South Korea's online economic Nostradamus, and the search for his identity

BACK in September a message appeared on an online bulletin board owned by Daum, the most popular web host in a country, South Korea, with a huge internet culture. Written by someone called “Minerva”, it predicted the imminent collapse of Lehman Brothers, a now-defunct investment bank.

Wild speculation is normally disregarded, but when it proved to be right just five days later, a prophet was born. Word raced through the “netizen” community, and when Minerva went on to predict that the Korean won would fall against the dollar by around 50 won a day in the first half of the week of October 6th, his followers began to watch the currency markets in anticipation. The won did indeed fall by about that much over the next three days.

Minerva became an internet phenomenon, with 40m-odd hits to date. Web-users combed through previous posts, looking for prognostications, and clues about his identity. Sharp comments on the state of the Korean economy and government policy only increased his standing. The media now call him “the Internet Economic President”.

The administration of President Lee Myung-bak is frequently accused of authoritarianism by opponents, so it came as little surprise when the finance minister, Kang Man-soo, admitted that officials had attempted to uncover the blogger’s identity. Some people believe him to be a senior figure in a financial firm. Others think he may even be a civil servant undermining the government from inside. All Minerva has revealed is that he is a man in his 50s.

With the government on his tail, the Minerva case is no longer just about economic prescience. As one equity analyst in Seoul puts it, “The real issue about Minerva is the government’s action…we are not in the 1970s or 1980s!” During that period South Korea was ruled by a military dictatorship, and freedom of speech curtailed.

For now, given the state of Korea’s economy—the central bank slashed rates again this week—Minerva’s identity has taken a back seat to his more recent predictions. He says the KOSPI 100 stockmarket index, now over 1,000, will drop to 500, and the value of flats in Seoul will fall by half. Such a bearish prospect may appear outlandish but, unlike Cassandra, Minerva has many believers.

http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=12783609&subjectID=348963&fsrc=nwl ◦

South Korea's online economic Nostradamus, and the search for his identity

South Korea's Economy: Half Finished

South Korea's story to date has in big part been the story of what is sometimes called a “developmental state”—that is, one that uses formidable powers to direct and regulate the economy to achieve growth above all else.

The first “Miracle on the Han” worked because the developmental state, after 1961, mostly got things right. Or, rather, it got them right until it got them very wrong, resulting in the 1997 financial crisis. By then, the economy and the way it was financed had become far too complex for traditional guidance, and the state’s sense of omnipotence had blinded it to the need for structural reform. The recovery from crisis accomplished only half the structural reforms South Korea needs. There will be no second miracle unless Mr Lee accomplishes the other half.

Now that he has recovered his poise after the beef fiasco, his supporters argue that Mr Lee is just the man for the job. Under him, says Sakong Il, chairman of the president’s National Competitiveness Council, restrictions will be lifted to augment the country’s low stock of foreign investment. Small businesses will be boosted when the government cuts through red tape and lowers the minimum capital requirement for start-ups to just 100 won, from 50m won now. And rules for investment will be eased in the Seoul metropolitan area, which businesses much prefer to the investment zones in the middle of nowhere promoted by Roh Moo-hyun, the previous president. The council plans to submit 147 laws to the National Assembly this autumn, with the aim, Mr Sakong says, of raising South Korea’s standing in the World Bank’s comparisons of national competitiveness from 30th to 15th.

All this is welcome, but it is not enough. Mr Lee, as a former chaebol executive, will need to prove that he is friendly to markets, not simply to business. “When critics say the chaebol are too big, I don’t know what they mean,” says Mr Sakong. “Bigness itself is not badness; what matters more is whether the actions companies take are legitimate or not.” That is fine as far as it goes. One test for Mr Lee will be whether he and the courts continue to treat the misdemeanours of chaebol bosses lightly. An even more telling one will be whether minority shareholders will be able to seek redress against chaebol trampling on their rights.

Old habits die hard
Traces of the developmental state persist. Although Kang Man-soo, the finance minister, blames heavy taxes, subsidies and regulation for a decline in South Korea’s investment rate, he also promises “a very ambitious plan” of subsidies and incentives for boosting internet businesses such as computer gaming. Known as “e-sports”, this has emerged out of nowhere and become a huge spectator sport, employing 25,000 people in Seoul and spawning nearly 100 game-engineering “academies”.

It is an example of Korean entrepreneurial energies let loose. The government’s proposals seem to represent an old-fashioned instinct to back winners.

Both the country’s patterns of energy use and its attitude towards the environment point more towards the past than the future. Randall Jones, an economist at the OECD, notes that South Korea uses 1.5 times as much energy for every unit of GDP as does Japan. For a country that imports all its hydrocarbons, energy efficiency will, the government says, be pushed to the top of the agenda. As well as promoting a more efficient industry, that will mean weaning Koreans off their gas-guzzlers and improving mass transit.

Seoul’s air, once famously noxious, is much improved, but South Korea lags at conservation. The developmental state is also a construction state, and too often the government seems to feel that nature untrammelled is a chance wasted. Two-fifths of the country’s rich mudflats, or about 1,600 square kilometres, mainly on the peninsula’s west coast, have been “reclaimed”. That has dire consequences not only for fishermen but for seabirds and rare waders too. Almost invariably the government and the construction companies trump environmental interests.

Just as South Korea’s economy is something of a half-way house, so is its democracy. The beef protests seemed to reflect this. Only a short time after Mr Lee had been voted into office, the protesters bringing downtown Seoul to a halt argued that theirs was a more representative kind of politics. That was clearly nonsense. Yet the nation’s political establishment hardly helped its case when the National Assembly was incapable of convening.

South Korea’s labour disputes can also be ascribed to an immature democracy. Workers’ rights were suppressed during years of military dictatorship. Unions have since made up for lost time, and even illegal strikes are tolerated at some of the big chaebol. Yet the strikes do not reflect an unbridgeable divide between capital and labour: rather, nearly all South Koreans are capitalists, and many of the strikers had voted for Mr Lee. Clear leadership from him could do much to put the country’s labour relations on a more stable footing.

