(FORTUNE Magazine) – LABOR UNREST, like democracy, is something South Korea will have to learn to live with. Since President Chun Doo Hwan grudgingly agreed to sweeping democratic reforms last summer, labor disputes have erupted by the thousands and many have turned violent. After years of docilely working six days a week for some of the lowest wages among industrializing countries in Asia, Korean workers are demanding, and often getting, a bigger piece of Korea's remarkable economic success. So far, the government estimates that strikes and demonstrations have cost the country $1 billion in export revenues. Suh Sang-Mok, vice president of the Korea Development Institute, a government-financed research organization in Seoul, says that rising wages coupled with a steady increase in the value of the Korean won in relation to the dollar could slow the economy. Once the smoke and tear gas clear, however, 1987 could yet turn out to be a banner year. Even with all the work stoppages, South Korea's gross national product will likely grow 10% this year, a remarkable encore to 1986's stunning 12.5% gain. Rha Woong Bae, minister of trade and industry, has downgraded the country's export goal from $45 billion to $44 billion -- but that is still 27% higher than last year. It probably will produce a current-accounts surplus of around $7 billion -- up from $4.6 billion in 1986. South Korea will end the year as the world's leading producer of shoes, microwave ovens, and perhaps ships and textiles as well. Strikes could keep automakers from reaching their production goal of more than a million vehicles this year, but exports could still total around 500,000 cars, up some 65% from 1986. Korean manufacturers will trail only Japan in videocassette recorders and will be among the handful of companies anywhere capable of making 256- kilobyte computer memory chips. Though higher wages will hurt older, low- tech industries, most of Korea's booming export-oriented companies can afford to give workers what they want. Still, South Korea is facing a formidable task in keeping its economy on track. It must traverse a mine field of rising worker expectations, increasing competition from other countries, and irritated trading partners who would like to see the gush of Korean exports slowed. Under pressure from the U.S., the won has been allowed to rise 10% against the dollar in the past 18 months. Makers of textiles, Korea's No. 1 export, have complained that the slowly rising won is damaging their ability to compete. THE TORRENT OF EXPORTS that has put Korea on the world stage is way out of proportion to an economy barely 6% the size of Japan's and 2% that of the U.S. South Korea's most famous product, the Hyundai Motor Excel, costs about double the average South Korean's annual income. An often overlooked fact is that South Korea is still a relatively poor country. Last year's per capita income of around $2,200 is one-eighth that of the U.S. and a third of Italy's. Even with reductions from this year's trade surplus, South Korea's $39-billion external debt keeps it in the ranks of the Third World's heavyweight borrowers. The bitterness of South Korea's labor conflict highlights an aspect of South Korea's economy that was largely ignored when government planners were focusing on growth -- and Western countries were eager to celebrate a capitalist success story in Asia. South Korea is hardly a model of a free economy. The hand of government planners in setting priorities and steering companies has been heavy. The low wages that helped fuel growth did not result from market forces. For 25 years, successive governments deliberately held down pay rates. They virtually barred strikes, jailed militant labor leaders, and decreed tough guidelines for wage increases. To block development of independent unions, companies created their own and installed leaders acceptable to the government. Says a Western diplomat in Seoul: ''Union leaders were practically appointed by the national security police.'' With democratic winds sweeping South Korea this summer, workers were emboldened to push for higher pay, independent unions, and the right to strike, which is still technically illegal in many industries. At first the government took a hands-off attitude. ''Let the people solve their own problems,'' said a spokesman. The unusual stance reflected a consensus among Koreans that workers were probably entitled to higher wages. Some took the view that labor protests are the growing pains of democracy -- and a part of any modern country's history. Even President Chun, who had agreed to democratic reforms only after nationwide demonstrations, was conciliatory. ''Recent demands by laborers must, in principle, be accommodated,'' he told his cabinet. When a worker was killed at the Daewoo shipyard in Koje Island, Roh Tae Woo, a classmate of Chun's at the Korean Military Academy and the majority party's candidate for president in the December elections, sent flowers to the family. Then, in early September, some confrontations turned even uglier. Workers went on violent rampages at Hyundai Heavy Industries in Ulsan when a protester was run over by a truck. Strikers burned a car at the Daewoo Motor plant near Seoul after a lingering labor dispute that had interrupted production throughout the summer. Finally, government officials declared that the violence had exceeded tolerable limits and warned that ''impure elements,'' a government euphemism for radicals, had infiltrated the labor movement. Riot police stormed the Hyundai and Daewoo plants, seizing several hundred workers they claimed were responsible for the violence. Student leaders were arrested and charged with sedition. On the campuses of Seoul's leading universities, police battled students returning from summer vacation. As the government stiffened, so did the workers. ''They feel this