February 4, 1997
South Korea: Despite World-Class Economy, Sense of Decline
Related ArticlesSouth Korean President Fails to Placate Foes (Jan. 23) South Koreans Assess Strike and Find Loss Manageable (Jan. 21) Seoul Appears to Ease Stance in Strike Standoff (Jan. 12)
By ANDREW POLLACK
EOUL, South Korea -- During the dirt-poor years following the Korean War, South Koreans were exhorted to extend the lives of pencils by attaching sticks to stubs that had become too short to grip.
Four decades later, the Seoul Education Office is reviving the slogan. "It's time to grasp the used-up pencils again," it said in a recent newspaper advertisement that called on students and their parents to "take the lead in saving our economy."
"Let's turn off the lights, even a single lamp, and save water, even a single drop," the ad said. "Let's correct the habit of showing off by wearing expensive clothes or using imported stationery."
Such penny-pinching might seem out of place in a nation of 45 million people that is now the world's 11th largest economy, with a per capita output that has quadrupled in the past decade to more than $10,000.
But though it has performed an economic miracle, South Korea is now gripped by a deep unease about its future. Economic growth is slowing, the stock market is near a four-year low, the Korean won has sunk to its lowest exchange rate against the dollar in a decade, and the trade deficit has more than doubled in the last year. Banks are hobbled by bad debt, businesses strangled in red tape, and wages are soaring, weakening industrial competitiveness.
Suddenly, it seems to Koreans, the era of fast growth is ending, endangering hopes that their country will make the leap from industrialization to a high-technology economy on a par with the United States and Japan.
The sense of crisis has been punctuated by two events in the last month -- the nationwide strike in reaction to a new labor law that threatens job security, and the stunning collapse of Hanbo Steel, flagship of the nation's 14th largest conglomerate, under nearly $6 billion in debt and a cloud of corruption.
"Most people don't think it's a cycle but that structurally something is wrong," said Kim Pyung Koo, a professor of economics at Sogang University in Seoul. "South Korea is being sandwiched between fully industrialized economies and less developed, low-cost economies like China."
In fact, though, some of the gloom is unwarranted. Yes, the pace of growth has faltered from 9 percent two years ago to an expected 6 percent this year, but that is still more than twice as fast as expected growth in the United States. And while a recent newspaper editorial was headlined "Soaring Unemployment," the jobless rate it lamented was 2.4 percent, a figure most other countries can only dream of.
Moreover, some of the problems are cyclical. One reason for the surging trade deficit, for instance, is that prices of computer memory chips, which account for 16 percent of South Korea's exports, have collapsed to a fifth of their levels a year ago because of an industry glut, not because South Korean companies are losing competitiveness. The fall of the Japanese yen in the last year has made Japanese products more competitive, hurting South Korean exports.
What is happening is that South Korea's economy is maturing. And the development model the country has used -- heavy government direction of business, tightly closed markets, export-led growth and the funneling of resources to industry at the expense of consumers -- is running out of steam, just as it is in Japan, where the model was first perfected.
The government has announced plans to embark on economic reforms -- deregulating the financial system, opening markets, chipping away at the power of the family-owned conglomerates known as chaebol and at lifetime employment, seniority-based pay and other workplace practices that seem ill-suited for a more competitive age.
But the changes so far have been gradual and sometimes half-hearted, just as they have been in Japan. And some critics say that the government of President Kim Young Sam seems adrift. Rather than taking bold measures, they say, it is offering half-measures or symbolic gestures, like exhorting against the consumption of expensive foreign goods.
The issues at the heart of South Korea's economic malaise are serious ones:
-- Wages have quadrupled since 1987, a faster rise than in other Asian "tigers" such as Taiwan and Singapore. That has forced a mass exodus of light industries, such as shoe manufacturing, to lower-wage countries in Asia. Such a migration is now starting for cars, electronics and other heavier industries as well.
-- Banks are weighed down by bad debts and a lack of business acumen that stems from their long-time role as little more than agents of the government, funneling loans to favored industries run by chaebol. Bribery of government officials and bankers by businessmen wanting loans is common.
