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INTEREST GROUPS AND LOBBYISTS
IN AMERICAN POLITICAL PROCESS
Yong Hyo Cho
Graduate School of International Studies
Sogang University
1.GROUP THEORY AND INTEREST GROUPS
Interest groups or groups in general are considered a strikingly significant
force in American society as well as in American politics. In fact, one of the two
most popular approaches to the study and interpretation of American politics
during the post World War Ⅱ period is the so-called “group theory,” the other
being “power structure” study.
Group theorists suggest that groups, not individuals, are the basic unit of
political participation. There are a wide variety of groups in terms of the kinds of
interest represented, size of the groups, and the level of influence they exert.
These groups represent economic, political, ethnic, cultural, ideological, and
religious interests and differences, among others. The political process is
considered essentially a process of group competition for power over the
Yong Hyo Cho
6
allocation of resources. No one group is believed to be large enough or strong
enough to dominate politics at the national level, or in most states and
communities, since the largest group is inevitably a minority by itself. Therefore,
groups form coalitions to create a dominant majority, while the opposing groups
act as countervailing forces. 1
The group concept of politics stresses the pluralistic nature of American
politics where individuals with shared interests form groups and participate in
the political process to reflect their interests and views in the policy -making
process in competition with other groups. However, some critics argue that group
theory and the pluralistic concept of American politics has an upper class bias.
E.E. Schattschneider indicates that business and the upper class elements
dominate groups that are active in politics. Schattschneider says:
The business or upper-class bias of the pressure system shows up everywhere.
Businessmen are four or five times as likely to write to their congressmen as manual
laborers are. College graduates are far more apt to write to their congressmen than people
in the lowest educational category.
The data raise a serious question about the validity of the proposition that special-interest
groups are a universal form of political organization reflecting all interests. ··· the vice
of the groupist theory is that it conceals the most significant aspects of the system. The
flaw in the pluralist heaven is that the heavenly chorus sings with a strong upper class
accent.2
The scholars representing group theory include: David B. Truman, The Governmental
Process; Political Interests and Public Opinion (New York: Alfred A. Knopf, 1951) ; Earl
Latham, “The Group Basis of Politics ; Notes for a Theory,” The American Political Science
Review, Vol XLVI, No. 2, June 1952, pp. 376-397 among others.
2 E.E. Schattschneider, The Semi-Sovereign People (New York; Holt, Reinehart, and
1
Interest Groups and Lobbyists in American Political Process
7
Group theorists may have exaggerated the importance of groups and their
egalitarian nature by stressing their universality. For example, a pioneer of group
theory, Arthur Bently, stated that the “great task in the study of any form of
social life is the analysis of these groups. When the groups are adequately stated,
everything is stated. When I say everything, I mean everything. The complete
description will mean the complete science, in the study of social phenomena, as
in any other field.” 3
It is not the intention here to argue for or against whether the group is
universalistic, pluralistic, or has an upper-class biases. The intention here is to
emphasize the importance of interest groups, pressure groups, or lobbies in
understanding the policy-making process and political life in the United States.
Concern over interest groups is as old as the Republic itself. James Madison, one
of the Founding Fathers of the United States, discussed the importance of
interest groups in The Federalist Papers, which he called “factions.” Factions
were viewed as being inherently bad, but not necessarily detrimental. He believed
that the “system of numerous and divided powers would act to prevent any of the
narrow factional interests from gaining a position of dominance in government
and the society.” 4 This view, espoused by Madison, is surprisingly similar to an
assumption of the contemporary group theorists regarding the existence of
opposing interest groups that present countervailing pressure against dominant
3
4
Winston,Inc., 160). Reprinted in Frank Munger and Douglas Price (eds.), Political Parties
and Pressure Groups. (New York ; Thomas Y. Crowell Company, 1964), pp. 130-147.
Quotation is taken from pp. 139, 141 and 142. Robert H. Salisbury finds that Washington
lobbyists today are largely as elitist group. See “Washington lobbyists: A Collective
Portrait,” in Allan J. Cigler and Burdett A. Loomis (eds.), Interest Group Politics
(Washington, D.C. : Congressional Quarterly, Inc., 1986), pp. 146-161.
Arthur Bentley, The Process of Government (Bloomington, 1949), pp. 208-209.
Norman J. Ornstein and Shirley Elder, Interest Groups, Lobbying and Policymaking
Yong Hyo Cho
8
interest groups.
2. INTEREST GROUPS, LOBBYISTS, AND LOBBYING
Interest and pressure groups are virtually synonymous in American
political science literature. They have special interests or public interests t o
protect and promote through governmental actions, both legislative and
administrative. In most cases, these groups are not necessarily created for the
sole purpose of exerting influence on the political process. They are created to
promote business, trade, and professional activities as well as cultural, ethnic,
and religious objectives. The frequency and intensity of their political
involvement to influence government policy vary from one group to the next.
Normally, a representative (or group of representatives), oftentimes an
officer, of an organization is primarily responsible for presenting the position of
the group to appropriate government agencies and officials. However, in many
cases, professional experts of law, consulting, public relations, or public affairs
firms are hired by the interest groups to supplement their own staff or in rare
cases act as the sole representatives of the groups. Part of the activities of the
groups’ representatives, or the hired experts, to influence the governmental
decision making process is lobbying, and those who are engaged in the lobbying
activities are called lobbyists.
The primary function of the lobbyists is to track the process and flow of
policy issues important to the particular interest groups and offer information to
influence their decisions. The information is, of course, intended to persuade the
decision makers to favor the position of the group. Therefore, to gain and retain
(Washington, D.C. : Congressional Quarterly press, 1987), p.9.
Interest Groups and Lobbyists in American Political Process
9
access to the decision makers is critically important.
The information made available by lobbyists is also important and
valuable for decision makers. At times, the decision makers seek out the views of
lobbyists in their consideration of a particular decision issue. Credibility is
essential for the lobbyist to remain effective. Once a lobbyist lies to a
congressman, congressional staff member, or agency official, he or she loses
credibility and thus effectiveness. There is ongoing interagency communication
within the decision-making system on a regular basis. More importantly,
information comes from multiple sources, such as other lobbyists, agencies and
congressional staff members; the Congressional Research Service, the General
Accounting Office, or the Congressional Budget Office. Misinformation will
inevitably be revealed during the deliberative process of the decision issues.
Also important to note here is that for a lobbyist to be effective and
influential, the interest group that the lobbyist represents has to be legitimate,
powerful, and important to the decision makers and to the community. The
attributes of an interest group that help determine the effectiveness of the
interest group’s lobbying activities are various. The members’ political activism,
contribution
to
campaign
funds,
connections
to
the
decision
makers’
constituencies, their political preferences, etc. will affect their political clout in
relation to various decision makers.
3.THE GROWTH OF INTEREST GROUPS
Interest groups began to proliferate in the 1960’s, and they centered their
headquarters in and around Washington, D.C., the center of political and
governmental power in the world. Some 2,400 organizations with central offices
Yong Hyo Cho
10
in Washington, two-thirds of which were founded in the 1960’s and thereafter,
employ as many as 80,000 people. Business interests (trade and business
associations, and corporations) are by far the dominant type.
By 1978, more than 500 corporations had established public affairs offices
in Washington and this growth has continued. The number of lawyers in
Washington, long regarded as a rough predictor of the number of lobbyists, grew
from less than 11,000 in 1973 to more than 37,000 a decade later. In 1965, there
were 45 out-of-town law firms with branch offices in Washington; the figure
increased to 247 in 1984. There is no reliable information regarding the number
of Washington-based consultants, but it is large. The number of registered
lobbyists with the U.S. Congress was 7,200 in 1985, more than double the 3,400
figure of the previous decade. It is common knowledge that not all lobbyists
comply with registration requirements. 5 Social welfare, consumer protection,
and single-issue groups including anti-abortion, environmental protection, and
school prayer have grown significantly. The most notable of all is the explosive
growth of political action committees(PAC’s) since the middle of the 1970’s.
The Federal Election Campaign Act of 1971 authorized the creation of
separate,
segregated
funds
by
labor
unions,
corporations,
and
other
organizations. These funds would be raised through voluntary contributions by
members, employees, or stockholders and used for political activities. Neither
corporations nor labor unions are allowed to make direct campaign contributions
from their treasuries. Treasury funds may be spent only for communications to
persons associated with the corporation or union and to members of their
5
Robert H. Salisbury, “Washington Lobbyists: A Collective Portrait,” in Allan J. Cigler and
Burdett A. Loomis (eds.), Interest Group Politics, Second Edition (Washington, D.C.:
Congressional Quarterly, Inc. 1986), pp. 146-161.
Interest Groups and Lobbyists in American Political Process
11
families. Corporation or union treasury may also be spent for voter registration
and mobilization and to establish, administer, and solicit funds for a political
action committee.
There are two types of political action committees, affiliated and
independent. An affiliated PAC is created by an already existing labor union,
corporation, or other types of organization. An independent PAC is not
associated with any existing organization but created to address is a specific issue
or advocate a particular ideology. The growth of PAC’s is shown in Table 1. In
1974, there were only 608 PAC’s and by 1986 the number of PAC’s grew to 4,092.
PAC’s peaked in 1987-88 with 4,832 and declined slightly to 4,528 in the 1995-96
election cycle. PAC’s raised $287.8 millions in 1984 and their political
contributions to congressional candidates alone amounted to $112.6 million
during the 1983-84 election cycle. During the 1995-96 election cycle, a total of
4,528 PAC’s raised $437.4 million and donated about one-half of the money,
$217.8 million to the political candidates and kept $103.9 million as cash on
hand. 6
What accounts for the increase in interest groups in recent decades? The
causes are undoubtedly complicated, but there are three significant factors.
First, the growth of government, particularly the federal government,
motivated the formation of interest groups and their political activism. Not only
has the total budget of all governments grown astronomically, but the economic
impacts of governmental spending have become widespread and profound. New
programs, expansion of existing programs, grants, subsidies, and guarantees
offered by the federal government, in particular, and state and local governments
6
The financial data of the PAC’s was derived from the Federal Election commission website,
Yong Hyo Cho
12
in general have made it important for the affected groups to organize and
participate in the decision-making process to look after their interests. For
example, the federal budget was about $100 billion in 1960, and now is $1.631
trillion in 1997, affecting every aspect of economic and social life of Americans, as
well as the governments and peoples around the world. 7
Second,
new
technology,
particularly
computers
and
other
communication techniques, have contributed to the rise of interest groups. The
new technology that became available in the past two decades made it easier and
less expensive to reach and organize constituents. Technological capability to
mobilize grass roots support, raise funds, and disseminate information to
constituencies through computerized mass mailing has helped the growth of
interest groups and the expansion of their scope of activities.
Third and most important is the decline of political parties. The broad
popular attachment to the two major political parties (the Democratic and
Republican parties) formed a stable foundation for electoral behavior in the
United States. But in recent years, party affiliations have eroded significantly.
The proportion of Americans identifying with one of the major parties declined
from 75% during the 1950’s to an average of 63% during the 1970’s and further
declined to 58% in 1996. Details of the trends in party identification are shown in
Table 2.
7
http://www.fec.gov/finance/paclangye.htm.
The U.S. budget data of 1997 comes from Office of Management and Budget, Budget of the
United States Government: Fiscal Year 1998 (Washington, P.C. : U.S. Government
Interest Groups and Lobbyists in American Political Process
13
[Table 1] PAC GROWTH, 1974-96
Committee Type
Trade/
Non-
Date
Corpo-
12/31/74
11/24/751)
rate
89
139
201
226
05/10/762)
294
246
4523)
992
12/31/76
433
224
4893)
1,146
12/31/77
550
234
438
110
8
20
1,360
12/31/78
785
217
453
162
12
24
1,653
08/00/79
885
226
483
206
13
27
1,840
12/31/79
950
240
514
247
17
32
2,000
07/01/80
1,107
255
544
309
23
41
2,279
12/31/80
1,206
297
576
376
42
56
2,551
07/01/81
1,253
303
580
442
38
64
2,678
12/31/81
1,329
318
616
531
41
68
2,901
07/01/82
1,417
350
629
628
45
82
3,149
12/31/82
1,469
380
651
723
47
103
3,371
07/01/83
1,514
379
666
740
50
114
3,461
12/31/83
1,538
378
645
793
51
122
3,525
07/01/84
1,642
381
665
940
53
125
3,803
12/31/84
1,682
394
698
1,053
52
130
4,009
07/01/85
1,687
393
694
1,039
54
133
4,000
12/31/85
1,710
388
695
1,003
54
142
3,992
Labor
Membership/ Connected
3183)
Health
3573)
Cooper- Corporation
ative
Without
Stock
Total
608
772
07/01/86
1,734
386
707
1,063
56
146
4,092
1987-884)
2,008
401
848
1,345
61
169
4,832
1989-90
1,972
372
801
1,321
60
151
4,677
1991-92
1,930
372
835
1,376
61
153
4,727
1993-94
1,875
371
852
1,318
56
149
4,621
1995-96
1,836
358
896
1,259
45
134
4,528
Note:
1) On November 24, 1975, the FEC issued Advisory Opinion 1975-23 “SUNPAC.”
2) On May 11, 1976, the President signed the FECA Amendments of 1976, PL 94 -283.
3) For the years 1974-76, these numbers represent all other political committees.
No further categorization is available.
4) Data was compiled by election cycles.
Source : FEC figures, July 14, 1986 and 1997
Political parties are still the primary institutional frameworks of American
politics through which political contests are carried out and legislative behavior
is organized in the U.S. Congress and the state and local legislatures. However,
Printing Office, 1997), p. 303.
