At the turn of the nineteen eighties the South Korean economy was in serious trouble. There was mounting labour unrest, militancy and a steady rise in political demonstrations. It was not obvious at first, but during the early months of 1980 General Chun Doo-hwan was steadily gathering the reins of power in his hands behind the scenes.
Following the assassination of Park on 29 October 1979 Prime Minister Choi Kyu-hah became acting President. It was decided that according to the 1972 constitution the ‘National Conference on Unification’ (NCU), the electoral college, should elect a new President. Thus on 6 December 1979 Choi was formally elected President. Legally he was allowed to serve out the rest of Park’s term, he could have served in theory until 1984, however Choi had none of the power-base of Park and is generally described as having been a ‘weak’ leader.
There was increasing political pressure to end the authoritarian Yushin constitution, and become more like a Western style democracy. The leaders of the main political parties were the “Three Kims”. These were Kim Jong-pil of Park’s Democratic Republican Party, Kim Young-sam of the opposition New Democratic Party, and Kim Dae-jung who had been only narrowly beaten by Park in the 1971 presidential elections. Leaders of the opposition called for a new constitution involving a popularly elected President, a reduction of the Presidential term from six to four years, and restrictions on the emergency powers of the executive.
Political parties were divided on the pace of liberalisation. President Choi was in favour of only gradual reform. However he did rescind ‘Emergency Decree No. 9’, a 1975 edict which banned practically all anti-government activity, releasing detainees held under the above. In his 21 December 1979 inaugural speech he promised a new constitution about a year in the future, to be followed by elections
The first indication of Chun’s bid for power was signalled by the so-called “12 – 12 Incident”. Six weeks after Park’s assassination, on December the twelfth 1979, troops under Major General Chun Doo-hwan, Head of the Defence Security Command, arrested the Army Chief of Staff, General Chung Seung-hwa and some forty other officers. Chun’s command had been in charge of the investigation into Park’s assassination and Chung was arrested under the pretext of being involved in a coup plot against Park. The arrest involved an armed stand-off and fire-fights between different units of the ROK Army. During the incident Chun ordered the march south of units from the DMZ border with the north, led by his loyal associate General Roh Tae-woo. This troop movement tipped the balance in his favour at the cost of risking the national security of the South.
At the time the nation believed it had narrowly escaped a military seizure of power, however with hind-sight it is now understood this incident marked a shift in the balance of power from an older generation of generals who came up during the Korean War, and their displacement by a younger generation of generals identified as “Class Eleven” of the ‘Korean Military Academy’ (KMA). These officers were the first to go through the full four-year training programme of the KMA, graduating in 1955, and were highly trained. Over the following few months Chun was to consolidate his power before emerging as the national leader. Meanwhile the economic and political situation in South Korea deteriorated.
Immediately following the ’12 – 12 incident’ a new civilian cabinet was formed with former deputy Prime Minister Shin Hyon-hwak as the new PM and Lee Hahn-been as deputy PM. The cabinet was packed with economic liberals. Some Koreans dubbed it the ‘bulletproof cabinet’ because it seemed to have survived a military coup.
At the start of the eighties South Korea was heavily indebted. A ‘Third World debt crisis’ had arisen and the ROK was the fourth largest debtor on the list after Brazil, Mexico and Argentina. South Korea needed to keep borrowing money to keep going, but lenders and investors were worried about possible future political instability following the assassination of Park. In addition international financial institutions such as the IMF and World Bank which had the ability to help Korea, expected the ROK to take steps to reduce its indebtedness and liberalise its economy in return. The economic technocrats of the new cabinet were inclined to favour similar prescriptions and launched a radical programme of economic ‘shock therapy’.
The programme implemented from January 1980 included a large rise in interest rates to fight inflation, a 60 percent increase in oil prices, and a 20 percent devaluation of the Won to the dollar to 580 per dollar, the first devaluation since 1975. A new flexible exchange rate regime was adopted which pegged the Won to the US dollar on a daily basis. It was intended that greater exchange rate flexibility would help the ROK economy to adjust. In particular devaluations should boost exports, helping industry.
Business reaction to the new policy was hostile as businesses faced bigger import costs and higher loan repayments at a time of high indebtedness. They struggled to cope at first. The cabinet realised that the policies could cause the collapse of some large business groups, but decided to take the risk. In one interview deputy PM Lee complained that he was extremely unpopular at home, and was only popular with the IMF and the World Bank.
Fortunately the benefits of the package soon appeared as Korean exports became more competitive. In 1980 Hyundai and Samsung saw a near doubling of their exports by value. POSCO’s steel exports rose dramatically. On average exports rose 16 percent in 1980, but the chaebol got a disproportionately large share of this. The chaebol also benefited because many of them had qualified for ‘General Trading Company’ status during the seventies which now guaranteed them access to export finance at a time of tight monetary policy.
On the political front, there followed what some have described as the ‘Seoul Spring’. In February 1980 president Choi restored the civil rights of over six hundred political activists who had been banned from politics, including prominent figures like Kim Dae-jung, former president Yun Po-sun and Christian theologian Ham Sok-hon.