is the time to get something,'' said a government spokesman. By mid-September, the violence seemed to peak. But the workers had made their point. According to the International Labor Organization, South Korean manufacturing workers had the longest workweek in the world in 1985, the latest figures available: 53.8 hours, vs. 41.5 in Japan and 40.5 in the U.S. Their average wage, according to the U.S. Bureau of Labor Statistics, was the lowest among Asia's fastest-growing economies: $1.39 an hour, vs. $1.67 in Taiwan, $2.23 in Singapore, and $9.50 in Japan (the U.S.'s is $13.09). With no minimum wage and little enforcement of labor laws, some workers can end up with as little as $125 a month for a six-day, 60-hour week. The workers' unhappy mood was not helped by reports of healthy profits among South Korea's biggest companies, and by the growing gap between blue- and white-collar workers. In recent years real wage increases averaged 6% to 7% annually, while productivity was increasing 8% to 10%. Government officials and economists insist workers have benefited from the economic boom and that income disparity is normal in a developing country. But they also concede that the oft-repeated tale of South Korea's economic miracle raised expectations. Despite the economic cliffhanger, South Korea continued its hesitant course toward democracy. In early September the ruling Democratic Justice party agreed to hold a national presidential election by December 20. Roh Tae Woo had long since been picked as the party's candidate. But the opposition is still trying to decide who should run against him. The country's most famous dissenter is Kim Dae Jung, who has been battling South Korea's authoritarian leaders for more than two decades. He has been jailed by various regimes and spent years in exile. But he is not the only Kim to challenge the government. Kim Young Sam is leader of the Reunification Democratic party, the largest opposition group. The two Kims have tried to come to an agreement over which of them should be the candidate, but so far have failed. If they both run and split the opposition, Roh might end up as South Korea's first fairly elected president in 25 years. Workers have shrewdly avoided taking political sides in pursuing their goals. But they are keenly aware that without the rising demands for democracy, their protests would have gone nowhere. Nobody knows that better than Lee Tong Su, 28, an auto worker who had an earlier confrontation with authorities -- when the government was especially intolerant of dissent. His story illustrates the complex motives of Korean workers. Son of a farmer, he answered a newspaper ad in 1979 and went to work in the engine plant at the modern complex in Pupyong, outside Seoul, where Daewoo makes the Pontiac LeMans for General Motors. This summer, production was slowed by walkouts and sit-ins involving hundreds of employees and by strikes at suppliers that shut off the flow of parts. LEE FEELS STRONGLY that he and his co-workers deserve more from Daewoo. They got no raise last year, 5% this year. His first brush with protest followed his return from military service several years ago. He and other veterans discovered that they were earning less than new workers at the plant because they had missed increases while they were in the military. They argued unsuccessfully that they should not be penalized for compulsory military service and staged a protest to demand a $22.50 monthly increase. The company gave them $7.50, he says -- and took them down to the local police station to sign a pledge that they would not participate in further protests. Because of this pledge, Lee says, he did not take part in the disruptions at the plant in August. But he strongly supports the efforts to create an independent union. He admits it will not be easy to oust the union formed last year under company auspices. ''I anticipate a lot of pain,'' he says. He rejects government suggestions that ''outsiders'' -- read radical leftists -- are involved in the labor disputes. He says his co-workers have rejected the overtures of radical students who want to take up their cause, but they do work with former Daewoo employees allegedly fired for union activities. Rhetorically, he asks: ''Are we supposed to consider fired workers impure forces?'' For all his committed stance on unionism, Lee considers Daewoo Motor a relatively good place to work. ''In comparison to other companies,'' he says, ''it's quite good.'' He works an average 66 hours a week and takes home roughly $415 a month. ''For myself alone it's adequate,'' says Lee, who plans to marry this fall. ''Once I have a family, it will be tight.'' Because of his earlier brush with the police, he does not expect to advance much. ''I've been cornered,'' he says philosophically, but he adds, ''I plan to retire from this company.'' His circumstances might seem enviable to those of a 17-year-old girl who works in a shoe factory in the southern port city of Pusan. Because her family was poor, she skipped high school and went to work. In South Korea education is free only through elementary school. Six days a week, she sticks trimming on sneakers. She lives in a tightly controlled company dormitory for which she pays a small residence fee. Every month she sends home $60 out of her $160 paycheck to help pay tuition for her two younger brothers. At the risk of being fired, she joined the protests for higher pay at her company. The breadth of the new willingness of South Koreans to confront management and government reflects a deep shift in a society that has long been subservient to authority. The Confucian precepts of respect for hierarchy and elders have been seriously weakened because the last two governments, which both sprang from military takeovers, have been widely regarded as illegitimate. ''The Confucian system has broken