Yong Hyo Cho
14
the importance of political parties in the perception of the American public and
in the actual political process has diminished over the years. A survey conducted
by the U.S. Advisory Commission on Intergovernmental Relations (ACIR) in
cooperation with the Gallup Poll in 1983 found that:
Disenchantment with the parties has grown to the point that many Americans expressed
more confidence in interest groups as representative institutions than in political parties.
When asked whether organized groups or parties best represented their political interest,
45% chose the former while only 34% chose, either of the major parties.8
The ACIR report argues further that “party organizations were being
(partly) supplanted by new mechanism in such traditional functions as recruiting
and nominating candidates, conducting and organizing campaigns, financing
elections, communicating candidate positions to the voters, and organizing the
government.” 9
Primary elections are now the dominant means of selecting candidates.
PAC’s are increasingly richer sources of campaign funds. Mass media,
particularly television, takes the place of stump speeches and door-to -door
canvassing to reach the voters and disseminate the political views and policy
stances of the candidates.
8
9
Advisory Comission on Inter-governmental Relations, The Transformation in American
Politics: Implications for Federalism (Washington, D.C. 1986), p. 21.
Ibid., pp. 21-22
Interest Groups and Lobbyists in American Political Process
[Table 2] TRENDS IN PARTY IDENTIFICATION, 1952-1996
15
1952
1956
1960
1964
1968
1972
1976
1978
1980
1982
1984
1988
1992
1996
Strong Democrat
22
21
21
26
20
15
15
15
16
20
18
16
14
19
Weak Democrat
25
23
25
25
25
25
25
24
23
24
22
17
16
11
Independent, Leaning Democrat
10
7
8
9
10
11
12
14
11
11
10
16
11
13
Independent, Middle of the Road
5
9
8
8
11
13
14
14
12
11
6
11
23
19
Independent, Leaning Republican
7
8
7
6
9
11
10
9
12
8
13
14
10
9
Weak Republican
14
14
13
13
14
13
14
13
14
14
15
15
16
13
Strong Republican
13
15
14
11
10
10
9
8
10
10
14
12
10
15
SOURCE : Michigan Center for Political Studies; 1952-78 data reprinted from Robert J. Samuelson, “Fragmentation and Uncertainty
Litter the Political Landscape,” National Journal (20 October 1979): 1931; and 1980-84 data form past election survey files. The 1988,
1992, and 1996 data were adopted from the results of surveys conducted by Wirthlin Worldwide. The particular figures represent the
survey results in the month of June each year.
Yong Hyo Cho
16
4.FOREIGN LOBBY
Representation of foreign interests in Washington has undergone drastic
changes during the past few decades. Traditionally, the foreign concerns of the
United States policy have centered on two issue areas: (1) military alliance and
military assistance; and (2) economic aid. Formal diplomatic channels have
taken care of the needs related to these policy concerns in most cases.
Some of the well-known exceptions to this generalization are the so-called
China lobby, Israel lobby, and the Saudi Arabia lobby. Beyond the normal
diplomatic channel, wide-ranging influence networks have been developed and
utilized to sway public opinion and/or public policy decisions in favor of the
countries involved. When foreign countries are involved in creating a broad based political support, they organize the latent or active interests already
existing.
The American lobby for Israel is based on the ardent support of Jewish
Americans who are committed to the cause of an independent and secure
statehood of Israel. The Jewish Americans are united and committed to this
cause.
The China lobby was centered on the large groups of political
conservatives who were dedicated to keeping China from Communist takeover.
The China lobby was the power base of the American support for the Chinese
Nationalist government led by Chiang Kai-shek. Many prominent Americans,
economic and intellectual leaders, were the central force of the China lobby and
their motivation was to keep the Nationalist government in power in order to
prevent the ultimate disaster of losing mainland China to Communist control.
Interest Groups and Lobbyists in American Political Process
17
Representatives of the Chinese Nationalist government and the Kuomintang have
worked closely with the leaders of the China lobby.
Saudi Arabia was successful in purchasing “AWACS” planes during the
Carter Administration. This highly controversial transaction was possible mainly
because of Saudi Arabia’s oil lobby in spite of the pro-Isaraeli opposition. The oil
lobby mobilized the support of the powerful American oil interests and those
prestigeous cultural and educational institutions benefiting from the donations of
the Saudi petro dollars. Even Begin, the Israeli prime minister, acquiesce d to the
AWACS deal with the U.S. assurance that the planes sold to Saudi Arabia would
remain entirely under American control.
The new foreign lobby of recent origin is focused on U.S. trade policy. The
United States imported $950 billion of goods and services and exported $836
billion of goods and services in 1996. 10 The United States held assets totaling
$2,932 billion abroad and foreign investment in the United States totaled $3,7 45
billion in 1995. 11 All of the frictions associated with trade, investment and other
related matters, reported and unreported, affect the economic, political. and
social interests of nearly every individual of every country in the world. Therefore,
the policy decisions, regulatory rulings, and administrative actions, guiding and
controlling international trade and investment of the United States, are a matter
of growing importance to the trading partners of the United States.
There is no way of knowing exactly how many Washington law firms,
public relations firms, public affairs and consulting firms, and individuals
represent foreign interests and clients. About 850 firms are registered as foreign
10
11
U.S. Bureau of the Census, U.S., International Trade in Goods and Services, Series FT900(95).
U.S. Bureau of Economic Analysis, Survey of Current Business, July 1996.
Yong Hyo Cho
18
agents with the Justice Department. The 1986 Edition of Washington
Representatives
(Columbus
Books,
Inc.)
lists
105
countries
and
842
organizations having representatives in Washington. Japan has the largest
number of organizations represented in Washington with 120; Canada with 76
organizations; France and Great Britain with 37 each; Korea and Germany with
35 each; and Taiwan with 33.
A predominant majority of foreign organizations retaining Washington
lobbyists are corporations and trade associations. It is also a common practice of
foreign governments and/or their embassies to hire one or more lobbying firms.
The tendency is for certain lobbying firms to represent multiple
organizations of the same country, i.e. a tendency toward country specialization.
Bregman, Abell, Kay, & Simon headed by Stanley Bregman, a former assistant to
the late Hubert H. Humphrey when he was a senator, has ten Taiwanese firms
and trade associations among its clients. Myron N. Solter, a lawyer lobbyist, has
seven clients, who are all Taiwanese firms in the field of rubber and related
industries.
Two Washington law firms, headed by Japanese Niseis, are also
prominent in representing Japanese clients. Tanaka, Ritzer & Middleton have 15
Japanese clients including the government of Japan and 14 business and trade
organizations. Mike Massaoka Associates represents 12 Japanese corporations
and trade associations.
Many of the prominent Washington law firms and consulting firms
representing foreign governments and foreign economic interests are headed or
staffed by high ranking former U.S. government officials or those who have close
political connections with the Washington power centers. Some of the examples
Interest Groups and Lobbyists in American Political Process
19
are as follows:
Manatt, Phelps, Rothenberg, Tunney, and Evans represents the embassy of Cyprus,
government of Jamaica, Jamaican Broadcasting Corp. Charles Manatt is a former chairman
of the Democratic National Committee and Thomas Evans is a former member of the U.S.
House of Representatives.
Arnold and Porter represents many foreign governments and business firms including the
Israeli government and embassy, the Korean government, the Korea Traders Association,
the Canadian Forest Industries Council, and the Canadian Meat Council among others. One
of its partners, William D. Rogers, is a former Secretary of State.
Gray and Co. Public Communications International Inc. founded and headed by Robert
Gray, Chairman of President Reagan’s first inaugural committee, represents several foreign
clients including the Electronic Industries Association of Japan, Hitachi America, Ltd.,
Hyundai Motor America, and Korean Airlines among others.
Sears Law Offices is founded and headed by John P. Sears, former Reagan Presidential
Campaign Manager. The firm represents Japan Airlines, the Japan Automobile
Manufacturers Association, and the South African Embassy.
Colby, Bailey, Werner & Associates are a consulting firm specializing in foreign clients. The
leading members of the firm, William E. Colby is the former director of the Central
Intelligence Agency and Norman A. Bailey is the former special assistant to President
Reagan’s National Security Affairs.12
Former officials who served in powerful positions are sought out by
foreign and domestic clients looking for access to high government offices.
Certainly such contacts will provide access for the clients, but not necessarily
Yong Hyo Cho
20
satisfaction because power in the American government is decentralized, and
access to a few high places is not sufficient to sway policy decisions to favor one’s
own positions. Burt Solomon makes an insightful point about the limits of
lobbyists, by quoting a lobbyist. “By the time a company comes to a lobbyist, it’s
at its wit’s end. The expectation is not to win, but to perform. Sometimes a
lobbyist can win by doing nothing; sometimes there’s nothing a lobbyist can
do.” 13
It is also customary that foreign clients pay higher fees than American
clients for this access. The reason is that foreigners cannot proffer jobs or votes
in a congressman’s district, thus they are tough to represent and so are charged
more. Those companies that are unsophisticated in Washington’s ways are the
most prone to hire big names during a crisis. An experienced lobbyist says, “you
see a biggest-is- the-best psychology operating in the minds of people who don’t
know what the best is and so settle for the biggest in terms of name. The world is
full of people who haven’t a goddamn notion of what goes on down here.” 14
Foreign clients tend to pursue a lobbying strategy of hiring big name lobbyists
who can gain access to high executive branch officials.
5.WHO ARE WASHINGTON LOBBYISTS?
Two portraits of Washington lobbyists are to be presented here; a
collective portrait and a portrait of a particular prominent Washington lobbyist.
A large-scale research was conducted in the late 1980’s by a group of political
scientists in a study of Washington lobbyists. A sample of 806 lobbyists, engaged
12
13
14
Derived from Washington Representatives (Columbia Books, Inc.) 1986
Burt Solomon, “Hawking Access,” National Journal (May 3, 1986), p.1049.
Bust Solomon, Ibid., p. 1053
Interest Groups and Lobbyists in American Political Process
21
in four policy areas, agriculture, labor, health, and energy, were interviewed.
Unfortunately, international trade policy was not included in this study. The
collective portrait presented here is a summary of a report based on this study. 15
A collective portrait - Washington lobbyists are mainly officers and staff
members of corporations, trade and professional organizations. Organizational
officers and the organizations’ government affairs staff account for 65.7 percent
of the sample lobbyists interviewed. Lawyers and consultants hired from outside
account for 13.9 percent and 4.5 percent, respectively. The remaining 15.9
percent are internal lawyers and research staff.
Washington lobbyists are generally well-educated, 91.3 percent being
college graduates and 27.5 percent being graduates from high prestige colleges.
About one-third of them hold law degrees.
Washington lobbyists are generally viewed as former government official s
who have moved to the private sector to cash in on their contacts and experience.
The sample lobbyists bear out this assumption to an extent. Fifty-four percent of
the lobbyists worked for the government in their previous jobs, 45 percent in the
federal government. Nearly 70 percent of the external lawyers worked for the
government previously. They make more money than other categories of
lobbyists and many of them used to hold policy positions in the executive branch
and are often hired for special tasks that routine lobbying cannot manage.
The average income of the lobbyists in 1982 was $90,489 which was
considerably higher than average income for other professionals. Their mean age
was 48.5 and the duration of their current positions averaged 12 years. This is an
impressive fact in that Washington lobbyists usually have many years of
15
Robert H. Salisbury, “Washington Lobbyists---,” op. cit.
Yong Hyo Cho
22
experience and constitute a stable community.
In short, Washington lobbyists are the elite, who are well-educated and
experienced in government, thus commanding high income. Lobbying is a longterm career for them.
Charls E. Walker - Charls E. Walker is president of Charls E. Walker
Associates, a lobbying and consulting firm in Washington. The firm represents 25
major American corporations and trade organizations. His clients include such
industrial giants as AT&T, duPont de Nemours and Co., Ford Motor Co.,
Goodyear Tire and Rubber Co., Proctor and Gamble Co., and Union Carbide
Corporation. He is a leading business lobbyist who started his firm when he left
the Nixon Administration as Deputy Secretary of the Department of Treasury in
1973.
Walker is a professional economist (monetary economics) with a Ph.D.
and teaching experience at the University of Texas and the University of
Pennsylvania (Wharton School) before assuming a Treasury position in the
Eisenhower Administration as an assistant to the Secretary of Treasury in 1959.
He then went to the American Bankers Association as Executive Vice President
when the Eisenhower Administration ended. He returned to the Treasury in 1969
as Under Secretary when Nixon won the 1968 presidential elections and finished
his government career as Deputy Secretary in 1973.
He is a legendary Washington insider with a masterful knowledge of
Washington and the way it works as portrayed by Elizabeth Drew. 16 Charls
Walker has built friendship and working relationships with a number of
influential and important people in Washington, which allows him to have
16
Elizabeth Drew, “Charlie: A Portrait of a Lobbyist,” in Cigler and Loomins (eds.), op. cit.
Interest Groups and Lobbyists in American Political Process
23
instant access to the appropriate policy makers in Congress and Executive branch,
industries and the mass media. He maintains regular and frequent contacts with
those people in his network for professional and social purposes. He meets them
in person to talk about policy issues, talks to them on the phone, plays golf with
them and has lunch and dinner with them. He has a close relationship with many
powerful people in Congress, the Executive branch, and outside the government
who are all important resources for his role as a lobbyist.
