Download Human Capital Conference Belguim 17 Dec 02

What Works in Hard Times?
the case of the Korean financial
crisis (1997-1999)
Raymond Torres, OECD
1
The financial crisis (1997-1999)
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2
Foreign exchange crisis in Autumn 1997, credit
crunch led to falling output (-6.7 % GDP growth in
1998)
Rapidly rising unemployment during 1998 (from 2 ½
per cent in 1997, to over 8 ½ % in early 1999)
One million Koreans thrown into poverty in 1998
What works?
Factor 1: Wage flexibility
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3
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Significant wage adjustment: in 1998, nominal
wages fell by 2 ½ %, implying a real wage cut by
10%
Depreciation of the Won, which together with real
wage cuts led to better competitiveness
In 1999/2000, real wages recuperated pre-crisis
levels
What works?
Factor 2: Rapid and massive expansion of
safety net
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4
Before the crisis: limited unemployment benefits,
very small social assistance net
Between 1997 and 1999, this is what was done:
 spending on labour programmes: + 2.5% of GDP
 number of workers eligible to unemployment
benefits doubled
 beneficiaries in public works: + 1,5 million
 people on social assistance benefits: + 0,5
million
Coverage of the Employment Insurance System (EIS)a
July
1995
January
1998
July
1999
December
2000
September
2001
Octobe
r 2002
Wage and salary earners
12 824
12 500
12 603
13 142
13 265
13 932
Eligible for EIS
4 280
5 190
8 342
8 700
9 269
9700c
Actually insured
4 204
4 309
5 876
6 747
6 884
7 102
Eligible as a percent of wage and salary earners
33.4
41.5
66.2
66.2
69.9
70c
Insured as a per cent of eligible workers
98.2
83.0
70.4
77.6
74.3
73c
Insured as a percent of wage and salary earners
32.8
34.5
46.6
51.3
51.9
51.0
..
..
13.5b
..
17b
5
Proportion of unemployed receiving benefits
Public and private employment offices
Ministry of Labor offices
Offices
Staff
Private employment offices
1995
2001
October
2002
1995
2001
October
2002
1995
2001
October
2002
52
191
166
285
269
253
1 271
4 361
5 265
1 000
2 497
2 354
360
1 370
1 975
3 500
..
..
.. : Data not available.
6
Local government offices
Source: Information by Ministry of Labor.
What works?
Factor 3: Funding of programmes through
small rises in taxes and…lower public wages!
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7
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Small increase in social security charges to fund
the Employment Insurance Fund
Cut in civil servants wages (by 10% in real terms in
1998)
Reorientation of public spending towards
employment and social programmes (public
spending about 23% of GDP)
Good starting position in 1997 (small public debt)
How was this possible?
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8
Tripartite agreement of February 1998 (3 months
after start of the crisis) with reforms covering
many issues
Central government and local authorities worked
hand-in-hand
Shared effort and, in the face of the crisis,
social cohesion