Korea at a Crossroads

We've recently been discussing the Korean economy on this blog, which the European Chamber of Commerce says we really ought to emulate. Feiren flipped me this wonderful piece from FEER on Korea's economy and the upcoming election (it's pay to view, so only half is here). See any similarities with our situation in Taiwan?

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In meeting this change, whoever is elected will face a number of issues over the next five-year presidential term.

North Korea remains a concern, but after almost 10 years of off-on engagement, South Koreans have become rather disinterested. Of greater concern to most Koreans is how the country can position itself in the face of a rising China. Government experts and business leaders have been talking about an economical sandwich between high-end Japan and low-end China for 15 years. Now the sandwich has become a vice-grip. As China gets better doing what Korea does—autos, shipbuilding, electronics—the vice is tightening. The fear is that Korea will be crushed.

Businesses have been responding by rushing offshore, and especially into China. But many in Korea still fail to grasp what is happening. In the country's development phase, the purpose of companies such as Samsung, Hyundai, LG and Daewoo was nation-building. Now Korean companies, like the counterparts in many countries around the world, are driven by the need to increase shareholder wealth. Many outside business instinctively feel that the Samsungs and LGs still serve the nation. What they fail to appreciate is they are not moving into foreign markets to save the nation, but for corporate survival. Thus while Korean companies go abroad, giving jobs to foreigners and paying taxes to foreign governments, foreign companies coming in may still be viewed with suspicion by many Koreans because they are "only motivated by making profit."

A few years ago, government experts decided that, to survive, Korea should become a regional logistics and research and development hub. The idea of being a regional financial center was suggested by foreign financial players and added to the strategy. Businesses and media fell into step with government thinking and "hub" became the fashionable word of the day.

But several years later, Korea is not a logistics hub. It is not an R&D center. Neither is it a regional financial center. Furthermore, it doesn't look as if the country is even starting to become any one of these three. The explanation comes down to a nationalistic and defensive way of thinking that is so deeply ingrained that it is shared by the frontrunners and unlikely to change. That way of thinking has two basic ideas: One is government must take the lead in the economy and the second is that Korean firms must be competitive and even take a leading position in any hub that is centered in Korea.

The reason these ideas are hard to change is because until now they worked so well. Korea developed in 40 years from a "bullock-cart economy," as one American official described it in the late 1940s, to advanced nation status under government leadership. The government decided on the industries to go into and pushed the conglomerates in the direction it wanted. Korea looked like a capitalist country, but in many ways, given such controls and ownership, it was centrally planned.

What the new government must learn to do is set a vision, create the right legal infrastructure — and then sit back and allow it to happen. In other words, let the market work. As the Hyundai man and wizard mayor of Seoul, Lee Myung-bak is hardly likely to take such a position. His approach is build-it-and-they-will-come, as typified by another of his projects as Seoul mayor, a development called the Seoul International Finance Center. In this vein, he has promised to build a canal the length of the country, from Busan to Seoul, saying it will reduce transportation costs. The issue of Korean businesses having to dominate explains why government has dragged its feet making the necessary regulatory changes for Korea to be a financial center. While outsiders assume the idea is for Korea to become a real financial hub like Singapore, the Korean bureaucrat, implementing policy and interpreting regulations, still believes his job is to make sure Korea has the advantage which means ensuring Korean companies are in a competitive position.

Thus, as Korean players like Shinhan Bank, KB, and Mirae Asset Management go from strength to strength, fear of foreign players will ease. The main reason that foreign private equity funds have been unfairly targeted in recent years by prosecutors, regulators, tax officials, lawmakers and media—in short, by the leadership of Korea Inc.—is simply because there were no Korean private equity funds until recent legal changes made them possible.

Another important area if Korea is to become a truly market-driven economy of advanced nation status concerns the rule of law. Respect for law is low because traditionally it was used by the powerful to disadvantage the weak. A 2002 World Bank Rule of Law index put Korea 8th from the bottom among OECD member states, below Hungary and above Italy. In the past, political power maintained a form of equilibrium. Not so long ago, when prosecutors descended on someone's home, the victim would call a friend in the presidential Blue House before contacting his lawyer.

A historical, if unsung, achievement of the current president, Roh Moo-hyun, has been to limit presidential authority by removing executive controls over prosecutors. (However, he has failed to limit their powers of investigation, or curb their abusive techniques.) In what seems like a remarkable development in egalitarian Korea, perceived public opinion, as expressed through the media and by civic groups, has moved to some extent into the vacuum created by the departure of authoritarian power. Thus not only will prosecutors investigate cases, but also decision makers will decide, according to a perception of what "the people" want. What Koreans call the unwritten Law of Public Sentiment takes precedence over actual law. Foreign private equity funds walked into this buzz saw when the press reported that, as they were registered in tax havens, they were getting away without paying taxes.

This environment of vague national vision, whimsical regulators and weak law is conducive to the corruption, tales of which fill the daily newspapers. In fact, there is such a merry-go-round of corruption that it is hard to imagine it ever stopping. Everyone criticizes conglomerates which come under fire for entertaining and giving gifts to regulators, politicians and journalists, when they know that, if they didn't, their business would suffer. Again, none of the presidential candidates seem to have a grip on the corruption question.

Education remains a perennial problem in Korea. Life for youngsters in Korea is a build up to a multiple-choice-type university-entrance examinations which seems to only test how well a student has memorized reams of facts. By their last year of high school, most are sleeping four hours a night. The irony is that this wrecking of childhood years is all for a higher education in a system whose standards are, academically-speaking, shockingly low. Seoul National University is the only Korean institution in this year's Times Higher Education Supplement World University Rankings 2007, coming in joint 51st place with the University of Texas, behind one Singaporean, three Japanese and three Chinese colleges. The other Korean universities are nowhere in the international league tables. The country spends more than any other OECD nation on extracurricular learning and hundreds of thousands of school kids, not just university students, are going overseas for a proper education.

The three leading candidates all agree that government should interfere less and allow schools more autonomy. Whether that means much remains to be seen. Education reform has been on the cards for years, but so far, governments have only tinkered at the edges.

Such problems combine to create a low level of trust in leaders and institutions. Each of the country's four democratically elected presidents in the last 20 years has experienced a similar journey in terms of popularity through his single, constitutionally limited, five-year term. Immediately after the election, popularity has been high. Many who voted for losing candidates felt they made a mistake, as if the idea were to guess the winner, and switched their support to the new president. Then a scandal or two followed by a failed policy or two, has ensured that by the last year, the president's own party forces him to give up party membership to stop him from "interfering" in the choice a candidate.

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Failure to be a regional logistics hub? Failure to become regional financial center? Low faith in public institutions? Lack of rule of law? Prosecutors run amok? Educational reforms failing? Nationalistic economic policies? Fear of getting crushed by China? Presidents with fading popularity? Investments in 1970s style large public infrastructure programs instead of 21st century economic policies? Yes, it's very clear we've successfully emulated the Korean experience.

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