Walker’s expertise covers several areas including taxes, banking, and
energy among others. He publishes a newsletter called, the Washington
Economic Report which sells for $125.00 a year. Free copies are sent to
congressmen and others whom he thinks appropriate. He also contributes
articles to the Op Ed pages of the Washington Post. His publication activities are
intended to sustain his professional credential. This is a way of practicing what
he preaches that “you have to know your subject.” He says that “I’d never go up to
the Hill (Congress) to testify without knowing that I know more about the subject
than anybody on the committee. Or, when you go and talk to a senator, you’d
better now what you know and what you don’t know, and if you get downtown
(the Executive Branch) and find you made a mistake, you’re immediately on the
phone and telling him that you made a mistake and he should throw away the
piece of paper you gave him, you’ll send up another one. Being able to write a
piece of paper for a member (of Congress) - a speech, or maybe the questions that
might be asked of witnesses to bring out the fallacies as we see them in their case
- I can just get over there on the typewriter and do it.” 17
He builds up support for the legislation he lobbies by not only personally
pp. 217-250
Yong Hyo Cho
24
talking to the individuals in critical role positions such as committee chairman
and members in the committee, but also asks other influential allies to talk to
those decision makers. He passes along useful and favorable information,
whether it be a letter or newspaper article to the policy-makers. He helps
legislators by providing them with useful services in their efforts for finding co sponsors, creating coalitions, marshalling arguments, drafting and redrafting
legislation to get the maximum consensus, to name a few.
Walker uses natural allies as the beginning point of his coalition building
efforts. “Coalitions of the like-minded are constantly stitched together sometimes they are lightly basted for a single occasion; sometimes the seams are
firm and hold up for many battles.” 18
He constantly assures his clients that he is on top of things, the activity
know as “stroking” the client. Part of his job is to calm the client’s anxieties. He
spends a lot of time on the phone doing this.
Walker knows how to enlist grassroots to cultivate a Congressman’s
interest in a bill. He illustrates his way of resorting to grass roots strategy as
follows:
... for Company X, which has a plant in Los Angeles, to set out what the total number of jobs
is, the payroll, how much is produced for export, and how much of those sales abroad are to
their own subsidiaries. That’s very important, because organized labor just indiscriminately
says that all these subsidiaries abroad are “runaway” plants - that we are exporting jobs. So
we develop the grassroots data to show how many jobs over here are related to exports that
are actually sales to the companies’ own subsidiaries abroad. Ford, for example, manufactures
17
18
Elizabeth Drew, ibid., p. 248
Drew, ibid., p. 222.
Interest Groups and Lobbyists in American Political Process
25
parts sold to its subsidiaries in Western Europe. --- I don’t care how anti-business a member
of Congress may be - if you can go in to that member and take an issue and show that it
means jobs and payrolls and economic growth in his district or his state, he’s going to listen
to you.”19
Walker cultivates and maintains excellent press relations. “It is import ant
for the lobbyist to cultivate the press, just as it is for a politician. If he does it well,
he is likely to receive in return an audience for his arguments, and perhaps even
an occasional mention in a column, and he can also pick up useful
information.”20 He sends a copy of the Washington Post editorial arguing that
American natural gas prices are kept too low to the Secretary of Energy
Department and the Banking Committee Chairman, both of whom are his
personal friends and involved in an energy legislation for which he is lobbying.
He sends a cover note saying that the editorial is A++ and also sends a copy of
the note to one of the editorial writers. Sometimes, he has lunch with them. He
uses this device to keep the press on his side.
In order to be a good lobbyist, Walker believes that the lobbyist has to
have some of the same qualifications as the successful politician. He says it is an
understanding of the people: what motivates people, what they fear, their hopes
and aspirations. Walker understands these things about people, as does the
successful politicians.
6.SUMMARY AND CONCLUSIONS
19
20
Drew, ibid., p. 238.
Drew, ibid., p. 244.
Yong Hyo Cho
26
Interest groups are a dynamic political institution in America. They have
been growing in number and in the variety of interests they represent. The
growth of interest groups is inversely correlated with the decline of political
parties in American politics. More people believe that interest groups represent
their interests better than the two major political parties. This does not mean
that interest groups are supplanting the political importance of political parties,
but only in relation to the specific interests immediately important for the
individuals and groups. PAC’s, the political arms of interest groups in most cases,
are playing an increasingly significant role in raising campaign funds for various
elections. The level of their campaign contributions does make a decisive
difference in determining the electoral outcomes.
Interest groups or their representatives are actively involved in lobbying
to affect the policy decisions in favor of their interests. As the magnitude and
variety of the U.S. government programs grow, more groups and individuals in
the U.S., and in nearly every nation are affected by American politics and policy making. Therefore, both American interest groups and foreign interest groups
including foreign governments have been growing in number and intensity in
their involvements in lobbying.
In recent decades, trade issues have become a central concern of the
foreign lobby. The foreign lobby has become a controversial issue since most
foreign interests, if not all, hire American lobbyists to represent them in
Washington. These American lobbyists, representing foreign interests, tend to be
former high-level government officials, thus creating an impression that
American national interests are compromised by foreign lobbying.
Interest group activism and lobbying are an inseparable part of the
Interest Groups and Lobbyists in American Political Process
27
American political institution and political process. They began with the
beginning of the Republic and have stayed with the American political system
throughout history, and are likely to remain strong in the future. American
democracy is participatory politics and participatory politics works well because
Americans are political go-getters as evident in their lobbying activities. Foreign
economic interests imitate the American interest groups through trade lobbies.
However, the foreign lobby is limited in its effectiveness for a variety of reasons ,
including their lack of a significant political constituency anchored in the
electorate, insufficient number of foreign experts with sophisticated knowledge
in the workings of the American political system, particularly Congress, and
resource limitations in general.
REFERENCE
Advisory Comission on Inter-governmental Relations, The Transformation in American
Politics: Implications for Federalism, Washington, D.C. 1986, p. 21.
Bentley, Arthur, 1949. The Process of Government, Bloomington, pp. 208-209.
Cigler, Allan J. and Burdett A. Loomis. “Washington lobbyists: A Collective Portrait,”
Interest Group Politics, Washington, D.C.: Congressional Quarterly, Inc., 1986, pp. 146161.
Drew, Elizabeth, “Charlie: A Portrait of a Lobbyist,” in Cigler and Loomins (eds.) pp. 217-250
Latham, Earl, 1952 . “The Group Basis of Politics; Notes for a Theory,” The American
Political Science Review, Vol. XLVI, No. 2, pp. 376-397.
Ornstein, Norman J. and Shirley Elder, 1987. Interest Groups, Lobbying and Policymaking,
Washington, D.C.: Congressional Quarterly press, p.9.
Yong Hyo Cho
28
Schattschneider, E.E., 1964. The Semi-Sovereign People, New York; Holt, Reinehart, and
Winston, Inc., 160). Reprinted in Frank Munger and Douglas Price (eds.), Political Parties
and Pressure Groups. (New York; Thomas Y. Crowell Company,), pp. 130-147.
Salisbury, Robert H., 1986. “Washington Lobbyists: A Collective Portrait,” in Allan J. Cigler
and Burdett A. Loomis (eds.), Interest Group Politics, Second Edition (Washington, D.C.:
Congressional Quarterly, Inc.), pp. 146-161.
Solomon, Burt, 1986. “Hawking Access,” National Journal, May 3, p.1049.
The financial data of the PAC’s was derived from the Federal Election commission website,
http://www.fec.gov/finance/paclangye.htm.
The U.S. budget data of 1997 comes from Office of Management and Budget, Budget of the
United States Government: Fiscal Year 1998, Washington, P.C. : U.S. Government
Printing Office, 1997, p. 303.
Truman ,David B., 1951. The Governmental Process; Political Interests and Public Opinion
New York: Alfred A. Knopf
U.S. Bureau of Economic Analysis, Survey of Current Business, July 1996.
U.S. Bureau of the Census, U.S., International Trade in Goods and Services, Series FT900(95).
Washington Representatives, Columbia Books, Inc., 1986
Sogang IIAS Research Series on International Affairs. Vol. 1 29
HARMONIZING INTERNATIONAL HUMAN RIGHTS
NORMS AND CULTURAL VALUES
Byung-Sun Oh
Graduate School of International Studies
Sogang University
1.
INTRODUCTION
In this paper I would like to take up some of the problems inherent in
integrating international human rights law into domestic legislation. This research is
mainly directed to the issue of probing into the significant relationship between
international human rights norms and indigenous cultural values. This inquiry
assumes the existence of a substantial amount of positive elements in the national
cultures and cultural values that directly relate to human rights. It also believes that
certain elements in human rights can strengthen the existing cultural values. The
following would be the main targets of this research: 1) to identify key cultural values
dominating the everyday mode of life that serve to safeguard and promote personal
and community well-being; 2) to analyze how these cultural values relate to
international human rights norms; 3) to identify means of incorporating these
human rights-related cultural values in government policy and national laws in order
to foster a harmonious human rights culture (See Plantilla & Raj, 1997: 2; Ryden
1998, 14).
Byung-Sun Oh
30
In a regional conference held recently, several Asia-Pacific countries declared
support for human rights educational policy that draws “--- on the rich cultural
heritage and diversity in the region, including appropriate recognition of family and
community values.” The same declaration states that “--- human rights education
must affirm not only rights and freedoms but also responsibilities” and “--- promote
the values and practices of healing, reconciliation and conflict resolution”
(Conference-Workshop on Asia-Pacific Human Rights Education for Development,
held in Manila, in December 1995).
The relationship between international human
rights norms and cultural background of societies was also mentioned in the
important international documents of human rights in the 1990s. One prime
example is the Vienna Declaration and Programme of Action of 1993 (UN World
Conference on Human Rights) which states that “all human rights are universal,
indivisible and interdependent and interrelated. The international community must
treat human rights globally in a fair and equal manner, on the same footing, and with
the same emphasis. While the significance of national and regional particularities
and various historical, cultural and religious backgrounds must be borne in mind, it
is the duty of States, regardless of their political, economic and cultural systems, to
promote and protect all human rights and fundamental freedoms” (Section 5, Part 1).
This is the latest consensus among States on the issue of universality and culture. It
is supposed to embody a compromise on the divergent views of States on the nature
of human rights and cultural peculiarities of the societies. It reaffirms the
universality of human rights and at the same time takes into account the actual
realities existing within each State.
Harmonizing International Human Rights Norms and Cultural…
31
2. OBSTACLES IN ASIAN HUMAN RIGHTS CULTURE
Although the task for building a harmonized human rights culture is
desirable, however several pessimistic claims persist as obstacles in fostering human
rights culture in Asia (See Kausikan 1993: 32-38). These can be summarized as
follows: 1) religious diversities and the cultural and social uniqueness among Asian
states and consequent difficulty in finding common standards of human rights
protection; 2) strong cultural relativism and consequent denial of universal
applicability of international human rights norms, which are espoused by some Asian
states; 3) Prevalence of economic development goals over the concerns of human
rights protection to be given to the people.
In order to overcome the above barriers on the way towards nurturing human
rights culture in Asia, some critical examination on the problems and obstacles
would be helpful. What we can do in this direction is a critical reevaluation of the
current phenomena concerning human rights issues taking place in the Asian region
and new understandings of those phenomena and a change of attitude (See Ghai
1994: 14). What is to be suggested are mainly these: 1) divergent religious and value
systems are not necessarily negative factors in promoting human rights culture as
can be seen in the examples of European states and American states. 2) cultural
relativist arguments raised mostly by political elites of the Asian region for the
preserving social hierarchy and traditional authoritarian regime seems anachronistic
in consideration of recent sharp increase of litigation method in dispute settlement in
Asia. 3) some pragmatic approach adopted by former colonized states under the
Western powers such as Singapore and Malaysia stressing greater importance on
economic development and unique Asian value along with undervaluing the
universal standard of international human rights norms seems inappropriate. This
Byung-Sun Oh
32
criticism is made possible in view of the contrasting examples of other neighboring
Asian states, for example, Hong Kong, South Korea and Taiwan where the policy of
enhancing human rights standard not dissimilar to international level is positively
promoted (See Oh 1997: 242-247).
In addition to the above arguments and suggestions, some additional
elaboration on the themes may be helpful. Some relevant ideas and discussion on the
issue of Asian human rights culture may be introduced. Here the point is introducing
the notion of linkages between human rights and cultural values by adopting a
constructive reinterpretation of current conflicting situations, such as the debates of
universalism versus relativism, universal standard versus Asian value, rightsoriented individualism versus duty-oriented communitarianism, and etc. Here it is
useful to examine some fundamental concept and ideas concerning Asian human
rights debate: 1) the relativist conception of human rights, and 2) Asian values
argument.
First, the relativist conception of human rights (See Teson 1985: 123-142).
The argument in favor of seeing human rights as relative concepts is based on the
premise that human rights, as presently conceived, reflects the culture of the major
authors of human rights instruments, starting with the United Nation’s Universal
Declaration of Human rights. Since the West is seen as having the greatest influence
on the modern-day human rights conceptualization, it cannot therefore, according to
this view, be assumed that human rights are applicable to other regions (Pathak
1989: 7). However it can be argued that though human rights concept actually
evolved in the West, this does not necessarily mean that human rights do not become
or are not universal. We can agree on Jack Donnelly’s account in this matter:
Although human rights are Western in origin and thus historically particular, they
are of near universal contemporary relevance. Contemporary social conditions have
Harmonizing International Human Rights Norms and Cultural…
33
given the idea and practice of human rights wide applicability (Donnelly 1989: 50). It
may be pointed out that while the concept of human rights actually originated in
Europe (but not designed to become universal due to the exclusion of women and
other non-European races), the universal human rights adopted after the second
world war are as new to the West as they are for China, and thus it has been only 50
years since the two cultural spheres were confronted with such a universal concept
for the first time. Again another author argues that there exist a “common culture of
modernity” that has engulfed all societies by virtue of the rise of the global economy.
