Complacency risk for Korea - Frontline - if the government of South Korea delays economic reforms, the national could be looking at another financial crisis

Business Asia, Feb, 2003 by William Pesek, Jr

In late 1996, the champagne corks were popping all around the South Korean capital. The nation had just joined the Organization for Economic Cooperation and Development--a sign it graduated into the ranks of the world's most advanced economies.

It turned out to be the high point of the nation's post-Korean War boom. A year later, Korea fell into crisis with Asia's other former tiger economies. While Korea's meltdown had myriad causes, it mostly boiled down to complacency. Officials felt the good times would last forever and were slow to modernise the economy.

Today, Korea again faces that risk. It's repaired its economy since the 1997 Asian financial crisis, making it one of the world's top performers. Now that the good times are back, investors wonder if Korea is sliding back into the kind of contentment it did in the late 1990s, especially with a new president taking the reins soon.

No pulling back

"Even if we wanted to back away from reforms, we couldn't," Kim Yong Duk, Korea's deputy Finance Minister who oversees international issues, including currency policy, said. "Foreign investors shouldn't worry too much about the new President's policies."

Comforting words, indeed. Kim pointed out that the Government isn't just committed to reform, but locked into it. Investors are watching Seoul's every movement and gesture. It won't be easy to retreat from economic reforms, Kim said, so Korea will remain on the right track.

Luckily, policy makers like Kim are around to see to it. Kim, for example, pulled aside President-elect Roh Moo Hyun a few weeks back and recommended he meet with sceptical foreign investors. Roh scheduled a speech to the American Chamber of Commerce, expecting 200 or so investors. Over 800 showed up, speaking volumes about how worried markets are about Korea's outlook.

Concerns

At a time when the foreign media is exaggerating the extent of anti-American sentiment in Korea, many investors liked what they heard. "Koreans still like Americans," said Jeffrey Jones, former chairman of the American Chamber of Commerce in Korea, after listening to Roh's ideas.

Tensions with North Korea are certainly one reason for concern. Investors have been selling Korean stocks since late last year, when Pyongyang disclosed its nuclear weapons program.

Business confidence also has been damaged by the row between Pyongyang and Washington. While the odds don't favour Pyongyang's nuclear program derailing the South's economy, markets are taking few chances.

Tackling problems

Yet the longer-term risks are a bigger concern. The question is whether Korea will continue reining in the conglomerates that dominate the economy, strengthening the financial system, opening markets to foreigners and improving corporate governance. Cultivating the small- and medium-size companies that were neglected for decades is also high on Seoul's to-do list.

"I'm confident the new Government will tackle these issues," Kim said.

Reinventing an economy takes more than five years, he said, and investors should give Seoul some time. Since the Asian crisis, Korea accomplished what Japan hasn't in 12 years. It has upgraded, diversified and strengthened the economy and worked to change the way overseas investors view Korea, as well as how average Koreans view foreign financiers.

Much remains to be done, though, to secure Korea's move into the ranks of the world's biggest and most transparent economies.

The nation still needs to boost per capita income, increase competition and go further to reduce the influence of the huge business groups, or chaebol.

William Pesek Jr is a columnist for Bloomberg.