The student and labour movements which were to emerge in the eighties were to prove more militant than most of those during the seventies. Student demonstrations began to take off from March 1980 with the start of a new academic year. April the nineteenth was the anniversary of the 1960 student demonstrations which had brought down Rhee. It marked the beginning of a further intensification of student demonstrations calling for the end to martial law which had been imposed by Chung Seung-hwa upon Park’s assassination. Other demands included those for a new, more democratic constitution, an end to compulsory military training, re-admittance of students expelled from universities for political activities, the removal of prime minister Shin Hyon-hwak, and the removal of General Chun, who was increasingly visible as the centre of military power in the state.
During spring 1980 the labour movement also began to gather momentum. Under the Yushin constitution both collective bargaining and strikes had been banned. With the apparent lapse of the system union activity increased with workers voting out union officials thought to be collaborators with the authorities. Increasing numbers of strikes broke out around the country with long pent up grievances being openly expressed. From January to April 1980 there were some 719 labour disputes registered, seven times as many as in the whole of 1979. Of these 534 were over unpaid wages.
The government was in disarray with different officials giving out different messages about the legality of collective bargaining and strikes, the Office of Labour stating that collective bargaining was in fact legal. A number of prominent cases of labour unrest took place during this period.
In Sabuk about 700 coal miners seized control of the mine and the town. Seeking a union leader they saw as corrupt, who had suppressed their grievances, they could only find his wife who they held hostage for four days to keep government troops at bay. During this time she was publicly humiliated. There were violent confrontations with riot police, during which a local police station was ‘sacked’ and looted.
At the Tongmyong Timber Company workers had not received back pay or severance pay as the company had been going bankrupt. In desperation they occupied the company premises and threatened the family of one of the owners with violence.
In the Seoul Peace Market numerous sit-ins and work disputes erupted in the sweatshops over some of the lowest pay and worst working conditions in the country. Although there was no real violence, it added to the sense of ‘things coming apart’.
On 14 April 1980 General Chun first stepped into the public limelight by appointing himself head of the civilian KCIA, while remaining head of the ‘Defence Security Command’. Previously he had worked in the shadows to build his power base, now he openly took control of both civilian and military security posts in violation of the constitution.
During May 1980 tens of thousands of people took to the streets to demonstrate, culminating with a mass rally of 50,000 students outside Seoul Railway Station on 15 May. The numbers involved were much higher than in 1960. There were violent confrontations with riot police during which some deaths occurred. The next day, 16 May, Kim Jong-pil, leader of the DRP called for the end of martial law.
Some in the military and conservative minded politicians seem to have viewed the situation as spiraling out of control. On the 17 May the cabinet met at the capitol building in Kwanghwamun Seoul, to find General Chun, accompanied by a formal armed guard, present. Chun ‘instructed’ the cabinet that they were to extend martial law to cover the whole country, and then resign. Chun used the excuse of infiltration of the south by northern agents to justify his actions, but in retrospect this is generally seen as a flimsy fiction.
A ‘Special Committee for National Security Measures’ (SCNSM) took over government with Choi as chairman. The committee was packed with military and had a ‘Standing Committee’ chaired by General Chun. Conservatives feared the instability would be exploited by the North and intended to stamp it out.
Kim Jong-pil and Kim Young-sam were put under investigation and forced to resign from the leadership of their political parties. Many opposition politicians were arrested for corruption and the two main parties were effectively dissolved.
Strong measures were now taken to end the unrest, universities were shut to stop student rioting. In most areas demonstrators now adopted a low profile seeing the authorities meant business. In one city however, Kwangju, in South Cholla province, the base of opposition leader Kim Dae-jung, a major uprising took place.
The Kwangju conflict seems to have started on 18 May when students staged a demonstration at Chonam National University against its closure and fighting broke out between the demonstrators and a small contingent of paratroopers. The violence then spread to the city centre with thousands of people coming onto the streets. Police struggled to contain the protestors at first and were replaced with paratroops by the late afternoon. The conflict escalated over the next days, with much violence and many horrific atrocities ensuing. There were to emerge reports of bayonetings and burnings with flame throwers by the paratroops.
On 20 May troops shot a number of protestors near Kwangju railway station. Later that day angered by what they saw as biased reporting, demonstrators set fire to the Munhwa Broadcasting Corporation building, also torching the Korea Broadcasting Service building the next morning.
The immediate conflict climaxed on 21 May with troops firing on protestors. Some protestors raided armories and police stations to arm themselves with rifles. Fire-fights broke out between the military and civilian militias. Following this, troops withdrew leaving the streets to the demonstrators and sealed off the city.
Over the next few days citizens’ and students’ committees were set up to run affairs in the ‘liberated’ city. The ‘Citizens’ Settlement Committee’ attempted to negotiate with the besieging military. During this period some sympathetic demonstrations also broke out in nearby cities.
By late on 26 May the military had been reinforced and were prepared to seize back the city. In the early hours of 27 May the citizens’ militias were easily defeated and the army re-established control of the city. Estimates of the death toll from the rebellion vary from the military’s original official estimate of just 144 civilians and 26 security forces killed, to opposition estimates ranging up to 2,000 killed. Kim Dae-jung was arrested on national security charges, including sedition, being blamed for instigating the Kwangju uprising. He was sentenced to death but was later reprieved.