States, regions, cities, families, patterns of life, are all shaped by this culture. Human
rights have become a part of a world social process, the institutional expression of
which is the international law of human rights. International law is seen as an intercultural law, and an appeal to international law is the evidence for the existence of
universal standards of human rights (Vincent 1986: 50).
Secondly, the Asian values argument (See Peerenboom 1993: 53-57; Bell
1996: 641). Some governments maintain that there are certain values found to be
common in Asia. These values are perceived to be contradictory to those of the West
and thus support the view that values are not universal and common to all people.
Some of these ‘Asian’ values are identified as follows: a) placing society above the self,
upholding the family as the building block of society, b) resolving issues through
consensus instead of contention, c) the importance of duty as a counterpoint to rights,
d) the obligation of the community to look after its less advantaged members. It must
be noted that the views above are mainly espoused by China, Malaysia, and
Singapore. In opposition to the view about the existence of ‘Asian’ values, it is argued
that cultural diversity in Asia is based on profound differences in values. Thus, the
attempt to identify concrete examples of ‘Asian’ values is likely to lead to a degree of
selectivity and subjectivity. It is likewise mentioned that values perceived as ‘Asian’
Byung-Sun Oh
34
are not much dissimilar to values existing in other regions of the world. It is thus
questionable, to say the least, to assert that there are uniquely ‘Asian’ values.
3. RECONCILING THE UNIVERSALITY OF HUMAN RIGHTS
WITH THE PARTICULARITY OF CULTURES
Based upon the afore-mentioned considerations, a number of authors
espouse the view that there is a common ground upon which ideas on human rights
coming from the West, East or other regions of the world can be reconciled. There is
no comprehensive agreement on all aspects of culture, but there are basic elements
in all cultures which sustain a common understanding of human existence. One
author states that “---human rights do rely on the idea of human dignity which can
also be found in various cultural and religious traditions. Thus, although human
rights do not derive immediately from religious traditions, they are not alien to those
traditions that have recognized the idea of human dignity. Hence, with reference to
human dignity, a critical reconciliation between competing requirements of
particular religious traditions and modern international human rights standards
might be conceivable” (See Bielefeldt 1995: 601).
There is also a striking cross-cultural consensus on many values that today
we seek to protect through human rights, especially when those values are expressed
in relatively general terms. Life, social order, the family, protection from arbitrary
rule, prohibition of inhuman and degrading treatment, the guarantee of a place in the
life of the community and access to an equitable share of the means of subsistence
may be certain moral aspirations in nearly all cultures.
It is argued that the concept of universal human rights does not disregard the
reality of varied cultures in different societies. Moreover the concept of human rights
Harmonizing International Human Rights Norms and Cultural…
35
is not static. It relates to all peoples and situations (See Perry 1998: Chapter 4).
H.
Bielefeldt also argues it in this way: The universality of human rights does not mean
the global imposition of a particular set of Western values, but instead aims at the
universal recognition of pluralism and difference - different religions, cultures,
political convictions, ways of life - insofar as such difference expresses unfathomable
potential of human existence and the dignity of the persons. To be sure, pluralism
and difference apply also to the concept of human rights which itself remains open
and must be open to different and conflicting interpretations in our pluralistic and
multi-cultural political world. Without the recognition of such difference within the
human rights debate, the discourse would amount to cultural imperialism.
Nevertheless it seems clear that the very idea of human rights precludes some
political practices, such as oppression of dissidents, discrimination against
minorities, slavery and apartheid (Bielefeldt 1995: 594).
How is it possible to reconcile the differing approaches to human dignity? Or
what would it mean to come to a genuine, unenforced international consensus on
human rights? Charles Taylor once suggested that it would be something like what
John Rawls describe in his Political Liberalism as an ‘overlapping consensus’ (See
Ralws, 1993: Lecture IV). That is, different groups, countries, religious communities,
civilizations,
while
holding
incompatible
fundamental
views
on
theology,
metaphysics, human nature, etc., would come to an agreement on certain norms that
ought to govern human behavior. Each would have its own way of justifying this from
out of its profound background conception. We would agree on the norms, while
disagreeing on why they were the right norms. And we would be content to live in
this consensus, undisturbed by the differences of profound underlying belief (Taylor
1996: 1).
The idea was already expressed in 1949 by Jacques Maritain as follows: “I am
Byung-Sun Oh
36
quite certain that my way of justifying belief in the rights of man and the ideal of
liberty, equality, fraternity is the only way with a firm foundation in truth. This does
not prevent me from being in agreement on these practical convictions with people
who are certain that their way of justifying them, entirely different from mine or
opposed to mine, --- is equally the only way founded upon truth” (From the
Introduction to UNESCO, Human Rights: Comments and Interpretations, London:
Allan Wingate, 1949, pp.10-11).
With the understanding that there can be consensus for reconciling different
conceptualizations of human rights according to different cultures, various
approaches to attain this objective may be suggested. One persuasive suggestion may
be a cross-cultural dialogue. As W. L. Holeman argues that dialogue between cultures
is a better way than an imposition of a ‘universal idea’ that is based on a specific
culture. Each culture must therefore be open to insights from, and criticisms of, other
perspectives. A healthy pluralism of cultures, as against global monoculture, means
that each culture learns about itself by seeing itself through the eyes of another. It
does not preoccupy itself with hegemonic ambitions. It enables cultures to benefit
and borrow from the strengths of others. And it helps clear up misconceptions about
other cultures (Holeman 1987: 214-215).
A corresponding process of reconciling culture and human rights should be
dialogue within cultures. The initiative to examine one’s culture comes from the
members of community owning the culture. It proceeds from an honest recognition
of a need to review one’s culture with the hope of relating it to human rights. To be
effective at the local and community levels, an emphasis on the global cosmopolitan
nature of universal norms of human rights may be by way of an opening in the
culture itself, not by an external imposition. Therefore it is of great importance to
nurture cultural rethinking, reinterpretation, and internal dialogue. For this task,
Harmonizing International Human Rights Norms and Cultural…
37
Richard Falk maintains as follows: virtually any cultural heritage is morally rich
enough that it can, if appropriately construed under some circumstances, make
inspirational contributions to the struggle for human rights, democracy and social
justice. The international protection of human rights cannot proceed very far without
liberating the culture itself to serve these ends. There are no fixed points of
normative reference. Hence, we are all responsible for the discovery and protection
of human rights, and to establish such a process of inquiry which itself is an
expression of the integrity of any given cultural identity (Falk 1992: 54. 60).
Based upon the above synthesizing reasoning, I thus suspect, we may be able
to agree with Yash Ghai’s view that “the development and understanding of rights are
contingent on a variety of factors, moral ideas as well as material conditions, and that
differences in the perception of human rights are attributable to these ideas and
conditions rather than to any inherent notion of culture or community. This
approach does indeed provide a basis for reconciling the so-called Western and
Eastern perceptions of human rights” (See Ghai 1994: 12).
4. KOREAN ISSUES ON HARMONIZED HUMAN RIGHTS
CULTURE
(1). Development of the Idea of Human Rights in Korea
Now let us turn to Korean issues on harmonizing international human rights
norms and cultural values. While the concept of human rights in the West has been
translated into legal terms, the Asian concept of human rights has remained at an
ethical and customary level. Instead the Asian equivalent of human rights has been
regarded as some goal concept such as human dignity and welfare. In this sense, the
Asian culture may be characterized as an ‘alegal’ culture, in contrast to the ‘legal’
Byung-Sun Oh
38
Western culture.
Nonetheless, in the 20th century, people everywhere have had a long history
of human rights struggles against abusive political power and social evils including
war and false beliefs all over the world. The contemporary world, especially
subsequent to the United Nations Declaration of Human Rights of 1948, has pursued
the internationalization of human rights through international conventions and
contracts. While the concept of human rights has become internationalized, it still
needs to be more strongly grounded into the domestic soil through a synthesis
process with indigenous cultures. The degree of commonality and difference between
the concept of human rights and the concept of human dignity is rather subtle. But if
we assume that human rights are a more legalized concept than is human dignity,
then Korean history and culture may be considered relatively ‘under-developed’ as
compared to Western countries. Culture as well as history affects human rights today.
The idea of human rights inhering in each person as a human was not
generally regarded as part of pre-modern Korean legal culture; but one had duties
according to one’s place in the socio-political hierarchy, and within that context one’s
sense of duty might well carry with it, even in relations with superiors, a modest
expectation that the other recognized a duty to reciprocate, if not in equal kind, at
least with humane condescension. Thus within the Confucian hierarchy of carefully
differentiated stations in society, there existed to some degree a ‘reciprocal-duty
consciousness’ which in effect functioned as a type of qualified individual-rights
consciousness. Irresponsibility was not an accepted principle of government or social
rule, however often manifested by some elites. However, the notion of human rights
established under government policy and formal law, with protective institutions, as
developed in the West, was new and alien when Korea was forced to open its ports to
Japan and the West.
Harmonizing International Human Rights Norms and Cultural…
39
A few of the paradoxical images in introducing modern notion of human
rights in modern Korea may be briefly described as follows:(Beer 1991: 266)
1) In the decades from the late 1800s, as human rights ideas began entry into
Korean society, Koreans came under ever more systematic governmental and
foreign control.
2) The first sustained efforts at modern legal development took place as part
of Japan’s effort ultimately to absorb Korea into its own political culture.
3) Relatively straightforward human-rights movements like the Equalization
Society of the 1920s could not be easily accommodated by nationalists
preoccupied with rival visions for achieving independence.
4) Concerns for human rights and democracy, which were part of the political
thought behind the March First Movement of 1919 and other pre-Liberation
politics, gave way to division, poverty, war, and repression after Liberation in
1945.
5) Long and savage civil conflicts between 1945 and 1953 only hardened
south-north division and heightened tensions to the point in the south as to
weaken inclinations to honor democratic rights and liberties.
6) No constitution in independent South Korea has outlasted the ruler who
presided at its inception.
7) Widespread support for democratic law and politics among the Korean
people has co-exited with torture and repression by successive governments
and with uncompromising rigidity on the part of some elements in the
opposition.
Korea has tried to develop democratic politics based on the ‘rule of law,’
Byung-Sun Oh
40
setting up whole codes in several legal areas and in the judicial system. Nevertheless,
Korea seems to have reached an impasse between institutional westernization and
mental acculturation. Sociological surveys indicate that the Korean people still have a
strongly mixed ‘pre-modern’ and ‘modern’ legal consciousness.
Persistent difficulty in implementing the International Covenants and
protecting human rights is the weakness of the normative power of the Constitution.
In theory, the Constitution is the supreme law of the state and sets the highest
standard for the merit and validity of government measures and laws. However,
since its first proclamation in 1948, the Constitution has been unable to preserve its
dignity as the supreme law.
It has been amended 9 times so far, all of these
amendments were centered on the questions of the method of electing the President,
the lengths of the terms, and the structure of the state power. All the Constitutional
amendments, except for those of 1960 and the present Constitution in 1987, were
aimed at extending the term of office of the incumbent president or at providing ex
post facto justifications of the military coup d’etat (1961 and 1980). Because of this
history, the Constitution has come to be regarded as something that can be changed
for the maintenance of power of the president or ruling party. It has been difficult for
the government, the courts, and the people to recognize the Constitution as the
supreme law that guarantees human rights and that can deny the legality of laws that
infringe on the human rights that are guaranteed in it.
The human rights provisions in the Constitution and other related laws have
not been implemented satisfactorily. Both the government and the courts have
construed those provisions in such a way as to accommodate the diverse
developmental needs of government policy, entailing numerous infringements on
human rights.
Meanwhile, the National Assembly, even though instituted through a general
Harmonizing International Human Rights Norms and Cultural…
41
election, has been criticized for not being independent from the President and the
administration. The ruling parties have been accustomed to passing laws without due
legal procedures such as debates and voting when the bills find strong opposition in
public opinion and/or in the opposition parties. For this reason, the Legislature is
criticized for passing the bills suggested by the administration using any available
means instead of revising or supplementing the bills that contain the provisions to
threaten the people’s rights.
(2). Some Traditional Values Entrenched in Korean Law
A legal culture is formed characterizing the unique way of living in a nation
with the rule of law. The characteristics of the traditional Korean legal culture were
described by late Korean jurist Hahm Pyong-Choon in his book ‘The Korean Political
Tradition and Law’ (1967). According to him, traditional Korean political culture and
philosophy were based on ‘Confucian precepts’; hence law and legal institutions were
underdeveloped and even despised. The primary mechanism for government at all
levels was presumed to be the force of the moral example of those in authority.
Moreover, the hierarchical structure of Korean society undermined the growth of law,
as particularistic distinctions of social status and official positions and the force of
social conventions precluded the possibility of predictability in judicial decisionmaking.
However since the collapse of feudal dynasty and opening the door to the
international society late last century, Korean political and legal culture has
fundamentally changed. Especially since the national liberation from Japanese rule
in 1945, Korea established a modern-type constitutional democracy.
According to the 1948 Constitution of the Republic of Korea, fundamental
human rights of people are to be protected. Among various rights to liberty which are
Byung-Sun Oh
42
to be guaranteed, freedom of religion is included, and the establishment of a state
religion is prohibited. Consequently, Confucianism cannot enjoy the privileged status
that it was known in the Chosun Dynasty. According to statistical data, the number of
people following Confucianism is fewer than those who follow Buddhism or
Christianity. This probably reflects the view of many present-day Koreans that
Confucianism is more a set of ethical norms, or reasonable way of thinking, than a
religion.
