"Korea's Economic Recovery and International Cooperation"

June 8, 2000

Choi, Woosock
President, Samsung Economic Research Institute, Korea

The Korean economy has experienced both quantitative and qualitative changes on an unprecedented scale. At the end of 1997, the economy fell victim to a currency crisis after being directly hit by the aftermath of the currency crises of Southeast Asian countries and had to be bailed out by the IMF. However, the nation started to break out of the crisis in the second half of 1998 and began to recover briskly at the beginning of 1999.

You can plainly see how dynamic the change of the economy was from the fact that the GDP growth rate recorded 5% in 1997, -6.7% in 1998, and 10.7% in 1999. Still, more than 8% growth is expected this year.

On June 12, a summit meeting between South and North Korea will be held for the first time since Korea was divided into two. This will greatly contribute to the relief of tension and the solidification of peace on the peninsula. Using the summit meeting as a catalyst, economic cooperation between the South and North is expected to speed up.

These are all in startling contrast to the dark and gloomy circumstances of two years ago. We are now even in a situation where the concerns have shifted to the possibility that the extremely quick economic recovery, widespread optimism and resulting complacency throughout the whole society may lead to yet another crisis.

The main reason why the Korean economy successfully pulled itself out of the worst of its economic woes to tread the path to the recovery was a combination of the global economy's improved conditions and the nation's self-rescue efforts. Initially, the IMF prescribed a policy of high interest and fiscal tightening. This caused a severe credit crunch, which suffocated the economy even further. However, the economy found room to breathe with the stabilization of financial markets around the world, helped by the concerted efforts of major industrialized countries.

Furthermore, the massive inflow of investment capital from the U.S. and Europe invigorated the anemic economy, which was also aided by Japanese capital, through the support of the Miyazawa Plan. The plan imparted a sense of relief to Asian countries including Korea, thereby making a significant contribution to the stabilization of financial markets in the region and the improvement of their international creditworthiness. I hope that Japan will play the same role again in the future.

Domestically, the Korean government changed its policy direction in the summer of 1998 to one of economic stimulation through monetary and fiscal expansion with the agreement of the IMF. This, in combination with the improved international economic environment, created momentum for economic recovery.

I feel that Korea was able to ride the favorable wave of the international economic environment due to the forced reforms the nation had to undergo. In order to get the support of the IMF and foreign investors, the nation could not help but execute fundamental reforms, which had been impossible in normal times. Those reforms made it possible to fix system fatigue, which had accumulated in the process of long-term high economic growth, although the pains and travails caused by the reforms were hardly negligible.

The situation at that time as so urgent that there was no time for disputes about what to do and how to do it. Therefore, decisions were instantly made and immediately executed in both the government and the corporate world. It was reminiscent of the reforms implemented in Japan by the MacArthur Command after the World War II. I really felt that the crisis would draw out the Korean people's extraordinary energy and fortitude.

Four major systems reforms have been simultaneously promoted under government initiative. They are corporate sector restructuring, financial sector restructuring, public sector restructuring, and labor market reform. First of all, financial sector restructuring was performed with the injection of public funds, sums of which reached as much as 80 trillion won. The amount of money injected in the first financial sector restructuring was equivalent to the annual budget of the central government. Since the first restructuring was not all encompassing, a second phase of financial sector restructuring requiring another 30 trillion won worth of public funds is needed. This is a reminder that reform will cost more if it is not promptly and resolutely carried out.

Corporate sector restructuring was more drastic. Sweeping restructuring of large conglomerates that is a characteristic of the Korean economy was pushed forward as strongly recommended by the IMF and the U.S. The business areas of those conglomerates were slimmed down, and their debt-to-equity ratios were also radically reduced. Taking advantage of the opportune stock market recovery at the time, companies increased their equity capital on a large scale. In order to survive, they also proceeded to sell off their assets to foreigners, attract foreign capital, and conduct business swaps and strategic alliances between themselves. On the back of these circumstances, the information technology (IT) industry and venture companies have risen markedly.