The sense of something half-finished colours South Korea’s diplomacy too. Mr Lee has reiterated that foreign policy rests on his country’s military alliance with the United States, which he now calls a “strategic alliance”.

South Korea has already sent troops to Iraq and Afghanistan in support of American-led reconstruction, and Mr Lee says that in future it will spend more on aid and contribute more to peacekeeping and antiterrorism operations. This reinvigorated alliance, the president’s foreign-policy advisers explain, will not only boost South Korea’s global standing but also provide leverage with tricky neighbours, notably Japan and China, where relations are bedevilled by land and history.

That is probably wishful thinking. For no matter what efforts South Korea makes on the global stage, it is still a shrimp among whales in its own region, and even there the power of its American godfather may decline in relative terms. Only the unification of a divided peninsula might bring South Korea the standing it craves. And given the fearsome problems North Korea would carry with it, even that is far from guaranteed.

http://www.economist.com/surveys/displaystory.cfm?story_id=12237141

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South Korea's Economy: Half Finished

South Korea's Chaebol (conglomerates): Companies OK; Leaders Behaving Badly

The rapid international rise of companies such as Samsung Electronics and LGE underlines a sea change in South Korea’s chaebol in just a decade. Before the Asian financial crisis the leading 50-odd chaebol were heavily indebted. With the help of cheap credit they had been able to get into any business that took their—or the government’s—fancy. After the crisis, about half the chaebol went to the wall; at the time, Daewoo’s collapse was the biggest corporate bankruptcy in history. The remainder were forced to shed hundreds of businesses or divisions in order to keep afloat and concentrate on what they did best. Those that learned the lesson have done very, very well.

Many of the changes have gone deep. After the crisis, foreign investors were welcomed, and now around half of the shares of Samsung Electronics and LGE are foreign-owned. South Korea made a vigorous attempt to improve corporate governance, increasing the rights of minority shareholders, boosting the role of outside directors, punishing improper disclosure and requiring the chaebol to publish consolidated financial statements. Shareholders may now, at least in theory, pursue class-action suits against the country’s biggest companies.

The previous two progressive administrations, less enamoured of big business than the current one, also took aim at the dominance of the biggest chaebol and their controlling families. By putting a ceiling on shareholdings in other companies held by chaebol-related firms, the Korea Fair Trade Commission (KFTC) hoped to cut through the rat’s nest of cross-shareholdings through which the founding families typically exercise control. The KFTC argued that the complex structures discouraged transparency, disadvantaged minority shareholders and raised the risk that bankruptcy in an affiliate might bring down the whole group.

In practice the new rules were hardly draconian. Exemptions were made for chaebol that had good internal monitoring systems or that formed a holding-company structure. Moreover, no South Korean government appears able to resist the temptation to use the chaebol for policy ends. Some of the biggest ones were exempted from the ceilings on outside shareholdings because they were giving support to Roh Moo-hyun’s favourite initiatives, such as investing in sectors designated as “growth engines”, promising to help build the “enterprise cities” that Mr Roh hoped would spread growth to the regions, or even attempting to do business with North Korea. As a result, the founding families of large business groups, using circular chains of shareholdings, continue to exercise control even though, says the OECD, they hold an average of only 6% of their group’s shares.

In almost any other OECD country this would be a scandal. In South Korea such foibles are too easily tolerated. Moreover, the chaebol’s ruling class displays an extraordinary degree of delinquent behaviour, and only rarely does it suffer the consequences, as it did in the case of Kim Woo-choong and Daewoo’s collapse.

A roster of recent misdemeanours illustrates the point. Last year Kim Seung-youn, the chairman of Hanwha, an explosives, construction and insurance group, confessed to going to a bar and, helped by his goons, beating up the staff. He said it was in retaliation for his own son having been hurt in a scuffle. Last year, too, the chairman of Hyundai Motor (and son of Hyundai’s founder), the world’s fifth-biggest carmaker, was convicted of embezzling $90m from his company. In 2003 the head of SK Group, a telecoms, oil-refining and construction conglomerate, was convicted of illegal share swaps designed to keep the group in family control. All three men were pardoned by President Lee Myung-bak on South Korea’s national day in August. Only Mr Kim served any time in jail.

The biggest case concerns the Samsung Group, South Korea’s largest, and its recent chairman, 66-year-old Lee Gun-hee. Samsung has long been accused of corrupt practices: Mr Lee was convicted of political bribery in the 1990s, though escaped without penalties. In April he was charged with tax evasion and breach of trust. But more serious allegations of bribery were dropped—even though he had been fingered by Samsung’s former chief lawyer, who spoke of a huge slush fund.

Mr Lee has also been charged with transferring control to his 40-year-old son and heir, Jay Y. Lee, by arranging for Samsung affiliates to sell shares to the younger Mr Lee at artificially low prices. After the charges he resigned, on live television, “to take legal and moral responsibility”. Yet though Mr Lee technically faces a life sentence, few believe he will spend much, if any, time in jail. Nine other Samsung officials have been charged, but none has been detained—partly, the government says, out of concern that the economy might be harmed. Although Mr Lee is no longer chairman, Samsung executives in private talk as though he were still running the group.

