Monday, November 16, 2009

Korea Prospects

Korean model triumphs over West

By Ian Williams
Asia Times 17 November 2009

The resurgence of the South Korean economy as Western countries, most notably the United States, struggle to emerge from financial crisis should put paid to long-standing criticism of the Asian country's chaebol- (or conglomerate-) based approach to growth.

In the most recent quarter, South Korea surprised even its own forecasters by achieving 3.9% annual economic growth, helped by a 4% increase in exports to China. That followed on the previous quarter's 2.6% growth, the highest in the 30-member Organization for Economic Cooperation and Development (OECD).

Underlining the strength of the economy, Korea's jobless rate rose in September at the slowest pace among the world's major economies - up by 0.4%, to 3.4%, compared with a year earlier, indicating its employment conditions remain relatively better than others in the face of the economic slowdown, a report from the Paris-based OECD showed on November 10. The OECD average rise was 2.3 percentage points.

Despite being a member of the OECD and of the Group of 20, nominally the successor to the Group of Eight leading industrialized nations, Korea has not really been regarded as a full member of the industrialized nations club.

For example, Korea was accepted into the OECD in 1996, yet it was only late last year, just before the global meltdown, that it was promoted from the FTSE emerging markets indices - and that was only after the admission of Israel raised some eyebrows.

Ironically, it's the aspects of Korea's business and economy that led Western business pundits to look down on it and caused reservations about its "developed" status that appear to have given the country its comparative advantage during the crisis.

The role in the economy of chaebol (or conglomerates, often family-based and with interlinked shareholdings), an emphasis on actually making things that people want, and the years of government protection and coordination on which key industries were built, now seem to be paying off.

Even before the financial crisis broke last year, the United Nations Development Program's Human Development Index, which takes into account education, longevity and other factors besides gross domestic product, placed Korea in its "Very Highly Developed" group. The International Monetary Fund, the World Bank and other compilers showed the country as the world's 15th-biggest economy.

As a measure of Korea's progress, its export strength to China is not goods for finishing and re-export, a feature of much of, for example, of Taiwan's and other East Asian economies' export industry, nor were they low-quality "cheap" goods in the pejorative sense. South Korea produces high-quality but economical goods that Chinese consumers demand.

Chinese consumers are not alone in being attracted to these products, as rising sales of Hyundai cars in the United States during the "cash for clunkers” program this year testify. Hyundai Kia Automotive Group's October sales in the US not only jumped nearly 50% from the same month last year, according to the automotive industry publication Ward's Auto; the increase rates of the two carmakers was the largest among light-vehicle brands, and nearly 14 times higher than the average increase rate for foreign brands.

At home, Korea's Industrial Production Index increased 5.4% in September from the previous month and 11.0% from the year before, according to Statistics Korea.

More impressively, and demonstrating that Korean manufacturers have money and confidence to invest, September's Equipment Investment Index surged 18.8% from the previous month and 5.8% from a year earlier. The government has also locked up money to spare, with currency reserves in October, at US$264 billion, reaching their second highest level ever.

In contrast, the Anglo-American consensus, which saw manufacturing and engineering as synonymous with rust-belts and obsolescence, is now suffering. Former British premier Tony Blair and Gordon Brown, his chancellor of the Exchequer and now prime minister, and former US president George W Bush were alike seduced with the charms of the service economy, where the population exist by lending each other money and selling (on credit) to each other things other people have made in less-blessed and sophisticated countries. Iceland is the extreme example of where that attitude can get you. Whaling might soon be their only source of income.

In any case, the economic advisers to both Prime Minister Brown and US President Barack Obama now seem to be reconsidering the previous neglect of manufacturing after years in which American and British governments reinterpreted and applied the commandment to it in the poet Arthur Hugh Clough's words:

Thou shalt not kill
But need'st not strive
Officiously to keep alive.

Similarly, years of Western hectoring of the Koreans about their lack of transparency as compared with Western corporate governance suddenly look more than a little foolish, in light of the opacity and indeed mendacity of Wall St and the City of London that has now brought the world to the brink of economic collapse.

Korean success has also been achieved without the widening of the income gap between richest and poorest that the bonus-collectors of the West tell us is an inescapable concomitant of economic growth. The country's Gini coefficient, used as a gauge of the wealth gap, with a lower figure indicating a smaller divide between rich and poor, was 31.3 in 2007 in South Korea, compared with 45 for the US the same year, according to CIA data.

Recent events might suggest that Seoul is committing itself to the broader principles of the Anglo-Saxon "Washington Consensus" on economic strategy. [1] It recently signed a free-trade agreement with the European Union, the world's biggest such deal since the North American Free Trade Agreement between Canada, the US and Mexico came into force in 1994. The US Congress is also under pressure to ratify a Korea-US free-trade deal.

But the newfound attachment to free trade comes at an appropriate time. The Asian tigers, just like the US and Germany before them, grew their industries to maturity in the greenhouse of protectionism before exposing them to competition.

Those allegedly inefficient and old-fashioned chaebol have grown into world-class companies, whose flexibility, innovation and nimbleness the crisis has demonstrated. Hyundai, Samsung, LG and others are global leaders in their fields, with clear success in marketing their wares.

Yet there is more to Korea's progress than that. Its government did not abstain from discussion about which direction the economy should take. The rapid turnaround from the recent financial crisis was in part because the size of its stimulus package, starting with US$11 billion last November, and the quickness with which it was passed and implemented by the government, but also because of a degree of social cohesion that allowed the stimulus package to be targeted more precisely.

"In times of crisis, Koreans come together," said one analyst, contrasting it with Washington, where a crisis is an opportunity to eviscerate one's political enemy.

Seoul's response as the economy turned around was not to let the economy coast along on the same, renewed trajectory, but to direct massive funding towards green and energy-conserving technologies, which seems to be meeting a response from the companies involved.

Similarly, its Development Bank is playing hardball with struggling General Motors over the future of its Korea-based Daewoo unit, demanding guarantees on future production and technology transfer before committing funds to the GM subsidiary, which is the US company's main producer of export model cars but which is excluded from Washington's bailout package.

Korea still needs to resolve tensions between the permanent and temporary workforce; it also needs to expand its service sector. Probably, it needs to rebalance its export sector to lessen its dependence on the US economy, to build on its comparative advantages in China and the developing world, and even to exploit the EU free-trade agreement.

This latest crisis, however, means that Korea, and indeed other Asian economies, should have even more self-confidence to develop in the direction that the empirical evidence indicates is successful, rather than burning sacrifices at the altar of an economic deity - the Anglo-Saxon Washington consensus - that has so spectacularly failed.

1. The term "Washington Consensus" has come to be associated with fundamental free-market policies, with limited state interference in industry and trade.

Ian Williams is the author of Deserter: Bush's War on Military Families, Veterans and His Past, Nation Books, New York.

(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

Tuesday, November 03, 2009