The summer of 1980 was to be a time of economic difficulties. Unemployment was rising, with increasing numbers of workers from industrial centres like Masan returning to their families in the countryside. The government began to back-peddle on its anti-inflationary austerity policies, cutting interest rates. This trend would not last though.
From July 1980 there were attempts to restructure the chaebol, some of which were now duplicating effort and competing with each other in the domestic ROK market. At the behest of the SCNSM, PM Shin appointed a former Blue House economist Park Seong-yawng to lead an effort to restructure the major industrial sectors.
The aim was to eliminate competing and overlapping product lines by a massive corporate restructuring of the chaebol. Ostensibly decisions were made on rational grounds of efficiency. In practice it is alleged that corporate lobbying, and ‘turf wars’ between industrial groups, played a significant role in shaping the final outcomes. In the event some business units changed hands, or ended up in government custody, while there were major management changes in many others.
An initial plan to push Daewoo out of the automotive industry was stymied by the opposition from its business partner, US auto giant GM. Similarly a plan to foist Hyundai’s troubled ‘Changwon Machinery Complex’ onto Daewoo ended up with it in the hands of state owned power company KEPCO. Originally intended to be the flagship of South Korean capital equipment manufacture, the Changwon facility was reportedly massively over-capacity, highly indebted and had few hopes of becoming profitable in the foreseeable future. Daewoo said they could not afford to pay for it, though they would manage it on a service contract basis. Eventually it was handed to the Korean electrical power generator for the reason that its main products were manufactured for the electricity generating industry.
In August 1980 Chun became President of South Korea. First he was promoted to a Four Star General. On 16 August 1980 Choi resigned as President. Chun was then endorsed as President by the military Chiefs of Staff, a constitutional formality, and retired from the army. On 27 August 1980 the NCU elected him President.
In his inaugural speech he pledged the creation of a democratic welfare state, the drafting of a new constitution and elections in 1981. He also promised to work for peaceful reunification with the North and warned that democracy would have to ‘conform to Korean traditions’.
The new constitution limited the emergency powers of the President and provided for indirect election of the President by a popularly elected ‘electoral college’. On 22 October 1980 this new constitution was approved by a national referendum. Political parties were again allowed.
The year 1980 had been a bad one for the economy which contracted with GNP falling by 5.2 percent, the first year this had happened since the Korean War. The annual consumer price inflation rate was 29 percent that year. In his new year speech at the beginning of 1981 Chun made it clear he believed that stabilisation of the macroeconomy came first in the long struggle to improve the economy, indicating an emphasis on anti-inflationary rather than high growth policies.
In February 1981 the elections for the electoral college gave a large majority to Chun’s recently formed ‘Democratic Justice Party’, (DJP), and in March 1981 Chun was elected President for a seven year term under the new constitution. Thus began the ‘Fifth Republic’, a period which remains contentious to this day and rouses strong feelings in many Koreans.
Chun’s regime was to come down heavily on labour activists. From the start he restored and reinforced many of the policies used to control labour activism under Park. The independent labour movement which emerged following the assassination of Park was suppressed by Chun.
In 1980 the FKTU was reorganised with 107 local branches being closed and the chairmen of twelve industrial federations being replaced. As a result FKTU membership fell from just over one million members in 1979 to just over 948,000 members in 1980.
In the early eighties the Ministry of Labour worked closely with FKTU on a daily basis. National Security Planning Agency (formerly the KCIA) agents were present in the offices of FKTU to monitor its activities, sometimes ordering the dismissal of officers considered too outspoken. The Defence Security Command and Seoul Police both regularly visited the FKTU headquarters in Seoul. Through the FKTU the government was involved in promoting the careers of unionists they favoured, while impeding the careers of those they disliked.
While national union officials were monitored by the Ministry of Labour, local union leaders were controlled by the company. They were often bought off by the employers with benefits and privileges such as personal offices, cars and chauffeurs. They were paid by the company. Genuinely independent trade unionists could become the focus of attention of the intelligence services. Blacklisting made it difficult for those singled out by the state as militants to get work.
Trade union activities were restricted and confined to workplace matters by amendments of the “Trade Union Act” in 1981. For example third party involvement in workplace industrial relations, such a union federations, even including the ‘tame’ FKTU, was prohibited. Government laws and policies kept the union movement fragmented. Every workplace had to have a separate union.
The relatively few cases of independent union activity during most of Chun’s reign were dealt with harshly. A cadre of strike breaking police called the ‘paekkol’ (white skull brigades) was created, named after their white motorcycle helmets. They would arrive at the scenes of strikes and sit-ins on motorcycles wearing protective clothing, then use violence to break up strikes. They often worked alongside riot police as snatch squads to seize activists. In the early nineteen eighties workers arrested under the ‘National Security Law’ accounted for a third of all political prisoners.
