term basis.

Korea is on the way to conquering its foreign exchange crisis and to achieving overall economic stabilization. Japan, too, has come through various economic impediments since the fall of the bubble economy. We really had hardships but now are in the course of consolidating fundamentals for economic stabilization in the future, having just emerged from a long tunnel of depression.

The situations in Korea and Japan are quite similar. I will be conscious of this similarity while talking about the circumstances under which Japan finds itself.

In my personal view, there are two pressing issues. One is the need to take strong policy measures in favor of small and mid-size businesses. The other is the need for the participation of the people in pursuing economic stability. These are the two things I want to stress.

Truly, small and medium businesses weigh heavily in all economic sectors in Japan. They account for 70% of production and 85% each in distribution and employment. I assume this is true in Korea, too.

In fighting the foreign exchange crisis, Korea has one more problem than Japan. That is the structural adjustment of business conglomerates, known in Korea as "chaebol," that bear heavily on the full range of the Korean economy. Currently, they are in the swirl of structural adjustment.

Restructuring in the financial sectors and the reform of chaebols have great impact on small and medium businesses, causing them serious pain. Japan has not yet had to deal with this issue to such an extent. It is Korea's small and medium businesses that are suffering in the face of the reform of chaebols.

In Japan, Prime Minister Obuchi called the extraordinary Diet session in November "the Diet of small and medium businesses." This means that he intends to make considerable efforts and mobilize various policy means to

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help them. Here, we can see how hard Japan will work for businesses in
this segment.

I will explain what we have experienced in this respect and hope that it
will be of some help to Korea.

To state the conclusion first, a new corporation will be founded to
supply credit guarantees on behalf of small and medium businesses in
addition to other policy considerations to prevent them from failing.

For example, the government will put 50 trillion yen into this corporation
for credit guarantees to carefully selected small and medium-size firms. No
collateral or security is needed for access to this loan program. Korea may
also consider this sort of program.

This is a matter of great importance because small and medium
enterprises suffer most at times of socio-economic transition. They indeed
need careful policy consideration, for which a corporation similar to that
which I mentioned may be of help. This organization will be useful in
preventing their collapse.

As you may realize, if viewed from a different angle, it would also serve
as an indirect means to reduce unemployment.

As a matter of pressing concern, I would again stress that small and
medium business concerns deserve help.

Now, how can we inspire the people in general to take part in the
economic reconstruction of their country? This is a matter of attitude as
well.

The "One company for one village" movement is what we have in
Japan. In the case of Korea, it could be one company for one city,
province, township(myon) or other type of area. We may call it the one
company for one township movement.

In Japan, there are 3,000 villages while, as I understand, there are about
1,200 townships in Korea. We may encourage each township to set up one
company. To do something for "our own" community is to contribute to
the reconstruction of the whole country. This way, villagers will be proud

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of joining efforts to rebuild their country and of boosting the whole
economy for all of the people. I believe that this is very significant from
the economic and social point of view.

Today's situation reminds me of the Saemaul Movement, which was the
idea of the late President Park Chung-Hee. I heard him explain this new
community movement and still clearly remember what he said. This
nationwide campaign, as you know, was a sweeping success. How about
reviving the spirit of this movement?

There is a Japanese prefecture called Oita, where Governor Haramatsu vigorously championed what he called "one thing for one village" drive. His idea was to have every village produce one thing that it could really be proud of. It was a great success.

How to foster small and medium enterprises and how to have the
general public participate in economic reconstruction are the two major
tasks that should be addressed at this moment.

Next, I would like to turn to a long-term issue of national magnitude. Here again, I have two things I want to emphasize. One is making Korea and Japan a free trade zone like the United States and Mexico. Isn't this worth considering? The other one is to connect Korea and Japan with an undersea tunnel along the Tsushima strait like the Dover tunnel in Europe and let the people of the two countries travel more freely.

I will give you one example to help you understand what I mean. Tsushima is an island about midway between Korea and Japan. There is a smaller island called Iki, which I think should be put to good use. What is key in this connection are the stable economic foundations of Japan and Korea in the whole of East Asia, a regional security system in East Asia, U.S.-Japan relations under their mutual defense pact and the same between the United States and Korea. The political, diplomatic and security prospects of Korea and Japan are a matter of serious concern.

In a long-term perspective, I propose to bind Korea and Japan into a
single free trade area and connect the two neighboring countries with the

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Tsushima undersea tunnel. I hope that this proposal will be given serious consideration by the two governments as well as at the private level.

Finally, as I observe Korea's economic realities at this time, I am quite relieved of the serious concern I had two years ago when the foreign exchange crisis broke out. I believe that the Koreans have conquered their economic troubles with the same fortitude with which they rebuilt their country from the rubble of the Korean War. I wish them success in their future endeavors. Thank you.

