Sudden government changes and political violence in South Korea have threatened an already troubled economy with loss of significant support from all-important foreign investors, business leaders here say.
Foreign bankers, developers and economists say South Korea's longterm prospects are still good, given its hard-working labor force and savvy financial leadership, but eagerness for immediate heavy investment has fallen off.
Many foreign banks are already close to their country limits for loans to South Korea. They appear unwilling to increase their commitments until it is clear that political upheaval has ended and Seoul's new military rulers are not going to interfere in economic management.
The October assassination of president Park Chung Hee and the subsequent military coups and students uprisings "could not have happened at a worse time," one American banker said. "Three weeks before Park died they were predicting 1980 would be a difficult year" because of the anticipated American recession and self-imposed growth curbs to cure inflation, which was approaching 30 percent a year.
In response to both the political and economic difficulties, foreign banks here have raised by 50 percent the cost to Korean business of short-term loans financing their crucial export-import market. One banker suggested that when the Seoul government next attempts to secure major overseas long-term financing, including a $600 million syndication loan expected in October, foreign banks may participate but cut back on short-term lending to keep from increasing their total commitment in Korea.
Such a move, said the banker, "would have a serve impact on the capacity of Korean businesses to balance their books."
Oil price rises have hit South Korea hard, despite progress toward building nuclear plants. The tourist trade dipped severely during the uprisings in May, although it may pick up now that the Streets have returned to normal and Seoul is hosting the Miss Universe pageant. Light industrial exports remain sluggish, however.
Seoul's long time economic planners, who still hold positioned of influence in the post-Park, martial-law government, would have had great difficulty this year in any case reining in an economy weakened by too much success. Some analysts suggest that the country's growing middle class, whose wages have for years climbed even faster than prices, have forsaken the frugal habits of consumers, in other developing Asian nations, such as Taiwan, and gone on a dangerous spending spree.
Last year, the government attempted to impose limits on salary increases, restrict the growth of the money supply and curb domestic credit. South Korea depended on its ability to produce reasonably priced, light industrial goods for export, but rising wages were beginning to price Korean goods out of the world market.
The effort to reduce real wages collapsed because of the need to win popular support after Park's death. The government devalued the won by 18.7 percent. Early this month it announced a series of credits and subsidies to produce more jobs, further refueling the inflationary spiral.
The philosophy behind Korea's extraordinary economic growth in the last decade has been high inflation and heavy borrowing from abroad. Its government financiers are vigorously courting foreign investors to ensure that the foreign money base does not collapse. A meeting of the international economic consultative institutions that are most heavily involved in the country's development just ended in Paris. The head of the Bank of Korea left the Paris conference for a tour of leading bank offices in the United States.
After the Park assassination, then-deputy premier Shin Hyon Hwack called a meeting of resident foreign business leaders here. "I think we were all very reassured," one participant said. But on Dec. 12, a group of military officers led by Lt. Gen. Chon Doo Hwan arrested their military rivals, necessitating another reassurance meeting of the foreign business community, this one conducted by Deputy Vice Premier Lee Bin Hahn.
Last month, when unrest brought full martial law and insurrection in the city of Kwangju, Deputy Premier Kim Woun Gei had to host a third meeting for worried businessmen.
"So should we believed the reassurances any more?" said one U.S. banker. "I'm not saying they are not sincere, but this is like a three act play with each act the same. Is there going to be a fourth act or a fifth act? I don't know."
Chon and other military leaders have since held their own meetings with American businesses here. Chon assured one group "there will be not more Kwangjus." The statements reassured some of his listeners, but others wondered if Chon meant the military would use the same strong-arm tactics that goaded Kwangju residents into the May insurrections in the first place.
Some of the most respected economic planners in the government, such as foreign trade expert Kim Jae Ik, have been given important posts on the new special committees set up by the martial law leaders.
"There are capable people. They are professional, lifetime bureaucrats," said one foreign businessman. "But do they control the destiny of this country? I guess the answer is no."
American managers report that the government is much slower now in responding to queries and requests. The rule under the Park administration, when requests were funnelled quickly through the presidential staff at Blue House, was about two weeks for a reply. Now several weeks go by.
However, one large U.S. firm, Purina Korea, is proceeding with a $7 million animal feed plant at Kunsan, its third such plant here. Minnesota Mining and Manufacturing is also reportedly considering major expansion.
"I think we would prefer to see a civilian-oriented government," said one American businessman who has been here for several decades. "But the good progress [under Park] was made under a highly centralized, military-oriented government, and no one would want to prejudge what might happen."
"There are two theories," said an American economist. "Some say this is a society with ancient authoritarian traditions and the people want that kind of leadership and because of their perception of the threat from the North will accept military rule, if not really welcome it.
"Others say this society has progressed so far in the last 20 years in the extension of educational and material benefits that you have an economically strong middle class that will not accept such rule, and must have a more liberal form of government for stability.
"I tend to find the second argument more convincing."