Why start-ups were S. Korean economy's false hope

When Jin Seung-hyon presented himself before flashing cameras and shouting journalists at the Seoul public prosecutor's office this week, the scene was familiar enough. Here was another businessman accused of rigging stock prices, embezzling cash, receiving millions in illegal loans - and bribing regulators to cover up his alleged crimes. South Korea's nexus of corrupt businessmen, bankers, and government officials was simply rearing its head again.

But the difference is that Mr. Jin is not part of the old-boy network, but a 27-year-old member of a new generation of business whizzes leading the high-tech boom that has helped drive South Korea's economic recovery.

Many here are dismayed to see that corrupt practices are seemingly being passed to the next generation. Even the Financial Supervisory Commission, a watchdog agency created in 1998 to help Korea reform its economy, has been implicated in not only this but another bribery scandal.

Three years after Korea was hit by the Asian economic crisis, the cases have dampened optimism for the power of the New Economy to bypass the country's financial problems. Korean companies and banks have in fact made progress toward reform since the International Monetary Fund's $55 billion bailout - the biggest ever - saved South Korea from default. But achievements are being overshadowed by warnings of a new crisis.

Many companies still labor under huge debt and would be declared bankrupt elsewhere. But in Korea, banks have been loath to admit all the nonperforming loans on their books.

Even the companies that the banks have agreed should go under keep living on. Fifteen months after the Daewoo Group collapsed, creditors are still trying to sell the most promising of 12 Daewoo firms on the block: General Motors has been sniffing through the wreckage since Ford lost interest in September.

Companies like Daewoo, dumping cheap products and living on taxpayer money, spoil the market for healthier competitors, analysts say. "This could look as bad as the first crisis. But it's not a new crisis. It's the same one as the old one, continuing on," says Adrian Cowell, a director at State Street Global Advisors in Seoul.

Others believe Korea has made substantial progress - only that the sheer depth of the problems mean it will take years longer to resolve. A current downturn is due to the cyclical nature of the economy, says Bill Hunsaker, head of research at ING Barings in Seoul. Over half of Korea's industrial output comes from steel, cars, chemicals, textiles, and computer chips - all of which are slumping in market demand..

South Korea has almost completely opened to foreign investment. Its own businesses are switching to more democratic decisionmaking, and banks are better at analyzing risk, notes Mr. Hunsaker.

"But they still have a long way to go, and global circumstances are turning unfavorable," says Hank Morris, director at Industrial Research and Consulting in Seoul.

Circumstances are still not as unfavorable as they were in December 1997. For years, businesses lobbied government officials to pressure banks into lending to dubious projects. When it became clear that much of this could never be repaid, foreign lenders who had jumped onto the Korean economic "miracle" began calling in their loans. The value of the currency, the won, and the nation's supply of foreign reserves quickly eroded. Enter the IMF.

The bailout came with conditions - Korea had to open up to foreign investment, introduce market mechanisms, and legislate corporate transparency. Non-viable businesses had to be allowed to fail, and the banks that lent to them had to be recapitalized with taxpayer money. In 1998, nearly 1 million people were thrown out of work and thousands became homeless. A new president, Kim Dae Jung, promised to implement reform.

One crucial task was to break up the giant conglomerates, or chaebol - controlled by unaccountable founding families who typically use successful businesses to support weak ones. But even as Hyundai Group, the largest chaebol, broke up in recent months, government officials encouraged profitable Hyundai Motors to support Hyundai Engineering & Construction, a giant employer teetering on bankruptcy.

In Korea, where there is no real social welfare system, the consequences of unemployment are particularly acute. Labor unions have been threatening general strikes this winter, and oppose selling key companies to foreigners.

Another drag on reform has been the fact that the government's attention was elsewhere, say analysts. In 1999, New Economy companies helped drive Korea's deceivingly fast recovery. Unemployment dropped, and the economy rebounded with 11 percent growth. But as President Kim focused on repairing relations with North Korea, partisan bickering kept crucial economic reforms from passing in the National Assembly.

Still, corporate governance is improving and companies are increasingly focusing on profitability. "The pitfalls of the early 1990s are unlikely to happen again," says ING Barings's Hunsaker.

(c) Copyright 2000. The Christian Science Publishing Society