down under 25 years of military rule,'' says Kim Duk-Choong, an economist at Seoul's Sogang University and brother of Daewoo Chairman Kim Woo-Choong. Koreans of the old school were shocked when striking workers manhandled Hyundai founder Chung Ju Yung and held him prisoner for several hours. Still, the men who run the big conglomerates are responding. Daewoo Chairman Kim sat down with workers and reached a settlement for a 23% raise after spokesmen had said that it could not possibly give them more than 20%. Lee Kyung-Hoon, president of Daewoo Heavy Industries, got word of a strike while he was on a business trip to the U.S. He took a 19-hour flight back to Seoul and went directly into negotiations with his employees. After four nights and five days of talks, Lee had a deal: Workers went back with a 10% wage increase and an agreement calling for faster raises. In addition, the company extended its commitment to grant full scholarships to the children of women workers as well as to the children of men, an important benefit. Lee says he was fortunate. Lee is less concerned than government officials about the possible impact of large wage increases on South Korea's ability to compete. ''Rather than thinking that higher wages will make us less competitive,'' he says, ''I think we can cut costs.'' In negotiations, he says, workers admitted they could speed up productivity gains, which now average 15% a year at Daewoo. There does seem to be considerable room for higher wages in export industries. Daewoo Heavy Industries' biggest export to the U.S. is a forklift truck it manufactures for Caterpillar. Lee estimates Daewoo can make the truck for 30% less than a U.S. manufacturer could, and labor is only 12% of the cost. A U.S. embassy report says that Korean shipbuilding costs are 40% to 50% lower than those of the Japanese. Nomura Securities estimates that a subcompact car selling for $6,600 costs $1,400 less to manufacture in Korea than in Japan. SOUTH KOREA'S most glaring weakness is its dependence on foreign technology. As much as 40% of a Korean automobile is imported, mostly from Japan, where the appreciation of the yen against the dollar, and to a lesser extent against the Korean won, has made such purchases increasingly expensive. Daewoo's Lee buys forklift parts from Japan under a deal he made when the won was some 70% stronger against the yen than it is today. Since the cost of those parts has risen with the currency shift, he is now trying to switch his source from Japan to Korea. Depending on Japan traps Korea's industries in a vicious circle: The more they export, the more they have to pay the Japanese. South Korea hopes to hold its trade deficit with Japan to last year's $5.4 billion. The government has urged manufacturers to try to make more parts at home, or to buy more from the U.S. At the very least, buying American would help reduce the growing trade surplus with the U.S., South Korea's biggest and angriest trading partner. However, like Japan, South Korea talks a better game on two-way trade than it delivers. Imports from the U.S. have increased just 1% in 1986. The Koreans keep announcing market-opening measures, but they also maintain stiff barriers to U.S. companies trying to crack their market. Earlier this year, Korea opened its auto market to foreign makers with great fanfare -- but imposed taxes and a tariff that would boost the price almost 300%. The American Chamber of Commerce in Korea cites the case of Nash Engineering Co., a Connecticut manufacturer, which has captured more than 50% of the market for a certain type of hydraulic pump in South Korea. Nash used to get its import licenses from a government agency but was recently told that a manufacturers' association, which included its Korean competitors, would have to approve its imports. The company worries that its sales will be cut off. Says a Nash official: ''It's like GM asking Toyota for permission to import.'' Lower-tech industries, where labor content is high, do have reason to worry about higher wages. Textiles, for example, are still South Korea's No. 1 export. Although exports will likely hit a record $11 billion this year, the industry is in the midst of a restructuring to stay ahead of countries where wages are even lower: India, Pakistan, and the People's Republic of China. South Korean planners argue that their country is not yet ready to compete on the world stage. They say Korea needs several years of trade surplus to bring the debt down to a more manageable level. But U.S. officials say America can no longer afford to give South Korea the kind of benevolent access to its markets that helped lift Japan and other countries in the past. THE HOT BREATH of U.S. protectionism has pushed some Korean companies to imitate the Japanese strategy of moving production into their biggest markets. Samsung manufactures color TV sets in New Jersey and recently opened a pilot microchip plant in California. Korean textile makers have announced plans for a major investment in the U.S. But compared with the large Japanese investments in the U.S., these moves are merely symbolic. South Korea's economy is yet too poor to sustain its own growth. The driving force for economic expansion will continue to be exports for some years. But the backwash of U.S. anger with Japan and Taiwan, countries with huge cash surpluses, has already spilled over to Korea. ''When the whales are fighting,'' an executive quotes a Korean saying, ''the shrimp get their backs broken.'' Arguably, Korea's authoritative methods helped it reach ambitious economic goals. But the iron fist won't work anymore, now that Koreans have had a taste of freedom and fairer distribution of the fruits of economic success. That's why it is so important that South Korea restore labor peace without stopping progress toward democracy. And to do it as quickly as possible.