© 1997 BridgeNews

The World Discounts S. Korea's Economic Achievements

OPINION: THE WORLD DISCOUNTS S. KOREA'S ECONOMIC ACHIEVEMENTS: Unlike '94 Mexico, Which Crashed When The Hyperbole Bubble Burst, Korean Success Gets Too Little Attention

By Keith W. Rabin of KWR International and Kook-Hyun Chang of the Federation of Korean Industries

NEW YORK -- Could South Korea be headed for a Mexican-style financial breakdown? South Korea's burgeoning current-account deficit, a negative "foreign exchange liquidity index" and concern over the nation's external credit status are all cause for alarm. But while Korea's macroeconomic difficulties should not be minimized, it possesses a vastly different structural dynamic than Mexico's in 1994, yielding significantly different implications. It's unlikely South Korea will suffer from a Mexico-style breakdown. There is still real cause for concern, however, and some of it stems from a rapidly growing "perception deficit" in other countries. Simply put, there is a dramatic difference between Korea's economic achievements and the awareness of these achievements by external audiences.

KWR INTERNATIONAL recently measured the perceptions of more than 200 U.S. opinion leaders on a wide range of issues facing Korea, for a report to the Federation of Korean Industries New York Office and the Korean Chamber of Commerce and Industry in USA Inc. The research identified a clear lack of awareness among U.S. opinion leaders on a wide range of Korea-related issues. Even those who had extensive interactions with Korea showed far less awareness than expected. A perception deficit is insignificant in an economy that can rely on domestic capital and whose existence depends on development of low-cost export-oriented manufacturing capacity.

HOWEVER, AS KOREA struggles to globalize its economy and as its corporations continue their overseas expansion, Koreans will find themselves more and more dependent on foreign audiences and foreign capital. A far more serious price will be paid for the growing deficit between achievements and awareness. This further accentuates the need to raise the "valuation" of South Korea in the minds of foreign opinion leaders. Korea has experienced almost unparalleled economic growth for over three decades, advancing from the ranks of the world's poorest nations to become one of the world's major industrial economies. Its gross national product per person has grown over 300 percent in the last 10 years, and Korean firms have been actively expanding their operations and investments all over their world. While Korean investment in overseas markets and its imports of intermediate and capital goods have aggravated the nation's current-account deficit, over time this will increase the nation's competitive position.

UNTIL RECENTLY, Korea has been able to finance its economic growth through domestic savings, drawing upon its traditional spirit of self-reliance to build a world-class presence in sectors ranging from technology, chemicals and steel to industrial components, textiles, ships and light industry. However, future growth will require that Korean firms continue amassing assets all over the world-and the perceptions of overseas audiences will influence the capital costs Korean companies must bear. Is the Korean experience comparable to Mexico's before its 1994 breakdown?

WHILE MEXICO had made significant progress in liberalizing its economy and in promoting economic growth, Mexican imports were far more consumption-driven than those in Korea today. Additionally, it would be hard to identify a single Mexican company with the competitive presence of any of Korea's leading conglomerates. Mexico has never experienced sustained dynamic growth like that of the Korean economy. In the four years prior to the 1994 financial crisis, Mexico's economy rarely approached a 5 percent growth rate. Mexico was highly dependent on speculative portfolio capital and the need to promote passage of the North American Free Trade Agreement. The country was oversold to the media and the investment community through high-profile public relations programs organized by public-sector and private-sector entities in both Mexico and the United States.

THIS EFFORT helped to build the public support needed to pass the Nafta accord, yet ultimately the messages exceeded reality. This created a "perception surplus" and raised expectations to unsustainable levels. The results were disastrous. Within Mexico, opinion leaders had begun to believe their own publicity. There was a growing belief that investors and money managers would provide an endless stream of capital with few restrictions. On Wall Street, financiers, analysts and executives came to expect too much. Then, suddenly, they had to lower their projected earnings and forecasts. Fear and panic came to grip the financial markets. Mexico is only now beginning to recover from the damage.

UNLIKE MEXICO, which suffered from an unsustainable "perception surplus," Korea suffers from a "perception deficit." Korea's domestic interest rates are extremely high by international standards. And many South Korean corporations pay a premium in their overseas borrowings. As one banker who participated in our opinion leader survey commented: "Our business is to evaluate the creditworthiness of the U.S. subsidiaries of Korean conglomerates and to interact with U.S. third parties to complete financial transactions. U.S. perceptions of Korea have very real implications on the prices that we negotiate on behalf of Korean clients."

WHILE KOREA IS UNLIKELY to suffer a Mexico-style breakdown, the perception deficit directly affects the competitive strength of the nation. If Korea is to maintain its long-term competitiveness, the deficit must be addressed. This will require effective planning and identification of evolving priorities over the long term. It is critical that additional outreach and promotion be balanced within an integrated framework giving equal consideration to the development of credible, strategic messages and the organizational capabilities necessary to generate sustainable results. The opinion leader survey begins to address these critical issues. It is our hope that Korean firms and institutions will develop the capabilities and internal infrastructure necessary to develop the expanded public profile that Korea's economic achievements now demand.

KEITH W. RABIN is president of KWR International Inc., a New York-based consulting firm, and Kook-Hyun Chang is executive director of the Federation of Korean Industries New York Office, a trade association. Their views are not necessarily those of Bridge News.

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CONTACT: Keith W. Rabin
President
KWR International, Inc.
New York, New York 10023
Tel: 212-799-4294
Fax: 212-799-0517
E-mail: kwrintl@kwrintl.com