How do the chaebol families get away with it? Many of them grew from black markets, smuggling and other rackets that thrived after the Korean war in the early 1950s, thanks to vast amounts of American aid and military spending, and to the policies of import substitution favoured by South Korea’s strongman, Syngman Rhee. When Park Chung-hee seized power in 1961, the junta marched many of the racketeers through Seoul wearing dunce caps and placards with slogans such as “I am a corrupt swine”. As Mr Cumings recounts, it was Lee Gun-hee’s father, Lee Byung-chol, who proposed to Park that the swine seek foreign capital and equipment to launch the South Korean economy. Park called in ten of the leading businessmen and agreed not to jail them if they invested their “fines” in new industries that would sell to foreign markets.
The rest is history. To this day chaebol families are more admired for their economic contribution than reviled for their criminal propensities, which are often viewed as the foibles of a ruling aristocracy. The chaebol families are the closest thing South Koreans have to royalty. The clans intermarry and their shenanigans fill the gossip pages, as well as providing much of the inspiration for the television soap operas of the “Korean wave”—yet another South Korean export hit.

http://www.economist.com/surveys/displaystory.cfm?story_id=12237177
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South Korea's Chaebol (conglomerates): Companies OK; Leaders Behaving Badly

South's Korea's Export Juggernaut

JUST as South Korea, in historical terms, sees itself as a little thing among overbearing powers, so many of its businessmen and policymakers now feel that the country’s export machine, the thumping heart of the economy, is being squeezed by two giants. On one side is Japan, whose high technology and sophisticated production give it an edge in exports. On the other is China, whose low wages allow it to compete ruthlessly on cost, even as it learns to make ever more complex products. What, South Koreans wonder, is their economy’s place in Asia’s future?

They may be overreacting. Certainly, China’s rise up the production chain has been swift and, in some cases, ferocious; and the South Korean won has been the strongest of the region’s currencies since Asian growth took off earlier this decade, even if it has softened somewhat this year. Yet South Korea has responded admirably to increased competition and a stronger currency, notching up double-digit export growth for the past five years. It is now the world’s tenth-biggest exporter, and apart from a cyclical slump in Asian export growth that appears to be caused by America’s and Europe’s sharply slowing economies, there is plenty of reason to think that its success can continue for a while.

To date, China has proved a boon for South Korea’s exports. Having overtaken America in 2003 to become South Korea’s largest trade partner, it runs a bilateral trade deficit thanks to large imports of capital equipment and parts from South Korea. This growing bilateral trade reflects the knitting-together of production networks all over Asia, centred on China. China’s share of South Korea’s total exports of unfinished goods—that is, parts—rose from just 1% in 1992 to 27% in 2004, according to the IMF. Now China’s bilateral deficit is narrowing as South Korea imports more intermediate goods from there. Yet much of this is the result of South Korean investment in China.

South Korean manufacturers are still improving their own competitiveness. Partly thanks to modest wage growth, labour productivity in manufacturing has grown by an average of 10% a year since 2002. Indeed, the stronger won appears merely to be the flip side of that productivity growth. Currency strength, certainly, is squeezing profits in some areas, notably for small- and medium-sized businesses that are less efficient than larger firms, as well as for the big carmakers.

South Korean exports have not only grown but become more sophisticated as production has shifted out of low-value-added goods such as textiles that rely mainly on cheap labour. Korea’s spending on research and development is equivalent to nearly 3% of GDP a year, one of the highest rates among developed economies. According to the IMF, high-value-added products—things like cars, consumer electronics and top-of-the-range ships—now make up half of Korea’s exports, up from a quarter in 1990.

South Korea today is more of a whale than a shrimp in several global industries. In memory chips it is home to the world’s biggest maker of flash memory (Samsung Electronics) and the two biggest makers of DRAM chips (Samsung and Hynix). It has the third-largest steelmaker (POSCO), the fifth-largest carmaker (Hyundai Motor), and the world’s three biggest shipbuilders (Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering, or DSME). It is a leading producer of mobile handsets and of LCD screens for televisions, computers and much more.

Heavy industry, as Shaun Cochran of CLSA, a brokerage, puts it, is the country’s “sweet spot”. Take shipbuilding. As Hyundai’s founder, Chong Ju-yung, was boasting posthumously in those television advertisements this summer, there was no shipbuilding industry in South Korea until the 1960s. When the country’s dictator, Park Chung-hee, summoned Chong and told him to produce oil tankers, for which there was a sudden demand, Chong went straight to Greece and scooped up two contracts to build 260,000-tonne tankers, promising his customers delivery within two years, sooner than anyone else. He had neglected to mention that at that moment he lacked even a shipyard. He then waved the order in front of Barclays Bank, which lent him enough money to build a modern yard. No one in South Korea knew how to do that, so Chong dispatched 60 engineers to Scotland to learn. The ships were delivered before the deadline. This famous story, concedes Bruce Cumings of the University of Chicago in a refreshingly revisionist modern history, “Korea’s Place in the Sun”, may be apocryphal in its details, yet it has a strong whiff of truth about it.

Korea’s three big shipbuilders are thriving. Competing fiercely against each other, though by unwritten agreement not for staff, their order books are nearly full up to 2013. South Korea has two-fifths of the world market in new ships (which account for 8% of its exports), whereas China and Japan have to make do with a quarter-share each.

Seen from a helicopter, the vast DSME yard at Okpo Kojé island, near the south-eastern industrial port of Busan, looks impressive: great walls of steel rise up from the dry docks as enormous gantries offer up bows and other hull sections to assemble the world’s biggest container ships, liquefied natural gas (LNG) carriers and giant floating depots for storing and processing offshore oil and gas. On the ground, all notions of human scale are lost.

DSME’s chief executive, Nam Sang-tae, says that China is not a chief competitor, despite the state aid from which its shipbuilding industry has benefited. It cannot match South Korea for prompt delivery, and although Chinese shipyards offer low costs, they turn out relatively low-tech vessels, such as bulk carriers and run-of-the-mill oil tankers. South Korean yards are more interested in building, say, high-tech LNG carriers, which keep their cargo at -163ºC.

A new type which Daewoo Shipbuilding was the first to build regasifies the methane before it is piped ashore. The design and manufacture of deep-sea rigs, much in demand now that many oil and gasfields on the world’s continental shelves have been exploited, is even more challenging than building advanced ships, and offers higher profit margins; indeed DSME wants to operate as well as build specialised offshore oil rigs because oil companies pay such lucrative fees.