The management structure of Korean companies, which used to resemble that of Japanese companies, has become more like those of U.S. companies after the currency crisis. For example, profitability and cash flow have now become the main management goal instead of sales growth or market share. Furthermore, the corporate governance structure is also rapidly changing. Companies should now keep the market and their shareholders in mind rather than the government and banks since they have to raise capital in the stock market, which is now open to the investors of the world.

Companies which have adapted themselves to these new trends have survived, while those which have not have been weeded out. Reform of the labor market has also made considerable progress. Labor unions accepted wage cuts and layoffs. Also, the traditional systems of lifetime employment and a seniority-based compensation system are gradually giving way. A slow but considerable reform in the public sector is also taking place. The public sector, including the government, is being forced to deregulate and raise its efficiency through pressure by the quickly changing society.

In the early phase of the currency crisis, the government played the role of the agent of change, but later on the private sector took over the role. Specifically, the optimism, risk-taking attitude and challenging spirit, which are all characteristics of the Korean people, found a way to break through the economic crisis.

More than 3,000 companies went bankrupt a month right after the currency crisis, but since April 1998, the number of newly established companies started to exceed twice that of bankrupt companies. In particular, a great number of venture companies which possess advanced technology were established since the second half of 1998. As of the end of 1999, the number of registered venture companies exceeds 4,900, which is a 17-fold increase during a year and a half period.

The venture boom has given vitality to the Korean economy and contributed to lowering the unemployment rate. Presently, in Korea, the intellectual elite who work for major companies or the government are moving to venture companies, boldly giving up the stable life their former workplaces could guarantee. It is these fledgling venture companies and their young employees that lead the IT industry and the Internet business of Korea.

Large companies are also adopting the flexible management structure of venture companies and are also actively participating in e-commerce. However, it is still true that a lot of companies face difficulties due to their accumulated debt, weak capital structure and outdated management practices despite these efforts.

In addition, a large number of the management of Korean companies has been replaced since the currency crisis. The age group of CEOs of major companies and large banks has dropped to the early fifties. The CEO of Samsung Electronics, a world-renown Korean electronics company, is 56 years old, the president in charge of digital media, a core field of the company' s business, is 48 and many CEO/senior vice presidents who are in charge of divisions are in their forties. The young executives of Korea are devoting all their abundant energy, and physical and intellectual prowess to their business. In contrast, I have observed that many experienced but aged executives often lose great business opportunities because they think too much and too long before making a decision.

In the case of venture companies, especially those in the IT industry, there are quite a few presidents in their twenties and thirties who started their own business. Some of them have even become billionaires, helped by the bullish stock market that enthusiastically hail such companies. It can be said that the era of the Korean dream has once again dawned.

The optimism of the Korean people can be seen in the rapid speed of the recovery of consumption. For example, automobile sales growth recorded 63% in 1999 after falling to 48% in 1998. The number of mobile phone users increased to 23 million at the end of last year from less than 10 million before the currency crisis. Also, Internet users increased to 15 million, up from 1 million before the crisis. Currently, there have sprung up 15 thousand Internet PC rooms across the nation, the popularity of which is similar to Japan's karaoke. Even telecom service charges are now as low as in the U.S. In this respect, many experts have highly optimistic views about the development of the IT industry and the digitalization of the Korean economy.

However, the influence of foreign capital on the Korean economy has become considerable recently. When stock prices hit rock bottom due to the currency crisis, foreign capital flowed in, so much so that foreign companies currently possess more than one-fourth of listed Korean stocks. Meanwhile, the M&A activities of foreign companies have been so active that they have already secured a bridgehead in the major industries of Korea such as the financial, machinery, paper, chemical, seed, and electronic industries. Even though they came in bearing high risk at a time when the economy was fragile, they are now enjoying high returns.

The increase of foreign capital's weight is accelerating the globalization of the Korean economy and forcing the adoption of an U.S.-style market economy and so-called global standards. However, they are in some degree of conflict with the old customs and culture that Korea has maintained for a long time. In addition, they cause some social problems such as the worsening of the income disparity and the widely spreading notion of 'survival of the fittest'. Therefore, the nation greatly needs the wisdom to preserve the good points of Asian values while accepting the strong points of a U.S.-style market economy.