## Dr. Sohn

Thank you. We will close this session at 11:15, instead of the original closing time of 11:00, in order to hear from Mr. Miyazaki and Mr. Barnevik, who have not yet had a chance to speak. Senior Minister Lee also has a few more words for us. Mr. Miyazaki has to leave shortly, so I will give him the floor first.

## Mr. Miyazaki

I know that the chairman and many others present here are good in Japanese. So, I would like to speak in Japanese.

Above all, I am grateful and honored to be invited to this forum. There is no question that Japan has a large trade surplus with Korea. In its trade relations with Korea, it also is true that Japan damages Korea in many respects by selling more than it buys, resulting in an ever snowballing trade surplus.

Personally, I came to this forum to learn from your wisdom.

In a sense, as viewed from your position, I am out of balance at this moment. To be brief, I want to comment on the lessons that our people have learned from the recent financial and economic troubles.

First of all, economic reform is one thing that we cannot do without.

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Otherwise, there is no way to overcome the crisis. This is a matter of concern. Korea as well as Japan will register positive growth this year. With this turn of events, our urgent need is to realize a market-led economy in the true sense of the word.

Second, what we have to keep in mind is that whatever happens in one country affects others quickly, no matter whether it is desirable or not. So, one of the lessons we have learned from the recent foreign exchange contagion is that we have to remain ready for crisis management. Today, it takes less and less time for what happens in one country to spread to the rest of the world.

Sluggish reaction to a crisis causes tremendous losses not only to the country where it occurs but to others as well. This fact requires the sharing of information.

For instance, concerning capital trade, we must be able to cope with any unexpected situation like the sudden inflow or outflow of capital. This is what we have realized of late. We have also realized that we need the cooperation of individual countries as well as international organizations to keep ourselves free of financial crisis or to help others out of such crisis that have already occurred.

In the past, all international cooperation was made on the basis of individual countries. It was a matter between the peoples or countries concerned. However, under a market-led economy, cooperation between the peoples and countries concerned is not as effective as it used to be.

In the present world, trade is free and borderless and is closely followed by the movement of capital and labor. As a result, the influence of states is diminishing as far as the global economy is concerned.

From the economic point of view, the state is losing its position, though it will never be extinguished because it has tradition, history and other proud heritages. From the economic aspect, the world nations are becoming borderless and individual states are weakening in their roles and influence.

124 Agenda for the New Millennium

It is the private sector that augments the shrinking roles and influence of states under a market economy. This means that economic matters should be left for the private sector to take care of.

More often than not, in Japan, we use the words government-people cooperation or people-government cooperation. It is often stressed that the government and the people must stand united for such and such. But I don't agree with these phrases because I believe that the leadership should come from the private sector. Under a market economy, the government's role should be limited to supporting the private sector.

The appropriate role of the private sector is what we have yet to study on the basis of various experiences. In brief, the private sector should take full responsibility for what it does. It should think and act under its own responsibility. This accountability is the precondition for a civilian-led economy. It all depends on the power of the market.

As in Japan, a market economy system in the strict sense of the word has to be allowed to take root in Korea as soon as possible.

Apparently, a market economy has its shortcomings. As I mentioned yesterday, a market economy, as I understand it, provides equal opportunities to everyone for fair competition in the market, better economic effect, and higher standard of living for all.

In this society of competition, it is inevitable to have winners and losers. In a country, this problem of winners and losers can be redressed with social safety net programs or other means of social stability. But it is not as simple as this between countries and has to be dealt with on a non-governmental basis rather than at the level of the people or state. Thank you.

Dr. Sohn

Thank you. I think we have a few minutes left for Mr. Barnevik. Please?

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■ Mr. Barnevik

Well, you may have heard enough advice by now, I don't know what one can add. There have been a lot of wise things said. One piece of advice is to read that report that we didn't have presented, unfortunately, in this last session, from the gentlemen sitting over there. It's a very good paper, and I read it last night, and even if it hasn't been presented here, I think it's a good idea to read it.

Let me just make a few very quick observations. I think the interesting thing with the crisis in Korea is not the crisis itself. That has been talked about forever in the past 2 years. It is that it became a trigger for change. The trigger for change, instructive for Korea, was year 1996 and year 1997. It's just that this became a trigger.

Like I said yesterday, I think it's important that the government doesn't intervene too much directly with companies, like Mr. Ruding said also. I think there has to be a climate pushing this reform, but to give numbers for all chaebols that are the same, I don't think is a good idea. If I ran a chaebol myself, and I was under pressure to raise capital, I would move extremely fast. I went through such situations, when I merged ABB in year 1987, we had to close 40 plants, and we had to lay off 45,000 people. I gave myself 18 months. Get it done with, get it over with, and then people have to focus on the future, new opportunities, the competitors, the customers. So the strong advice is: don't delay on the company level. Move with what you need and have to do.

