UK feels Korea's pain

Collapse of South Korean economy thwarts investment worth billions in Britain as tremors
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The Independent Online
A year ago, the town of Newport in Gwent was gripped by the kind of euphoria usually reserved for Welsh rugby victories. The local MP, Paul Flynn, called it "brilliant, wonderful news". His Labour colleague, Harry Jones, leader of the Newport council predicted that it would cheer up the entire region. And William Hague, then the Conservative Welsh Secretary, was equally gushing - he described it "the biggest vote of confidence" Wales has ever had.

The excitement, over a decision made in a high-rise corporate board room 7,000 miles away, was a perfect example of the workings of what is fashionably called the global economy. LG, a Korean corporation formerly known as Lucky Goldstar, had decided to set up a huge electronics manufacturing centre in Newport's Imperial Park.

How many in Wales had ever heard of LG, one of Korea's big four chaebol - family-run conglomerates uniting banks, heavy industry and manufacturing firms? But LG was coming to Wales, bringing with it pounds 7bn and 6,100 jobs. It was the economic equivalent of a victory over England at Cardiff Arms Park.

Over the past 10 years, other regions of Britain have experienced the same elation - Dunfermline in Scotland, Antrim in Northern Ireland, and Wynyard Park in north-east England. But, suddenly, things are looking very different. On Friday, Samsung told the Independent it was postponing indefinitely a pounds 450m investment in Wynyard. Hyundai was frantically denying reports it would do the same with pounds 2.4bn investment to build semi-conductors in Dunfermline. Daewoo admitted all its overseas investments, including the VCR factory in Antrim, were under review. LG insists it is sticking to its plans in Britain, but - given the scale of the disaster to have struck South Korea in the last fortnight - it will not be a surprise if this confidence turns out to be premature.

What the global economy promised, the global economy is suddenly having second thoughts about. "When we first proposed this, things looked very rosy," says Moon Dong Shik, an executive at Samsung which will not be adding the expected 2,000 further jobs to the 900 already generated at Wynyard. "We could build the factory, but that would be a crazy decision. It would be very dishonest and we would deceive a lot of people".

It is perhaps a measure of the embarrassment it is causing in diplomatic and government circles that more than five months after Samsung says that it informed the British government, nobody in Wynyard had been told about the change of plan. For in the 1990s, South Korea has been a British success story. Through its embassy in Seoul, the DTI has launched a series of aggressively promoted investment initiatives that succeeded in bagging commitments worth pounds 6.75bn - about two thirds of all the Korean investment into Europe. As the big investors of the late 1980s, the Japanese, fell prey to a prolonged slump, so Korean companies rose to take up the slack.

Apart from the energy of its diplomats, Britain has a few in-built advantages - the English language (widely taught in Korea), a small but unforgotten role as one of the South's defenders during the Korean War, a relatively well-educated and low-paid workforce, the City of London and - not least - some generous financial incentives (the land LG occupies in Newport was provided free). Britain can count on a big share of the Korean investment pie, compared with its European competitors. But the pie is shrinking.

The crunch came nine days ago when, on the verge of bankruptcy after spending perhaps $20bn (pounds 11.8bn) in a failed attempt to prop up its currency, Korea finally appealed to the International Monetary Fund for a bail-out. But the crisis has been brewing for years.

It is difficult to recall nowadays what a no-hoper Korea once seemed, in the immediate aftermath of the Korean War in the 1950s - permanently divided between US-backed South and Stalinist North, ruined by a three- year civil war, and ruled over by a succession of intemperate right-wing dictators. But one of those dictators, a former general named Park Chung Hee, set the country on a remarkable forced march to prosperity.

By targeting key heavy industries, and manipulating banks and big businesses, he succeeded in achieving world-class competitiveness in fields such as shipbuilding and steel making. The system was based on favouritism and corruption, but it propelled annual wages from an average of $80 in 1960 to $10,000. South Korea today is the eleventh largest economy in the world. Even last week, presidential hopeful, Kim Dae Jung, was predicting it would overtake Britain by 2015.

The problem is that, having achieved global economic status and democracy, South Korea is still lumbered with the corporate culture of a developing dictatorship. Corporations are addicted to growth and investment at the expense of profit and consolidation, a strategy that works fine with growth rates of 8 per cent and more, as Korea almost invariably enjoyed until recently. But when the economy slows down, overcapacity and diminished demand bring huge losses. Huge loans, made by banks at the bidding of the government, cannot be repaid. The companies default, banks are squeezed, and confidence evaporates.

This year, big chaebol started to go spectacularly bankrupt. Korean share prices fell, as did the Korean won, making bank loans even more difficult to repay.

The alternative - a competitive free-market economy in which the efficient prosper and the inefficient fail - will only be achieved with considerable pain and much disruption. The IMF will no doubt insist on tight spending and a relaxation of labour laws. Given the high proportion of inefficient enterprises, there will be bankruptcies and mergers, laying off workers. Korea's noisy and touchy trade unions will not take this lying down. Above all, investment will be cut.

This does not mean Korean firms will withdraw from overseas markets, and the attractions that led them abroad in the first place (competitive labour costs, access to new markets) are still there. But political logic suggests the rest of the world will bear at least some of the burden: it is far harder for a Korean company to put a Korean out of a job than to sack an Irishman, a Welshman, an Englishman or a Scot.

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