The ICAS Lectures

No. 97-930-MSB

  Foreign Perspectives on the Korean Economy  

  Michael S. Brown

ICAS Fall Symposium
Korea's Challenges Ahead
Chonju, Korea
September 29-30, 1997

Institute for Corean-American Studies, Inc.

965 Clover Court, Blue Bell, PA 19422

Tel : (610) 277-9989; (610) 277-0149
Fax: (610) 277-3992
Email: icas@icasinc.org
http://www.icasinc.org

 

 

FOREIGN PERSPECTIVES ON THE KOREAN ECONOMY

Michael S. Brown

I am very pleased to be in Chonju City today and have the opportunity to address this impressive audience. I would like to first compliment the Institute for Corean-American Studies and the Chollabuk-do Provincial Government for attracting an excellent group of seminar speakers from all over the world. I am only sorry that I was not able to attend the entire conference due to several prior commitments.

When asked to speak at this conference, I was given some freedom to pick a topic. Not knowing at the time exactly what I would want to cover, I suggested a broad topic, something along the lines of "A Foreigner's Perspective on the Korean Economy". I see that we ended up with "Foreign Perspectives on the Korean Economy", which is close enough, but I think it is important to state up front that there are obviously many foreign views and opinions on the Korean economy. My comments today largely reflect personal views and not necessarily those of the roughly 2000 individual members of the American Chamber of Commerce in Korea.

I have spent the better part of 12 years in Asia, first in Tokyo, then Seoul, from l987 to early l991, Australia and then back to Seoul in l994. Every day I eagerly await the local newspapers. There is so much happening in Korea and so much of what is happening is played out in the press. For example, several weeks ago, on the same day, front page stories in the two English newspapers carried the following headlines.

First Newspaper: Against Possible Chemical Attack by NK, Government Urges Seoulites to Buy Gas Masks.

Second Newspaper: NK, U.S. hold preliminary meeting for Peace Talks.

Though unrelated stories, should a foreign visitor pick up one paper and not the other, that visitor could walk away with a very different view on the prospects for stability on the Korean peninsula. Korea is in the press all the time. It is a dream country for journalists. While it is very important for those of us in Korea representing foreign businesses to stay informed on Korea we need to keep our activities in perspective. One could spend all of his or her working hours reading about Korea and digesting the various pronouncements. Not to take anything away from the press, which I believe has improved over the past decade, to be successful as a foreign operation in Korea, it is critical that one's head office or regional office not let "the headlines" run our businesses. This is much easier said than done, particularly as Korea now aggressively airs its dirty linen in the press in part as a means to create public consensus on reform issues.

I don't want to spend your valuable time on many statistics related to the Korean economy, particularly the macros. I assume that you know historical growth rates, inflation, trends in trade, savings rates, etc. I also assume that you know something about the Chaebols and how, often at the expense of local financial institutions, they were encouraged to aggressively grow and obtain global competitiveness in several key industries, such as shipbuilding, semiconductors, automobiles, petrochemicals and iron and steel. Instead of the past, I would like to talk about the future and more specifically about how I think the Korean people may have to redefine their expectations, particularly as they relate to government and business leaders. I don't mean to suggest that only the peoples expectations have to change, and not that of business or government, but as Korea becomes an integral part of the global economy with significant political influence, the benchmarks for change are no longer in Korea but outside of Korea. This is difficult for people in any society to accept, but perhaps more important for the Korean people to understand as they are by far the most important resource, in a country lacking natural resources.

To me Korea is a very paternalistic country. The hierarchy in government and business is sacred. Leaders are expected to be aggressive and decisive. They solve problems, they take action. This works well in a relatively small centrally planned economy, but in a larger more developed free market economy, particularly when it comes to the government, it takes more leadership today not to take action than to take action. The bankruptcies of several large Korean business groups is destabilizing. The financial markets are nervous, labor is anxious and management is looking for support and direction. The rules of the game are changing, though perhaps too quickly by Korean standards, not fast enough to restore global competitiveness.

The question of Korea's global competitiveness was raised in the early l990's. Annual GNP growth fell to 5-6% in l992 and l993, off the averages of 12% in late l980's and 9% in l990 and l991. Calls for financial and labor market reforms were heard then, but what happened? External events! The yen began its dramatic appreciation from yen 130 to 85. New markets became available in Eastern Europe, former Soviet republics and diplomatic ties were established with China. Semiconductor chip prices soared, creating local liquidity reminiscent of the petrodollar deposits American banks received in the l970s. These external events allowed Korea to avoid having to make the tough political decisions to reform its economy. Though the need for reform was cited by many, the macros were just too good to build public consensus that dramatic change was required.