An example of the treatment of independent unions was the fate of the ‘Cheonggye Garment Worker’s Union’. In January 1981 Chun dissolved it by decree. Out of desperation some garment workers went to the AFL-CIO (American Federation of Labor Congress of Industrial Organizations) Free Labour Institute and took its American director hostage. Two demonstrators threatened suicide if the authorities attacked. When the police forced entry to the building the two workers threw themselves to their deaths out of upper story windows.
The year 1981 was to be a year of purges as Chun’s regime determined to consolidate its hold on power and stamp out unrest. Some 800 politicians and 8,000 civil servants and businessmen were banned from political activity. In addition about 37,000 journalists, students, teachers, union officials, and civil servants were detained in ‘purification camps’. At these camps, often in rural mountainous areas, inmates were subjected to physical exercise, ‘political re-education’, and beatings. Descriptions of the camp regimes by former inmates are strongly reminiscent of descriptions of similar camps in Maoist China. Many died from the severe treatment.
Even today in retrospect, Chun is widely considered to have been one of the most unpopular figures in South Korean politics. Unlike Park he and his family and associates were perceived as corrupt by the general public. Chun expanded the intelligence and security apparatus to strengthen his regime. He vastly expanded the paramilitary riot police force, and by the mid-eighties they numbered around 150,000. These were used to confront the frequent demonstrations wearing the characteristic ‘samurai-like’ armour of helmets and face visors, which became ‘iconic’ of the Chun years.
Chun was unpopular with many in industry too. Some business leaders thought he paid too much attention to the prescriptions of academic, liberal economists, whilst ignoring the advice from the ‘practical men’ of industry and commerce. Businesses also struggled, at a time of recession, to pay so-called ‘quasi-taxes’. These were unofficial donations to various charities or schemes practically extorted from them by Chun or his corrupt relatives. The FKI even dared to recommend in one report that these be replaced by formal, ‘transparent’ taxes.
In the economic sphere, despite some personal interest in ‘micro-economic’ affairs, such as high technology industry promotion, Chun was prepared to hand management of the macro-economy, such as monetary policy and the exchange rate regime, to qualified technocrats who were liberal economists. This was in spite of resistance by some of his military colleagues. Chun’s economic team in the early years had three main goals, to cut the government deficit, limit growth of the money supply, and combat rising wages.
During 1981 the ROK economy returned to growth but at a rate of 6.2 percent per annum, lower than in the seventies. At the end of 1981 the size of the economy had just returned to where it had been at the end of 1979, two years earlier. Inflation was falling in response to the austerity. In 1982 the average consumer price inflation rate was down to seven percent, and in 1983 down to just three percent. In addition the fall in demand for imports helped to reduce the trade deficit.
In 1983 a freeze on government spending reduced the total government deficit to 1.4 percent of GNP, it had been 4.7 percent in 1981. The deficit was cut largely by reducing subsidies to industry, payments to farmers and support for the ‘National Investment Fund’ which had helped finance the operations of the HCI programme.
Monetary policy was tightened, with higher interest rates. The rate of growth of ‘M2 Money’ (cash in circulation plus short-term bank deposits) slowed to 7.7 percent per annum in 1984. It had been rising by 27 percent per annum in 1980.
A range of measures were attempted to slow the growth in wages. Unions were effectively constrained by authoritarian methods. Employers were pressurised to hold down wages.
A new team of economic liberals in the cabinet, brought in after major corruption scandals in ‘curb market’ finance in 1982, sought to advance their cause by ordering a thorough review of the sixth five year plan to run from 1987 to 1991. Their main aims were to dismantle the industrial controls of the Ministry of Trade and Industry (MTI, formerly MCI), and to dismantle the financial controls supervised by the MoF. The role of the MoF would be strengthened at the expense of the MTI, reflecting better the formal legal constitution of these two institutions. The MoF would be used to lower tariffs (import duties), reduce restrictions on imports, and liberalise the regime for foreign investors.
From 1982 gradual steps towards re-privatisation of the banking sector began. That year two commercial banks were privatised and no longer offered the chaebol preferential treatment. The following year, 1983, two new private commercial banks were established. It was hoped these would serve to demonstrate innovative business practices to the other banks in the sector which had been lending under close government direction for a long time and lacked the experience of operating like truly private enterprises.
When in October 1983 two of the leading members of the economics team were killed by a terrorist bomb in Rangoon set by North Korean agents, a new economics team was formed which has been described as having pursued a less radical course of liberalisation. They continued to put fighting inflation first however. When the year 1983 posted a high growth rate of 11 percent, the team reacted with tighter monetary policy, fearing the economy was overheating. Growth was slowed to eight percent in 1984 and five percent in 1985. The slowdown put great financial pressure on many industrial groups.
This new team has been described as adopting a ‘command economy’ approach to managing the economy in the period 1984-85. As one means of fighting inflation they employed a ‘wages policy’, freezing the pay of state employees for several years, and issuing wage-price guidelines to private business. The Ministry of Labour determined annual wage increases through government wage guidelines and was the final arbiter of all disputes. It had powers to review all documents relating to a dispute, including internal union documents. It could disband unions considered too militant.
