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Among Asia’s crisis-hit economies struggling for recovery and reform, South Korea may well claim it leads on both counts. Interest rates, the currency and equity prices have markedly improved from the depths of a year and half ago. A return of market confidence is also in evidence as foreign capital flows in and access to international credit is reopened, albeit selectively. Upon completing his first year in office in February, President Kim Dae Jung had good reason to declare that, financially at least, the country was out of danger.

The International Monetary Fund now forecasts a sharp GDP rebound to 2 percent growth for 1999 from last year’s contraction of more than 6 percent. Yet, the structural and social issues exposed by the crisis remain as formidable as before. Unemployment continues to bulge, and now threatens to reach the 9 percent level. President Kim is under pressure to show results, most of all, in restructuring the “chaebol” — the country’s powerful, but overstretched and debt-ridden,business groups.

Reform has gone forward more visibly in the financial sector and labor relations. Progress would not have been possible without Mr. Kim’s embrace of the IMF’s tough and unpopular prescriptions for reform in return for an international bailout package of nearly $60 billion. Having long been a victim of South Korea’s authoritarian politics until saved by the democratization of the late ’80s, the reformist leader virtually identified his goals with the IMF-World Bank’s calls for open, transparent and accountable institutions.

Ten years into a postcommunist world, Japan, South Korea and the United States still share a unique security concern over the presence of a hostile and unpredictable regime in the northern half of the Korean Peninsula. The three allies are pursuing a two-track policy of firmness and engagement. As South Korea concentrates on economic revival, it needs no added tensions.

Mr. Kim’s initiatives also brought off what promises to be the beginnings of a true reconciliation with Japan. The prospect of a strong turnaround in the world’s 11th-largest economy — a neighbor — topped by new warmth in bilateral ties, would be a boon to Japan as it seeks to redefine its place in Asia’s changing security and economic relations.

In the restructuring of South Korea’s financial sector, the Financial Supervisory Commission served as all-powerful referee. It screened the country’s banks, life insurance and financial companies and forced nonperformers to exit in droves. Three troubled banks placed under government control have been proposed for sale to foreign financial groups. Seven better-performing banks or those having met the commission’s criteria were not spared restructuring either. Two of them already merged in January and another two are marked to combine into one. When the current phase of reorganization is over as planned in two years, many expect stiffer competition — aided by the presence of foreign players — to upgrade the corporate performance.

Labor reform, especially the revision of the Labor Standards Law that was pushed through the legislature early last year, was widely received as an epochal step toward introducing more flexibility as urged by the IMF. The reform is expected to enable employers to adjust more flexibly to hard times, although some seasoned observers of the South Korean labor scene say the measure’s significance is chiefly declaratory.

Clearly, the toughest challenge to President Kim’s structural reform campaign is the downsizing of the conglomerates. They borrowed heavily to finance expansion, which dangerously strained South Korea’s financial system and their proliferating affiliates created excess capacity in various sectors. Decision-making by the family-controlled chaebols are widely faulted for a lack of transparency and accountability.

The government is pressing the major chaebols for accelerated reform, mixing persuasion with threats of a freeze in bank credit. But the chaebols’ much-publicized plans for restructuring have not yet made much progress. The policy of the IMF and the government is to see the debt-to-equity ratio cut to 2 to 1 from more than 4 to 1 at present. But it turned out that the country’s five largest conglomerates last year increased instead of reducing their assets significantly.

President Kim speaks of South Korea becoming a model for Asian recovery. Indeed, the country stands out on a regional economic landscape that is now being swept by a wave of re-Westernization. His reputation is at stake, but the more important question is whether South Korea’s recovery and reform will proceed in a mutually supportive way.

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