The Sunday Times (London) January 12 1997
Asia's tiger economies start to lose their bite

The East is paying a high price for industrial maturity, write David Smith and Michael Sheridan

The wind blows cold in South Korea in January. And last week it was blowing on a new and, to western eyes, rather puzzling phenomenon. The South Koreans, along with the other Asian "tiger" economies, were supposed to be so super-competitive that they could avoid the kind of labour confrontations more typical of supposedly ageing industrial donkeys such as Britain and France.

Instead, South Korea has moved from being a bright industrial newcomer to suffering the problems of economic maturity with no period of grace in between. And it is not alone. The tigers ­ which some said would overwhelm the West with their economic superiority ­ may be starting to lose their bite.

"The main mistake made by so many of these countries was that they believed 'Asian values' would help them avoid all these problems," says Dr Gerald Segal, Asian research fellow at the International Institute of Strategic Studies.

"These confrontations tell you that there is a close link between economic change and political change. Countries like these do slow down and they do run into structural problems. It is a warning sign to everyone else in the region."

Segal sees parallels with Japan, once thought to be immune from the harsh realities facing western economies, but now struggling to shake off the stagnation that has characterised its economic performance in the 1990s. Sooner or later, Father Time catches up.

South Korea's winter of discontent saw strikes and demonstrations spreading last week across a country widely regarded in the West as a paragon of industrial strength. Tens of thousands marched in the streets of Seoul and other cities against a new labour law that makes it easier for employers to fire their workers.

The government says South Korean business badly needs a "flexible labour market" and is threatening legal action against the unions. Seven strike leaders are holed up, in freezing conditions, in a tent in the grounds of the capital's Myongdong Roman Catholic cathedral, preaching defiance of the forces of global economic competition. They have set a deadline of Tuesday for the law to be repealed.

The Asians are discovering that the economic wonders worked by cheap, docile labour, weak exchange rates and closed domestic markets cannot be sustained for ever. Labour disputes and clashes between business and workers will multiply in Asia this year; 1997 could in fact be the year when the Asian miracle turns out to be not so miraculous after all.

Ironically, what Asia is now facing is the challenge of success. As the Asian economies have climbed up the ladder, increased wealth has created a middle class and expanded the number of people with aspirations to join the new elite. But, simultaneously, the middle class is demanding a voice in politics, which makes smooth authoritarian government no longer so simple. And the workforces, whose muscle and conformity helped propel the tigers out of poverty, are demanding their share of the rewards.

All this is happening just as the Asians are coming under global pressure to open up their protected markets, which ensured life-long job security for many workers and provided an impregnable base for low-cost exports to the West.

Change, therefore, is not confined to South Korea. In Thailand, where an overheated economy is in trouble, outraged workers recently burnt down a Japanese-owned factory when their expected bonuses were not paid. The labour market in Malaysia is so tight that skilled employees have achieved great bargaining power and will simply quit for another job if their demands are not met.

The Chinese authorities have hastily arrested and put on trial two men in the southern boom town of Shenzhen. Their crime was to try to organise a free trade union among the multitude of poor migrant workers who provide the backbone of the local manufacturing economy. The prospect of organised labour unrest, says Human Rights Watch/Asia, is a "nightmare scenario" for the Communist party.

It is the developing crisis in South Korea, however, that is the best example of what happens when a developing economy "matures" and thus grapples with the classic problems that occurred in Europe at the end of the long boom after the second world war.

Last year the South Korean government was full of pride. The country's extended run of exporting success and the growth of its formidable conglomerates ­ the chaebols ­ was propelling it into the ranks of the industrialised elite.

It was a new democracy, where the army would no longer automatically shoot down strikers in the streets. The South Koreans won admission to the Organisation for Economic Co-operation and Development (OECD), the industrial countries' club, a token of their status in the global economy.

It was a shock, therefore, when the South Korean conglomerates, so ruthlessly efficient at exploiting globalisation to their own advantage, suddenly came up against the resistance of organised labour to change at home. Membership of the OECD entailed obligations: a commitment to deregulate the economy and to open South Korean markets to foreign competitors. That meant ending the implicit contract providing lifetime employment for Korean workers.

The government called a session of the national assembly before dawn on December 26 and swept the legislation through without any opposition members present. The unions, infuriated, called a series of strikes in protest. At first the authorities claimed there was "little public support" for the strikes, but resistance to the law has spread like wildfire.

The authorities declared the strikes illegal but that did not intimidate the protesters. By last week the unions estimated that 230,000 workers were on strike and the trade ministry said the disputes had cost the economy approximately £1 billion in lost production.

"We want to show the people we are patient," said Choi Myong Ah, of the Confederation of Trade Unions, "but we are also preparing for the worst." The trial of strength will probably end in a compromise, even though South Korea's drive to deregulate its economy is a crucial test for the government.

Problem-hit though the tiger economies may be, they are not about to crash to earth. The OECD, for example, sees them "shifting to a more sustainable pace of growth", which means 5%-6% a year ­ down from the 8%-10% rates of their finest economic hour but still well above the 2%-3% rates more typical of Britain and other European economies.

Over the next decade or so, however, their growth will slow to these "mature" rates. The economist Paul Krugman, a professor at the Massachusetts Institute of Technology, puts it straightforwardly. Economies, once they have matured, grow more slowly, at about 2% a year. The tigers are no different. Neither is China. As he has said, the idea that these countries could dominate the world by maintaining high growth rates well into the next millennium will look as quaint, in 20 or 30 years' time, as the once-popular notion that Leonid Brezhnev's Russia would become the world economic superpower.

Chris Patten, the governor of Hong Kong, took up the question of whether the tigers are facing economic eclipse last week. "The first wave of successful Asian economies now has to face a new challenge," he said in the 1997 NatWest lecture. "It is not how to catch up with the mature technology and information-based economies of western Europe and north America. The challenge is to keep pace with them."

The tigers, in other words, have done the easy bit. They have transferred labour from agriculture to industry. They have invested heavily, and have benefited from investment and the transfer of technology from abroad. What they now have to demonstrate is their ability to deliver "quality-based growth", rather than growth based on adding ever larger quantities of capital and labour.

This means that they have to be inventive and innovative. For Patten, it also means that they have to combine their further development with economic freedom and opportunity for their people. This is precisely the problem South Korea is facing, and which the Chinese government will face when it takes over Hong Kong in the summer. Britain could be handing over the colony just as its period of tigerish expansion is at an end.

The outcome of the South Korean confrontation will be watched with trepidation in countries elsewhere in Asia, where industrial upheaval could set off social frictions that authoritarian governments and immature political systems are ill-equipped to handle. The struggle could give "Asian values" a whole new meaning as the region comes to grips with the inevitable challenges of economic maturity.