All the South Korean shipbuilders throw a lot of money at research and development. Each has a large design institute, and they generously support university engineering faculties.

Mr Nam is also sanguine about the effect of shipping’s notorious boom-and-bust cycles on his business. Patterns of global logistics are changing, he says, spurred by a growth in world trade and a China-led hunger for resources, so more ships are needed overall, not just new kinds. Climate change, Mr Nam says, offers further opportunities. The potential viability of Arctic sea routes in future is prompting a demand for vessels strengthened to withstand ice. Another growth area is “winterising” oil rigs to cope with drilling in cold climates. Pressure for cleaner transport also helps (bunker fuel used by most of the world’s shipping is filthy).

Okpo is a company town where DSME has its own hospital, cinemas and international school for the families of overseas clients who come to keep an eye on their ships under construction. There are dormitories for single young men and women respectively, one on each side of the bay. Internet forums host thriving dating and matchmaking services, and newly married couples get to move out of the dormitories into their own flats. The town has an income per person of over $30,000, the second-highest in the country.

Iron constitution
Daewoo Shipbuilding was nationalised when the Daewoo chaebol of which it formed a part continued to pile up debts even when the financial crisis was over, entering new businesses with what turned out to be criminal insouciance. Kim Woo-choong, the chaebol’s founder, eventually admitted to accounting fraud and embezzlement worth over $30 billion, and in 2006 was sentenced to ten years in jail before being pardoned. Yet the company’s shipbuilding arm has thrived.

The government has floated a minority of DSME’s shares on the stockmarket. Later this year it is due to sell the controlling stake to one of four prospective buyers. Among the bidders is POSCO, the shipbuilder’s main steel supplier, which itself was started from scratch by the state in the late 1960s, using $120m of war reparations paid after Japan and South Korea normalised their relations. Foreign investors and development experts in Washington, DC, had given warning that a dirt-poor country like South Korea should not aim for self-sufficiency in steel. Yet the company, which was privatised after the 1997 financial crisis, has become a symbol of national pride. POSCO fed the country’s industrial beast and is now, by several measures, the world’s most efficient steel producer.

South Korea’s industrial structure is unusual, says POSCO’s boss, Lee Ku-taek. Its steel consumption per person is the fourth-highest in the world, yet most of the steel eventually goes overseas: nearly 100% in the case of POSCO’s shipbuilding clients, and 60% in the case of Korean carmakers. The steelmaker also serves South Korean construction companies abroad, for example in Dubai. Its customers’ eagerness to conquer fiercely competitive markets overseas may have kept POSCO lean. “Steel’s competitiveness here has made South Korea what it is,” says Mr Lee, “and I’m hugely proud of that.”

Now that he is hoping to buy DSME he sees the chance to double the shipbuilder’s value, which the stockmarket currently puts at $6 billion, by concentrating on complex products such as oil rigs. In shipbuilding, Mr Lee points out, the less you need to weld, the more you save. POSCO, he says, can tailor plates to specific ships, making the product much cheaper.

After two decades of building up its domestic market, says Mr Lee, POSCO will spend the next two decades establishing a powerful presence overseas, through greenfield sites and acquisitions, including in mines that can secure the company’s supply of ore. It will be following the example of South Korea’s consumer-electronics companies, which sometimes used almost military methods for their push overseas. At LG Electronics (LGE) they tell a story of a country manager who was dropped into Algeria during the civil war when other multinationals kept away, put off by the risk. When he emerged several years later, he had built up a multimillion dollar franchise.

The country’s biggest successes in consumer electronics are LGE and Samsung Electronics. Only a decade ago consumers abroad hardly knew them, and if they did it was as makers of cheap knock-offs of classier brands, notably Sony. Today they have annual sales of $43 billion and $92 billion respectively, along with a reputation for making hip and sophisticated mobile handsets, MP3 players, televisions, digital cameras and more. LGE, for instance, is the world’s largest maker of plasma televisions; Samsung has recently overtaken Motorola to become the second-biggest maker of mobile phones. Samsung’s stockmarket capitalisation, at over $80 billion, has raced past Sony’s and is second only to Apple among consumer-electronics companies. Samsung Electronics now makes the televisions on which Sony sticks its name badge.

All we need is love
Dermot Boden, LGE’s new chief marketing officer, explains that much still needs to be done to realise the company’s global ambitions, but his appointment, as a non-Korean, indicates the direction in which the best South Korean companies are going. South Korean companies, like Japanese ones, tend to recruit managers internally, rewarding length of service and often putting generalists into positions calling for special expertise. Exceptionally, LGE this year brought five overseas specialists to form part of the 20-strong top team of executives, among them Mr Boden, an Irishman who had earned a reputation for building consumer-goods brands.

Branding, says Mr Boden, is what LGE needs now. The company has superb products and offers excellent service. (It needs to in South Korea, where impatient customers put down the phone if it is not answered within ten seconds.) Yet emotional attachment to LGE’s products, Mr Boden points out, remains low. Products come and go: a new mobile-phone model, for instance, is typically on sale for only about six months. It is a brand that encourages the customer to keep coming back—and if he likes LG mobile phones, he might consider buying, say, an LG television. Samsung has already gone down this road, raising its profile by sponsoring the Olympics and Chelsea football team.

http://www.economist.com/specialreports/displaystory.cfm?story_id=12237117 ◦

South's Korea's Export Juggernaut

Wisdom in Crowds in Korea?

Michael B. Han, CFA Portfolio Manager
Matthews International Capital Management, LLC

Last month, South Korea’s decision to resume U.S. beef imports triggered massive protests in Seoul. For more than 40 days the city was moved by rallies that escalated into an outpouring of tens of thousands who took to the streets to oppose a trade deal they feared could expose the public to mad cow disease. The issue has posed a political crisis for South Korean President Lee Myung Bak, who took office following a landslide victory just four months ago.