Now, obviously, it is painful, it is difficult. But you have to sell the idea. Hyundai now is selling turbine generators to Hanjung. That will cost some jobs. No question about that, when you merge the two. But then you have a stronger Korean company, who will be stronger on the export market. So if you lose x jobs at the merger, you gain y where you have merged and are stronger. So you must communicate that, you must convince your people, and you must do it and do it fast. And do believe me, the risk is

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not that you move too fast. The risk is that you move too slowly. That you move too slowly in the companies.

Regarding advice for individual companies, I mentioned a few things yesterday. Governance, I won't go into. We talked about that yesterday and Minister Lee Kuan Yew here has given you an excellent list from different papers on what needs to be done. And I think it will happen as Korea becomes more integrated in the world economy.

I talked about added value. POSCO with 28 million tons should not strive for 56 million tons. They should strive for doubling the price per kilo on the 28 million tons they have. Move up on the technology ladder; move up in quality and in the product segments.

Focus. I think, if I ran a chaebol, I would rather be world leader in 2-3 product programs where I am no.1 or no.2 in the world than be no. 10 or 15 in ten product programs. Well, that you don't do overnight. It takes a while to be the top. But I think that is the course for the future. And I think these broad-based domestic supported constructions will not be successful in the future.

Now steer toward service, revamp maintenance, automation. Inside your country and outside your country, that is a winning recipe. Now big plants will be there, but will not dominate as they did in the past.

Then, finally, build global networks. I think the challenge for Korean industry is to get into other cultures. Send your young people out. I sent 200 Americans at ABB to Europe, Latin America, and Asia every year. Not because Americans lack education. They have good education. But they need to live 3, 5, 7 years abroad. Then they get back home to America, and you build a population of Americans, a breeding ground for future international managers. So send them out when they are young, before their children become teenagers, to Europe, to America and to other places in Asia, and bring them back again. You have to deliberately work with human capital. Like someone said, the strength of Korea is in its people. It's not the raw material, it's not location, it's not all the richness.

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It is the people. And being now, a globalized economy, you have to build a population of internationally promotable people not just Koreans but also other nationalities. You have to offer other people a career inside your companies ; you have to accept them coming here. In my Board in ABB, there are 9 nationalities among 12 people. Japanese, American, German, Latin American, South American, you name it. Unfortunately, no Korean. But you can't have every country. You can't have too big a board. But you start at the top with that kind of multi-cultural structure, and you have already invested abroad. You have a foothold out there. You have bridgeheads out there. Now, you have to build the global structure for these companies. These are a few pieces of advice from my side. Thank you.

## Dr. Sohn

I apologize for not being able to give you more time. Now then, we'll hear some more from Senior Minister Lee.

## Senior Minister Lee

I would like to add to what Mr. Sejima said. His emphasis on small and medium enterprises reminded me that I did not sufficiently emphasize this point, this difference between Taiwan and Korea. But the Taiwanese economy was saved because it had many small and medium enterprises. And the danger for Korea is that yours are all in huge chaebols. I add this is a danger because we are now in the phase of very rapid technological change. And if you see the way in which big companies in America and in Europe are being threatened by small upstarts Microsoft from nowhere, CISCO systems from nowhere, Dell Computers IBM was threatened, but it fought back, it reshaped itself. I'm convinced that for the next 10, 20 maybe 30 years, the information technology revolution is going

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to spawn hundreds of thousands of new businesses, which we can't imagine. Ebay from nowhere, Yahoo from nowhere. So the structure of society in Japan, of Korea, even of Singapore, is a hierarchical society where they leave the initiatives to the leaders. That is, for us, a great disadvantage. The Taiwanese broke out of it because they used to send out 5,000 Ph.D. students every year. And from the 1960s, they used to stay on in America. Then in the 1980s, the Finance Minister, K.T. Lee, started his own version of the Silicon Valley, and brought them back and seeded their businesses. And a whole wide spread of small industries grew up that saved the Taiwanese economy. Now I'm not sure whether we can do it, but we're going to try. And I think definitely that Korea should try. The new wave, if you miss it, you will catch up, but you will have lost so much.

The big banks are under threat. You are going to do banking on the Internet, online. I don't know how long, maybe in 5 years, but it is going to happen.

Finally, what do you have? You may no longer have, in banking, the same customer relationship. It's just price on the Internet and your brand name reliability. So in this age of change, the more you spawn off bright young entrepreneurs, the more you will have your economy succeed.