-- The near-monopoly by the chaebol of credit has allowed them to expand so fast that industry is swimming in overcapacity. It has also frozen out the sort of small, entrepreneurial companies that in the United States have often been the pioneers in new technologies. South Korea also lacks the base of small, nimble parts suppliers that undergird the success of Japan's manufacturing giants. "Korea's industrial structure has an Arnold Schwarzenegger upper body on Woody Allen legs," said Stephen Marvin, head of research at Ssangyong Investment & Securities Co.
-- The current account deficit, the broadest measure of trade, more than doubled in 1996 to about $23 billion, in part because South Korea's dearth of small companies and its technological laggardness force it to import Japanese components and production machines for the cars, videocassette recorders, computer chips and ships it makes.
Now, the need for financial reform seems most urgent. With the financial system nearly closed to foreign capital, interest rates exceed 12 percent, the economy is starved for cash, said Park Ungsuh, president of the Samsung Economic Research Institute. Companies typically take six months to pay bills, meaning that smaller firms live from hand to mouth. "Stronger corporations survive, weaker ones simply collapse," Park said.
The Kim government has lifted some restrictions on bank lending and raised the ceiling on foreign ownership of a South Korean corporation's stock to 20 percent from 15 percent. The president has promised further sweeping reform of the bloated financial sector, but since that would lead to mergers and layoffs, most analysts do not expect drastic action with a presidential election coming up at the end of the year.
One potential sticking point is that if banks are to be strengthened, it might be necessary to end the ban on chaebol ownership of them. But that would only strengthen these conglomerates that many people believe are already too powerful.
Once again Kim appears to be vacillating. He came into office in 1993 pledging to force the conglomerates to concentrate on a few key businesses. But the government then permitted the Samsung Group to enter the automobile business (though it did block the entrance of Hyundai into steel-making).
On Kim's watch, in fact, the share of gross national product accounted for by the 30 largest chaebol actually rose, to 16.2 percent in 1995 from 13.5 percent in 1992, according to the Korea Economic Research Institute.
Some government policies strike some analysts as silly or self-defeating. The push to use pencils down to the nub and other clarion calls to frugality -- like requesting that nightclub owners stop serving imported whisky and that vacationers stop spending so much on foreign travel -- are unlikely to have the desired effect of cutting the trade deficit and might only trigger charges of protectionism by South Korea's trading partners. Besides, far from being profligate, South Korea has one of the highest savings rates in the world.
The government has taken one decisive move to raise the country's competitiveness: a new labor law that makes it easier for companies to lay off workers and tame breakneck growth in wages. But that has led to labor strife, and many economists think the move was necessary.
In many cases, companies are offering bonuses to workers, particularly higher-paid managers in their 40s and 50s, to retire "with honor," though it is usually anything but. News reports and television dramas characterize these humbled men as "fathers with bowed heads."
The seniority system, in which everyone's wages advance together with years of service, is also starting to give way to merit pay, a concept that does not sit well in a nation that prides itself on egalitarianism.
"I don't necessarily like the Wall Street system either," said Milton S. Kim, president of Ssangyong Investment & Securities, referring to the huge salaries paid to Wall Street stars. "But if our market is opening up and Morgan Stanley and Goldman, Sachs are poaching our best people, what choice do I have?"
For all South Korea's travails, other fast-growing nations of Asia, where export growth and economic growth have slowed in the last year, are in the same boat. And for South Korea, at least, the boat isn't about to capsize.
In most industries now at the core of the Korean economy -- steel, shipbuilding, cars and electronics -- the major rival is Japan, where wages are much higher. South Korea can still sell products that are less expensive, if lower in quality, than the Japanese.
"Korea is mid-priced, mid-tech capital and intermediate goods," Marvin of Ssangyong Securities said. "Mid-priced, mid-tech goods are exactly what China needs, it's what Eastern Europe needs and Latin America needs."
Some analysts are even hopeful that the forces of global competition and deregulation will force the chaebol to reform on their own. The Ssangyong Group, for instance, is now negotiating to sell its money-losing automobile business to the Samsung Group, so it can concentrate on areas like cement and oil where it is stronger.
Sakong Il, a former finance minister who is now chairman of the Institute for Global Economics, a Seoul research organization, said that, amid all the economic turmoil, South Koreans must accept that they are moving a notch up the international economic pecking order. That means, he noted, they cannot expect the breakneck growth of old.
"It's like you're doing 80 miles per hour and suddenly you have a speed limit and have to drop to 60," Sakong said. "You have to get used to it."
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