Korea has become a multi-cultural society due to industrialization,
urbanization, and internationalization. Contemporary Korean Law comprises
heterogeneous cultural values: deep inside the structure of legal norms traditional
Confucian communitarian values such as perfectionism, legal paternalism, and legal
moralism are imbedded in the present legal structure, though the general structure is
composed of modern liberal democratic values such as liberty and equality before the
law, which have been as well rooted through the democratization of Korea.
Here are some conspicuous examples of legislation within modern Korean
law which preserves traditional Confucian cultural values. Especially notable is the
Korean criminal law system because, unlike the criminal law in every other society, it
is tinged with ethical and cultural characteristics which permit or prohibit certain
kinds of crimes. This is called the legal enforcement of dominant morals. Accordingly
in Korea some traditional Confucian ethics regarded as worth preserving are
enforced legally through Korean criminal law.
A. Crime of adultery
Under the Article 241 of the Criminal Code, “a married person who commits
adultery shall be punished by penal servitude for more than two years. The same
shall apply to the other participants.”
Harmonizing International Human Rights Norms and Cultural…
43
Adultery is, of course, a decisive menace to marriage within a family system,
and as such is censured by most societies. However, in the Western world, adultery is
not proscribed in the criminal code, but is treated rather as a matter of conscience.
Even in China and Japan, there is no provision relating to adultery in the criminal
code. However, according to Korean Confucianism the status of a married couple was
highly respected and protected. The provision stipulating as a crime the act of
adultery in the Korean criminal code may be interpreted as a reflection of the public
aspiration and the common morality for preserving the integrity of family life (Oh
1994: 281).
There has been some strong criticism of this article by several specialists in
criminal law, but many women’s organizations in Korea support the continuance of
this provision. It is, therefore, interesting to note that both the feminist movement
and Confucian scholars agree on this matter even though they have continually been
at loggerheads regarding the revision of the family law in many other respects.
B. Murder of Lineal Ascendant
In the words of Article 250, “(1) A person who kills another shall be punished
by death, penal servitude for life, or for not less than five years.
(2) A person who
kills his own or his spouses’s lineal ascendant shall be punished by death or penal
servitude for life.”
This provision demonstrates the fact that Confucian culture places great
emphasis on respect for one’s elders, and on a child’s moral duty towards his
ascendants. There has been criticism of this provision as being contrary to the spirit
of the Constitution Article 11, which states that “All citizens are equal before the law.”
However, in light of frequent inhumane crimes by the younger generation, the
dominant opinion is still that this provision in the Criminal Code must be maintained.
Byung-Sun Oh
44
In contrast to the above, according to Article 251, “A lineal ascendant who
kills a baby while being delivered or after delivery to avoid disgrace or for fear of the
impossibility of bringing the baby up or for some other extenuating motive shall be
punished by penal servitude for not more than ten years.” This provision may be
explained on the basis of Confucian ethics, which pays less respect to infants and
children. As an extreme example of this provision, it may be possible to justify
murder of an unwanted baby by suggesting that the chastity of the woman was so
highly valued under patriarchal family ethics, that the child is regarded not as an
independent person, but as a possession of the parent. This concept stems from the
fundamental concept of filial piety, by which a father and son are the same entity.
C. Criminal Responsibility
Article 151(2) of the Criminal Code prescribes that “If a relative, head of the
house or a family member living with the said person commits the crime of harboring
a criminal for the benefit of the criminal, he shall not be punishable.”
Article 155 also guarantees exemption from punishment for the crimes of
suppression of evidence, concealment and forgery or alteration of the evidence in
criminal cases if such acts were committed by a relative, head of the house, or a
family member living with the said person, for the benefit of the criminal.
These provisions are to be explained as remnants of the Family Mutual
Protection, which was exercised customarily and legally in old China and Korea.
Those institutionalized principles also reveal the negative aspect of the Crime of
Ascendant Accusation. The action, under which a child accuses his parents of a crime,
was itself prohibited as a crime of being unfilial, and the action, which concealed the
crime of the parents, was tolerated by the law in the spirit of the Confucian theory of
Harmonizing International Human Rights Norms and Cultural…
45
human feelings. This traditional Confucian principle of law was incorporated into the
first modern Criminal Code (Hyongpop Daejeon) of 1905. Article 285 of the Code of
Civil Procedure guarantees the right to refuse to testify on the part of relatives, family
heads of family members of the witness, or a person who was in any of the aforesaid
relationships with the witness. These rights of current procedural laws may be
explainable as a means of securing a fair trial, but they could also be explained as a
remnant of Confucian family ethics which protected the intimacy of family relations.
These examples chosen from the Criminal Code show how traditional values
influenced the provisions of the law. While from the Western point of view they may
be regarded as infringements of human rights, customary Korean culture would
prefer to underlie how to seek to maintain traditional social customs.
D. Social Law and Confucianism
Social laws, including labor laws and social security laws may be the best
expression of society’s ethos. But because its implementation invariably requires
funding, Korean social legislation has not been fully codified, even though Koreans
still long to implement the social values expressed in Confucian and other religioushumanitarian ideals.
Article 3 of the Law of Elder Welfare (1989) states that “the State and Nation
should make efforts to maintain the good old customs of reverence for elders and of
filial piety.” This provision of reverence for elders and filial piety is the legal
expression of traditional Confucian moral sentiments.
5. EXAMPLE OF THE CURRENT DEVELOPMENT OF HUMAN
RIGHTS
Byung-Sun Oh
46
(1). The Status and Legal Rights of Women: Discriminatory Practices
In theory, the Constitution is the ultimate guarantee of human rights. Yet like
the Constitutions of many East Asian states it is barely fifty years old and during that
time, it has been subject to change. Thus it lacks the credibility its name implies.
Despite these deficiencies modern Korean society has made steps to increase human
rights legislation. One area in which this is particularly noticeable is in the area of the
legal status of women. Sensitivity to the rights of women is a field that has developed
in many Asian societies: Japan, China (ROC and PRC) as well as in Korea. By looking
at developments in this field we can see how the idea of human rights is entering into
the legal consciousness of the ordinary people.
The Korean Constitution stipulates a provision about the value of marriage
and family life based on and maintained by the individual person’s dignity and
gender equality (Article 36:1). This may be interpreted as a reflection of the
traditional value of stressing the integrity of the family system, though it is expressed
in the contemporary rights-based language of human dignity and equality.
The Korean government, in pace with the worldwide trend of legislating the
prohibition of gender discrimination in employment, introduced the GenderEquality Employment Act in 1987 (which was revised in 1989) to promote gender
equality of opportunity and treatment, institution of child-care leave, and prevention
of disadvantages for female in cases of marriage and pregnancy. However, gender
discrimination at the hands of the labor market still continues due to the
ineffectiveness of the legal system to prevent the continuance of unreasonable
customs. A wide range of discrimination against female workers exists in the areas of
recruitment and employment, wages, retirement age, promotion, job placement and
assignment, education and training.
Harmonizing International Human Rights Norms and Cultural…
47
Since the early 1960s, Korea has achieved rapid industrialization mainly
through relying on abundant supply of cheap labor, especially that of females.
According to statistics provided by a government agency, the rate of the female labor
force participation increased from 36.3% in 1963, to 39.6% in 1975, and to 45.0% in
1987. As a consequence, the female share in the labor force also changed from 34.9%
in 1963, to 36.7% in 1975, and to 40.4% in 1987. Among the factors which are
supposed to have resulted in such a rise in the female labor force participation are
modern education with its emphasis on the equality of the sexes and the changes in
the norms of sex-role differentiation.
In spite of such increased size and weight of the female labor force, however,
sex discrimination is still prevailing in society as a whole, termed external, as well as
within the labor market. Sex discrimination within the labor market refers to
employment discrimination and wage discrimination. Employment discrimination
can be classified into occupational discrimination and discrimination in internal
employment practice. Occupational discrimination denotes employment in lower
paid, routine and more menial positions than a male counterpart despite her having
the same educational and career background. Discrimination in employment practice
denotes deliberate, unfair treatment at the work place in terms of location, training,
and promotion which is based solely on gender. Wage discrimination denotes the
implementation of a wage system differentiated by sex even when males and females
are working on the same job.
There are several theoretical perspectives on sex discrimination in the labor
market Attempts from a conservative perspective to find the main reason for the sex
discrimination in the inferior status of female human capital in terms such as
education and skill-training. According to their argument, it is proper for a female
worker to have an inferior status in terms of wage, position, and/or work conditions.
Byung-Sun Oh
48
But before we accept such a perspective and try to apply it to the Korean labor
market we have to consider the reason why the human capital of female workers is
considered inferior to that of male workers in Korea. The answer to this question is
most likely to be found in the traditional sex-related norms of Korea. Traditionally,
Korean people have a strong predisposition to a ‘boy-preference’ under the influence
of Confucianism and as a consequence, have developed a number of social norms
stipulating that the female’s role should be confined to household chores. However,
such traditional norms are now changing slowly and investments in female education
are increasing more and more. In this respect, when we handle the problem of sexdiscrimination in the labor market, we should not stick to female worker’s inferior
status in terms of human capital but instead shift our attention to ‘sheer sex
discrimination’ - that is, why the status of female workers is not improving even
though their educational level is on an upward trend.
(2). Improving the Status and Legal Rights of Women
Due to the Gender-Equality Employment Act employers are prohibited from
discriminating against women in hiring, dismissal, or retirement. The law guarantees
special protection for pregnant women and mothers, with provisions for one year
child care leave as well as 60 days of paid maternity leave. The law also requires
employers to provide child care facilities in the work place. It has made a significant
contribution to abolishing discrimination against women.
For ten years between 1980 to 1990 economically active women increased by
38.1%, to a total of 7,474,000, while the number of men increased by 22.1% as of
1990. The increase is due to the social approval of working women, the need for
additional income for increased consumer appetites, a decline in the birth rate, and
Harmonizing International Human Rights Norms and Cultural…
49
the use of new home appliances that freed women from housework to enter the labor
market. A mere increase in the number of employed women does not automatically
enhance their social status, however, because the bulk of working women are paid
privately and engaged in unskilled jobs. Many women tend to be employed in smallscale industries which are not protected by the Labor Standard Law, and their
employment status tends to be unstable. A considerable number of them are
temporary employees or daily workers. However, the increase in professional women
means a rise in social status because they have opportunities to participate in
decision-making processes. Nowadays women constitute 16% of doctors, about half
of the total number of pharmacists, and 14.4% of journalists.
Legal status reflects political, economic, and social status. Since the 1970s
and 1980s, Korean women have come to develop an increased understanding of
women’s legal rights. As a result, the revised Family Law was passed in 1989 and was
hailed as the most outstanding victory of women’s political groups. Women also
participated actively in the enactment of the Gender-Equality Employment Law, and
drafted the Mother-Child Care Law and the Prevention of Prostitution Act.
The Family Law reflects tradition and custom as it deals with marriage and
family life. First, the revised law amended the head of the family inheritance and the
succession system, thus weakening the patriarchal system somewhat, but the system
of the head of the family still remains. Second, it broadened the scope of relatives,
including the mother’s and wife’s relatives along with those of a father and husband.
Third, the old law’s provision permitting a husband to register a child born out of
wedlock without the consent of his wife was abolished. Fourth, a new provision was
included permitting equal parental authority over the children: the old law had only
recognized a father’s authority. Fifth, the law concerning marital age was
strengthened in favor of the wife. When a couple divorces, they must discuss who has
Byung-Sun Oh
50
the responsibility of rearing the children. A property division claim was inaugurated
in case of divorce. When a couple does not reach an agreement, the case is brought to
the Family Court. Sixth, men and women were given equal rights to inheritance.
Thus it can be said that the present Family Law enhanced women’s rights (See Kim
1995: 12).
Due to the continuous efforts to improve women’s legal and social positions
clearly people in contemporary Korea are experiencing changes in attitude and
perceptions of gender roles. Quite recently the government established a new
personnel recruitment policy by introducing a employment target system, which is
similar to a quota system but slightly weaker than the latter, for women who apply
for entering into a government post. This affirmative treatment policy for women has
been implemented from the year of 1997 in the central government and will continue
until the year of 2001. This preferential treatment policy for women in employment
will be expected to give a tremendous impact on local governments and private
business sectors
6. CONCLUSION
Nowadays the harmonious integration of the values stressing cooperation
and competition among members of an organization appears increasingly crucial for
Korean society’s continuous development. The communal spirit-oriented new
confucian ethics, which stresses duty-consciousness, contrast with the individualoriented Westernized ethics, which emphasizes right-consciousness. For some of
Korean people, who want to cherish Confucian-value-oriented ethics, the
development of the concept of basic human rights, especially in connection with
private property, private interest, and the privacy of the individual, present a
Harmonizing International Human Rights Norms and Cultural…
51
challenge. This is in part because the new Confucian ethics stresses one’s duty to a
larger entity over individualism.
This paper has looked at the issue of harmonization of domestic law with
indigenous cultural value with a view to implementing the universal prescriptions of
international human rights covenants. It has highlighted the role played by
customary social norms in formulating the law and issued the caution that this
influence is susceptible to varying interpretations as infringement of human rights or
as promotion of traditional society. Secondly, the grounding of law in a Constitution
has been shown to be questioned given the inherent frailty of the Constitution itself
and the legislative bodies. Thirdly, the paper has argued that domestic law must not
only be strengthened so as to give greater guarantee to the equality of all but also to
ensure that law can play an active role in shaping a more just society and in fighting
for the rights of the underprivileged. The combination of customary law, positive law
and law as an agent of social change is typical of East Asian nations today. If they are
to fully realize human rights as defined at the international level, the role of each
element in the combination must be taken into account.