I don't know much about it. All I know is the little that I read as chairman of our investment corporation. We were persuaded some 15 years ago to put some money in venture capital. And there are proper managers, mainly on the West Coast, some on the East Coast of America. And these stable companies in insurance and pension funds, they seeded bits of money in new ventures that are properly assessed. And if out of ten, one succeeds, they have it made. I have spoken to one or two of these venture capital experts. Out of ten, they expect 4-5 to fail, 2-3 to break even, and 1-2 will succeed. They have it made. The Europeans have not done it. They haven't got this tradition. The Americans have. It's part of the Wild West, it's part of the "Let's do it." There's an irreverence, a disregard for

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established authority and methods. Maybe we have to try this. Because with this new technology, there will be a whole host of breakthroughs. And your chaebols are the exact opposite. You are the IBMs and you are under threat. So when Mr. Sejima talked about small and medium enterprises, my mind went back to venture capital. I think it's something the chaebols should look into and then help spawn. You do not lack talent. I mean, if you look at all the Ph.D.s in American engineering schools, you will see they are half Asians. Most of them from East Asia. You score in mathematics, you score in engineering, you score in sciences. All you need is that extra: how to translate a good idea into a commodity that breaks through and makes money. Thank you.

## Dr. Sohn

We're almost out of time now. I'll take just one final question from our Korean group here.

## Audience

Sorry to keep you this long. I'd like to ask you one question. During this economic crisis, between government and citizens, and from citizens to the business sector, and from the business sector to the government, we lost all the trust. And unless we build this trust, it will be awfully difficult to come up with the market force to make this market economy. So how can we regain and rebuild the trust between the three parties.

## Senior Minister Lee

I'm not an expert on Korean politics. I know it is based on provincial loyalties. I think you have to work on what you have. If in fact your loyalties are as they are, then work on them as building blocks. And I

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would approach it in a multi-layered way. Whether it is at your little-town level, whether it is in the big cities where you have a more cosmopolitan approach to social classes and economic interests, you have to build a consensus.

Korea's problem is more acute than Japan's. The Japanese consensus broke when Mr. Miyazawa lost the elections in 1992, and Mr. Ozawa broke away. And then their problems got compounded. One government after the other, and there's been a kind of revolving door, and now, Mr. Obuchi has got a second term. But as a result of that, actors became mayors of Tokyo and Osaka and odd things happened. A certain rejection of the present set of stale leaders and stale ideas.

Yours is a much more fundamental problem. It broke in a dramatic way when Roh Tae Woo won the election and brought Kim Young Sam in as president. Then I think you went through a traumatic experience when former president Kim Young Sam put two former presidents on trial. So you have a very armored, unreformed, un-reconstructed, conservative I think if you break the mold in which you have put your icons, you have a problem. And here again I go back to Gorbachev and Deng Xiaoping.

Gorbachev never knew what a revolution was, never knew he needed the confidence of the people in their basic beliefs. So he destroyed Stalin, and then he destroyed Lenin. Then he's destroyed the basis for his own rule. But Deng Xiaoping was a very experienced man. He said Mao Zedong, he did a lot of things wrong, but 70% right, 30% wrong. You will remember that. I took a deep breath, and thought, "He wants to keep stability."

Now when you start destroying the authority of the office and say, "Look, they are a lot of bums, crooks and rogues," what's to prevent your people from thinking, "This chap is no better." How do you prove that you are better? I don't know. So yours is a more fundamental problem. I don't know how you rebuild the authority of your presidency, of the system that you have run so successfully, despite its flaws. But somehow

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you're got to throw up new leaders, new civic organizations, whether it's the FKI, whether it's the unions, I don't know what other civic organizations there are in Korea, but...... When I fought the communists, and I found them so totally in grip, in command of all the pockets of support, at the school level, at the newspaper level, at recreational organizations, I created with government resources what I called the People's Association. And I brought in the chess players, the badminton players, the whole lot. Anybody who has a following, and in every society you have people who are more energetic, with more initiative, and they become leaders of a little group. Maybe 100, maybe 1,000. But they are leaders. The others listen to him because they know him, they work with him. So if you can get them together in some form, whether it is in provinces, based on industries, or similar professions, you may be able to rebuild trust. I mean you have raised a fundamental question. I as an outsider dare not touch, but since you have raised it, you have asked me, I say, yes, I agree. You have a very profound problem. It's a problem Indonesia faces today. How does President Abdurrahman Wahid prove that he is different from President Habibie or from President Suharto or Sukarno? He was part of the system. So, do the people suddenly say yes, what they KKN, corruption, collusion, nepotism has gone? Habibie was part of it, but Abdurrahman Wahid was also a part of the system. So how? I don't know. You have a chance to start with President Kim Dae Jung. Somehow, he's got to widen his reach and go beyond just his original core support. FKI, and what other groups you find, your lawyer associations, your doctor associations, there must be all these professional groups, and every one of them has people in charge who are respected by their members. So you are in the process of building up a new leadership.

Dr. Sohn

We will have to close this session now, and there will be a press

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