LAST YEAR'S Asian crisis served as a reminder that the world's financial system is only as strong as its weakest link. So the repair of an especially weak link, even one that many Americans have barely heard of, is worth welcoming. This month the creditors of Daewoo, South Korea's second-largest conglomerate, approved a plan to break the firm into pieces and sell off all but the car-making bits. If the project stays on track, the cash from this sale will go to pay down part of Daewoo's astronomical debts. The new, slimmed-down Daewoo will be more stable than its predecessor; and as the old Daewoo accounts for more than a tenth of South Korea's exports, the entire economy will gain.
It is too early to celebrate, however. Daewoo has fallen on hard times before. It has promised to submit to dismemberment before. But each time the promise has merely bought time from creditors, and allowed Daewoo to soldier on intact. As a result, South Korea never escaped the shadow of a sickly giant whose potential for collapse represented a standing threat to its economy. It is important that the South Korean government, which came to Daewoo's rescue in past crises, deliver on its promise to see the restructuring program through to its conclusion. The international community, which had to pony up a $58 billion bailout for South Korea in December 1997, has a legitimate interest in keeping the pressure on as well.
Daewoo's restructuring is by no means the only task facing South Korea's reformers. Several other over-indebted conglomerates, notably Hyundai, are in need of makeovers. South Korea needs to enact solid bankruptcy laws, which would make such restructurings routine, rather than tests of political will. There has been much talk of selling insolvent banks to foreign investors, who might end the practice of lending on the basis of connections rather than merit.
Over the past year, South Korea's government has opened its economy to imports and foreign investment. It has closed and merged some banks. These reforms helped make Seoul's stock market a star performer in the first half of this year. Meanwhile, currency devaluation helped boost exports. The good news will be if these results spur the South Koreans on to further economic restructuring. It would be terrible if the recovery encouraged the idea that the need for hard reform is gone.