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Perspectives, Philadelphia: University of Pennsylvania Press
Beer, Lawrence W. 1991, “Epilogue - Comparative Perspective on Human Rights in
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(ed.), Human Rights In Korea in Historical
and Policy
Perspectives, Harvard University Press
Bell, Daniel A. 1996, “The East Asian Challenge to Human Rights: Reflections on an
East West Dialogue.” Human Rights Quarterly, Vol.18, No.3, pp.641-667
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Bielefeldt, Heiner 1995, “Muslim Voices in the Human Rights Debate.” Human
Rights Quarterly, Donnelly, Jack 1989, Universal Human Rights in Theory
and Practice, New York: Cornell University Press
Falk, Richard 1992, “Cultural Foundations for the International Protection of Human
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Ghai, Yash 1994, “Human Rights and Governance: The Asia Debate.” Australian
Yearbook of International Law, Vol.15, pp.1-34
Hahm, Pyong-Choon 1967, The Korean Political Tradition and Law, Seoul: Hollym
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Kim, Ok Yul 1995, “Korean Woman Today and Toward 2000.” Asian Women, Vol.1,
pp.1-28
Oh, Byung-Sun 1994, Teleological Desert and Justice, Seoul: Sogang University
Press
1997, “Cultural Values and Human Rights: The Korean Perspective.” J.
R. Plantilla & S. L. Raj, SJ (eds.), Human Rights in Asian Cultures –
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Pathak, R. S. 1989, “Introductory Report on Universality of Human Rights.” in
Universality of Human Rights, Council of Europe, Strasbourg
Peerenboom, R. P. 1993, “What’s Wrong with Chinese Rights?: Toward a Theory of
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pp.29-57
Perry, Michael J. 1998, The Idea of Human Rights, Oxford: Oxford University Press
Plantilla, J. R. & S. L. Raj, SJ 1997, Human Rights in Asian Cultures - Continuity
and Change, Osaka: Hurights Osaka
Ralws, John 1993, Political Liberalism, New York: Columbia University Press
Ryden, Edmund 1998, Human Rights & Values in East Asia, Fujen Catholic
University, Taiwan
Taylor, Charles 1996, “Conditions of an Unenforced Consensus on Human Rights.” a
Paper delivered for Human Rights Conference held at Seoul National
University, 1996
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Teson, Fernando R. 1985, “International Human Rights and Cultural Relativism.”
Virginia Journal of International Law, Vol.25, pp.869-898
Vincent, R. J. 1986, Human Rights and International Relations, Cambridge:
Harvard University Press
53
Sogang IIAS Research Series on International Affairs. Vol.1 54
CAPITAL MARKET LIBERALIZATION AND THE
FOREIGN EXCHANGE CRISIS
- MEXICO AND KOREA IN A COMPARATIVE PERSPECTIVE -
Yoon Je Cho
Graduate School of International Studies
Sogang University
and
Chong-Sup Kim
Graduate School of International Studies
Sogang University
1. INTRODUCTION
This paper analyzes the foreign exchange crisis of Mexico and Korea, and
investigates the common elements that could have caused the crisis, as well as the
distinct factors that might have had similar effects.
What we have learned is that a country in the process of capital market
opening should be particularly careful of the risk of a foreign exchange crisis because
first, with the opening of the capital market, and the inflow of vast foreign capital,
combined with the increased volatility of domestic capital, can lead to a very unstable
local financial market, and by which any shock can reverse the direction of the flow,
leading to a huge outflow of capital. Second, when the capital market opening is not
complemented with adequate institutional reforms, the existing institutions may
Capital Market Liberalization and the Foreign Exchange…
55
rather make the economy more vulnerable to shocks. Third, as the market opens
political factors may have a greater influence on the foreign exchange market.
The paper first presents a brief overview of the evolution of the foreign
exchange crisis in Korea and Mexico. Then, the relationship between the process of
capital market opening and the foreign exchange crisis in the two countries is
analyzed in a comparative perspective. Finally, implications are derived for a more
open Korean economy in the future.
2. EVOLUTION OF THE FOREIGN EXCHANGE CRISIS IN
KOREA AND MEXICO
Since there has already been much discussion on the origin leading up to the
recent foreign exchange crisis in Korea and Mexico, only the pertinent details needed
for the comparison of the two countries will be briefly summarized.
(1). Korea
Among the many compounded causes behind Korea’s foreign exchange crisis,
the most fundamental reason is the aggravation of the financial structure by firms
that had cumulated after 1995, together with the downturn of the economy and
resulted in large-scale bankruptcies. This has been reflected in the rise of bad loans
in the financial sector, which combined with the repercussions of the foreign
exchange crisis in Thailand and other East Asian economies, detonated the ensuing
foreign exchange crisis in Korea.
The development of the Korean economy until the 1980s, was achieved
through tacit agreement among the government, conglomerates and banks, which
resulted in a huge moral hazard problem. Also, the competition among the
Yoon Je Cho & Chong-Sup Kim
56
“chaebols” resulted in excessive investment. This kind of economic atmosphere
changed to a certain extent in the 1990s by liberalizing the financial sector and
deregulating the economy, but there has been no drastic change in the incentive
structure and the business practices in the fundamental economy.
Since the Korean government has carried out a relatively conservative fiscal
and monetary policy, the market opening and financial liberalization has not
disturbed much of the economic stability.
As seen on [Table 1], the current account deficit was the only visible problem.
In 1996, the current account deficit had increased to 4.9% of the GDP. Even though
there has been a current account deficit throughout the years except in 1993, the
foreign reserve increased due to the large inflow of short-term foreign capital.
[Table 1] Korea’s Macroeconomic Indicators
(Unit: %, billion dollars)
Growth rate
80-85
86-91
1992
1993
1994
1995
1996
6.3
9.9
5.1
5.8
8.6
8.9
7.1
Inflation
10.9
6.1
6.3
4.8
6.2
4.5
4.9
Corporate
bond yield
Fiscal
deficit1)
/GDP
19.0
15.1
16.2
12.6
12.9
13.8
11.9
-2.5
-0.2
-0.7
0.3
0.5
0.4
0.3
Current
account
/GDP
-3.8
3.0
-1.5
0.1
-1.2
-2.0
-4.9
Foreign
reserves
7.1
12.2
17.1
20.3
25.7
32.7
33.2
1) IMF consolidated fiscal deficit
The other side of the current account deficit and inflow of short-term capital
was that the firms that were being supplied with short-term capital were able to
increase their investment. The sudden increase in the investment by the “chaebols”
was made possible by capital liberalization without government intervention. In
addition, the moral hazards already present between the financial sector and
“chaebols,” and the absence of the corporate and financial supervision, made it
Capital Market Liberalization and the Foreign Exchange…
57
impossible to effectively restrict the non-profitable investment of the large
conglomerates.
In particular, by changing the short-term financing companies to merchant
banks and allowing these banks to carry out foreign exchange transactions, the
inflow of short-term capital increased substantially. Being allowed to borrow from
abroad, the merchant banks usually borrowed capital on a short-term basis but
invested it on a long-term basis. Out of the total capital brought in by the merchant
banks during 1992 to 1996 on a short-term basis, those invested on a short-term
basis were merely 3-6% and the rest were invested on a long-term basis. Although
this term-mismatch made the economy vulnerable to external shocks and prone to
foreign exchange crisis, the supervisory authorities did not regulate it adequately.
Against this backdrop, as many conglomerates went bankrupt in the early
1997, and the government failed to enforce a corporate and financial sector reform
policy expediently, due to the burden of the coming presidential election, the
international confidence in the Korean government was rapidly lost.
The foreign exchange crisis in Thailand coupled with the increased
vulnerability of the Korean financial sector, raised serious doubts about Korea’s
macroeconomic situation, soundness of the financial sector, political situation and
the government’s willingness to carry out reforms, and even cast uncertainties on
future economic development of the Asian countries. This led to the sudden flight of
foreign investors from East Asian countries.
(2). Mexico
Being excluded from the international financial market due to the foreign
exchange crisis of 1982, Mexico experienced a long period of slow growth. Since 1985
Yoon Je Cho & Chong-Sup Kim
58
Mexico undertook a series of structural reform policies including trade liberalization,
stabilization, deregulation, financial liberalization, and privatization. The success in
the negotiation and the subsequent restructuring of foreign debt allowed Mexico to
return to the international financial market, and after the opening of the financial
market in 1990, there has been a steady inflow of foreign capital of over $20 billion
annually since 1991. As a result the international reserve increased, but so did the
current account deficit due to the appreciation of the real exchange rate.
As an instrument of stabilization, the exchange rate was pegged to the dollar
in 1988, and since January 1989 it was adjusted upward every day at a specified
speed. Since November 1991 the exchange rate was allowed to fluctuate within an
exchange rate band which was slightly expanded everyday. The short-term
confidence of the exchange rate band brought about foreign capital in search of
interest rate, and in turn the short-term capital inflow allowed this policy to be
maintained. Also, the expectation from NAFTA allowed the constant increase of
direct investments.
But the foreign capital that came in were mostly portfolio investment, and so
the inflow of foreign capital made the Mexican economy very vulnerable to both
internal and external shocks. The overvalued exchange rate and the excessive current
account deficit of over $20 billion annually could be sustained only with a
continuous inflow of foreign capital.
In order to prevent the expansion of the money supply caused by the inflows
of foreign capital, a sterilization policy was enforced and accordingly the inflation
rate dropped to a single digit (8%) for the first time in 20 years. The problem of this
policy was that the economy went into depression, due to the high real interest rate.
As seen in [Table 2] the GDP growth in 1993 was 0.7% and in 1994 it increased
slightly to 3.5%. Therefore it can be concluded that the problems at this point were
Capital Market Liberalization and the Foreign Exchange…
59
the overvalued exchange rate, excessive current account deficit, and the economic
depression.
[Table 2] Mexico’s Macroeconomic Indicators
(Unit: %, billion dollars)
1990
1991
1992
1993
1994
Growth
rate
4.5
3.6
2.8
0.7
3.5
Inflation
Fiscal
balance
/GDP
Current
account
deficit
29.9
18.8
11.9
8.0
7.0
-3.3
-1.5
0.5
-2.1
-3.9
7.6
14.9
24.8
23.4
28.9
Foreign
Foreign
portfolio
direct
investmen investmen
t
t
6.0
2.6
23.0
4.8
25.6
4.4
29.4
4.4
9.9
8.0
Interest
rate
37.07
22.56
18.78
18.56
15.50
Source: Mexico’s Central Bank
During early 1994 when NAFTA went into effect, foreign investment slightly
decreased due to the armed revolts in the state of Chiapas, which was considered to
have a nominal effect on the economy. However, foreign investment dropped
drastically as political instability increased due to the assassination of the
presidential candidate of the ruling party in March, and interest rates rose in the U.S.
The exchange rate faced upward pressure, and it depreciated close to the upperlimits
of the exchange rate band. Mexico’s Central Bank had to inject $10 billion from the
international reserve to defend this band. Moreover the flight away from pesos and
the increase in demand for foreign currency led to the increase in the interest rate,
and as a countermeasure the government issued short-term dollar-denominated
bonds (Tesobonos) in a large quantity. At this stage, capital that had been staying in
government peso-denominated bonds (Cetes), made an exodus abroad and to the
Tesobonos. As a result, the interest rate of Cetes, that had been reduced to single
digit from 1993, increased to 18%.
But political instability continued. In June the Minister of Internal Affairs,
much trusted by the people, resigned and in October the leader of the ruling party
Yoon Je Cho & Chong-Sup Kim
60
was assassinated. These incidents led to the Mexican government’s decision to
decrease sharply the foreign reserve and increase the issuing of the Tesobonos as a
preventive countermeasure to forestall any possible problems. But as the government
maintained the exchange rate band, the current account deficit to GDP ratio
increased from 6.5% in 1993 to 7.9% in 1994.
Going though many stages of defending the exchange rate, the central bank
spent half of its foreign reserves, and lost its confidence on its ability to sustain the
exchange rate. Foreign exchange speculation continued even after the change in
government. The foreign exchange reserve that was over $16 billion in November
11th was reduced to $11.1 billion by December 16th. Not being able to withstand the
depreciation pressure, the new government had to depreciate the exchange rate by
15% on December 20th, 20 days after taking office. But as the market pressure for
further devaluation became stronger, in two days the exchange rate was allowed to
float. During these two days $5 billion of the foreign reserve was spent, and as the
exchange rate was allowed to float, there was another 25% depreciation.
3. COMPARATIVE ANALYSIS OF THE FOREIGN EXCHANGE
CRISIS IN KOREA AND MEXICO
(1). Macroeconomic indicators and macroeconomic policy
When observing the foreign exchange crisis of Korea and Mexico, we
concluded that, in an open economy, it is difficult to project the possibility of a
foreign exchange crisis based on the traditional macroeconomic indicators. The
macroeconomic indicators of the two countries seemed to point to a favorable
situation. Korea kept up a high GDP growth rate of 7-8% and Mexico also expected a
high growth rate due to NAFTA. The huge financial deficit and high inflation rate
Capital Market Liberalization and the Foreign Exchange…
61
that used to be prevalent in countries with debt crisis were not observed in Korea or
Mexico. Korea has shown a one-digit inflation rate since the early 1980s, and the
fiscal balance was showing a surplus. In 1993, Mexico succeeded in bringing down
the inflation rate to a single digit number for the first time in twenty years. The fiscal
balance in Mexico kept improving since 1987, and even if in 1993 it worsened in a
slight degree, compared with the historical level it was not a serious problem. The
“fundamentals” were viewed as being sound in both countries. This was the reason
that the governments of both countries asserted even a few months before the
occurrence of the foreign exchange crisis that there was no possibility of a crisis.