By 1984 the rate of wage growth had been reduced to 10 percent per annum, a rate which was maintained through the mid-eighties. As a comparison, during the late seventies wages had been rising by more than 30 percent a year.
In the mid-eighties an independent union movement was beginning to emerge. Underground unionists worked with political activists, including student activists to organise leading independent union associations, such as the ‘Korean Labour Welfare Association’, with the support of Christian groups and the ‘Seoul Labour Movement Alliance’, set up by a dismissed unionist. Such groups organised several important strikes at chaebol workplaces including the ‘Daewoo Motor Company Strike’, in which some student activists took part, disguised as workers. The ‘Daewoo Apparel Co. Strike’ and the ‘Kuro Allied Strike’ in 1984. In 1986 the ‘Inchon Workers’ Alliance’ was also set up by student activist groups. Many of these strikes did not end well for those who participated.
The government’s new economics team also sought to restructure various industries by direct government intervention and industrial policy as opposed to relying on market forces working through the system. For example the government sought to restructure the shipping industry, which was hit by the fall in international trade during the nineteen eighties’ global recession. The industry was already protected, with Korean exporters being required to ship their goods by Korean shipping firms. The Korean shipping firms in turn were compelled to purchase their vessels from Korean shipyards, for which they received state subsidies on the cost of new tonnage. Some sixty seven shipping firms were consolidated into just seventeen according to a government plan. These mergers tended to favour stronger companies with deeper pockets, usually the chaebol. It is claimed that Hanjin and Hyundai were big winners in the restructuring process.
Another example was the construction industry which had entered a deep recession in the eighties following the boom of the seventies. Many small construction firms went bankrupt and the government attempted to force the surviving firms to take them over. This idea was unpopular with some firms and some of the larger, stronger ones resisted the government on this issue.
There were occasions when the economists’ restructuring plans were apparently hijacked by Chun for political reasons. In early 1985 the Kukje chaebol was dismembered by its major creditor Cheil Bank (‘First Korean Bank’) and effectively ceased to exist. Though justified as part of a rationalisation effort directed at the chaebol, many saw it as punishment for the company founder’s support of the opposition political leader Kim Young-sam. It is reported the chaebol generally took it as a warning sign to ‘toe the line’.
In the event the expected ‘attacks’ on other deeply indebted chaebol did not materialise. It has been suggested the government backed-off from such a radical programme because of fears of the damage it would cause to the economy, and the damage it might do to the confidence of foreign investors and lenders.
The liberal economists had other plans for the rationalisation of the chaebol which never really bore fruit. Each industrial group was ordered to identify its core and peripheral activities. The intention was that groups would divest themselves of the peripheral activities and focus just on their core activities. In the view of these economists, over-diversification meant a lack of specialisation and thus a lack of efficiency. They believed forcing these groups to specialise would increase productivity. Some industrialists, such as Chung Ju-yung of Hyundai, complained that the division into core and peripheral activities was a false distinction.
From 1985 the ‘Office of Bank Supervision and Examination’, (OBSE), began a programme aimed at forcing chaebol to shed peripheral businesses by starving these affiliates of credit. It was opposed by strong lobbying, and public statements in the press from the leading chaebol and the FKI. The attempt to control the direction of credit by the state was even attacked as a ‘retreat from liberalism’. In the event the regulators backed-off, greatly watering down the measures effectively abandoning the effort. This confrontation hinted that despite their huge financial vulnerability there was a shift in the balance of power from the state in favour of the chaebol.
Another idea of the liberal economists was to push the chaebol away from their traditional dependence on finance from banks and commercial loans, and to move them towards the ‘Anglo-American’ model of relying more on shareholder investment. This was intended to have a number of beneficial effects. Firstly it should reduce the indebtedness of industrial groups by providing extra finance. Equity financing was intended to be a less burdensome form of company finance than commercial loans which compelled the recipients to a stream of repayments. Secondly it was intended to transform the chaebol from ‘family firms’ run by relatives, thought to be inefficient managers, to public corporations with a more professional management class. Thus the chaebol should become more efficient, less corrupt, and better run, facing the scrutiny of shareholders. Thirdly it would boost the development of the Korean stock market, creating a more liberal, market oriented form of Korean capitalism. In effect it was intended as a ‘modernising’ policy.
The “Capital Market Promotion Law” (1983) was used to force chaebol to sell shares to the public. The chaebol responded grudgingly and did not embrace the policy with enthusiasm. Industrialists did not yet see the Korea Stock Exchange (KSE) as a valuable source of investment funds. In addition the state set the prices of share issues. The policy was criticised as mere ‘political theatre’ for public consumption. However in the late nineteen eighties the KSE was to undergo rapid growth. In 1985 the stock market value only equated to nine percent of GNP, but by 1990 it had risen to sixty percent of GNP. Eventually the chaebol themselves would come to dominate the business of issuing securities.
Attacks by the Chun regime on the chaebol are generally seen as having been a political tactic by which Chun could make himself more popular with the public who distrusted these conglomerates. The economists who drafted and implemented many of these plans however, had a clear goal of restructuring South Korean industry and finance.
