Huge hurdles in Korea

Business Asia, August 30, 1999

Most analysts believe South Korea is on its way to reliving its glorious economic past. Dr Adrian Buzo(*), however, argues that significant hurdles stand in Korea's way

The rebound in South Korea from its 1997 economic crisis has been swift, but the nation is unlikely ever again to achieve pre-1997 growth rates.

The nation has entered a new phase of development, marked by a faltering drive to enforce root-and-branch reform, the continuing erosion of its international competitiveness, and possible prolonged economic stagnation.

To be sure, the government can point to a list of significant reforms.

Gross national product is expected to grow by 4 per cent in 1999, short-term debt has fallen from more than 50 per cent of total foreign debt to less than 25 per cent, and the current account surplus is a healthy A$20 billion.

The regulatory and administrative reform process has achieved a significant downsizing of the central government, the wholesale elimination of restrictive government regulations, the preparation of a number of state-owned enterprises for privatisation, and the streamlining of foreign investment regulations and procedures.

However, much of this change has been quantitative. A good deal of the rebound growth to date has been consumer-driven, while much of the dramatic improvement in the balance of payments has been at the expense of capital investment.

This will have important consequences for South Korean firms' international competitiveness in the longer term.

It is especially crucial at a time when China is capturing many traditional Korean markets in textiles and consumer electronics goods, and when the international markets for such Korean export staples as automobiles and semi-conductors are facing over-supply.

Moreover, the huge industrial conglomerates, or chaebol, remain deeply entrenched at the heart of the economic system, and in fact have further consolidated their hold on some sectors since 1997.

Many continue to pursue old, failed expansionist business strategies, and the looming disintegration of at least one, Daewoo, threatens to push the economy back into crisis. The Daewoo empire, led by business patriarch Kim Woo Choong, has fallen into a sea of debt and many analysts doubt that it can recover.

The political environment for reform is not promising. President Kim Dae Jung's anti-chaebol rhetoric remains bold, but his international prestige tends to obscure the uncomfortable domestic reality that he presides over a fragile and opportunistic coalition.

This delivered him the presidency in 1997, but he is now under mounting pressure.

So far the single five-year term presidential system has delivered extended periods of lame-duck presidency, and it is hard to see how Kim can avoid sharing the fate of his predecessors Kim Young Sam and Roh Tae Woo.

A combination of unrealistic expectations and undeliverable promises has produced a falling approval rating, thus reducing his authority precisely at a time when vigorous oversight of reform policies is needed.

Already we see signs that reform momentum is beginning to fade and old instincts re-emerging in an inconsistent mixture of new and old strategies.

The heart of the problem remains the very economic model that underwrote past success -- a tightly interlocking economic, political and social system geared for the single-minded pursuit of GNP maximisation.

This has shaped structures, institutions and mind-sets in South Korea in ways that are far more anti-market than is often realised.

To seek genuine reform is to ask ageing elite business, government and academic networks to re-examine the principles and practices that have guided their entire professional careers during the years of rapid economic growth.

Moreover, while South Korea has been a model international citizen in many ways, internationalism has shallow roots in Korean society, while chauvinistic nationalism -- a modern invention as much as a reflection of the so-called Hermit Kingdom syndrome -- still has deep roots.

These are still often nurtured and encouraged in an inward-looking education system. They inhibit many Korean businesses from moving confidently and purposefully into the international arena.

We should not underestimate South Korea. The fundamental characteristics of economic size, diversity and resilience will ensure it maintains its status as a major regional economy.

But any vision of a South Korean economic future which ignores the fundamental watershed reached in 1997 is seriously misplaced.

(*) Dr Adrian Buzo is a visiting fellow at the University of New South Wales and a board member of the Australia Korea Foundation.