[Table 3] Public Sector Balance: Mexico
(Unit: % of GDP)
1987
1988
1989
1990
1991
1992
1993
1994
Financial balance1)
-16.0
-12.4
-5.6
-3.3
-1.5
0.5
-2.1
-3.9
Primary balance2)
5.8
8.0
8.4
7.6
5.3
5.6
3.6
2.3
Operational balance3)
1.8
-3.6
-1.7
1.8
2.9
2.9
2.1
0.5
Source: Secretary of Finance, Mexico
Footnote: 1) financial balance: includes all the public sector borrowing requirements: in that it refers
to the whole public sector, it may differ from IMF standards
2) Primary balance: financial balance less interest paid on public debt; with high interest
rate this might have much different from the financial balance
3) Operational balance: primary balance plus the real portion of the interest paid on public
debt
The problem both countries faced in terms of macroeconomic perspective
was the excessive current account deficit. The current account deficit of Mexico in
1994 was 8.3% of the GDP and that of Korea in 1996 was 4.9% of the GDP. In both
cases, the current account deficit was at a dangerous level or at least very close to it
according to IMF standards. But as other economic indicators suggested
overwhelmingly favorable condition, it seems that the governments of both Korea
Yoon Je Cho & Chong-Sup Kim
62
and Mexico did not take the current account deficit too seriously.
In addition, it is difficult to see the current account deficit as either a
sufficient or a necessary condition of a foreign exchange crisis. It is true that the
current account deficit can not be maintained for a long period of time, but it is also
true that it can be reduced gradually without affecting much of a country’s economy.
Also, in an open economy, it is difficult to take the current account deficit as the only
or the main cause of the imbalance of the supply and demand of foreign currency. On
the contrary, in an open economy, concentration of foreign debt in short-term or the
abundance of the liquidity in the economy can account for the instability of the
foreign exchange market. Any internal or external shock can bring about a sharp
outflow of foreign capital independent of the current account balance.
The problem in both Korea and Mexico was that there were no visible
policies leading to a rapid reduction of the current account deficit. The current
account deficit can be reduced through the depreciation of the exchange rate, and
tight monetary and fiscal policies. But both governments either failed to use these
policies or they tried to adjust too slowly.
One reason that the government opted for a slow adjustment of the exchange
rate and interest rate, was because the decision-makers believed that the economy
could adjust gradually without any problem. In Korea, an additional reason was that
the already weak conglomerates and financial institutions could be seriously affected
by higher interest rate and depreciation of the currency. There was also a political
reason by which the government did not want to lower the per capita income, of
10,000 dollars, through the depreciation of the currency. In Mexico, apart from the
possibility of making the foreign exchange market excessively unstable by
dismantling the exchange rate band through currency depreciation, the government
could not aggravate the already depressed economy by initiating a tight monetary
Capital Market Liberalization and the Foreign Exchange…
63
policy in a year of a presidential election. What is interesting is that in both countries
the foreign exchange crisis was related to political uncertainty in the presidential
election.
(2). Capital market opening and foreign exchange crisis
The lesson we could draw from the cases of Korea and Mexico was that in the
process of capital market opening, a country should be particularly careful of the risk
of the occurrence of a foreign exchange crisis. The reasons are:
First, with the opening of the capital market, the inflow of vast foreign capital,
combined with the increased volatility of domestic capital, the local financial market
can became very unstable, by which any internal or external shock can reverse the
direction of the capital flow leading to a huge outflow of capital;
Second, when the capital market opening is not complemented with
adequate institutional reforms, the existing institutions may instead make the
economy more vulnerable to internal or external shocks;
Third, as the market opens political factors may have a greater influence on
the foreign exchange market.
A. Capital market opening and the movement of short-term capital
The similarity between Korea and Mexico was that both countries were
promoting the liberalization of the capital market before the foreign exchange crisis.
The result of this liberalization in Korea was the worsening of the current account
deficit and the increase in the short-term foreign debt by the banks and merchant
banks. In Mexico, due to the capital market opening in 1990, foreigners were able to
purchase government bonds and stocks of almost every sector. These types of capital
Yoon Je Cho & Chong-Sup Kim
64
liberalization brought in an enormous amount of foreign investment. But the sudden
inflow of foreign capital equates to the possibility sudden outflow, so the economy
became vulnerable to internal and external shocks and thus there was an increased
possibility of a foreign exchange crisis.
In the case of Korea, between 1994 and 1996 the short-term foreign debt of
the banking sector alone increased by $20 billion annually. At the end of 1997, due to
the worsening of the local and the international economic situations, the foreign
banks did not rollover the short-term foreign debt and thus, the debt had to be paid
at once. This had brought about the foreign exchange crisis in Korea.
[Table 4] Long and Short-term External Debt: Korea
(Unit: billion dollars, %)
Short-term
borrowing of
banks
Short-term
borrowing of
merchant banks
Long-term debt
/total debt
Short-term debt
/total debt
45.8
49.8
65.8
85.8
104.8
3.3
3.6
5.1
7.1
12.6
56.8
56.3
46.6
42.2
41.7
43.2
43.7
53.4
57.8
58.3
1992
1993
1994
1995
1996
In the case of Mexico, the annual foreign investment exceeded $20 billion
between 1991 and 1993 due to the liberalization of the capital market. There were
also foreign direct investments of $4-5 billion annually. But the political instability in
1994 and the enormous outflow of foreign capital led to the sharp decline in the
foreign reserves.
Capital Market Liberalization and the Foreign Exchange…
65
[Figure 1] Foreign Investment and Current Account: Mexico
12
10
8
billion dollars
6
4
2
0
- 2
- 4
- 6
- 8
- 10
1 9 9 3 :IV
1 9 9 4 :I
1 9 9 4 :II 1 9 9 4 :III 1 9 9 4 :IV
d ire c t in ve stm e n t
1 9 9 5 :I
1 9 9 5 :II 1 9 9 5 :III 1 9 9 5 :IV
p o rtfo lio in ve stm e n t
1 9 9 6 :I
1 9 9 6 :II 1 9 9 6 :III 1 9 9 6 :IV
c u rre n t a c c o u n t
As can be seen in [Figure 1], the foreign portfolio investment in Mexico
started to decrease during the second quarter of 1994 when the political situation
became unstable, and at the fourth quarter more than $5 billion was withdrawn from
the country. The difference in the case of Mexico compared to Korea was that the
problem in Mexico was not one of foreign debt. In the case of Korea, the outflow of
capital was through the repayment of the short-term foreign debt, so it might be said
that the foreign exchange crisis was actually a debt crisis. But in an economy with an
open capital market, not only does the repayment of the foreign debt bring about the
outflow of foreign capital, but so does the withdraw of foreign investment from the
local stock and bond market. Moreover when the foreign exchange is not controlled,
the domestic residents can also take part in the role of the outflow of capital. There
can be an outflow of foreign capital, even without the repayment of the foreign debt.
Liquidity can play a crucial role in the outflow of foreign capital being
conducted by both foreigners and domestic residents. In the case of Mexico, the
foreign exchange crisis was not a matter of short-term foreign debt. As seen in [Table
5], the ratio of short-term public debt to the total public debt was very low, so we can
Yoon Je Cho & Chong-Sup Kim
66
not say that the equilibrium of supply and demand of the foreign exchange market
was broken due to the pressure of the repayment of the foreign debt. Also the foreign
debt in the private sector in 1994 was $25 billion each in the financial and the nonfinancial sectors and did not pose much of a problem. Actually, the dollars used in
the first quarter of 1995 were $12.9 billion, of which $5.9 billion were used for the
payment of Tesobonos, $3.4 billion for public sector debt, $2.5 billion for banking
sector debt, and $1.2 billion for private sector debt.
[Table 5] Public Debt: Mexico
(Unit: billion dollars, %)
1993.3
1993.6
1993.9
1993.12
1994.3
1994.6
1994.9
1994.12
1995.3
Total public debt
Short-term
/total public debt
Total public debt
/GDP
Short-term
public debt
/GDP
77.3
78.9
79.3
78.7
81.7
83.5
85.1
85.4
87.5
5.9
5.7
5.3
5.4
6.2
6.2
7.2
7.4
4.9
19.6
19.7
20.3
18.3
20.3
19.9
20.9
29.8
36.6
1.2
1.1
1.1
1.0
1.3
1.2
1.5
2.2
1.8
Source: Mexico’s Secretary of Finance
In Mexico, the abundant liquidity rather than the foreign debt played a
crucial role in the outflow of capital in such a short period, and it can be concluded
that the foreign reserve was easily drained due to the this abundant liquidity. After
the successful stabilization policy in 1987, the liquidity has been drastically increased.
Although dollar-denominated assets were also present, the peso-denominated bonds
increased faster before 1994, because of the higher interest rate.
Most of the liquidity was in fact held in the form of government bonds.
Among the government bonds, the peso-denominated Cetes and dollar-denominated
Tesobonos had the largest shares. The central bank issued these bonds every week as
Capital Market Liberalization and the Foreign Exchange…
67
the agent of the government, and after 1990 even foreigners were allowed to
purchase most of the Mexican government bonds. However, in an economy with
open capital market, when a domestic resident invests in the Mexican government
bonds, his opportunity cost is the rate of return of the investment in the international
capital market. Therefore, distinguishing residents from foreigners would lose
significance.
As can be seen in [Figure 2], foreign investment in the stock market
increased from $17 billion in 1991 to $56 billion in 1993. Therefore, the share of the
foreigners in the stock rose from 18% to 27%. The foreign investment in bonds
increased from $7 billion to $20 billion in the same period. The bonds acquired by
the foreigners were mostly bonds issued by the government denominated in pesos or
dollars.
[Figure 2] Foreign Portfolio Investment: Mexico
80
70
billion dollars
60
50
40
30
20
10
0
1991
1992
1993
sto c k
1994
1995
1996
bonds
As political instability increased in 1994, the increased liquidity made the
outflow of foreign capital easier, and as the result of the capital outflow, M3
decreased.21 But out of M3, there has been a drastic increase in the section which
M3 = M2 + short-term bonds issued by non-bank financial institutions and the
government
21
Yoon Je Cho & Chong-Sup Kim
68
was denominated in dollars. The reason was that the capital moved from assets
denominated in pesos to those denominated in dollars which were free from
devaluation risk.
Of course even if the government bonds denominated in dollars were free
from the devaluation risk, it cannot be said that they were free from any risk. If the
government declares a moratorium on its dollar-denominated debt due to the drain
of foreign reserves, it was likely that these bonds will also face losses. As soon as the
investors realized that their dollar-denominated bonds were not free from the risk of
default by the Mexican government, they moved their capital abroad to much safer
assets, even if the interest rate paid on Mexican bonds were much higher. This
detonated the foreign exchange crisis in Mexico.
[Figure 3] M3: Mexico
180
160
140
billion dollars
120
M 3
100
80
M 3 in p e so s
60
40
M 3 in fo re ig n c u rre n c y
20
10/1997
05/1997
12/1996
07/1996
02/1996
09/1995
04/1995
11/1994
06/1994
01/1994
08/1993
03/1993
10/1992
05/1992
12/1991
07/1991
02/1991
09/1990
04/1990
11/1989
06/1989
01/1989
08/1988
03/1988
10/1987
05/1987
12/1986
07/1986
02/1986
09/1985
04/1985
11/1984
06/1984
01/1984
0
Comparing the international reserves and the liabilities in dollars, it can be
said that there were possibilities of default as early as 1994. In April 1994, the foreign
reserve did not even amount to the portion of the M3 which was denominated in
foreign currency. It was inevitable that the Mexican government declared a
moratorium if the foreign investors decided not to rollover the government bonds
Capital Market Liberalization and the Foreign Exchange…
69
after the expiration. In [Table 6], it is shown that the share in M3 of the assets
denominated in foreign currencies sharply increased after March 1994, and that the
foreign reserve was not even able to cover the payment of the Tesobonos. However,
default in this case would not only be due to the liabilities owed to the foreigners,
because the residents also held a large amount of Tesobonos. Therefore, when a
government has to pay its debt, what is important is not so much whether the
government has to pay its residents or to foreigners, but whether it must pay the debt
in dollars or local currency.
[Table] M3: Mexico
1994.1
1994.2
1994.3
1994.4
1994.5
1994.6
1994.7
1994.8
1994.9
1994.10
1994.11
1994.12
M3 in foreign
currency/M3
Tesobonos/
M3
Foreign reserves
/M3 in foreign
currency
Foreign reserves/
Tesobonos
0.10
0.10
0.12
0.16
0.17
0.18
0.20
0.21
0.21
0.20
0.21
0.30
0.01
0.01
0.02
0.06
0.08
0.08
0.10
0.12
0.12
0.11
0.12
0.19
1.76
1.94
1.44
0.75
0.69
0.63
0.56
0.51
0.52
0.56
0.38
0.18
13.69
13.59
7.02
1.89
1.55
1.31
1.07
0.88
0.89
0.99
0.67
0.29
Source: Mexico’s Central Bank
In the process of opening the capital market, Korea should pay exceptional
attention to Mexico’s experience. Korea has faced the foreign exchange crisis without
fully completing the liberalization of the capital market. What had brought about the
foreign exchange crisis was the short-term foreign debt in the financial sector, not
the withdrawal of foreign portfolio investment nor the capital flight by the residents.
The amount of the foreign capital that left the stock market was miniscule when
compared to the amount of short-term foreign debt that was to be paid.
Yoon Je Cho & Chong-Sup Kim
70
However, with the IMF program, both the long and short-term bond markets
has been completely opened to the foreigners. It seems that in the future the
administration of the foreign exchange will be liberalized and the exchange control to
the residents will be removed. Therefore, it is very likely that the foreign exchange
market will become much more unstable.