The Year 1985 was to prove a turning point for the ROK economy in the nineteen eighties. All indications were bad except the low inflation rate. In 1985 the newly privatised banking system nearly collapsed under the weight of underperforming loans, mainly to the chaebol, and had to be bailed out by the state. The central bank, the ‘Bank of Korea’, stepped in with 300 billion Won of emergency low interest loans to the troubled banks. It was the first of three such tranches of central bank loans from 1985 to 1987 which totalled 1.7 trillion Won. In addition the banks received government aid from other ‘special funds’. This money was mainly passed on to the debt laden chaebol to roll over their loans and prevent them collapsing.
The massive bailout was conducted in a less than transparent manner. Apparently the shareholders of the recipient banks were unaware of the details. Some banks which were in less trouble were publicly critical of the bail out, warning of the dangers of ‘moral hazard’. That if banks knew they could always fall back on state bailouts they would be less likely to be careful in their loans, and become less efficient as businesses.
In spite of these measures at the end of the decade the five main commercial banks were still struggling with about 2.5 trillion Won of non-performing loans. In addition chaebol debt to state owned financial institutions accounted for a similar amount again. The fragility of the banking system was used as a justification for the continued exclusion of foreign competition from the South Korean financial sector.
Banking liberalisation under Chun was partial. The state retained some control by reserving the right for the MoF to appoint bank presidents and the right to appoint executive board members. Many such personnel were in fact former MoF officials. Through such mechanisms the state could continue to influence the activities of the banks even though they were formally private businesses. It was in this way the state was able to use the banks to implement policies such as the restructuring of certain chaebol and industries. In fact these policies cost the banks substantial sums in new loans, deferred interest collection, and write offs totalling over ten trillion Won. Such measures were often part of the agreements by which firms would take over failing enterprises.
One fear of the economists, soon to be realised, was that the chaebol would move into the financial sector en masse. This would actually give them greater financial independence from the state, and thus more freedom of action and power to make their own business decisions. Rather than curbing the chaebol it would strengthen them. Safeguards were thus put in place to prevent chaebol control of the banking system, ceilings were placed on share holdings by any single shareholder in a bank, also ceilings were placed on the percentage of loans and loan guaratees available to the chaebol.
However in the late eighties a parallel system of private finance was growing. The activities and number of “Non-Bank Financial Institutions” (NBFIs) increased as a result of liberalisation. They offered higher rates of return than the banks. This enabled the bringing of funds which were previously directed into the informal ‘curb’ sector into a formal, state regulated sector.
On the one hand the state regulated the NBFIs, with MoF setting their interest rates. On the other hand NBFIs provided a means for chaebol to get around the restrictions on their activities in the banking sector, such as borrowing limits and ownership restrictions. The chaebol began to acquire NBFIs because they were facing difficulties obtaining funds in the era of tight monetary policy and high interest rates of the mid-eighties. By 1990 the chaebol owned fifty percent of all NBFIs.
From late 1985 to 1986 there occurred a dramatic improvement in the fortunes of the South Korean economy. It was mainly caused by changes in the external global economy. One important impediment to South Korea’s exports had been the pegging of the Won to the US dollar. In the mid-eighties the US dollar was at a high level which damaged the export competitiveness of the ROK. US Treasury Secretary James Baker now sought to fight the yawning trade deficit of the USA by agreements on currency revaluations with America’s main export competitors, notably Japan and West Germany, in late 1985, known as the “Plaza Accord”. The new policy of a weaker dollar immediately boosted South Korea’s exports. Korean exporters gained market share at the expense of Japan mainly, but also at the expense of some European exporters.
Along with the currency issue two other favourable factors helped the Korean economy. Firstly the weak dollar policy meant lower interests rates in the USA stimulating growth in Korea’s most important export market. America sucked in South Korean exports, rapidly increasing its share of ROK exports from just over a third, to 40 percent of a much larger total value of exports in 1986. Secondly a collapse in the price of oil in November 1985, caused by cut-throat competition between OPEC members for market share, the so-called “Third Oil Shock”, made energy imports dramatically cheaper.
From 1986 to 1988 the ROK economy grew by over 12 percent per annum in the three consecutive years. The year 1986 was the first year South Korea actually posted a trade surplus. The export surpluses soon became large, totalling a sum of US$ 23 billion over these three years. The value of total sales of the major chaebol increased anything from four-fold to ten-fold over the decade of the eighties, largely due to this late eighties boom. Commentators present in the country recorded the social changes. In just a few years South Korea changed from a society of austerity to one where signs of conspicuous consumption were apparent for the first time. By 1988 the economy of the ROK was more than twice the size it was when Chun seized power.
With the export boom debts were steadily paid off and the debt crisis receded from view for the time being, though events at the turn of the twenty first century were to show that structural weakness still persisted in South Korea’s major industrial groups. Other new tensions emerged, though, including trade friction with Japan and protectionism in the West.
The USA removed South Korea from its ‘Generalised System of Preferences’ (GSP), by which it gained lower import duties on its exports to the USA, on the basis that the country was now sufficiently developed not to need preferential treatment. In 1988 the European Community (EC) suspended South Korea’s eligibility for GSP benefits in a dispute over intellectual property protection.
