© 1999 BridgeNews

The BridgeNews Forum: Daewoo Bailout Is Crucial To South Korean Reforms

By Young Man Kim of the Korean Chamber of Commerce and Industry in the USA

NEW YORK -- Many commentators have suggested that the South Korean government's recent decision to help arrange a creditor bailout for Daewoo Corp. can be observed as backsliding, calling into question the future of South Korea's economic reform initiatives.

Although we share some of their frustration about the pace of reform, they miss the point about what is happening in South Korea and how a radically different new economy is emerging.

Much of the criticism appears to imply that South Korea's government has given up on reform, surrendering to the forces of inertia and corporate resistance; large South Korean conglomerates are doing little to restructure; and foreign investors are likely to flee, puncturing confidence, and ultimately leading to another slowdown.

Although not stated, it is hinted that South Korea is again on the slippery slope to another International Monetary Fund crisis, similar to that in late 1997. In essence, the implication is that not much has really changed in South Korea and the same problems that caused the worst recession in recent history sit waiting to strike again.

We do not believe that South Korea is on the brink of another crisis.

South Korea should witness real gross domestic product growth of 5 to 6 percent this year, hardly a reflection of an economy tottering on the brink of a new chasm. In June, industrial productivity rose 29.5 percent, shipments grew 30.7 percent and manufacturing 79.8 percent, approaching pre-crisis levels. Foreign exchange reserves are at a record high -- more than $60 billion. The current account balance registered a massive surplus in 1998; from January to March 1999 alone it reached $6.87 billion.

Foreign investors have not been deterred from investing in South Korea.

Foreign direct investment in South Korea rose 250 percent during the first quarter of 1999 compared to the same period of 1998, reaching $2.04 billion. This followed a record $9 billion in foreign investment in 1998.

Even during Daewoo's recent crisis, Philips Electronics and the LG Group finalized a deal giving the Dutch firm a 50 percent stake in LG LCD for $1.6 billion, the largest foreign-equity investment in the country. Similarly, Apple Computer announced a $100 million strategic investment in Samsung.

The government of South Korean President Kim Dae Jung is committed to overhauling the South Korean economy. A solid representative of the democratic process, Kim has stood by the need to implement tough structural reforms.

We see no evidence that the president has become less committed to reshaping his country. Earlier this year, he even reshuffled his cabinet to strengthen the hand of reformers.

The banking sector has been largely reconstructed; government is being streamlined; deregulation is occurring; better corporate governance and transparency procedures have been adopted, as has a new foreign direct-investment regime.

South Korea's reform process is difficult and its impact has been tough on the South Korean people. What is being attempted in South Korea -- a radical shift from an economy stage-managed through a close working relationship among government, large companies and labor unions to a market-driven economy -- is a significant change. Such transformations do not take place easily and overnight, nor do they occur in linear fashion. Moreover, in a democratic society, decisions must be made with due respect to the rule of law.

The media is quick to pounce on South Korea for being slow with its economic reforms. However, the long and arduous process of creating a working market economy in the United States is often forgotten. The powerful US economy of today evolved through decades of reform, massive corporate upheaval and recurrent stock market crashes.

South Korea is being asked to condense the US experience of many decades into a handful of years.

The US government has selectively intervened to help US corporations when their threatened demise would have a highly negative impact on the national interest. Certainly this was the case with Chrysler Corp.

Daewoo clearly represents the same difficult decision for the South Korean government. Although Daewoo has been slow to restructure, it is the second-largest company in the country, has a sizeable work force and strongly contributes to national exports.

If Daewoo is allowed to fail, its collapse would jeopardize hard-earned gains, create greater unemployment, hurt a banking sector that is in the process of recovery and undermine the social consensus behind reform that has developed among the South Korean people.

The IMF crisis of 1997-98 was a sobering experience, forcing a fundamentalchange in the thinking and attitudes of the South Korean people about what must be done to regain lost momentum and to help develop the strengths and capabilities needed to build a value-added, high-tech economy.

Despite problems, which we readily acknowledge, reform is occurring, new methods of business are being introduced and productivity is coming back on line.

At the end of the day, investors -- both South Korean and foreign -- will be the ones to decide whether South Korea is successfully making this transition.

Thus far, with record amounts of foreign direct investment and one of the best performing stock markets, the verdict appears to be that reform is sticking and that South Korea represents one of the most attractive investment opportunities in the world.

YOUNG MAN KIM is president of the Korean Chamber of Commerce and Industry in the USA, Inc. and vice chairman of SK Global America Ltd. His views are not necessarily those of Bridge News, whose ventures include the Internet site www.bridge.com.