The situation today is very different, the yen has returned to 125, key markets in Southeast Asia are going to be tougher to penetrate, due to weakening currencies, and chip prices remain very low. While it would be easy to blame external factors, or the cycle for Korea's competitive problems, this would not be productive. In fact, by global standards the macro economic statistics still look relatively good: 6-7% GDP growth, low inflation rate, a low unemployment and narrowing current account deficit. What has people worried, however, and rightfully so, are the problems that their employers are facing. People are beginning to realize that the paternalism of the past is not sustainable in a higher cost economy subject to global market pressures.

For example, many people are worried, or should be worried, about corporate profitability. In the corporate sector, the top five business groups are reported to have made net profits of won 1.29 trillion for l996, while the top 30 business groups earned just over won 600 billion. Profits for the top five business groups were down almost 86% from the won 6.2 trillion in l995. Groups 6 to 30 change in name and ranking somewhat from year to year, but in aggregate their results went from profits of just under won 300 billion in l995 to losses of won 600 billion in l996. Although I have not seen a complete listing of first half results for l997, I understand that profits for the top five business groups may be down 30% from that of the previous year and with several major bankruptcies in the first half of the year, profitability for groups 6 to 30 is certain to be negative.

There is real pain in corporate Korea. The ability to invest and employ ultimately rests with corporate profitability. We have begun to see companies launch early retirement programs, cut back on recruitment and delay expansion programs. This is culturally very difficult for Korean business. This also makes Korean employees insecure. Labor reform, particularly as it relates to being able to rationalize businesses is important to future competitiveness. Equally important to Korea will be the ability for people eventually laid off or let go to find their way back into productive employment. While current regulations may constrain the movement of labor out of specific businesses, Korean culture makes the process of redeploying labor in existing businesses quite difficult. In a high growth environment, there are many opportunities to move people up an organization, but as growth slows and new skills are required in certain businesses, labor is very rigid. I have seen numerous instances where very capable people have failed or been relatively ineffective in new jobs largely because they were not accepted by an employer's long time employees. Korean employees will need to become more flexible and receptive to the introduction of new employees across all levels of the organization. Global markets change too frequently to allow maturing and fragmenting Korean business groups to only grow their own staff.

I believe Korea has a great opportunity to accelerate structural change and create new forms of employment by aggressively seeking foreign direct investment. I know that Governor Yoo and the Chollabuk-do government share this view. I also understand that a relatively large group provincial officials will visit several U. S. states early next year to learn first hand on how U.S. local government officials go about marketing their states to potential foreign investors.

While I applaud the government's interest in attracting foreign investment, I still get a sense that to some degree Korea has a very narrow definition of what constitutes good foreign direct investment; that is high-technology and large projects. Much has been said of Korea's structural trade deficit, particularly related to capital equipment, imports of which have until recently been subsidized by allowing Korean companies to borrow long term foreign currency at rates often half that of won rates to settle these imports. As a WTO member with opening boarders, I believe the structural deficit of concern 10 years out is not with the U.S. or Japan but quite possibly with South East Asia and China where investment in consumer goods manufacturing will be made to service the demands of a financially attractive Korean consumer. This type of investment is important to Korea and though it competes directly with local company products, it should be encouraged. To do so, Korea will have to do a better job managing relationships with existing foreign direct investors which tend to be the first point of contact for new investors. While Korean industrial policy in support of small and medium sized industry has largely failed in reducing the Chaebol's share of the Korean economy, foreign investment can help level the playing field in Korea which in turn can give small and medium sized companies a better chance to succeed.

To return to the initial question of this state of Korean economy, I do expect and plan for tough times over the next several years. Structural changes are never easy and often slow to implement, particularly in countries where shareholders are relatively passive and management is less vulnerable to corporate takeovers. I strongly believe that Korea can make the transition from a successful centrally planned economy to free market economy. I also have faith in the Korean worker. When times are tough they will sacrifice for the good of country and company. Hopfully some day a leval of trust between management and labor will exist such that change becomes natural without creating a sense of crisis.

The press will continue to play an important role in shaping people's perceptions and expectations. The more negative the news the more likely structural reform will be accelerated. While I would never wish misfortune on Korea, a favorable swing in the cycle for several key export items may not be in Korea's longer term interest.

With that, I will close my remarks though I would be pleased to take questions from the floor should time permit.

 

 

This page last updated 9/24/2010 jdb

 

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