Until about five years ago when a case of mad cow disease was detected in the U.S., South Korea had been among the top importers of American beef. Though many U.S. officials maintained that there were no statistically significant safety risks to U.S. meat exports, Korea, along with Japan and the European Union, imposed a blanket ban, later resuming conditional imports. Then in April, public outcry ensued when President Lee, a former chairman of Hyundai with a reputation for action that has earned him the nickname "The Bulldozer" agreed to lift the U.S. beef ban. The move was seen as one expected to help clear the way for a broader U.S.–South Korea free trade agreement that has been stalled. But by June, growing public uproar over the issue led Lee’s presidential aides to resign over the flap.

In and of itself, the reopening of the domestic Korean market to U.S. beef may not seem to justify the widespread furor that it unleashed. But what the public backlash really represents is Korea’s fear that its government is not acting in its best interest. The mostly peaceful protests have not been demonstrations against the U.S., or against free trade. Rather, the frustrations have been directed at the leadership’s lack of sensitivity to concerns over health risks, and highlight fears that the government prioritizes business over public safety.

President Lee has since publicly apologized over the situation and modified his earlier trade deal to limit U.S. beef imports to younger cattle, believed to be at less risk of mad cow disease. Despite the moves, however, the beef protests have given rise to sharp criticisms of the administration’s other plans for economic reform, including possible plans to privatize the public health care system and plans to build a grand canal. There have also been criticisms over Lee’s cabinet member selections.

How does a president’s landslide election victory plummet to record low approval ratings just a few months later? To begin with, South Korean voter turnout has been quite low, and many voters in the last election generally felt they were choosing between the “lesser of two evils.” Many protesters also regard President Lee’s beef deal as a rash and reckless act that stood to realize merely $1 billion in beef imports.

It is still unclear what will become of any free trade agreements between the U.S. and South Korea but the wider issue is that of Korea’s distrust of government. That Koreans feel inclined to take to the streets en masse may also indicate the lack of effective legal and political systems for public disputes. Compared to the U.S., Korea’s legal system is less approachable for the average person and the society is generally less litigious. When class-action lawsuits are not an option for protection, it is easier to understand why many may be moved to protest publicly. The danger, however, is that the political distrust is breeding voter apathy and diminishing turnouts at election time.

What is remarkable to note, however, is the ability of protesters to affect public policy. Following public backlash to the beef issue, the U.S. has reportedly looked further into establishing a system to verify the age of its livestock. The U.S. media has also begun to urge tighter regulation on the food inspection system. It seems that the aggregate wisdom of crowds and their voices have carried across the Pacific.

Evolution of Democracy
There are significant differences between the culture of demonstration in Korea now, compared to that of 20 years ago. Pro-democracy movements in South Korea in the 1980s were largely driven by college student leaders and frequently turned violent. Though recently there have been increasingly violent clashes between protesters and police, demonstrations over the beef issue began calmly when the majority of ordinary citizens participated. They have included young parents with children, executives in suits, middle school students, Roman Catholic nuns and Buddhist monks. Another important difference is that unlike the pro-democracy movements of two decades ago, the recent beef protests have involved no single, specific ideology, political leaning or special interest group. The protests involved passionate debate among participants, who remained respectful to each other. Commentators have credited Koreans for protesting peacefully, noting the high level of public participation as evidence of a maturing democracy. South Korea’s high Internet penetration rate, and its use of the Internet to mobilize the public over social issues, are also seen as signs of a highly educated society.

Indeed, Korea places great emphasis on education. It ranks fifth out of 35 developed nations in terms of its percentage of graduates under age 35 with four-year college degrees or higher, according to the Organization for Economic Co-operation and Development. The country also ranks third behind only India and China in terms of the number of students it sends to the U.S. each year to pursue higher education degrees. (In 2007, more than 62,000 Korean students came to the U.S. for school.)

The evolution of democracy in Korea is also evident in the decreasing signs of corruption where business and politics overlap. In the 1980s, two former presidents, Chun Doo Whan and Roh Tae Woo, had received illegal contributions of $1 billion and $500 million, respectively, from businesses. Both former presidents were convicted, and subsequent leaders have been accused of taking far less in kickbacks from business. The most recent offense—involving $10 million in controversial campaign contributions—by former President Roh Moo Hyun indicated there is a large decline in the size of dubious financial contributions to politicians.

Economic Democracy, the Next Evolution
Just as political democracy benefits grassroots movements, economic democracy benefits minority shareholders. Following the 1997 Asian financial crisis, Korean officials improved government transparency by adopting accounting standards similar to those of the U.S. The next step is to improve corporate governance.

In Korea, public participation, not activist hedge funds, paved the way to economic democracy. Non-government organizations (NGOs), which comprise professors and lawyers, have been involved in shareholder activism over the past decade. NGOs such as the People’s Solidarity for Participatory Democracy and Solidarity for Economic Reform, backed by minority shareholders’ voting rights, initiated a proxy battle against majority shareholders of what is known as chaebol, or large family-controlled conglomerates. Chaebols have played a significant role in the exportoriented growth of Korea’s economy. Though many chaebol affiliates have grown to become top-tier players in their fields, many could still benefit from improvements to corporate governance.

Armed with professional volunteers, NGOs have uncovered tax evasion cases or revealed other questionable corporate transactions that have benefited chaebol families at the expense of minority shareholders. NGOs are developing the skill of using litigation and proxy battles to enhance public awareness over complicated corporate governance practices. The organizations have also rallied against bad policy proposals regarding the adoption of poison pills.

Shareholder activism initiated by NGOs has also begun to move institutional shareholders. The National Pension Service (NPS), the country's leading institutional investor and the only national pension fund, voted against two business tycoons (both formerly convicted of fraud) who were seeking re-election to the boards of their respective corporate subsidiaries. The NPS’ first attempt to remove the two board members failed because the two tycoons had large holdings.