A trend emerged of the chaebol setting up production affiliates in their target market countries. As the costs of production were often higher in these countries the motive was most likely to circumvent trade barriers. An accompanying trend was an increase in spending by the chaebol on advertising in support of the increased production. In 1985 Korean companies spent only US$ 4.1 million on advertising in the US market, by 1988 it had escalated to US$ 150 million.
The export boom undermined the government’s attempts to control the money supply. As companies repatriated their profits it threatened to boost the money supply. To deal with this the government issued low-yielding monetary stabilisation bonds and forced financial institutions to buy them. This propped up interest rates and helped maintain tight monetary policy.
Companies attempting to expand to make the most of the export boom found the government’s tight monetary policy making it difficult for them to get the finance they needed. In 1986 the government even temporarily banned companies from taking foreign loans, still deeply concerned about the debt burden on companies and banks.
Companies turned, as the government hoped, to the KSE. In 1985 total market capitalisation stood at US$ 10 billion, but by the end of 1989 it had reached US$ 130 billion. In 1989 alone Korean companies raised US$ 20 billion on the KSE, more than was raised on the New York Stock Exchange that year. The government pricing of new share issues meant that such issues were usually oversubscribed. This was a deliberate policy of the government to guarantee a quick profit to those who ventured to take up the offers. For example in May 1987 Daewoo Telecommunications share issue was more than two hundred times oversubscribed. The company was in the midst of a successful PC export venture.
Some companies were forced to turn to expensive ‘curb’ finance, while other companies started to find ‘back door’ ways of obtaining finance. Businesses developed manipulations on the foreign currency markets which provided foreign banks a means to invest in Korean companies circumventing government controls. Though these methods were not technically illegal, the government stamped down on them, the Bank of Korea banned the transactions and punished the offending companies by forcing them to buy government bonds at below value.
Samsung led the way in issuing convertible corporate bonds on foreign markets as a means of raising foreign capital. In 1985 Samsung Electronics started to issue convertible corporate bonds in Europe. These bonds gave a very low interest payment, e.g. as low as 1.75 percent per annum, but could be converted into common stock in the company for a payment in excess of the normal stock price. In spite of the premium the bonds sold well. The MoF took up the suggestion of this method of financing by Samsung, but tightly controlled the number of companies allowed to use such finance till 1990.
Despite the rhetoric of economic liberalisation, the government under Chun in fact attempted to keep a tight control of the financial sector. The privatised banks were kept under control as described above, and were largely protected from foreign competition as it was feared their debt burden could easily result in their collapse. The KSE and securities businesses were small, exclusive and tightly regulated industries. For most of the eighties there were just twenty five Korean securities firms, with entry to the business tightly controlled by the government. There were fears that if fully liberalised, the in and outflows of ‘hot’ foreign money could destabilise the Korean financial sector. This was a view which was to prove prophetic at the end of the nineteen nineties.
While the export boom was taking off there were dramatic developments on the political front which were to lead to a sudden and unexpected return to electoral democracy. During the mid-eighties Chun had begun a modest liberalisation ending the intensive police surveillance of college campuses, releasing some student activists who had been arrested, ending the night time curfew, and relaxing restrictions on political activity. However political demonstrations became more frequent not less.
In 1984 Kim Young-sam and Kim Dae-jung formed an umbrella group to oppose the regime, the “Consultative Committee for the Promotion of Democracy”. In January 1985 members of this group formed a new political party, the “New Korea Democratic Party” (NKDP). In February 1985 the NKDP won a third of seats in the National Assembly. Later in 1985 Kim Dae-jung returned to the ROK and was immediately placed under house arrest. Kim’s presence in the country encouraged an increase in opposition activity.
In 1986 the Chun government began negotiations with the NKDP about a new constitution. As it transpired Chun was to honour his vow to retire after one seven year term of office, but was trying to secure a transition to his preferred successor Roh Tae-woo. However the tensions within the ranks of the opposition re-emerged and the NKDP split up. Kim Young-sam and Kim Dae-jung formed a break away party together, the “Reunification Democratic Party” which was less compromising with the government than the rump of the NKDP. The negotiations over a new constitution were broken off.
In January 1987 Pak Chong-chol, an activist from Seoul National University, died during torture and interrogation. This caused a lot of hostility among the public towards the government and there was a new outbreak of student demonstrations. Then on 13 April 1987 Chun announced that the NCU would choose the next president. This indicated that the appointment of Roh would be a mere formality. This triggered large scale political activity involving not just the usual student and labour activists, but many dissatisfied members of the educated professional middle classes.
Despite growing political unrest on 10 June 1987 the DJP nominated Roh as their candidate for the presidency and large street demonstrations involving citizens from all walks of life erupted. A military crackdown looked to be imminent. The night before the nomination, a student activist Lee Han-yol was critically injured when a rifle-launched tear gas grenade hit him in the head at point blank range, causing further public outrage. The depth to which Chun’s popularity had sunk was attested by the sympathy and support for demonstrators shown by middle class white collar workers, the ‘salarymen’.