Looking at the foreign capital that has flowed in, the U.S. and European countries have been the main providers of such capital. However, the capital that flowed in from Japan has been relatively small. Koreans hope that the capital would flow in from the U.S., Europe, and Japan equally so that they can check and balance each other. However, Japanese capital seems quite cautious, maybe too much. Indeed, while the U.S. and Europe have invested one-third of the direct investment flowing into Korea, Japan invested only 10%. Even this amount was recorded after 1999 when the Korean economy was on the track to recovery. In 1997 and 1998, the figure was only 5%.

Renault, a French automaker, decided to take over Samsung Motors after a short negotiation. In contrast, a large Japanese company gave up acquiring the petrochemical plants of the Samsung and Hyundai Groups even after a long negotiation. When taking over Samsung Motors, Renault made Samsung its business partner and secured a strong foothold in Korea by attaching a condition to their agreement that Samsung should hold shares in the company. Even though Japan has adequate reasons and its own economic logic, it seems regrettable that it might lose opportune chances because it is too cautious and try to be perfect.

Of course, it is understandable that Japan does not have much room to make investments in Korea at this juncture since it is in a difficult economic situation itself. But the economy of Japan would improve much faster if an economic policy taking all the economies of Asia into its perspective is set up and implemented.

In the digital economy, a cross-border network and alliance among companies all over the world are being promoted. Therefore, Korea and Japan will be able to cooperate with each other in cutting-edge industries and the components and materials industries. They can also cooperatively prevent or solve the problems of overproduction and over-investment. The condition for such closer cooperation between the two countries is ripe since the relationship between Korea and Japan has recently improved.

As Mr. Chihaya, president of the Nippon Steel Corporation, may agree with me, I wonder if Nippon Steel could have given a helping hand to the establishment of POSCO 30 years ago only on economic rationale. It is hard to deny that the present prosperity of the Korean steel industry, which benefits both countries, was possible only because Mr. Inayama, president of Nippon Steel Corporation at that time, had the business acumen to make a resolute decision.

The Asian market will become even bigger if countries in the region compete with each other, thereby growing together, instead of worrying about the so-called 'Boomerang Effect'. So I feel that the establishment of an international cooperation system with the initiative of the Japanese and the expansion of human resources exchange are in urgent need for the co-prosperity of the entire region.

On the latter point, it is worthy of note that the young talents of Asia, including Korea, go to the U.S. to study instead of Japan, which is so close. In the Korean case, the number of students studying in the U.S. is overwhelmingly huge. They come back to Korea and take up important posts in the government, universities, and the corporate world. In this way, the influence of the U.S. is still permeating through every aspect of Korean society. Therefore, I feel that it is high time that Japan should implement a large-scale program like the Fulbright Program of the U.S.

Korea's experience after the currency crisis has taught us that thinking and action beyond the existing framework are needed to overcome economic hardship. This is even more true in this era of globalization and the digital economy. What could be seen as very irrational and dangerous behavior may become the catalyst for great success in the future. A top manager should have the acumen to make this type of resolute decision in a timely fashion. If critics inside a company all talk about the problems, not the solutions, thereby implementing only risk aversion measures, nothing will be accomplished in a time of rapid change.

Of course, the Korean economy has some aspects of risk, also. This is because the nation has not yet been equipped with a social system, economic competence and crisis-control ability that are commensurate with the open economy, even though the economy has been opened wide since the currency crisis.

In addition, there are some signs that the Korean economy goes far beyond of its own potential. That is why the possibility of a second round of the currency crisis is being raised as the nation's current account balance decreases rapidly and domestic financial markets show unstable movement. If international short-term capital ebbs out as in 1997, the economy may be put in the jeopardy once again. However, we have experienced that, if we lose self-confidence and vigor and hesitate in anxiety, companies and possibly the entire nation becomes more vulnerable.

Korea may face even bigger problems if it stands still fearing failures since it has a significant amount of external liabilities and its economy has not fully grown. In this era of drastic change, we have no choice but to take action first and flexibly respond to the next situation since it is virtually impossible to completely predict and prepare for all contingencies. The same argument could be applied to business cooperation between companies or even to economic cooperation among Asian countries.

I feel that if Korea's young energy is combined with the Japan's rich experience, capital and technology, it will bear rich fruit for both countries.

Thank you.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.