The fund currently has $220 billion in assets under management, and its asset allocation in the domestic equity market has been growing rapidly, which indicates that NPS may play a significant role in the future. There also appears to be a stronger likelihood that, going forward, people will be more concerned with corporate governance, which is critical to the performance of their retirement savings. Corporate governance and political transparency deserve more public attention than they currently receive. Fortunately, we continue to see signs of positive change—even if it’s in the form of surprisingly massive beef rallies. We see an evolving sense of democracy among those who are mobilizing to shape public policy. As these trends continue we hope minority shareholder value will be enhanced and a more vibrant sense of entrepreneurship will evolve.

http://www.matthewsfunds.com/about_asia/asia_insight.cfm


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Wisdom in Crowds in Korea?

U.S. beef selling well despite protests

American beef began reaching Koreans' dinner tables despite anti-U.S. beef candlelit vigils and lingering public concern over its safety.

Most big discount stores are still reluctant to deck their shelves with American beef in fear of public backlash. But it seems to be a matter of time before refrigerators of restaurants and households of Koreans are filled with "Made in U.S.'' beef.

Midday Friday, dozens of people were standing in line in front of a five meter square butcher's shop "A-Meat FC'' in Keumchon, southwestern Seoul. Some, seemingly from remote areas, rushed to join the crowd after parking their vehicles in nearby spaces. The shop's inside was bursting at the seams with customers while five workers were busy tapping electronic cash registers and packing ordered meat.

"We have skipped meals for days,'' a cashier said. "Customers gather from opening till closing time.'' This imported-meat-only shop began selling American beef on Tuesday, six days after the government's official notification of U.S. beef imports.

"It's selling like hot cakes,'' said Park Chang-kyu, the shop owner. "Of course, it was not an easy decision to sell American beef amid public sentiment hostile to U.S. beef. But look. It's amazing.''

A male customer, who drove to the shop from Yeoido to buy beef, said "I will buy U.S. beef equivalent to 100,000 won ($100). American beef fits our taste and is much cheaper than Korean beef.''

Prices of U.S. beef vary― sirloin is 2,300 won per 100 grams, and beef for Bulgogi and soup are 900 won and 650 won, respectively.

"The prices are roughly one third of Korean beef,'' Park said. "We purchase 5 tons of U.S. beef per day but it's insufficient to meet customers' demand. We plan to buy more.

''Currently, there are only two beef shops dealing with American beef in Seoul including A-Meat F.C. But a growing number of shops are expected to handle American beef from next week at the earliest as the demand for the imported beef soars.

According to the association of meat importers, 2 tons of U.S. beef have been sold since July 1 through the two butcher shops.

Two other restaurant chains with 50 branches nationwide ― Damiso and Oredrim ― are considering adding U.S. beef to their menu.

Hi-Food, a mass-circulator for imported beef, also said it planned to ask the quarantine office to check 400 tons of U.S. beef they imported from August but recently decided to advance the date to next week to meet customers' demand.

"We have received numerous calls from clients. We cannot help handling American beef again despite outstanding concern over the meat,'' said Park Bong-soo, Hi-Food president.

The meat-importing association, comprised of 130 wholesalers and retailers, will launch a nationwide campaign from July 15 to raise public awareness of safety of U.S. beef and to boost consumption.

The Ministry for Food, Agriculture, Forestry and Fisheries said Friday more than 1,000 tons of American beef have completed quarantine inspection.

http://www.koreatimes.co.kr/www/news/nation/2008/07/117_27045.html
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U.S. beef selling well despite protests

S. Korea, US agree on beef deal; protests continue

South Korea said it will resume imports of U.S. beef after American and South Korean suppliers agreed to block meat from older cattle, aiming Saturday to soothe health concerns that sparked weeks of demonstrations against new President Lee Myung-bak.

Still, protest leaders argued the plan doesn't go far enough and staged the latest of their daily candlelight rallies. The rally caused the main intersection in downtown Seoul to be blocked as thousands of riot police prevented demonstrators from marching to the presidential Blue House.
Procedures to put the new import agreement into effect were to start Monday, Trade Minister Kim Jong-hoon said, but it was not clear when American beef would reach South Korean markets.

Lee, a pro-U.S. conservative who took office in February, had agreed to allow resumed American beef imports in April — seeking to improve relations with Washington and pave the way for a larger free-trade deal between the two countries to help reinvigorate the South Korean economy.

The beef-loving South has allowed intermittent U.S. beef imports since banning it in 2003 after the first case of mad cow disease was discovered there.

The April agreement had few restrictions on what meat would be allowed, sparking protests against Lee for caving in to American demands and failing to consider public opinion about health risks. In the wake of demonstrations that grew as large as 80,000 people, Lee replaced all his top advisers and his entire Cabinet also has offered to resign.

The demonstrations have since dwindled, and police said about 9,600 protesters gathered Saturday evening in Seoul.

Some of them turned violent, however, dragging a police bus with ropes off a barricade and smashing its windows, TV footage showed. Riot police responded by spraying fire extinguishers at the demonstrators. There were no reports of serious injuries.

The U.S. government had refused to renegotiate the April deal, worried it would set a precedent for other countries to back out of trade agreements.

Instead, U.S. Trade Representative Susan Schwab said the new arrangement — agreed to after talks last week with her South Korean counterpart — was a "commercial understanding" between U.S. exporters and South Korean importers that only meat from cattle younger than 30 months would be shipped, believed to be less at risk for mad cow disease.

The plan is "a transitional measure, to improve Korean consumer confidence in U.S. beef," she said in a statement.

The U.S. Department of Agriculture will set up a "voluntary" system to verify the age of beef, Schwab said. If South Korea finds beef has been shipped that violates the agreement, it can take action only against the specific product or company involved.

"The age verification system will be in place until concerns over safety of U.S. beef subside," South Korean Trade Minister Kim told reporters in Seoul. He said South Korea will have the right to inspect U.S. slaughterhouses, and will not import parts of cattle such as brains, eyes, skulls and spinal cords that can carry mad cow disease.