Another political factor was the approach of the 1988 Summer Olympics which had been awarded to Seoul in 1981 by the International Olympic Committee. The IOC now threatened to relocate the games if the situation escalated. To lose the Olympic franchise would be a severe loss of face for the government and the nation. It would cost Korean business and the government in financial as well as political terms too. On 22 June 1987 Chun offered to compromise with the political opposition but was ignored. On 26 June 1987 over 100,000 people joined a peace protest march in Seoul.
On 29 June 1987 Roh with Chun’s approval declared that the DJP would accept a new constitution with provisions for direct election of the president. A number of liberalisation measures were also announced; the end of censorship, the release of political prisoners, and the allowing of political activity by opposition groups. Following this the political protests quickly died down. The series of demonstrations from 10 to 29 June 1987 would become dubbed the “June Democracy Movement”.
At the end of June following Roh’s statement of intent to democratise, although protests by students and dissidents died down, there was a sudden explosion of industrial unrest. During Summer to Autumn 1987 over 3000 strikes erupted across the country, more than in the previous ten years combined. From June to October 1987 it has been estimated that over a million workers participated in strikes. One study found that 32 percent of all manufacturing firms with over 300 employees suffered strikes during 1987, with two thirds of large factories, employing over 1000, being hit.
These were illegal wildcat strikes. They started in several industrial cities on the southern coast, spreading from Ulsan westwards to other industrial centres including Pusan, Changwon, and Masan. Within a month they had spread north to Inchon and Seoul.
By August the industrial unrest assumed the character of a general strike. As well as strikes in the major chaebol; Daewoo, Hyundai, Kia, Samsung and Lucky-Goldstar, taxi drivers and bus drivers also went on strike in many towns and cities. Fishermen went on strike, even closing the Pusan fish market. Coal miners from thirty two mines went on strike reducing national coal output by half.
For years workers had bourn the main burden of making Korea’s firms both small and large profitable. Workers accommodated in company dormitories and fed in company refectories were prey to a form of industrialised slavery in which employers often failed to pay wages, delayed payment or only ever partly paid what was owed to their staff. Unpaid and underpaid wages were a widespread cause of disaffection among Korean workers.
With the sense that democracy was approaching, the blue collar workers now demanded that their grievances were heard and addressed. By 1987 the industrial working class population had significantly grown. During the three years of the export boom 1986 to 1988 a million new jobs were created for blue collar workers in manufacturing industry. In spite of the growth of the workforce membership of FKTU affiliated unions had been falling through the decade due to the official unions’ evident impotence.
This new struggle was mainly centred on heavy industry unlike earlier labour strife which tended to affect light manufacturing. Most notable for its scale, duration and acrimony was the series of strikes that hit Hyundai. Large employers like Hyundai which employed tens of thousands concentrated in relatively small sites were a breeding ground for independent and militant labour activism. The Hyundai strikers were notably militant clashing with police through July and August, occupying shipyards and factories. Starting with Hyundai Engine workers, the workers at twelve other Hyundai affiliates founded their own independent unions within a month.
Hyundai workers staged marches in Ulsan, wearing hard hats and gas masks, accompanied by heavy vehicles. There were some clashes with riot police. They eventually took over Ulsan Sports Stadium from where an agreement was negotiated with management. Trouble continued at other Hyundai sites throughout September though, especially at the shipyard where there were numerous clashes with police.
On Geoje Island Daewoo’s shipyard was rocked by violent struggles, during which a young worker Lee Sok-kyu was critically injured when hit by a tear gas grenade. This triggered an escalation of violence. The hospital holding Lee was occupied by workers and a hotel believed to be used by the management was attacked.
Not only did workers demand better pay, but objected to militaristic discipline, strict dress codes, compulsory morning exercises, poor food in company canteens, the gulf between blue collar and white collar status, and the work appraisal systems. August marked the peak of industrial unrest overall. At this peak over a million workers were involved, about a third of the workforce. Most industries were affected in some way. Many of the strikes were successful with large wage increases and improved employment conditions being obtained in many cases. The year 1987 was to be called the year of the “Great Workers’ Struggle”.
In December 1987 presidential elections were held under what were generally agreed to be free and fair conditions. In a supreme irony the opposition vote split, enabling Roh to win the election with 37 percent of the vote as opposed to Kim Young-sam with 28 percent and Kim Dae-jung with 27 percent.
Roh is thought to have won the conservative vote of those most concerned about the stability and security of the country, while Kim Young-sam has been identified with the educated middle-class liberals and white-collar voters. Kim Dae-jung has been identified with the left-wing and labour unionist voters.
The most striking feature of the pattern of voting however was its regional character. Kim Young-sam got strong support from his political base in Pusan and the South Eastern province of South Kyongsang. Kim Dae-jung got strong political support from his political base in Kwangju and the Honam region, including North and South Cholla. While Roh got strong support from his political base in Daegu and North Kyongsang.
Chun served out his term till the last day on 25 February 1988, when Roh’s five year presidency commenced. Thus came to an end the tumultuous ‘Fifth Republic’.