B. Complementary institutional reforms
In the international financial market, the innovation of technology gave
momentum to the liberalization of the capital market, and this, in turn, made the
domestic financial market more unstable. However, as can be seen from the Korean
and Mexican case, the institutional and structural reform in the course of economic
liberalization can be achieved with time according to the social and political
environment. This has increased the possibility that an economy will face speculative
attacks when the distortions and weaknesses in the economic structure are suddenly
exposed. As the revolution in electronic and telecommunication technology has
increased the speed in the flow of information in the international financial market
and has made the movement of capital not only larger in scale, but also more volatile.
In the case of an industrialized country, domestic economic regulation and order has
changed with the change in national and international financial market. For the cases
of Mexico and Korea or other developing countries, the speed of liberalization of the
capital market surpassed the changing of the existing regulation and order,
increasing the structural distortion and the possibility of encountering a foreign
exchange crisis.
Therefore in the case of developing countries, a change in the financial
supervision system and an improvement of corporate financial structure and other
Capital Market Liberalization and the Foreign Exchange…
71
structural changes should accompany the financial liberalization in order to reduce
the possibility that the instability in the national financial market will lead to a
foreign exchange crisis during the process of liberalizing the capital market. In the
case of Korea and Mexico, the institutional reform was slow or inadequate compared
to the fast liberalization of the capital market, leading to deepened distortion and to
increased vulnerability to external shocks. The institutional and structural factors,
which in the past had contributed to the economic growth, were not fit in the new
economic environment and even increased the inefficiency and the rigidity of the
economy.
In the case of Korea, before the foreign exchange crisis, the risk sharing
relationship among the government, conglomerates, and banks increased the moral
hazard, and the loose financial supervision structure and the lack of market capacity
to supervise and monitor the investment behavior, aggravated the structural
problems. But there was also a safety net to share the risk and to socialize the loss
through the so-called government run finance. It was possible to an extent to check
the excessive investment of firms through the entry barrier by the industrial policy of
the government. However, financial liberalization, opening of the capital market and
other deregulations brought about the collapse of the existing safety net before a new
mechanism was developed that could restrain the moral hazard and the excessive
investment, making the economy extremely weak and vulnerable to external and
internal shocks. In other words, the deregulation of the capital flow without adequate
supervisory systems for the financial and corporate sector, and improvement of the
corporate financial structure, that increase the efficiency of the economy in an open
and liberalized economy, made the economy vulnerable to external and internal
shocks.
Yoon Je Cho & Chong-Sup Kim
72
[Table 7] Liquidity Ratio of Banks
(Unit: billion dollars, %)
Banks
Short-term
Short-Term
borrowing
Assets
(A)
(B)
1992
458
390
1993
498
1994
Merchant Banks
Short-term
Short-Term
borrowing
Assets
(A)
(B)
85.2
33
1
3.6
445
89.3
36
1
4.0
658
549
82.7
51
2
3.0
1995
858
686
80.0
71
2
3.1
1996
1,048
841
80.3
126
8
6.3
(B)/(A)
(B)/(A)
Moreover, even with a careful approach to liberalizing the capital market and
continued regulation of foreign investment in the bond market, the foreign debt
structure became more concentrated in the short-term debt. As a result the shortterm foreign debt exceeded the total foreign reserve, increasing the possibility of a
foreign exchange crisis due to the loss of confidence by foreign investors.
The safety net that was much needed, but not established, in Korea was a
stronger governmental supervisory system for the financial and corporate sector. In
the situation where the government did not regulate the entry of firms, the only
possible mechanism that could prevent the excessive investment were the financial
institutions and the capital market. However, these failed to fulfill their duty because
of the existing moral hazard, lack of transparency of the accounting structure, and
the limitation in the representation of minority shareholders. As the government
stopped intervention in the financial institutions, which were in a weak position with
respect to the “chaebols,” they were unable to restrain the excessive investment of the
firms (Cho, 1997). Also even if the government had to strengthen the supervisory
function of the financial institutions, when the financial activities were liberalized, it
Capital Market Liberalization and the Foreign Exchange…
73
did not strengthen at all the supervision of some financial institutions, especially the
merchant banks, increasing the possibility of a financial crisis.
C. Political stability and liberalization of the capital market
When we look at the case of Mexico, doubts arise on the desirability or even
the possibility of completely opening the capital market in a politically unstable
country that has not gone through the political reforms. When the market is opened,
it is inevitable that the economy will be affected strongly by the movements of shortterm capital, and this short-term capital reacts sensitively with respect not only to
the political situation but also to the internal and external shocks.
Of course, it cannot be said that the currency crisis of Mexico had occurred
only due to the political instability. It may be true that there were several mistakes in
economic policies before that, but as political factors might have had an important
influence on the determination of the economic policy, it can be considered that the
distortion of the economic policy was caused by political factors. It is difficult to deny
that the Mexican government delayed the devaluation in 1994 and did not follow a
tight monetary policy mainly because of political reason even if economic factors
were also taken into consideration.
The fact that the political conflict within the ruling party increased and that
this conflict was exposed abroad could have posed no serious problem under a closed
or strongly regulated economy. However, in an open economy these conflicts affect
the viewpoints of the foreign investors, and this in turn may tremendously affect the
economy. As the conflicts in the ruling party may lead to factions and thus lead to a
loss in the presidential election, it might result in a drastic change in the economic
policies by the next government. In the case of Mexico, as in other developing
Yoon Je Cho & Chong-Sup Kim
74
countries with a short history of an open market, a change in economic policy can
work as a disadvantage to foreign investors, and the foreigners may withdraw their
investment to avoid these uncertainties.
In the case of Korea, the viewpoints by the foreign investors on the growing
strength of the labor union drastically affected the movement of short-term capital.
The fall of the external credit rating in 1997 and the withdraw of the foreign
investment was definitely related to the instability of the labor market. Therefore, for
the market mechanism to work more efficiently in an open economy, it is necessary
to have a stable political development, concurrently with stability in the relationship
between labor and management.
The reason Korea could keep up a comparatively stable growth despite the
political instability in the early 1980s, was because the Korean economy was not
sufficiently open. It is hard to accept that the national and international conditions in
the early 1980s were more favorable than those in 1997. On the contrary, the
conditions in the 1980s were much more unfavorable than those in 1997. The
political situation was very unstable, and as for the international environment, there
were a variety of unfavorable factors, such as the increase in the international
interest rates, depression in the developed countries, and the debt crisis in the Latin
American countries. Of course, we faced a very high possibility of falling into a
foreign exchange crisis at that time, but the reason we were able to overcome this was
that our economy was comparatively closed and that, against the backdrop of the
cold war, support from allies such as the U.S. and Japan was more active.
(3). Implications
Not only in Mexico or Korea but also in any other developing country, the
Capital Market Liberalization and the Foreign Exchange…
75
liberalization and opening of the capital market may be accompanied with
overvalued exchange rates, distortion in the relative price structure, generation of
bubbles, and an increase in the current account deficit. These lead to the fragility of
the economy and thus to a higher possibility of facing a financial or a currency crisis.
First of all, it has been proven that in this process the capital flow in the developing
country became very volatile, and with this, the macroeconomic environment may be
strongly affected.
In order to lessen the instability caused by liberalization, institutional reform
is needed. However, institutional change is achieved slowly compared with the fast
liberalization of the economy and the unification of the international financial
market. Therefore, in a situation where adequate institutional framework is not
introduced with liberalization to complement the instability of the economy, the
economy becomes even more sensitive to external factors than before liberalization.
The foreign exchange crisis in the southeast Asian countries was the most important
external factor in the case of Korea. In Mexico, the raise of the interest rate in the
United States was the external factor that played an important role in causing the
foreign exchange crisis.
On the other hand, if faced with a currency crisis there is nothing but the
IMF bailout program which the countries can turn to. However, the IMF program
tends to force such excessive austerity measures that these countries try their best
not to go into the IMF program, persisting on defending the exchange rate. But this
behavior exhausts their foreign reserve and eventually leads to a foreign exchange
crisis, worsening even more the foreign exchange market and thus devaluating the
currency more than necessary. Furthermore, this may have harmful effects on the
regional and world economy because of the competitive devaluation of the countries
in trouble that have to increase the exports.
Yoon Je Cho & Chong-Sup Kim
76
Even after noticing the possibility of facing a foreign exchange crisis, Korea
and Mexico, have spent all their resources in defending the exchange rate and in the
concealment of the possibility of a currency crisis, which then led to an even tragic
situation. In Korea, there had been pressures to devaluate the currency since early
1997 and the usable foreign reserves kept declining. But the policy of the Korean
government was not to raise the interest rate in order to balance the demand and
supply of the foreign exchange market, but to defend the exchange rate by using the
foreign reserves. In November, the usable foreign reserves decreased to $7.3 billion
and it became impossible to maintain the same policy.
[Table 8] Changes in Official Foreign Reserves
(Unit: end of quarter, billion dollars)
Official Foreign
Reserves1)
Deposits at
Overseas Branch
Others
Usable Foreign
Reserves
96
Dec.
97
98
Mar.
Jun.
Sep.
Oct.
Nov.
Dec.
Jan.
Feb.
33.2
29.2
33.3
30.4
30.5
24.4
20.4
23.5
26.7
3.8
-
8.0
-
8.0
-
8.0
-
8.0
0.2
16.9
0.2
11.3
0.2
10.9
0.2
8.0
0.2
29.4
21.1
25.3
22.4
22.3
7.3
8.9
12.4
18.5
Footnote : 1) IMF basis
Source: Bank of Korea
In the case of Mexico, the economy experienced, in March 1994, an large
outflow of capital and a reduction in the foreign reserves due to the political
instability. This situation was made even worse by the use of an expansion of
domestic credits. The right policy might have been to raise the interest rate to attract
foreign investors and to restrict the credit expansion to decrease the current account
deficit and keep up the foreign reserves. The elimination of the effect of the decrease
in monetary base (M1) due to the decrease in the foreign reserve through the credit
expansion, might have been a policy mistake of the Mexican government. As can be
Capital Market Liberalization and the Foreign Exchange…
77
seen in [Figure 4], even though there was a sharp decrease in the foreign reserves in
March and November of 1994, the monetary base was kept stable. The reason was
that there was an expansion of the domestic credits corresponding to the decrease in
the foreign reserves.
If a tight monetary policy was employed in this situation, the interest rate
would have increased. The rise in interest rate would have increased the inflow of
foreign capital or would have suppressed the outflow of the foreign capital. Also, the
decrease in expenditure due to the high interest rates would have, to an extent,
improved the current account. But the bad loan problem of the banks were already at
a noticeable level, and besides, in a situation where the economy was in recession, an
additional rise in the interest rates would have been a political burden. This situation
was similar to Korea where the interest rate could not be raised and credits could not
be tightened due to the vulnerable corporate and financial sectors.
[Figure 4] Monetary Base: Mexico
150
100
50
03/1996
02/1996
01/1996
12/1995
11/1995
10/1995
09/1995
08/1995
07/1995
06/1995
05/1995
04/1995
03/1995
02/1995
01/1995
12/1994
11/1994
10/1994
09/1994
08/1994
07/1994
06/1994
05/1994
04/1994
03/1994
0
02/1994
m onetary base
01/1994
billion dollars
i
nternati
onalreserves
-50
net dom esti
c credi
t
-100
An alternative policy was to devaluate the exchange rate in order to improve
the current account. But in the case of Mexico, additional devaluation was not
possible since the exchange rate was already close to the upperbound of the exchange
Yoon Je Cho & Chong-Sup Kim
78
rate band. An additional devaluation would have meant a breaking up of the
exchange rate band; thus the exchange rate would have been made even more
unstable. This policy would have been a burden to the government with the
presidential election coming up. In a similar situation, the Korean government was
also afraid of the effect the devaluation would have on the price level of the country.
It seems that both countries placed more emphasis on political rather than
economic factors upon deciding the economic policies, including exchange rate
policy and interest rate policy, even under the possibility of facing a foreign exchange
crisis. However, a policy mistake in an open economy is bound to pay a much higher
price than in a closed economy. The present political situation in Korea is much more
stable compared to that of the 1980s and the Korean economy is also much more
open than before. Therefore, the internal and external shocks, and the policy
mistakes that would not have been much of a problem in the 1980’s have brought
about the current foreign exchange crisis. In this aspect, Korea must be much more
careful on the correlation between the political system and the liberalization of the
economy when Korea gets out of the IMF program. The IMF program will make the
Korean economy even more open, and therefore will require an even more stable
political and institutional framework. As the liberalization of the economy, under the
current crisis, is proceeding much more rapidly than both the political and
institutional follow up and the adjustment in preexisting practices, more concerted
efforts are needed for all of these measures to be carried out contemporaneously.
4. CONCLUSION
It was shown that capital market opening can make the domestic financial
market very unstable, and increases the possibility of a foreign exchange crisis from
Capital Market Liberalization and the Foreign Exchange…
79
either internal or external shocks. However, the IMF program will make the Korean
economy even more open and thus more vulnerable to shocks if complementary
institutional reforms are not introduced.
Without these reforms, the existing institutions may rather increase the
structural distortion and make the economy even more vulnerable to another shock
in the future. Additionally, political stability is essential for the recovery and long-run
economic growth. The political instability not only increases the probability of a
currency crisis in an opening economy, but also may push the already doubtful
economy into a vicious cycle of recurring crisis. However, as the political and
institutional reform is achieved slowly compared with the financial liberalization, we
can say that this is the most urgent task we are facing.
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