The new agreement drew criticism from both sides in the trade dispute.

Democratic U.S. Sen. Max Baucus, chairman of the Senate Finance Committee, argued there was no scientific reason to limit imports of American beef. U.S. meat has been certified as safe to consume by the Paris-based World Organization for Animal Health.

"The implications of this agreement set an unfortunate precedent for U.S. beef trade with Korea and other countries," Baucus said in a statement.

The coalition of South Korean civic groups that has supported the protests said the voluntary agreement did not go far enough and vowed to continue demonstrating.

"We made it clear that a complete renegotiation is the only alternative that can fundamentally solve the people's concerns about mad cow disease," the coalition said in a statement.

Eating meat products contaminated with mad cow disease is linked to variant Creutzfeldt-Jakob disease, a rare and deadly nerve disease.

http://news.yahoo.com/s/ap/20080622/ap_on_re_as/skorea_us_beef;_ylt=AiEeYgYE7lkYlWHuGywhpZuyBhIF
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S. Korea, US agree on beef deal; protests continue

A generation of South Koreans ready to abandon their dreams

Like many Koreans of his generation, Lee Dong-sup, who is now in his 50s, grew up as a devastatingly poor country boy in post-war Korea and literally crawled his way to success. “The walk to my elementary school was more like an expedition,” Lee said. “The round trip took four hours because we couldn’t afford the bus ticket.

“My textbooks smelled like kimchi most of the time because we didn’t have Tupperware back then. We carried our kimchi and rice in cheap tins and the juice always leaked. Oh, how I would dream about having a fried egg every night before going to bed,” he said, chuckling.

The country boy, however, dreamed of more than just eggs. He wanted to see the world and make something of himself. He moved to Seoul and enrolled in the economics department of a leading university. He then worked for a conglomerate for some 20 years, while making a comfortable living for his family. Then came the financial crisis and Lee got laid off from his job in 1998 when he was in his mid-40s. He has been starting small businesses ever since, but none of them provided the secure income of his pre-crisis salary.

“It’s O.K. though,” Lee said. “I’m doing well. At least I know that I’ll never be as poor as I was in my childhood.”

For his son, Lee Sun-jae, in his late 20s, the rags-to- riches success story of his father seems like a distant fairy tale. He is not interested in conglomerate riches or entrepreneurial gambles. He thirsts for security, the kind of rock-solid guarantee of employment that his father never attained. Thus, after graduating from university two years ago, he joined thousands of other anxious Koreans in studying for the civil service examination.

“I have to admit I was quite shaken up when my father lost his conglomerate job overnight,” he said.

“He worked so hard for that company. When I was little, I would whine because he was always working. I couldn’t believe how the company, which my father devoted his youth to, could be so cruel as to fire him without a second glance,” he said.

Lee Sun-jae isn’t the only young person in Korea who hungers for the lifelong job security of a civil service position. This year’s data from the National Statistical Office shows that 36.9 percent (196,000) of job-seekers aged 15 to 29, are studying for the seventh or ninth grade civil service examination. This makes government service the preferred career by a huge margin. A distant third, at 16.5 percent, is trying out for a public corporation. Youth unemployment is now at its highest level since the late 1990s. As of last year unemployment among those aged 15 to 29 was 7.6 percent ― double the rate for the rest of the working population. Fighting against these adverse social circumstances, Korea’s youths are being anything but reckless.

“After the monetary crisis, the concept of having a job for life, of devoting yourself to one company, no longer exists,” said Lee Gwang-suk, head of Incruit, a popular employment portal site. “With the country’s shaky economy and youth unemployment, young people want to be civil servants and have the guarantee of a job until they retire.”

Job loyalty has also become less of an issue for job hunters. The days when people committed themselves to a single company, paying their dues and in return, getting a kind of second family are over. It’s hard to believe that Samsung Electronics ran a campaign back in 1991 with the catchline “Coffee break at 3 a.m.” in which employees prided themselves on their long working hours. National Statistical Office numbers show those aged 15 to 29 spent an average of 21 months in their first job. Only 18 percent of them stayed at the same job for over three years. In a book released this August titled “880,000-won Generation,” Park Gwon-il talks about the structural imbalances that have caused this phenomenon. “In Korean society today, the self-made man can’t exist.” he said. “There is an imbalance between different generations. While many of the parents of people who are in their 20s today are self-made men, that generation made a social structure which can’t digest them anymore. As Korean society has stabilized, there are fewer opportunities for someone to recreate their life and become a success on the basis of sheer willpower.”

Not only is there less room for success, but for Jeon Hong-ju, 31, this structural imbalance has made him give up the thought of pursuing his life’s passion. Upon graduating, Jeon began work as a marketing manager for Ales Music, a small independent music label. In his home there are thousands of music CDs. “Although the pay wasn’t very good, I loved working there,” he said. After almost two years at the label, Jeon quit. “The company was struggling to stay afloat. I couldn’t take it anymore. I was anxious about turning 30 and not having a secure job.”

Last year, he took the ninth grade level civil service examination and passed. He now works in a district office in Incheon. “I’m good at adjusting, so this job is fine,” he said with a faint laugh.

“It’s a nine-to-six job. I don’t get paid much but at least I’m not worried about where my next paycheck will come from.”

The situation has been under scrutiny by politicians and the media. Young people who opt for the security of a civil service job are called gongsijok, or members of the public servants’ clan. Presidential candidate Lee Myung-bak made a statement at a forum last month about the disillusioned youth of Korea. “The fact that young Koreans prefer the security of a civil service job proves how generally insecure our economy is. However, I wish they wouldn’t give up their dreams so easily and not be so afraid of risk or change.”

Jeon thinks these kinds of public statements are irresponsible. “For the past decade, the infrastructure has been getting worse and worse,” he said. “Korea before and after the IMF crisis are two different countries. Although we are better fed, we are more worldly and weary. Naturally we are concerned about having a roof over our heads and a decent meal when we are 60 or 70 years old. So what’s wrong with that?”

Jeon’s statement might sound cynical but recent statistics are far from the “dare to dream” scenario which the media, especially the conservative print media, try to create for Korea’s youth. In a recent survey of 1,082 job hunters in their 20s conducted by Job Korea, a large employment portal site, 47.3 percent said that they have contemplated suicide because of the stress of finding a job. Last week, a 25-year-old female, who graduated from a prestigious university in Seoul in 2006, committed suicide after failing the entrance exam for the pharmaceutical department at another university. She left a note saying, “I should have just studied for the civil service examination.” The police officer responsible for the case commented, “She wanted to go to the pharmaceutical department because it was hard for her to get a job after graduating from the humanities department.”

Jeon has also thought about transferring to another department which has a higher percentage of employment among graduates. “I am a social science major so there is a limit to what I can apply for,” he said as he laughed. “I couldn’t apply, for example, to the marketing department at a big conglomerate. I seriously thought of trying to get into the kimchi department of some university, so at least I would have a skill.”

As Lee Dong-sup watches his son study hard for the upcoming civil service examination, he feels guilty. “He used to be very good at art. I feel so guilty that my generation couldn’t provide a better environment for my son and his friends. And here I am, telling stories about my childhood hardships,” he said.

Lee’s son sees it differently, “There is this great quote from ‘Death of a Salesman,’” he said. “Biff Loman addresses Willy, his father, saying that the things he loves in this world, the work, food and the time to sit and smoke are waiting for him the minute he says he knows who he is. And he questions why the hell he is trying to become what he doesn’t want to be. When I was younger and saw my father working till 2 a.m., I wanted to tell my father that. Maybe I’m just as disillusioned as he is but I am not going to go to a company and struggle and just end up getting laid off,” he said.

http://joongangdaily.joins.com/article/view.asp?aid=2881886

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A generation of South Koreans ready to abandon their dreams

What's Propelling Korea's Growth?

Investors in South Korea's two best-known blue chips have scant reason for cheer these days. The leading icon of Korean corporate success, Samsung Electronics, appears headed for a third straight year of falling profits as a result of the crash in memory-chip prices. And growth at Hyundai Motor Co. has stalled as Korea's surging currency has erased most of the automaker's cost advantage vis-à-vis its Japanese rivals.

Time to bail out of the Korean stock market? Investors don't seem to think so. The Seoul exchange's benchmark KOSPI index has surged 34% so far this year despite the U.S. credit crunch. The chief attraction: Korea's steel mills, shipbuilders, petrochemical operations, and other smokestack industries. Shares of petrochemical producer LG Chem Ltd. and steelmaker Posco have more than doubled. And Hyundai Heavy Industries Co. (the world's largest shipbuilder, which split from Hyundai Motor Co in 2002) has tripled. Samsung's shares, meanwhile, are down by 13% this year and Hyundai Motor's are up just 5%. "Forget about the Digital Era and fancy marketing," says Park Kyung Min, chief executive at Seoul-based fund manager Hangaram Investment Management. "It's all China and emerging markets."

In the late '90s, Korea's old industrial sector seemed like deadweight when compared with the country's booming technology companies. Its foundries and petrochemical operations epitomized the debt-fueled expansion that wounded Korea in the 1997 Asian foreign exchange crisis. No other country poured as much money into production facilities, and many basic industries became hopelessly oversupplied. Korea in 1998 had nearly 50 million tons of steel production capacity, about double domestic demand. Two sprawling new Korean ethylene plants added to a global capacity glut. And all of Korea's major shipyards built new dry docks even as rivals fretted about oversupply.

These days, though, all that investment is looking mighty smart. With emerging economies booming, the gluts have changed into shortages, and Korea has ready capacity to crank out steel, container ships, and the plastics needed for everything from MP3 players to car bumpers. Shipbuilders Hyundai Heavy, Samsung Heavy Industries (SHI), and Daewoo Shipbuilding & Marine Engineering all now have nearly four years of order backlogs as shippers cater to ballooning trade between China and the rest of the world. And in the first eight months of this year, exports of steel leapt by 26%, ships and heavy machinery such as bulldozers by 25%, and petrochemicals by 22%. "China certainly was a factor in freeing us from debt and starting a virtuous circle of profits and growth," says Kim Tae Han, strategy chief at Samsung Total Petrochemicals Co., an affiliate of Samsung Group now half-owned by French oil giant Total (TOT). Its profit in the first half of 2007 climbed 16%, to $250 million, on sales of $1.8 billion, up 3.3% from a year earlier. Since 1999, the company's exports—mostly to China—have jumped by 240%, to $2.3 billion last year.

That's not to say Korea felt no pain in the intervening years. Companies that were leveraged to the hilt folded or were sold. Hyundai Petrochemical Co., which found itself $2.9 billion in debt after building a new ethylene plant, went into receivership in 2001, while Hanbo Steel went bankrupt in 1997 after racking up $4.4 billion in debt. Yet many factories that failed were so high-tech that no one dared scrap them. Hanbo, for instance, was bought by the company now known as Hyundai Steel in 2004 for $750 million—one of three failing mills Hyundai has taken over since 2000. "The financial crisis was a huge opportunity for us to buy modern facilities on the cheap," says Kim Sang Gyu, business strategy chief at Hyundai Steel, an affiliate of the automaker and now Korea's second-largest steel producer. Sales jumped 38% in the first half, to $4 billion, while exports soared 47%, to $950 million.

With China and the Middle East building basic industries like crazy, Koreans know the current boom won't last forever. But for now, they're happy to fall back on their smokestack companies while the erstwhile stars ride out the turmoil in the U.S. and the developed world. Says economist Lim Kyung Mook at Korea Development Institute, a government-funded think tank: "The economy is much more balanced and healthier now." ◦

What's Propelling Korea's Growth?